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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2004oro
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from       to
 Commission File Number 0-22495 PEROT SYSTEMS CORPORATION  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    75-2230700
(IRS Employer
Identification No.)
 2300 WEST PLANO PARKWAY
PLANO, TEXAS
75075
(Address of principal executive offices)
(Zip Code) (972) 577-0000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). x Yes o No Number of shares of registrants common stock outstanding as of April 30, 2004:
111,224,452 shares of Class A Common Stock and 3,275,012 shares of
Class B Common Stock.




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004 
 INDEX PagePART I:
    
    FINANCIAL INFORMATIONITEM 1:
    
    FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31,
2003
    
    
    1Condensed Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3:
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    19ITEM 4:
    
    CONTROLS AND PROCEDURES
    
    
    19PART II:
    
    OTHER INFORMATIONITEM 1:
    
    LEGAL PROCEEDINGS
    
    
    20ITEM 4:
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    21ITEM 6:
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    21SIGNATURES
    
    
    
    
    23Rule 13a-14 Certification by President and CEORule 13a-14 Certification by VP and CFOSection 1350 Certification by President and CEOSection 1350 Certification by VP and CFO




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##### Table of Contents



ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) PEROT SYSTEMS CORPORATION AND SUBSIDIARIES 
     ASSETS March 31, 2004
    
    December 31, 2003Current assets:Cash and cash equivalents
    
    $
    118,721
    
    
    $
    123,770Short-term investments
    
    
    33,985
    
    
    
    37,599Accounts receivable, net
    
    
    232,303
    
    
    
    208,244Prepaid expenses and other
    
    
    71,209
    
    
    
    52,370Total current assets
    
    
    456,218
    
    
    
    421,983Property, equipment and purchased software, net
    
    
    144,120
    
    
    
    142,836Goodwill
    
    
    358,625
    
    
    
    347,576Other non-current assets
    
    
    105,017
    
    
    
    98,202Total assets
    
    $
    1,063,980
    
    
    $
    1,010,597LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    32,205
    
    
    $
    27,063Accrued liabilities
    
    
    100,221
    
    
    
    98,021Other current liabilities
    
    
    83,270
    
    
    
    81,959Total current liabilities
    
    
    215,696
    
    
    
    207,043Long-term debt
    
    
    75,498
    
    
    
    75,498Other non-current liabilities
    
    
    15,743
    
    
    
    15,277Total liabilities
    
    
    306,937
    
    
    
    297,818Stockholders equity:Common stock
    
    
    1,143
    
    
    
    1,123Additional paid-in capital
    
    
    441,040
    
    
    
    421,847Retained earnings
    
    
    307,358
    
    
    
    288,615Other stockholders equity
    
    
    (3,575
    )
    
    
    (4,174
    )Accumulated other comprehensive income
    
    
    11,077
    
    
    
    5,368Total stockholders equity
    
    
    757,043
    
    
    
    712,779Total liabilities and stockholders equity
    
    $
    1,063,980
    
    
    $
    1,010,597
 The accompanying notes are an integral part of these financial statements. Page 1




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES 
     Three months ended March 31,2004
    
    2003Revenue
    
    $
    419,804
    
    
    $
    336,361Direct cost of services
    
    
    335,376
    
    
    
    272,087Gross profit
    
    
    84,428
    
    
    
    64,274Selling, general and administrative expenses
    
    
    53,449
    
    
    
    43,412Operating income
    
    
    30,979
    
    
    
    20,862Interest income
    
    
    384
    
    
    
    705Interest expense
    
    
    (463
    )
    
    
    (5
    )Equity in earnings of unconsolidated affiliates
    
    
    
    
    
    
    1,525Other income (expense), net
    
    
    (1,008
    )
    
    
    1,300Income before taxes
    
    
    29,892
    
    
    
    24,387Provision for income taxes
    
    
    11,149
    
    
    
    9,510Income before cumulative effect of a change in
accounting principle
    
    
    18,743
    
    
    
    14,877Cumulative effect of a change in accounting principle,
net of tax
    
    
    
    
    
    
    (42,959
    )Net income (loss)
    
    $
    18,743
    
    
    $
    (28,082
    )Basic earnings (loss) per common share:Income before cumulative effect of a change in
accounting principle
    
    $
    0.16
    
    
    $
    0.14Cumulative effect of a change in accounting
principle, net of tax
    
    
    
    
    
    
    (0.40
    )Net income (loss)
    
    $
    0.16
    
    
    $
    (0.26
    )Weighted average common shares outstanding
    
    
    113,944
    
    
    
    109,046Diluted earnings (loss) per common share:Income before cumulative effect of a change in
accounting principle
    
    $
    0.16
    
    
    $
    0.13Cumulative effect of a change in accounting
principle, net of tax
    
    
    
    
    
    
    (0.38
    )Net income (loss)
    
    $
    0.16
    
    
    $
    (0.25
    )Weighted average diluted common shares outstanding
    
    
    119,494
    
    
    
    113,962
 The accompanying notes are an integral part of these financial statements. Page 2




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES 
     Three months ended March 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    18,743
    
    
    $
    (28,082
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    13,382
    
    
    
    7,346Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    42,959Change in deferred taxes
    
    
    (5,423
    )
    
    
    3,949Other non-cash items
    
    
    3,592
    
    
    
    (1,539
    )Changes in assets and liabilities (net of effects from acquisitions
of businesses):Accounts receivable, net
    
    
    (23,837
    )
    
    
    (5,943
    )Prepaid expenses
    
    
    (8,818
    )
    
    
    (10,841
    )Accounts payable and accrued liabilities
    
    
    7,587
    
    
    
    (11,051
    )Accrued compensation
    
    
    (8,128
    )
    
    
    (248
    )Income taxes
    
    
    14,926
    
    
    
    18,918Other current and non-current assets
    
    
    (7,449
    )
    
    
    (5,634
    )Other current and non-current liabilities
    
    
    (2,313
    )
    
    
    (1,525
    )Net cash provided by operating activities
    
    
    2,262
    
    
    
    8,309Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (10,522
    )
    
    
    (13,175
    )Acquisitions of businesses, net of cash acquired of
$0 and $2,222, respectively
    
    
    (8,071
    )
    
    
    (82,778
    )Net proceeds from the sale of short-term investments
    
    
    5,442
    
    
    
    Other
    
    
    (83
    )
    
    
    (18
    )Net cash used in investing activities
    
    
    (13,234
    )
    
    
    (95,971
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    6,061
    
    
    
    984Other
    
    
    (65
    )
    
    
    (142
    )Net cash provided by financing activities
    
    
    5,996
    
    
    
    842Effect of exchange rate changes on cash and cash equivalents
    
    
    (73
    )
    
    
    1,761Net decrease in cash and cash equivalents
    
    
    (5,049
    )
    
    
    (85,059
    )Cash and cash equivalents at beginning of period
    
    
    123,770
    
    
    
