##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the quarterly period ended September 30, 2006
 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 0-22495
 PEROT SYSTEMS CORPORATION
  DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    75-2230700
(IRS Employer
Identification No.)
 
 
 þ o
 
 þ o o
 o þ




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##### Table of Contents



PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of September 30, 2006
and December 31, 2005
    
    
    1Condensed Consolidated Income Statements for the three and nine months
ended September 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005
    
    
    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
    
    
    28ITEM 4: CONTROLS AND PROCEDURES
    
    
    28PART II: OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGS
    
    
    29ITEM 1A: RISK FACTORS
    
    
    29ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    30ITEM 6: EXHIBITS
    
    
    30SIGNATURES
    
    
    32Form of Unit CertificateRule 13a-14 CertificationRule 13a-14 CertificationSection 1350 CertificationSection 1350 Certification




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September 30,
    
    
    December 31,2006
    
    
    2005(dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    197,100
    
    
    $
    259,598Short-term investments
    
    
    104,475
    
    
    
    Accounts receivable, net
    
    
    337,943
    
    
    
    277,780Prepaid expenses and other
    
    
    62,896
    
    
    
    65,974Total current assets
    
    
    702,414
    
    
    
    603,352Property, equipment and purchased software, net
    
    
    194,933
    
    
    
    180,036Goodwill
    
    
    462,645
    
    
    
    443,439Deferred contract costs, net
    
    
    56,318
    
    
    
    85,313Other non-current assets
    
    
    56,921
    
    
    
    58,480Total assets
    
    $
    1,473,231
    
    
    $
    1,370,620LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    42,839
    
    
    $
    38,680Deferred revenue
    
    
    38,433
    
    
    
    28,035Accrued compensation
    
    
    54,215
    
    
    
    60,024Income taxes payable
    
    
    34,458
    
    
    
    51,064Accrued and other current liabilities
    
    
    94,856
    
    
    
    81,812Total current liabilities
    
    
    264,801
    
    
    
    259,615Long-term debt
    
    
    84,696
    
    
    
    76,505Non-current deferred revenue
    
    
    65,765
    
    
    
    47,143Other non-current liabilities
    
    
    9,686
    
    
    
    26,822Total liabilities
    
    
    424,948
    
    
    
    410,085Commitments and contingenciesStockholders equity:Common stock
    
    
    1,223
    
    
    
    1,205Additional paid-in capital
    
    
    524,877
    
    
    
    502,443Retained earnings
    
    
    543,162
    
    
    
    494,082Treasury stock
    
    
    (32,532
    )
    
    
    (35,332
    )Deferred compensation
    
    
    
    
    
    
    (11,394
    )Accumulated other comprehensive income
    
    
    11,553
    
    
    
    9,531Total stockholders equity
    
    
    1,048,283
    
    
    
    960,535Total liabilities and stockholders equity
    
    $
    1,473,231
    
    
    $
    1,370,620
  Page 1




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(dollars and shares in thousands, except per share data)Revenue
    
    $
    582,914
    
    
    $
    510,078
    
    
    $
    1,697,373
    
    
    $
    1,471,581Direct cost of services
    
    
    513,718
    
    
    
    403,636
    
    
    
    1,420,217
    
    
    
    1,151,889Gross profit
    
    
    69,196
    
    
    
    106,442
    
    
    
    277,156
    
    
    
    319,692Selling, general and administrative expenses
    
    
    74,592
    
    
    
    66,098
    
    
    
    208,142
    
    
    
    185,924Operating income (loss)
    
    
    (5,396
    )
    
    
    40,344
    
    
    
    69,014
    
    
    
    133,768Interest income
    
    
    2,447
    
    
    
    1,758
    
    
    
    6,484
    
    
    
    5,597Interest expense
    
    
    (1,343
    )
    
    
    (869
    )
    
    
    (3,461
    )
    
    
    (2,474
    )Other income (expense), net
    
    
    1,722
    
    
    
    612
    
    
    
    2,442
    
    
    
