##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from          to
 Commission File Number 1-14773
 PEROT SYSTEMS CORPORATION
  DELAWARE
    
    75-2230700(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 
 
 þ o
  þ o o
 o þ




---



##### 



PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Income Statements for the three and nine months ended September 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4: CONTROLS AND PROCEDURES
    
    
    25PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
    
    
    25ITEM 1A: RISK FACTORS
    
    
    26ITEM 6: EXHIBITS
    
    
    26SIGNATURES
    
    
    27Agreement and Plan of MergerRule 13a-14 Certification by President and CEORule 13a-14 Certification by Vice President and CFOSection 1350 Certification by President and CEOSection 1350 Certification by Vice President and CFO




---



##### Table of Contents



September 30, 2007
    
    
    December 31, 2006(Dollars in millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    175
    
    
    $
    250Short-term investments
    
    
    
    
    
    
    133Accounts receivable, net
    
    
    465
    
    
    
    338Prepaid expenses and other
    
    
    72
    
    
    
    62Total current assets
    
    
    712
    
    
    
    783Property, equipment and purchased software, net
    
    
    248
    
    
    
    220Goodwill
    
    
    714
    
    
    
    463Deferred contract costs, net
    
    
    87
    
    
    
    61Other non-current assets
    
    
    106
    
    
    
    54Total assets
    
    $
    1,867
    
    
    $
    1,581LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    71
    
    
    $
    52Deferred revenue
    
    
    55
    
    
    
    42Accrued compensation
    
    
    47
    
    
    
    65Income taxes payable
    
    
    4
    
    
    
    37Accrued and other current liabilities
    
    
    118
    
    
    
    105Total current liabilities
    
    
    295
    
    
    
    301Long-term debt
    
    
    214
    
    
    
    84Non-current deferred revenue
    
    
    94
    
    
    
    82Other non-current liabilities
    
    
    24
    
    
    
    9Total liabilities
    
    
    627
    
    
    
    476Commitments and contingenciesStockholders equity:Common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    577
    
    
    
    533Retained earnings
    
    
    654
    
    
    
    575Treasury stock
    
    
    (21
    )
    
    
    (21
    )Accumulated other comprehensive income
    
    
    29
    
    
    
    17Total stockholders equity
    
    
    1,240
    
    
    
    1,105Total liabilities and stockholders equity
    
    $
    1,867
    
    
    $
    1,581
  1




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in millions, except per share data)Revenue
    
    $
    655
    
    
    $
    583
    
    
    $
    1,880
    
    
    $
    1,697Direct cost of services
    
    
    542
    
    
    
    514
    
    
    
    1,556
    
    
    
    1,420Gross profit
    
    
    113
    
    
    
    69
    
    
    
    324
    
    
    
    277Selling, general and administrative expenses
    
    
    71
    
    
    
    74
    
    
    
    212
    
    
    
    208Operating income (loss)
    
    
    42
    
    
    
    (5
    )
    
    
    112
    
    
    
    69Interest income
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    6Interest expense
    
    
    (3
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    (3
    )Other income, net
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Income (loss) before taxes
    
    
    41
    
    
    
    (3
    )
    
    
    111
    
    
    
    74Provision (benefit) for income taxes
    
    
    16
    
    
    
    (3
    )
    
    
    40
    
    
    
    25Net income
    
    $
    25
    
    
    $
    
    
    
    $
    71
    
    
    $
    49Earnings per
share of common stock:Basic, Class A
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.58
    
    
    $
    0.41Basic, Class B
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.58
    
    
    $
    0.41Diluted
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.57
    
    
    $
    0.40Diluted, Class B
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.57
    
    
    $
    0.40Weighted average number of common
shares outstanding (in thousands):Basic, Class A
    
    
    122,391
    
    
    
    118,729
    
    
    
    121,577
    
    
    
    118,378Basic and diluted, Class B
    
    
    648
    
    
    
    817
    
    
    
    757
    
    
    
    817Diluted
    
    
    125,315
    
    
    
    121,817
    
    
    
    124,967
    
    
    
    121,821
  2




---



##### Table of Contents



Nine Months Ended September 30,2007
    
    
    2006(Dollars in millions)Cash flows from operating activities:Net income
    
    $
    71
    
    
    $
    49Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    76
    
    
    
