##### 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 June 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




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##### 



PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Income Statements for the three and six months ended June 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    12ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    20ITEM 4: CONTROLS AND PROCEDURES
    
    
    20PART II: OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGS
    
    
    20ITEM 1A: RISK FACTORS
    
    
    21ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    21ITEM 6: EXHIBITS
    
    
    22SIGNATURES
    
    
    23Rule 13a-14 Certification by Chief Executive OfficerRule 13a-14 Certification by Vice President and Chief Financial OfficerSection 1350 Certification by Chief Executive OfficerRule 13a-14 Certification by Vice President and Chief Financial Officer




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##### Table of Contents



perot systems corporation and subsidiaries
 
 condensed consolidated balance sheets
 as of June 30, 2007 and december 31, 2006
 (unaudited)
 June 30, 2007
    
    
    December 31, 2006(Dollars in millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    158
    
    
    $
    250Short-term investments
    
    
    
    
    
    
    133Accounts receivable, net
    
    
    433
    
    
    
    338Prepaid expenses and other
    
    
    84
    
    
    
    62Total current assets
    
    
    675
    
    
    
    783Property, equipment and purchased software, net
    
    
    239
    
    
    
    220Goodwill
    
    
    633
    
    
    
    463Deferred contract costs, net
    
    
    81
    
    
    
    61Other non-current assets
    
    
    105
    
    
    
    54Total assets
    
    $
    1,733
    
    
    $
    1,581LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    56
    
    
    $
    52Deferred revenue
    
    
    48
    
    
    
    42Accrued compensation
    
    
    44
    
    
    
    65Income taxes payable
    
    
    6
    
    
    
    37Accrued and other current liabilities
    
    
    114
    
    
    
    105Total current liabilities
    
    
    268
    
    
    
    301Long-term debt
    
    
    158
    
    
    
    84Non-current deferred revenue
    
    
    85
    
    
    
    82Other non-current liabilities
    
    
    23
    
    
    
    9Total liabilities
    
    
    534
    
    
    
    476Commitments and contingenciesStockholders equity:Common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    566
    
    
    
    533Retained earnings
    
    
    629
    
    
    
    575Treasury stock
    
    
    (21
    )
    
    
    (21
    )Accumulated other comprehensive income
    
    
    24
    
    
    
    17Total stockholders equity
    
    
    1,199
    
    
    
    1,105Total liabilities and stockholders equity
    
    $
    1,733
    
    
    $
    1,581
  1




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED INCOME STATEMENTS
 for the three and six months ended June 30, 2007 and 2006
 (unaudited)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in millions, except per share data)Revenue
    
    $
    635
    
    
    $
    572
    
    
    $
    1,225
    
    
    $
    1,114Direct cost of services
    
    
    529
    
    
    
    463
    
    
    
    1,014
    
    
    
    906Gross profit
    
    
    106
    
    
    
    109
    
    
    
    211
    
    
    
    208Selling, general and administrative expenses
    
    
    70
    
    
    
    70
    
    
    
    141
    
    
    
    134Operating income
    
    
    36
    
    
    
    39
    
    
    
    70
    
    
    
    74Interest income
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4Interest expense
    
    
    (3
    )
    
    
    (1
    )
    
    
    (5
    )
    
    
    (2
    )Other income (expense), net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Income before taxes
    
    
    36
    
    
    
    41
    
    
    
    70
    
    
    
    77Provision for income taxes
    
    
    13
    
    
    
    15
    
    
    
    24
    
    
    
    28Net income
    
    $
    23
    
    
    $
    26
    
    
    $
    46
    
    
    $
    49Earnings per share of common stock:Basic, Class A
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.38
    
    
    $
    0.41Basic, Class B
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.38
    
    
    $
    0.41Diluted
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.37
    
    
    $
    0.40Diluted, Class B
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.37
    
    
    $
    0.40Weighted average number of common shares
outstanding (in thousands):Basic, Class A
    
    
    121,567
    
    
    
    118,572
    
    
    
    121,159
    
    
    
    118,202Basic and diluted, Class B
    
    
    817
    
    
    
    817
    
    
    
    817
    
    
    
    817Diluted
    
    
    124,943
    
    
    
    121,949
    
    
    
    124,558
    
    
    
    121,766
  2




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Six Months Ended June 30,2007
    
    
    2006(Dollars in millions)Cash flows from operating activities:Net income
    
    $
    46
    
    
    $
    49Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    50
    
    
    