    599Income (loss) before taxes
    
    
    (2,570
    )
    
    
    41,845
    
    
    
    74,479
    
    
    
    137,490Provision (benefit) for income taxes
    
    
    (2,883
    )
    
    
    16,400
    
    
    
    25,399
    
    
    
    53,017Net income
    
    $
    313
    
    
    $
    25,445
    
    
    $
    49,080
    
    
    $
    84,473Basic and diluted earnings per common share:Basic earnings per common share
    
    $
    
    
    
    $
    0.22
    
    
    $
    0.41
    
    
    $
    0.72Weighted average common shares outstanding
    
    
    119,546
    
    
    
    118,098
    
    
    
    119,195
    
    
    
    117,810Diluted earnings per common share
    
    $
    
    
    
    $
    0.21
    
    
    $
    0.40
    
    
    $
    0.70Weighted average diluted common shares outstanding
    
    
    121,817
    
    
    
    121,794
    
    
    
    121,821
    
    
    
    121,540
  Page 2




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Nine months endedSeptember 30,2006
    
    
    2005(dollars in thousands)Cash flows from operating activities:Net income
    
    $
    49,080
    
    
    $
    84,473Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    57,762
    
    
    
    41,675Impairment of assets
    
    
    46,333
    
    
    
    787Stock-based compensation
    
    
    12,301
    
    
    
    1,148Change in deferred taxes
    
    
    (11,627
    )
    
    
    20,979Excess tax benefits from stock-based compensation arrangements
    
    
    (2,461
    )
    
    
    Other non-cash items
    
    
    312
    
    
    
    1,155Changes in assets and liabilities (net of effects from
acquisitions of businesses):Accounts receivable, net
    
    
    (48,948
    )
    
    
    (52,533
    )Prepaid expenses
    
    
    (6,772
    )
    
    
    (7,969
    )Deferred contract costs, net
    
    
    (22,338
    )
    
    
    (36,245
    )Accounts payable and accrued liabilities
    
    
    16,277
    
    
    
    1,912Accrued compensation
    
    
    (7,344
    )
    
    
    (11,447
    )Deferred revenue
    
    
    30,512
    
    
    
    24,120Income taxes
    
    
    (2,392
    )
    
    
    3,863Other current and non-current assets
    
    
    (561
    )
    
    
    8,689Other current and non-current liabilities
    
    
    935
    
    
    
    3,377Net cash provided by operating activities
    
    
    111,069
    
    
    
    83,984Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (54,819
    )
    
    
    (54,116
    )Acquisitions of businesses, net
    
    
    (29,185
    )
    
    
    (93,368
    )Purchases of short-term investments
    
    
    (146,480
    )
    
    
    Net proceeds from the sale of short-term investments
    
    
    42,005
    
    
    
    Other
    
    
    40
    
    
    
    53Net cash used in investing activities
    
    
    (188,439
    )
    
    
    (147,431
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    
    
    
    
    (78,652
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    76,505Proceeds from issuance of common and treasury stock
    
    
    27,844
    
    
    
    17,319Excess tax benefits from stock-based compensation arrangements
    
    
    2,461
    
    
    
    Purchases of treasury stock
    
    
    (17,685
    )
    
    
    (20,655
    )Other
    
    
    197
    
    
    
    (864
    )Net cash provided by (used in) financing activities
    
    
    12,817
    
    
    
    (6,347
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,055
    
    
    
    (4,152
    )Net decrease in cash and cash equivalents
    
    
    (62,498
    )
    
    
    (73,946
    )Cash and cash equivalents at beginning of period
    
    
    259,598
    
    
    
    304,786Cash and cash equivalents at end of period
    
    $
    197,100
    
    
    $
    230,840
  Page 3




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Short-term investments
  Significant Accounting Standards to be Adopted
 FASB Interpretation No. 48
  FASB Statement No. 157
  Page 4




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SEC Staff Accounting Bulletin No. 108
      As ofFebruary 28,2006Current assets
    
