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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NcdM1/1hiaH5odIbK8VHH20HsK4kV5RXuOUCTx8RNMYzlxy5fJ4sCq3bm7YsxjaA OyZa1JxD0GC8s1pF4+2eUA== 0000950134-07-004400.txt : 20070228 0000950134-07-004400.hdr.sgml : 20070228 20070228170239 ACCESSION NUMBER: 0000950134-07-004400 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070228 DATE AS OF CHANGE: 20070228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEROT SYSTEMS CORP CENTRAL INDEX KEY: 0000894253 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 752230700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14773 FILM NUMBER: 07658790 BUSINESS ADDRESS: STREET 1: 2300 W PLANO PKWY CITY: PLANO STATE: TX ZIP: 75075 BUSINESS PHONE: 9725770000 MAIL ADDRESS: STREET 1: 2300 W PLANO PKWY CITY: PLANO STATE: TX ZIP: 75075 10-K 1 d43919e10vk.htm FORM 10-K e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the Fiscal Year Ended December 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the Transition Period From to

Commission File Number 0-22495

PEROT SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		75-2230700
(State of Incorporation)		(I.R.S. Employer Identification No.)

2300 WEST PLANO PARKWAY PLANO, TEXAS		75075
(Address of Principal Executive Offices)		(Zip Code)

(Registrant’s Telephone Number)

(972) 577-0000

Securities registered pursuant to Section 12(b) of the Act:


		Name of
		Each Exchange
		On Which
Title of Each Class		Registered

Class A Common Stock		New York Stock Exchange
Par Value $0.01 per share

Securities registered pursuant to Section 12(g) of the Act:

Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated” filer in Rule 12b-2 of the Exchange Act.

þ Large accelerated filer o Accelerated filer o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 30, 2006, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant’s common stock as reported on the New York Stock Exchange, was approximately $1,232,282,752 (calculated by excluding shares owned beneficially by directors and officers).

Number of shares of registrant’s common stock outstanding as of February 23, 2007: 120,976,714 shares of Class A Common Stock and 816,638 shares of Class B Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: certain information required in Part III of this Form 10-K is incorporated from the registrant’s Proxy Statement for its 2007 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2006.

FORM 10-K

For the Year Ended December 31, 2006

INDEX


PART I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	15



PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37



PART III
Item 10.	Directors and Executive Officers of the Registrant	37
Item 11.	Executive Compensation	37
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	37
Item 13.	Certain Relationships and Related Transactions	38
Item 14.	Principal Accountant Fees and Services	38



PART IV
Item 15.	Exhibits and Financial Statement Schedules	39
Signatures		42
Amended and Restated Stock Option Agreement
Stock Purchase Agreement
Information Technology Services Agreement
Subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP
Rule 13a-14 Certification by Peter A. Altabef
Rule 13a-14 Certification by Russell Freeman
Section 1350 Certification by Peter A. Altabef
Section 1350 Certification by Russell Freeman
Schedule II - Valuation and Qualifying Accounts

This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “forecasts,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “see,” “target,” “projects,” “position,” or “continue” or the negative of such terms and other comparable terminology. These statements reflect our current expectations, estimates, and projections. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Actual events or results may differ materially from what is expressed or forecasted in these forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined below under the caption “Risk Factors.” These risk factors describe reasons why our actual results may differ materially from any forward-looking statement. We disclaim any intention or obligation to update any forward-looking statement.

PART I


Item 1.	*Business*

Overview

Perot Systems Corporation, originally incorporated in the state of Texas in 1988 and reincorporated in the state of Delaware on December 18, 1995, is a worldwide provider of information technology (commonly referred to as IT) services and business solutions to a broad range of customers. We offer our customers integrated solutions designed around their specific business objectives, chosen from a breadth of services, including technology infrastructure services, applications services, business process services, and consulting services.

With this approach, our customers benefit from integrated service offerings that help synchronize their strategy, systems, and infrastructure. As a result, we help our customers achieve their business objectives, whether those objectives are to accelerate growth, streamline operations, or enhance customer service capabilities.

Our Services

We provide the following categories of services to our customers either on a standalone basis or bundled within a comprehensive solution. Within our market-facing units and as described in more detail below, we offer a mix of these services as part of our solutions.


	•	Infrastructure services

	•	Consulting services

	•	Applications services

	•	Business process services

Infrastructure Services

Infrastructure services are typically performed under multi-year contracts in which we assume operational responsibility for various aspects of our customers’ businesses, including data center and systems management, Web hosting and Internet access, desktop solutions, messaging services, program management, hardware maintenance and monitoring, network management, including VPN services, service desk capabilities, physical security, network security, and risk management. We typically hire a significant portion of the customer’s staff that have supported these functions. We then apply our expertise and operating methodologies to increase the efficiency of the operations, which usually results in increased operational quality at a lower cost.


	Consulting Services

The consulting services provided within the Consulting and Application Solutions segment includes the implementation of prepackaged software applications. Consulting services are typically viewed as discretionary services by our customers, with the level of business activity depending on many factors, including economic conditions and specific customer needs.


	Applications Services

Applications services include services such as application development and maintenance, including the development and maintenance of custom and packaged application software for customers, and application systems migration and testing, which includes the migration of applications from legacy environments to current technologies, as well as performing quality assurance functions on custom applications. We also provide other applications services such as application assessment and evaluation, hardware and architecture consulting, systems integration, and Web-based services.


	Business Process Services

Business process services include services such as product engineering, claims processing, life insurance policy administration, call center management, payment and settlement management, security, and services to improve the collection of receivables. In addition, business process services include engineering support and other technical and administrative services that we provide to the U.S. federal government.

Our Contracts

Our contracts include services priced using a wide variety of pricing mechanisms. In determining how to price our services, we consider the delivery, credit and pricing risk of a business relationship. For the year ended December 31, 2006:


	•	Approximately 30% of our revenue was from fixed-price contracts where our customers pay us a set amount for contracted services. For some of these fixed-price contracts, the price will be set so that the customer realizes immediate savings in relation to their current expense for the services we will be performing. On contracts of this nature, our profitability generally increases over the term of the contract as we become more efficient. The time that it takes for us to realize these efficiencies can range from a few months to a few years, depending on the complexity of the services.

	•	Approximately 29% of our revenue was from time and materials contracts where our billings are based on measurements such as hours, days or months and an agreed upon rate. In some cases, the rate the customer pays for a unit of time can vary over the term of a contract, which may result in the customer realizing immediate savings at the beginning of a contract.

	•	Approximately 25% of our revenue was from cost plus contracts where our billings are based in part on the amount of expense we incur in providing services to a customer. Our largest cost plus contract was our infrastructure outsourcing contract with UBS AG, which was also our largest customer through December 31, 2006. As discussed below under “Our UBS Relationship,” our infrastructure outsourcing contract with UBS ended on January 1, 2007, and the services we performed for UBS under that contract represented 12% of our revenue for 2006.

	•	Approximately 16% of our revenue was from per-unit pricing where we bill our customers based on the volumes of units provided at the unit rate specified. In some contracts, the per-unit prices may vary over the term of the contract, which may result in the customer realizing immediate savings at the beginning of a contract.

We also utilize other pricing mechanisms, including license fees and risk/reward relationships where we participate in the benefit associated with delivering a certain outcome. Revenue from these other pricing mechanisms totaled less than 1% of our revenue.

when an upfront payment is made to purchase assets or as a sales incentive, an outsourcing services contract will typically produce less cash at the beginning of the contract with significantly more cash being generated as efficiencies are realized later in the term. With a cost plus contract, the amount of cash generated tends to be relatively consistent over the term of the contract.

Our Lines of Business

We offer our services under three primary lines of business: Industry Solutions, Government Services, and Consulting and Applications Solutions. We consider these three lines of business to be reportable segments and include financial information and disclosures about these reportable segments in our consolidated financial statements. You can find this financial information in Note 13, “Segment and Certain Geographic Data,” of the Notes to Consolidated Financial Statements below. We routinely evaluate the historical performance of and growth prospects for various areas of our business, including our lines of business, delivery groups, and service offerings. Based on a quantitative and qualitative analysis of varying factors, we may increase or decrease the amount of ongoing investment in each of these business areas, make acquisitions that strengthen our market position, or divest, exit, or downsize aspects of a business area.

Industry Solutions

Industry Solutions, which is our largest line of business and represented approximately 78%, 77%, and 75% of our total revenue for 2006, 2005, and 2004, respectively, provides services to our customers primarily under long-term contracts in strategic relationships. These services include technology and business process services, as well as industry domain-based, short-term project and consulting services.

Our Industry Solutions line of business consists of four delivery groups, three of which are market-facing — Healthcare, Commercial Solutions, and Insurance and Business Process Solutions. The fourth group, Infrastructure Solutions, is the delivery organization for our technology infrastructure management services, and is responsible for defining the technology strategies for customers within each industry group.

Healthcare

Our Healthcare group, which represented approximately 47%, 46%, and 45% of our total revenue for 2006, 2005, and 2004, respectively, and approximately 60% of revenue for the Industry Solutions line of business for each of those years, provides services primarily to providers of healthcare, but we also serve health insurance organizations and organizations that are a part of the healthcare supply chain:


	•	Providers — including hospitals, physician practices and public sector agencies. Our hospital customers include health systems and freestanding hospitals. Our physician practice customers include large academic medical center practice groups. Within the public sector, we focus on federal government healthcare agencies such as the Veterans Health Administration.

	•	Health insurance organizations — including national insurers, Blue Cross and Blue Shield plans and regional managed care organizations; and

	•	Healthcare supply chain — including medical surgical suppliers and distributors and retail pharmacy.

Within our Healthcare group, we provide a full range of services, including consulting, applications, infrastructure, and business process services. Our associates deliver technology-based solutions to meet the demanding challenges of the healthcare industry globally to:


	•	Improve patient safety and quality;

	•	Lower the healthcare cost trend and achieve new levels of customer satisfaction; and

	•	Achieve administrative transaction process efficiency.

For hospitals, we provide information technology, revenue cycle, supply chain sourcing solutions, as well as operational and clinical transformation services that drive lower costs, increase cash and improve the delivery of care. We employ the industry’s leading clinical, technology, and process know-how to provide our services.

For physicians, we deploy electronic health records and facilitate revenue cycle management. Our information technology and revenue cycle solutions provide a self-funding vehicle for clinical technology investments.

For health insurance organizations, we enable the transformation to consumer health models by supporting administrative process efficiency with our PERADIGM technology platform and business process services.

For healthcare supply chain, we provide technology infrastructure support and solutions that enhance the integration of the supply chain process among suppliers, distributors, hospitals, and physician organizations.

For public sector healthcare, we utilize our commercial healthcare expertise to support federal government healthcare initiatives.

Commercial Solutions

Our Commercial Solutions group, which represented approximately 27%, 29%, and 29% of our total revenue for 2006, 2005, and 2004, respectively, and approximately 35%, 37%, and 38% of revenue for the Industry Solutions line of business for 2006, 2005, and 2004, respectively, provides services to customers primarily in three markets:


	•	Manufacturing — including customers in automotive and automotive components and parts, machinery and durable goods.

	•	Consumer — including customers in travel, transportation and publishing industries.

	•	Engineering and Construction — including customers in commercial and residential construction.

Within Commercial Solutions, we provide a full range of services including consulting, applications, infrastructure, and business process services. Our infrastructure and application services are designed to help clients reduce technology costs while increasing operational quality. Our product engineering services are focused on helping manufacturers to develop their products more effectively and include research and design engineering, program management, and manufacturing engineering. Our industry-specific consulting services include business and technology solutions that improve the efficiencies of critical processes, including product design, supply chain execution, call centers, collaborative engineering tools, and manufacturing plant floor processes.

Insurance and Business Process Solutions

The Insurance and Business Process Solutions group, which represented approximately 4%, 2%, and 1% of our total revenue for 2006, 2005, and 2004, respectively, and approximately 5%, 3%, and 2% of revenue for the Industry Solutions line of business for 2006, 2005, and 2004, respectively, provides industry specific IT and general back-office business services to the Insurance Industry and to customers in the Healthcare and Commercial Solutions groups. These services leverage our global delivery capabilities, which include application development and maintenance, infrastructure services, data entry, transaction processing, document capture and management, and customer care services. This group uses these capabilities and leverages proprietary intellectual property and technology platforms to provide various business process services, including revenue cycle outsourcing, claims processing, financial and accounting services, and life insurance policy administration. These services benefit our customers by providing lower-cost options with increased visibility into and control over their back-office business processes.

Infrastructure Solutions

Our Infrastructure Solutions group is responsible for defining the technology strategies for our Industry Solutions customers and us. This group identifies new technology offerings and innovations that deliver value to our customers. It manages, updates and maintains the technology infrastructure for our customers and us, including networks, data centers, help desks, mainframes, servers, storage, and workspace computing. It also provides senior technology consultants to assist our customers with more complex technology transformations. It manages, resolves and documents problems in our customers’ computing environments. The group also provides comprehensive monitoring, planning, and safeguarding of information technology systems against intrusion by monitoring system and network status, collecting and analyzing data regarding system and network performance, and applying

appropriate corrective actions. All of these activities are either performed at customer facilities or delivered through centralized data processing centers that we maintain.

Government Services

Our Government Services group, which represented approximately 13%, 14%, and 15% of our total revenue for 2006, 2005, and 2004, respectively, provides consulting, engineering support, and technology-based business process solutions for the Department of Defense, the Department of Homeland Security, various federal intelligence agencies, and other governmental agencies.

Our core product portfolio includes information technology and business process outsourcing, business process services, IT infrastructure support, and a wide array of professional services. These services include the direct support of engineering, safety, quality assurance, logistics, environmental, and program management for federal managers across a broad spectrum of critical programs. We provide infrastructure support to the federal government through management consulting services, information technology and system support, application design and development, government financial services, business process services, and outreach, media and communications services.

On January 30, 2007, we acquired all of the outstanding shares of QSS Group, Inc. (QSS), a U.S. federal government information technology services company, for $247 million (net of $1 million of cash acquired), $30 million of which is being held in an escrow account for up to approximately eighteen months. As a result of this acquisition, we have gained several significant government-wide acquisition contracts and expanded both the scope of services and the areas we serve within the Department of Homeland Security and the Department of Defense. The purchase price was partially funded by $75 million borrowed against our existing credit facility.

Consulting and Applications Solutions

In the first quarter of 2006, we combined the Consulting Solutions group, which was previously included in our Commercial Solutions group in the Industry Solutions line of business, with the Applications Solutions line of business. Our Consulting and Applications Solutions line of business represented approximately 9%, 9%, and 10% of our total revenue for 2006, 2005, and 2004, respectively, net of the elimination of inter-segment revenue.

The Consulting and Applications Services Group provides global consulting and integration services, applications development and management services, and applications outsourcing services to our global client base. These services are delivered on-site and offshore, providing innovative industry focused solutions. Leading through domain expertise to provide performance improvement, business and technology architecture and transformation, these services include enterprise applications implementation and integration; the development and maintenance of custom and packaged applications; application systems migration; testing; migration of applications from legacy environments to current technologies; and performing quality assurance functions on custom applications.

Perot Systems Associates

The markets for IT personnel and business integration professionals are intensely competitive. A key part of our business strategy is the hiring, training, and retaining of highly motivated personnel with strong character and leadership traits. We believe that employing associates with such traits is — and will continue to be — an integral factor in differentiating us from our competitors in the IT industry. In seeking such associates, we screen candidates for employment through a rigorous interview process. In addition to competitive salaries, we distribute cash bonuses that are paid promptly to reward excellent performance, and we have an annual incentive plan based on our performance in relation to our business and financial targets.

As of December 31, 2006, we employed approximately 21,200 associates. A limited number of these associates located in the United States are currently employed under an agreement with a collective bargaining unit. In European countries, our associates are generally members of work councils and have worker representatives. We believe that our relations with our associates are good.

Our UBS Relationship

UBS AG was our largest customer through December 31, 2006. We earned approximately 13%, 15%, and 16% of our revenue in connection with services performed on behalf of UBS and its affiliates for 2006, 2005, and 2004, respectively. We performed most of our services for UBS under an infrastructure outsourcing contract called the IT Services Agreement, which ended January 1, 2007. During 2006, 2005, and 2004, the amounts of annual revenue that we earned from UBS and its affiliates under the IT Services Agreement were $265 million, $262 million, and $244 million, respectively, and the amounts of gross profit earned were $58 million, $53 million, and $51 million, respectively. We continue to provide applications services to UBS, which are provided outside the scope of the infrastructure outsourcing contract and represented $43 million of revenue in 2006. We do not expect significant changes in the applications services we provide to UBS as a result of the end of the infrastructure outsourcing contract.

Competition

We operate in extremely competitive markets, and the technology required to meet our customers’ needs changes. In each of our lines of business we frequently compete with companies that have greater financial resources; more technical, sales, and marketing capacity; and larger customer bases than we do. Because many of the factors on which we compete, as discussed below, are outside of our control, we cannot be sure that we will be successful in the markets in which we compete. If we fail to compete successfully, our business, financial condition, and results of operations will be materially and adversely affected.

Industry Solutions

Our Industry Solutions line of business competes with a number of different information technology service providers depending upon the region, country, and/or market we are addressing. Some of our more frequent competitors include: Accenture Ltd., Affiliated Computer Services, Inc., BearingPoint, Inc., Cap Gemini Ernst & Young, CGI Group, Inc., Cerner Corporation, Computer Sciences Corporation, Electronic Data Systems Corporation, First Consulting Group, Incorporated, Hewlett Packard Company, IBM Global Services (a division of International Business Machines Corporation), McKesson Corporation, Siemens Business Services, Inc., Unisys Corporation, smaller consulting firms with industry expertise in areas such as healthcare or financial services, and the consulting divisions of large systems integrators and information technology services providers. In addition, we may compete with non-IT outsourcing providers who enter into marketing and business alliances with our customers that provide for the consolidation of services. As we enter new markets, we expect to encounter additional competitors. Our Industry Solutions line of business competes on the basis of a number of factors, including the attractiveness and breadth of the business strategy and services that we offer, pricing, technological innovation, quality of service, ability to invest in or acquire assets of potential customers, and our scale in certain industries. We also frequently compete with our customers’ own internal information technology capability, which may constitute a fixed cost for our customer. In addition, the market for consulting services is affected by an oversupply of consulting talent, both domestically and offshore, which results in downward price pressure for our services. All of these factors may increase pricing pressure on us.

Government Services

Our Government Services line of business competes with a number of different service providers depending on the federal agency or department as well as the market we are addressing. Some of our more frequent competitors include: Accenture Ltd., Affiliated Computer Services, Inc., BearingPoint, Inc., Booz-Allen and Hamilton, CACI International, Inc., Computer Sciences Corporation, Electronic Data Systems Corporation, General Dynamics, Lockheed Martin Corporation, Northrop Grumman Corporation, Science Applications International Corporation, SRA International, and Unisys Corporation. We compete on the basis of a number of factors, including the attractiveness and breadth of the business strategy and professional services that we offer, pricing, technological innovation, and quality of service. We must frequently compete in federal and defense programs with declining budgets, which creates pressure to lower our prices.

Consulting and Applications Solutions

Our Consulting and Applications Solutions line of business competes with a number of different service providers, including Accenture, Ltd., BearingPoint, Inc., Cap Gemini Ernst & Young, Cognizant Technology Solutions Corporation, Deloitte Consulting LLP (a member of Deloitte Touche Tomatsu), IBM Global Services (a division of International Business Machines Corporation), iGate Global Solutions Limited, Infosys Technologies Limited, Mastek, Limited, MphasiS, an EDS company, Patni Computer Systems Limited, Polaris Software Lab Limited, Sapient Corporation, Satyam Computer Services, Tata Consultancy Services Limited, and Wipro Limited. We compete on many factors, including price, industry expertise, our process methodologies and intellectual property, and our past successes in executing assignments. Emerging offshore development capacity in countries such as India and China is increasing the degree of competition for our software development services.

Financial Information About Foreign and Domestic Operations

See Note 13, “Segment and Certain Geographic Data,” to the Consolidated Financial Statements included elsewhere in this report.

Intellectual Property

While we attempt to retain intellectual property rights arising from customer engagements, our customers often have the contractual right to such intellectual property. We rely on a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our associates and limit distribution of proprietary information. There can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

We license the right to use the names “Perot Systems” and “Perot” in our current and future businesses, products, or services from the Perot Systems Family Corporation and Ross Perot, our Chairman Emeritus. The license is a non-exclusive, royalty-free, worldwide, non-transferable license. We may also sublicense our rights to the Perot name to some of our affiliates. Under the license agreement, either party may, in its sole discretion, terminate the license at any time, with or without cause and without penalty, by giving the other party written notice of such termination. Upon termination by either party, we must discontinue all use of the Perot name within one year following notice of termination. The termination of this license agreement could materially and adversely affect our business, financial condition, and results of operations. Except for the license of our name, we do not believe that any particular copyright, trademark, or group of copyrights and trademarks is of material importance to our business taken as a whole.

Our Web Site and Availability of SEC Reports and Corporate Governance Documents

Our Internet address is www.perotsystems.com and the investor relations section of our Web site is located at www.perotsystems.com/investors. We make available free of charge, on or through the investor relations section of our Web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Also, posted on our corporate responsibility section of our Web site (located at www.perotsystems.com/responsibility), and available in print upon request of any shareholder to our Investor Relations department, are our charters for our Audit Committee, Compensation Committee, and Nominating and Governance Committee, as well as our Standards & Ethical Principles and our Corporate Governance Guidelines (which include our Director Qualification Guidelines and Director Independence Standards). Within the time period required by the SEC and the New York Stock Exchange, we will post on our Web site any amendment to the Standards & Ethical Principles and any waiver applicable to our executive officers or directors.

Item 1A. Risk Factors

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors in evaluating an investment in our common stock. The risks described below are not the only ones that we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition, or results of operations could be materially and adversely affected. In such case, the trading price of our Class A common stock could decline, and you could lose all or part of your investment. You should also refer to the other information set forth in this report, including our Consolidated Financial Statements and the related notes.

We may bear the risk of cost overruns relating to software development and implementation services, and, as a result, cost overruns could adversely affect our profitability.

