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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 September 30, 2003oro
    
    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

(Exact name of registrant as specified in its charter)


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. xYes oNo

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). xYes oNo

Number of shares of registrants common stock outstanding as of October 31,
2003: 111,250,672.





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|                                          |                                                                                               |                                                                                                                 |  |  |  |  |  | 
|----------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I:FINANCIAL INFORMATION             
|                                          | ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)                                                     
|                                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002                           
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002          
|                                          | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                          | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                          | ITEM 4: CONTROLS AND PROCEDURES                                                              
|PART II: OTHER INFORMATION               
|                                          | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                          | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                          | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                               
|EX-31.1 Rule 13a-14 Certification by CEO 
|EX-31.2 Rule 13a-14 Certification by CFO 
|EX-32.1 Section 1350 Certification by CEO
|EX-32.2 Section 1350 Certification by CFO



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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2003

INDEX







PagePART I:FINANCIAL INFORMATIONITEM 1:FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002
    
    
    1Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 and 2002
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2:MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    24ITEM 4:CONTROLS AND PROCEDURES
    
    
    24PART II: OTHER INFORMATIONITEM 1:LEGAL PROCEEDINGS
    
    
    25ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    26ITEM 6:EXHIBITS AND REPORTS ON FORM 8-K
    
    
    27SIGNATURES
    
    
    30






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ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)







PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)

September 30, 2003
    
    December 31, 2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    192,895
    
    
    $
    212,861Accounts receivable, net
    
    
    187,815
    
    
    
    162,367Prepaid expenses and other
    
    
    51,777
    
    
    
    42,415Total current assets
    
    
    432,487
    
    
    
    417,643Property, equipment and purchased software, net
    
    
    55,027
    
    
    
    62,543Goodwill
    
    
    274,966
    
    
    
    211,075Long-term accrued revenue
    
    
    7,471
    
    
    
    74,489Other non-current assets
    
    
    122,202
    
    
    
    76,563Total assets
    
    $
    892,153
    
    
    $
    842,313LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,088
    
    
    $
    24,452Accrued liabilities
    
    
    100,095
    
    
    
    92,948Other current liabilities
    
    
    68,083
    
    
    
    38,116Total current liabilities
    
    
    197,266
    
    
    
    155,516Other non-current liabilities
    
    
    7,182
    
    
    
    10,211Total liabilities
    
    
    204,448
    
    
    
    165,727Stockholders equity:Common stock
    
    
    1,111
    
    
    
    1,087Additional paid-in capital
    
    
    407,734
    
    
    
    392,821Other stockholders equity
    
    
    277,597
    
    
    
    284,700Accumulated other comprehensive income (loss)
    
    
    1,263
    
    
    
    (2,022
    )Total stockholders equity
    
    
    687,705
    
    
    
    676,586Total liabilities and stockholders equity
    
    $
    892,153
    
    
    $
    842,313


The accompanying notes are an integral part of these financial statements.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)







Three months ended September 30,
    
    Nine months ended September 30,2003
    
    2002
    
    2003
    
    2002Revenue
    
    $
    371,330
    
    
    $
    342,497
    
    
    $
    1,067,732
    
    
    $
    1,001,741Costs and expenses:Direct cost of services
    
    
    301,447
    
    
    
    262,657
    
    
    
    880,786
    
    
    
    764,411Selling, general and administrative expenses
    
    
    46,916
    
    
    
    51,431
    
    
    
    137,322
    
    
    
    151,392Operating income
    
    
    22,967
    
    
    
    28,409
    
    
    
    49,624
    
    
    
    85,938Interest income, net
    
    
    516
    
    
    
    897
    
    
    
    1,791
    
    
    
    2,985Equity in earnings of unconsolidated affiliates
    
    
    1,681
    
    
    
    2,123
    
    
    
    4,722
    
    
    
    6,050Other income (expense), net
    
    
    589
    
    
    
    (455
    )
    
    
    2,113
    
    
    
    (1,128
    )Income before taxes
    
    
    25,753
    
    
    
    30,974
    
    
    
    58,250
    
    
    
    93,845Income tax expense
    
    
    10,043
    
    
    
    12,234
    
    
    
    22,717
    
    
    
    35,504Income before cumulative effect of a change in
accounting principle
    
    
    15,710
    
    
    
    18,740
    
    
    
    35,533
    
    
    
    58,341Cumulative effect of a change in accounting principle,
net of tax
    
    
    
    
    
    
    
    
    
    
    (42,959
    )
    
    
    Net income (loss)
    
    $
    15,710
    
    
    $
    18,740
    
    
    $
    (7,426
    )
    
    $
    58,341Basic earnings (loss) per common share:Income before cumulative effect of a change in
accounting principle
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.32
    
    
    $
    0.55Cumulative effect of a change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.39
    )
    
    
    Net income (loss)
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    (0.07
    )
    
    $
    0.55Weighted average common shares outstanding
    
    
    110,755
    
    
    
    106,840
    
    
    
    109,876
    
    
    
    105,392Diluted earnings (loss) per common share:Income before cumulative effect of a change in
accounting principle
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.31
    
    
    $
    0.51Cumulative effect of a change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.37
    )
    
    
    Net income (loss)
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    (0.06
    )
    
    $
    0.51Weighted average diluted common shares outstanding
    
    
    115,205
    
    
    
    112,950
    
    
    
    114,662
    
    
    
    115,257Pro forma amounts assuming the accounting change is applied retroactively:Net income
    
    $
    15,710
    
    
    $
    12,460
    
    
    $
    35,533
    
    
    $
    35,161Basic earnings per common share
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.32
    
    
    $
    0.33Diluted earnings per common share
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.31
    
    
    $
    0.31


The accompanying notes are an integral part of these financial statements.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)







Nine months ended September 30,2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (7,426
    )
    
    $
    58,341Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    26,351
    
    
    
    22,745Cumulative effect of a change in accounting principle
    
    
    42,959
    
    
    
    Impairment of assets related to exiting a contract
    
    
    20,743
    
    
    
    Change in deferred taxes
    
    
    4,226
    
    
    
    10,508Equity in earnings of unconsolidated affiliates
    
    
    (4,722
    )
    
    
    (6,050
    )Other non-cash items
    
    
    (6,328
    )
    
    
    2,444Changes in assets and liabilities (net of effects from acquisitions
of businesses):Accounts receivable, net
    
    
    7,194
    
    
    
    10,660Prepaid expenses
    
    
    (8,394
    )
    
    
    (112
    )Long-term accrued revenue
    
    
    (6,085
    )
    
    
    (30,219
    )Accounts payable and accrued liabilities
    
    
    (7,642
    )
    
    
    (7,364
    )Accrued compensation
    
    
    6,192
    
    
    
    (14,223
    )Income taxes
    
    
    20,338
    
    
    
    21,862Other current and non-current assets
    
    
    (12,130
    )
    
    
    (22,732
    )Other current and non-current liabilities
    
    
    2,039
    
    
    
    (10,661
    )Net cash provided by operating activities
    
    
    77,315
    
    
    
    35,199Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (22,818
    )
    
    
    (25,536
    )Acquisitions of businesses, net of cash acquired of
$2,930 and $10,328, respectively
    
    
    (88,695
    )
    
    
    (98,312
    )Other
    
    
    805
    
    
    
    794Net cash used in investing activities
    
    
    (110,708
    )
    
    
    (123,054
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    7,165
    
    
    
    20,339Purchases of treasury stock
    
    
    
    
    
    
    (6,907
    )Other
    
    
    (717
    )
    
    
    (615
    )Net cash provided by financing activities
    
    
    6,448
    
    
    
    12,817Effect of exchange rate changes on cash and cash equivalents
    
    
    6,979
    
    
    
    8,271Net decrease in cash and cash equivalents
    
    
    (19,966
    )
    
    
    (66,767
    )Cash and cash equivalents at beginning of period
    
    
    212,861
    
    
    
    259,178Cash and cash equivalents at end of period
    
    $
    192,895
    
    
    $
    192,411


The accompanying notes are an integral part of these financial statements.

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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 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 (SEC). The interim condensed consolidated
financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-owned subsidiaries (collectively, the Company)
with all significant intercompany transactions eliminated. In the opinion of
management, 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, 2002, in the Companys Annual Report
on Form 10-K filed with the SEC on March 12, 2003. Operating results for the
three and nine month periods ended September 30, 2003, are not necessarily
indicative of the results for the year ending December 31, 2003.