    212,861Cash and cash equivalents at end of period
    
    $
    118,721
    
    
    $
    127,802
 The accompanying notes are an integral part of these financial statements. Page 3




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES 
    NOTE 1. GENERAL The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. The interim condensed consolidated
financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-owned subsidiaries with all significant
intercompany transactions eliminated. In our opinion, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
statement of the financial position, results of operations and cash flows for
the interim periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. These financial statements should
be read in conjunction with the audited financial statements for the year ended
December 31, 2003, in our Annual Report on Form 10-K filed with the SEC on
March 15, 2004. Operating results for the three-month period ended March 31,
2004, are not necessarily indicative of the results for the year ending
December 31, 2004. Certain of the 2003 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation. Stock-Based Compensation As permitted by Statement of Financial Accounting Standard No. 123, Accounting
for Stock-Based Compensation, and FAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure, we have elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for our employee stock options. Under
APB 25, compensation expense is recorded when the exercise price of employee
stock options is less than the fair value of the underlying stock on the date
of grant. We have implemented the disclosure-only provisions of FAS 123 and FAS
148. Had we elected to adopt the expense recognition provisions of FAS 123, the
impact on net income (loss) and earnings (loss) per common share would have
been as follows: Three months ended March 31,2004
    
    2003Net income (loss)As reported
    
    $
    18,743
    
    
    $
    (28,082
    )Add: Stock-based compensation expense included
in reported net income (loss), net of related
tax effects
    
    
    145
    
    
    
    51Less: Total stock-based employee compensation
expense determined under fair value based methods
for all awards, net of related tax effects
    
    
    (3,725
    )
    
    
    (4,484
    )Pro forma
    
    $
    15,163
    
    
    $
    (32,515
    )Basic earnings (loss) per common shareAs reported
    
    $
    0.16
    
    
    $
    (0.26
    )Pro forma
    
    $
    0.13
    
    
    $
    (0.30
    )Diluted earnings (loss) per common shareAs reported
    
    $
    0.16
    
    
    $
    (0.25
    )Pro forma
    
    $
    0.13
    
    
    $
    (0.29
    )
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) We utilize the Black-Scholes option pricing model to calculate our pro forma
stock-based employee compensation expense, and the assumptions used for each
period are as follows: Three months ended March 31,2004
    
    2003Weighted average risk free interest rates
    
    
    2.25
    %
    
    
    2.34
    %Weighted average life (in years)
    
    
    3.7
    
    
    
    3.8Volatility
    
    
    52
    %
    
    
    57
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value per
share of options granted
    
    $
    5.33
    
    
    $
    4.38
 With the exception of grants with cliff vesting and acceleration features, the
expected life of each grant was generally estimated to be a period equal to one
half of the vesting period, plus one year, for all periods presented. The
expected life for cliff vesting grants was equal to the vesting period, and the
expected life for grants with acceleration features was estimated to be equal
to the midpoint of the vesting period. NOTE 2. ACQUISITIONS Perot Systems TSI B.V. In 1996, we entered into a joint venture with HCL Technologies whereby we each
owned 50% of HCL Perot Systems B.V. (HPS), an information technology services
company based in India. On December 19, 2003, we acquired HCL Technologies
shares in HPS, and changed the name of HPS to Perot Systems TSI B.V. (TSI).
This transaction was accounted for as a step acquisition under the purchase
method of accounting. TSI is an IT services firm specializing in business
transformation and application outsourcing. TSI currently serves customers in
the United Kingdom, Singapore, Switzerland, Luxembourg, Germany, India,
Thailand, Malaysia, Japan, Australia and the United States. As a result of the
acquisition, we expanded the geographical areas in which we provide services
and broadened our customer base in our application development service
offering. Because of the late December 2003 closing of this acquisition, the
post-acquisition results of operations of TSI were not material to our
consolidated results of operations for 2003. Therefore, to simplify the process
of consolidating TSI, we continued to account for TSIs results of operations
using the equity method of accounting through December 31, 2003. The balance of
our investment in TSI immediately prior to our consolidation of TSI on December
31, 2003, was $29,495. The additional cash consideration paid for HCL Technologies interest in TSI
was $98,848 (including acquisition costs and net of $12,667 of cash acquired).
As of December 31, 2003, we consolidated the assets and liabilities of TSI.
Accordingly, the TSI assets acquired and liabilities assumed are included in
our consolidated balance sheets at December 31, 2003. During the first quarter of 2004, we completed the appraisals of the acquired
intangible assets. However, the allocation of TSI purchase consideration to
the assets and liabilities acquired, including goodwill, as well as the
allocation of goodwill to our reportable units, has not been completed
primarily due to the pending completion of the valuation of certain tangible
assets and certain liabilities. The estimated excess purchase price over net
assets acquired of $67,509 was recorded as goodwill on the condensed
consolidated balance sheets, was assigned to the Consulting segment and is not
deductible for tax purposes. Page 5




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) The following table summarizes the preliminary values assigned to the TSI
assets acquired and liabilities assumed as of December 31, 2003, and the
reversal of our historical investment balance. Current assets
    
    $
    84,282Property, equipment and purchased software, net
    
    
    21,716Goodwill (estimated)
    
    
    67,509Identifiable intangible assets
    
    
    7,650Other non-current assets
    
    
    1,540182,697Current liabilities
    
    
    (38,521
    )Other non-current liabilities
    
    
    (3,166
    )Reversal of our investment balance
    
    
    (29,495
    )Purchase consideration
    
    $
    111,515
 Soza & Company, Ltd. On February 20, 2003, we acquired all of the outstanding shares of Soza &
Company, Ltd., and the purchase agreement provided for additional payments to
be made in the future if certain financial targets were achieved. In the first
quarter of 2004, we determined that Soza had achieved certain financial targets
for 2003. As a result of achieving these targets and in accordance with the
purchase agreement, we made additional payments of $6,298 in cash and $8,580 in
641 shares of our Class A Common Stock that resulted in us recording $14,878 of
additional goodwill to the Government Services segment. This goodwill is not
deductible for tax purposes. In addition, during the first quarter of
2004, we
increased the values of certain tax assets that we had purchased in the Soza
acquisition and reduced the amount of purchase price allocated to goodwill by
$3,508. ADI Technology Corporation On July 1, 2002, we acquired all of the outstanding shares of ADI Technology
Corporation, and the purchase agreement provided for additional payments to be
made in the future if certain financial targets were achieved. In the first
quarter of 2004, we determined that ADI had achieved certain financial targets
for 2003. As a result of achieving these targets and in accordance with the
purchase agreement, we made additional payments of $2,294 in cash and $2,325 in
175 shares of our Class A Common Stock that resulted in us recording $4,619 as
additional goodwill. This goodwill was assigned to the Government Services
segment and is not deductible for tax purposes. NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the three months ended March
31, 2004, by reporting segment are as follows: GovernmentIT Solutions
    