    58Impairment of assets
    
    
    2
    
    
    
    46Stock-based compensation
    
    
    12
    
    
    
    12Change in deferred taxes
    
    
    (3
    )
    
    
    (12
    )Excess tax benefits from stock-based compensation arrangements
    
    
    (3
    )
    
    
    (2
    )Other non-cash items
    
    
    (1
    )
    
    
    Changes in assets and liabilities (net of effects from acquisitions of businesses):Accounts receivable, net
    
    
    (49
    )
    
    
    (49
    )Prepaid expenses
    
    
    (6
    )
    
    
    (7
    )Deferred contract costs, net
    
    
    (41
    )
    
    
    (22
    )Accounts payable and accrued liabilities
    
    
    (12
    )
    
    
    16Accrued compensation
    
    
    (28
    )
    
    
    (7
    )Deferred revenue
    
    
    20
    
    
    
    31Income taxes
    
    
    (1
    )
    
    
    (2
    )Other current and non-current assets
    
    
    (1
    )
    
    
    (1
    )Other current and non-current liabilities
    
    
    (1
    )
    
    
    1Net cash provided by operating activities
    
    
    35
    
    
    
    111Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (66
    )
    
    
    (55
    )Acquisitions of businesses, net
    
    
    (338
    )
    
    
    (29
    )Purchases of short-term investments
    
    
    (600
    )
    
    
    (147
    )Net proceeds from sale of short-term investments
    
    
    733
    
    
    
    42Other
    
    
    
    
    
    
    1Net cash used in investing activities
    
    
    (271
    )
    
    
    (188
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    130
    
    
    
    Proceeds from issuance of common stock
    
    
    21
    
    
    
    18Proceeds from issuance of treasury stock
    
    
    
    
    
    
    10Excess tax benefits from stock-based compensation arrangements
    
    
    3
    
    
    
    2Purchases of treasury stock
    
    
    
    
    
    
    (18
    )Other
    
    
    
    
    
    
    1Net cash provided by financing activities
    
    
    154
    
    
    
    13Effect of exchange rate changes on cash and cash equivalents
    
    
    7
    
    
    
    1Net decrease in cash and cash equivalents
    
    
    (75
    )
    
    
    (63
    )Cash and cash equivalents at beginning of period
    
    
    250
    
    
    
    260Cash and cash equivalents at end of period
    
    $
    175
    
    
    $
    197
  3




---



##### Table of Contents



Financial instruments
  Derivative Financial Instruments
      4




---



##### Table of Contents



Significant accounting standards to be adopted
 FASB Statement No. 157
  FASB Statement No. 159
        5




---



##### Table of Contents



Current assets
    
    $
    61Property, equipment and purchased software, net
    
    
    1Goodwill
    
    
    172Identifiable intangible assets
    
    
    50284Current liabilities
    
    
    (35
    )Total consideration paid as of September 30, 2007
    
    $
    249
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006Revenue
    
    $
    659
    
    
    $
    1,905
    
    
    $
    1,915Income before taxes
    
    
    (2
    )
    
    
    112
    
    
    
    78Net income
    
    
    
    
    
    
    72
    
    
    
    51Basic earnings per common share, Class A
    
    
    
    
    
    
    0.59
    
    
    
    0.43Basic earnings per common share, Class B
    
    
    
    
    
    
    0.59
    
    
    
    0.43Diluted earnings per common share
    
    
    
    
    
    
    0.58
    
    
    
    0.42Diluted earnings per common share, Class B
    
    
    
    
    
    
    0.58
    
    
    
    0.42
    6




---



##### Table of Contents



Current assets
    
    $
    22Property, equipment and purchased software, net
    
    
    1Goodwill
    
    
    80Identifiable intangible assets
    
    
    11114Current liabilities
    
    
    (23
    )Total consideration paid as of September 30, 2007
    
    $
    91
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Revenue
    
    $
    670
    
    
    $
    601
    
    
    $
    1,938
    
    
    $
    1,755Income before taxes
    
    
    39
    
    
    
    (3
    )
    
    
    107
    
    
    
    71Net income
    
    
    24
    
    
    
    
    
    
    
    69
    
    
    
    47Basic earnings per common share, Class A
    
    
    0.20
    
    
    