    $
    4,295Property, equipment and purchased software, net
    
    
    1,942Goodwill
    
    
    12,436Identifiable intangible assets
    
    
    5,010Other non-current assets
    
    
    62024,303Current liabilities
    
    
    (2,717
    )Other non-current liabilities
    
    
    (462
    )Total consideration paid as of September 30, 2006
    
    $
    21,124
  Page 5




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ConsultingandIndustry
    
    
    Government
    
    
    ApplicationsSolutions
    
    
    Services
    
    
    Solutions
    
    
    TotalBalance as of December 31, 2005
    
    $
    250,208
    
    
    $
    127,552
    
    
    $
    65,679
    
    
    $
    443,439Estimated goodwill from eServ acquisition
    
    
    12,436
    
    
    
    
    
    
    
    
    
    
    
    12,436Additional goodwill for TAG acquisition
    
    
    7,629
    
    
    
    
    
    
    
    
    
    
    
    7,629Reclassification of goodwill due to
change in reporting units
    
    
    (15,471
    )
    
    
    
    
    
    
    15,471
    
    
    
    Other
    
    
    
    
    
    
    (52
    )
    
    
    (807
    )
    
    
    (859
    )Balance as of September 30, 2006
    
    $
    254,802
    
    
    $
    127,500
    
    
    $
    80,343
    
    
    $
    462,645
   Deferred contract costs, net
   Page 6




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Identifiable intangible assets
  As of September 30, 2006Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    ValueService mark
    
    $
    4,293
    
    
    $
    (3,801
    )
    
    $
    492Customer-based intangible assets
    
    
    38,149
    
    
    
    (20,021
    )
    
    
    18,128Other intangible assets
    
    
    7,153
    
    
    
    (4,903
    )
    
    
    2,250Total
    
    $
    49,595
    
    
    $
    (28,725
    )
    
    $
    20,870
     Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    313
    
    
    $
    25,445
    
    
    $
    49,080
    
    
    $
    84,473Foreign currency translation adjustments
    
    
    1,072
    
    
    
    (953
    )
    
    
    2,003
    
    
    
    2,603Other
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    Total comprehensive income
    
    $
    1,385
    
    
    $
    24,492
    
    
    $
    51,102
    
    
    $
    87,076
   Page 7




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Stock-based compensation
    Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006Direct cost of services
    
    $
    1,264
    
    
    $
    4,307Selling, general and administrative expenses
    
    
    1,978
    
    
    
    6,323Total stock compensation expense from stock options and ESPP
    
    
    3,242
    
    
    
    10,630Stock compensation expense from stock options and ESPP,
net of tax
    
    
    2,158
    
    
    
    7,092Decrease in diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.06
   Page 8




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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net incomeAs reported
    
    $
    25,445
    
    
    $
    84,473Add: stock-based compensation
expense/(benefit) included in
reported net income, net of
related tax effects
    
    
    (75
    )
    
    
    724Less: total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of related tax effects
    
    
    (2,638
    )
    
    
    (10,353
    )Pro forma
    
    $
    22,732
    
    
    $
    74,844Basic earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.72Pro forma
    
    $
    0.19
    
    
    $
    0.64Diluted earnings per common shareAs reported
    
    $
    0.21
    
    
    $
    0.70Pro forma
    
    $
    0.19
    
    
    $
    0.62
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006(1)
    
    2005
    
    2006
    
    2005Weighted average risk free interest rates
    
    
    
    
    
    
    4.00
    %
    
    
    4.76
    %
    
    
    3.87
    %Weighted average life (in years)
    
    
    
    
    
    
    5.0
    
    
    
    5.2
    
    
    
    5.1Volatility
    
    
    
    
    
    
    44
    %
    
    
    35
    %
    
    
    43
    %Expected dividend yield
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value per
share of options granted
    
    $
    
    
    
    $
    6.18
    
    
    $
    5.94
    
    
    $
    6.14
 
 (1)
    
    No stock options were granted for the three months ended September 30, 2006.  Page 9