    Services
    
    Consulting
    
    TotalBalance as of December 31, 2003
    
    $
    122,817
    
    
    $
    81,029
    
    
    $
    143,730
    
    
    $
    347,576Additional goodwill for ADI
acquisition
    
    
    
    
    
    
    4,619
    
    
    
    
    
    
    
    4,619Additional goodwill for Soza
acquisition
    
    
    
    
    
    
    11,370
    
    
    
    
    
    
    
    11,370TSI purchase price allocation
adjustments
    
    
    
    
    
    
    
    
    
    
    (4,850
    )
    
    
    (4,850
    )Other
    
    
    3
    
    
    
    
    
    
    
    (93
    )
    
    
    (90
    )Balance as of March 31, 2004
    
    $
    122,820
    
    
    $
    97,018
    
    
    $
    138,787
    
    
    $
    358,625
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) Identifiable intangible assets as of March 31, 2004, are recorded in other
non-current assets in the condensed consolidated balance sheets and are
composed of: Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    BookValue
    
    Amortization
    
    ValueService marks
    
    $
    5,761
    
    
    $
    (3,066
    )
    
    $
    2,695Customer based assets
    
    
    22,599
    
    
    
    (5,198
    )
    
    
    17,401Other intangible assets
    
    
    4,855
    
    
    
    (1,660
    )
    
    
    3,195Balance at March 31, 2004
    
    $
    33,215
    
    
    $
    (9,924
    )
    
    $
    23,291
 Total amortization expense for identifiable intangible assets was $2,519 and
$707 for the quarters ended March 31, 2004 and 2003, respectively. Amortization
expense is estimated at $9,942, $5,190, $3,995, $3,170, $2,233 and $486 for the
years ended December 31, 2004 through 2009, respectively. Identifiable
intangible assets are amortized on a straight-line basis over their estimated
useful lives, ranging from 1 to 15 years. The weighted average useful life is
approximately five years. NOTE 4. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss), net of tax, was as follows: Three monthsended March 31,2004
    
    2003Net income (loss)
    
    $
    18,743
    
    
    $
    (28,082
    )Foreign currency translation adjustments
    
    
    5,086
    
    
    
    848Other
    
    
    623
    
    
    
    46Total comprehensive income (loss)
    
    $
    24,452
    
    
    $
    (27,188
    )
 NOTE 5. STOCKHOLDERS EQUITY The components of Other stockholders equity were as follows: March 31, 2004
    
    December 31, 2003Deferred compensation
    
    $
    (3,687
    )
    
    $
    (3,814
    )Other
    
    
    112
    
    
    
    (360
    )Total other stockholders equity
    
    $
    (3,575
    )
    
    $
    (4,174
    )
 At March 31, 2004, there were 111,078 shares of our Class A Common Stock
outstanding and 3,217 shares of our Class B Common Stock outstanding. At
December 31, 2003, there were 109,262 shares of our Class A Common Stock
outstanding and 3,042 shares of our Class B Common Stock outstanding. The
increase in the number of Class A Common Stock outstanding is due to the
exercise of stock options, the issuance of shares as additional purchase price
consideration for certain acquisitions, and the issuance of shares to
participants in the Employee Stock Purchase Plan. Page 7




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) NOTE 6. INCOME TAXES Our effective tax rate for the first quarter of 2004 was 37.3%. Our effective
tax rate for income before cumulative effect of a change in accounting
principle for the first quarter of 2003 was 39.0%. The tax rate for the first
quarter of 2004 was less than the rate in 2003 due primarily to the acquisition
of TSI. TSI has tax holidays in certain Asian jurisdictions, which exempt
specific types of income from taxation. NOTE 7. SEGMENT DATA We offer our services under three primary lines of business, which are also
reportable segments. These lines of business are IT Solutions, Government
Services and Consulting. IT Solutions, our largest line of business, provides
services to our customers primarily under long-term contracts in strategic
relationships. These services include technology and business process services,
as well as industry domain-based, short-term project and consulting services.
The Government Services segment provides consulting and technology-based
business process solutions for the Department of Defense, law enforcement
agencies, and other governmental agencies. The Consulting segment provides our
customers high-value and repeatable services related to business and technical
expertise and the design and implementation of business and software solutions,
primarily under short-term contracts related to specific projects. Other
includes our remaining operating areas and corporate activities, income and
expenses that are not related to the operations of the other reportable
segments, as well as the elimination of approximately $5,520 of intersegment
revenue related to the provision of services by TSI (in the Consulting segment)
to the other segments (for 2004 only). The reporting segments follow the same accounting policies that we use for our
consolidated financial statements. Segment performance is evaluated based on
income (loss) before taxes, exclusive of income and expenses that are included
in the Other category. All corporate and centrally incurred costs are
allocated to the segments based principally on expenses, employees, square
footage, or usage. The following is a summary of certain financial information by reportable
segment: IT
    
    GovernmentSolutions
    
    Services
    
    Consulting
    
    Other
    
    TotalFor the quarter ended March 31, 2004:Revenue
    
    $
    314,925
    
    
    $
    64,762
    
    
    $
    45,637
    
    
    $
    (5,520
    )
    
    $
    419,804Income (loss) before taxes
    
    
    22,362
    
    
    
    3,816
    
    
    
    3,872
    
    
    
    (158
    )
    
    
    29,892For the quarter ended March 31, 2003:Revenue
    
    $
    289,675
    
    
    $
    35,029
    
    
    $
    11,590
    
    
    $
    67
    
    
    $
    336,361Income (loss) before taxes
    
    
    19,565
    
    
    
    2,726
    
    
    
    (67
    )
    
    
    2,163
    
    
    
    24,387
 Prior to the first quarter of 2004, our Global Software Services group was
included in our Consulting segment. During the first quarter of 2004, we
changed the structure of this group which is now included in the IT Solutions
segment. All prior period amounts have been adjusted to reflect this change. Page 8




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) NOTE 8. EARNINGS PER SHARE The following is a reconciliation of the numerators and the denominators of the
basic and diluted per common share computations for income before the
cumulative effect of a change in accounting principle. For the three months ended March 31,2004
    
    2003Basic
Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    18,743
    
    
    $
    14,877Weighted average common shares outstanding
    
    
    113,944
    
    
    
    109,046Basic earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.16
    
    
    $
    0.14Diluted
Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    18,743
    
    
    $
    14,877Weighted average common shares outstanding
    
    
    113,944
    
    
    
    109,046Incremental shares assuming dilution
    
    
    5,550
    
    
    
    4,916Weighted average diluted common shares outstanding
    
    
    119,494
    
    
    