We provide services related to the development of software applications and the implementation of complex software packages for some of our customers. The effort and cost associated with the completion of these software development and implementation services are difficult to estimate and, in some cases, may significantly exceed the estimates made at the time we begin the services. We provide these software development and implementation services under level-of-effort and fixed-price contracts. The level-of-effort contracts are usually based on time and materials or direct costs plus a fee. Under those arrangements, we are able to bill our customer based on the actual cost of completing the services, even if the ultimate cost of the services exceeds our initial estimates. However, if the ultimate cost exceeds our initial estimate by a significant amount, we may have difficulty collecting the full amount that we are due under the contract, depending upon many factors, including the reasons for the increase in cost, our communication with the customer throughout the project, and the customer’s satisfaction with the services. As a result, we could incur losses with respect to these software development and implementation services even when they are priced on a level-of-effort basis. If we provide these software development or implementation services under a fixed-price contract, we bear all the risk that the ultimate cost of the project will exceed the price to be charged to the customer.

Our largest customers account for a substantial portion of our revenue and profits, and the loss of any of these customers could result in decreased revenue and profits.

Our 10 largest customers accounted for 47.8% of our revenue for 2006 and 49.1% of our revenue in 2005. UBS was the only customer that accounted for more than 10% of our revenue for 2006 and 2005. After UBS, our next nine largest customers accounted for 34.4% of our revenue in 2006 and 34.1% of our revenue in 2005. Subsequent to the end of the UBS infrastructure outsourcing contract, the application services provided to UBS within our Consulting and Applications Solutions segment is expected to result in UBS remaining as one of our top fifteen customers.

Generally, we may lose a customer as a result of a merger or acquisition, contract expiration, the selection of another provider of information technology services, entry into strategic business and marketing alliances with other business partners, business failure or bankruptcy, or our performance. Our outsourcing contracts typically require us to maintain specified performance levels with respect to the services that we deliver to our customer, with the result that if we fail to perform at the specified levels, we may be required to pay or credit the customer with amounts specified in the contract. In the event of significant failures to deliver the services at the specified levels, a number of these contracts provide that the customer has the right to terminate the agreement. In addition, some of these contracts provide the customer the right to terminate the contract at the customer’s convenience. The customer’s right to terminate for convenience typically requires the customer to pay us a fee. We may not retain long-term relationships or secure renewals of short-term relationships with our large customers in the future.

Profitability of our contracts may be materially, adversely affected if we do not accurately estimate the costs of services and the timing of the completion of projects.

The services that we provide, and projects we undertake, pursuant to our contracts are increasingly complex. Our success in accurately estimating the costs of services and timing for the completion of projects and other initiatives to be provided pursuant to our contracts is critical to our ability to price our contracts for long-term

profitability. While these estimates reflect our best judgment regarding preexisting costs, efficiencies that we will be able to deliver, and resources that will be required for implementation and performance, any increased or unexpected costs, delays or failures to achieve anticipated cost reductions could materially, adversely affect the profitability of these contracts.

If entities we acquire fail to perform in accordance with our expectations or if their liabilities exceed our expectations, our profits could be diminished and our financial results could be adversely affected.

In connection with any acquisition we make, there may be liabilities that we fail to discover or that we inadequately assess. To the extent that the acquired entity failed to fulfill any of its contractual obligations, we may be financially responsible for these failures or otherwise be adversely affected. In addition, acquired entities may not perform according to the forecasts that we used to determine the price paid for the acquisition. If the acquired entity fails to achieve these forecasts, our financial condition and operating results may be adversely affected.

Development of our software products may cost more than we initially project, and we may encounter delays or fail to perform well in the market, which could decrease our profits.

Our business has risks associated with the development of software products. There is 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. In addition, there is the risk that the cost of product development differs materially from our estimates or a delay in product introduction may reduce the portion of the market captured by our product.

Our ability to perform on contracts on which we partner with third parties may be materially and adversely affected if these third parties fail to successfully or timely deliver their commitments.

Our engagements often require that our products and services incorporate or coordinate with the software or systems of other vendors and service providers. Our ability to deliver our commitments may depend on the delivery by these vendors and service providers of their commitments. If these third parties fail to deliver their commitments on time or at all, our ability to perform may be adversely affected, which could have a material adverse effect on our business, revenue, profitability or cash flow. In addition, in some cases, we may be responsible for the performance of other vendors or service providers delivering software, systems or other requirements.

Our government contracts contain early termination and reimbursement provisions that may adversely affect our revenue and profits.

Our Government Services line of business provides services as a contractor and subcontractor on various projects with U.S. government entities. Despite the fact that a number of government projects for which we serve as a contractor or subcontractor are planned as multi-year projects, the U.S. government normally funds these projects on an annual or more frequent basis. Generally, the government has the right to change the scope of, or terminate, these projects at its discretion or as a result of changes in laws or regulations that might affect our ability to qualify to perform the projects. The termination or a major reduction in the scope of a major government project could have a material adverse effect on our results of operations and financial condition. Approximately 99% of the revenue from the Government Services line of business in 2006 is from contracts with the U.S. government for which we serve as a contractor or subcontractor.

U.S. government entities audit our contract costs, including allocated indirect costs, or conduct inquiries and investigations of our business practices with respect to our government contracts. If the government finds that we improperly charged costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. If the government discovers improper or illegal activities in the course of audits or investigations, the contractor may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with the U.S. government. These government remedies could have a material adverse effect on our results of operations and financial condition.

We have a significant business presence in India, and risks associated with doing business there could decrease our revenue and profits.

Our Consulting and Applications Solutions line of business is located primarily in India. In addition to the risks regarding fluctuations in currency exchange rates and regarding international operations discussed below, the following risks associated with doing business in India could decrease our revenue and profits:


	•	governments could enact legislation that restricts the provision of services from offshore locations;

	•	potential wage increases in India which could prevent us from maintaining our competitive advantage; and

	•	cost increases if the Government of India reduces or withholds tax benefits and other incentives provided to us or if we are unable to obtain new tax holiday benefits when our existing tax holiday benefits expire in 2007 through 2009.

If we are unable to successfully integrate acquired entities, our profits may be less and our operations more costly or less efficient.

We have completed several acquisitions in recent years, and we will continue to analyze and consider potential acquisition candidates. Acquisitions involve significant risks, including the following:


	•	companies we acquire may have a lower quality of internal controls and reporting standards, which could cause us to incur expenses to increase the effectiveness and quality of the acquired company’s internal controls and reporting standards;

	•	we may have difficulty integrating the systems and operations of acquired businesses, which may increase anticipated expenses relating to integrating our business with the acquired company’s business and delay or reduce full benefits that we anticipate from the acquisition;

	•	integration of an acquired business may divert our attention from normal daily operations of the business, which may adversely affect our management, financial condition, and profits; and

	•	we may not be able to retain key employees of the acquired business, which may delay or reduce the full benefits that we anticipate from the acquisition and increase costs anticipated to integrate and manage the acquired company.

Our contracts generally contain provisions that could allow customers to terminate the contracts and sometimes contain provisions that enable the customer to require changes in pricing, decreasing our revenue and profits and potentially damaging our business reputation.

Our contracts with customers generally permit termination in the event our performance is not consistent with service levels specified in those contracts. The ability of our customers to terminate contracts creates an uncertain revenue and profit stream. If customers are not satisfied with our level of performance, our reputation in the industry may suffer, which may also adversely affect our ability to market our services to other customers. Furthermore, some of our contracts contain pricing provisions that permit a customer to request a benchmark study by a mutually acceptable third-party benchmarker. Generally, if the benchmarking study shows that our pricing has a difference outside a specified range and the difference is not due to the unique requirements of the customer, then the parties will negotiate in good faith any appropriate adjustments to the pricing. This may result in the reduction of our rates for the benchmarked services and could negatively impact our results of operations or cash flow.

Some contracts contain fixed- and unit-price provisions or penalties that could result in decreased profits.

Some of our contracts contain pricing provisions that require the payment of a set fee or per-unit fee by the customer for our services regardless of the costs we incur in performing these services, or provide for penalties in the event we fail to achieve certain service levels. In such situations, we are exposed to the risk that we will incur significant unforeseen costs or such penalties in performing the services under the contract.

Fluctuations in currency exchange rates may adversely affect the profitability of our foreign operations.

Fluctuations in currency exchange rates may adversely affect the profitability of our foreign operations. For instance, with respect to most of our Indian operations, our customers pay us in their local currency (typically British Pounds, Euros or U.S. Dollars), but our costs are primarily incurred in Indian Rupees. Therefore, if the Rupee increases in strength against these local currencies, our profits from our Indian operations would be adversely affected. To attempt to mitigate the effects of significant foreign currency fluctuations, we use forward exchange contracts and other techniques. At December 31, 2006, we had 51 forward contracts to purchase and sell various currencies in the amount of $75 million. These contracts expire at various times before the end of 2007.

Our international operations expose our assets to increased risks and could result in business loss or in more expensive or less efficient operations.

We have operations in many countries around the world. In addition to the risks related to fluctuations in currency exchange rates and the additional risk associated with doing business in India discussed above, risks that affect these international operations include:


	•	complicated licensing and work permit requirements may hinder our ability to operate in some jurisdictions;

	•	our intellectual property rights may not be well protected in some jurisdictions;

	•	our operations may be vulnerable to terrorist actions or harmed by government responses;

	•	governments may restrict our ability to convert currencies; and

	•	additional expenses and risks inherent in conducting operations in geographically distant locations, with customers speaking different languages and having different cultural approaches to the conduct of business.

If customers reduce spending that is currently above contractual minimums, our revenue and profits could diminish.

Some of our outsourcing customers request services in excess of the minimum level of services required by the contract. These services are often in the form of project work and are discretionary to our customers. Our customers’ ability to continue discretionary project spending may depend on a number of factors including, but not limited to, their financial condition, and industry and strategic direction. Spending above contractual minimums by customers could end with limited notice and result in lower revenue and earnings.

If we fail to compete successfully in the highly competitive markets in which we operate, our business, financial condition, and results of operations will be materially and adversely affected.

We operate in extremely competitive markets, and the technology required to meet our customers’ needs changes. In all of our lines of business, we frequently compete with companies that have greater financial resources; more technical, sales, and marketing capacity; and larger customer bases than we do. Because many of the factors on which we compete are outside of our control, we cannot be sure that we will be successful in the markets in which we compete. If we fail to compete successfully, our business, financial condition, and results of operations will be materially and adversely affected.

Increasingly complex regulatory environments may increase our costs.

Our customers are subject to complex and constantly changing regulatory environments. These regulatory environments change and in ways that cannot be predicted. For example, our financial services customers are subject to domestic and foreign privacy and electronic record handling rules and regulations, and our customers in the healthcare industry have been made subject to increasingly complex and pervasive privacy laws and regulations. These regulations may increase our potential liabilities if our services contribute to a failure by our customers to comply with the regulatory regime and may increase the cost to comply as regulatory requirements increase or change.

Our quarterly financial results may vary.

We expect our financial results to vary from quarter to quarter. Such variations are likely to be caused by many factors that are, to some extent, outside our control, including:


	•	the mix, timing, and completion of customer projects;

	•	unforeseen costs on fixed- or unit-price contracts;

	•	implementation and transition issues with respect to new contracts;

	•	hiring, integrating, and utilizing associates;

	•	the timing of new contracts and changes in scope of services performed under existing contracts;

	•	the resolution of outstanding tax issues from prior years;

	•	the issuance of common shares and options, together with acquisition and integration costs, in connection with acquisitions;

	•	currency exchange rate fluctuations; and

	•	costs to exit certain activities or terminate projects.

Accordingly, we believe that quarter-to-quarter comparisons of financial results for preceding quarters are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance.

Changes in technology could adversely affect our competitiveness, revenue, and profit.

The markets for our information technology services change rapidly because of technological innovation, new product introductions, changes in customer requirements, declining prices, and evolving industry standards, among other factors. New products and new technology often render existing information services or technology infrastructure obsolete, excessively costly, or otherwise unmarketable. As a result, our success depends on our ability to timely innovate and integrate new technologies into our service offerings. We cannot guarantee that we will be successful at adopting and integrating new technologies into our service offerings in a timely manner.

We could lose rights to our company name, which may adversely affect our ability to market our services.

We do not own the right to our company name. In 1988, we entered into a license agreement with Ross Perot, who is currently our Chairman Emeritus, and the Perot Systems Family Corporation that allows us to use the name “Perot” and “Perot Systems” in our business on a royalty-free basis. Mr. Perot and the Perot Systems Family Corporation may terminate this agreement at any time and for any reason. Beginning one year following such a termination, we would not be allowed to use the names “Perot” or “Perot Systems” in our business. Mr. Perot’s or the Perot Systems Family Corporation’s termination of our license agreement could materially and adversely affect our ability to attract and retain customers, which could have a material adverse effect on our business, financial condition, and results of operations.

Failure to recruit, train, and retain technically skilled personnel could increase costs or limit growth.

We must continue to hire and train technically skilled people in order to perform services under our existing contracts and new contracts into which we will enter. The people capable of filling these positions have historically been in great demand, and recruiting and training such personnel requires substantial resources. We may be required to pay an increasing amount to hire and retain a technically skilled workforce. In addition, during periods in which demand for technically skilled resources is great, our business may experience significant turnover. These factors could create variations and uncertainties in our compensation expense and efficiencies that could directly affect our profits. If we fail to recruit, train, and retain sufficient numbers of these technically skilled people, our business, financial condition, and results of operations may be materially and adversely affected.

Alleged or actual infringement of intellectual property rights could result in substantial additional costs.

Our suppliers, customers, competitors, and others may have or obtain patents and other proprietary rights that cover technology we employ. We are not, and cannot be, aware of all patents or other intellectual property rights of which our services may pose a risk of infringement. Others asserting rights against us could force us to defend ourselves or our customers against alleged infringement of intellectual property rights. We could incur substantial costs to prosecute or defend any intellectual property litigation, and we could be forced to do one or more of the following:


	•	cease selling or using products or services that incorporate the disputed technology;

	•	obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology; or

	•	redesign those services or products that incorporate such technology.

Provisions of our certificate of incorporation, bylaws, stockholders’ rights plan, and Delaware law could deter takeover attempts.

Our Board of Directors may issue up to 5,000,000 shares of preferred stock and may determine the price, rights, preferences, privileges, and restrictions, including voting and conversion rights, of these shares of preferred stock without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock.

In addition, we have adopted a stockholders’ rights plan. Under this plan, after the occurrence of specified events that may result in a change of control, our stockholders will be able to buy stock from us or our successor at half the then current market price. These rights will not extend, however, to persons participating in takeover attempts without the consent of our Board of Directors or that our Board of Directors determines to be adverse to the interests of the stockholders. Accordingly, this plan could deter takeover attempts.

Some provisions of our certificate of incorporation and bylaws and of Delaware General Corporation Law could also delay, prevent, or make more difficult a merger, tender offer, or proxy contest involving our company. Among other things, these provisions:


	•	require a 662/3% vote of the stockholders to amend our certificate of incorporation or approve any merger or sale, lease, or exchange of all or substantially all of our property and assets;

	•	require an 80% vote for stockholders to amend our bylaws;

	•	require advance notice for stockholder proposals and director nominations to be considered at a vote of a meeting of stockholders;

	•	permit only our Chairman, President, or a majority of our Board of Directors to call stockholder meetings, unless our Board of Directors otherwise approves;

	•	prohibit actions by stockholders without a meeting, unless our Board of Directors otherwise approves; and

	•	limit transactions between our company and persons that acquire significant amounts of stock without approval of our Board of Directors.

Our financial results are materially affected by a number of economic and business factors.

Our financial results are materially affected by a number of factors, including broad economic conditions, the amount and type of technology spending that our customers undertake, and the business strategies and financial condition of our customers and the industries we serve, which could result in increases or decreases in the amount of services that we provide to our customers and the pricing of such services. Our ability to identify and effectively respond to these factors is important to our future financial and growth position. Each of our three major lines of

business has distinct economic factors, business trends, and risks that could have a material adverse effect on our results of operations and financial condition.

Item 2. Properties

As of December 31, 2006, we had offices in approximately 70 locations in the United States and eleven countries outside the United States. Our office space and other facilities cover approximately 2,500,000 square feet. We own our corporate headquarters facility in Plano, Texas. Our Industry Solutions line of business uses the corporate headquarters facility and data center. The Government Services and the Consulting and Applications Solutions lines of business do not make significant use of the facility. Our Consulting and Applications Solutions business is primarily located in two campus facilities in India. We own the buildings and lease the land (under a 99 year lease agreement) of our Delhi facility. In addition, we own both the land and buildings of our Bangalore facility. The majority of our remaining office space and other facilities are leased.

In addition to these properties, we also occupy office space at customer locations throughout the world. We generally occupy this space under the terms of the agreement with the particular customer. We believe that our current facilities are suitable and adequate for our business.

We have commitments related to data processing facilities, office space, and computer equipment under non-cancelable operating leases and fixed maintenance agreements for remaining periods ranging from one to ten years. We have disclosed future minimum commitments under these leases and agreements as of December 31, 2006, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 14, “Commitments and Contingencies,” to the Consolidated Financial Statements, which are included elsewhere in this report. Upon expiration of our leases, we do not anticipate any significant difficulty in obtaining renewals or alternative space.

Item 3. Legal Proceedings

We are, from time to time, involved in various litigation matters. We do not believe that the outcome of the litigation matters in which we are currently a party, either individually or taken as a whole, will have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, we cannot predict with certainty any eventual loss or range of possible loss related to such matters.

We currently purchase and intend to continue to purchase the types and amounts of insurance coverage customary for the industry and geographies in which we operate. We have evaluated our risk and consider the coverage we carry to be adequate both in type and amount for the business we conduct.

IPO Allocation Securities Litigation

In July and August 2001, we, as well as some of our current and former officers and directors and the investment banks that underwrote our initial public offering, were named as defendants in two purported class action lawsuits seeking unspecified damages for alleged violations of the Securities Exchange Act of 1934 and the Securities Act of 1933. These cases focus on alleged improper practices of investment banks. Our case has been consolidated for pretrial purposes with approximately 300 similar cases in the IPO Allocation Securities Litigation. We have accepted a settlement proposal presented to all issuer defendants under which plaintiffs would dismiss and release all claims against all issuer defendants, 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 of $1 billion (including amounts recovered from the underwriters). On April 24, 2006, the court held a fairness hearing with respect to the proposed settlement, but has not yet issued a ruling.

In December 2006, the Second Circuit Court of Appeals vacated the class certifications in the IPO class action test cases, finding the predominance of common questions over individual questions that is required for class certification cannot be met by those plaintiffs. Upon remand, the district court stayed the proceedings pending plaintiffs’ petition to the Court of Appeals requesting a review by all of the judges of the court sitting en banc.

Other

In addition to the matters described above, we have been, and from time to time are, named as a defendant in various legal proceedings in the normal course of business, including arbitrations, class actions and other litigation involving commercial and employment disputes. Certain of these proceedings include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. We are contesting liability and/or the amount of damages, in each pending matter.

Item 4. Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2006.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities*

Our Class A Common Stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “PER.” The table below shows the range of reported per share sales prices for each quarterly period within the two most recent fiscal years.


	High		Low

2005
First Quarter	$	16.02	$	12.16
Second Quarter		14.40		12.24
Third Quarter		15.06		13.52
Fourth Quarter		14.66		12.75
2006
First Quarter	$	15.69	$	14.04
Second Quarter		15.90		13.64
Third Quarter		14.90		12.99
Fourth Quarter		17.07		13.42

The last reported sale price of our Class A Common Stock on the NYSE on February 23, 2007, was $17.12 per share. As of February 23, 2007, the approximate number of record holders of Class A Common Stock was 2,532. All of our Class B Common Stock is held by UBS AG.

We have never paid cash dividends on shares of our Class A Common Stock and have no current plans to pay dividends in the future.

Issuer Purchases of Equity Securities

The following table provides information relating to our repurchase of common stock for the fourth quarter of 2006.

Approximate

Dollar

Total Number

Value of

of Shares

Shares that

Average

Purchased as

May Yet

Total Number

Price

Part of

Be Purchased

of Shares

Paid per

Publicly Announced

Under the

Period

Purchased

Share

Plans(1)

November 1, 2006 — November 30, 2006

26,387(2

)

15.08

18,000

74,700,000


(1)	On May 3, 2005, we announced that we initiated a $75 million stock buyback program. This plan has been replaced by a new stock buyback program adopted September 28, 2006, authorizing the repurchase of up to $75 million of our common stock. The program authorizes the repurchase of our common stock from time to time in the open market, under a Rule 10b5-1 plan, or through privately negotiated, block transactions, which may include substantial blocks purchased from unaffiliated holders.

(2)	Shares of Class A Common Stock.

Performance Graph

The graph below compares the performance of our Class A Common Stock since December 31, 2001.

COMPARE CUMULATIVE TOTAL RETURN
AMONG PEROT SYSTEMS CORPORATION,
NYSE MARKET INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON DEC. 31, 2001

Equity Compensation Plan Information

The following table gives information about our Class A Common Stock that may be issued under our equity compensation plans as of December 31, 2006. See Note 9, “Common and Preferred Stock,” and Note 10, “Stock Options and Stock-Based Compensation,” to the Consolidated Financial Statements included herein for information regarding the material features of these plans.

Number of

Securities Remaining

Number of

Available for

Securities to

Future Issuance

be Issued

Weighted-Average Exercise

Under Equity

Upon Exercise

Price of

Compensation Plans

of Outstanding

Outstanding Options,

(Excluding Securities

Options, Warrants

Warrants and

Reflected in

Plan Category

and Rights

Rights

Column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

11,487,019

(1)

15.93

48,262,237

(2)

Equity compensation plans not approved by security holders

6,681,799

11.82

500,757

(3)

Total

18,168,818

14.42

48,762,994


(1)	Excludes 956,510 restricted stock units that have been granted under the 2001 Long-Term Incentive Plan.

(2)	Includes 32,455,039 shares available to be issued under the 2001 Long-Term Incentive Plan and 15,807,198 shares available to be issued under the 1999 Employee Stock Purchase Plan.

(3)	Includes 40,757 shares available to be issued to directors who elect to receive stock in lieu of their cash retainer and 460,000 shares available to directors for annual equity compensation.


Item 6.	*Selected Financial Data*

The following selected consolidated financial data as of and for the years ended December 31, 2006, 2005, 2004, 2003, and 2002, have been derived from our audited Consolidated Financial Statements. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related Notes to Consolidated Financial Statements, which are included herein.