    38Impairment of assets
    
    
    2
    
    
    
    Stock-based compensation
    
    
    8
    
    
    
    8Change in deferred taxes
    
    
    (6
    )
    
    
    7Excess 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
    
    
    (32
    )
    
    
    (56
    )Prepaid expenses
    
    
    (13
    )
    
    
    (11
    )Deferred contract costs, net
    
    
    (29
    )
    
    
    (15
    )Accounts payable and accrued liabilities
    
    
    (12
    )
    
    
    31Accrued compensation
    
    
    (31
    )
    
    
    (20
    )Deferred revenue
    
    
    9
    
    
    
    26Income taxes
    
    
    (10
    )
    
    
    (9
    )Other current and non-current assets
    
    
    (2
    )
    
    
    2Net cash (used in) provided by operating activities
    
    
    (22
    )
    
    
    48Cash flows from investing activities:Purchases of property, equipment and software
    
    
    (48
    )
    
    
    (36
    )Acquisitions of businesses, net
    
    
    (252
    )
    
    
    (29
    )Purchases of short-term investments
    
    
    (493
    )
    
    
    Net proceeds from sale of short-term investments
    
    
    626
    
    
    
    Net cash used in investing activities
    
    
    (167
    )
    
    
    (65
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    75
    
    
    
    Proceeds from issuance of common stock
    
    
    15
    
    
    
    12Proceeds from issuance of treasury stock
    
    
    
    
    
    
    8Excess tax benefits from stock-based compensation arrangements
    
    
    3
    
    
    
    2Purchases of treasury stock
    
    
    
    
    
    
    (17
    )Other
    
    
    1
    
    
    
    1Net cash provided by financing activities
    
    
    94
    
    
    
    6Effect of exchange rate changes on cash and cash equivalents
    
    
    3
    
    
    
    2Net decrease in cash and cash equivalents
    
    
    (92
    )
    
    
    (9
    )Cash and cash equivalents at beginning of period
    
    
    250
    
    
    
    260Cash and cash equivalents at end of period
    
    $
    158
    
    
    $
    251
  3




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Financial instruments
   Significant accounting standards to be adopted
 FASB Statement No. 157
  FASB Statement No. 159
    4




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Current assets
    
    $
    61Property, equipment and purchased software, net
    
    
    1Goodwill
    
    
    172Indentifiable intangible assets
    
    
    50284Current liabilities
    
    
    (35
    )Total consideration paid as of June 30, 2007
    
    $
    249
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2007
    
    2006Revenue
    
    $
    641
    
    
    $
    1,250
    
    
    $
    1,256Income before taxes
    
    
    43
    
    
    
    71
    
    
    
    81Net income
    
    
    27
    
    
    
    47
    
    
    
    51Basic earnings per common share, Class A
    
    
    0.23
    
    
    
    0.38
    
    
    
    0.43Basic earnings per common share, Class B
    
    
    0.23
    
    
    
    0.38
    
    
    
    0.43Diluted earnings per common share
    
    
    0.22
    
    
    
    0.38
    
    
    
    0.42Diluted earnings per common share, Class B
    
    
    0.22
    
    
    
    0.38
    
    
    
    0.42
  5




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ConsultingandIndustry
    
    
    Government
    
    
    ApplicationsSolutions
    
    
    Services
    
    
    Solutions
    
    
    Total(in millions)Balance as of December 31, 2006
    
    $
    255
    
    
    $
    128
    
    
    $
    80
    
    
    $
    463Goodwill resulting from QSS acquisition
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    172Other
    
    
    4
    
    
    
    
    
    
    
    (6
    )
    
    
    (2
    )Balance as of June 30, 2007
    
    $
    259
    
    
    $
    300
    
    
    $
    74
    
    
    $
    633
   As of June 30, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    Value(in millions)Service mark
    
    $
    1
    
    
    $
    (1
    )
    
    $
    Customer-based assets
    
    
    80
    
    
    
    (21
    )
    
    
    59Other intangible assets
    
    
    3
    
    
    
    (1
    )
    
    
    2Total
    
    $
    84
    
    
    $
    (23
    )
    
    $
    61
    Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in millions)Net income
    
    $
    23
    
    
    $
    26
    
    
    $
    46
    
    
    $
    49Foreign currency translation adjustments
    
    
    6
    
    
    
    1
    
    
    