    113,962Diluted earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.16
    
    
    $
    0.13
 For the three months ended March 31, 2004 and 2003, options to purchase 13,698
and 23,791 shares, respectively, of our common stock were excluded from the
calculation of diluted earnings per common share because the impact was
antidilutive given that the exercise prices for these options were greater than
the average actual share price for the respective quarter. NOTE 9. CREDIT FACILITY On January 20, 2004, we entered into a revolving credit facility with a
syndicate of banks that allows us to borrow up to $100,000. Borrowings under
the credit facility will be either through revolving loans or letters of credit
obligations. The credit facility is guaranteed by certain of our domestic
subsidiaries. Interest on borrowings varies with usage and begins at an
alternate base rate, as defined in the credit facility agreement, or the LIBOR
rate plus an applicable spread based upon our debt/EBITDA ratio applicable on
such date. We are also required to pay a facility fee based upon the unused
credit commitment and certain other fees related to letter of credit issuance.
The credit facility matures on January 19, 2007, and requires certain financial
covenants, including a debt/EBITDA ratio, a minimum interest coverage ratio, a
minimum capitalization ratio and a minimum current ratio, each as defined in
the credit facility agreement. There have been no borrowings under this credit
facility as of March 31, 2004. NOTE 10. COMMITMENTS AND CONTINGENCIES Litigation We are involved in the following legal proceedings. IPO Allocation Securities Litigation In July and August 2001, we, as well as some of our current and former officers
and the investment banks that underwrote our initial public offering, were
named as defendants in two purported class action lawsuits. Page 9




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) These lawsuits, Seth Abrams v. Perot Systems Corp. et al. and Adrian Chin v. Perot Systems,
Inc. et al., were filed in the United States District Court for the Southern
District of New York. The suits allege violations of Rule 10b-5, promulgated
under the Securities Exchange Act of 1934, and Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933. Approximately 300 issuers and 40 investment banks
have been sued in similar cases. The suits against the issuers and
underwriters have been consolidated for pretrial purposes in the IPO Allocation
Securities Litigation. The lawsuit involving us focuses on alleged improper
practices by the investment banks in connection with our initial public
offering in February 1999. The plaintiffs allege that the investment banks, in
exchange for allocating public offering shares to their customers, received
undisclosed commissions from their customers on the purchase of securities and
required their customers to purchase additional shares in aftermarket trading.
The lawsuit also alleges that we should have disclosed in our public offering
prospectus the alleged practices of the investment banks, whether or not we
were aware that the practices were occurring. The plaintiffs are
seeking unspecified damages, statutory compensation and costs and
expenses of the litigation. During 2002, the current and former officers and directors of Perot Systems
Corporation that were individually named in the lawsuits referred to above were
dismissed from the cases. In exchange for the dismissal, the individual
defendants entered agreements with the plaintiffs that toll the running of the
statute of limitations and permit the plaintiffs to refile claims against them
in the future. In February 2003, in response to the defendants motion to
dismiss, the court dismissed the plaintiffs Rule 10b-5 claims against us, but
did not dismiss the remaining claims. We have accepted a settlement proposal presented to all issuer defendants.
Pursuant to the proposed settlement, plaintiffs would dismiss and release all
claims against us and our current and former officers and directors, in
exchange for an assurance by the insurance companies collectively responsible
for insuring the issuers in all of the IPO cases that the plaintiffs will
achieve a minimum recovery (including amounts recovered from the underwriters),
and for the assignment or surrender of certain claims we may have against the
underwriters. We would not be required to make any cash payment with respect
to the settlement. The proposed settlement requires approval of an unspecified
percentage of issuers. The proposed settlement would also require court
approval, which cannot be assured. Litigation Relating to the California Energy Market In June 2002, we were named as a defendant in a purported class action lawsuit
that alleges that we conspired with energy traders to manipulate the California
energy market. This lawsuit, Art Madrid v. Perot Systems Corporation et al.,
was filed in the Superior Court of California, County of San Diego. The case
is currently pending in the Superior Court for the County of
Sacramento. The plaintiffs are seeking unspecified damages, treble
damages, restitution, punitive damages, interest, costs,
attorneys fees and declaratory relief. In
September 2003, we filed a demurrer to the complaint and an alternative motion
to strike all claims for monetary relief. In January 2004, the court granted
our demurrer and did not grant the plaintiffs leave to amend their complaint.
The plaintiffs, however, have filed a notice of appeal. In June, July and August 2002, Perot Systems, Ross Perot and Ross Perot, Jr.,
were named as defendants in eight purported class action lawsuits that allege
violations of Rule 10b-5, and, in some of the cases, common law fraud. These
suits allege that our filings with the Securities and Exchange Commission
contained material misstatements or omissions of material facts with respect to
our activities related to the California energy market. All of these eight
cases have been consolidated in the Northern District of Texas, Dallas Division
in the case of Vincent Milano v. Perot Systems Corporation. The plaintiffs in
this case filed a consolidated amended complaint in July 2003. The plaintiffs
are seeking unspecified monetary damages, interest, attorneys fees and costs.
In October 2003, we moved to dismiss the amended complaint with prejudice. The
plaintiffs have filed an opposition to our motion. In 1997 and 1998, pursuant to a consulting contract with the California
Independent Systems Operator, we assisted in implementing the operating systems
for Californias newly deregulated wholesale electricity markets. The
consolidated amended complaint in these federal court securities class actions
alleges that the statements in our public filings and statements were
fraudulently misleading, because we did not disclose to Page 10




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) investors that (1) we allegedly advocated improper bidding practices to our customers in the
California wholesale electricity markets and (2) in October 1997, the
California ISO sent a letter to us accusing us of wrongfully using confidential
information in our 1997-1998 marketing efforts. Other In addition to the matters described above, we have been, and from time to time
are, named as a defendant in various legal proceedings in the normal course of
business, including arbitrations, class actions and other litigation involving
commercial and employment disputes. Certain of these proceedings include
claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, we cannot predict with certainty the eventual loss or range of loss
related to such matters. We are contesting liability and/or the amount of
damages in each pending matter and believe, based on current knowledge and
after consultation with counsel, that the outcome of these matters will not
have a material adverse effect on our consolidated financial condition,
although the outcome could be material to our operating results for a
particular future period, depending on, among other things, the level of our
income for such period. We have purchased, and expect
to continue to purchase, insurance coverage that we believe is
consistent with coverage maintained by others in our industry. This
coverage is expected to limit our financial exposure to claims
covered by these policies in many cases. Contract-related Contingency During 2003 we exited an under-performing contract. As a result of the exiting
of this contract, we determined that certain contract-related assets were
impaired and additional expenses would be incurred related to the exiting of
this contract, resulting in a loss of $17,676 that was recorded in the second
quarter of 2003 in direct cost of services. This estimated loss represents our
current estimate of the loss related to exiting this contract and is in
addition to the loss of approximately $19,500 that we recorded in the first
quarter of 2003 in our cumulative effect of a change in accounting principle
upon adoption of EITF 00-21. We have filed a claim in arbitration to recover
amounts we believe are due under this contract, and the other party filed
counterclaims. Therefore, the amount of actual loss with respect to exiting
this contract may vary from our current estimates. Purchase Commitment We have an agreement with a telecommunication service provider to purchase
services from, or sell services on behalf of, this provider having a gross
value of $19,500 over a four-year commitment period. We entered into
arbitration with this vendor in 2003 and had recorded a liability for our
estimate of the unfulfilled minimum purchase commitment of $5,550 at December
31, 2003. The arbitration concluded in the first quarter of 2004, and based on
the outcome, we recorded an additional liability of $3,273 through a
charge to direct cost of
services. The total liability recorded to date of $8,823 relates to the
unfulfilled minimum purchase commitment for the first three years of the
commitment period, which ended on March 31, 2004. We currently expect to
fulfill the minimum purchase commitment for the remaining commitment period
that ends on March 31, 2005. Guarantees and Indemnifications We have applied the disclosure provisions of FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others, to our agreements that contain
guarantee or indemnification clauses. FIN 45 requires us to disclose certain
types of
guarantee and indemnification arrangements, even if the likelihood of our being
required to perform under these arrangements is remote. The following is a
description of arrangements in which we are a guarantor, as defined by FIN 45. Page 11