	Year Ended December 31,
	2006		2005		2004		2003			2002
	(Dollars in millions, except per share data)

Operating Data:
Revenue	$	2,298	$	1,998	$	1,773	$	1,461		$	1,332
Direct cost of services		1,905		1,575		1,405		1,194			1,021

Gross profit		393		423		368		267			311
Selling, general and administrative expenses		280		249		236		188			195

Operating income		113		174		132		79			116
Interest income, net		5		4		1		3			4
Equity in earnings (loss) of unconsolidated affiliates		—		—		—		(2	)		4
Other income (expense), net		2		2		2		2			(2	)

Income before taxes		120		180		135		82			122
Provision for income taxes		39		69		41		30			44

Income before cumulative effect of changes in accounting principles		81		111		94		52			78
Cumulative effect of changes in accounting principles, net of tax(1)		—		—		—		(50	)		—

Net income	$	81	$	111	$	94	$	2		$	78

Earnings per share of common stock:
Basic:
Income before cumulative effect of changes in accounting principles	$	0.67	$	0.94	$	0.82	$	0.47		$	0.74
Cumulative effect of changes in accounting principles, net of tax(1)		—		—		—		(0.45	)		—

Net income	$	0.67	$	0.94	$	0.82	$	0.02		$	0.74

Diluted:
Income before cumulative effect of changes in accounting principles	$	0.66	$	0.91	$	0.78	$	0.45		$	0.68
Cumulative effect of changes in accounting principles, net of tax(1)		—		—		—		(0.43	)		—

Net income	$	0.66	$	0.91	$	0.78	$	0.02		$	0.68

Weighted average number of common shares outstanding:
Basic		119,503		117,880		115,203		110,573			106,309
Diluted		122,118		121,867		120,532		115,334			115,429
Balance Sheet Data (at Period End):
Cash and cash equivalents	$	250	$	260	$	305	$	124		$	213
Total assets		1,581		1,371		1,226		1,011			842
Long-term debt		84		77		—		75			—
Stockholders’ equity		1,105		961		862		713			677
Other Data:
Capital expenditures	$	93	$	70	$	33	$	28		$	37


(1)	The cumulative effect of changes in accounting principles, net of tax, in 2003 was due to our adoption of Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements, which are included herein.

Overview

Our Services

Our customers may contract with us for any one or more of the following categories of services:


	•	Infrastructure services

	•	Consulting services

	•	Applications services

	•	Business process services

Infrastructure Services


	Consulting Services

Consulting services include strategy consulting, enterprise consulting, technology consulting, and research. The consulting services provided to customers within our Industry Solutions and Government Services segments typically consist of customized, industry-specific business solutions provided by associates with industry expertise. The consulting services provided within the Consulting and Application Solutions segment includes the implementation of prepackaged software applications. Consulting services are typically viewed as discretionary services by our customers, with the level of business activity depending on many factors, including economic conditions and specific customer needs.


	Applications Services

Business Process Services

improve the collection of receivables. In addition, business process services include engineering support and other technical and administrative services that we provide to the U.S. federal government.

Our Contracts


	•	Approximately 30% of our revenue was from fixed-price contracts where our customers pay us a set amount for contracted services. For some of these fixed-price contracts, the price will be set so that the customer realizes immediate savings in relation to their current expense for the services we will be performing. On contracts of this nature, our profitability generally increases over the term of the contract as we become more efficient. The time that it takes for us to realize these efficiencies can range from a few months to a few years, depending on the complexity of the services.

	•	Approximately 29% of our revenue was from time and materials contracts where our billings are based on measurements such as hours, days or months and an agreed upon rate. In some cases, the rate the customer pays for a unit of time can vary over the term of a contract, which may result in the customer realizing immediate savings at the beginning of a contract.

	•	Approximately 25% of our revenue was from cost plus contracts where our billings are based in part on the amount of expense we incur in providing services to a customer. Our largest cost plus contract was with our infrastructure outsourcing contract UBS AG, which was also our largest customer through December 31, 2006. As discussed below under “Our UBS Relationship,” our infrastructure outsourcing contract with UBS ended on January 1, 2007, and the services we performed for UBS under that contract represented 12% of our revenue for 2006.

	•	Approximately 16% of our revenue was from per-unit pricing where we bill our customers based on the volumes of units provided at the unit rate specified. In some contracts, the per-unit prices may vary over the term of the contract, which may result in the customer realizing immediate savings at the beginning of a contract.

Depending on a customer’s business requirements and the pricing structure of the contract, the amount of cash generated from a contract can vary significantly during a contract’s term. With fixed- or unit-priced contracts or when an upfront payment is made to purchase assets or as a sales incentive, an outsourcing services contract will typically produce less cash at the beginning of the contract with significantly more cash being generated as efficiencies are realized later in the term. With a cost plus contract, the amount of cash generated tends to be relatively consistent over the term of the contract.

Our Lines of Business

We offer our services under three primary lines of business: Industry Solutions, Government Services, and Consulting and Applications Solutions. Industry Solutions, our largest line of business, provides services to our customers primarily under long-term contracts in strategic relationships. These services include technology and business process services, as well as industry domain-based, short-term project and consulting services. Government Services provides consulting, engineering, and technology-based business process solutions for the Department of Defense, the Department of Homeland Security, various federal intelligence agencies, and other governmental agencies. In the first quarter of 2006, we combined the Consulting Solutions group, which was previously included in our Commercial Solutions group in the Industry Solutions line of business, with the Applications Solutions line of business. This combined line of business, Consulting and Applications Solutions, provides software-related services, including the implementation of prepackaged software applications, application development and maintenance, and application systems migration and testing, primarily under short-term contracts related to specific projects.

Results of Operations


	*Overview of Our Financial Results for 2006*

Our financial results are affected by a number of factors, including broad economic conditions, the amount and type of technology spending by our customers, and the business strategies and financial condition of our customers and the industries we serve, which could result in increases or decreases in the amount of services that we provide to our customers and the pricing of such services. Our ability to identify and effectively respond to these factors is important to our future financial growth.

We evaluate our consolidated performance on the basis of several performance indicators. The four key performance indicators we use are revenue growth, earnings growth, free cash flow, and the value of contracts signed. We compare these key performance indicators to both annual target amounts established by management and to our performance for prior periods. We establish the targets for these key performance indicators primarily on an annual basis, but we may revise them during the year. We assess our performance using these key indicators on a quarterly and annual basis.

Modification of Customer Contracts

During September 2006, we modified an existing contract that included both construction services and non-construction services. The construction services related to a software development and implementation project, which was modified to eliminate the fixed-price development and implementation deliverables in the original contract. Under the original contract, we determined that we could not recognize revenue on the software development and implementation project separately from the non-construction services based on the guidance of AICPA Statement of Position No. 97-2, “Software Revenue Recognition.” As a result, we were deferring both the revenue on the software development and implementation project, consisting of the amounts we were billing for those services, and the related costs, up to the relative fair value of the software development and implementation project. At December 31, 2005, we had deferred $48 million of costs related to the software development and implementation project. Following the contract modification in September 2006, we impaired $44 million of the deferred costs and recorded this charge to direct cost of services in the consolidated income statements. The remaining deferred costs represent the relative fair value of the software delivered under the modified contract. Prior to the contract modification, we had deferred approximately $19 million of revenue under the original contract terms, which represents fees collected in advance of the software implementation, and was included in non-current deferred revenue on the consolidated balance sheet. Under the terms of the modified contract, we signed a promissory note to pay the customer $12 million over four years and we have recorded the present value of this note of $11 million as of September 30, 2006, as a reduction of deferred revenue. We will amortize the remaining $4 million of deferred costs and $8 million of deferred revenue over the term of the modified contract of approximately seven years.

During the years ended December 31, 2006 and 2005, we incurred losses of $31 million and $12 million, respectively, on a contract with a customer in our Commercial Solutions group. The loss incurred in 2005 included a $3 million charge for the impairment of certain deferred contract costs. In October 2006, we reached an amicable agreement with this client, resolving our disputes over the scope, service levels and fees under an infrastructure services contract. Under the terms of the modified contract, we will continue to provide services and expect the contract to generate positive gross profits in the aggregate over the remaining contract term. Due to ongoing transition activities, we expect to continue to incur operating losses on this contract through 2007.

Revenue Growth

Revenue growth is a measure of the growth we generate through sales of services to new customers, retention of existing contracts, acquisitions, and discretionary services from existing customers. Revenue for 2006 grew by 15.0% as compared to 2005. As discussed in more detail below, this revenue growth came primarily from the following:


	•	A net increase in revenue from the expansion of base services and discretionary technology investments by our existing long-term customers.


	•	Revenue from new contracts signed during 2006 and from new contracts signed in 2005 for which we did not recognize a full year of revenue in 2005.

	•	Revenue from a company acquired in 2006 and a company acquired during the third quarter of 2005 for which we did not recognize a full year of revenue in 2005.

Earnings Growth

We measure earnings growth using diluted earnings per share, which is a measure of our effectiveness in delivering profitable growth. Diluted earnings per share for 2006 decreased 27.5% to $0.66 per share from $0.91 per share for 2005. This decrease came primarily from:


	•	As discussed above in “Modification of Customer Contracts,” during the third quarter of 2006, we modified a customer contract and recorded $44 million of expense in direct cost of services, or approximately $0.22 per diluted share, associated with the impairment of deferred software development and implementation costs.

	•	As discussed above in “Modification of Customer Contracts,” during 2006, we incurred $31 million in losses on an infrastructure services contract with a Commercial Solutions customer, which compares to $12 million in losses during 2005. The increase in losses from this contract results in a decrease in gross profit of $19 million, or approximately $0.10 per diluted share.

	•	Effective January 1, 2006, we adopted FAS 123R, “Share-Based Payment,” which requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and eliminates the ability to account for these instruments under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which was allowed under the original provisions of FAS 123, “Accounting for Stock-Based Compensation.” As a result, during 2006, we recorded additional stock compensation expense of $14 million ($10 million net of tax) as compared to 2005, which reduced our earnings by approximately $0.08 per diluted share. Of this additional stock compensation expense, $6 million was recorded in direct cost of services and $8 million was recorded in selling, general and administrative expenses.

Partially offsetting these decreases in earnings were improvements in operating profits on a modified customer contract, a company acquired, and new contracts signed in 2006. In addition, a decrease in our effective tax rate for the year ended December 31, 2006, to 32.5% as compared to an effective tax rate for the year ended December 31, 2005, of 38.3%, resulted in a benefit of approximately $0.06 per diluted share.

Free Cash Flow

We calculate free cash flow on a trailing twelve month basis as net cash provided by operating activities less purchases of property, equipment and purchased software, as stated in our consolidated statements of cash flows. We use free cash flow as a measure of our ability to generate cash for both our short-term and long-term operating and business expansion needs. We use a twelve-month period to measure our success in this area because of the significant variations that typically occur on a quarterly basis due to the timing of certain cash payments. Free cash flow for the twelve months ended December 31, 2006, was $120 million as compared to $80 million for the twelve months ended December 31, 2005. Free cash flow, which is a non-GAAP measure, can be reconciled to “Net cash provided by operating activities” as follows (in millions):


	Twelve Months
	Ended
	December 31
	2006			2005

Net cash provided by operating activities	$	213		$	150
Purchases of property, equipment and software		(93	)		(70	)

Free cash flow	$	120		$	80

The increase in net cash flow provided by operating activities of $63 million is explained below in the Operating Activities section of Liquidity and Capital Resources.

TCV of Contracts Signed

The amount of “Total Contract Value” (commonly referred to as TCV) that we sell during a twelve-month period is a measure of our success in capturing new business in the various outsourcing and consulting markets in which we provide services and includes contracts with new customers and contracts for new services with existing customers. We measure TCV as our estimate of the total expected revenue from contracts that are expected to generate revenue in excess of a defined amount during a contract term that exceeds a defined length of time.

Various factors may impact the timing of the signing of contracts with customers, including the complexity of the contract, competitive pressures, and customer demands. As a result, we generally measure our success in this area over a twelve-month period because of the significant variations that typically occur in the amount of TCV signed during each quarterly period. During the twelve-month period ended December 31, 2006, the amount of TCV signed was $2.7 billion, as compared to $0.9 billion for the twelve-month period ended December 31, 2005.

Additional Measurements

Each of our three primary lines of business has distinct economic factors, business trends, and risks that could affect our results of operations. As a result, in addition to the four metrics discussed above that we use to measure our consolidated financial performance, we use similar metrics for each of these lines of business and for certain industry groups and operating units within these lines of business.

Comparison of 2006 to 2005

Revenue

Revenue for 2006 increased from 2005 across all segments. Below is a summary of our revenue for 2006 as compared to 2005 (amounts in millions):


	Year Ended December 31
	2006			2005			$ Change			% Change

Industry Solutions	$	1,803		$	1,534		$	269			17.5	%
Government Services		291			272			19			7.0	%
Consulting and Applications Solutions		255			236			19			8.1	%
Elimination of intersegment revenue		(51	)		(44	)		(7	)		15.9	%

Total	$	2,298		$	1,998		$	300			15.0	%

Industry Solutions

The net increase in revenue from the Industry Solutions segment for 2006 as compared to 2005 was primarily attributable to:


	•	$115 million net increase from existing accounts and short-term project work. This net increase resulted from expanding our base services to existing long-term customers and from providing additional discretionary services to these customers. The discretionary services that we provide, which include short-term project work, can vary from period-to-period depending on many factors, including specific customer and industry needs and economic conditions. This increase was primarily related to contracts in the healthcare industry.

	•	$85 million increase from new contracts signed during 2006 and from new contracts signed in 2005, for which we did not recognize a full year of revenue in 2005. This increase consists primarily of $68 million and $15 million from new contracts signed in the Healthcare and Commercial Solutions groups, respectively. The services that we are providing to these new customers are primarily the same services that we provide to the majority of our other long-term outsourcing customers.

	•	$37 million increase from revenue related to an acquisition within our Commercial Solutions group in the first quarter of 2006. The acquired company is a provider of product engineering outsourcing services.

	•	$32 million increase from revenue related to an acquisition within our Insurance and Business Process Solutions group during the third quarter of 2005, for which we did not recognize a full year of revenue in


		2005. The acquired company is a provider of policy administration and business process services to the life insurance and annuity industry.

Net increases in revenue from contracts in the healthcare industry are largely due to changes in the healthcare industry, which has required increased system investment by our existing customers and new customers. Because of the complexities associated with system changes, combined with our customers’ desire to focus on core functions, the healthcare outsourcing market has experienced increased levels of business. The strength in healthcare revenue comes primarily from two factors:


	•	Our solutions for the healthcare market were developed over several years and are highly customized to the specific business needs of the market. We identified certain aspects of the healthcare market as core to our long-term service offerings several years ago when the market for technology and business process services was immature. As a result, we have an established presence and brand, which we have strengthened primarily through internal investments in software and solutions.

	•	The healthcare industry continues to be in a state of change as health systems look to transform their clinical and administrative back-office operations, payer organizations work to develop new consumer-based health models, and as the rate of medical cost inflation continues to be high. Clinical transformation revolutionizes the way in which the healthcare provider community uses information technology to automate the clinical process resulting in improvements in both healthcare quality and efficiency.


	Government Services

The $19 million, or 7.0%, net increase in revenue from the Government Services segment for 2006 as compared 2005 was primarily attributable to new services provided to the Departments of Education and Energy, revenue from a safety, environmental and engineering services company that we acquired in the third quarter of 2005, for which we did not recognize a full year of revenue in 2005, and project work associated with our support of the Department of Defense. Our business with the federal government will fluctuate due to annual federal funding limits and the specific needs of the federal agencies we serve.


	Consulting and Applications Solutions

Revenue from the Consulting and Applications Solutions segment of $204 million for 2006, net of the elimination of intersegment revenue of $51 million, increased $12 million as compared to revenue of $192 million for 2005, net of the elimination of intersegment revenue of $44 million. This net increase was primarily attributable to an increase in the demand for application development and maintenance services from existing customers in the financial services industry. Partially offsetting this increase was a decrease in revenue from the implementation of prepackaged software applications. Intersegment revenue relates to the provision of services by the Consulting and Applications Solutions segment to the other segments.


	UBS

Revenue from UBS, our largest customer through December 31, 2006, was $308 million for 2006, or 13.4% of our total revenue. This revenue was reported within the Industry Solutions and Consulting and Applications Solutions lines of business and is summarized in the following table (amounts in millions):


	Year Ended December 31
	2006		2005		Change

UBS revenue in Industry Solutions	$	265	$	262		1.1	%
UBS revenue in Consulting and Applications Solutions		43		37		16.2	%

Total revenue from UBS	$	308	$	299		3.0	%

As discussed below under “Effect of the End of Our Outsourcing Contract with UBS,” substantially all of the UBS revenue that is reported within the Industry Solutions line of business was earned under the outsourcing agreement with UBS that ended on January 1, 2007.


	Domestic Revenue

Domestic revenue grew by 15.4% in 2006 to $1,894 million from $1,641 million in 2005. This increase was primarily the result of revenue growth within the Industry Solutions segment. Domestic revenue growth for our Industry Solutions segment came primarily from the healthcare industry, where we experienced a strong demand as described above, and from the acquisitions within our Commercial Solutions group.


	Non-domestic Revenue

Non-domestic revenue, consisting primarily of European and Asian operations, increased by 13.2% in 2006 to $404 million from $357 million in 2005. Asian operations generated revenue of $140 million in 2006 as compared to $125 million in 2005, and this increase was primarily from the Consulting and Applications Solutions operations in India and revenue from the UBS infrastructure outsourcing contract. The largest components of our European operations are in the United Kingdom and Switzerland. In the United Kingdom, revenue for 2006 increased to $179 million from $168 million primarily due to increases in revenue from our Consulting and Applications Solutions segment as well as an increase in revenue from the UBS infrastructure outsourcing contract. Revenue in Switzerland, which was primarily from the UBS infrastructure outsourcing contract, increased to $33 million for 2006 from $31 million for 2005. The UBS infrastructure outsourcing contract ended January 1, 2007.


	Gross Margin

Gross margin, which is calculated as gross profit divided by revenue, for 2006, was 17.1% of revenue, as compared to the gross margin for 2005 of 21.2%. This year-to-year decrease in gross margin was primarily due to the following:


	•	As discussed above in “Modification of Customer Contracts,” during the third quarter of 2006 we modified a customer contract and recorded $44 million of expense in direct cost of services associated with the impairment of deferred software development and implementation costs.

	•	A $19 million decrease in gross profit from an infrastructure services contract with a Commercial Solutions customer discussed in “Modification of Customer Contracts.” This decrease was due to a loss of $31 million on this contract that we incurred in 2006 as compared to a loss of $12 million in 2005.

	•	In the second quarter of 2005, we settled a dispute with a former customer. As a result, we received a $7 million payment and reduced our liabilities by $3 million, both of which were recorded as a reduction to direct cost of services. The dispute related to a contract we exited in 2003.

	•	An increase in the amount of total associate bonus expense, net of the amounts reimbursable by our customers, recorded in direct cost of services. In 2006, we recorded $33 million of net expense for associate bonuses, of which $10 million was recorded in the fourth quarter of 2006. In 2005, we recorded $26 million of net expense for associate bonuses, of which $4 million was recorded in the fourth quarter of 2005.

	•	During 2006, we recorded $6 million of additional stock compensation expense in direct cost of services as compared to the prior year period as a result of our adoption of FAS 123R.

Partially offsetting these decreases was an increase in profitability related to a customer contract modified in September 2006.


	Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2006 increased 12.4% to $280 million from $249 million in 2005. As a percentage of revenue, SG&A for 2006 was 12.2% of revenue, which was slightly lower than SG&A for 2005 of 12.5% of revenue. The increase in SG&A expenses is primarily due to $12 million of acquisition-related SG&A, $8 million of additional stock compensation expense that was recorded as a result of our adoption of FAS 123R, and $5 million of expense related to implementing profit improvement actions and an asset impairment.


	Provision for Income Taxes

Our effective income tax rate for the year ended December 31, 2006, was 32.5% as compared to 38.3% for the year ended December 31, 2005. The tax rate for 2006 was lower than the tax rate for 2005 due to an increased impact

from our foreign operations, including the impact of tax holidays, an increase in tax-exempt interest income, and a net reduction of deferred tax asset valuation allowances. In addition, the effective tax rate for 2005 included income tax expense due to the repatriation of foreign earnings pursuant to the American Jobs Creation Act of 2004 (the Act) and a net increase in deferred tax asset valuation allowances. The Act created a temporary incentive through December 31, 2005, for U.S. companies to repatriate income earned abroad by providing an 85% dividends received deduction on qualifying foreign dividends. The decrease in the effective tax rate from December 31, 2005, to December 31, 2006, is further explained in Note 12, “Income Taxes.”


	*Comparison of 2005 to 2004*


	Revenue

Revenue for 2005 increased from 2004 across all segments. Below is a summary of our revenue for 2005 as compared to 2004 (amounts in millions):


	Year Ended December 31
	2005			2004			$ Change			% Change

Industry Solutions	$	1,534		$	1,332		$	202			15.2	%
Government Services		272			263			9			3.4	%
Consulting and Applications Solutions		236			208			28			13.5	%
Elimination of intersegment revenue		(44	)		(30	)		(14	)		46.7	%

Total	$	1,998		$	1,773		$	225			12.7	%


	Industry Solutions

The net increase in revenue from the Industry Solutions segment for 2005 as compared to 2004 was primarily attributable to:


	•	$117 million increase from contracts signed with new customers during 2004 for which we did not recognize a full year of revenue in 2004. This increase was composed of $78 million and $39 million from contracts signed in the Healthcare and Commercial Solutions groups, respectively. The services that we are providing to these new customers are primarily the same type of services that we provide to the majority of our other long-term outsourcing customers. The strength in healthcare new sales revenue came primarily from the reasons discussed above in our comparison of 2006 to 2005 revenue.

	•	$57 million net increase from existing accounts and short-term project work. This net increase resulted from expanding our base services to existing long-term customers and from providing additional discretionary services to these customers. The discretionary services that we provide, which include short-term offerings and project work, can vary from period to period depending on many factors, including specific customer and industry needs and economic conditions. This increase was primarily related to contracts in the healthcare industry.

	•	$19 million increase from revenue related to an acquisition within our Insurance and Business Process Solutions group in the third quarter of 2005. The acquired company is a leading provider of policy administration and business process services to the life insurance and annuity industry.

	•	$9 million increase from contracts signed with new customers during 2005. This increase was composed of $6 million and $3 million from new contracts signed in the Commercial Solutions and Healthcare groups, respectively. The services that we are providing to these new customers are primarily the same type of services that we provide to the majority of our other long-term outsourcing customers.


	Government Services

The $9 million, or 3.4%, net increase in revenue from the Government Services segment for 2005 as compared to 2004 was primarily attributable to existing program expansion, including our support of the National Institute of Allergic and Infectious Diseases, the Department of Defense and services provided to other governmental agencies, coupled with new services provided to the departments of Education and Energy. Partially offsetting these increases was a loss of business in the second half of 2004, the majority of which came from the loss of a contract with U.S.