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Description of stock-based compensation plans
  2001 Long-Term Incentive Plan
  Employee Stock Purchase Plan
  2006 Non-Employee Director Equity Compensation Plan
  1996 Non-Employee Director Stock Option/Restricted Stock Plan
  Page 10




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1991 Stock Option Plan
  Activity in our stock-based compensation plans
  Weighted-Weighted-
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (in Years)
    
    ValueOutstanding at January 1, 2006
    
    
    25,342
    
    
    $
    14.81Granted
    
    
    83
    
    
    
    15.00Exercised
    
    
    (2,527
    )
    
    
    8.57Forfeited
    
    
    (4,872
    )
    
    
    20.62Outstanding at September 30, 2006
    
    
    18,026
    
    
    
    14.12
    
    
    
    4.52
    
    
    $
    36,715Exercisable at September 30, 2006
    
    
    10,113
    
    
    
    14.77
    
    
    
    4.16
    
    
    
    26,084
  Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageExercise
    
    Remaining
    
    
    
    
    
    ExerciseRange of Prices
    
    Number
    
    Price
    
    Life
    
    Number
    
    Price$0.25 - $5.00
    
    
    1,315
    
    
    $
    2.21
    
    
    
    1.30
    
    
    
    1,068
    
    
    $
    2.06$5.01 - $10.00
    
    
    2,403
    
    
    
    9.66
    
    
    
    5.59
    
    
    
    1,823
    
    
    
    9.66$10.01 - $15.00
    
    
    8,192
    
    
    
    12.48
    
    
    
    4.51
    
    
    
    2,858
    
    
    
    11.72$15.01 - $20.00
    
    
    2,434
    
    
    
    16.36
    
    
    
    5.00
    
    
    
    1,038
    
    
    
    16.86$20.01 - $25.00
    
    
    3,682
    
    
    
    23.46
    
    
    
    4.67
    
    
    
    3,326
    
    
    
    23.61Total
    
    
    18,026
    
    
    
    14.12
    
    
    
    4.52
    
    
    
    10,113
    
    
    
    14.77
 Page 11




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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Aggregate
intrinsic value of
Class A stock
options exercised
and restricted
stock units vesting
    
    $
    3,488
    
    
    $
    5,592
    
    
    $
    15,396
    
    
    $
    15,407Income tax benefits
from the exercise
of Class A stock
options
    
    $
    1,178
    
    
    $
    2,198
    
    
    $
    4,802
    
    
    $
    3,476Cash received from
our stock-based
compensation
arrangements
    
    $
    7,423
    
    
    $
    6,359
    
    
    $
    27,631
    
    
    $
    15,403
       Page 12




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Consulting andIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Other
    
    TotalFor the three months ended September 30, 2006:Revenue
    
    $
    457,530
    
    
    $
    73,016
    
    
    $
    65,587
    
    
    $
    (13,219
    )
    
    $
    582,914Income (loss) before taxes
    
    
    (14,875
    )
    
    
    5,548
    
    
    
    9,001
    
    
    
    (2,244
    )
    
    
    (2,570
    )For the three months ended September 30, 2005:Revenue
    
    $
    391,470
    
    
    $
    69,216
    
    
    $
    61,448
    
    
    $
    (12,056
    )
    
    $
    510,078Income before taxes
    
    
    23,659
    
    
    
    4,609
    
    
    
    13,345
    
    
    
    232
    
    
    
    41,845For the nine months ended September 30, 2006:Revenue
    
    $
    1,325,194
    
    
    $
    220,419
    
    
    $
    187,577
    
    
    $
    (35,817
    )
    
    $
    1,697,373Income (loss) before taxes
    
    
    34,166
    
    
    
    15,616
    
    
    
    25,208
    
    
    
    (511
    )
    
    
    74,479For the nine months ended September 30, 2005:Revenue
    
    $
    1,129,254
    
    
    $
    199,364
    
    
    $
    175,127
    
    
    $
    (32,164
    )
    
    $
    1,471,581Income (loss) before taxes
    
    
    98,265
    
    
    