Certain of the 2002 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.

Change in Accounting Principle for Revenue Arrangements with Multiple
Deliverables

The Company has long-term fixed-price contracts that include multiple
deliverables. Prior to January 1, 2003, the Company recognized revenue on
these contracts under the percentage-of-completion method using incurred costs
as a measure of progress towards completion. On November 21, 2002, the
Financial Accounting Standards Board (FASB) Emerging Issues Task Force
reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (EITF 00-21), regarding whether 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. The Company was required to apply the
provisions of EITF 00-21 to all new agreements with multiple deliverables
entered into in fiscal periods beginning after June 15, 2003. Alternatively,
the Company was permitted to apply EITF 00-21 to existing agreements and record
the effect of adoption as the cumulative effect of a change in accounting
principle. On January 1, 2003, the Company adopted EITF 00-21 and changed its
method of accounting for revenue from agreements with multiple deliverables for
both existing and prospective customer contracts.

The Companys adoption of EITF 00-21 on January 1, 2003, resulted in an expense
for the cumulative effect of a change in accounting principle of $69,288
($42,959, net of the applicable income tax benefit), or $0.37 per diluted
share, which includes approximately $19,500 of expense (approximately $12,090,
net of the applicable income tax benefit), or $0.11 per diluted share, to
recognize an estimated loss on a contract element included in a contract that
the Company expected to be profitable in the aggregate over its term.

For contracts including multiple deliverables meeting the separation criteria
of EITF 00-21, the Company allocates the total arrangement consideration to
each separate unit of accounting based on the relative fair values of the
deliverables in each unit of accounting and recognizes revenue based on the
Companys revenue recognition policy applicable to each separate unit of
accounting. In general, EITF 00-21 limits the amount of revenue allocated to
an individual deliverable under an agreement to the lesser of its relative fair
value or the amount not contingent on the Companys performance of other
deliverable elements under the agreement, regardless of the probability of the
Companys performance.

Long-term accrued revenue on in-progress fixed-price contracts totaled $7,471
and $74,489 at September 30, 2003, and December 31, 2002, respectively. The
amount of revenue the Company recognized during the three and nine months ended
September 30, 2003, that was previously recognized and included as a component of the cumulative effect
of a change in accounting principle relating to the adoption of EITF 00-21, was
not significant.

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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)

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its 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. The Company has implemented the disclosure-only provisions of Statement
of Financial Accounting Standards Board No. (FAS) 123, Accounting for
Stock-Based Compensation, and FAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure. Had the Company elected to adopt the
expense recognition provisions of FAS 123, the pro forma impact on net income
(loss) and earnings (loss) per common share would have been as follows:

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss)
As reported
    
    $
    15,710
    
    
    $
    18,740
    
    
    $
    (7,426
    )
    
    $
    58,341Less: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (4,213
    )
    
    
    (3,040
    )
    
    
    (12,732
    )
    
    
    (10,228
    )Pro forma
    
    $
    11,497
    
    
    $
    15,700
    
    
    $
    (20,158
    )
    
    $
    48,113Basic earnings (loss) per common share
As reported
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    (0.07
    )
    
    $
    0.55Pro forma
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    (0.18
    )
    
    $
    0.46Diluted earnings (loss) per common share
As reported
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    (0.06
    )
    
    $
    0.51Pro forma
    
    $
    0.10
    
    
    $
    0.14
    
    
    $
    (0.18
    )
    
    $
    0.42


The Company utilizes the Black-Scholes option pricing model to calculate its
pro forma stock-based compensation expense, and the assumptions used for each
period are as follows:

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Weighted average risk free interest rates
    
    
    2.32
    %
    
    
    2.80
    %
    
    
    2.24
    %
    
    
    3.81
    %Volatility
    
    
    54
    %
    
    
    58
    %
    
    
    55
    %
    
    
    58
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value per
share of options granted
    
    $
    4.59
    
    
    $
    4.53
    
    
    $
    4.36
    
    
    $
    7.20


With the exception of certain 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.

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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)

Financial Accounting Standards Board Interpretation No. 46

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, which changes
the criteria for consolidation by business enterprises of variable interest
entities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
On October 9, 2003, the FASB deferred the effective date for applying the
provisions of FIN 46 to variable interest entities created prior to February 1,
2003, which now must be consolidated as of the end of the first interim or
annual period ending after December 15, 2003. FIN 46 may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated.

In June 2000, the Company entered into an operating lease contract with a
variable interest entity for the use of land and office buildings in Plano,
Texas, including a data center facility. The Company currently does not
consolidate this entity but will be required to consolidate this entity under
FIN 46 beginning on December 31, 2003. The Company does not plan to restate
any previously issued financial statements in connection with its adoption of
FIN 46, but it will provide disclosures of the pro forma impact of FIN 46 on
all previous fiscal periods presented in its financial statements.
Accordingly, upon consolidation of this entity on December 31, 2003, the
Company will increase its assets and long-term debt by approximately $65,200
and $75,500, respectively. Additionally, the Company will record an expense
for the cumulative effect of a change in accounting principle of approximately
$10,300 ($6,400, net of the applicable income tax benefit), or approximately
$.06 per share (diluted), representing primarily the cumulative depreciation
expense on the office buildings and data center facility through December 31,
2003. In 2004, the Company will begin recording additional depreciation
expense of approximately $3,200 per year relating to these newly consolidated
assets.

NOTE 2. ACQUISITIONS

Soza & Company, Ltd.

On February 20, 2003, the Company acquired all of the outstanding shares of
Soza & Company, Ltd. (Soza), a professional services company that provides
information technology, management consulting, financial services and
environmental services primarily to public sector customers. As a result of the
acquisition, the Company increased its customer base and service offerings in
the Government Services segment.

The purchase price comprised $73,527 in cash (net of $2,222 of cash acquired),
$5,000 of which is being held in an escrow account for up to two years, and may
include additional payments totaling up to $32,000 in cash or stock over the
next two years. The possible future payments are contingent upon Soza achieving
certain financial targets over the same period, and at the Companys
discretion, up to 70% of these payments may be settled in Class A Common Stock
of the Company. The results of operations of Soza and the estimated fair value
of assets acquired and liabilities assumed are included in the Companys
condensed consolidated financial statements beginning on the acquisition date.
The excess purchase price over net assets acquired of $53,876 was recorded as
goodwill on the condensed consolidated balance sheets. The goodwill was
assigned to the Government Services segment and is not deductible for tax
purposes.

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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 estimated fair values of the Soza assets
acquired and liabilities assumed at the date of acquisition.

As ofFebruary 20, 2003Current assets
    
    $
    31,286Property, equipment and purchased software, net
    
    
    1,833Goodwill
    
    
    53,876Other non-current assets
    
    
    15,387102,382Current liabilities
    
    
    (21,597
    )Other non-current liabilities
    
    
    (5,036
    )Purchase consideration
    
    $
    75,749


Other

During the first nine months of 2003, the Company determined that financial
performance targets for two acquisitions were achieved. As a result, an
additional $10,000 in cash was paid to the previous owners of Advanced
Receivable Strategy, Inc. (ARS). The Company acquired substantially all of
the assets of ARS during 2001. The related goodwill was assigned to the IT
Solutions segment and is deductible for tax purposes. In addition, the Company
paid $3,000 in cash to the previous shareholders of ADI Technology Corporation
(ADI), which the Company acquired in 2002. Also during the first nine months
of 2003, the Company recorded a purchase price adjustment for ADI based on the
completion of a contractual purchase price adjustment period, which reduced
goodwill by $2,985.

NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003, by reporting segment are as follows:

GovernmentIT Solutions
    
    Services
    
    Consulting
    
    TotalBalance as of December 31, 2002
    
    $
    112,805
    
    
    $
    26,899
    
    
    $
    71,371
    
    
    $
    211,075Additional goodwill for ADI acquisition
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Additional goodwill for ARS acquisition
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000Goodwill for Soza acquisition
    
    
    
    
    
    
    53,876
    
    
    
    
    
    
    
    53,876Balance as of September 30, 2003
    
    $
    122,805
    
    
    $
    80,790
    
    
    $
    71,371
    
    
    $
    274,966


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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 September 30, 2003, are recorded in other
non-current assets in the condensed consolidated balance sheets and are
composed of:

Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    BookValue
    
    Amortization
    
    ValueService marks
    
    $
    5,552
    
    
    $
    (2,731
    )
    
    $
    2,821Customer based assets
    
    
    15,949
    
    
    
    (1,852
    )
    
    
    14,097Other intangible assets
    
    
    3,735
    
    
    
    (1,724
    )
    
    
    2,011Balance at September 30, 2003
    
    $
    25,236
    
    
    $
    (6,307
    )
    
    $
    18,929


Total amortization expense for identifiable intangible assets was $1,213 and
$2,796 for the three and nine months ended September 30, 2003, respectively,
and $629 and $1,634 for the three and nine months ended September 30, 2002,
respectively. Amortization expense is estimated at $3,832, $4,201, $4,049,
$3,458, $2,634 and $2,219 for the years ended December 31, 2003 through 2008,
respectively. Identifiable intangible assets are amortized over their estimated
useful lives, ranging from 18 months to 15 years. The weighted average useful
life is approximately six years.

NOTE 4. COMPREHENSIVE INCOME (LOSS)

The Companys total comprehensive income (loss), net of tax, was as follows:

Three months
    
    Nine monthsended September 30,
    
    ended September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss)
    
    $
    15,710
    
    
    $
    18,740
    
    
    $
    (7,426
    )
    
    $
    58,341Foreign currency translation adjustments
    
    
    736
    
    
    
    696
    
    
    
    3,295
    
    
    
    4,006Other
    
    
    (680
    )
    
    
    (142
    )
    
    
    (10
    )
    
    
    (171
    )Total comprehensive income (loss)
    
    $
    15,766
    
    
    $
    19,294
    
    
    $
    (4,141
    )
    
    $
    62,176


NOTE 5. STOCKHOLDERS EQUITY

The components of Other stockholders equity were as follows:

September 30, 2003
    
    December 31, 2002Retained earnings
    
    $
    278,683
    
    
    $
    286,109Other
    
    
    (1,086
    )
    
    
    (1,409
    )Total other stockholders equity
    
    $
    277,597
    
    
    $
    284,700


At September 30, 2003, there were 107,190 shares of the Companys Class A
Common Stock outstanding and 3,917 shares of Class B Common Stock outstanding.
At December 31, 2002, there were 105,272 shares of the Companys Class A Common
Stock outstanding and 3,392 shares of the Companys Class B Common Stock
outstanding. The increase in the number of shares of Class A Common Stock is
due to the exercise of options and the issuance of shares to participants in
the Employee Stock Purchase Plan.

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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. EXITING OF BUSINESS RELATIONSHIPS

During the three months ended June 30, 2003, the Company exited an
under-performing contract that included a software development project in which
the actual development costs were expected to exceed the estimated costs as
stated in the contract. While the contract provides for the Company to collect
most of the excess of the actual cost over the estimate in the contract, the
Company and its client were unable to reach agreement on the timing and form of
payment for the excess. As a result, the Company recorded $17,676 of expense
in direct cost of services, which is composed of the following:



| |  | The impairment of assets related to this contract totaling $20,743,
including the impairment of $14,729 of long-term accrued revenue;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  | The accrual of estimated costs to exit this contract of $3,766; and
|- |  | -------------------------------------------------------------------



| |  | Partially offsetting the above expenses, the reversal of $6,833 in
accrued liabilities that had been recognized for future losses that
the Company expected to incur to complete the application development
project.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the second quarter of 2002, the Company began to expect that the application
development project would generate a loss. The Company did not recognize a
loss on the contract at that time because it expected that the contract would
be profitable in the aggregate over its term. As part of the Companys adoption
of EITF 00-21 in the first quarter of 2003, the Company separated the
deliverables in the contract into separate units of accounting and recognized
an estimated loss on the application development project totaling approximately
$19,500 (approximately $12,090, net of the applicable income tax benefit), or
$0.11 per diluted share, which was recorded as part of the cumulative effect of
a change in accounting principle. The Company is providing the services
necessary to transition certain functions back to the client, which may be
completed during the fourth quarter of 2003.

During the three months ended September 30, 2002, the Company exited a
technology infrastructure services joint venture. As a result, the Company
received a payment of $7,267 and incurred expenses of $89 that were recorded in
revenue and direct cost of services, respectively.

During the three months ended June 30, 2002, the Company terminated a business
relationship. As a result, the Company received a termination fee of $7,289 and
incurred expenses of $759 that were recorded in revenue and direct cost of
services, respectively. In addition, in connection with this termination, the
Company reduced a deferred tax asset valuation allowance, resulting in an
income tax benefit of $1,565.

NOTE 7. SEGMENT DATA

The Companys operations are classified into three primary lines of business,
which are also reportable segments. These lines of business are IT Solutions,
Government Services, and Consulting. The IT Solutions segment provides
services to customers primarily under long-term contracts in strategic
relationships. These services include technology and business process
outsourcing, as well as industry domain-based short-term project and consulting
offerings. The Government Services segment provides consulting and
technology-based business process solutions for the Department of Defense and
various other governmental agencies. The Consulting segment provides 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. The Companys remaining operating areas and
corporate activities are included in Other and include profits and expenses
that are not related to the operations of the other reportable segments.

The reporting segments follow the same accounting policies used for the
Companys condensed consolidated financial statements. The Company evaluates
segment performance based on income (loss)

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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)

from operations before income taxes, exclusive of profits 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 three months ended September 30, 2003:Revenue
    
    $
    302,152
    
    
    $
    54,185
    
    
    $
    14,520
    
    
    $
    473
    
    
    $
    371,330Income (loss) before taxes
    
    
    16,405
    
    
    
    2,610
    
    
    
    597
    
    
    
    6,141
    
    
    
    25,753For the three months ended September 30, 2002:Revenue
    
    $
    307,589
    
    
    $
    19,280
    
    
    $
    15,266
    
    
    $
    362
    
    
    $
    342,497Income (loss) before taxes
    
    
    28,280
    
    
    
    853
    
    
    
    1,152
    
    
    
    689
    
    
    
    30,974For the nine months ended September 30, 2003:Revenue
    
    $
    877,647
    
    
    $
    147,571
    
    
    $
    41,279
    
    
    $
    1,235
    
    
    $
    1,067,732Income (loss) before taxes
    
    
    35,630
    
    
    
    9,676
    
    
    
    (82
    )
    
    
    13,026
    
    
    
    58,250For the nine months ended September 30, 2002:Revenue
    
    $
    935,789
    
    
    $
    19,280
    
    
    $
    45,196
    
    
    $
    1,476
    
    
    $
    1,001,741Income (loss) before taxes
    
    
    86,700
    
    
    
    853
    
    
    
    2,286
    
    
    
    4,006
    
    
    
    93,845


As discussed above in Note 6, during the first nine months of 2003 the Company
recorded $17,676 of expense in direct cost of services associated with exiting
an under-performing contract, which is included in the IT Solutions segment.
In addition, as discussed below in Note 8, the Company revised its estimates to
complete its previous years streamlining efforts, resulting in a reduction in
selling, general and administrative expenses (SG&A) of $6,272, which is
included in the Other category.

As discussed in Note 6, during the first nine months of 2002 the Company
recorded $14,556 of revenue associated with the terminations of two business
relationships, and this revenue is included in the IT Solutions segment.
Because of the nature of this revenue, the Company has reported the related
gross profit of $13,708 in Other.

Also included in Other for the first nine months of 2002 are a payment
received from a customer in bankruptcy that was previously believed to be
unrecoverable, severance and other costs to exit certain activities, and
expenses associated with the California energy investigations and related
litigation as discussed below in Note 11.

NOTE 8. REALIGNED OPERATING STRUCTURE

During 2001, the Company realigned its operating structure in order to
strengthen the Companys market position and reduce its costs, which resulted
in charges of $74,690. In 2002, the Company continued efforts to streamline
its operations and recorded charges of $8,151 in the second quarter and $2,936
in the third quarter related to severance and other costs to exit certain
activities.