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) We are a party to a variety of agreements under which we may be obligated to
indemnify another party. Typically, these obligations arise in the context of
contracts entered in the normal course of business under which we agree to hold
the other party harmless against losses arising from certain matters, which may
include death or bodily injury, loss of or damage to tangible personal
property, improper disclosures of confidential information, infringement or
misappropriation of copyrights, patent rights, trade secrets or other
intellectual property rights, breaches of third party contract rights, and
violations of certain laws applicable to our services, products or operations.
The indemnity obligation in these arrangements is customarily conditioned on
the other party making an adverse claim pursuant to the procedures specified in
the particular contract, which procedures typically allow us to challenge the
other partys claims. The term of these indemnification provisions typically
survives in perpetuity after the applicable contract terminates. It is not
possible to predict the maximum potential amount of future payments under these
or similar agreements, due to the conditional nature of our obligations and the
unique facts and circumstances involved in each particular agreement. However,
we have purchased and expect to continue to purchase a variety of liability
insurance policies, which are expected, in most cases, to limit our financial
exposure to claims covered by such policies (other than claims relating to the
infringement or misappropriation of copyrights, patent rights, trade secrets or
other intellectual property). In addition, we have not historically incurred
material costs individually or in the aggregate to defend lawsuits or settle
claims related to these indemnification provisions. As a result, we believe the
likelihood of a material liability under these arrangements is remote.
Accordingly, we have no liabilities recorded for these agreements as of March
31, 2004. We include warranty provisions in substantially all of our customer contracts
in the ordinary course of business. These provisions generally provide that our
services will be performed in an appropriate and legal manner and that our
products and other deliverables will conform in all material respects to
specifications agreed between our customer and us. Our obligations under these
agreements may be limited in terms of time or amount or both. In addition, we
have purchased and expect to continue to purchase errors and omissions
insurance policies, which are expected, in most cases, to limit our financial
exposure to claims covered by such policies. Because our obligations are
conditional in nature and depend on the unique facts and circumstances involved
in each particular matter, we record liabilities for these arrangements only on
a case by case basis when management determines that it is probable that a
liability has been incurred. As of March 31, 2004, we have no liability
recorded for warranty claims. Page 12




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, and with the information under the heading
Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2003. Acquisition of Perot Systems TSI B.V. As discussed in Note 2, Acquisitions, on December 19, 2003, we acquired HCL
Technologies shares in HPS, and changed the name of HPS to Perot Systems TSI
B.V. Because of the late December 2003 closing of this acquisition, the
post-acquisition results of operations of TSI were not material to our
consolidated results of operations for 2003. As a result, we continued to
account for TSIs results of operations using the equity method of accounting
through December 31, 2003, and we consolidated the assets and liabilities of
TSI as of December 31, 2003. Change in Accounting Principle for Revenue Arrangements with Multiple Deliverables On November 21, 2002, the Financial Accounting Standards Board Emerging Issues
Task Force reached a consensus on Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables, regarding when an arrangement involving multiple
deliverables contains more than one unit of accounting and how arrangement
consideration should be measured and allocated to the separate units of
accounting in an arrangement. We adopted EITF 00-21 effective January 1, 2003
for both existing and prospective customer contracts, which resulted in an
expense in the first quarter of 2003 for the cumulative effect of a change in
accounting principle of $69.3 million ($43.0 million, net of the applicable
income tax benefit), or $0.38 per diluted share. This adjustment resulted
primarily from the reversal of unbilled revenues associated with our long-term
fixed price contracts that include construction-type services, as each such
contract had been accounted for as a single unit of accounting using the
percentage-of-completion method. This adjustment also includes approximately
$19.5 million (approximately $12.1 million, net of the applicable
income tax benefit), or $0.11 per diluted share, to recognize an estimated loss
on a construction-type service included in a contract with multiple
deliverables that we expected to be profitable in the aggregate over its term
and that was previously accounted for as a single unit of accounting using the
percentage-of-completion method. As a result of our adoption of EITF 00-21, we recognized revenues of
approximately $0.8 million during the first quarter of 2004 that were included
in the cumulative effect of a change in accounting principle, which we recorded
in the first quarter of 2003. Comparison of the Three Months Ended March 31, 2004 and 2003 Revenue Revenue for the first quarter of 2004 increased by $83.4 million, or 24.8%, to
$419.8 million from revenue of $336.4 million for the first quarter of 2003 due
to increases in revenue from the IT Solutions, Government Services and
Consulting segments. Revenue from the IT Solutions segment increased by $25.2 million, or 8.7%, to
$314.9 million for the first quarter of 2004 from revenue of $289.7 million in
the first quarter of 2003. This net increase was primarily
attributable to: Page 13




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  
    
    $18.8 million increase from contracts signed during the twelve-month
period following the first quarter of 2003. For these contracts, we
are primarily providing our customers technology-related services,
including IT infrastructure management, application development and
maintenance, business process re-engineering, and proprietary software
application services, which include implementation and customization
of our Diamond® health benefits administration suite of software for a
few of these customers. The selection criteria for outsourcing
contracts typically include the alignment of our operational plan and
the customers business needs, the price for the services to be
delivered, the skills of the team that will be leading the
relationship, and the level of industry expertise exhibited. The
contracts underlying this revenue increase came primarily from markets
where we have established expertise and service offerings, although a
subset of this revenue growth came from expanding existing service
offerings for the healthcare industry into new geographies.
    
    $15.8 million increase associated with outsourcing contracts signed
during the first quarter of 2003 with customers in the healthcare and
manufacturing industries for which we did not recognize a full quarter
of revenue during the first quarter of 2003 because of the timing of
the contract signings and subsequent contract start dates. The
outsourcing contracts underlying this revenue increase include a mix
of technology and business process services such as IT infrastructure
management, application development and maintenance, proprietary
software application services, which include implementation and
customization of our Diamond® health benefits administration suite of
software for one of these customers, and claims processing services.
    