    
    
    
    
    0.57
    
    
    
    0.40Basic earnings per common share, Class B
    
    
    0.20
    
    
    
    
    
    
    
    0.57
    
    
    
    0.40Diluted earnings per common share
    
    
    0.19
    
    
    
    
    
    
    
    0.55
    
    
    
    0.39Diluted earnings per common share, Class B
    
    
    0.19
    
    
    
    
    
    
    
    0.55
    
    
    
    0.39
    ConsultingandIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Total(in millions)Balance as of December 31, 2006
    
    
    $255
    
    
    
    $128
    
    
    
    $80
    
    
    
    $463Goodwill resulting from QSS acquisition
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    172Goodwill resulting from JJ Wild acquisition
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Other
    
    

4
    
    
    
    
    
    
    
    (5
    )
    
    
    (1
    )Balance as of September 30, 2007
    
    
    $339
    
    
    
    $300
    
    
    
    $75
    
    
    
    $714
  Deferred contract costs, net
  7




---



##### Table of Contents



Identifiable Intangible Assets
  As of September 30, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    Value(in millions)Service mark
    
    $
    4
    
    
    $
    (1
    )
    
    $
    3Customer-based assets
    
    
    87
    
    
    
    (24
    )
    
    
    63Other intangible assets
    
    
    4
    
    
    
    (2
    )
    
    
    2Total
    
    $
    95
    
    
    $
    (27
    )
    
    $
    68
    Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in millions)Net income
    
    $
    25
    
    
    $
    
    
    
    $
    71
    
    
    $
    49Foreign currency translation adjustments
    
    
    3
    
    
    
    1
    
    
    
    10
    
    
    
    2Net unrealized gain on foreign exchange
forward contracts and interest rate
swaps
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Total comprehensive income
    
    $
    30
    
    
    $
    1
    
    
    $
    83
    
    
    $
    51
  (in millions)Accumulated gain at December 31, 2006
    
    $
    Net unrealized gain on hedging transactions
    
    
    2Reclassifications
into earningsTotal accumulated gain at September 30, 2007
    
    $
    2
 8




---



##### Table of Contents



Credit Facility
     Stock-based compensation
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in millions, except per share data)Direct cost of services
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    4Selling, general and administrative expenses
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    6Total stock compensation expense from stock options and ESPP
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    10Stock compensation expense from stock options and ESPP, net of tax
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    7Basic earnings per common share, Class A
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.06Basic earnings per common share, Class B
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.06Diluted earnings per common share, Class A
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.06Diluted earnings per common share, Class B
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.06
 9




---



##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006 (1)
    
    2007
    
    2006Weighted average risk free interest rates
    
    
    4.88
    %
    
    
    
    
    
    
    4.88
    %
    
    
    4.76
    %Weighted average life (in years)
    
    
    5.0
    
    
    
    
    
    
    
    5.0
    
    
    
    5.2Volatility
    
    
    23
    %
    
    
    
    
    
    
    23
    %
    
    
    35
    %Expected dividend yield
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value
per share of options granted
    
    $
    4.65
    
    
    
    
    
    
    $
    4.67
    
    
    $
    5.94
 
 (1)
    
    No stock options were granted during the three months ended September 30, 2006. Activity in our stock-based compensation plans
  Nine
months ended September 30,2007
    
    
    2006Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at January 1
    
    
    18,169
    
    
    $
    14.42
    
    
    
    25,342
    
    
    $
    14.81Granted
    
    
    1,602
    
    
    
    15.41
    
    
    
    83
    
    
    
    15.00Exercised
    
    
    (1,705
    )
    
    
    8.22
    
    
    
    (2,527
    )
    
    
    8.57Forfeited
    
    
    (1,438
    )
    
    
    17.28
    
    
    
    (4,872
    )
    
    
    20.62Outstanding at September 30
    
    
    16,628
    
    
    
    14.90
    
    
    
    18,026
    
    
    
    14.12Exercisable at September 30
    
    
    8,945
    
    
    
    15.51
    
    
    
    10,113
    
    
    
    14.77
   10




---



##### Table of Contents



11




---



##### Table of Contents



Consulting andIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Other
    
    Total(in millions)For the three months ended September 30, 2007:Revenue
    
    $
    454
    
    
    $
    147
    
    
    $
    80
    
    
    $
    (26
    )
    