    11,969
    
    
    
    27,854
    
    
    
    (598
    )
    
    
    137,490
    Page 13




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Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Earnings per Common ShareNet income
    
    $
    313
    
    
    $
    25,445
    
    
    $
    49,080
    
    
    $
    84,473Weighted average common shares
outstanding
    
    
    119,546
    
    
    
    118,098
    
    
    
    119,195
    
    
    
    117,810Basic earnings per common share
    
    $
    
    
    
    $
    0.22
    
    
    $
    0.41
    
    
    $
    0.72Diluted Earnings per Common ShareNet income
    
    $
    313
    
    
    $
    25,445
    
    
    $
    49,080
    
    
    $
    84,473Weighted average common shares
outstanding
    
    
    119,546
    
    
    
    118,098
    
    
    
    119,195
    
    
    
    117,810Incremental shares assuming dilution
    
    
    2,271
    
    
    
    3,696
    
    
    
    2,626
    
    
    
    3,730Weighted average diluted common
shares outstanding
    
    
    121,817
    
    
    
    121,794
    
    
    
    121,821
    
    
    
    121,540$
    
    
    
    $
    0.21
    
    
    $
    0.40
    
    
    $
    0.70
    Litigation
   Page 14




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IPO Allocation Securities Litigation
   Other
   Page 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, 2005. These risk factors describe reasons why our actual
results may differ materially from any forward-looking statement. We disclaim any intention or
obligation to update any forward-looking statement.
 
  RESULTS OF OPERATIONS
  Lines of Business
  Overview of Our Financial Results for the Third Quarter of 2006
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Modification of Customer Contracts
   Revenue Growth
  §
    
    A net increase in revenue from the expansion of base services and
discretionary technology investments by our existing long-term
customers.
 §
    
    Revenue from new contracts signed during the twelve-month period
following the third quarter of 2005.
 §
    
    Revenue from a company acquired during the twelve-month period
following the third quarter of 2005.
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Earnings Growth
  §
    
    As discussed above in Modification of Customer Contracts, during
the third quarter of 2006, we modified a customer contract and
recorded $43.7 million of expense in direct cost of services, or
approximately $0.22 per diluted share, associated with the
impairment of deferred software development and implementation
costs.
 §
    
    During the third quarter of 2006, we recorded expense of $5.8
million, or approximately $0.03 per diluted share, related to
actions to strengthen future profitability. This expense is
attributable to the consolidation and elimination of facilities
and products, the combination of units, and severance expense.
 §
    
    As discussed above in Modification of Customer Contracts, during
the third quarter of 2006, we incurred an $8.0 million loss on an
infrastructure services contract with a Commercial Solutions
customer, which compares to a $3.1 million loss in the same period
in 2005. The year-over-year increase in losses from this
contract results in a decrease in gross profit of $4.9 million, or
approximately $0.03 per diluted share.
 §
    
    Effective January 1, 2006, we adopted FAS 123R, Share-Based
Payment, which requires employee stock options and rights to
purchase shares under stock participation plans to be accounted
for under the fair value method and eliminates the ability to
account for these instruments under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, which was allowed
under the original provisions of FAS 123, Accounting for
Stock-Based Compensation. As a result, during the third quarter
of 2006, we recorded additional stock compensation expense of $3.2
million ($2.2 million net of tax) as compared to the third quarter
of 2005, which reduced our earnings by approximately $0.02 per
diluted share. Of this additional stock compensation expense, $1.2
million was recorded in direct cost of services and $2.0 million
was recorded in selling, general and administrative expenses.
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Free Cash Flow
  Twelve MonthsEndedSeptember 302006
    
    
    2005Net cash provided by operating activities
    
    $
    176.8
    
    
    $
    158.3Purchases of property, equipment and software
    
    
    (71.1
    )
    
    
    (65.1
    )Free cash flow
    
    $
    105.7
    
    
    $
    93.2
 TCV of Contracts Signed
   Additional Measurements
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Comparison of the Three Months Ended September 30, 2006 and 2005
 Revenue
  Three months ended September 302006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    457.5
    