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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 payments made against these charges during the first nine months of 2003
are as follows:

Employee
    
    FacilityRelated
    
    RelatedCosts
    
    Costs
    
    TotalProvision balance at December 31, 2002
    
    $
    7,629
    
    
    $
    14,382
    
    
    $
    22,011Less: cash payments
    
    
    (725
    )
    
    
    (7,859
    )
    
    
    (8,584
    )Less: changes in estimate
    
    
    (5,336
    )
    
    
    (936
    )
    
    
    (6,272
    )Remaining balance at September 30, 2003
    
    $
    1,568
    
    
    $
    5,587
    
    
    $
    7,155


During 2003, the Company revised its estimates to complete its previous years
streamlining efforts, resulting in a reduction in SG&A and in the related
liabilities of $6,272. The change in estimate for the employee related costs
primarily related to the favorable resolution of an employment dispute, and the
change in estimate for the facility related costs was primarily due to changes
in the estimated costs to close two facilities. The remaining balance of $7,155
is included on the condensed consolidated balance sheets in the amounts of
$2,863 in accrued liabilities and $4,292 in other non-current liabilities and
is expected to be settled by the end of 2006.

NOTE 9. INCOME TAXES

During the first nine months of 2002, the Company reduced a deferred tax asset
valuation allowance of $1,565 in connection with the termination of a certain
business relationship. Without the effect of this $1,565 tax benefit, the
effective tax rate for the first nine months of 2002 would have been 39.5%.

NOTE 10. EARNINGS PER SHARE

The following chart is a reconciliation of the numerators and the denominators
of the basic and diluted per share computations for income before the
cumulative effect of a change in accounting principle.

For the three months ended September 30,2003
    
    2002Basic Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    15,710
    
    
    $
    18,740Weighted average common shares outstanding
    
    
    110,755
    
    
    
    106,840Basic earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.14
    
    
    $
    0.18Diluted Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    15,710
    
    
    $
    18,740Weighted average common shares outstanding
    
    
    110,755
    
    
    
    106,840Incremental shares assuming dilution
    
    
    4,450
    
    
    
    6,110Weighted average diluted common shares outstanding
    
    
    115,205
    
    
    
    112,950Diluted earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.14
    
    
    $
    0.17


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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)

For the nine months ended September 30,2003
    
    2002Basic Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    35,533
    
    
    $
    58,341Weighted average common shares outstanding
    
    
    109,876
    
    
    
    105,392Basic earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.32
    
    
    $
    0.55Diluted Earnings per Common ShareIncome before cumulative effect of a change in accounting principle
    
    $
    35,533
    
    
    $
    58,341Weighted average common shares outstanding
    
    
    109,876
    
    
    
    105,392Incremental shares assuming dilution
    
    
    4,786
    
    
    
    9,865Weighted average diluted common shares outstanding
    
    
    114,662
    
    
    
    115,257Diluted earnings per common share before cumulative effect of a
change in accounting principle
    
    $
    0.31
    
    
    $
    0.51


For the three and nine months ended September 30, 2003, options to purchase
21,508 and 21,546 shares, respectively, of the Companys 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
higher than the Companys average stock price for these periods. For the three
and nine months ended September 30, 2002, options to purchase 17,366 and 15,522
shares, respectively, of the Companys common stock were excluded for the same
reason as discussed above.

NOTE 11. CONTINGENCIES

Litigation

The Company is, from time to time, involved in various litigation matters
arising in the ordinary course of its business. The Company believes that the
outcomes of these litigation matters, either individually or taken as a whole,
will not have a material adverse effect on its consolidated financial
condition, results of operations or cash flows.

IPO Allocation Securities Litigation

In July and August 2001, the Company, as well as some of its current and former
officers and the investment banks that underwrote the Companys 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 the Company
focuses on alleged improper practices by the investment banks in connection
with the Companys 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 Company shares in aftermarket trading. The lawsuit also
alleges that the Company should have disclosed in its public

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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)

offering prospectus the alleged practices of the investment banks, whether or
not the Company was aware that the practices were occurring.

During 2002, the individual Company defendants were dismissed from the case.
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 the Company, but did not dismiss the
remaining claims.

The Company recently decided to accept a settlement proposal presented to all
issuer defendants. Pursuant to the proposed settlement, plaintiffs would
dismiss and release all claims against the Company and its 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
the Company may have against the underwriters. The Company 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.
In the event that the settlement is not completed, the Company will continue
to vigorously defend itself in this case.

Litigation Relating to the California Energy Market

In June 2002, the Company was named as a defendant in a purported class action
lawsuit that alleges that it 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.

In June, July and August 2002, the Company, 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 the Companys SEC filings contained material misstatements or
omissions of material facts with respect to the Companys activities related to
the California energy market. Two lawsuits, Herbert Condell v. Perot Systems
Corp. et al. and Richard J. Dowling v. Perot Systems Corp. et al. were filed in
the United States District Court for the Southern District of New York. Four
lawsuits, Robert Markewich v. Perot Systems Corp. et al., Vincent Milano v.
Perot Systems Corp. et al., Lori Will v. Perot Systems Corp. et al. and June
Zordich v. Perot Systems Corp. et al. were filed in the United States District
Court for the Northern District of Texas, Dallas Division. Two lawsuits,
Joffre Berger v. Perot Systems Corp. et al., and Daniel Taubenfeld v. Perot
Systems Corp. et al., were filed in the United States District Court for the
Eastern District of Texas, Sherman Division. All of these eight cases have
been consolidated in the Northern District of Texas, Dallas Division.

The Company believes the claims against it are without merit and will
vigorously defend itself in these cases.

During the three and nine months ended September 30, 2002, the Company incurred
expenses of $5,146 and $8,676, respectively, associated with the California
energy investigations and related litigation and have included these costs
within SG&A.

Other Contingencies

Contract-Related Contingency

As discussed above in Note 6, during the second quarter of 2003, the Company
exited an under-performing contract that included a software development
project in which the actual development costs were expected

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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)

to exceed the estimated costs as stated in the contract. While the contract
provides for the Company to collect most of the excess of the actual cost over
the estimate in the contract, the Company and its client were unable to reach
agreement on the timing and form of payment for the excess.

The Company is providing the services necessary to transition certain functions
back to the client, which may be completed during the fourth quarter of 2003.

As a result of the exiting of this contract, in the second quarter of 2003 the
Company determined that certain contract-related assets were impaired and
additional expenses would be incurred in the future related to exiting this
contract, resulting in a loss of $17,676 recorded in direct cost of services.
This estimated loss represents managements current estimate of the loss
related to exiting this contract. The amount of actual loss with respect to
exiting this contract may differ from the Companys current estimates.

NOTE 12. GUARANTEES AND INDEMNIFICATIONS

The Company has applied the disclosure provisions of FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others, to its agreements that contain guarantee or indemnification clauses. FIN 45
requires the Company to disclose certain types of guarantee and indemnification arrangements, even if the likelihood of the Company
being required to perform under these arrangements is remote. The following is a description of arrangements in which the Company is a guarantor, as defined
by FIN 45.

The Company is a party to a variety of agreements under which it may be obligated to indemnify another party. Typically, these obligations arise in the context of contracts under which the Company
agrees 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 the Companys 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 the Company 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 the Companys obligations and the unique facts and circumstances involved in each particular agreement.
However, the Company has purchased and expects to continue to purchase a variety of liability insurance policies which are expected, in most cases, to limit the Companys 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, the Company has not historically incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the likelihood of a material liability under these
arrangements is remote. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.

The Company includes warranty provisions in substantially all of its customer contracts in the ordinary
course of business. These provisions generally provide that the Companys services will be performed in an appropriate and legal manner and that
its products and other deliverables will conform in all material respects to specifications agreed between the Company and its customer. The Companys obligations under these agreements may be limited in terms of time or amount
or both. In addition, the Company has purchased and expects to continue to purchase errors and omissions insurance policies which are expected, in most cases, to limit the Companys financial exposure to claims covered by such policies. Because the Companys
obligations are conditional in nature and depend on the unique facts and circumstances involved in each particular matter, the Company records 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 September 30, 2003, the Company had no liability recorded for warranty claims.

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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 OPERATION

Change in Accounting Principle for Revenue Arrangements with Multiple
Deliverables

We have long-term fixed-price contracts that include multiple deliverables.
Prior to January 1, 2003, we recognized revenue on these contracts under the
percentage-of-completion method using incurred costs as a measure of progress
towards completion. On November 21, 2002, the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force reached a consensus on Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, regarding
whether 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 were
required to apply the provisions of EITF 00-21 to all new agreements with
multiple deliverables entered into in fiscal periods beginning after June 15,
2003. Alternatively, we were permitted to apply EITF 00-21 to existing
agreements and record the effect of adoption as the cumulative effect of a
change in accounting principle. On January 1, 2003, we adopted EITF 00-21 and
changed our method of accounting for revenue from agreements with multiple
deliverables for both existing and prospective customer contracts.

