##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2008
 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 incorporation or
    
    (IRS Employer Identification No.)organization)
 
 
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PagePART I:
    
    FINANCIAL INFORMATIONITEM 1:
    
    FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of September
30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Income Statements for the
three and nine months ended September 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    16ITEM 3:
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 4:
    
    CONTROLS AND PROCEDURES
    
    
    26PART II:
    
    OTHER INFORMATIONITEM 1:
    
    LEGAL PROCEEDINGS
    
    
    26ITEM 1A:
    
    RISK FACTORS
    
    
    27ITEM 6:
    
    EXHIBITS
    
    
    28SIGNATURES
    
    
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007  (unaudited)
 September 30, 2008
    
    
    December 31, 2007(Dollars in millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    246
    
    
    $
    187Short-term investments
    
    
    
    
    
    
    23Accounts receivable, net
    
    
    488
    
    
    
    477Prepaid expenses and other
    
    
    91
    
    
    
    70Total current assets
    
    
    825
    
    
    
    757Property, equipment and purchased software, net
    
    
    216
    
    
    
    235Goodwill
    
    
    721
    
    
    
    713Deferred contract costs, net
    
    
    107
    
    
    
    82Other non-current assets
    
    
    107
    
    
    
    113Total assets
    
    $
    1,976
    
    
    $
    1,900LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    64
    
    
    $
    69Deferred revenue
    
    
    65
    
    
    
    55Accrued compensation
    
    
    85
    
    
    
    58Income taxes payable
    
    
    15
    
    
    
    18Accrued and other current liabilities
    
    
    129
    
    
    
    130Total current liabilities
    
    
    358
    
    
    
    330Long-term debt
    
    
    181
    
    
    
    213Non-current deferred revenue
    
    
    79
    
    
    
    70Other non-current liabilities
    
    
    53
    
    
    
    44Total liabilities
    
    
    671
    
    
    
    657Commitments and contingenciesStockholders equity:Common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    582
    
    
    
    565Retained earnings
    
    
    786
    
    
    
    698Treasury stock
    
    
    (53
    )
    
    
    (49
    )Accumulated other comprehensive income
    
    
    (11
    )
    
    
    28Total stockholders equity
    
    
    1,305
    
    
    
    1,243Total liabilities and stockholders equity
    
    $
    1,976
    
    
    $
    1,900
  1




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED INCOME STATEMENTS
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in millions, except per share data)Revenue
    
    $
    711
    
    
    $
    655
    
    
    $
    2,096
    
    
    $
    1,880Direct cost of services
    
    
    587
    
    
    
    542
    
    
    
    1,734
    
    
    
    1,556Gross profit
    
    
    124
    
    
    
    113
    
    
    
    362
    
    
    
    324Selling, general and administrative expenses
    
    
    76
    
    
    
    71
    
    
    
    223
    
    
    
    212Operating income
    
    
    48
    
    
    
    42
    
    
    
    139
    
    
    
    112Interest income
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    6Interest expense
    
    
    (2
    )
    
    
    (3
    )
    
    
    (7
    )
    
    
    (8
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1Income before taxes
    
    
    48
    
    
    
    41
    
    
    
    140
    
    
    
    111Provision for income taxes
    
    
    18
    
    
    
    16
    
    
    
    52
    
    
    
    40Net income
    
    $
    30
    
    
    $
    25
    
    
    $
    88
    
    
    $
    71Earnings per share of common stock:Basic, Class A
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.74
    
    
    $
    0.58Basic, Class B
    
    
    
    
    
    $
    0.20
    
    
    
    
    
    
    $
    0.58Diluted
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.73
    
    
    $
    0.57Diluted, Class B
    
    
    
    
    
    $
    0.20
    
    
    
    
    
    
    $
    0.57Weighted average number of common shares
outstanding (in thousands):Basic, Class A
    
    
    120,151
    
    
    
    122,391
    
    
    
    119,750
    
    
    
    121,577Basic and diluted, Class B
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    757Diluted
    
    
    122,576
    
    
    
    125,315
    
    
    
    121,712
    
    
    
    124,967
  2




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Nine Months Ended September 30,2008
    
    
    2007(Dollars in millions)Cash flows from operating activities:Net income
    
    $
    88
    
    
    $
    71Adjustments to reconcile net income to net cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    85
    