    7
    
    
    
    1Total comprehensive income
    
    $
    29
    
    
    $
    27
    
    
    $
    53
    
    
    $
    50
   6




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Stock-based compensation
   Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in millions, except per share data)Direct cost of services
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    3Selling, general and administrative expenses
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4Total stock compensation expense from stock
options and ESPP
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    7Stock compensation expense from stock
options and ESPP, net of tax
    
    
    2
    
    
    
    3
    
    
    
    4
    
    
    
    5Basic earnings per common share, Class A
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.04Basic earnings per common share, Class B
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.04Diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.04Diluted earnings per common share, Class B
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.04
   7




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Activity in our stock-based compensation plans
  Six months ended June 30,2007
    
    
    2006Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at January 1
    
    
    18,169
    
    
    
    14.42
    
    
    
    25,342
    
    
    
    14.81Granted
    
    
    53
    
    
    
    18.65
    
    
    
    83
    
    
    
    15.00Exercised
    
    
    (1,367
    )
    
    
    7.99
    
    
    
    (1,885
    )
    
    
    8.55Forfeited
    
    
    (989
    )
    
    
    16.92
    
    
    
    (4,409
    )
    
    
    21.05Outstanding at June 30
    
    
    15,866
    
    
    
    14.83
    
    
    
    19,131
    
    
    
    14.00Exercisable at June 30
    
    
    9,071
    
    
    
    15.63
    
    
    
    10,198
    
    
    
    15.04
       8




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Consulting andIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Other
    
    Total(in millions)For the three months ended June 30, 2007:Revenue
    
    $
    436
    
    
    $
    145
    
    
    $
    75
    
    
    $
    (21
    )
    
    $
    635Income before taxes
    
    
    22
    
    
    
    6
    
    
    
    9
    
    
    
    (1
    )
    
    
    36For the three months ended June 30, 2006:Revenue
    
    $
    449
    
    
    $
    72
    
    
    $
    63
    
    
    $
    (12
    )
    
    $
    572Income before taxes
    
    
    26
    
    
    
    6
    
    
    
    8
    
    
    
    1
    
    
    
    41For the six months ended June 30, 2007:Revenue
    
    $
    860
    
    
    $
    259
    
    
    $
    146
    
    
    $
    (40
    )
    
    $
    1,225Income before taxes
    
    
    41
    
    
    
    11
    
    
    
    19
    
    
    
    (1
    )
    
    
    70For the six months ended June 30, 2006:Revenue
    
    $
    867
    
    
    $
    148
    
    
    $
    122
    
    
    $
    (23
    )
    
    $
    1,114Income before taxes
    
    
    49
    
    
    
    10
    
    
    
    16
    
    
    
    2
    
    
    
    77
 9




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Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Basic Earnings per Common ShareNet income allocated to Class A common shares(1)
    
    $
    22,575
    
    
    $
    25,672
    
    
    $
    45,826
    
    
    $
    48,432Weighted average common shares outstanding, Class A
    
    
    121,567
    
    
    
    118,572
    
    
    
    121,159
    
    
    
    118,202Basic earnings per common share, Class A
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.38
    
    
    $
    0.41Net income allocated to Class B common shares(1)
    
    $
    152
    
    
    $
    177
    
    
    $
    309
    
    
    $
    335Weighted average common shares outstanding, Class B
    
    
    817
    
    
    
    817
    
    
    
    817
    
    
    
    817Basic earnings per common share, Class B
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.38
    
    
    $
    0.41Diluted Earnings per Common ShareNet income (2)
    
    $
    22,727
    
    
    $
    25,849
    
    
    $
    46,135
    
    
    $
    48,767Weighted average common shares outstanding
    
    
    122,384
    
    
    
    119,388
    
    
    
    121,975
    
    
    
    119,017Incremental shares assuming dilution
    
    
    2,559
    
    
    
    2,561
    
    
    
    2,583
    
    
    
    2,749Weighted average diluted common shares outstanding (3)
    
    
    124,943
    
    
    
    121,949
    
    
    
    124,558
    
    
    
    121,766Diluted earnings per common share
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.37
    
    
    $
    0.40Net income allocated to Class B common shares(4)
    
    $
    148
    
    
    $
    172
    
    
    $
    301
    
    
    $
    325Weighted average common shares outstanding, Class B
    
    
    817
    
    
    
    817
    
    
    
    817
    
    
    
    817Diluted earnings per common share, Class B
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.37
    
    
    $
    0.40
 
 (1)
    
    Net income is allocated to Class A and Class B common shares based on the 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 common stock are assumed to be converted; therefore, 100% of net income is
allocated to common stock.(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.  10




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Litigation
   IPO
Allocation Securities Litigation
   Other
  11




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 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 Second Quarter of 2007
   12




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 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 second quarter of 2006.
  Earnings Growth
  
    
    Gross profits from our infrastructure outsourcing contract with UBS
decreased by $14 million in the second quarter of 2007 as compared to
the second 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 $.07 per diluted share.
    