Our adoption of EITF 00-21 on January 1, 2003, resulted in an expense 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 $0.37 per diluted share,
which includes approximately $19.5 million of expense (approximately $12.1
million, net of the applicable income tax benefit), or $0.11 per diluted share,
to recognize an estimated loss on a contract element included in a contract
that we expected to be profitable in the aggregate over its term. The $69.3
million expense was recorded as a reduction in long-term accrued revenue of
$58.8 million and an increase in accrued liabilities of $10.5 million.

To illustrate the impact of the adoption of EITF 00-21 on our financial results
for 2002, we have shown in the table below the pro forma revenue, gross profit,
gross margin and net income (loss) as if EITF 00-21 had been applied during the
three and nine months ended September 30, 2002 (amounts in millions):

Three Months Ended September 30, 2002
    
    Nine Months Ended September 30, 2002Impact from
    
    Pro Forma
    
    
    
    
    
    Impact from
    
    Pro FormaReported
    
    EITF 00-21
    
    Amounts
    
    Reported
    
    EITF 00-21
    
    AmountsRevenue
    
    $
    342.5
    
    
    $
    (7.6
    )
    
    $
    334.9
    
    
    $
    1,001.7
    
    
    $
    (27.1
    )
    
    $
    974.6Gross profit
    
    
    79.8
    
    
    
    (10.1
    )
    
    
    69.7
    
    
    
    237.3
    
    
    
    (37.4
    )
    
    
    199.9Gross margin
    
    
    23.3
    %
    
    
    
    
    
    
    20.8
    %
    
    
    23.7
    %
    
    
    
    
    
    
    20.5
    %Net income (loss)
    
    
    18.7
    
    
    
    (6.2
    )
    
    
    12.5
    
    
    
    58.3
    
    
    
    (23.1
    )
    
    
    35.2


The amount of revenue we recognized during the three and nine months ended
September 30, 2003, which was included as a component of the cumulative effect
of a change in accounting principle relating to the adoption of EITF 00-21, was
not significant. The impact of EITF 00-21 on the three and nine months ended
September 30, 2002, as reflected above, was limited to the IT Solutions
segment.

Exiting of a Customer Contract

During the second quarter of 2003, we exited an under-performing contract that
included a software development project in which the actual development costs
were expected to exceed the estimated costs as stated in the contract. While
the contract provides for us to collect most of the excess of the actual cost
over the estimate in the contract, we and our client were unable to reach
agreement on the timing and form of payment for the excess. As a result, we
recorded $17.7 million of expense in direct cost of services, which is composed
of the following:

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



| |  | The impairment of assets related to this contract totaling $20.7 million, including the impairment of $14.7 million of
long-term accrued revenue;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The accrual of estimated costs to exit this contract of $3.8 million; and
|- |  | -------------------------------------------------------------------------



| |  | Partially offsetting the above expenses was the reversal of $6.8 million in accrued liabilities that had been recognized
for future losses that we expected to incur to complete the application development project.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the second quarter of 2002, we began to expect that the application
development project would generate a loss. However, we did not recognize a
loss on the contract at that time because we expected that the contract would
be profitable in the aggregate over its term. As part of our adoption of EITF
00-21 in the first quarter of 2003, we separated the deliverables in the
contract into separate units of accounting and recognized a net estimated loss
on the application development project totaling approximately $19.5 million
(approximately $12.1 million, net of the applicable income tax benefit), or
$0.11 per diluted share, which was recorded as part of the cumulative effect of
a change in accounting principle. The $19.5 million net estimated loss on the
application development project had the following net impact on revenue, direct
cost of services and gross profit for each quarterly period of 2002 (in
millions):

Three months endedJune 30
    
    September 30
    
    December 31Revenue
    
    $
    (5.0
    )
    
    $
    (1.0
    )
    
    $
    (3.8
    )Direct cost of services
    
    
    7.7
    
    
    
    2.5
    
    
    
    0.4Gross profit
    
    
    (12.7
    )
    
    
    (3.5
    )
    
    
    (4.2
    )


We are providing the services necessary to transition certain functions back to
the client, which may be completed during the fourth quarter of 2003.

Comparison of the Three Months Ended September 30, 2003 and 2002

Revenue

Revenue for the third quarter of 2003 increased by $28.8 million, or 8.4%, to
$371.3 million from revenue of $342.5 million in the third quarter of 2002. As
noted above, we adopted EITF 00-21 effective January 1, 2003, which adjusted
revenue recognized on existing contracts based on the new criteria of EITF
00-21 regarding whether 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.
The effect from this change in accounting is reflected above in the
presentation of pro forma amounts for revenue, gross profit, gross margin and
net income (loss) for the three months ended September 30, 2002. The following
comparison of third quarter 2003 to third quarter 2002 was prepared using pro
forma amounts for third quarter 2002.

Revenue for the third quarter of 2003 increased by $36.4 million, or 10.9%,
compared to pro forma third quarter 2002 revenue of $334.9 million. This
increase in revenue is due to increases in revenue from the Government Services
and IT Solutions segments, partially offset by a decrease in revenue from the
Consulting segment.

Revenue from Government Services increased $34.9 million, or 180.8%, to $54.2
million in the third quarter of 2003 from $19.3 million for the third quarter
of 2003. The increase is primarily attributable to the acquisition of Soza &
Company, Ltd. in February 2003.

Revenue from the IT Solutions segment increased $2.2 million, or 0.7%, to
$302.2 million in the third quarter of 2003 from pro forma revenue of $300.0
million in the third quarter of 2002. This net increase

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

was primarily attributable to a $25.1 million increase in revenue from
contracts signed in the twelve-month period following the third quarter of
2002. Partially offsetting the increase were:



| |  | an $18.7 million decrease in revenue as a result of exiting business relationships and under-performing delivery units
during 2002, including two joint ventures;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $3.3 million decrease from UBS to $58.7 million in 2003 from $62.0 million in 2002; and
|- |  | -----------------------------------------------------------------------------------------



| |  | a $0.9 million net decrease primarily from short-term offerings and project work provided to customers within our long-term
account base. Within our long-term client contracts we typically perform services above our base level of services. 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 client needs.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue from the Consulting segment decreased 5.2% to $14.5 million in the
third quarter of 2003 from $15.3 million in the third quarter of 2002 due
primarily to weak demand for custom application solutions and package
implementation services.

Gross Margin

Gross margin for the third quarter of 2003 of 18.8% of revenue was lower than
the gross margin for the third quarter of 2002 of 23.3% and is lower than the
pro forma gross margin for the third quarter of 2002 of 20.8%. The following
items are important in understanding the decrease in gross margin as compared
to the pro forma gross margin for 2002:



| |  | In the third quarter of 2002, we recorded revenue of $7.3 million and
direct cost of services of $0.1 million, resulting in gross profit of
$7.2 million, associated with exiting an infrastructure joint venture;
and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As discussed above in Exiting of a Customer Contract, the pro forma
gross profit for the third quarter of 2002 includes a reduction of
$3.5 million associated with the adoption of EITF 00-21 for this
contract ($1.0 million as a reduction of revenue and $2.5 million as
an increase in direct cost of services).
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Without the effects of these items, gross margin for the third quarter of 2003
would have decreased to 18.8% of revenue from a gross margin of 20.1% in the
third quarter of 2002 (calculated by adjusting the pro forma gross margin of
20.8% for the third quarter of 2002 for the 2002 items discussed above). The
year over year decline in gross margin is due to low profitability in the early
phases of new contracts signed in the twelve-month period following the third
quarter of 2002 and an increase in expense for year-end bonuses to be paid to
associates, partially offset by increased profitability from certain
fixed-price contracts. During the third quarter of 2003, we recorded
additional expense for associate year-end bonuses as compared to the prior year
period, which reduced gross margin for the third quarter of 2003 by 1.2
percentage points.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the third quarter of 2003
decreased 8.8% to $46.9 million from $51.4 million for the third quarter of
2002. SG&A for the third quarter of 2003 was 12.6% of revenue, which is lower
than SG&A for the third quarter of 2002 of 15.3% of pro forma revenue. In our
analysis of SG&A for the third quarters of 2003 and 2002, we identified the
following items that are important in understanding this change:



| |  | During the third quarter of 2002, we recorded $3.0 million of expense
in SG&A associated with the elimination of approximately 52 positions
in connection with a restructuring of European operations;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



| |  | During the third quarter of 2002, we recorded $5.1 million of expense
in SG&A associated with our response to investigations of the
California energy crisis; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the third quarter of 2003, we recorded a reduction of expense
of $0.9 million resulting from a revised estimate of liabilities
associated with our prior year streamlining efforts.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Without the effects of these items, SG&A would have increased by $4.5 million,
or 10.4%, to $47.8 million for the third quarter of 2003 from $43.3 million for
the third quarter of 2002. As a percentage of revenue, SG&A was consistent at
12.9% of revenue for the third quarters of 2003 and 2002 (using pro forma
revenue).