    
    
    76Impairment of assets
    
    
    3
    
    
    
    2Stock-based compensation
    
    
    13
    
    
    
    12Change in deferred taxes
    
    
    (1
    )
    
    
    (3
    )Excess tax benefits from stock-based compensation arrangements
    
    
    
    
    
    
    (3
    )Other non-cash items
    
    
    
    
    
    
    (1
    )Changes in assets and liabilities (net of effects from
acquisitions of businesses):Accounts receivable, net
    
    
    (18
    )
    
    
    (49
    )Prepaid expenses
    
    
    (15
    )
    
    
    (6
    )Deferred contract costs, net
    
    
    (43
    )
    
    
    (41
    )Accounts payable and accrued liabilities
    
    
    (15
    )
    
    
    (12
    )Accrued compensation
    
    
    31
    
    
    
    (28
    )Deferred revenue
    
    
    19
    
    
    
    20Income taxes
    
    
    (3
    )
    
    
    (1
    )Other current and non-current assets
    
    
    (7
    )
    
    
    (1
    )Other current and non-current liabilities
    
    
    1
    
    
    
    (1
    )Net cash provided by operating activities
    
    
    138
    
    
    
    35Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (38
    )
    
    
    (66
    )Acquisitions of businesses, net
    
    
    (18
    )
    
    
    (338
    )Purchases of short-term investments
    
    
    (40
    )
    
    
    (600
    )Net proceeds from sale of short-term investments
    
    
    63
    
    
    
    733Other
    
    
    1
    
    
    
    Net cash used in investing activities
    
    
    (32
    )
    
    
    (271
    )Cash flows from financing activities:Repayments of debt
    
    
    (34
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    
    
    
    
    130Proceeds from issuance of common stock
    
    
    8
    
    
    
    21Proceeds from issuance of treasury stock
    
    
    16
    
    
    
    Excess tax benefits from stock-based compensation arrangements
    
    
    
    
    
    
    3Purchases of treasury stock
    
    
    (24
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (34
    )
    
    
    154Effect of exchange rate changes on cash and cash equivalents
    
    
    (13
    )
    
    
    7Net increase (decrease) in cash and cash equivalents
    
    
    59
    
    
    
    (75
    )Cash and cash equivalents at beginning of period
    
    
    187
    
    
    
    250Cash and cash equivalents at end of period
    
    $
    246
    
    
    $
    175
  3




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Fair Value Measurements
   
    
    Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
    
    Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or liabilities
in active markets and quoted prices for identical or similar assets or liabilities in
markets that are not active.
    
    Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
 4




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Basis of Fair Value MeasurementsQuoted PricesIn Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    UnobservableSeptember 30,
    
    Items
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(in millions)Cash equivalents  money market funds
    
    $
    162
    
    
    $
    162
    
    
    $
    
    
    
    $
    Interest rate swaps
    
    $
    (2
    )
    
    $
    
    
    
    $
    (2
    )
    
    $
    Foreign currency derivative financial instruments:Forward contracts
    
    $
    (12
    )
    
    $
    (12
    )
    
    $
    
    
    
    $
    Options
    
    $
    (6
    )
    
    $
    
    
    
    $
    (6
    )
    
    $
    
   Significant accounting standards to be adopted
 FASB Statement No 141R
  5




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##### Table of Contents



FASB Statement No 161
  FSP No. FAS 142-3
     6




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HighQ IT for the manufacturing industry GmbH
 IT IT IT IT IT IT
 JJ Wild, Inc.
  QSS Group, Inc.
  eServ, LLC
  7




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##### Table of Contents



Other
  IT
   Industry
    
    
    GovernmentSolutions
    
    
    Services
    
    
    Total(in millions)Balance as of December 31, 2007
    
    $
    413
    
    
    $
    300
    
    
    $
    713Goodwill resulting from the HighQIT acquisition
    
    
    6
    
    
    
    
    
    
    
    6Additional goodwill resulting from the eServ acquisition
    
    
    4
    
    
    
    
    
    
    
    4Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )Balance as of September 30, 2008
    
    $
    422
    
    
    $
    299
    
    
    $
    721
  8




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##### Table of Contents



As of September 30, 2008Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    Value(in millions)Service marks
    
    $
    4
    
    
    $
    (2
    )
    
    $
    2Customer-based assets
    
    
    90
    
    
    