    $
    655Income (loss) before taxes
    
    
    24
    
    
    
    6
    
    
    
    12
    
    
    
    (1
    )
    
    
    41For the three months ended September 30, 2006:Revenue
    
    $
    458
    
    
    $
    73
    
    
    $
    66
    
    
    $
    (14
    )
    
    $
    583Income (loss) before taxes
    
    
    (15
    )
    
    
    5
    
    
    
    9
    
    
    
    (2
    )
    
    
    (3
    )For the nine months ended September 30, 2007:Revenue
    
    $
    1,314
    
    
    $
    406
    
    
    $
    226
    
    
    $
    (66
    )
    
    $
    1,880Income (loss) before taxes
    
    
    65
    
    
    
    17
    
    
    
    31
    
    
    
    (2
    )
    
    
    111For the nine months ended September 30, 2006:Revenue
    
    $
    1,325
    
    
    $
    221
    
    
    $
    188
    
    
    $
    (37
    )
    
    $
    1,697Income before taxes
    
    
    34
    
    
    
    15
    
    
    
    25
    
    
    
    
    
    
    
    74
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Basic Earnings per Common ShareNet income allocated to Class A common shares (1)
    
    $
    25,088
    
    
    $
    311
    
    
    $
    70,914
    
    
    $
    48,744Weighted average common shares outstanding, Class A
    
    
    122,391
    
    
    
    118,729
    
    
    
    121,577
    
    
    
    118,378Basic earnings per common share
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.58
    
    
    $
    0.41Net income allocated to Class B common shares (1)
    
    $
    133
    
    
    $
    2
    
    
    $
    441
    
    
    $
    336Weighted average common shares outstanding, Class B
    
    
    648
    
    
    
    817
    
    
    
    757
    
    
    
    817Basic earnings per common share
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.58
    
    
    $
    0.41Diluted Earnings per Common ShareNet income (2)
    
    $
    25,221
    
    
    $
    313
    
    
    $
    71,355
    
    
    $
    49,080Weighted average common shares outstanding
    
    
    123,039
    
    
    
    119,546
    
    
    
    122,334
    
    
    
    119,195Incremental shares assuming dilution
    
    
    2,276
    
    
    
    2,271
    
    
    
    2,633
    
    
    
    2,626Weighted average diluted common shares outstanding (3)
    
    
    125,315
    
    
    
    121,817
    
    
    
    124,967
    
    
    
    121,821Diluted earnings per common share
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.57
    
    
    $
    0.40Net income allocated to Class B common shares (4)
    
    $
    130
    
    
    $
    2
    
    
    $
    430
    
    
    $
    327Weighted average common shares outstanding, Class B
    
    
    648
    
    
    
    817
    
    
    
    757
    
    
    
    817Diluted earnings per common share, Class B
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.57
    
    
    $
    0.40
 
 (1)
    
    Net income is allocated to Class A and Class B common shares based on weighted average
common shares attributable to each class of stock.(2)
    
    For purposes of the diluted net income per share computation for common stock, shares of
Class B are assumed to be converted; therefore, 100% of net income is allocated to common
stock. 12




---



##### Table of Contents



(3)
    
    Class B shares are assumed to be converted in the weighted average diluted common shares
outstanding.(4)
    
    Net income is allocated to class B common shares based on the weighted average diluted
common shares attributable to each class of stock.   Litigation
   IPO Allocation Securities Litigation
   Other
  13




---



##### Table of Contents



14




---



##### Table of Contents



This quarterly report contains forward-looking statements. These statements relate to future events
or our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, forecasts, expects, plans,
anticipates, believes, estimates, predicts, potential, see, target, projects,
position, or continue or the negative of such terms and other comparable terminology. These
statements reflect our current expectations, estimates, and projections. These statements are not
guarantees of future performance and involve risks, uncertainties, and assumptions that are
difficult to predict. Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including the risks described in our Annual Report on Form
10-K for the year ended December 31, 2006. These risk factors describe reasons why our actual
results may differ materially from any forward-looking statement. We disclaim any intention or
obligation to update any forward-looking statement.
 