    The remaining $.04 of growth per diluted share, came primarily from
our Industry Solutions line of business as the result of actions to
strengthen profitability, including account profit improvements and a
reduction to employee expenses, primarily incentive compensation.
Partially offsetting this benefit were decreased gross margins in our
Industry Solutions and Government Services lines of business.
 Free Cash Flow
  Twelve MonthsEndedJune 30,2007
    
    
    2006Net cash provided by operating activities
    
    $
    143
    
    
    $
    166Purchases of property, equipment and software
    
    
    (105
    )
    
    
    (73
    )Free cash flow
    
    $
    38
    
    
    $
    93
  13




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 TCV of Contracts Signed
   Additional Measurements
  Comparison of the Three Months Ended June 30, 2007 and 2006
 Revenue
  Three Months Ended June 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    436
    
    
    $
    449
    
    
    $
    (13
    )
    
    
    (2.9
    )%Government Services
    
    
    145
    
    
    
    72
    
    
    
    73
    
    
    
    101.4
    %Consulting and Applications Solutions
    
    
    75
    
    
    
    63
    
    
    
    12
    
    
    
    19.0
    %Elimination of intersegment revenue
    
    
    (21
    )
    
    
    (12
    )
    
    
    (9
    )
    
    
    75.0
    %Total
    
    $
    635
    
    
    $
    572
    
    
    $
    63
    
    
    
    11.0
    %
 Industry Solutions
  
    
    $41 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.
    
    $14 million increase from new contracts signed during the twelve-month
period following the second quarter of 2006 and from new contracts
signed in the second quarter of 2006 for which we did not recognize a
full quarter of revenue in the second quarter of 2006. This increase
was composed of $6 million and $8 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.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
  
    
    Our solutions for the healthcare market were developed over several
years and are highly customized to the specific business needs of the
market. We identified certain aspects of the healthcare market as core
to our long-term service offerings several years ago when the market
for technology and business process services was immature. As a
result, we have an established presence and brand, which we have
strengthened primarily through internal investments in software and
solutions.
    
    The healthcare industry continues to be in a state of change as health
systems globally look to transform their clinical and administrative
back-office operations, payer organizations work to develop new
consumer-based health models, and the rate of medical cost inflation
continues to be high. Clinical transformation revolutionizes the way
in which the healthcare community uses information technology to
automate the clinical process resulting in improvements in both
healthcare quality and efficiency.
 Government Services
  Consulting and Applications Solutions
  Gross Margin
  
    
    The decreased gross margin for Industry Solutions primarily stems from early stage contracts related to our entry into new markets,
a renegotiated contract where we assumed responsibility for expanded
operations, and a reduction in profits recognized on a contract,
resulting primarily from uncertainties related to possible changes by
the client to the system implementation schedule as a result of a change in control of the client.
    
    A reduced gross profit margin for Government Services is 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.
    
    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.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Selling, General and Administrative Expenses
  Other Income Statement Items
   Comparison of the Six Months Ended June 30, 2007 and 2006
 Revenue
  Six Months Ended June 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    860
    
    
    $
    867
    
    
    $
    (7
    )
    
    
    (0.8
    )%Government Services
    
    
    259
    
    
    
    148
    
    
    
    111
    
    
    
    75.0
    %Consulting and Applications Solutions
    
    
    146
    
    
    
    122
    
    
    
    24
    
    
    
    19.7
    %Elimination of intersegment revenue
    
    
    (40
    )
    
    
    (23
    )
    
    
    (17
    )
    
    
    73.9
    %Total
    
    $
    1,225
    
    
    $
    1,114
    
    
    $
    111
    
    
    
    10.0
    %
 Industry Solutions
  
    
    $88 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.
    