Citizenship and Immigration Services that was rebundled by the customer along with other programs for a recompetition bid. The consortium of companies with which we participated for the recompete did not win this business. Our business with the federal government will fluctuate due to annual federal funding limits and the specific needs of the federal agencies we serve.


	Consulting and Applications Solutions

Revenue from the Consulting and Applications Solutions segment of $192 million for 2005, net of the elimination of intersegment revenue of $44 million, increased $14 million as compared to revenue of $178 million for 2004, net of the elimination of intersegment revenue of $30 million. This increase was primarily attributable to an increase in the demand for application development and maintenance services from customers in the financial services industry. Intersegment revenue relates to the provision of services by the Consulting and Applications Solutions segment to the Industry Solutions segment.


	UBS

Revenue from UBS, our largest customer through December 31, 2006, was $299 million for 2005, or 15.0% of our total revenue. This revenue was reported within the Industry Solutions and Applications Solutions lines of business and is summarized in the following table (amounts in millions):


	Year Ended December 31
	2005		2004		Change

UBS revenue in Industry Solutions	$	262	$	244		7.4	%
UBS revenue in Consulting and Applications Solutions		37		33		12.1	%

Total revenue from UBS	$	299	$	277		7.9	%

The increase in revenue from UBS was due primarily to an increase in the number of associates providing services to UBS relating to their business expansion and various short-term projects.


	Domestic Revenue

Domestic revenue grew by 12.7% in 2005 to $1,641 million from $1,456 million in 2004. This increase was primarily the result of revenue growth within the Industry Solutions segment. Domestic revenue growth for our Industry Solutions segment came primarily from the healthcare industry, where we experienced a strong demand as described above, and from the acquisition within our Commercial Solutions group.


	Non-domestic Revenue

Non-domestic revenue, consisting primarily of European and Asian operations, increased by 12.6% in 2005 to $357 million from $317 million in 2004. Asian operations generated revenue of $125 million in 2005 as compared to $104 million in 2004, and this increase was primarily from the Consulting and Applications Solutions operations in India as a result of an increase in the amount of intersegment services it provides domestic customers through subcontracts with our Industry Solutions segment. The largest components of our European operations are in the United Kingdom and Switzerland. In the United Kingdom, revenue for 2005 increased to $168 million from $145 million primarily due to increases in revenue from our Consulting and Applications Solutions segment from customers in the financial services markets, as well as an increase in revenue from UBS. Revenue in Switzerland, which was primarily from the UBS infrastructure outsourcing contract, remained the same at $31 million for 2005 and 2004. The UBS infrastructure outsourcing contract ended January 1, 2007.


	Gross Margin

Gross margin, which is calculated as gross profit divided by revenue, for 2005 was 21.2% of revenue, which is higher than the gross margin for 2004 of 20.8%. This year-to-year increase in gross margin was primarily due to the following:


	•	In the second quarter of 2005, we settled a dispute with a former customer. As a result, we received a $7 million payment and reduced our liabilities by $3 million, both of which were recorded as a reduction to


		direct cost of services. The dispute related to a contract we exited in 2003. This settlement resulted in a 0.5 percentage point increase in our gross margin for 2005.


	•	A reduction in the amount of total associate bonus expense recorded in direct cost of services. In 2005, we recorded $49 million of expense for associate bonuses, of which $23 million was reimbursable by our customers. In 2004, we recorded $56 million of expense for associate bonuses, of which $22 million was reimbursable by our customers.

	•	An overall net increase in profitability for existing commercial customer contracts signed prior to 2004, which was primarily due to an increase in the amount of services we perform that are in addition to our base level of services. The increased services are discretionary in nature, and the associated gross margins are typically higher than those we realize on our base level of services. As discussed above, we have seen increased demand for discretionary investment from several customers, primarily in the Healthcare and Commercial Solutions Groups.

Partially offsetting these increases was a $12 million loss in 2005 on a Commercial Solutions contract, which included a $3 million loss related to the impairment of certain deferred contract costs. This loss relates to an infrastructure services contract we signed in 2004 and began transitioning services in 2005.


	Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2005 increased 5.5% to $249 million from $236 million in 2004. As a percentage of revenue, SG&A for 2005 was 12.5% of revenue, which was lower than SG&A for 2004 of 13.3% of revenue. This decrease as a percentage of revenue was primarily due to a reduction in amortization expense relating to the intangible assets recorded from our acquisition of TSI, which declined $5 million in 2005, and a continued emphasis on controlling incremental SG&A associated with revenue growth.


	Other Income Statement Items

Interest income for 2005 increased by $5 million as compared to 2004 due primarily to higher average cash balances and higher interest rates during 2005 as compared to 2004. Interest expense for 2005 increased by $2 million as compared to 2004 because of an increase in the variable interest rate on our debt.

Our effective income tax rate for the year ended December 31, 2005, was 38.3% as compared to 30.4% for the year ended December 31, 2004. Income tax expense for 2005 included $3 million of income tax expense on $42 million of foreign earnings repatriated pursuant to the American Jobs Creation Act of 2004 (the Act). The Act created a temporary incentive through December 31, 2005, for U.S. companies to repatriate income earned abroad by providing an 85% dividends received deduction on qualifying foreign dividends. Income tax expense for 2005 also included a net increase in deferred tax asset valuation allowances of $2 million. Income tax expense for 2004 included a net decrease in deferred tax asset valuation allowances of $3 million and a reduction of $3 million relating to the resolution of various outstanding tax issues from prior years.

Effect of the End of Our Infrastructure Outsourcing Contract with UBS

UBS AG was our largest customer through December 31, 2006. Our infrastructure outsourcing agreement with UBS ended on January 1, 2007. During 2006, our UBS relationship generated $308 million, or 13.4%, of our revenue, which included $265 million of revenue and $58 million of gross profit from our infrastructure outsourcing contract with UBS that ended on January 1, 2007.

We continue to provide offshore services to UBS, which are provided outside the scope of the infrastructure outsourcing contract that ended on January 1, 2007. We do not expect significant changes in the offshore services we provide to UBS as a result of the end of the outsourcing contract.


	Liquidity and Capital Resources

We believe our existing cash and cash equivalents, short-term investments, expected cash flows from operating activities, and the $123 million currently available under the restated and amended revolving credit facility, which is discussed below, will provide us sufficient funds to meet our operating needs for the foreseeable future. At December 31, 2006, we have cash and cash equivalents of $250 million and short-term investments of $133 million,

net. During 2006, cash and cash equivalents decreased $10 million as compared to a decrease of $45 million and an increase of $181 million for 2005 and 2004, respectively.


	*Operating Activities*

Net cash provided by operating activities was $213 million in 2006 as compared to $150 million in 2005 and $158 million in 2004. The primary reasons for the changes in cash provided by operating activities for these three years are as follows:


	•	Net income was $81 million, $111 million, and $94 million in 2006, 2005, and 2004, respectively. The reduction in net income in 2006 includes non-cash asset impairments of $46 million. In addition, depreciation and amortization expense, which are also non-cash expenses, were $79 million, $59 million, and $54 million in 2006, 2005, and 2004, respectively. The increase in depreciation expense in 2006 as compared to 2005 and 2004 was due primarily to depreciation and amortization expense on property, equipment, and purchased software and amortization of deferred costs, both of which are associated primarily with new contract signings.

	•	During 2006, 2005, and 2004, cash provided by the changes in accounts payable and accrued liabilities was $33 million, $3 million, and $4 million, respectively. This change is primarily due to the timing of vendor payments.

	•	During 2006, there was an increase in deferred revenue received from clients as compared to 2005 and 2004.

	•	During 2006, we decreased our spending on deferred contract costs as compared to 2005 and 2004.

	•	Bonuses paid to associates under our bonus plans in 2006, 2005, and 2004 (including payments of annual bonuses relating to the prior year’s bonus plan) were $72 million, $70 million, and $46 million, respectively. Included in the bonus amounts that were paid in 2006, 2005, and 2004 were approximately $24 million, $24 million, and $19 million, respectively, of bonus payments that are reimbursable by our customers. The amount of bonuses that we pay each year is based on several factors, including our financial performance and management’s discretion.

	•	During 2006, 2005, and 2004, we made net cash payments for income taxes of $50 million, $31 million, and $17 million, respectively.


	*Investing Activities*

Net cash used in investing activities was $255 million for 2006 as compared to $168 million for 2005 and $7 million for 2004. These changes in cash used in investing activities were primarily attributable to the following:


	•	During 2006, we purchased $93 million of property, equipment and purchased software as compared to $70 million during 2005 and $33 million during 2004. This increase was primarily related to our business expansion needs for data center and office facilities.

	•	During 2006, we paid $29 million for acquisitions of businesses, including $21 million for the acquisition of eServ LLC, a provider of product engineering outsourcing, and $8 million as additional consideration related to the acquisition of Technical Management, Inc. and its subsidiaries, including Transaction Applications Group, Inc. (TAG).

	•	During 2006, we purchased short-term investments of $133 million, net.

	•	During 2005, we paid $98 million for acquisitions, including $60 million (net of cash received) for the acquisition of TAG, $17 million as additional consideration related to the acquisition of Soza & Company, Ltd., $7 million (net of cash received) for the acquisition of PrSM Corporation, $7 million as additional consideration related to the acquisition of ADI Technology Corporation, and $7 million related to the acquisition of one other company.

	•	During 2004, we paid $12 million as additional consideration for acquisitions, including $6 million as additional consideration related to the acquisition of Soza, $3 million as additional consideration related to the acquisition of ADI, and $3 million as additional consideration related to the acquisition of TSI and one


		other company. Also during 2004 we received $38 million of net proceeds from the sale of marketable equity securities.

Financing Activities

Net cash provided by financing activities was $27 million for 2006, compared to net cash used in financing activities of $22 million in 2005 and net cash provided by financing activities of $25 million in 2004. During 2006, we purchased $18 million of treasury stock as compared to $42 million in 2005. In addition, during 2006, we received higher proceeds from the issuance of common stock due to the exercise of stock options as compared to 2005 and 2004.

We routinely maintain cash balances in certain European and Asian currencies to fund operations in those regions. During 2006, foreign exchange rate fluctuations had a net positive impact on our non-domestic cash balances of $5 million, as the U.S. dollar weakened against the British Pound, Euro, Indian Rupee, and other currencies. During 2005, foreign exchange rate fluctuations had a net negative impact on our non-domestic cash balances of $5 million, as the U.S. dollar strengthened against the Euro, the British Pound, Swiss Franc and the Indian Rupee. We manage foreign exchange exposures that are likely to significantly impact net income or working capital. At December 31, 2006, we had forward contracts to purchase and sell various currencies in the amount of $75 million, which expire at various times before the end of 2007.

Contractual Obligations and Contingent Commitments

The following table sets forth our significant contractual obligations at December 31, 2006, and the borrowing of $75 million against our credit facility for our purchase of QSS Group, Inc. (QSS), in January 2007, including the effect such obligations are expected to have on our liquidity and cash flows for the periods indicated (in millions):


			2008-		2010-
	2007		2009		2011		Thereafter		Total

Operating leases	$	51	$	67	$	34	$	39	$	191
Long-term debt		2		5		154		—		161
Estimated interest expense on long-term debt		9		18		15		—		42

Total	$	62	$	90	$	203	$	39	$	394

We discuss these contractual obligations in Note 8, “Debt,” and Note 14, “Commitments and Contingencies” to the Consolidated Financial Statements, which are included herein. Minimum lease payments related to facilities abandoned as part of our prior years’ realigned operating structures are included in the operating lease amounts above.

The following table sets forth our significant contingent commitments for the periods indicated (in millions) and represents the maximum amount of such commitments:


	2007		2008		Total

Contingent payments to sellers for acquisitions	$	14	$	3	$	17

The contingent payments for significant acquisitions are discussed below and in Note 4, “Acquisitions,” to the Consolidated Financial Statements.


	Long-Term Debt

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. As part of our adoption of FIN 46, we began consolidating this entity on December 31, 2003. Upon consolidation, we recorded the debt between the variable interest entity and the financial institutions (the lenders) of $75 million. The debt bore interest at LIBOR plus 100 basis points for 97% of the outstanding balance while the remaining 3% was charged interest at LIBOR plus 225 basis points. The agreement was to mature in June 2005 with one optional two-year extension; however, we did not extend the agreement. In March 2005, we borrowed $77 million under our credit facility to pay the exercise amount of $75 million for the purchase option under the operating lease and certain other expenses. Our consolidated variable interest entity then repaid the amount due to the lenders.

As discussed above in “Modification of Customer Contracts,” in September 2006, we signed a promissory note to pay a customer $12 million over four years and recorded the present value of the note of $11 million as a reduction of deferred revenue. At December 31, 2006, $3 million is included in accrued and other current liabilities and $7 million is recorded in long-term debt on the consolidated balance sheet.

Credit Facility

In January 2004, we entered into a three-year credit facility with a syndicate of banks that allows us to borrow up to $100 million. In March 2005, we executed a restated and amended agreement that expanded the facility to $275 million and extended the term to five years. In August 2006, a further amendment to the agreement extended the maturity date of the facility to August 2011. Borrowings under the credit facility will be either through loans or letter of credit obligations. The credit facility is guaranteed by certain of our domestic subsidiaries. In addition, we have pledged the stock of one of our non-domestic subsidiaries as security on the facility. Interest on borrowings varies with usage and begins at an alternate base rate, as defined in the credit facility agreement, or the LIBOR rate plus an applicable spread based upon our debt/EBITDA ratio applicable on such date. We are also required to pay a facility fee based upon the unused credit commitment and certain other fees related to letter of credit issuance. The credit facility matures in August 2011 and requires certain financial covenants, including a debt/EBITDA ratio and a minimum interest coverage ratio, each as defined in the credit facility agreement. As discussed above, in March 2005 we borrowed $77 million against the credit facility. In January 2007, we borrowed an additional $75 million in connection with our acquisition of QSS, which is discussed further in Note 20 “Subsequent Event.”

Other Commitments and Contingencies

As discussed in Note 4, “Acquisitions,” to the Consolidated Financial Statements, we may be required to make $7 million in additional payments to the sellers of eServ over the next two fiscal years, depending on their achievement of certain financial targets. In addition, we may be required to pay the sellers of TAG an additional payment of up to $10 million in 2007 depending on their achievement of certain financial targets.

Critical Accounting Policies

The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is important to management’s discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities.

Critical accounting policies are those that reflect significant judgments and uncertainties and may result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements.

Revenue Recognition

We provide services to our customers under contracts that contain various pricing mechanisms and other terms. These services include infrastructure services, applications services, business process services, and consulting services.

Within these four categories of services, our contracts include non-construction service deliverables, including infrastructure services and business process services, and construction service deliverables, such as application development and implementation services.

Accounting for Revenue in Single-Deliverable Arrangements

Revenue for non-construction service deliverables is recognized as the services are delivered in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” which provides that revenue should be recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is reasonably assured. Under our policy, persuasive evidence of an arrangement exists when a final understanding between us and our customer exists as to the specific nature and terms of the services that we are going to provide, as documented in the form of a signed agreement between us and the customer.

Revenue for non-construction services priced under fixed-fee arrangements is recognized on a straight-line basis over the longer of the term of the contract or the expected service period, regardless of the amounts that can be billed in each period, unless evidence suggests that the revenue is earned or our obligations are fulfilled in a different pattern. If we are to provide a similar level of non-construction services each period during the term of a contract, we would recognize the revenue on a straight-line basis since our obligations are being fulfilled in a straight-line pattern. If our obligations are being fulfilled in a pattern that is not consistent over the term of a contract, then we would recognize revenue consistent with the proportion of our obligations fulfilled in each period. In determining the proportion of our obligations fulfilled in each period, we consider the nature of the deliverables we are providing to the customer and whether the volumes of those deliverables are easily measured, such as when we provide a contractual number of full time equivalent associate resources. If the amount of our obligations fulfilled in each period is not easily distinguished by reference to the volumes of services provided, then we would recognize revenue on a straight-line basis.

Revenue for construction services that do not include a license to one of our software products is recognized in accordance with the provisions of AICPA Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” In general, SOP 81-1 requires the use of the percentage-of-completion method to recognize revenue and profit as our work progresses, and we primarily use hours incurred to date to measure our progress toward completion. This method relies on estimates of total expected hours to complete the construction service, which are compared to hours incurred to date, to arrive at an estimate of how much revenue and profit has been earned to date. Although we primarily measure our progress toward completion using hours incurred to date, we may measure our progress toward completion using costs incurred to date if the construction services involve a significant amount of non-labor costs. Because these estimates may require significant judgment, depending on the complexity and length of the construction services, the amount of revenue and profits that have been recognized to date are subject to revisions. If we do not accurately estimate the amount of hours or costs required or the scope of work to be performed, or do not complete our projects within the planned periods of time, or do not satisfy our obligations under the contracts, then revenue and profits may be significantly and negatively affected or losses may need to be recognized. Revisions to revenue and profit estimates are reflected in income in the period in which the facts that give rise to the revision become known.

Revenue for the sale of a license from our software products or the sale of services relating to a software license is recognized in accordance with the provisions of AICPA Statement of Position No. 97-2, “Software Revenue Recognition.” In general, SOP 97-2 addresses the separation and the timing of revenue recognition for software and software-related services, such as implementation and maintenance services. SOP 97-2 also requires the application of the percentage-of-completion method as described in SOP 81-1 for those software arrangements that require significant production, modification, or customization of the software. As a result, the accounting for revenue related to software arrangements includes many of the estimates and significant judgments discussed above.

Revenue for services priced under time and materials contracts and unit-priced contracts is recognized as the services are provided at the contractual unit price.

Accounting for Revenue in Multiple-Deliverable Arrangements

For those arrangements that include multiple deliverables, we first determine whether each service, or deliverable, meets the separation criteria of Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has standalone value to the customer and if there is objective and reliable evidence of the fair value of the remaining deliverables in the arrangement. Each deliverable that meets the separation criteria is considered a separate “unit of accounting.” We allocate the total arrangement consideration to each unit of accounting based on the relative fair value of each unit of accounting. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.

After the arrangement consideration has been allocated to each unit of accounting, we apply the appropriate revenue recognition method for each unit of accounting as described previously based on the nature of the arrangement and the services included in each unit of accounting. All deliverables that do not meet the separation

criteria of EITF 00-21 are combined into one unit of accounting, and the most appropriate revenue recognition method is applied.

In arrangements for both non-construction and construction services, we may bill the customer prior to performing services, which would require us to record deferred revenue. In other arrangements, we may perform services prior to billing the customer, which could require us to record unbilled receivables or to defer the costs associated with either the non-construction or construction services, depending on the terms of the arrangement and the application of the revenue separation criteria of EITF 00-21.

In certain arrangements we may pay consideration to the customer at the beginning of a contract as an incentive, which is most commonly in the form of cash. This consideration is recorded in other non-current assets on the consolidated balance sheets and is amortized as a reduction to revenue over the term of the related contract.

As a result of our adoption of EITF 00-21 in 2003, we recognized revenue of approximately $5 million, $3 million, and $3 million during 2006, 2005, and 2004, respectively, that were recognized prior to 2003 under our accounting for revenue prior to the adoption of EITF 00-21 and were also included in the cumulative effect of a change in accounting principle, which we recorded in the first quarter of 2003.

Contract Costs

Costs to deliver services are expensed as incurred, with the exception of setup costs and the cost of certain construction and non-construction services for which the related revenue must be deferred under EITF 00-21 or other accounting literature. We defer and subsequently amortize certain setup costs related to activities that enable us to provide the contracted services to customers. Deferred contract setup costs may include costs incurred during the setup phase of a customer arrangement relating to data center migration, implementation of certain operational processes, employee transition, and relocation of key personnel. We amortize deferred contract setup costs on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. Useful lives range from three years up to a maximum of the term of the related customer contract.

For a construction service in a single-deliverable arrangement, if the total estimated costs to complete the construction service exceed the total amount that can be billed under the terms of the arrangement, then a loss would generally be recorded in the period in which the loss first becomes probable. For a construction service in a multiple-deliverable arrangement, if the total estimated costs to complete the construction service exceed the amount of revenue that is allocated to the separate construction service unit of accounting (based on the relative fair value allocation, as limited to the amount that is not contingent), then the actual costs incurred to complete the construction service in excess of the allocated fair value would be deferred, up to the amount of the relative fair value, and amortized over the remaining term of the contract. A loss would generally be recorded on a construction service in a multiple-deliverable arrangement if the total costs to complete the service exceed the relative fair value of the service.

Deferred contract costs are evaluated for realizability whenever events or changes in circumstances indicate that the carrying amount may not be realizable. Our evaluation is based on the amount of non-refundable deferred revenue that is related to the deferred contract costs and our projection of the remaining gross profits from the related customer contract. To the extent that the carrying amount of the deferred contract costs is greater than the amount of non-refundable deferred revenue and the remaining net gross profits from the customer contract, a charge is recorded to reduce the carrying amount to equal the amount of non-refundable deferred revenue and remaining gross profits.

Year-end Bonus Plan

One of our compensation methods is to pay to certain associates a year-end bonus, which is based on associate and team performance, our financial results, and management’s discretion. The amount of bonus expense that we record each quarter is based on several factors, including our financial performance for that quarter, our latest expectations for full year results, and management’s estimate of the amount of bonus to be paid at the end of the year. As a result, the amount of bonus expense that we record in each quarter can vary significantly.

Contingencies

We account for claims and contingencies in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” FAS 5 requires that we record an estimated loss from a claim or loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible but not probable that an asset has been impaired or a liability has been incurred or the amount of a probable loss cannot be reasonably estimated, then we may disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business.

Valuation of Goodwill and Intangibles

Our business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we could incur. The determination of the fair value of goodwill and other intangibles requires us to make estimates and assumptions about future business trends and growth at the date of acquisition. If an event occurs that would cause us to revise the estimates and assumptions we used in analyzing the value of our goodwill or other intangibles, such revision could result in an impairment charge that could have a material impact on our financial condition and results of operations.

Income Taxes

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. On a quarterly basis, we evaluate the need for and adequacy of valuation allowances based on the expected realizability of our deferred tax assets and adjust the amount of such allowances, if necessary. The factors used to assess the likelihood of realization include our latest forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Income tax expense consists of our current and deferred provisions for U.S. and foreign income taxes.