  RESULTS OF OPERATIONS
  Lines of Business
  Overview of Our Financial Results for the Third Quarter of 2007
   Modification of a Customer Contract
  15




---



##### Table of Contents



Revenue Growth
  
    
    Revenue from a company acquired during the first quarter of 2007.
 
    
    An increase in revenue from the expansion of base services and discretionary technology
investments by our existing long-term customers.
 
    
    Revenue from new contracts signed during the twelve-month period following the third quarter
of 2006.
  Earnings Growth
  
    
    As discussed above in Modifications of a Customer Contract, during the third quarter of
2006, we modified a customer contract and recorded $44 million of expense in direct cost of
services, or approximately $0.22 per diluted share, associated with the impairment of deferred
software, development and impairment costs.
 
    
    A reduction in incentive compensation of $10 million, or approximately $0.05 per diluted
share. This reduction is attributable to a lower expected amount of
associate incentive
compensation for 2007 and differences in the quarterly recognition of bonus expense between
2006 and 2007. The reduction in associate incentive compensation for the nine months ended
September 30, 2007 in comparison to the nine months ended September 30, 2006, was
approximately $18 million.
 
    
    During the third quarter of 2006, we recorded expense of $6 million, or approximately $0.03
per diluted share, related to actions to strengthen future profitability. The expense is
attributable to the consolidation and elimination of facilities and products, the combination
of units, and severance expense.
  
    
    Gross profits from our infrastructure outsourcing contract with UBS decreased by $14 million
in the third quarter of 2007 as compared to the third quarter of 2006 as a result of the end
of the UBS contract. The loss from this infrastructure outsourcing contract resulted in a
decrease in earnings of approximately $0.07 per diluted share.
 
    
    Reduced profits within the Government Services line of business primarily as a result of
contract scope reductions on existing contracts related to federal government budget pressure
and lower margins related to QSS, which was acquired in the first quarter of 2007, because of
the cost plus nature of their work.
 
    
    Reduced profits from existing contracts within Industry Solutions as a result of contracts
that ended during the last twelve months, renegotiated contracts, and new contracts that will
not reach full levels of profitability until after 2007.
 16




---



##### Table of Contents



Free Cash Flow
  Twelve MonthsEndedSeptember 30,2007
    
    
    2006Net cash provided by operating activities
    
    $
    137
    
    
    $
    177Purchases of property, equipment and software
    
    
    (104
    )
    
    
    (71
    )Free cash flow
    
    $
    33
    
    
    $
    106
 TCV of Contracts Signed
   Additional Measurements
  Comparison of the Three Months Ended September 30, 2007 and 2006
 Revenue
  Three Months Ended September 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    454
    
    
    $
    458
    
    
    $
    (4
    )
    
    
    (0.9
    )%Government Services
    
    
    147
    
    
    
    73
    
    
    
    74
    
    
    
    101.4
    %Consulting and Applications Solutions
    
    
    80
    
    
    
    66
    
    
    
    14
    
    
    
    21.2
    %Elimination of intersegment revenue
    
    
    (26
    )
    
    
    (14
    )
    
    
    (12
    )
    
    
    85.7
    %Total
    
    $
    655
    
    
    $
    583
    
    
    $
    72
    
    
    
    12.3
    %
 17




---



##### Table of Contents



Industry Solutions
  
    
    $36 million net increase from existing accounts and short-term project work. This net
increase resulted from expanding our base services to existing long-term customers and from
providing additional discretionary services to these customers. The discretionary services
that we provide, which include short-term project work, can vary from period-to-period
depending on many factors, including specific customer and industry needs and economic
conditions. This increase was primarily related to contracts in the healthcare industry.
 
    
    $17 million increase from new contracts signed during the twelve-month period following the
third quarter of 2006 and from new contracts signed in the third quarter of 2006 for which we
did not recognize a full quarter of revenue in the third quarter of 2006. This increase was
composed of $7 million and $10 million from new contracts signed in the Healthcare and
Commercial Solutions groups, respectively. The services that we are providing to these new
customers are primarily the same services that we provide to the majority of our other
long-term outsourcing customers.
 