    $25 million increase from new contracts signed during the twelve-month
period following the second quarter of 2006 and from new contracts
signed in the second quarter of 2006 for which we did not recognize a
full six months of revenue during the six months ended June 30, 2006.
This increase was composed of $11 million and $14 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.
    
    $12 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 six months of revenue during the six
months ended June 30, 2006. The acquired company is a provider of
product engineering outsourcing services.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 Government Services
  Consulting and Applications Solutions
  Gross Margin
  
    
    In the first quarter of 2007, we acquired QSS within our Government
Services group. 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.
    
    A $28 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.
  Selling, General and Administrative Expenses
  Other Income Statement Items
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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
  
    
    Cash used by changes in accounts payable and accrued liabilities was
$12 million for the six months ended June 30, 2007, as compared to
cash provided of $31 million for the same period of the prior year.
This decrease is primarily due to the timing of vendor payments.
    
    During the six months ended June 30, 2007, there was a decrease of $17
million in net deferred revenue received from clients as compared to
the same period in 2006.
    
    During the six months ended June 30, 2007, we increased our spending
by $14 million on deferred contract costs as compared to the same
period in 2006 due to new contract signings in 2007 that had
significant transitional activity for which costs are deferred until
services are operational.
    
    During the six months ended June 30, 2007, we made net cash payments
for income taxes of $40 million as compared to $30 million in the six
months ended June 30, 2006.
    
    Bonuses paid to associates under our bonus plans in the first six
months of 2007 and 2006 (including payments of annual bonus amounts
relating to the previous years bonus plan) were approximately $47
million and $58 million, respectively. Included in these bonus amounts
paid in 2007 and 2006 were approximately $6 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.
    
    These factors were partially offset by a $24 million change in the use
of cash from our accounts receivable balances as compared to the six
months ended June 30, 2006. We typically collect our accounts receivable
within 55-65 days, and therefore our accounts receivable balance at
the end of each period can change based on the amount of revenue for
that period and the timing of collection from our customers, which may
vary significantly from period to period.
 Investing Activities
  
    
    During the six months ended June 30, 2007, we paid $252 million for
acquisitions of businesses, including $248 million, net of cash
acquired, for the acquisition of QSS, and $4 million of additional
consideration for the acquisition of eServ LLC, a provider of high-end
product engineering outsourcing services.
    
    During the six months ended June 30, 2007, we purchased $48 million of
property, equipment and purchased software as compared to $36 million
during the six months ended June 30, 2006. This increase was primarily
related to our business expansion needs for data center and office
facilities.
    
    During the six months ended June 30, 2007, we liquidated short-term
investments of $133 million, net, primarily due to our acquisition of
QSS.
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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 
    
    During the six months ended June 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
   Contractual Obligations
  Significant Accounting Standards to be Adopted
 FASB Statement No. 157
  FASB Statement No. 159
  19




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##### Table of Contents



IPO Allocation Securities Litigation
   20




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##### Table of Contents



Other
  
   
   Nominee
    
    For
    
    WithheldRoss Perot
    
    
    96,434,493
    
    
    
    3,954,338Ross Perot, Jr
    
    
    95,139,512
    
    
    
    5,249,319Peter A. Altabef
    
    
    97,022,557
    
    
    
    3,366,274Steven Blasnik
    
    
    95,354,782
    
    
    
    5,034,049John S.T. Gallagher
    
    
    98,723,218
    
    
    
    1,665,613Carl Hahn
    
    
    97,916,740
    
    
    
    2,472,091DeSoto Jordan
    
    
    74,078,836
    
    
    
    26,309,995Thomas Meurer
    
    
    97,418,876
    
    
    
    2,969,955Cecil H. (C. H.) Moore, Jr
    
    
    98,728,424
    
    
    
    1,660,407Anthony J. Principi
    
    
    98,702,326
    
    
    
    1,686,505Anuroop (Tony) Singh
    
    
    98,698,389
    
    
    
    1,690,442
  21




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##### 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.)31.1*
    
    Rule 13a-14 Certification dated July 31, 2007, by Peter A. Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated July 31, 2007, by Russell Freeman, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification dated July 31, 2007, by Peter A. Altabef, President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated July 31, 2007, by Russell Freeman, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 22




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##### Table of Contents



PEROT SYSTEMS CORPORATION
(Registrant)Date: July 31, 2007
    
    By /s/ ROBERT J. KELLY

Robert J. KellyCorporate Controller and PrincipalAccounting Officer
 23