We do not provide for U.S. income tax on the undistributed earnings of our non-U.S. subsidiaries. Except for amounts repatriated in 2005 pursuant to the American Jobs Creation Act of 2004 (the Act), we intend to either permanently invest our non-U.S. earnings or remit such earnings in a tax-free manner. The Act created a temporary incentive through December 31, 2005, for U.S. companies to repatriate income earned abroad by providing an 85 percent dividends received deduction for qualifying foreign dividends.

The cumulative amount of undistributed earnings (as calculated for income tax purposes) of our non-U.S. subsidiaries was approximately $182 million at December 31, 2006, and $150 million at December 31, 2005. Such earnings include pre-acquisition earnings of non-U.S. entities acquired through stock purchases and are intended to be invested outside of the U.S. indefinitely. The ultimate tax liability related to repatriation of such earnings is dependent upon future tax planning opportunities and is not estimable at the present time.

Determining the consolidated provision for income taxes involves judgments, estimates, and the application of complex tax regulations. As a global company, we are required to provide for income taxes in each of the jurisdictions where we operate, including estimated liabilities for uncertain tax positions. We are subject to income tax audits by federal, state, and foreign tax authorities, and we are currently under audit by the Internal Revenue Service as well as the Indian tax authorities. We fully cooperate with all audits, but we defend our positions vigorously. Although we believe that we have provided adequate liabilities for uncertain tax positions, the actual liability resulting from examinations by tax authorities could differ substantially from the recorded income tax liabilities and could result in additional income tax expense. Changes to our recorded income tax liabilities resulting from the resolution of tax matters are reflected in income tax expense in the period of resolution. Other factors may cause us to revise our estimates of income tax liabilities including the expiration of statutes of limitations, changes

in tax regulations, and tax rulings. Changes in estimates of income tax liabilities are reflected in our income tax provision in the period in which the factors resulting in our change in estimate become known to us. As a result, our effective tax rate may fluctuate on a quarterly basis.

Stock-based compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” which requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method. Prior to the adoption of FAS 123R and as permitted by FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” we elected to follow APB 25 and related interpretations in accounting for our employee stock options and implemented the disclosure-only provisions of FAS 123 and FAS 148. Under APB 25, stock compensation expense was recorded when the exercise price of employee stock options was less than the fair value of the underlying stock on the date of grant. For a further discussion of the impact of FAS 123R on our financial statements, see Note 10, “Stock Options and Stock-Based Compensation.”

Significant Accounting Standards to be Adopted

FASB Interpretation No. 48

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which clarifies the accounting for and disclosure of uncertainty in tax positions. Additionally, FIN 48 provides guidance on the recognition, measurement, derecognition, classification and disclosure of tax positions and on the accounting for related interest and penalties. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the balance sheet). This interpretation is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact this interpretation will have on our results of operations or financial position.

FASB Statement No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides guidance for using fair value to measure assets and liabilities. FAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Our adoption of FAS 157 is not expected to have a material impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of business, we enter into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. We generally manage these transactions by ensuring that costs to service these contracts are incurred in the same currency in which revenue is received. By matching revenue and costs to the same currency, we have been able to substantially mitigate foreign currency risk to earnings. We use foreign currency forward contracts or options to manage exposures arising from these transactions when necessary. We do not foresee changing our foreign currency exposure management strategy. Our use of foreign currency forward contracts expanded in 2004 due to increased foreign currency exposures resulting from our acquisition of the remaining interests in Perot Systems TSI B.V.

During 2006, 17.6%, or $404 million, of our revenue was generated outside of the United States. Using sensitivity analysis, a hypothetical 10% increase or decrease in the value of the U.S. dollar against all currencies would change total revenue by 1.7%, or $40 million. In our opinion, a substantial portion of this fluctuation would be offset by expenses incurred in local currency.

At December 31, 2006, we had approximately $108 million of cash and cash equivalents denominated in currencies other than the U.S. dollar.


Item 8.	*Financial Statements and Supplementary Data*

Index to Consolidated Financial Statements and Financial Statement Schedules


	*Consolidated Financial Statements*


		Page

Management’s Report on Internal Control Over Financial Reporting		F-1
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005		F-4
Consolidated Income Statements for the years ended December 31, 2006, 2005 and 2004		F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		F-7
Notes to Consolidated Financial Statements		F-8 – F-40

Financial Statement Schedule II, “Valuation and Qualifying Accounts,” is submitted as Exhibit 99.1 to this Annual Report on Form 10-K.

Schedules other than that listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2006. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that our degree of compliance with the policies or procedures may deteriorate.

Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, based upon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, our management determined that our internal control over financial reporting was effective as of December 31, 2006, based on the criteria in Internal Control — Integrated Framework issued by COSO.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Dated: February 28, 2007


Peter A. Altabef		Russell Freeman
President and Chief Executive Officer		Vice President and Chief Financial Officer

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Perot Systems Corporation:

We have completed integrated audits of Perot Systems Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.


	*Consolidated financial statements and financial statement schedule*

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Perot Systems Corporation and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006.


	*Internal control over financial reporting*

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance

F-2

with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

February 28, 2007

F-3

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of December 31, 2006 and 2005


	2006			2005
	(Dollars in millions
	except par values and
	shares in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	250		$	260
Short-term investments		133			—
Accounts receivable, net		338			278
Prepaid expenses and other		37			33
Deferred income taxes		25			32

Total current assets		783			603
Property, equipment and purchased software, net		220			180
Goodwill		463			444
Deferred contract costs, net		61			85
Other non-current assets		54			59

Total assets	$	1,581		$	1,371




LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:
Accounts payable	$	52		$	39
Deferred revenue		42			28
Accrued compensation		65			60
Income taxes payable		37			51
Accrued and other current liabilities		105			82

Total current liabilities		301			260
Long-term debt		84			77
Non-current deferred revenue		82			47
Other non-current liabilities		9			26

Total liabilities		476			410

Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred Stock; par value $.01; authorized 5,000 shares; none issued		—			—
Class A Common Stock; par value $.01; authorized 300,000 shares; issued 120,316 and 118,241 shares, respectively		1			1
Class B Convertible Common Stock; par value $.01; authorized 24,000 shares; issued 2,275 and 2,217 shares, respectively		—			—
Additional paid-in capital		533			502
Retained earnings		575			494
Treasury stock		(21	)		(35	)
Deferred compensation		—			(11	)
Accumulated other comprehensive income		17			10

Total stockholders’ equity		1,105			961

Total liabilities and stockholders’ equity	$	1,581		$	1,371

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

F-4

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

for the years ended December 31, 2006, 2005 and 2004


	2006			2005			2004
				(Dollars in millions,
				except per share data)

Revenue	$	2,298		$	1,998		$	1,773
Direct cost of services		1,905			1,575			1,405

Gross profit		393			423			368
Selling, general and administrative expenses		280			249			236

Operating income		113			174			132
Interest income		10			8			3
Interest expense		(5	)		(4	)		(2	)
Other income, net		2			2			2

Income before taxes		120			180			135
Provision for income taxes		39			69			41

Net income	$	81		$	111		$	94

Earnings per share of common stock:
Basic	$	0.67		$	0.94		$	0.82
Diluted	$	0.66		$	0.91		$	0.78
Weighted average number of common shares outstanding (in thousands):
Basic		119,503			117,880			115,203
Diluted		122,118			121,867			120,532

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

F-5

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

for the years ended December 31, 2006, 2005 and 2004


	Shares of															Accumulated
	Common				Additional											Other		Total
	Stock		Common		Paid-In			Retained		Treasury			Deferred			Comprehensive		Stockholders’
	Issued		Stock		Capital			Earnings		Stock			Compensation			Income		Equity
	(Dollars in millions and shares in thousands)

Balance at January 1, 2004		112,304	$	1	$	421		$	289	$	—		$	(4	)	$	6	$	713
Issuance of Class A shares related to acquisitions		815		—		11			—		—			—			—		11
Issuance of Class A shares under incentive plans		552		—		6			—		—			—			—		6
Class A shares repurchased (9 shares)		—		—		—			—		—			—			—		—
Exercise of stock options for Class A shares (2,911 shares, including 9 shares from treasury)		2,902		—		17			—		—			—			—		17
Exercise of stock options for Class B shares		700		—		3			—		—			—			—		3
Tax benefit from stock options exercised and restricted stock units vested		—		—		9			—		—			—			—		9
Purchase of equity held by minority shareholders of TSI and replacement of outstanding TSI stock options, net		—		—		5			—					(1	)		—		4
Deferred compensation, net, and other		—		—		6			—		—			(5	)		—		1
Net income		—		—		—			94		—			—			—		94
Other comprehensive income, net of tax:
Translation adjustment		—		—		—			—		—			—			4		4

Comprehensive income		—		—		—			—		—			—			—		98

Balance at December 31, 2004		117,273	$	1	$	478		$	383	$	—		$	(10	)	$	10	$	862
Issuance of Class A shares under incentive plans (689 shares, including 27 shares from treasury)		662		—		7			—		—			—			—		7
Class A shares repurchased (1,710 shares)		—		—		—			—		(23	)		—			—		(23	)
Class B shares repurchased (1,458 shares)		—		—		—			—		(19	)		—			—		(19	)
Exercise of stock options for Class A shares (2,306 shares, including 483 from treasury)		1,823		—		7			—		7			—			—		14
Exercise of stock options for Class B shares		700		—		3			—		—			—			—		3
Tax benefit from stock options exercised and restricted stock units vested		—		—		3			—		—			—			—		3
Deferred compensation, net, and other		—		—		4			—		—			(1	)		—		3
Net income		—		—		—			111		—			—			—		111
Other comprehensive income, net of tax:
Translation adjustment		—		—		—			—		—			—			—		—

Comprehensive income		—		—		—			—		—			—			—		111

Balance at December 31, 2005		120,458	$	1	$	502		$	494	$	(35	)	$	(11	)	$	10	$	961
Issuance of Class A shares under incentive plans (1,013 shares, including 373 shares from treasury)		640		—		3			—		5			—			—		8
Class A shares repurchased (1,288 shares)		—		—		—			—		(18	)		—			—		(18	)
Exercise of stock options for Class A shares (3,463 shares, including 2,028 from treasury)		1,435		—		2			—		27			—			—		29
Exercise of stock options for Class B shares		58		—		—			—		—			—			—		—
Reclassification of deferred compensation, net		—		—		(11	)		—		—			11			—		—
Tax benefit from stock options exercised and restricted stock units vested		—		—		20			—		—			—			—		20
Stock-based compensation		—		—		17			—		—			—			—		17
Net income		—		—		—			81		—			—			—		81
Other comprehensive income, net of tax:
Translation adjustment		—		—		—			—		—			—			7		7

Comprehensive income		—		—		—			—		—			—			—		88

Balance at December 31, 2006		122,591	$	1	$	533		$	575	$	(21	)	$	—		$	17	$	1,105

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

F-6

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2006, 2005 and 2004


	2006			2005			2004
	(Dollars in millions)

Cash flows from operating activities:
Net income	$	81		$	111		$	94
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		79			59			54
Impairment of assets		46			4			—
Stock-based compensation		17			3			2
Change in deferred taxes		(17	)		10			8
Excess tax benefits from stock-based compensation arrangements		(7	)		—			—
Other non-cash items		4			—			(2	)
Changes in assets and liabilities (net of effects from acquisitions of businesses):
Accounts receivable, net		(49	)		(47	)		(24	)
Prepaid expenses		(3	)		(5	)		(2	)
Deferred contract costs		(30	)		(45	)		(35	)
Accounts payable and accrued liabilities		33			3			4
Accrued compensation		2			(14	)		25
Current and non-current deferred revenue		50			27			24
Income taxes		5			28			17
Other current and non-current assets		1			12			(5	)
Other current and non-current liabilities		1			4			(2	)

Total adjustments		132			39			64

Net cash provided by operating activities		213			150			158

Cash flows from investing activities:
Purchases of property, equipment and software		(93	)		(70	)		(33	)
Acquisitions of businesses, net of cash acquired of $0, $6, and $0, respectively		(29	)		(98	)		(12	)
Purchases of short-term investments		(689	)		—			—
Net proceeds from sale of short-term investments		556			—			38

Net cash used in investing activities		(255	)		(168	)		(7	)

Cash flows from financing activities:
Repayment of long-term debt		—			(79	)		—
Proceeds from issuance of long-term debt		—			77			—
Proceeds from issuance of common and treasury stock		37			24			25
Excess tax benefits from stock-based compensation arrangements		7			—			—
Purchases of treasury stock		(18	)		(42	)		—
Other		1			(2	)		—

Net cash provided by (used in) financing activities		27			(22	)		25

Effect of exchange rate changes on cash and cash equivalents		5			(5	)		5

Net (decrease) increase in cash and cash equivalents		(10	)		(45	)		181
Cash and cash equivalents at beginning of year		260			305			124

Cash and cash equivalents at end of year	$	250		$	260		$	305

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

F-7

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Nature of Operations and Summary of Significant Accounting Policies

Perot Systems Corporation, a Delaware corporation, is a worldwide provider of information technology (commonly referred to as IT) services and business solutions to a broad range of customers. We offer our customers integrated solutions designed around their specific business objectives, and these services include infrastructure services, applications services, business process services, and consulting services. Our significant accounting policies are described below.

Principles of consolidation

Our consolidated financial statements include the accounts of Perot Systems Corporation and all domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated.

Although we have no significant investments in unconsolidated companies as of December 31, 2006, 2005, and 2004, our policy is to account for investments in companies in which we have the ability to exercise significant influence over operating and financial policies by the equity method. Accordingly, our share of the earnings (losses) of these companies is included in consolidated net income. Investments in unconsolidated companies that are less than 20% owned, where we have no significant influence over operating and financial policies, are carried at cost. We periodically evaluate whether impairment losses must be recorded on each investment by comparing the projection of the undiscounted future operating cash flows to the carrying amount of the investment. If this evaluation indicates that future undiscounted operating cash flows are less than the carrying amount of the investment, the underlying investment is written down by charges to expense so that the carrying amount equals the future discounted cash flows.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, realizability of deferred contract costs, impairments of goodwill, long-lived assets, and intangible assets, accrued liabilities, income taxes, restructuring costs, and loss contingencies associated with litigation and disputes.

Our estimates are based on historical experience and various other assumptions, including assumptions about counterparty financial condition and future business volumes above contractual minimums, which we believe are reasonable under the circumstances and that form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Cash equivalents

All highly liquid investments with original maturities of three months or less that are purchased and sold generally as part of our cash management activities are considered to be cash equivalents.

Revenue recognition

We provide services to our customers under contracts that contain various pricing mechanisms and other terms. The fees under these arrangements are generally based on the level of effort incurred in delivering the services, including cost plus and time and materials fee arrangements, on a contracted fixed price for contracted services, or

F-8

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

on a contracted per-unit price for each unit of service delivered. These services generally fall into one of the following categories:


	•	Infrastructure services — include data center and systems management, Web hosting and Internet access, desktop solutions, messaging services, program management, hardware maintenance and monitoring, network management, including VPN services, service desk capabilities, physical security, network security, and risk management. We typically hire a significant portion of the customer’s staff that have supported these functions. We then apply our expertise and operating methodologies to increase the efficiency of the operations, which usually results in increased operational quality at a lower cost. The term of our outsourcing contracts generally ranges between five and ten years.

	•	Consulting services — include services such as strategy consulting, enterprise consulting, technology consulting, and research. The consulting services provided to customers within our Industry Solutions and Government Services segments typically consist of customized, industry-specific business solutions provided by associates with industry expertise. The consulting services provided within the Consulting and Application Solutions segment includes the implementation of prepackaged software applications. Consulting services are typically viewed as discretionary services by our customers, with the level of business activity depending on many factors, including economic conditions and specific customer needs. The term of our applications services contracts varies based on the complexity of the services provided and the customers’ needs.

	•	Applications services — include services such as application development and maintenance, including the development and maintenance of custom and packaged application software for customers, and application systems migration and testing, which includes the migration of applications from legacy environments to current technologies, as well as performing quality assurance functions on custom applications. We also provide other applications services such as application assessment and evaluation, hardware and architecture consulting, systems integration, and Web-based services. The term of our business process services contracts generally ranges from month-to-month to five years.

	•	Business process services — include services such as product engineering, claims processing, life insurance policy administration, call center management, payment and settlement management, security, and services to improve the collection of receivables. In addition, business process services include engineering support and other technical and administrative services that we provide to the U.S. federal government. The term of our business process services contracts generally ranges from month-to-month to five years.

Accounting for Revenue in Single-Deliverable Arrangements

F-9

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pattern. If our obligations are being fulfilled in a pattern that is not consistent over the term of a contract, then we would recognize revenue consistent with the proportion of our obligations fulfilled in each period. In determining the proportion of our obligations fulfilled in each period, we consider the nature of the deliverables we are providing to the customer and whether the volumes of those deliverables are easily measured, such as when we provide a contractual number of full time equivalent associate resources. If the amount of our obligations fulfilled in each period is not easily distinguished by reference to the volumes of services provided, then we would recognize revenue on a straight-line basis.

Revenue for services priced under time and materials contracts and unit-priced contracts is recognized as the services are provided at the contractual unit price.

Accounting for Revenue in Multiple-Deliverable Arrangements

F-10

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of our adoption of EITF 00-21 in 2003, we recognized revenue of approximately $5 million, $3 million, and $3 million during the years ended December 31, 2006, 2005, and 2004, respectively, that were recognized prior to 2003 under our accounting for revenue prior to the adoption of EITF 00-21 and were also included in the cumulative effect of a change in accounting principle, which we recorded in the first quarter of 2003.

Contract costs

Year-end bonus plan

F-11

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contingencies

Research and development costs

Research and development costs are included in SG&A, are charged to expense as incurred, and were $3 million, $2 million, and $3 million in the years ended December 31, 2006, 2005, and 2004, respectively.

Property, equipment and purchased software

Buildings are stated at cost and are depreciated on a straight-line basis using estimated useful lives of 20 to 30 years. Computer equipment and furniture are stated at cost and are depreciated on a straight-line basis using estimated useful lives of two to seven years. Leasehold improvements are amortized over the shorter of the lease term, the estimated useful life of the improvement, or seven years. Purchased software that is utilized either internally or in providing services is capitalized at cost and amortized on a straight-line basis over the lesser of its useful life or the term of the related contract.

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in the consolidated income statements. Expenditures for repairs and maintenance are expensed as incurred.

Capitalized software development costs

We capitalize internal software development costs for software we sell to our customers in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” This statement specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features and technical performance requirements. We cease capitalization and begin amortization of internally developed software when the product is made available for general release to customers, and thereafter, any maintenance and customer support is charged to expense as incurred. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software of three to five years, but amortization may be accelerated to ensure that the software costs are amortized in a manner consistent with the anticipated timing of product revenue. We continually evaluate the recoverability of capitalized software development costs, which are reported at the lower of unamortized cost or net realizable value.

We also capitalize internal software development costs for software we use internally in accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” This statement specifies that computer software development costs for computer software intended for internal use occur in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage,

F-12

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

where costs are expensed as incurred. We cease capitalization of developed software for internal use when the software is ready for its intended use and placed in service. We amortize such capitalized costs on a product-by-product basis using a straight-line basis over the estimated useful lives of three to five years.

Goodwill and other intangibles

We allocate the cost of acquired businesses to the assets acquired and liabilities assumed based on estimated fair values at the date of acquisition, and any cost of the acquired companies not allocated to assets acquired or liabilities assumed is recorded as goodwill. Goodwill is not amortized, but instead is evaluated at least annually for impairment. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from twelve months to six years.

The determination of the fair value of goodwill and other intangibles requires us to make estimates and assumptions about future business trends and growth at the date of acquisition. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill or other intangibles, such revision could result in an impairment charge that could have a material impact on our financial condition and results of operations.

Goodwill is tested for impairment annually in the third quarter or whenever an event occurs or circumstances change that may reduce the fair value of the reporting unit below its book value. The impairment test is conducted for each reporting unit in which goodwill is recorded by comparing the fair value of the reporting unit to its carrying value. Fair value is determined primarily by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the goodwill of the reporting unit. If the implied fair value is less than the carrying amount of the goodwill of the reporting unit, we would recognize an impairment loss to write down the goodwill to fair value.

Impairment of long-lived assets

Long-lived assets and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Our review is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge is recorded to reduce the carrying amount to the projected future discounted cash flows.

Income taxes

F-13

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

incentive through December 31, 2005, for U.S. companies to repatriate income earned abroad by providing an 85 percent dividends received deduction for qualifying foreign dividends.

Determining the consolidated provision for income taxes involves judgments, estimates, and the application of complex tax regulations. As a global company, we are required to provide for income taxes in each of the jurisdictions where we operate, including estimated liabilities for uncertain tax positions. We are subject to income tax audits by federal, state, and foreign tax authorities and we are currently under audit by the Internal Revenue Service and the Indian tax authorities. We fully cooperate with all audits, but we defend our positions vigorously. Although we believe that we have provided adequate liabilities for uncertain tax positions, the actual liability resulting from examinations by tax authorities could differ substantially from the recorded income tax liabilities and could result in additional income tax expense. Changes to our recorded income tax liabilities resulting from the resolution of tax matters are reflected in income tax expense in the period of resolution. Other factors may cause us to revise our estimates of income tax liabilities including the expiration of statutes of limitations, changes in tax regulations, and tax rulings. Changes in estimates of income tax liabilities are reflected in our income tax provision in the period in which the factors resulting in our change in estimate become known to us. As a result, our effective tax rate may fluctuate on a quarterly basis.

Foreign operations

The consolidated balance sheets include foreign assets and liabilities of $204 million and $90 million, respectively, as of December 31, 2006, and $125 million and $60 million, respectively, as of December 31, 2005.

Assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at current exchange rates as of the respective balance sheet date, and revenue and expenses are translated at average exchange rates during each reporting period. Translation gains and losses are recorded as a component of accumulated other comprehensive income on the consolidated balance sheets.

We periodically enter into forward contracts to manage certain foreign currency transactions for periods consistent with the terms of the underlying transactions. The forward contracts generally have maturities that do not exceed twelve months.

The net foreign currency transaction gains (losses) reflected in other income (expense), net, in the consolidated income statements were approximately $1 million, $0, and $(1) million for the years ended December 31, 2006, 2005, and 2004, respectively.

Financial instruments

The carrying amounts reflected in our consolidated balance sheets for cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and short-term and long-term debt approximate their respective fair value. Fair values are based primarily on current prices for those or similar instruments.