    
    $
    391.5
    
    
    $
    66.0
    
    
    
    16.9
    %Government Services
    
    
    73.0
    
    
    
    69.2
    
    
    
    3.8
    
    
    
    5.5
    %Consulting and Applications Solutions
    
    
    65.6
    
    
    
    61.5
    
    
    
    4.1
    
    
    
    6.7
    %Elimination of intersegment revenue
    
    
    (13.2
    )
    
    
    (12.1
    )
    
    
    (1.1
    )
    
    
    9.1
    %Total
    
    $
    582.9
    
    
    $
    510.1
    
    
    $
    72.8
    
    
    
    14.3
    %
 Industry Solutions
  §
    
    $35.6 million net increase from existing accounts and short-term
project work. This net increase resulted from expanding our base
services to existing long-term customers and from providing
additional discretionary services to these customers. The
discretionary services that we provide, which include short-term
project work, can vary from period-to-period depending on many
factors, including specific customer and industry needs and
economic conditions. This increase was primarily related to
contracts in the healthcare industry.§
    
    $18.8 million increase from new contracts signed during the
twelve-month period following the third quarter of 2005. This
increase was composed of $17.3 million and $1.5 million from new
contracts signed in the Healthcare and Commercial Solutions
groups, respectively. The services that we are providing to these
new customers are primarily the same services that we provide to
the majority of our other long-term outsourcing customers.§
    
    $11.6 million increase from revenue related to an acquisition
within our Commercial Solutions group in the first quarter of
2006. The acquired company is a provider of product engineering
outsourcing services.
  §
    
    Our solutions for the healthcare market were developed over
several years and are highly customized to the specific business
needs of the market. We identified certain aspects of the
healthcare market as core to our long-term service offerings
several years ago when the market for technology and business
process services was immature. As a result, we have an established
presence and brand, which we have strengthened primarily through
internal investments in software and solutions.
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§
    
    The healthcare industry continues to be in a state of change as
health systems look to transform their clinical and administrative
back-office operations, payer organizations work to develop new
consumer-based health models, and as the rate of medical cost
inflation continues to be high. Clinical transformation
revolutionizes the way in which the healthcare provider community
uses information technology to automate the clinical process
resulting in improvements in both healthcare quality and
efficiency.
 Government Services
  Consulting and Applications Solutions
  UBS
  Three Months EndedSeptember 30,2006
    
    
    2005
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    64.3
    
    
    $
    66.0
    
    
    
    (2.6
    %)UBS revenue in Consulting and Applications Solutions
    
    
    11.5
    
    
    
    9.4
    
    
    
    22.3
    %Total revenue from UBS
    
    $
    75.8
    
    
    $
    75.4
    
    
    
    0.5
    %
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Gross Margin
  §
    
    As discussed in Modification of Customer Contracts, in the third
quarter of 2006, we modified a customer contract and recorded
$43.7 million of expense in direct cost of services associated
with the impairment of deferred software development and
implementation costs.§
    
    A $4.9 million decrease in gross profit from an infrastructure
services contract with a Commercial Solutions customer discussed
in Modification of Customer Contracts. This decrease was due to
an $8.0 million loss on this contract that we incurred in the
third quarter of 2006.§
    
    In the third quarter of 2006, we recorded $1.2 million of
additional stock compensation expense in direct cost of services
as compared to the prior year period as a result of our adoption
of FAS 123R.
 Selling, General and Administrative Expenses
  Provision for Income Taxes
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Comparison of the Nine Months Ended September 30, 2006 and 2005
 Revenue
  Nine months ended September 30,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    1,325.2
    
    
    $
    1,129.3
    
    
    $
    195.9
    
    
    
    17.3
    %Government Services
    
    
    220.4
    
    
    
    199.4
    
    
    
    21.0
    
    
    
    10.5
    %Consulting and Applications Solutions
    
    
    187.6
    
    
    