    
    $7 million increase from revenue related to an acquisition within our Healthcare group during
the third quarter of 2007.
  Government Services
  Consulting and Applications Solutions
  18




---



##### Table of Contents



Gross Margin
  
    
    As discussed in Modification of a Customer Contract, in the third quarter of 2006, we
modified a customer contract and recorded $44 million of expense in direct cost of services
associated with the impairment of deferred software development and implementation costs.
 
  
    
    A $14 million decrease in gross profit from the expiration of our infrastructure outsourcing
contract with UBS that is reported within the Industry Solutions line of business.
 
    
    A reduced gross profit margin for Government Services primarily attributable to the
acquisition of QSS. The gross margins associated with the acquisition are typically lower than
those we realize within our consolidated margins because of the cost plus nature of their
work. Additionally, lower margins were realized within our Government Services group as a
result of contract scope reductions on existing contracts related to federal government budget
pressure.
 
    
    Reduced profits from existing contracts within Industry Solutions as a result of contracts
that ended during the last twelve months, renegotiated contracts, and new contracts that will
not reach full levels of profitability until after 2007.
 Selling, General and Administrative Expenses
  Other Income Statement Items
  19




---



##### Table of Contents



Comparison of the Nine Months Ended September 30, 2007 and 2006
 Revenue
  Nine Months Ended September 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    1,314
    
    
    $
    1,325
    
    
    $
    (11
    )
    
    
    (0.8
    )%Government Services
    
    
    406
    
    
    
    221
    
    
    
    185
    
    
    
    83.7
    %Consulting and Applications Solutions
    
    
    226
    
    
    
    188
    
    
    
    38
    
    
    
    20.2
    %Elimination of intersegment revenue
    
    
    (66
    )
    
    
    (37
    )
    
    
    (29
    )
    
    
    78.4
    %Total
    
    $
    1,880
    
    
    $
    1,697
    
    
    $
    183
    
    
    
    10.8
    %
 Industry Solutions
  
    
    $129 million net increase from existing accounts and short-term project work. This net
increase resulted from expanding our base services to existing long-term customers and from
providing additional discretionary services to these customers. The discretionary services
that we provide, which include short-term project work, can vary from period-to-period
depending on many factors, including specific customer and industry needs and economic
conditions. This increase was primarily related to contracts in the healthcare industry.
 
    
    $36 million increase from new contracts signed during the twelve-month period following the
third quarter of 2006 and from new contracts signed in the third quarter of 2006 for which we
did not recognize a full nine months of revenue during the nine months ended September 30,
2006. This increase was composed of $16 million, $18 million, and $2 million from new
contracts signed in the Healthcare, Commercial Solutions and Insurance and Business Process
Solutions groups, respectively. The services that we are providing to these new customers are
primarily the same services that we provide to the majority of our other long-term outsourcing
customers.
 
    
    $13 million increase from revenue related to an acquisition within our Commercial Solutions
group during the first quarter of 2006 for which we did not recognize a full nine months of
revenue during the nine months ended September 30, 2006. The acquired company is a provider
of product engineering outsourcing services.
 
    
    $7 million increase from revenue related to an acquisition within our Healthcare group during
the third quarter of 2007.
 Government Services
  Consulting and Applications Solutions
  20




---



##### Table of Contents



Gross Margin
  
    
    As discussed in Modification of a Customer Contract, in the third quarter of 2006, we
modified a customer contract and recorded $44 million of expense in direct cost of services
associated with the impairment of deferred software development and implementation costs.
 
    
    A reduction to employee-related expenses, consisting primarily of incentive compensation.
  
    
    A $42 million decrease in gross profit from the expiration of our infrastructure outsourcing
contract with UBS that was reported within the Industry Solutions line of business.
 
    
    The acquisition of QSS within our Government Services group in the first quarter of 2007.
The gross margins associated with the acquisition are typically lower than those we realize
within our consolidated margins because of the cost plus nature of their work. Additionally,
lower margins were realized within our Government Services group as a result of contract scope
reductions on existing contracts related to federal government budget pressure.
 Selling, General and Administrative Expenses
  Other Income Statement Items
   Subsequent Event
   21




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
  
    
    Cash used by changes in accounts payable and accrued liabilities was $12 million for the nine
months ended September 30, 2007, as compared to cash provided of $16 million for the same
period of the prior year. This decrease is primarily due to the timing of vendor payments.
 