We use derivative financial instruments for the purpose of managing specific exposures as part of our risk management program and hold all derivatives for purposes other than trading. To date, our use of such instruments has been limited to foreign currency forward contracts. We do not currently utilize hedge accounting with regard to these derivatives and record all gains and losses associated with such derivatives in the earnings of the appropriate period. In accordance with Statement of Financial Accounting Standards (FAS) No 133, “Accounting for Derivative

F-14

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Instruments and Hedging Activities,” we record the net fair value of the derivatives in accounts receivable, net, on the consolidated balance sheets.

Our short-term investments consist of Variable Rate Demand Notes (VRDN). Our VRDN investments are tax-exempt instruments of high credit quality. The primary objectives of VRDN investments are preservation of invested funds, liquidity sufficient to meet cash flow requirements, and yield. VRDN securities have variable interest rates that reset at regular intervals of one, seven, 28, or 35 days. Although VRDN securities are issued and rated as long-term securities, they are priced and traded as short-term instruments. We classify these short-term investments as available for sale in accordance with FAS 115, “Accounting for Certain Instruments in Debt and Equity Securities.” Because our VRDNs have short reset periods, their cost approximates fair value.

Concentrations of credit risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash equivalents, short-term investments, and accounts receivable. Our cash equivalents consist primarily of short-term money market deposits, which are deposited with reputable financial institutions. Our short-term investments consist of VRDNs, which are tax-exempt instruments of high credit quality. We believe the risk of loss associated with both our cash equivalents and short-term investments to be remote. We have accounts receivable from customers engaged in various industries including banking, insurance, healthcare, manufacturing, telecommunications, travel and energy, as well as government customers in defense and other governmental agencies, and our accounts receivable are not concentrated in any specific geographic region. These specific industries may be affected by economic factors, which may impact accounts receivable. Generally, we do not require collateral from our customers. We do not believe that any single customer, industry or geographic area represents significant credit risk.

No customer accounted for 10% or more of our total accounts receivable (including accounts receivable recorded in both accounts receivable, net, and long-term accrued revenue) at December 31, 2006 or at December 31, 2005.

Treasury stock

Treasury stock transactions are accounted for under the cost method. During 2006, we purchased 1,288,000 shares of Class A common stock for $18 million. We purchased 1,710,000 shares of Class A common stock and 1,458,000 shares of Class B common stock for a total $42 million during 2005. Our repurchased Class A treasury stock was utilized for employee stock plans during the year, and at December 31, 2006, we have 87,000 and 1,458,000 shares of Class A and Class B common stock, respectively in treasury. The remaining Class A treasury shares will be used for employee stock plans, acquisitions, and other uses. At December 31, 2005, we had 1,200,000 and 1,458,000 shares of Class A and Class B common stock, respectively, in treasury. At December 31, 2004, there were no shares in treasury.

Stock-based compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” which requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method. Prior to the adoption of FAS 123R and as permitted by FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” we elected to follow APB 25 and related interpretations in accounting for our employee stock options and implemented the disclosure-only provisions of FAS 123 and FAS 148. Under APB 25, stock compensation expense was recorded when the exercise price of employee stock options was less than the fair value of the underlying stock on the date of grant. For a further discussion of the impact of FAS 123R on the results of our financial statements, see Note 10, “Stock Options and Stock-Based Compensation.”

F-15

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

To account for the tax effects of stock based compensation, FAS 123R requires a calculation to establish the beginning pool of excess tax benefits, or the additional paid-in capital (APIC) pool, available to absorb any tax deficiencies recognized after the adoption of FAS 123R. Tax deficiencies arise when the actual tax benefit from the tax deduction for share-based compensation at the statutory tax rate is less than the related deferred tax asset recognized in the financial statements. We have elected the alternative transition method for calculating the APIC pool as described in FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.”

Significant accounting standards to be adopted

FASB Interpretation No. 48

FASB Statement No. 157

In September 2006, the FASB issued FAS 157, “Fair Value Measurements,” which provides guidance for using fair value to measure assets and liabilities. FAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Our adoption of FAS 157 is not expected to have a material impact on our consolidated financial statements.

2. Accounts Receivable

Accounts receivable, net, consisted of the following as of December 31:


	2006			2005
	(in millions)

Amounts billed	$	214		$	184
Amounts to be invoiced		106			85
Recoverable costs and profits		13			8
Other		13			8
Allowance for doubtful accounts		(8	)		(7	)

	$	338		$	278

With regard to amounts billed, allowances for doubtful accounts are provided based primarily on specific identification where less than full recovery of accounts receivable is expected. Amounts to be invoiced represent revenue contractually earned for services performed that are invoiced to the customer primarily in the following month. Recoverable costs and profits represent amounts recognized as revenue that have not yet been billed in accordance with the contract terms but are anticipated to be billed within one year. Other accounts receivable primarily represents amounts to be reimbursed by customers for the purchase of third party products and services that are not recorded as revenue or direct cost of services.

F-16

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Property, Equipment and Purchased Software

Property, equipment and purchased software, net, consisted of the following as of December 31:


	2006			2005
	(in millions)

Owned assets:
Land and buildings	$	157		$	125
Computer equipment		97			74
Furniture and equipment		72			54
Leasehold improvements		21			17

		347			270
Less accumulated depreciation and amortization		(153	)		(115	)

		194			155

Purchased software		74			64
Less accumulated amortization		(48	)		(39	)

		26			25

Total property, equipment and purchased software, net	$	220		$	180

Depreciation and amortization expense for property, equipment and purchased software was $55 million, $41 million, and $38 million for the years ended December 31, 2006, 2005, and 2004, respectively.

4. Acquisitions

eServ LLC

On February 28, 2006, we acquired substantially all of the assets of eServ LLC, a provider of product engineering outsourcing services. As a result of the acquisition, we broadened our suite of BPO services for the automotive, manufacturing and industrial services markets. The initial purchase price for eServ was $21 million, of which $3 million is being held in escrow for up to approximately two years, and we may make additional payments totaling up to $7 million in cash in 2007 and 2008. The possible future payments are contingent upon eServ achieving certain financial targets for 2006 and 2007. Additionally, we may make an additional payment in 2008 to associates of eServ if certain financial conditions are met for both 2006 and 2007. Because this payment is contingent on employment after the acquisition, we will record this payment, if earned, as compensation expense on our consolidated statements of operations. The results of operations of eServ and the estimated fair value of assets acquired and liabilities assumed are included in our consolidated financial statements beginning on the acquisition date. The allocation of the eServ purchase consideration to the assets and liabilities acquired, including goodwill, is not final due to a potential contractual purchase price adjustment. The fair values of the acquired purchased software and intangible assets totaled $1 million and $5 million, respectively, resulting in the estimated excess purchase price over net assets acquired of $12 million, which was recorded as goodwill on the consolidated balance sheets, was assigned to the Industry Solutions segment, and is deductible for tax purposes. Any additional future payments will be recorded as additional goodwill in the Industry Solutions segment.

F-17

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the adjusted fair values of the eServ assets acquired and liabilities assumed at the date of acquisition, which was February 28, 2006 (in millions):


Current assets	$	4
Property, equipment and purchased software, net		2
Goodwill		12
Identifiable intangible assets		5
Other non-current assets		1

		24
Current liabilities		(3	)

Total consideration paid as of December 31, 2006	$	21

This business is not considered to be material to our consolidated results of operations, financial position, and cash flows.

Technical Management, Inc.

On August 12, 2005, we acquired all of the outstanding shares of Technical Management, Inc. and its subsidiaries, including Transaction Applications Group, Inc. (TAG), a leading provider of policy administration and business process services to the life insurance and annuity industry. As a result of the acquisition, we expanded our business process services offerings to include life insurance administration. The initial purchase price for TAG was $60 million (net of $5 million of cash acquired), $3 million of which is being held in an escrow account for up to approximately 18 months, and we may make additional payments totaling up to $10 million in cash or stock during 2007. The possible future payments are contingent upon TAG achieving certain financial targets over the same period, and at our discretion, up to 15% of these payments may be settled in our Class A Common Stock. During 2006, we determined that TAG met their financial targets for 2005, and we paid $8 million of additional consideration in cash. The net amount of $8 million was recorded as additional goodwill that was assigned to the Industry Solutions segment and is not deductible for tax purposes. The results of operations of TAG and the estimated fair value of assets acquired and liabilities assumed are included in our consolidated financial statements beginning on the acquisition date. As of December 31, 2006, the estimated excess purchase price over net assets acquired of $57 million was recorded as goodwill on the consolidated balance sheets, was assigned to the Industry Solutions segment, and is not deductible for tax purposes. We completed the appraisal of tangible assets and the purchase price adjustment in 2006.

The following table summarizes the adjusted fair values of the TAG assets acquired and liabilities assumed at the date of acquisition, which was August 12, 2005 (in millions):


Current assets	$	11
Property, equipment and purchased software, net		9
Goodwill		57
Identifiable intangible assets		13
Other non-current assets		5

		95
Current liabilities		(7	)
Other non-current liabilities		(15	)

Total consideration paid as of December 31, 2006	$	73

F-18

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reflects pro forma combined results of operations as if the acquisition had taken place at the beginning of the calendar year for each of the periods presented and included an estimate for amortization expense for identifiable intangible assets that were acquired:


	2005		2004
	(Unaudited)
	(in millions)

Revenue	$	2,031	$	1,818
Income before taxes		175		134
Net income		108		94
Basic earnings per share of common		0.92		0.81
Diluted earnings per share of common stock		0.89		0.78

The pro forma results for the year ended December 31, 2005, include a predominantly non-cash charge of $7 million (approximately $4 million, net of the applicable income tax benefit) resulting primarily from modifications of certain share-based payments made by TAG to former holders of options to buy shares of its common stock prior to the acquisition in 2005. In our opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 2005 or 2004, nor are they indicative of future operations of the combined companies under our ownership and management.

PrSM Corporation

In July 2005, we acquired all of the outstanding shares of PrSM Corporation for $7 million in cash (net of $42,000 of cash acquired). PrSM is a safety, environmental and engineering services company that provides services to various government agencies, including the U.S. Department of Energy, the U.S. Department of Defense and NASA. The allocation of the PrSM purchase consideration to the assets and liabilities acquired resulted in goodwill of $7 million, which was assigned to the Government Services segment and is not deductible for tax purposes. This business is not considered to be material to our consolidated results of operations, financial position and cash flows.

Perot Systems TSI B.V.

In 1996, we entered into a joint venture with HCL Technologies whereby we each owned 50% of HCL Perot Systems B.V. (HPS), an information technology services company based in India. On December 19, 2003, we acquired HCL Technologies’ shares in HPS, and changed the name of HPS to Perot Systems TSI B.V., which now operates within our Consulting and Applications Solutions line of business. This transaction was accounted for as a step acquisition under the purchase method of accounting. TSI specializes in business transformation and application outsourcing and currently serves customers in Australia, Germany, India, Japan, Malaysia, Singapore, Switzerland, the United Kingdom, and the United States. As a result of the acquisition, we expanded the geographical areas in which we provide services and broadened our customer base in our application development service offering.

The consideration paid in 2003 for the equity interests in TSI held by HCL Technologies and certain minority interest holders was $99 million in cash (including acquisition costs and net of $13 million of cash acquired). During 2004, we granted stock options to purchase approximately 500,000 shares of our common stock at exercise prices below fair value in exchange for the outstanding stock options of TSI. As a result, we recorded $5 million as additional paid-in capital relating to the fair value of the stock options granted, $3 million as additional goodwill, and $2 million as deferred compensation, which is not additional purchase price consideration. In addition, during 2004 we repurchased the remaining outstanding shares of TSI held by minority interests for $3 million in cash, recorded additional goodwill of $3 million and recorded $1 million in other adjustments to total consideration that increased goodwill.

F-19

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2004, we also completed the appraisals of the acquired tangible and intangible assets, which resulted in an increase to the value allocated to land of $4 million, the recording of acquired intangibles of $8 million, other reductions to net assets acquired of $1 million, and a net reduction to goodwill of $11 million. For each of the years ended December 31, 2006 and 2005, we adjusted our pre-acquisition income tax liabilities to reduce them by approximately $1 million, which resulted in a decrease to goodwill of approximately $2 million. The excess purchase price over net assets acquired of $65 million was recorded as goodwill on the consolidated balance sheets, was assigned to the Consulting and Applications Solutions segment, and is not deductible for tax purposes.

Soza & Company, Ltd.

On February 20, 2003, we acquired all of the outstanding shares of Soza & Company, Ltd., 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, we increased our customer base and service offerings in the Government Services reporting segment. The initial purchase price for Soza was $74 million in cash (net of $3 million in cash acquired). The purchase agreement contained provisions that included additional payments of up to $32 million, which were dependent on Soza achieving certain financial targets in 2003 and 2004. At our discretion, up to 70% of this additional consideration could have been settled in our Class A Common Stock. Soza met the financial target for 2003, and we paid additional consideration of $15 million in 2004, consisting of $6 million in cash and $9 million in form of 641,000 shares of our Class A Common stock. Soza also met the financial target for 2004, and we paid additional consideration of $17 million in cash in 2005.

ADI Technology Corporation

On July 1, 2002, we acquired all of the outstanding shares of ADI Technology Corporation, a professional services company that provides technical, information, and management disciplines to the Department of Defense and other governmental agencies. As a result of the acquisition, we expanded into a Government Services reporting segment.

The initial purchase price for ADI was $38 million in cash (net of $45,000 in cash acquired). The purchase agreement contained provisions that included additional payments of up to $15 million, which were dependent on ADI achieving certain annual financial targets in 2002 through 2004. At our discretion, up to 60% of this additional consideration could have been settled in our Class A Common Stock. During 2003, we determined that ADI met the financial target for 2002, and we paid $1 million of additional cash consideration, which was net of a contractual purchase price adjustment of $2 million. During 2004, we determined that ADI met the financial target for 2003, and we paid $5 million of additional consideration, consisting of $3 million in cash and $2 million in the form of 175,000 shares of our Class A Common Stock. During 2005, we determined that ADI met the financial target for 2004, and we paid $7 million of additional consideration in cash.

Other acquisitions

Additionally, during the years ended December 31, 2005 and 2004, we paid additional consideration for other acquired businesses that met financial targets that individually and in the aggregate were not material to our consolidated results of operations, financial position or cash flows in the year acquired.

F-20

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005, by reportable segment are as follows:


						Consulting
						and
	Industry			Government		Applications
	Solutions			Services		Solutions			Total
	(in millions)

Balance as of January 1, 2005	$	195		$	97	$	67		$	359
Additional goodwill for ADI acquisition		—			7		—			7
Additional goodwill for Soza acquisition		—			17		—			17
Goodwill resulting from PrSM acquisition		—			7		—			7
Goodwill resulting from TAG acquisition		49			—		—			49
Other		6			—		(1	)		5

Balance as of December 31, 2005		250			128		66			444
Goodwill resulting from eServ acquisition		12			—		—			12
Additional goodwill resulting from TAG acquisition		8			—		—			8
Reclassification of goodwill due to change in reporting units		(15	)		—		15			—
Other		—			—		(1	)		(1	)

Balance as of December 31, 2006	$	255		$	128	$	80		$	463

During the first quarter of 2006, we combined the Consulting Solutions group, which was previously included in our Commercial Solutions group in the Industry Solutions line of business, with the Applications Solutions line of business. As a result of this change, we allocated the goodwill from the Consulting Solutions group to both the Commercial Solutions group and the Consulting and Applications Solutions line of business based on the relative fair values of the Commercial Solutions group and the Consulting Solutions group.


6.	Deferred Contract Costs, Net, and Other Non-Current Assets

Deferred contract costs, net

F-21

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$4 million of deferred costs and $8 million of deferred revenue over the term of the modified contract of approximately seven years.

The remaining balances of deferred contract costs, net, at December 31, 2006 and 2005, relate primarily to deferred contract setup costs, which are amortized on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. Amortization expense for deferred contract setup costs was $11 million, $5 million, and $2 million for the years ended December 31, 2006, 2005, and 2004, respectively.

Other non-current assets

Other non-current assets consist of the following as of December 31:


	2006		2005
	(in millions)

Non-current prepaid assets	$	9	$	11
Sales incentives, net		8		15
Identifiable intangible assets, net		19		23
Non-current deferred tax asset, net		7		—
Other non-current assets		11		10

	$	54	$	59


	Sales incentives

In certain arrangements we may pay consideration to the customer at the beginning of a contract as a sales incentive, which is most commonly in the form of cash. This consideration is recorded in other non-current assets on the consolidated balance sheets and is amortized as a reduction to revenue over the term of the related contract. Amortization for sales incentives was $3 million for each of the years ended December 31, 2006, 2005, and 2004.


	Identifiable intangible assets

Identifiable intangible assets are recorded in other non-current assets in the consolidated balance sheets and are composed of:


	As of December 31, 2006							As of December 31, 2005
	Gross					Net		Gross					Net
	Carrying		Accumulated			Book		Carrying		Accumulated			Book
	Value		Amortization			Value		Value		Amortization			Value
	(in millions)

Service mark	$	5	$	(4	)	$	1	$	6	$	(4	)	$	2
Customer-based assets		38		(22	)		16		34		(15	)		19
Other intangible assets		7		(5	)		2		7		(5	)		2

Total	$	50	$	(31	)	$	19	$	47	$	(24	)	$	23

Total amortization expense for identifiable intangible assets was $8 million, $6 million, and $10 million, for the years ended December 31, 2006, 2005, and 2004, respectively. Amortization expense is estimated at $7 million, $5 million, $4 million, and $3 million for the years ended December 31, 2007 through 2010, respectively. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from one to six years. The weighted average useful life is approximately four years.

F-22

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following as of December 31:


	2006		2005
	(in millions)

Operating expenses	$	72	$	54
Accrued subcontractor costs		20		20
Taxes other than income		5		4
Other		8		4

	$	105	$	82

Accrued operating expenses include liabilities recorded for both corporate and contract-related needs, including accruals for employee benefit plan costs and other general expenditures.


8.	Debt

Long-term debt

As discussed above in Note 6, “Deferred Contract Costs, net and Other Non-Current Assets,” in September 2006, we signed a promissory note to pay a customer $12 million over four years and recorded the present value of the note of $11 million as a reduction of deferred revenue. At December 31, 2006, $3 million is included in accrued and other current liabilities and $7 million is recorded in long-term debt on the consolidated balance sheet.

Credit facility

In January 2004, we entered into a three-year credit facility with a syndicate of banks that allows us to borrow up to $100 million. In March 2005, we executed a restated and amended agreement that expanded the facility to $275 million and extended the term to five years. In August 2006, a further amendment to the agreement extended the maturity date of the facility to August 2011. Borrowings under the credit facility will be either through loans or letter of credit obligations. The credit facility is guaranteed by certain of our domestic subsidiaries. In addition, we have pledged a portion of the stock of one of our non-domestic subsidiaries as security on the facility. Interest on borrowings varies with usage and begins at an alternate base rate, as defined in the credit facility agreement, or the LIBOR rate plus an applicable spread based upon our debt/EBITDA ratio applicable on such date. We are also required to pay a facility fee based upon the unused credit commitment and certain other fees related to letter of credit issuance. The credit facility matures in August 2011 and requires certain financial covenants, including a debt/EBITDA ratio and a minimum interest coverage ratio, each as defined in the credit facility agreement. As discussed above, in March 2005 we borrowed $77 million against the credit facility. In January 2007, we borrowed an additional $75 million in connection with our acquisition of QSS Group, Inc., which is discussed further in Note 20, “Subsequent Event.”

F-23

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. Common and Preferred Stock

Class B Convertible Common Stock

The Class B shares were authorized in conjunction with the provisions of the original service agreements with Swiss Bank Corporation, one of the predecessors of UBS AG, which were signed in January 1996. Class B shares are non-voting and convertible into Class A shares, but otherwise are equivalent to the Class A shares.

Under the terms and conditions of the UBS agreements, each Class B share shall be converted, at the option of the holder, on a share-for-share basis, into a fully paid and non-assessable Class A share upon sale of the share to a third-party purchaser under one of the following circumstances: 1) in a widely dispersed offering of the Class A shares; 2) to a purchaser of Class A shares who prior to the sale holds a majority of our stock; 3) to a purchaser who after the sale holds less than 2% of our stock; 4) in a transaction that complies with Rule 144 under the Securities Act of 1933, as amended; or 5) any sale approved by the Federal Reserve Board of the United States.

During 1997, we concluded a renegotiation of the terms of our strategic alliance with UBS. Under these terms and conditions, we sold to UBS 100,000 shares of our Class B stock at a purchase price of $3.65 per share. These shares are fully vested as of January 1, 2007.

Under the terms and conditions of the same 1997 agreement, we sold UBS options to purchase 7,234,000 shares of our Class B Common Stock at a non-refundable cash purchase price of $1.125 per option. Prior to 2005, UBS had exercised 6,476,000 of these options in accordance with this plan, 700,000 shares were exercised during 2005, and 58,000 were exercised during 2006. Of the total 7,334,000 Class B shares issued to UBS, 5,059,000 were converted to Class A shares prior to 2005 and 1,458,000 were repurchased from UBS during 2005 for $19 million and are currently held in treasury. The remaining 817,000 Class B shares are outstanding as of December 31, 2006, and are fully vested as of January 1, 2007.

Preferred stock

In July 1998, our Board of Directors approved an amendment to our Certificate of Incorporation that authorized 5 million shares of Preferred Stock, the rights, designations, and preferences of which may be designated from time to time by the Board of Directors. On January 5, 1999, our Board of Directors authorized two series of Preferred Stock in connection with the adoption of a Stockholder Rights Plan: 200,000 shares of Series A Junior Participating Preferred Stock, par value $.01 per share (the Series A Preferred Stock), and 10,000 shares of Series B Junior Participating Preferred Stock, par value $.01 per share (the Series B Preferred Stock and, together with the Series A Preferred Stock, the Preferred Stock).

Stockholder rights plan

As mentioned above, we have a Stockholder Rights Plan, pursuant to which one Class A Right and one Class B Right (Right, or together, the Rights) is attached to each respective share of Class A and Class B Common Stock. Each Right entitles the registered holder to purchase a unit consisting of one one-thousandth of a share of Series A or Series B Preferred Stock from us, at a purchase price of $55.00 per share, subject to adjustment. These Rights have certain anti-takeover effects and will cause substantial dilution to a person or group that attempts to acquire us in certain circumstances. Accordingly, the existence of these Rights may deter certain acquirors from making takeover proposals or tender offers.