Other Statement of Operations Items

Equity in earnings of unconsolidated affiliates, which represents our share of
the earnings of HCL Perot Systems N.V. (HPS), a software joint venture based in
India, was $1.7 million in the three months ended September 30, 2003, compared
to $2.1 million in the same period of 2002.

Comparison of the Nine Months Ended September 30, 2003 and 2002

Revenue

Revenue for the nine months ended September 30, 2003, increased by $66.0
million, or 6.6%, to $1,067.7 million from revenue of $1,001.7 million for the
nine months ended September 30, 2002. As noted above, we adopted EITF 00-21
effective January 1, 2003, which adjusted revenue recognized on existing
contracts based on the new criteria of EITF 00-21 regarding whether 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. The effect from this
change in accounting is reflected above in the presentation of pro forma
amounts for revenue, gross profit, gross margin and net income (loss) for the
nine months ended September 30, 2002. The following comparison of the first
nine months of 2003 to the first nine months of 2002 was prepared using pro
forma amounts for the first nine months of 2002.

Revenue for the first nine months of 2003 increased by $93.1 million, or 9.6%,
compared to pro forma revenue for the first nine months of 2002 of $974.6
million.

Revenue from Government Services increased $128.3 million, or 664.8%, to $147.6
million for the first nine months of 2003 from $19.3 million for the same
period in 2002. This increase is attributable to the acquisitions of Soza &
Company, Ltd. in February 2003 and ADI Technology Corporation in July 2002.

Revenue from the IT Solutions segment decreased $31.1 million, or 3.4%, to
$877.6 million for the first nine months of 2003 from pro forma revenue of
$908.7 million in the same period of 2002. This decrease was primarily
attributable to:



| |  | An $18.0 million decrease from existing accounts, short-term offerings, and project work that is provided to customers
within our long-term account base. Within our long-term client contracts we typically perform services above our base
level of services. 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 client needs;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A $49.3 million decrease in revenue as a result of exiting certain business relationships and under-performing delivery
units during 2002, including two joint ventures; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A $12.0 million decrease from UBS to $177.5 million in 2003 from $189.5 million in 2002.
|- |  | ----------------------------------------------------------------------------------------

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

These decreases in revenue were partially offset by a $48.2 million increase in
revenue from contracts signed in the twelve-month period following the third
quarter of 2002.

Revenue from the Consulting segment decreased 8.8% to $41.2 million in the
first nine months of 2003 from $45.2 million in the same period of 2002 due
primarily to the weak demand for custom application solutions and package
implementation services.

Gross Margin

Gross margin for the nine months ended September 30, 2003, was 17.5% of
revenue, which is lower than the gross margin for the nine months ended
September 30, 2002, of 23.7% and the pro forma gross margin for the nine months
ended September 30, 2002, of 20.5%. The following items are important in
understanding the decrease in gross margin as compared to the pro forma gross
margin for 2002:



| |  | In the first nine months of 2002, we recorded revenue of $14.6 million
and direct cost of services of $0.9 million, resulting in gross profit
of $13.7 million, associated with the terminations of two business
relationships;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the first nine months of 2002, we received a $3.0 million payment
from a customer in bankruptcy reorganization that was previously
believed to be unrecoverable;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As discussed above in Exiting of a Customer Contract, the pro forma
gross profit for the first nine months of 2002 includes a reduction of
$16.2 million associated with the adoption of EITF 00-21 for a
contract we exited ($6.0 million as a reduction of revenue and $10.2
million as an increase in direct cost of services); and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As discussed above in Exiting of a Customer Contract, in the second
quarter of 2003, we recorded $17.7 million of expense in direct cost
of services associated with the exiting of this contract.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Without the effects of these items, gross margin for the first nine months of
2003 would have decreased to 19.2% of revenue from a gross margin of 20.6% in
the same period of 2002 (calculated by adjusting the pro forma gross margin of
20.5% for the first nine months of 2002 for the 2002 items discussed above).
The year over year decline in gross margin is primarily due to low
profitability in the early phases of new contracts signed in the twelve-month
period following the third quarter of 2002, an increase in expense for year-end
bonuses to be paid to associates, and $3.6 million of expense associated with
unfulfilled minimum purchase commitments. During the first nine months of
2003, we recorded additional expense for associate year-end bonuses as compared
to the prior year period, which reduced gross margin for the first nine months
of 2003 by 0.6 percentage points.

Selling, General, and Administrative Expenses

SG&A for the nine months ended September 30, 2003, decreased 9.3% to $137.3
million from $151.4 million for the same period of 2002. SG&A for the first
nine months of 2003 was 12.9% of revenue, which is lower than SG&A for the same
period of 2002 of 15.5% of pro forma revenue. In our analysis of SG&A for the
first nine months of 2003 and 2002, we identified the following items that are
important in understanding this change:



| |  | During the first nine months of 2002, we recorded $11.1 million of
expense in SG&A relating to severance and other costs to exit
activities and $8.7 million of expense associated with our response to
investigations of the California energy crisis; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the first nine months of 2003, we recorded $3.3 million of
expense in SG&A related to severance and other costs to eliminate
approximately 150 positions in various business functions and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



| |  | geographic areas. In addition, we recorded a reduction of expense of $6.3
million resulting from revising our estimate of liabilities associated with
actions in prior years to streamline our operations, which included a
favorable resolution of an employment dispute.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Without the effects of these items, SG&A would have increased by $8.7 million,
or 6.6%, to $140.3 million for the first nine months of 2003 from $131.6
million for the same period of 2002. As a percentage of revenue, SG&A would
have decreased to 13.1% of revenue for the first nine months of 2003 from 13.5%
of pro forma revenue for the prior year period. This decrease is primarily the
result of the benefits obtained from our prior year streamlining efforts.
Partially offsetting these expense reductions is an increase in SG&A expenses
associated with our recently formed Government Services segment.

Other Statement of Operations Items

Equity in earnings of unconsolidated affiliates, which represents our share of
the earnings of HPS, was $4.7 million in the nine months ended September 30,
2003, compared to $6.1 million in the same period of 2002.

The effective tax rate for income before the cumulative effect of a change in
accounting principle for the nine months ended September 30, 2003, was 39.0%.
During the second quarter of 2002, we reduced a deferred tax asset valuation
allowance of $1.6 million in connection with the termination of a
business relationship. Without the effect of this $1.6 million tax benefit, the
effective tax rate for the first nine months of 2002 would have been 39.5%.

Business Outlook

The following statements regarding our business outlook are based on current
expectations. These statements are forward-looking and actual results may
differ materially. In formulating this outlook, we considered recent and
potential sales, acquisitions and current market conditions.

As discussed more fully below in Accounting Standards Issued, we delayed our
adoption of Financial Accounting Standards Board Interpretation No. 46 (FIN 46)
following the FASBs deferral of the effective date of FIN 46. We now expect
to adopt FIN 46 as of December 31, 2003, and will record an expense for the
cumulative effect of a change in accounting principle of approximately $10.3
million ($6.4 million, net of the applicable income tax benefit), or
approximately $.06 per share (diluted), representing primarily the cumulative
depreciation expense on the office buildings and a data center facility through
December 31, 2003.