    (38
    )
    
    
    52Other intangible assets
    
    
    3
    
    
    
    (3
    )
    
    
    Total
    
    $
    97
    
    
    $
    (43
    )
    
    $
    54
    Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in millions)Net income
    
    $
    30
    
    
    $
    25
    
    
    $
    88
    
    
    $
    71Net unrealized gain (loss) on foreign
exchange forward contracts, options,
and interest rate swaps
    
    
    (1
    )
    
    
    2
    
    
    
    (18
    )
    
    
    2Foreign currency translation adjustments
    
    
    (15
    )
    
    
    3
    
    
    
    (21
    )
    
    
    10Total comprehensive income
    
    $
    14
    
    
    $
    30
    
    
    $
    49
    
    
    $
    83
  Accumulated gain at December 31, 2007
    
    $
    1Net unrealized loss on hedging transactions
    
    
    (21
    )Reclassifications into earnings
    
    
    3Total accumulated loss at September 30, 2008
    
    $
    (17
    )
 9




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Stock-based compensation
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in millions)
    
    
    (in millions)Direct cost of services
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    3Selling, general and administrative expenses
    
    
    3
    
    
    
    3
    
    
    
    10
    
    
    
    9Stock-based compensation expense
    
    
    4
    
    
    
    4
    
    
    
    13
    
    
    
    12Total stock-based compensation expense, net of tax
    
    
    3
    
    
    
    3
    
    
    
    8
    
    
    
    8
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Weighted average risk free interest rates
    
    
    3.20
    %
    
    
    4.88
    %
    
    
    2.80
    %
    
    
    4.88
    %Weighted average life (in years)
    
    
    4.72
    
    
    
    5.0
    
    
    
    4.72
    
    
    
    5.0Volatility
    
    
    27
    %
    
    
    23
    %
    
    
    27
    %
    
    
    23
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value
per share of options granted
    
    $
    5.03
    
    
    $
    4.65
    
    
    $
    4.09
    
    
    $
    4.67
 10




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Activity in our stock-based compensation plans
  Nine months ended September 30,2008
    
    2007Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    PriceOutstanding at January 1
    
    
    16,240
    
    
    
    15.00
    
    
    
    18,169
    
    
    
    14.42Granted
    
    
    1,683
    
    
    
    14.34
    
    
    
    1,602
    
    
    
    15.41Exercised
    
    
    (1,427
    )
    
    
    11.10
    
    
    
    (1,705
    )
    
    
    8.22Forfeited
    
    
    (953
    )
    
    
    15.92
    
    
    
    (1,438
    )
    
    
    17.28Outstanding at September 30
    
    
    15,543
    
    
    
    15.23
    
    
    
    16,628
    
    
    
    14.90Exercisable at September 30
    
    
    9,176
    
    
    
    15.73
    
    
    
    8,945
    
    
    
    15.51
      11




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##### Table of Contents



Industry
    
    GovernmentSolutions
    
    Services
    
    Other(1)
    
    Total(in millions)For the three months ended September 30, 2008:Revenue
    
    $
    544
    
    
    $
    168
    
    
    $
    (1
    )
    
    $
    711Income before taxes
    
    
    39
    
    
    
    9
    
    
    
    
    
    
    
    48For the three months ended September 30, 2007:Revenue
    
    $
    508
    
    
    $
    147
    
    
    $
    
    
    
    $
    655Income before taxes
    
    
    37
    
    
    
    6
    
    
    
    (2
    )
    
    
    41For the nine months ended September 30, 2008:Revenue
    
    $
    1,608
    
    
    $
    490
    
    
    $
    (2
    )
    
    $
    2,096Income before taxes
    
    
    123
    
    
    
    17
    
    
    
    
    
    
    
    140For the nine months ended September 30, 2007:Revenue
    
    $
    1,476
    
    
    $
    406
    
    
    $
    (2
    )
    
    $
    1,880Income before taxes
    
    
    97
    
    
    
    17
    
    
    
    (3
    )
    
    
    111
  (1)
    
    Other includes our remaining operating areas and corporate activities, income and expenses
that are not related to the operations of the other reportable segments, and the elimination
of intersegment revenue and direct costs of services of approximately $1 million for the three
months ended September 30, 2008 and $2 million for the nine months ended September 30, 2008
and 2007 related to the provision of services by the Industry Solutions segment to the
Government Services segment.
 12