    175.1
    
    
    
    12.5
    
    
    
    7.1
    %Elimination of intersegment revenue
    
    
    (35.8
    )
    
    
    (32.2
    )
    
    
    (3.6
    )
    
    
    11.2
    %Total
    
    $
    1,697.4
    
    
    $
    1,471.6
    
    
    $
    225.8
    
    
    
    15.3
    %
 Industry Solutions
  §
    
    $94.3 million net increase from existing accounts and short-term
project work. This net increase resulted from expanding our base
services to existing long-term customers and from providing
additional discretionary services to these customers. The
discretionary services that we provide, which include short-term
project work, can vary from period-to-period depending on many
factors, including specific customer and industry needs and
economic conditions. This increase was primarily related to
contracts in the healthcare industry.§
    
    $45.6 million increase from new contracts signed during the
twelve-month period following the third quarter of 2005. This
increase was composed of $41.4 million and $4.2 million from new
contracts signed in the Healthcare and Commercial Solutions
groups, respectively. The services that we are providing to these
new customers are primarily the same services that we provide to
the majority of our other long-term outsourcing customers.§
    
    $31.1 million increase from revenue related to an acquisition
within our Commercial Solutions group during the third quarter of
2005, for which we did not recognize a full nine months of revenue
in 2005. The acquired company is a provider of policy
administration and business process services to the life insurance
and annuity industry.§
    
    $24.9 million increase from revenue related to an acquisition
within our Commercial Solutions group in the first quarter of
2006. The acquired company is a provider of product engineering
outsourcing services.
 Government Services
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Consulting and Applications Solutions
  UBS
  Nine months endedSeptember 302006
    
    
    2005
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    196.8
    
    
    $
    196.6
    
    
    
    0.1
    %UBS revenue in Consulting and Applications Solutions
    
    
    30.7
    
    
    
    26.4
    
    
    
    16.3
    %Total revenue from UBS
    
    $
    227.5
    
    
    $
    223.0
    
    
    
    2.0
    %
  Gross Margin
  §
    
    As discussed above in Modification of Customer Contracts, during
the third quarter of 2006 we modified a customer contract and
recorded $43.7 million of expense in direct cost of services
associated with the impairment of deferred software development
and implementation costs.§
    
    A $24.0 million decrease in gross profit from an infrastructure
services contract with a Commercial Solutions customer discussed
in Modification of Customer Contracts. This decrease was due to
a loss of $25.6 million on this contract that we incurred in the
first nine months of 2006.§
    
    In the second quarter of 2005, we settled a dispute with a former
customer. As a result, we received a $7.6 million payment and
reduced our liabilities by $2.7 million, both of which were
recorded as a reduction to direct cost of services. The dispute
related to a contract we exited in 2003.§
    
    In the first nine months of 2006, we recorded $4.3 million of
additional stock compensation expense in direct cost of services
as compared to the prior year period as a result of our adoption
of FAS 123R.
 Selling, General and Administrative Expenses
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Provision for Income Taxes
  Expected Effect of the End of Our Outsourcing Contract with UBS
   Liquidity and Capital Resources
  Operating Activities
  §
    
    Cash provided by the changes in accounts payable and accrued
liabilities was $16.3 million for the first nine months of 2006 as
compared to cash provided of $1.9 million for the same period of
the prior year. This change is primarily due to the timing of
vendor payments.§
    
    Cash provided from a reduction in spending on deferred contract
costs for the nine months ended September 30, 2006 as compared to
the same period last year.
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§
    
    Cash provided by an increase in deferred revenue received from
clients for the nine months ended September 30, 2006 as compared
to the same period last year.
  Investing Activities
  §
    
    During the nine months ended September 30, 2006, we purchased
short-term investments of $104.5 million, net.§
    
    During the nine months ended September 30, 2006, we paid $29.2
million for acquisitions of businesses, including $21.1 million
for the acquisition of eServ LLC, a provider of product
engineering outsourcing, and $8.1 million of additional
consideration for the acquisition of Technical Management, Inc.§
    