    $5.0 million net increase from existing accounts, short-term
offerings, and project work. We typically perform services that are
above our base level of services for our long-term customers. Given
the discretionary nature of these additional services, the amount of
these services that we provide to our customers may fluctuate from
period to period depending on many factors, including economic
conditions and specific customer needs.
    
    Partially offsetting these increases was a $14.4 million decrease in
revenue associated with three major customer contract changes. We
ended an under-performing contract during the fourth quarter of 2003,
resulting in an $8.7 million decrease in revenue year-to-year for the
first quarter of 2004. Additionally, we completed two major contract
renewals that resulted in a year-to-year revenue reduction of $5.7
million, primarily relating to reductions in price. Revenue from Government Services increased $29.8 million, or 85.1%, to $64.8
million for the first quarter of 2004 from $35.0 million for the first quarter
of 2003. This increase is primarily attributable to the acquisition of Soza &
Company, Ltd. in February 2003 as we recognized approximately $21.8 million of
additional revenue in the first quarter of 2004 resulting from a full quarter
of revenue in our financial statements. The remaining year-to-year increase of
$8.0 million is primarily attributable to new contracts and existing program
expansion within the Department of Homeland Security, the Department of
Defense, and the civilian agencies of the federal government. For the
contracts underlying this revenue increase, we are providing program
management, administrative, professional and engineering services related to
both a recently awarded program by the Department of Homeland Security and from
existing programs where specific initiatives of the government required
additional resources for the first quarter of 2004 as compared to the same
period in the prior year. Our business with the federal government may
fluctuate because of annual funding requirements and the specific needs of the
federal agencies we serve. Revenue from the Consulting segment increased 245.7% to $40.1 million for the
first quarter of 2004, net of the elimination of intersegment revenue of $5.5
million, from $11.6 million for the first quarter of 2003. This increase is
primarily attributable to the acquisition of TSI, which contributed $27.6
million of revenue, net of the elimination of intersegment revenue of $5.5
million, for the first quarter of 2004. The remaining increase is attributable
to increased revenue from technology and business consulting services,
primarily attributable
to an increased level of services related to the implementation of prepackaged
software applications. These services are typically viewed as discretionary
services by our customers with the level of business activity depending on many
factors including economic conditions and specific customer needs. Page 14




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS Revenue from UBS, our largest customer, was $66.3 million for the first quarter
of 2004, or 15.8% of revenue. This revenue is reported within the IT Solutions
and Consulting lines of business and is summarized in the following table: Three Months Ended March 312004
    
    2003
    
    ChangeUBS revenue in IT Solutions
    
    $
    58.3
    
    
    $
    58.8
    
    
    
    (0.9
    %)UBS revenue in Consulting
    
    
    8.0
    
    
    
    
    
    
    
    n/mTotal revenue from UBS
    
    $
    66.3
    
    
    $
    58.8
    
    
    
    12.8
    %
 The increase in revenue from UBS for the Consulting line of business is due to
the acquisition of TSI as discussed above. Gross Margin Gross margin, which is calculated as gross profit divided by revenue, for the
first quarter of 2004 was 20.1% of total revenue, which is higher than the
gross margin for the first quarter of 2003 of 19.1% of total revenue. This
year-to-year increase in gross margin is primarily due to the acquisitions of
TSI and Vision Healthsource, which increased gross margin by 1.8 percentage
points. TSI and Vision were acquired during the twelve-month period following
the first quarter of 2003 and typically realize higher gross margins than what
we normally realize on traditional IT outsourcing contracts because of the
nature of the services they provide, which are offshore business process
outsourcing and application management services. This year-to-year increase is
also due to a slight increase in overall profitability for commercial customer
contracts and our government business. Partially offsetting these increases
were the three major customer contract changes discussed above, which reduced
our gross margin by 1.0 percentage points, and an increase in expense of $2.4
million for year-end bonuses to be paid to associates in the IT
Solutions segment and in our corporate SG&A operating areas. In addition, as
discussed below in Purchase Commitment, in the first quarter of 2004 we
recorded $3.3 million of expense associated with an unfulfilled minimum
purchase commitment. During the first quarter of 2003, we recorded $2.0 million
of expense associated with this unfulfilled minimum purchase commitment. Selling, General and Administrative Expenses Selling, general and administrative expenses for the first quarter of 2004
increased 23.0% to $53.4 million from $43.4 million for the first quarter of
2003. This increase is primarily attributable to the acquisitions of Soza and
TSI and additional costs associated with corporate compliance and business
insurance, partially offset by reduced SG&A expenses resulting from cost
reductions made in 2003. SG&A for the first quarter of 2004 was 12.7% of
revenue, which is slightly lower than SG&A for the first quarter of 2003 of
12.9% of revenue. Other Statement of Operations Items Interest income for the first quarter of 2004 decreased to $0.4 million from
$0.7 million for the first quarter of 2003. This decrease is primarily due to
lower average cash balances and lower interest rates during the first quarter
of 2004 as compared to the same period in 2003. Interest expense for the first quarter of 2004 increased by $0.5 million as
compared to the first quarter of 2003. This increase is primarily related to
the long-term debt we recorded on our consolidated balance sheet as of December
31, 2003, upon adoption of Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities. During the first quarter of 2003, we recorded $1.5 million of income from our
previous 50% equity in the earnings of TSI, which we consolidated on December
31, 2003, following the acquisition of HCL Technologies shares in TSI, as
discussed above. Page 15




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS Other income (expense), net, for the first quarter of 2004 decreased to an
expense of $1.0 million from income of $1.3 million for the first quarter of
2003. This decrease is primarily due to the receipt of a $1.2 million
non-investment interest payment in the first quarter of 2003 and the
recognition of unrealized foreign exchange losses during the first quarter of
2004. Our effective tax rate for the first quarter of 2004 was 37.3%. Our effective
tax rate for income before cumulative effect of a change in accounting
principle for the first quarter of 2003 was 39.0%. The tax rate for the first
quarter of 2004 was less than the rate in 2003 due primarily to the acquisition
of TSI. TSI has tax holidays in certain Asian jurisdictions, which exempt
specific types of income from taxation. Business Outlook For the second quarter of 2004, we expect revenue to range from $412 million to
$427 million and earnings per share (diluted) to range from
$0.14 to $0.16. For
the second quarter of 2004, we expect sequential revenue growth from our
Government Services line of business with commercial outsourcing
revenue expected to be sequentially flat to a slight decline, depending on
fluctuations to project-related revenue and business volumes, and the timing of
new sales. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash flows from operations, available cash
reserves, and debt capacity under a revolving credit facility. During the
three months ended March 31, 2004, cash and cash equivalents decreased 4.1% to
$118.7 million from $123.8 million at December 31, 2003. Net cash provided by operating activities was $2.3 million for the three months
ended March 31, 2004, as compared to net cash provided by operating activities
of $8.3 million for the three months ended March 31, 2003. The following items
are important in understanding this change:  
    
    The increase in accounts receivable in the first quarter of 2004 of
$23.8 million is greater than the increase in the first quarter of
2003 of $5.9 million primarily due to the timing of customer cash
receipts, which varies from period to period.
    