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For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per
    
    
    (in thousands, except pershare data)
    
    
    share data)Basic Earnings per Common ShareNet income allocated to Class A common shares (1)
    
    $
    30,341
    
    
    $
    25,088
    
    
    $
    88,443
    
    
    $
    70,914Weighted average common shares outstanding, Class A
    
    
    120,151
    
    
    
    122,391
    
    
    
    119,750
    
    
    
    121,577Basic earnings per common share
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.74
    
    
    $
    0.58Net income allocated to Class B common shares (1)
    
    
    
    
    
    $
    133
    
    
    
    
    
    
    $
    441Weighted average common shares outstanding, Class B
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    757Basic earnings per common share
    
    
    
    
    
    $
    0.20
    
    
    
    
    
    
    $
    0.58Diluted Earnings per Common ShareNet income (2)
    
    $
    30,341
    
    
    $
    25,221
    
    
    $
    88,443
    
    
    $
    71,355Weighted average common shares outstanding
    
    
    120,151
    
    
    
    123,039
    
    
    
    119,750
    
    
    
    122,334Incremental shares assuming dilution
    
    
    2,425
    
    
    
    2,276
    
    
    
    1,962
    
    
    
    2,633Weighted average diluted common shares outstanding (3)
    
    
    122,576
    
    
    
    125,315
    
    
    
    121,712
    
    
    
    124,967Diluted earnings per common share
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.73
    
    
    $
    0.57Net income allocated to Class B common shares (4)
    
    
    
    
    
    $
    130
    
    
    
    
    
    
    $
    430Weighted average common shares outstanding, Class B
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    757Diluted earnings per common share, Class B
    
    
    
    
    
    $
    0.20
    
    
    
    
    
    
    $
    0.57
 
 (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.(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. 13




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For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007(in thousands)
    
    (in thousands)Common stock options
    
    
    7,214
    
    
    
    9,822
    
    
    
    8,415
    
    
    
    9,484Restricted stock units
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    4
   Litigation
   IPO Allocation Securities Litigation
  14




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Other
  15




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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, 2007. 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
  16




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Overview of Our Financial Results for the Third Quarter of 2008
    Revenue Growth
  
    
    Revenue from expansion of base services from existing accounts and project work.
 
    
    Revenue from new contracts signed during the twelve-month period following the third quarter
of 2007.
 
    
    Revenue related to acquisitions.
  17




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Earnings Growth
  Free Cash Flow
  Nine MonthsEndedSeptember 30,2008
    
    
    2007Net cash provided by operating activities
    
    $
    138
    
    
    $
    35Purchases of property, equipment and software
    
    
    (38
    )
    
    
    (66
    )Free cash flow
    
    $
    100
    
    
    $
    (31
    )
  TCV of Contracts Signed
   18




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Additional Measurements
  Comparison of the Three Months Ended September 30, 2008 and 2007
 Revenue
  Three Months Ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    544
    
    
    $
    508
    
    
    $
    36
    
    
    
    7.1
    %Government Services
    
    
    168
    
    
    
    147
    
    
    
    21
    
    
    
    14.3
    %Elimination of intersegment revenues
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Total
    
    $
    711
    
    
    $
    655
    
    
    $
    56
    
    
    
    8.5
    %
 Industry Solutions
  
    
    $26 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.
 
    
    $23 million increase from new contracts signed during the twelve-month period following the
third quarter of 2007. This increase was composed of $14 million, $8 million, and $1 million
from new contracts signed in the Commercial Solutions, Healthcare, and Insurance and Business
Processing 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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
    
    $7 million increase from revenue related to acquisitions made in the past year.
  Government Services
  Gross Margin
  
    
    Increased gross margin within Industry Solutions segment, including an increase from
contract profit improvements, project growth, and efficiency gains.
  
    
    Reduced gross margin for Government Services, primarily attributable to losses on a
project that ended in the quarter.
    
    Increased incentive compensation, net of amounts reimbursable by our customers.
 Selling, General and Administrative Expenses
  Other Income Statement Items
  20




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Comparison of the Nine Months Ended September 30, 2008 and 2007
 Revenue
  Nine Months Ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    1,608
    
    
    $
    1,476
    
    
    $
    132
    
    
    
    8.9
    %Government Services
    
    
    490
    
    
    
    406
    
    
    
    84
    
    
    
    20.7
    %Elimination of intersegment revenues
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    Total
    
    $
    2,096
    
    
    $
    1,880
    
    
    $
    216
    
    
    
    11.5
    %
 Industry Solutions
  
    
    $74 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.
 