    During the nine months ended September 30, 2005, we paid $93.4
million for acquisitions, including $60.0 million (net of cash
received) for the acquisition of Technical Management, Inc. and
its subsidiaries, including Transaction Applications Group, Inc.,
$17.0 million as additional consideration related to the
acquisition of Soza & Company, Ltd., $7.3 million (net of cash
received) for the acquisition of PrSM Corporation, $6.9 million as
additional consideration related to the acquisition of ADI
Technology Corporation, and $2.2 million related to the
acquisition of one other company.
 Financing Activities
   Significant Accounting Standards to be Adopted
 FASB Interpretation No. 48
  Page 26




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FASB Statement No. 157
  SEC Staff Accounting Bulletin No. 108
  Page 27




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Page 28




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IPO Allocation Securities Litigation
   Other
  
   Page 29




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Total Number
    
    Approximateof Shares
    
    Dollar Value ofTotal Number
    
    Average
    
    Purchased as
    
    Shares that Mayof Shares
    
    Price Paid
    
    Part of Publicly
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    per Share
    
    Announced Plans (1)
    
    Under the Plans (1)August 1, 2006  August 31, 2006
    
    
    84,000
    (2)
    
    $
    13.99
    
    
    
    84,000
    
    
    $
    75,000,000
 
 (1)
    
    On May 3, 2005, we announced that we initiated a $75 million stock buyback program. This
plan has been replaced by a new stock buyback program adopted September 28, 2006, authorizing
the repurchase of up to $75 million of our common stock. The program authorizes the
repurchase of our common stock from time to time in the open market, under a Rule 10b5-1
plan, or through privately negotiated, block transactions, which may include substantial
blocks purchased from unaffiliated holders.(2)
    
    Shares of Class A Common Stock. 
   EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT3.1
    
    Third Amended and Restated Certificate of Incorporation of Perot
Systems Corporation (the Company) (Incorporated by reference to
Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002.)3.2
    
    Fourth Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.2 of the Companys Current Report on Form 8-K filed
September, 24, 2004).4.1
    
    Specimen of Class A Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Companys Registration Statement
on Form S-1, Registration No. 333-60755.)4.2
    
    Rights Agreement dated January 28, 1999 between the Company and
The Chase Manhattan Bank (Incorporated by reference to Exhibit
4.2 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)4.3
    
    Form of Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock (included as Exhibit
A-1 to the Rights Agreement) (Incorporated by reference to
Exhibit 4.3 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)4.4
    
    Form of Certificate of Designation, Preferences, and Rights of
Series B Junior Participating Preferred Stock (included as Exhibit
A-2 to the Rights Agreement) (Incorporated by reference to
Exhibit 4.4 of the Companys Registration Statement on Form S-1,
Registration No. 333-60755.)10.11*
    
    Form of Unit Certificate  Restricted Stock Unit Agreement (2001
Long Term Incentive Plan).10.41
    
    Amended and Restated 2006 Non-Employee Director Equity
Compensation Plan adopted September 28, 2006 (Incorporated by
reference to Exhibit 10.41 to the Companys Current Report on Form
8-K filed October 5, 2006.)
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EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT10.42
    
    First Amendment to Amended and Restated Credit Agreement dated
August 28, 2006, by and among Perot Systems Corporation, as
Borrower, the Lenders party thereto, and JPMorgan Chase Bank,
N.A., as Administrative Agent (Incorporated by reference to
Exhibit 10.42 to the Companys Current Report on Form 8-K filed
August 31, 2006).31.1*
    
    Rule 13a-14 Certification dated October 31, 2006, by Peter A.
Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated October 31, 2006, by Russell
Freeman, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification dated October 31, 2006, by Peter A.
Altabef, President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated October 31, 2006, by Russell
Freeman, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. Page 31




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PEROT SYSTEMS CORPORATION(Registrant)Date: October 31, 2006
    
    By
    
    /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal 
Accounting Officer
 Page 32