Employee stock purchase plan

Eligible associates participate in an employee stock purchase plan (the ESPP), which provides for the issuance of a maximum of 20 million shares of Class A Common Stock and is divided into separate U.S. and Non-U.S. plans in order to ensure that United States employees continue to receive tax benefits under Sections 421 and 423 of the United States Internal Revenue Code. Eligible employees may have up to 10% of their earnings withheld to be used

F-24

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to purchase shares of our common stock on specified dates determined by the Board of Directors. The price of the common stock purchased under the ESPP will be equal to 85% of the fair value of the stock on the exercise date for the offering period.


10.	Stock Options and Stock-Based Compensation

Stock-based compensation

We adopted FAS 123R using the modified prospective method. Under this transition method, stock compensation expense for 2006 included the cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006, as well as those share-based payments granted subsequent to December 31, 2005. This compensation cost was based on the grant-date fair values determined in accordance with FAS 123 and FAS 123R, which we estimate using the Black-Scholes option pricing model and recognize ratably, less estimated forfeitures, over the vesting period, in direct cost of services or in selling, general and administrative expenses. In addition, upon adoption of FAS 123R we began recording the related deferred income tax benefits associated with stock compensation expense and began reflecting the excess tax benefits of stock-based compensation awards in cash flows from financing activities. Results for prior periods have not been restated.

For the year ended December 31, 2006, stock option compensation expense and costs associated with our employee stock purchase plan (ESPP) recorded in direct cost of services and selling, general and administrative expenses, as well as the decrease in diluted earnings per common share, were as follows:


	2006
	(in millions)

Direct cost of services	$	6
Selling, general and administrative expenses		8

Total stock compensation expense from stock options and ESPP		14
Stock compensation expense from stock options and ESPP, net of tax		10
Decrease in diluted earnings per share of common stock	$	0.08

Stock compensation expense related to restricted stock units was $3 million ($2 million net of tax), $3 million ($2 million net of tax), and $2 million ($1 million net of tax) for the years ended December 31, 2006, 2005, and 2004, respectively.

At December 31, 2006, there was $42 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested options and restricted stock units, which is expected to be recognized over a weighted-average period of 2.3 years.

F-25

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the effect on net income and earnings per common share as if we had elected to adopt the expense recognition provisions of FAS 123 for the years ended December 31, 2005 and 2004:


	2005			2004
	(in millions)

Net income
As reported	$	111		$	94
Add: stock-based compensation expense included in reported net income, net of related tax effects		2			1
Less: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(27	)		(19	)

Pro forma	$	86		$	76
Earnings per share of common stock
Basic:
As reported	$	0.94		$	0.82
Pro forma	$	0.73		$	0.66
Diluted:
As reported	$	0.91		$	0.78
Pro forma	$	0.72		$	0.64

We utilize the Black-Scholes option pricing model to calculate our actual and pro forma stock-based employee compensation expense and the assumptions used for each period are as follows:


	2006			2005			2004

Weighted average risk free interest rates		4.7	%		4.4	%		3.1	%
Weighted average life (in years)		5.0			4.6			3.2
Volatility		31	%		43	%		43	%
Expected dividend yield		0	%		0	%		0	%
Weighted average grant-date fair value per share of options granted at fair market value	$	5.32		$	6.05		$	5.27
Weighted average grant-date fair value per share of options granted below fair market value	$	—		$	—		$	8.81
Weighted average grant-date fair value per share of options granted above fair market value	$	—		$	3.14		$	—

Prior to January 1, 2006, with the exception of grants with cliff vesting and acceleration features, the expected life of each grant was generally estimated to be a period equal to one half of the vesting period, plus one year. The expected life for cliff vesting grants was generally 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. For those stock options granted subsequent to December 31, 2005, we estimated the expected life of each grant as the weighted average expected life of each tranche of the granted option, which was determined based on the sum of each tranche’s vesting period plus one-half of the period from the vesting date of each tranche to its expiration. For the year ended December 31, 2006, expected volatility of our stock price was based on implied volatilities from traded options on our common stock and on historical volatility over the expected term of the granted option. For the years ended December 31, 2005 and 2004, expected volatility of our stock price was based on only historical volatility over the expected term of the granted option. The estimated fair value is not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

To reduce future stock option compensation expense that we would otherwise recognize in our consolidated income statements with the adoption of FAS 123R, “Share-Based Payments,” and to further advance our corporate compensation objectives, in November 2005 we extended an offer to eligible employees to exchange certain

F-26

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

unvested stock options to purchase Class A common stock for fully vested replacement stock options to purchase 90% of the original number of shares of our Class A common stock. The stock options that were eligible to be exchanged were only those options to purchase shares of our Class A common stock at $25.00 per share that were scheduled to vest in March 2010. Of the 2,861,000 stock options eligible for exchange, employees representing approximately 72% of the eligible options accepted the offer, and we granted 1,859,000 fully vested replacement stock options to those employees. Also to reduce future stock option compensation expense, we accelerated the vesting for the remaining 795,000 stock options, but the underlying shares resulting from the future exercise of these stock options may not be sold prior to the original vesting date in March 2010. As a result of the offer and the acceleration of the remaining 795,000 stock options, our 2005 pro forma net income and diluted earnings per common share above were reduced by $12 million and $0.10, respectively.

Description of stock-based compensation plans

Below are descriptions of our active stock-based compensation plans, as well as our 1996 Non-Employee Director Stock Option/Restricted Stock Plan and our 1991 Stock Option Plan, under which a significant number of stock options remain outstanding.

2001 Long-Term Incentive Plan

In 2001, we adopted the 2001 Long-Term Incentive Plan under which employees, directors, or consultants may be granted stock options, stock appreciation rights, and restricted stock or may be issued cash awards, or a combination thereof. Under the 2001 Plan, stock option awards may be granted in the form of incentive stock options or non-statutory stock options. The exercise price of any incentive stock option issued is the fair market value on the date of grant, and the term of which may be no longer than ten years from the date of grant. The exercise price of a non-statutory stock option may be no less than 85% of the fair value on the date of grant, except under certain conditions specified in the 2001 Plan, and the term of a non-statutory stock option may be no longer than eleven years from the date of grant. The vesting period for all options is determined upon grant date, and the options usually vest over a three- to ten-year period, and in some cases can be accelerated through attainment of performance criteria. The options are exercisable from the vesting date, and unexercised vested options are canceled following the expiration of a certain period after the employee’s termination date.

2006 Non-Employee Director Equity Compensation Plan

In 2006, we adopted the 2006 Non-Employee Director Equity Compensation Plan. This plan provides for the issuance of up to 500,000 Class A common shares to non-employee Board members at a designated amount on June 1 of every year. Shares under the plan would be immediately vested upon the grant date and would have no restrictions. The non-employee Board members may elect to defer receipt of a future stock award to the date his or her service terminates.

1996 Non-Employee Director Stock Option/Restricted Stock Plan

In 1996, we adopted the 1996 Non-Employee Director Stock Option/Restricted Stock Plan. No new shares or options will be granted under this plan as the plan was terminated in 2006; however, provisions of this plan will remain in effect for all currently outstanding options granted under this plan. This plan provided for the issuance of up to 800,000 Class A common shares or options to Board members who are not our employees. Shares or options issued under the plan are subject to one- to five-year vesting, with options expiring after an eleven-year term. The purchase price for shares issued and exercise price for options issued is the fair value of the shares at the date of issuance. Other restrictions were established upon issuance. The options are exercisable from the vesting date, and unexercised vested options are canceled following the expiration of a certain period after the Board member’s termination date.

F-27

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1991 Stock Option Plan

In 1991, we adopted the 1991 Stock Option Plan, which was amended in 1993 and 1998. No additional stock options will be granted under this plan as the plan was terminated in 2001; however, provisions of this plan will remain in effect for all outstanding options that were granted under this plan. Pursuant to the 1991 Plan, options to purchase Class A common shares could be granted to eligible employees. Prior to the date of our initial public offering, such options were generally granted at a price not less than 100% of the fair value of our Class A common shares, as determined by the Board of Directors and based upon an independent third-party valuation. Subsequent to our initial public offering date, the exercise price for options issued was the fair market value of the shares on the date of grant. The stock options vest over a three- to ten-year period based on the provisions of each grant, and in some cases can be accelerated through the attainment of performance criteria. The options are usually exercisable from the vesting date, and unexercised vested options are canceled following the expiration of a certain period after the employee’s termination date.

Activity in our stock-based compensation plans

Activity in stock options for Class A Common Stock was as follows (options in thousands):


	2006					2005					2004
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Options			Price		Options			Price		Options			Price

Outstanding at January 1		25,342			14.81		29,904			14.68		32,907			13.99
Granted		1,543			14.89		3,755			19.26		2,651			13.34
Exercised		(3,451	)		8.54		(2,306	)		6.08		(2,911	)		5.74
Forfeited		(5,265	)		20.33		(6,011	)		20.27		(2,743	)		14.62
Outstanding at December 31		18,169			14.42		25,342			14.81		29,904			14.68
Exercisable at December 31		10,731			14.97		15,702			16.14		12,410			14.37

For outstanding and exercisable options at December 31, 2006, the weighted average remaining contractual term (in years) is 4.56 and 4.17 respectively. For outstanding and exercisable options at December 31, 2006, the aggregate intrinsic value is $62 million and $40 million respectively.

The following table summarizes information about options for Class A Common Stock outstanding at December 31, 2006 (options in thousands):


	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
			Exercise		Remaining				Exercise
Range of Prices	Options		Price		Life		Options		Price

$0.25 - $5.00		997	$	2.21		1.01		855	$	2.06
$5.01 - $10.00		2,252		9.66		5.33		1,942		9.66
$10.01 - $15.00		9,076		12.89		4.65		3,383		12.22
$15.01 - $20.00		2,235		16.24		5.01		1,134		16.52
$20.01 - $25.00		3,609		23.46		4.43		3,417		23.44

Total		18,169		14.42		4.56		10,731		14.97

We have 48,762,994 shares reserved for issuance under our equity compensation plans.

F-28

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about the aggregate intrinsic value and income tax benefits from the exercise of our Class A stock options and the vesting of restricted stock units during the years ended December 31, 2006, 2005, and 2004, as well as the amount of cash received from our stock-based compensation arrangements for the same periods:


	2006		2005		2004
	(in millions)

Aggregate intrinsic value of Class A stock options exercised and restricted stock units vested	$	25	$	20	$	26
Income tax benefits from the exercise of Class A stock options and restricted stock units vested		9		5		9
Cash received from our stock-based compensation arrangements		37		21		23

Of the total income tax benefit of $9 million, $5 million, and $9 million for the years ended December 31, 2006, 2005, and 2004, respectively, $7 million, for 2006, was reflected as excess tax benefits from stock-based compensation arrangements in net cash provided by financing activities in our consolidated statements of cash flow for the same period. There was no excess tax benefit for the years ended December 31, 2005 and 2004. In addition, upon adoption of FAS 123R, we reclassified the deferred compensation balance at December 31, 2005, of $11 million, which related primarily to the unearned compensation expense on restricted stock units, to additional paid-in capital.

The number of outstanding nonvested restricted stock units was 957,000, 807,000, and 574,000 for the years ended December 31, 2006, 2005, and 2004, respectively, with a weighted-average grant-date fair value per share of $14.60, $14.42, and $15.10, respectively. The number of nonvested restricted stock units that vested or forfeited during the year ended December 31, 2006 was insignificant.


11.	Termination of a Business Relationship

In 2001, we entered into a long-term fixed-price IT outsourcing contract with a customer that included various non-construction services and a construction service, which was an application development project. In 2003, we recorded losses on this contract totaling approximately $37 million, and we exited the contract. We completed the services necessary to transition certain functions back to the customer during the fourth quarter of 2003. In 2004, we filed a claim in arbitration to recover amounts we believed were due under this contract, and the other party filed counterclaims. In the second quarter of 2005, we settled this dispute, which resulted in a payment to us of approximately $7 million and a reduction of liabilities of approximately $3 million, both of which were recorded as a reduction to direct cost of services in 2005.


12.	Income Taxes

Income before taxes for the years ended December 31 was as follows:


	2006		2005		2004
	(in millions)

Domestic	$	77	$	137	$	111
Foreign		43		43		24

	$	120	$	180	$	135

F-29

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The provision for income taxes charged to operations was as follows:


	2006			2005		2004
	(in millions)

Current:
U.S. federal	$	44		$	42	$	22
State and local		4			5		3
Foreign		7			11		6

Total current		55			58		31

Deferred:
U.S. federal		(15	)		10		16
State and local		—			1		2
Foreign		(1	)		—		(8	)

Total deferred		(16	)		11		10

Total provision for income taxes	$	39		$	69	$	41

The tax benefits recorded directly to additional paid-in-capital from stock options exercised and restricted stock units vested were $20 million, $3 million, and $9 million in 2006, 2005, and 2004, respectively.

We have foreign net operating loss carryforwards of $41 million to offset future foreign taxable income that do not expire. We have U.S. federal net operating loss carryforwards of $9 million that may be used to offset future taxable income and will begin to expire in 2018. We have state net operating losses that expire over the next 20 years. We also have state income tax credits of $4 million that may be used to offset future Nebraska income tax liability and will begin to expire in 2016.

Deferred tax assets (liabilities) consist of the following at December 31:


	2006			2005
	(in millions)

Accrued liabilities	$	45		$	41
Accrued revenue		22			21
Loss carryforwards		15			17
Property and equipment		9			6
Stock-based compensation		4			—
Tax credits		4			4
Bad debt reserve		2			3
Other		3			5

Gross deferred tax assets		104			97

Deferred costs		(25	)		(33	)
Intangible assets		(20	)		(21	)
Investments in subsidiaries		(11	)		(11	)
Other		(1	)		(2	)

Gross deferred tax liabilities		(57	)		(67	)

Valuation allowance		(15	)		(16	)

Net deferred tax assets	$	32		$	14

F-30

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2006, we had deferred tax assets in excess of deferred tax liabilities of $47 million. Based upon our estimates of future taxable income and review of available tax planning strategies, we believe it is more likely than not that $32 million of such assets will be realized, resulting in a valuation allowance at December 31, 2006, of $15 million relating primarily to certain foreign jurisdictions. The valuation allowance decreased by $1 million during 2006, including $2 million recorded as a component of income tax expense, offset by an increase of $1 million due to foreign currency translation adjustments on our foreign valuation allowances.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income before taxes, as a result of the following differences:


	2006			2005			2004
	(in millions)

Statutory U.S. tax rate	$	42		$	63		$	47
State and local taxes, net of federal benefit		2			4			3
Nondeductible items		2			1			1
U.S. rates in excess of foreign rates and other		(5	)		(4	)		(4	)

		41			64			47
Resolution of prior year income tax issues		—			—			(3	)
Valuation allowance		(2	)		2			(3	)
Tax on repatriation of foreign earnings pursuant to the Act		—			3			—

Total provision for income taxes	$	39		$	69		$	41

Income tax expense for 2005 included $3 million of income tax expense on $42 million of foreign earnings repatriated pursuant to the Act. We do not provide for U.S. income tax on the undistributed earnings of our non-U.S. subsidiaries. Except for the aforementioned amounts repatriated pursuant to the Act, we intend to either permanently invest our non-U.S. earnings or remit such earnings in a tax-free manner. The cumulative amount of undistributed earnings (as calculated for income tax purposes) of our non-U.S. subsidiaries was approximately $182 million at December 31, 2006, and $150 million at December 31, 2005. Such earnings include pre-acquisition earnings of non-U.S. entities acquired through stock purchases and are intended to be invested outside of the U.S. indefinitely. The ultimate tax liability related to repatriation of such earnings is dependent upon future tax planning opportunities and is not estimable at the present time.

Our tax filings are subject to audit by the tax authorities in the jurisdictions where we conduct business. The Internal Revenue Service (IRS) and India tax authorities are currently auditing our income tax returns. These audits may result in assessments of additional taxes that are resolved with the authorities or potentially through the courts. Resolution of these matters involves some degree of uncertainty; accordingly, we provide income taxes only for the liabilities we believe will ultimately result from the proceedings.

The IRS has completed its examination of our federal income tax returns for the tax years ended December 31, 2000, through December 31, 2002, and we are appealing one issue. While the resolution of any issue under audit may result in income tax liabilities that are significantly different than the recorded liabilities, management believes the ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position or results of operation.

Certain of our subsidiaries in India, Singapore, Malaysia, and the Philippines have qualified for tax holidays and incentives. The 2006 tax benefit relating to these tax holidays and incentives was approximately $6 million (approximately $.05 per diluted share). Our India tax holidays were granted to Software Technology Parks and are scheduled to expire beginning March 2006 through March 2009. Our Singapore tax incentives were granted to encourage business development and expansion over a five-year period, which expires in September 2008. Our Malaysian subsidiary has been granted Pioneer status, which qualifies the company for a five-year tax holiday

F-31

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expiring in July 2007. Our Philippine subsidiary has been designated as an Ecozone IT Enterprise by the Philippine Economic Zone Authority, granting the company a four-year tax holiday expiring in August 2010.

13. Segment and Certain Geographic Data

We offer our services under three primary lines of business: Industry Solutions, Government Services, and Consulting and Applications Solutions. We consider these three lines of business to be reportable segments and include financial information and disclosures about these reportable segments in our consolidated financial statements. Operating segments that have similar economic and other characteristics have been aggregated to form our reportable segments. We routinely evaluate the historical performance of and growth prospects for various areas of our business, including our lines of business, delivery groups, and service offerings. Based on a quantitative and qualitative analysis of varying factors, we may increase or decrease the amount of ongoing investment in each of these business areas, make acquisitions that strengthen our market position, or divest, exit, or downsize aspects of a business area. During the past several years, we have used acquisitions to strengthen our service offerings for applications development and maintenance and business process services.

Industry Solutions, our largest line of business, provides services to our customers primarily under long-term contracts in strategic relationships. These services include technology and business process services, as well as industry domain-based, short-term project and consulting services. The Government Services segment provides consulting, engineering support, and technology-based business process solutions for the Department of Defense, the Department of Homeland Security, various federal intelligence agencies, and other governmental agencies. In the first quarter of 2006, we combined the Consulting Solutions group, which was previously included in our Commercial Solutions group in the Industry Solutions line of business, with the Applications Solutions line of business. This combined line of business, Consulting and Applications Solutions, provides software-related services, including the implementation of prepackaged software applications, application development and maintenance, and application systems migration and testing primarily under short-term contracts related to specific projects. “Other” includes our remaining operating areas and corporate activities, income and expenses that are not related to the operations of the other reportable segments, and the elimination of intersegment revenue and direct cost of services of approximately $51 million, $44 million and $30 million for the years ended December 31, 2006, 2005, and 2004, respectively, related to the provision of services by the Consulting and Applications Solutions segment to the Industry Solutions segment. The assets reported in “Other” consist primarily of cash and cash equivalents, short-term investments, and our corporate headquarters facility.

The reporting segments follow the same accounting policies that we use for our consolidated financial statements as described in the summary of significant accounting policies. Segment performance is evaluated based on income before taxes, exclusive of income and expenses that are included in the “Other” category. Substantially all corporate and centrally incurred costs are allocated to the segments based principally on expenses, employees, square footage, or usage.

F-32

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of certain financial information by reportable segment as of and for the years ended December 31, 2006, 2005, and 2004.


					Consulting and
	Industry		Government		Applications
	Solutions		Services		Solutions		Other			Total
	(in millions)

2006:
Revenue	$	1,803	$	291	$	255	$	(51	)	$	2,298
Depreciation and Amortization		58		5		7		9			79
Income before taxes		65		19		35		1			120
Total assets		687		211		189		494			1,581
2005:
Revenue	$	1,534	$	272	$	236	$	(44	)	$	1,998
Depreciation and Amortization		39		5		7		8			59
Income before taxes		125		16		39		—			180
Total assets		632		215		221		303			1,371
2004:
Revenue	$	1,332	$	263	$	208	$	(30	)	$	1,773
Depreciation and Amortization		28		5		12		9			54
Income before taxes		100		14		19		2			135
Total assets		470		163		242		351			1,226

All prior period amounts have been adjusted to reflect the combination in 2006 of the Consulting Solutions group with the Applications Solutions line of business.

During the third quarter of 2006, we recorded $44 million of expense in direct cost of services associated with the impairment of deferred software development and implementation costs relating to the modification of an existing contract. This charge is included in the Industry Solutions segment.

F-33

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized below is the financial information for each geographic area. “All Other” includes financial information from other foreign countries in which we provide services, including the following countries: Australia, Canada, China, France, Germany, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, Philippines, Romania, Singapore, Switzerland, and United Arab Emirates. Revenue for each country is based primarily on where the services are performed.


	2006		2005		2004
	(in millions)

United States:
Total revenue	$	1,894	$	1,641	$	1,456
Long-lived assets at December 31		183		145		110
United Kingdom:
Total revenue		179		168		145
Long-lived assets at December 31		1		1		1
India:
Total revenue		75		62		48
Long-lived assets at December 31		33		34		33
All Other:
Total revenue		150		127		124
Long-lived assets at December 31		3		—		—
Consolidated:
Total revenue		2,298		1,998		1,773
Long-lived assets at December 31		220		180		144

For the years ended December 31, 2006, 2005, and 2004, revenue from one customer, UBS, comprised approximately 13%, 15%, and 16% of total revenue, respectively. Our outsourcing agreement with UBS, which represented approximately 12% of our consolidated revenue for the year ended December 31, 2006, ended on January 1, 2007.

14. Commitments and Contingencies

Operating leases and maintenance agreements

We have commitments related to data processing facilities, office space and computer equipment under non-cancelable operating leases and fixed maintenance agreements for remaining periods ranging from one to ten years. Future minimum commitments under these agreements as of December 31, 2006, are as follows:


	Lease and
Year ended December 31:	Maintenance Commitments
	(in millions)
2007	$	51
2008		40
2009		27
2010		19
2011		15
Thereafter		39

Total	$	191

F-34

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Minimum payments have not been reduced by minimum sublease rental income of $2 million due in the future under non-cancelable subleases. We are obligated under certain operating leases for our pro rata share of the lessors’ operating expenses. Rent expense was $57 million, $44 million, and $31 million for the years ended December 31, 2006, 2005, and 2004, respectively. Additionally, as of December 31, 2006 and 2005, we maintained a provision balance of $3 million and $4 million, respectively, relating to unused lease space.

Federal government contracts

Despite the fact that a number of government projects for which we serve as a contractor or subcontractor are planned as multi-year projects, the U.S. government normally funds these projects on an annual or more frequent basis. Generally, the government has the right to change the scope of, or terminate, these projects at its discretion or as a result of changes in laws or regulations that might affect our ability to qualify to perform the projects. The termination or a reduction in the scope of a major government project could have a material adverse effect on our results of operations and financial condition.