    
    During the nine months ended September 30, 2007, we increased our spending on deferred
contract costs by $19 million as compared to the same period in 2006 due to recent contract
signings that had significant transitional activity for which costs are deferred until
services are operational.
 
    
    During the nine months ended September 30, 2007, there was a decrease of $11 million in net
deferred revenue received from clients as compared to the same period in 2006.
 
    
    During the nine months ended September 30, 2007, we made net cash payments for income taxes
of $44 million as compared to $39 million in the nine months ended September 30, 2006.
 
    
    Bonuses paid to associates under our bonus plans during the first nine months of 2007 and
2006 (including payments of annual bonus amounts relating to the previous years bonus plan)
were approximately $54 million and $64 million, respectively. Included in these bonus amounts
paid in 2007 and 2006 were approximately $7 million and $23 million, respectively, of bonus
payments that are reimbursable by our customers. The amount of bonuses that we pay each year
is based on several factors, including our financial performance and managements discretion.
 Investing Activities
  
    
    During the nine months ended September 30, 2007, we paid $338 million for acquisitions of
businesses, including $248 million, net of cash acquired, for the acquisition of QSS, $86
million, net of cash acquired, for the acquisition of JJ Wild, and $4 million of additional
consideration for the acquisition of eServ LLC, a provider of high-end product engineering
outsourcing services.
 
    
    During the nine months ended September 30, 2007, we purchased $66 million of property,
equipment and purchased software as compared to $55 million during the nine months ended
September 30, 2006. This increase was primarily related to our business expansion needs for
data center and office facilities.
 
    
    During the nine months ended September 30, 2007, we liquidated short-term investments of $133
million, net, primarily due to our acquisition of QSS.
 22




---



##### Table of Contents




    
    During the nine months ended September 30, 2006, we paid $29 million for acquisitions of
businesses, including $21 million for the acquisition of eServ and $8 million of additional
consideration for the acquisition of Technical Management, Inc., a provider of policy
administration and business process services to the life insurance and annuity industry.
 Financing Activities
   Profit Improvement Actions
   Contractual Obligations
  Critical Accounting Policies
 Derivative Financial Instruments
   23




---



##### Table of Contents



Significant Accounting Standards to be Adopted
 FASB Statement No. 157
  FASB Statement No. 159
  24




---



##### Table of Contents



IPO Allocation Securities Litigation
   Other
  25




---



##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT3.1
    
    Third Amended and Restated Certificate of Incorporation of Perot Systems Corporation (the Company)
(Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002.)3.2
    
    Fourth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 of the Companys Current Report
on Form 8-K filed September, 24, 2004).4.1
    
    Specimen of Class A Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Companys
Registration Statement on Form S-1, Registration No. 333-60755.)4.2
    
    Rights Agreement dated January 28, 1999 between the Company and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 4.2 of the Companys Registration Statement on Form S-1, Registration No. 333-60755.)4.3
    
    Form of Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock
(included as Exhibit A-1 to the Rights Agreement) (Incorporated by reference to Exhibit 4.3 of the Companys
Registration Statement on Form S-1, Registration No. 333-60755.)4.4
    
    Form of Certificate of Designation, Preferences, and Rights of Series B Junior Participating Preferred Stock
(included as Exhibit A-2 to the Rights Agreement) (Incorporated by reference to Exhibit 4.4 of the Companys
Registration Statement on Form S-1, Registration No. 333-60755.)10.43*
    
    Agreement and Plan of Merger dated August 10, 2007, by and among the Company, Eagle Delaware Corp., a Delaware
corporation, J.J. Wild Holdings, Inc., a Massachusetts corporation, J.J. Wild, Inc., a Massachusetts
corporation, and Certain Stockholders of J.J. Wild Holdings, Inc.31.1*
    
    Rule 13a-14 Certification
dated October 31, 2007, by Peter A. Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification
dated October 31, 2007, by John E. Harper, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification
dated October 31, 2007, by Peter A. Altabef, President and Chief Executive Officer.32.2**
    
    Section 1350 Certification
dated October 31, 2007, by John E. Harper, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 26




---



##### Table of Contents



PEROT SYSTEMS CORPORATION
(Registrant)Date: October 31, 2007
    By       /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal Accounting Officer 27