For the fourth quarter of 2003, we expect revenue to range from $363.0 million
to $378.0 million, representing an increase between 9.9% and 14.4% as compared
to the fourth quarter of 2002. Comparing revenue for the third quarter of 2003
to our expected revenue for the fourth quarter of 2003:



| |  | We expect approximately $10.0 million of sequential revenue expansion
related to recent new contract sales, which are expected to have low
profitability in the early phases of these contracts; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Partially offsetting revenue expansion from recently signed contracts
will be approximately $13.0 million of revenue declines, primarily as
the result of services we were performing under short-term contracts
that we are currently securing under long-term arrangement and
contract extensions, and a previously disclosed contract we are
exiting.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings per share (diluted) for the fourth quarter of 2003, prior to the
cumulative effect of a change in accounting principle related to our adoption
of FIN 46 of approxmiately $0.06 per share (diluted), is expected to range from $0.12 to $0.14. We believe that this earnings per
share information is important to investors as it will allow them to better compare expected earnings for the fourth quarter of 2003
to earnings for prior periods. Earnings per share (diluted) for the fourth quarter of 2003 is expected to range from $0.06 to
$0.08.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2003, cash and cash equivalents
decreased 9.4% to $192.9 million from $212.9 million at December 31, 2002.

Net cash provided by operating activities was $77.3 million for the nine months
ended September 30, 2003, compared to net cash provided by operating activities
of $35.2 million for the nine months ended September 30, 2002. The primary
reasons for this increase in cash provided by operations are as follows:



| |  | Net cash paid for income taxes decreased by $10.6 million, with net
refunds of $3.0 million in 2003 compared to net payments of $7.6
million in 2002;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Year-end bonuses paid to associates in 2003 decreased as compared to
2002 by approximately $9.3 million; and
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | Improved operating cash flows from several customer accounts,
including the contract that we exited during the second quarter of
2003.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities decreased to $110.7 million for the nine
months ended September 30, 2003, from $123.1 million for the same period in
2002. This decrease was due primarily to a $9.6 million decrease in the amount
of net cash paid for acquisitions of businesses:



| |  | During the first nine months of 2002, we paid $98.3 million net cash
for acquisitions, including $49.6 million net cash for the acquisition
of Claim Services Resource Group, Inc., $37.8 million of net cash for
the acquisition of ADI, and $10.0 million as additional consideration
related to the acquisition of ARS; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the first nine months of 2003, we paid $88.7 million net cash
for acquisitions, including $73.5 million net cash for the acquisition
of Soza and $10.0 million as additional consideration related to the
acquisition of ARS.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the nine months ended September 30, 2003, net cash provided by financing
activities decreased to $6.4 million from $12.8 million for the nine months
ended September 30, 2002. This decrease is due primarily to a decrease in the
exercise of options to purchase Class A Common Stock and Class B Common Stock
during the first nine months of 2003 from the same period in 2002. This
decrease was partially offset by a decrease in the number of shares of our
Class A Common Stock that we repurchased in the first nine months of 2003 as
compared to the first nine months of 2002.

We have no committed line of credit or other borrowings and anticipate that
existing cash and cash equivalents and expected net cash flows from operating
activities will provide sufficient funds to meet our operating needs for the
foreseeable future. We may obtain a line of credit, which we could use if we
make additional acquisitions using cash. As discussed under Accounting
Standards Issued, upon adoption of FIN 46 we will increase our long-term debt
by approximately $75.5 million.

We continue to have discussions with the other shareholder of HPS regarding the
potential purchase of its equity ownership in HPS or the potential sale of our
equity ownership in HPS to the other shareholder. The completion of such a
transaction would have a significant impact on our cash balance.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Contract-Related Contingency

As discussed above, during the second quarter of 2003 we exited an
under-performing contract. We expected this contract to be profitable in the
aggregate over its term, but the contract included an application development
element that was expected to generate a loss for its remaining term and was
negatively impacting our cash flow. As previously disclosed in our 2002 Form
10-K, the cost of this application development element was expected to exceed
the original estimate stated in the contract. While the contract provides for
us to collect most of the excess of the actual cost over the original estimate,
we were unable to reach agreement with the client on the timing and form of
payment for the excess. We are providing the services necessary to transition
certain functions back to the client, which may be completed during the fourth
quarter of 2003.

As a result of the exiting of this contract, in the second quarter of 2003 we
determined that certain contract-related assets were impaired and additional
expenses would be incurred in the future related to the exiting of this
contract, resulting in a loss of $17.7 million recorded in direct cost of
services. This estimated loss represents our current estimate of the loss
related to exiting this contract. The amount of actual loss with respect to
exiting this contract may exceed our current estimates.

Accounting Standards Issued

Financial Accounting Standards Board Interpretation No. 46

In January 2003, the FASB issued FIN 46, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, which changes
the criteria for consolidation by business enterprises of variable interest
entities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
On October 9, 2003, the FASB deferred the effective date for applying the
provisions of FIN 46 to variable interest entities created prior to February 1,
2003, which now must be consolidated as of the end of the first interim or
annual period ending after December 15, 2003. FIN 46 may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated.

In June 2000, we entered into an operating lease contract with a variable
interest entity for the use of land and office buildings in Plano, Texas,
including a data center facility. We currently do not consolidate this entity
but will be required to consolidate this entity under FIN 46 beginning on
December 31, 2003. We do not plan to restate any previously issued financial
statements in connection with our adoption of FIN 46, but we will provide
disclosures of the pro forma impact of FIN 46 on all previous fiscal periods
presented in our financial statements. Accordingly, upon consolidation of this
entity on December 31, 2003, we will increase our assets and long-term debt by
approximately $65.2 million and $75.5 million, respectively. Additionally, we
will record an expense for the cumulative effect of a change in accounting
principle of approximately $10.3 million ($6.4 million, net of the applicable
income tax benefit), or approximately $.06 per share (diluted), representing
primarily the cumulative depreciation expense on the office buildings and data
center facility through December 31, 2003. In 2004, we will begin recording
additional depreciation expense of approximately $3.2 million per year relating
to these newly consolidated assets.

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

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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: risks associated with negotiating and
exiting contractual relationships; risks associated with expanding earnings
from new sales; as well as other risks, including the loss of major clients;
deterioration of project and consulting-based revenue and profit; our ability
to achieve future sales; changes in our UBS relationship and variability of
revenue and expense associated with UBS, as well as other clients; risks
associated with the portion of client revenue and profits representing spending
above contractual minimums, which could be deemed as discretionary by clients
and result in lower revenue and earnings for us with limited notice; the
current and future performance of client contracts; risks associated with
non-recoverable cost overruns on software development contracts; risks
associated with the development of software products, including the risk that
capitalized costs of development may not be fully recovered if the market for
our products or the ability of our products to capture a portion of the market
differs materially from our estimates, the risk that the cost of product
development differs materially from our estimates, and the risk that a delay in
product introduction may reduce the portion of the market captured by our
product; growing start-up businesses; the highly competitive market in which we
operate; the variability of quarterly operating results; the reliance on
estimates that involve successful completion of future actions; guaranteed
purchase agreements; changes in technology; changes to accounting methods;
risks associated with acquisitions and divestitures, and risks related to
international operations. Please refer to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, 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.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK







For a discussion of our market-risk associated with foreign currencies as of
December 31, 2002, 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 nine months ended September 30, 2003, there has
been no significant 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). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that these 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 has materially affected, or is
reasonably likely to materially affect, internal control over financial
reporting.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003

PART II: OTHER INFORMATION







ITEM 1. LEGAL PROCEEDINGS







Litigation

We are, from time to time, involved in various litigation matters arising in
the ordinary course of our business. We believe that the outcomes of these
litigation matters, either individually or taken as a whole, will not have a
material adverse effect on our consolidated financial condition, results of
operations or cash flows.

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 Perot Systems 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.

During 2002, the individual Perot Systems defendants were dismissed from the
case. 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 recently decided to accept 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. In the event that
the settlement is not completed, we will continue to vigorously defend
ourselves in this case.

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.

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 SEC filings contained material misstatements or omissions
of

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003

material facts with respect to our activities related to the California energy
market. Two lawsuits, Herbert Condell v. Perot Systems Corp. et al. and Richard
J. Dowling v. Perot Systems Corp. et al. were filed in the United States
District Court for the Southern District of New York. Four lawsuits, Robert
Markewich v. Perot Systems Corp. et al., Vincent Milano v. Perot Systems Corp.
et al., Lori Will v. Perot Systems Corp. et al. and June Zordich v. Perot
Systems Corp. et al. were filed in the United States District Court for the
Northern District of Texas, Dallas Division. Two lawsuits, Joffre Berger v.
Perot Systems Corp. et al., and Daniel Taubenfeld v. Perot Systems Corp. et
al., were filed in the United States District Court for the Eastern District of
Texas, Sherman Division. All of these eight cases have been consolidated in
the Northern District of Texas, Dallas Division.