    
    $59 million increase from new contracts signed during the twelve-month period following the
third quarter of 2007. This increase was composed of $37 million, $18 million, and $4 million
from new contracts signed in the Commercial Solutions, Healthcare, and Insurance and Business
Processing 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.
 
    
    $54 million increase from revenue related to acquisitions.
  21




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Government Services
  Gross Margin
  
    
    Reduced gross margin for Government Services, primarily attributable to lower profit
margins related to an early stage outsourcing contract signed in 2007, and losses on a
project that ended in the quarter.
 
    
    Increased incentive compensation, net of amounts reimbursable by our customers.
 Selling, General and Administrative Expenses
  Other Income Statement Items
  22




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Liquidity and Capital Resources
  Operating Activities
  
    
    Net income was $88 million and $71 million for the nine months ended September 30, 2008 and
2007, respectively. Depreciation and amortization expense, which are non-cash expenses, were
$85 million and $76 million for the nine months ended September 30, 2008 and 2007,
respectively. The increase in
depreciation and amortization expense in 2008 as compared to 2007 was due primarily to purchases
of property and equipment in late 2007 associated with data center migration, our recent data
center expansion, and acquisitions. Stock based compensation expense, which is a non-cash
expense, was $13 million and $12 million for the nine months ended September 30, 2008 and 2007.
 
    
    Cash decreased due to an $18 million increase in
accounts receivable, net, for the nine months
ended September 30, 2008, as compared to $49 million increase for the same period of the prior
year. We typically collect our accounts receivable within 62-65 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.
 
    
    Cash used in accounts payable and accrued liabilities was $15 million for the nine months
ended September 30, 2008, as compared to cash used of $12 million for the same period of the
prior year. This decrease is primarily due to the timing of vendor payments.
 
    
    Bonuses paid to associates under our bonus plans in the first nine months of 2008 and 2007
(including payments of annual bonus amounts relating to the previous years bonus plan) were
approximately $28 million and $54 million, respectively. The amount of bonuses that we pay
each year is based on several factors, including our financial performance and managements
discretion. The increase in accrued compensation in 2008 primarily represents accrued annual
incentive compensation, which is expected to be paid in the first quarter of the following
year.
 
    
    During the nine months ended September 30, 2008, we made net cash payments for income taxes
of $57 million as compared to $44 million in the nine months ended September 30, 2007.
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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 Holdings, Inc. and its
subsidiary, JJ Wild, Inc., (collectively, JJ Wild) and $4 million of additional
consideration for the acquisition of eServ LLC, a provider of project engineering outsourcing
services.
 
    
    During the nine months ended September 30, 2008, we purchased $38 million of property,
equipment and purchased software as compared to $66 million during the nine months ended
September 30, 2007. The first
nine months of 2007 included purchases of property and equipment associated with data center
migration and our recent data center expansion.
 
    
    During the nine months ended September 30, 2008, we liquidated short-term investments of $23
million, net, as compared to $133 million, net, during the nine months ended September 30,
2007. The liquidation during the first nine months of 2007 was in connection with our
acquisition of QSS.
 
    
    During the nine months ended September 30, 2008, we paid $18 million for acquisitions of
businesses, including $14 million, net of cash acquired, for the acquisition of
HighQIT for the manufacturing industry GmbH and its subsidiary (collectively,
called HighQIT), $4 million of additional consideration for the acquisition of
eServ LLC, and $4 million for an acquisition in the second quarter of 2008. These payments
were partially offset by purchase price adjustments paid to us of $4 million.
 Financing Activities
  24




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Significant Accounting Standards to be Adopted
 .
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26




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IPO Allocation Securities Litigation
  Other
  
   27




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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 November 4, 2008, by Peter A.
Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated November 4, 2008, by John E.
Harper, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification dated November 4, 2008, by Peter A.
Altabef, President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated November 4, 2008, by John E.
Harper, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 28




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PEROT SYSTEMS CORPORATION
(Registrant)Date: November 4, 2008
    By
    /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal
Accounting Officer 29