    Year-end bonuses paid in 2004 primarily to associates in the IT
Solutions segment and in our corporate SG&A operating areas increased
as compared to 2003 by approximately $11.1 million. The amount of
year-end bonuses that we record for each period is based on several
factors, including our financial performance for the period and
managements discretion.
    
    Net cash paid for income taxes increased by $14.6 million, with net
payments of $0.9 million in 2004 compared to net refunds of $13.7
million in 2003. Net cash used in investing activities decreased to $13.2 million for the three
months ended March 31, 2004, as compared to $96.0 million for the same period
in 2003. This decrease was due primarily to a $74.7 million decrease in the
amount of net cash paid for acquisitions of businesses.  
    
    During the three months ended March 31, 2003, we paid $72.8 million
(net of cash received) for the acquisition of Soza and an additional
$10.0 million for the acquisition of ARS.
    
    During the three months ended March 31, 2004, we paid $6.3 million and
$2.3 million as additional consideration related to the acquisitions
of Soza and ADI, respectively. For the three months ended March 31, 2004, net cash provided by financing
activities increased to $6.0 million compared to $0.8 million for the three
months ended March 31, 2003. This increase is due Page 16




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS primarily to an increase in the amount of cash received upon the exercise of options to purchase Class A
Common Stock during the first quarter of 2004 as compared to the same period in
2003. We routinely maintain cash balances in certain European and Asian currencies to
fund operations in those regions. During the three months ended March 31, 2004,
foreign exchange rate fluctuations negatively impacted our non-domestic cash
balances by $0.1 million as the Euro weakened and the British pound and Indian
Rupee strengthened against the U.S. dollar. Our foreign exchange policy does
not call for hedging foreign exchange exposures that are not likely to impact
net income or working capital. On January 20, 2004, we entered into a revolving credit facility with a
syndicate of banks that allows us to borrow up to $100.0 million. We
anticipate that existing cash and cash equivalents and short-term investments,
expected cash flows from operating activities, and the $100.0 million available
under the revolving credit facility will provide us sufficient funds to meet
our operating needs for the foreseeable future. Purchase Commitment We have an agreement with a telecommunication service provider to purchase
services from, or sell services on behalf of, this provider having a gross
value of $19.5 million over a four-year commitment period. We entered into
arbitration with this vendor in 2003 and had recorded a liability for our
estimate of the unfulfilled minimum purchase commitment of $5.5 million at
December 31, 2003. The arbitration concluded in the first quarter of 2004, and
based on the outcome, we recorded an additional liability of
$3.3 million through a charge to
direct cost of services. The total liability recorded to date of $8.8 million
relates to the unfulfilled minimum purchase commitment for the first three
years of the commitment period, which ended on March 31, 2004, and is expected
to be paid in the second quarter of 2004. We currently expect to fulfill the
minimum purchase commitment for the remaining commitment period that ends on
March 31, 2005. FORWARD-LOOKING STATEMENTS 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, forecasts, expects, plans, anticipates, believes,
estimates, predicts, potential, or continue or the negative of such
terms and other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating all
forward-looking statements, you should specifically consider various factors
that may cause actual results to vary from those contained in the
forward-looking statements, such as:  
    
    Our contract with UBS (our largest customer) ends in January 2007 and we may renegotiate its term before then, either of
which events we expect would result in lower revenues or profits.
    
    Revenue from our contract with UBS may substantially vary between periods because it depends on the levels of service UBS
determines we have provided.
    
    We may bear the risk of cost overruns under custom software development contracts, and, as a result, cost overruns could
adversely affect our profitability.
    
    Our five largest customers account for a substantial portion of our revenue and profits and loss of any of these customers
could result in decreased revenues and profits.
    
    If entities we acquire fail to perform in accordance with our expectations or if their liabilities exceed our expectations,
our profits per share could be diminished and our financial results could be adversely affected.
    
    Our software development products may cost more than we initially project, encounter delays, or fail to perform well in the
market, which could decrease our profits.
    
    If we are unable to successfully integrate acquired entities, our profits may be less and our operations more costly or
less efficient.
    
    Our contracts generally contain provisions that could allow customers to terminate the
contracts and sometimes contain provisions that enable the customer
to require changes in pricing, decreasing our revenue
and profits and potentially damaging our business reputation. Page 17




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  
    
    Some contracts contain fixed-price provisions or penalties that could result in decreased profits.
    
    Fluctuations in currency exchange rates may adversely affect the profitability of our foreign operations.
    
    Our international operations expose our assets to increased risks and could result in business loss or in more expensive or
less efficient operations.
    
    We have a significant business presence in India, and risks associated with doing business there could decrease our revenue
and profits.
    
    Our government contracts contain early termination and reimbursement provisions that may adversely affect our revenue and
profits.
    
    If customers reduce spending that is currently above contractual minimums, our revenues and profits could diminish. Please refer to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, as filed with the U.S. Securities and Exchange Commission
and available at www.sec.gov, for additional information regarding risk
factors. We disclaim any intention or obligation to revise any forward-looking
statements whether as a result of new information, future developments, or
otherwise. Page 18




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of our market risk associated with foreign currencies as of
December 31, 2003, see Quantitative and Qualitative Disclosures about Market
Risk in Part II, Item 7A, Managements Discussion and Analysis of Financial
Condition and Results of Operations, of our Annual Report on Form 10-K for the
fiscal year then ended. For the three months ended March 31, 2004, there has
been no material change in related market risk factors. 
 ITEM 4: CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was carried
out by our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934). Our evaluation included the subsidiary in which we acquired a controlling
interest on December 19, 2003, HCL Perot Systems B.V. (HPS). HPS became our
subsidiary following the acquisition of the shares of HPS formerly owned by HCL
Technologies Ltd., our joint venture partner in HPS since its formation in
1996. Prior to our acquisition on December 19, 2003, HPS operated independently and
was not subject to public company reporting requirements. We did not
consolidate HPS in our financial statements prior to the acquisition but did
account for our investment under the equity method of accounting. We renamed
this subsidiary Perot Systems TSI B.V. following the acquisition. Since the acquisition of TSI, we have focused on analyzing and implementing
changes in TSIs procedures and controls to determine their effectiveness and
to make them consistent with, and integrate them into, our disclosure controls
and procedures. We continue to analyze TSIs procedures and controls and expect
to make additional changes in those procedures and controls in the future. Based upon their evaluation of the disclosure controls and procedures of Perot
Systems, on a consolidated basis, our Chief Executive Officer and Chief
Financial Officer concluded that such disclosure controls and procedures were
effective. There were no changes in internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting. However, we are continuing to analyze, and expect to make changes
in, the controls and procedures in place at TSI. Page 19