We believe the claims against us are without merit and will vigorously defend
ourselves in these cases.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS







The Company did not submit any matters to a vote of its security holders during
the period covered by this report.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K









| | (a) |  | Exhibits required by Item 601 of Regulation S-K
| | --- |  | -----------------------------------------------

Exhibit No.
    
    Document3.1
    
    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
    
    Third Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002.)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.)10.1
    
    Restricted Stock Plan (Incorporated by reference to Exhibit 10.3
of the Companys Form 10, dated April 30, 1997.)10.2
    
    Form of Restricted Stock Agreement (Restricted Stock Plan)
(Incorporated by reference to Exhibit 10.4 of the Companys Form
10, dated April 30, 1997.)10.3
    
    1996 Non-Employee Director Stock Option/Restricted Stock Incentive
Plan (Incorporated by reference to Exhibit 10.5 of the Companys
Form 10, dated April 30, 1997.)10.4
    
    Form of Restricted Stock Agreement (1996 Non-Employee Director
Stock Option/Restricted Stock Incentive Plan) (Incorporated by
reference to Exhibit 10.6 of the Companys Form 10, dated April
30, 1997.)10.5
    
    Form of Stock Option Agreement (1996 Non-Employee Director Stock
Option/Restricted Stock Incentive Plan) (Incorporated by
reference to Exhibit 10.7 of the Companys Form 10, dated April
30, 1997.)10.6
    
    Advisor Stock Option/Restricted Stock Incentive Plan
(Incorporated by reference to Exhibit 10.8 of the Companys Form
10, dated April 30, 1997.)10.7
    
    Form of Restricted Stock Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan) (Incorporated by
reference to Exhibit 10.9 of the Companys Form 10, dated April
30, 1997.)10.8
    
    Form of Stock Option Agreement (Advisor Stock Option/Restricted
Stock Incentive Plan) (Incorporated by reference to Exhibit 10.10
of the Companys Form 10, dated April 30, 1997.)10.9
    
    1999 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.32 of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.)10.10
    
    Amended and Restated 1991 Stock Option Plan (Incorporated by reference to Exhibit 10.10 of the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2002.)10.11
    
    Form of Stock Option Agreement (Amended and Restated 1991 Stock
Option Plan) (Incorporated by reference to Exhibit 10.34 of the
Companys Registration Statement on Form S-1, Registration No.
333-60755.)10.12
    
    2001 Long Term Incentive Plan (Incorporated by reference to
Exhibit 10.47 of Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.)10.13
    
    Form of Nonstatutory Stock Option Agreement (2001 Long Term
Incentive Plan)(Incorporated by reference to Exhibit 10.13 of the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2002.)


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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003


Exhibit No.
    
    Document10.14
    
    Associate Agreement dated July 8, 1996 between the Company and
James Champy (Incorporated by reference to Exhibit 10.20 of the
Companys Form 10, dated April 30, 1997.)10.15
    
    Restricted Stock Agreement dated July 8, 1996 between the Company
and James Champy (Incorporated by reference to Exhibit 10.21 of
the Companys Form 10, dated April 30, 1997.)10.16
    
    Letter Agreement dated July 8, 1996 between James Champy and the
Company (Incorporated by reference to Exhibit 10.22 of the
Companys Form 10, dated April 30, 1997.)10.17
    
    Employment Agreement dated March 11, 2002, between the Company and
Brian T. Maloney (Incorporated by reference to Exhibit 10.48 of
the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2002.)10.18
    
    Nonstatutory Stock Option Agreement dated March 11, 2002, between
the Company and Brian T. Maloney (Incorporated by reference to
Exhibit 10.49 of the Companys Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002.)10.19
    
    Amended and Restated Master Operating Agreement dated January 1,
1997 between Swiss Bank Corporation (predecessor of UBS AG) and
the Company (Incorporated by reference to Exhibit 10.31 to the
Companys Form 10, dated April 30, 1997.)10.20
    
    Amendment No. 1 to Amended and Restated Master Operating Agreement
dated September 15, 2000, between UBS AG and the Company
(Incorporated by reference to Exhibit 10.43 of the Companys
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)10.21
    
    Amended and Restated PSC Stock Option and Purchase Agreement dated
April 24, 1997 between Swiss Bank Corporation (predecessor of UBS
AG) and the Company (Incorporated by reference to Exhibit 10.30
to the Companys Form 10, dated April 30, 1997.)10.22
    
    Second Amended and Restated Agreement for EPI Operational
Management Services dated June 28, 1998 between Swiss Bank
Corporation (predecessor of UBS AG) and the Company (Incorporated
by reference to Exhibit 10.46 of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.)10.23
    
    Amendment No. 1 to Second Amended and Restated Agreement for EPI
Operational Management Services dated September 15, 2000, between
UBS AG and the Company. (Incorporated by reference to Exhibit
10.44 to the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)10.24
    
    Memorandum Agreement dated August 24, 2001, between UBS AG and
Perot Systems Corporation (Incorporated by reference to Exhibit
10.45 of the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001.)10.25
    
    Asset Purchase Agreement dated as of June 8, 2001 by and among the
Company, PSARS, LLC, Advanced Receivables Strategy, Inc. (ARS),
Advanced Receivables Strategy  Government Accounts Division, Inc.
(GAD), Meridian Healthcare Staffing, LLC (Meridian), Cash-Net,
LLC (Cash-Net) and the owners of ARS, GAD, Meridian and Cash-Net
(Incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed August 10, 2001.)10.26
    
    Stock Purchase Agreement dated as of February 4, 2003 by and among
the Company, Perot Systems Government Services, Inc., Soza & Company, Ltd. and the stockholders of Soza (Incorporated by
reference to Exhibit 2.1 of the Companys Current Report on Form
8-K filed March 7, 2003.)10.27
    
    Master Lease Agreement And Mortgage and Deed of Trust dated as of
June 22, 2000, between Perot Systems Business Trust No. 2000-1 and
PSC Management Limited Partnership (Incorporated by reference to
Exhibit 10.44 to the Companys Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2000.)10.28
    
    Commercial Sublease dated September 18, 2002, by and between PSC
Management Limited Partnership, as sublessor, and Perot Services
Company, LLC, as sublessee (Incorporated by reference to Exhibit
10.51 of the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002.)10.29
    
    Employment Agreement dated April 7, 2003, between the Company and
Jeff Renzi (Incorporated by reference to Exhibit 10.29 of the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2003.)21.1
    
    Subsidiaries of the Company. (Incorporated by reference to
Exhibit 21.1 of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.)


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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003


Exhibit No.
    
    Document31.1*
    
    Rule 13a-14 Certification dated November 12,
2003, by Ross Perot, Jr., President and Chief Executive
Officer.31.2*
    
    Rule 13a-14 Certification dated November 12,
2003, by Russell Freeman, Vice President and Chief Financial
Officer.32.1**
    
    Section 1350 Certification dated November 12, 2003, by Ross
Perot, Jr., President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated November 12, 2003, by
Russell Freeman, Vice President and Chief Financial Officer.




| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

On July 22, 2003, we filed a Current Report on Form 8-K to amend our
disclosure contained in Exhibit 2.1 to our Form 8-K filed on March 7,
2003 reporting the acquisition, through our wholly owned subsidiary,
Perot Systems Government Services, Inc., of all of the issued and
outstanding stock of Soza & Company, Ltd. This amended disclosure was
filed under Item 5 of Form 8-K.

On July 29, 2003, the Company filed a Current Report on Form 8-K to
report a press release and disclose the Rule 10b5-1 Sales Plan dated May
5, 2003, between Peter A. Altabef, our Vice President, Secretary and
General Counsel and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The matter was reported under Item 5 of Form 8-K.

On August 14, 2003, the Company filed a Current Report on Form 8-K
to report a press release. The matter was reported under Item 12 of Form
8-K.

* Filed herewith.
** Furnished herewith.

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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended September 30, 2003

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: November 12, 2003
    
    By /s/ ROBERT J. KELLY
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer


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