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004 
 PART II: OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We are involved in the following legal proceedings. IPO Allocation Securities Litigation In July and August 2001, we, as well as some of our current and former officers
and the investment banks that underwrote our initial public offering, were
named as defendants in two purported class action lawsuits. These lawsuits,
Seth Abrams v. Perot Systems Corp. et al. and Adrian Chin v. Perot Systems,
Inc. et al., were filed in the United States District Court for the Southern
District of New York. The suits allege violations of Rule 10b-5, promulgated
under the Securities Exchange Act of 1934, and Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933. Approximately 300 issuers and 40 investment banks
have been sued in similar cases. The suits against the issuers and
underwriters have been consolidated for pretrial purposes in the IPO Allocation
Securities Litigation. The lawsuit involving us focuses on alleged improper
practices by the investment banks in connection with our initial public
offering in February 1999. The plaintiffs allege that the investment banks, in
exchange for allocating public offering shares to their customers, received
undisclosed commissions from their customers on the purchase of securities and
required their customers to purchase additional shares in aftermarket trading.
The lawsuit also alleges that we should have disclosed in our public offering
prospectus the alleged practices of the investment banks, whether or not we
were aware that the practices were occurring. The plaintiffs are
seeking unspecified damages, statutory compensation and costs and
expenses of the litigation. During 2002, the current and former officers and directors of Perot Systems
Corporation that were individually named in the lawsuits referred to above were
dismissed from the cases. In exchange for the dismissal, the individual
defendants entered agreements with the plaintiffs that toll the running of the
statute of limitations and permit the plaintiffs to refile claims against them
in the future. In February 2003, in response to the defendants motion to
dismiss, the court dismissed the plaintiffs Rule 10b-5 claims against us, but
did not dismiss the remaining claims. We have accepted a settlement proposal presented to all issuer defendants.
Pursuant to the proposed settlement, plaintiffs would dismiss and release all
claims against us and our current and former officers and directors, in
exchange for an assurance by the insurance companies collectively responsible
for insuring the issuers in all of the IPO cases that the plaintiffs will
achieve a minimum recovery (including amounts recovered from the underwriters),
and for the assignment or surrender of certain claims we may have against the
underwriters. We would not be required to make any cash payment with respect
to the settlement. The proposed settlement requires approval of an unspecified
percentage of issuers. The proposed settlement would also require court
approval, which cannot be assured. Litigation Relating to the California Energy Market In June 2002, we were named as a defendant in a purported class action lawsuit
that alleges that we conspired with energy traders to manipulate the California
energy market. This lawsuit, Art Madrid v. Perot Systems Corporation et al.,
was filed in the Superior Court of California, County of San Diego. The case
is currently pending in the Superior Court for the County of
Sacramento. The plaintiffs are seeking unspecified damages, treble
damages, restitution, punitive damages, interest, costs,
attorneys fees and declaratory relief. In
September 2003, we filed a demurrer to the complaint and an alternative motion
to strike all claims for monetary relief. In January 2004, the court granted
our demurrer and did not grant the plaintiffs leave to amend their complaint.
The plaintiffs, however, have filed a notice of appeal. In June, July and August 2002, Perot Systems, Ross Perot and Ross Perot, Jr.,
were named as defendants in eight purported class action lawsuits that allege
violations of Rule 10b-5, and, in some of the cases, common law fraud. These
suits allege that our filings with the Securities and Exchange Commission
contained material misstatements or omissions of material facts with respect to
our activities related to the California
energy market. All of these eight cases have been consolidated in the Northern
District of Texas, Page 20




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004 Dallas Division in the case of Vincent Milano v. Perot
Systems Corporation. The plaintiffs in this case filed a consolidated amended
complaint in July 2003. The plaintiffs are seeking unspecified monetary
damages, interest, attorneys fees and costs. In October 2003, we moved to
dismiss the amended complaint with prejudice. The plaintiffs have filed an
opposition to our motion. In 1997 and 1998, pursuant to a consulting contract with the California
Independent Systems Operator, we assisted in implementing the operating systems
for Californias newly deregulated wholesale electricity markets. The
consolidated amended complaint in these federal court securities class actions
alleges that the statements in our public filings and statements were
fraudulently misleading, because we did not disclose to investors that (1) we
allegedly advocated improper bidding practices to our customers in the
California wholesale electricity markets and (2) in October 1997, the
California ISO sent a letter to us accusing us of wrongfully using confidential
information in our 1997-1998 marketing efforts. Other In addition to the matters described above, we have been, and from time to time
are, named as a defendant in various legal proceedings in the normal course of
business, including arbitrations, class actions and other litigation involving
commercial and employment disputes. Certain of these proceedings include
claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, we cannot predict with certainty the eventual loss or range of loss
related to such matters. We are contesting liability and/or the amount of
damages in each pending matter and believe, based on current knowledge and
after consultation with counsel, that the outcome of these matters will not
have a material adverse effect on our consolidated financial condition,
although the outcome could be material to our operating results for a
particular future period, depending on, among other things, the level of our
income for such period. We have purchased, and expect
to continue to purchase, insurance coverage that we believe is
consistent with coverage maintained by others in our industry. This
coverage is expected to limit our financial exposure to claims
covered by these policies in many cases. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of our security holders during the
period covered by this report. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits required by Item 601 of Regulation S-K Exhibit No.
    
    Document31.1*
    
    Rule 13a-14 Certification dated May 4, 2004,
by Ross Perot, Jr., President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated May 4, 2004,
by Russell Freeman, Vice President and Chief Financial
Officer.32.1**
    
    Section 1350 Certification dated May 4, 2004, by Ross
Perot, Jr., President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated May 4, 2004, by Russell
Freeman, Vice President and Chief Financial Officer.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004  (b)
    
    Reports on Form 8-K On January 5, 2004, we filed a Current Report on Form 8-K to report an
acquisition, through a wholly owned subsidiary, from HCL Technologies
Limited (HCLT), a corporation formed in India, of all of HCLTs
interest in HCL Perot Systems B.V., a joint venture entity formed by the
Company and HCLT. The matter was reported under Item 2 of Form 8-K. On February 10, 2004, we filed a Current Report on Form 8-K to report the
issuance of a press release announcing our fourth quarter fiscal 2003
results. The matter was reported under Item 12 of Form 8-K. On February 20, 2004, we filed a Current Report on Form 8-K to report the
issuance of a press release announcing the election of DeSoto Jordan to
the Board of Directors and the resignations of James Champy and William
Gayden from the Board of Directors. The matter was reported under Item 9
of Form 8-K. * Filed herewith.
** Furnished herewith. Page 22




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2004 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PEROT SYSTEMS CORPORATION
(Registrant)Date: May 4, 2004
    By  /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal
Accounting Officer Page 23