Our federal government contract costs and fees are subject to audit by the Defense Contract Audit Agency (DCAA) and other federal agencies. These audits may result in adjustments to contract costs and fees reimbursed by our federal customers. The DCAA has completed audits of our contracts through fiscal year 2003.

Contract-related contingencies

We have certain contingent liabilities that arise in the ordinary course of providing services to our customers. These contingencies are generally the result of contracts that require us to comply with certain level of effort or performance measurements, certain cost-savings guarantees, or the delivery of certain services by a specified deadline.

Foreign exchange forward contracts

At December 31, 2006, we had 51 forward contracts to purchase and sell various currencies in the amount of $75 million. These contracts expire at various times before the end of 2007. The estimated fair value of our forward contracts using bank rates and market quotes was a net asset of $1 million as of December 31, 2006. Our remaining risk associated with these transactions is the risk of default by the bank, which we believe to be remote.

Litigation

IPO Allocation Securities Litigation

F-35

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

collectively responsible for insuring the issuers in all of the IPO cases that the plaintiffs will achieve a minimum recovery of $1 billion (including amounts recovered from the underwriters). On April 24, 2006, the court held a fairness hearing with respect to the proposed settlement, but has not issued a ruling.

Other

Guarantees and indemnifications

We have applied the disclosure provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” to our agreements that contain guarantee or indemnification clauses. FIN 45 requires us to disclose certain types of guarantee and indemnification arrangements, even if the likelihood of our being required to perform under these arrangements is remote. The following is a description of arrangements in which we are a guarantor, as defined by FIN 45.

We are a party to a variety of agreements under which we may be obligated to indemnify another party. Typically, these obligations arise in the context of contracts under which we agree to hold the other party harmless against losses arising from certain matters, which may include death or bodily injury, loss of or damage to tangible personal property, improper disclosures of confidential information, infringement or misappropriation of copyrights, patent rights, trade secrets or other intellectual property rights, breaches of third party contract rights, and violations of certain laws applicable to our services, products or operations. The indemnity obligation in these arrangements is customarily conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular contract, which procedures typically allow us to challenge the other party’s claims. The term of these indemnification provisions typically survives in perpetuity after the applicable contract terminates. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. However, we have purchased and expect to continue to purchase a variety of liability insurance policies, which are expected, in most cases, to offset a portion of our financial exposure to claims covered by such policies (other than claims relating to the infringement or misappropriation of copyrights, patent rights, trade secrets or other intellectual property). In addition, we have not historically incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, we believe the likelihood of a material liability under these arrangements is remote. Accordingly, we have no significant liabilities recorded for these agreements as of December 31, 2006.

We include warranty provisions in substantially all of our customer contracts in the ordinary course of business. These provisions generally provide that our services will be performed in an appropriate and legal manner and that our products and other deliverables will conform in all material respects to specifications agreed between our customer and us. Our obligations under these agreements may be limited in terms of time or amount or both. In addition, we have purchased and expect to continue to purchase errors and omissions insurance policies, which are expected, in most cases, to limit our financial exposure to claims covered by such policies. Because our obligations are conditional in nature and depend on the unique facts and circumstances involved in each particular matter, we

F-36

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

record liabilities for these arrangements only on a case by case basis when management determines that it is probable that a liability has been incurred. As of December 31, 2006, we have no significant liability recorded for warranty claims.


15.	Retirement Plan and Other Employee Trusts

Our eligible associates participate in the Perot Systems 401(k) Retirement Plan, a qualified defined contribution retirement plan. The plan year is the calendar year. The plan allows eligible employees to contribute between 1% and the IRS limit of their annual compensation, including overtime pay, bonuses and commissions. We match 100% of employees’ contributions, up to a maximum of 4% of the employee’s compensation, and provide for immediate vesting of all company matching contributions. Employees are not allowed to invest funds in our Class A Common Stock; however, the plan does allow for our matching contributions to be paid in the form of Class A Common Stock, and employees are not restricted in selling any such stock. Our contributions, which were all made in cash, were $26 million, $23 million, and $19 million for the years ended December 31, 2006, 2005, and 2004, respectively.


16.	Supplemental Cash Flow Information


	2006		2005		2004
	(in millions)

Cash paid for interest	$	5	$	3	$	2

Cash paid for income taxes, net	$	50	$	31	$	17

Non-cash investing and financing activities:
Long-term debt assumed in acquisition of a business	$	—	$	3	$	—

Issuance of common stock and options to purchase shares of common stock for acquisitions of businesses	$	—	$	—	$	16


17.	Related Party Transactions

We are providing information technology and energy management services for Hillwood Enterprise L.P., which is controlled and partially owned by Ross Perot, Jr. This contract was scheduled to expire on January 31, 2007. However, an extension signed in January 2007 will keep this contract in effect until January 31, 2017. Following this period, the contract will automatically extend for consecutive one-year renewal terms. This contract includes provisions under which we may be penalized if our actual performance does not meet the levels of service specified in the contract, and such provisions are consistent with those included in other customer contracts. For the years ended December 31, 2006, 2005, and 2004, we recorded revenue of approximately $2,086,000, $1,624,000 and $1,640,000 and direct cost of services of approximately $1,656,000, $1,229,000, and $1,192,000, respectively. As of December 31, 2006 and 2005, accounts receivables of Perot Systems with Hillwood Enterprise, L.P. were approximately $438,000 and $545,000, respectively. Prior to entering into this arrangement, our Audit Committee reviewed and approved this contract.

During 2002, we subleased to Perot Services Company, LLC, which is controlled and owned by Ross Perot, approximately 23,000 square feet of office space at our Plano, Texas, facility. Rent over the term of the lease is approximately $422,000 per year. The initial lease term is 21/2 years with one optional 2-year renewal period, and the renewal period was exercised in accordance with the terms of the sublease. Prior to entering into this arrangement, our Audit Committee reviewed and approved this contract.

F-37

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18. Earnings Per Common Share

The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share of common stock computations.


	2006		2005		2004
	(Dollars in millions except per share data and shares in thousands)

Earnings per share of common stock:
Basic:
Net income	$	81	$	111	$	94

Weighted average common shares outstanding		119,503		117,880		115,203

Basic earnings per common share	$	0.67	$	0.94	$	0.82

Diluted:
Net income	$	81	$	111	$	94

Weighted average common shares outstanding		119,503		117,880		115,203
Incremental shares Diluted		2,615		3,987		5,329

Weighted average diluted common shares outstanding		122,118		121,867		120,532

Diluted earnings per common share	$	0.66	$	0.91	$	0.78

For the years ended December 31, 2006, 2005, and 2004, outstanding options to purchase 7,314,000, 11,903,000 and 14,498,000 shares, respectively, of our common stock were not included in the computation of diluted earnings per common share because including them would be antidilutive. For the year ended December 31, 2006, we determined whether an option was dilutive or antidilutive by comparing the average market price of our common shares for that period to the aggregate assumed proceeds from each stock option, measured as the sum of the assumed cash proceeds from and excess tax benefits that would be recorded upon the exercise of each stock option and the average unearned compensation cost on each stock option. For the years ended December 31, 2005 and 2004, we determined whether an option was dilutive or antidilutive based on the exercise prices for each option as compared to the average market price of our common shares for that period.

19. Realigned Operating Structure

In the first quarter of 2001, we implemented a new operating structure in order to strengthen our market position and reduce our costs. In connection with this realigned structure, we consolidated and closed certain facilities, eliminated administrative redundancies and non-billable positions, and recorded asset basis adjustments, resulting in a charge to selling, general, and administrative expenses totaling $34 million. The payments and

F-38

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

adjustments that have been made in connection with this charge for the years ended December 31, 2004, 2005, and 2006 are as follows:


	Facility Related
	Costs
	(in millions)

Provision balance at January 1, 2004	$	5
Less: cash payments		(1	)

Provision balance at December 31, 2004		4
Less: cash payments		(2	)

Provision balance at December 31, 2005		2
Less: cash payments		(2	)

Provision balance at December 31, 2006	$	—

20. Subsequent Event

On January 30, 2007, we acquired all of the outstanding shares of QSS Group, Inc., a U.S. federal government information technology services company, for $247 million (net of $1 million of cash acquired), $30 million of which is being held in an escrow account for up to approximately 18 months. As a result of this acquisition, we have gained several significant government-wide acquisition contracts and expanded both the scope of services and the areas we serve within the Department of Homeland Security and the Department of Defense. The purchase price was partially funded by $75 million borrowed against our existing credit facility.

21. Supplemental Quarterly Financial Data (Unaudited)


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(in millions)

Year Ended December 31, 2006:
Revenue	$	542	$	572	$	583	$	601
Direct cost of services(1)		443		463		514		485

Gross profit		99		109		69		116
Net income		23		26		—		32
Basic earnings per common share(3)	$	0.19	$	0.22	$	—	$	0.26
Diluted earnings per common share(3)	$	0.19	$	0.21	$	—	$	0.26

F-39

PEROT SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

First Quarter Second Quarter Third Quarter Fourth Quarter

(in millions)

Year Ended December 31, 2005:

Revenue
$ 473 $ 488 $ 510 $ 527

Direct cost of services(2)
369 379 403 424

Gross profit
104 109 107 103

Net income
26 33 25 27

Basic earnings per common share(3)
$ 0.22 $ 0.28 $ 0.22 $ 0.23

Diluted earnings per common share(3)
$ 0.22 $ 0.27 $ 0.21 $ 0.22


(1)	In the third quarter of 2006, we recorded $44 million of expense in direct cost of services associated with the impairment of deferred software development and implementation costs relating to the modification of an existing contract.

(2)	In the second quarter of 2005, we settled a dispute with a former customer. As a result, we received a $7 million payment and reduced our liabilities by $3 million, both of which were recorded as a reduction to direct costs of services. The dispute related to a contract we exited in 2003.

(3)	Due to changes in the weighted average common shares outstanding per quarter, the sum of basic and diluted earnings per common share per quarter may not equal the basic and diluted earnings per common share for the applicable year.

F-40


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

Evaluation of disclosure controls and procedures

The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, such controls and procedures were effective. See “Management’s Report on Internal Control Over Financial Reporting” on page F-1.

Changes in internal controls

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in our internal control over financial reporting that occurred during the most recent fiscal quarter, and they have concluded that there were no changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III


Item 10.	*Directors and Executive Officers of the Registrant*

All information required by Item 10 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2007, which we expect to file with the Securities and Exchange Commission within 120 days after December 31, 2006.


Item 11.	*Executive Compensation*

All information required by Item 11 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2007, which we expect to file with the Securities and Exchange Commission within 120 days after December 31, 2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

All information required by Item 12 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2007, which we expect to file with the Securities and Exchange Commission within 120 days after December 31, 2006.


Item 13.	*Certain Relationships and Related Transactions*

All information required by Item 13 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2007, which we expect to file with the Securities and Exchange Commission within 120 days after December 31, 2006.


Item 14.	*Principal Accountant Fees and Services*

All information required by Item 14 is incorporated by reference to our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2007, which we expect to file with the Securities and Exchange Commission within 120 days after December 31, 2006.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*

(1) and (2) Financial Statements and Financial Statement Schedule

The consolidated financial statements of Perot Systems Corporation and its subsidiaries and the required financial statement schedule are incorporated by reference in Part II, Item 8 of this report.

(3) Exhibits


Exhibit			Description of
Number			Exhibit

	3	.1	Third Amended and Restated Certificate of Incorporation of Perot Systems Corporation (the “Company”) (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002.)
	3	.2	Fourth Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed September 24, 2004.)
	4	.1	Specimen of Class A Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1, Registration No. 333-60755.)
	4	.2	Rights Agreement dated January 28, 1999, between the Company and The Chase Manhattan Bank (Incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1, Registration No. 333-60755.)
	4	.3	Form of Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock (included as Exhibit A-1 to the Rights Agreement) (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1, Registration No. 333-60755.)
	4	.4	Form of Certificate of Designation, Preferences, and Rights of Series B Junior Participating Preferred Stock (included as Exhibit A-2 to the Rights Agreement) (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1, Registration No. 333-60755.)
	10	.1	Restricted Stock Plan, as amended through March 22, 2006 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 28, 2006.)
	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	.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	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	.7	Amended and Restated 1991 Stock Option Plan, as amended through March 22, 2006 (Incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed March 28, 2006.)
	10	.8	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	.9	2001 Long Term Incentive Plan, as amended through March 22, 2006 (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed March 28, 2006.)
	10	.10	Form of Nonstatutory Stock Option Agreement (2001 Long Term Incentive Plan) (Incorporated by reference to Exhibit 10.13 of Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.)
	10	.11	Form of Unit Certificate — Restricted Stock Unit Agreement (2001 Long Term Incentive Plan) (Incorporated by reference to Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q filed October 31, 2006.)
	10	.13	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.)


Exhibit			Description of
Number			Exhibit

	10	.14	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	.15	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	.16	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	.17	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	.18	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 of the Company’s Form 10, dated April 30, 1997.)
	10	.19	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	.20	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	.21	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	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	.26	Employment Agreement dated March 14, 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.)
	10	.27	Amended and Restated License Agreement dated as of August 1, 1992, between Perot Systems Family Corporation and H.R. Perot and the Company (Incorporated by reference to Exhibit 10.30 of Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed March 12, 2004.)
	10	.28	Amendment to Amended and Restated License Agreement effective nunc pro tunc as of May 18, 1988, between Perot Systems Family Corporation and H.R. Perot and the Company (Incorporated by reference to Exhibit 10.31 of Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed March 12, 2004.)
	10	.29	Amended and Restated Credit Agreement dated as of March 3, 2005, by and among the Company, JPMorgan Chase Bank, N.A., KeyBank National Association, SunTrust Bank, Wells Fargo Bank, N.A., Wachovia Bank, N.A., Comerica Bank, Southwest Bank of Texas, N.A., Bank of Texas, N.A., The Bank of Tokyo-Mitsubishi, Ltd., Bank Hapoalim B.M., and Mizuho Corporate Bank, Ltd. (Incorporated by reference to Exhibit 10.38 of the Company’s Current Report on Form 8-K filed March 4, 2005.)
	10	.31	Master Agreement for Information Technology Services dated April 1, 2001, between Hillwood Enterprises, L.P. and the Company (Incorporated by reference to Exhibit 10.35 of Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed May 27, 2004.)
	10	.32	Statement of Work #1 dated April 11, 2001, between Hillwood Enterprises, L.P. and the Company (Incorporated by reference to Exhibit 10.36 of Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed May 27, 2004.)
	10	.33	EPI Transition Agreement dated September 16, 2004, between UBS AG and the Company (Incorporated by reference to Exhibit 10.37 of the Company’s Current Report on Form 8-K filed September 20, 2004.)


Exhibit			Description of
Number			Exhibit

	10	.35	Amendment No. 02 to Commercial Sublease dated as of December 18, 2005, by and between PSC Management Limited Partnership, a Texas limited partnership, and Perot Services Company, LLC, a Texas limited liability company (Incorporated by reference to Exhibit 10.39 of the Company’s Current Report on Form 8-K filed December 20, 2005.)
	10	.36	Form of Change-in-Control Severance Agreement (Incorporated by reference to Exhibit 10.40 of the Company’s Quarterly Report on Form 10-Q filed August 1, 2006.)
	10	.37	Amended and Restated 2006 Non-Employee Director Equity Compensation Plan adopted September 28, 2006 (Incorporated by reference to Exhibit 10.41 of the Company’s Current Report on Form 8-K filed October 4, 2006.)
	10	.38	First Amendment to Amended and Restated Credit Agreement dated August 28, 2006, by and among Perot Systems Corporation, as Borrower, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.42 of the Company’s Current Report on Form 8-K filed August 31, 2006.)
	10	.39*	Amended and Restated Stock Option Agreement dated December 27, 2006, between the Company and Ross Perot, Jr.
	10	.40*	Stock Purchase Agreement dated December 18, 2006, by and among Perot Systems Government Services, Inc., a wholly owned subsidiary of the Company, QSS Group, Inc., a Maryland corporation (“QSS”), and the stockholders of QSS. (Specified portions of this agreement have been omitted and will be filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.)
	10	.41*	Information Technology Services Agreement dated as of January 1, 2007, by and between the Company and Hillwood Enterprises, L.P., a Texas limited partnership.
	21	.1*	Subsidiaries of the Company.
	23	.1*	Consent of PricewaterhouseCoopers LLP dated February 28, 2007.
	31	.1*	Rule 13a-14 Certification dated February 28, 2007, by Peter A. Altabef, President and Chief Executive Officer.
	31	.2*	Rule 13a-14 Certification dated February 28, 2007, by Russell Freeman, Vice President and Chief Financial Officer.
	32	.1**	Section 1350 Certification dated February 28, 2007, by Peter A. Altabef, President and Chief Executive Officer.
	32	.2**	Section 1350 Certification dated February 28, 2007, by Russell Freeman, Vice President and Chief Financial Officer.
	99	.1*	Schedule II — Valuation and Qualifying Accounts.


*	Filed herewith.

**	Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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


	By:	/s/ Peter A. Altabef

Peter A. Altabef

President and Chief Executive Officer

Dated: February 28, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Peter A. Altabef Peter A. Altabef	Director, President, and Chief Executive Officer (Principal Executive Officer)	February 28, 2007

/s/ Russell Freeman Russell Freeman	Vice President and Chief Financial Officer (Principal Financial Officer)	February 28, 2007

/s/ Robert J. Kelly Robert J. Kelly	Corporate Controller (Principal Accounting Officer)	February 28, 2007

/s/ Ross Perot Ross Perot	Chairman Emeritus	February 28, 2007

/s/ Ross Perot, Jr. Ross Perot, Jr.	Chairman	February 28, 2007

/s/ Steve Blasnik Steve Blasnik	Director	February 27, 2007

/s/ John S.T. Gallagher John S.T. Gallagher	Director	February 28, 2007

/s/ Carl Hahn Carl Hahn	Director	February 28, 2007

/s/ DeSoto Jordan DeSoto Jordan	Director	February 28, 2007

/s/ Thomas Meurer Thomas Meurer	Director	February 28, 2007


Signature	Title	Date

/s/ Cecil H. Moore, Jr. Cecil H. Moore, Jr.	Director	February 28, 2007

/s/ Anuroop Singh Anuroop Singh	Director	February 28, 2007

/s/ Anthony Principi Anthony Principi	Director	February 27, 2007

EX-10.39 2 d43919exv10w39.htm AMENDED AND RESTATED STOCK OPTION AGREEMENT exv10w39

Exhibit 10.39

Perot Systems Corporation
1991 Stock Option Plan
Amended and Restated Stock Option Agreement

Non-Qualified Stock Option Grant

This Amended and Restated Stock Option Agreement (this “Agreement”) amends, restates and
replaces the Stock Option Agreement dated October 23, 2000 (the “Original Agreement”),
between Perot Systems and you. This Agreement amends the terms of the Original
Agreement effective on the date of the last signature below. This Agreement is not
valid until properly executed by both parties, with an original copy delivered to Perot
Systems.


Participant:		Ross Perot, Jr.
Employee ID:		18930
Effective Date:		October 23, 2000
Option Shares:		950,000
Option Date:		October 23, 2000
Option Price and
Vesting Schedule:


Vesting Date	Option Shares		Price
October 23, 2001		190,000	$	9.50
October 23, 2002		190,000	$	9.50
October 23, 2003		190,000	$	9.50
October 23, 2004		190,000	$	9.50
October 23, 2005		190,000	$	9.94


Expiration Date:		Eleven years after the Effective Date, unless terminated earlier under the Agreement or the Plan.

By signing this Agreement, the Participant:

	•		Agrees to be bound by the terms of this Agreement and the Plan;

	•		Acknowledges receiving an electronic or paper copy of (1) the Plan, (2) the Prospectus for the Plan, and (3) Perot Systems’ most recent Annual Report on Form 10-K; and

	•		Consents to receiving delivery of the all future communications and required documents relating to the Plan or this Agreement via TRAIN or other electronic transmission.


Ross Perot, Jr.		PEROT SYSTEMS CORPORATION

Signature:	/s/ Ross Perot, Jr.	By:	/s/ Thomas D. Williams

			Name: Thomas D. Williams
Date: 12-22-2006			Title: Vice President and General Counsel

		Date: December 27, 2006

Certain Definitions. As used in this Agreement, the following terms have the meanings indicated:

	(a)		“Agreement” means this Amended and Restated Stock Option Agreement between Perot Systems and Participant.

	(b)		“Committee” means the Board of Directors of Perot Systems or the committee of the Board, Chief Executive Officer or other officer of Perot Systems appointed to administer or to have authority with respect to the Plan.

	(c)		“Common Stock” means the Class A Common Stock, $.01 par value per share, of Perot Systems.

	(d)		“Company” means Perot Systems and its majority-owned subsidiaries.

	(e)		“Confidential Information” means all written, machine reproducible, oral and visual data, information and material, including but not limited to the terms of this Agreement and the Plan, business, financial and technical information, computer programs, documents and records (including those that Participant develops in the scope of his or her employment) that (i) the Company or any of its customers or suppliers treats as proprietary or confidential through markings or otherwise, (ii) relates to the Company or any of its customers or suppliers or any of their business activities, products or services (including software programs and techniques) and is competitively sensitive or not generally known in the relevant trade or industry, or (iii) derives independent economic value from not being generally known to, and is not readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Confidential Information does not include any information or material that is approved by Perot Systems for unrestricted public disclosure.

	(f)		“Effective Date” means the date set forth on the first page of this Agreement, which relates back to the effective date of the Original Agreement.

	(g)		“Expiration Date” means the date and time as of which the Option expires, which is the earlier of (i) the close of business on the eleven years after the Effective Date, or (ii) the date and time as of which all rights to exercise the Option are terminated under Section 2(d).

	(h)		“Market Value” of a share of Purchased Stock on a given date means the closing sale price for Purchased Stock, as determined in good faith by the Board of Directors, on such date or, if no closing sale price is available for such date, on the most recent prior date for which a closing sale price is available or, if no closing sale price is available, the closing bid price, as so determined, on such date or, if no closing bid price is available for such date, the closing bid price on the most recent prior date for which a closing bid price is available.



1991 Stock Option Plan	2	Stock Option Agreement

	(i)		“Net Investment Proceeds,” with respect to any share of Purchased Stock sold or otherwise transferred by Participant or Participant’s successor in interest, means the greater of the value of the gross proceeds received for such share or the Market Value of such share on the date of sale or transfer less, in either case, (i) the exercise price of the Option for such share plus simple interest on such amount at the rate of 8% per annum to the date of the sale or transfer, (ii) any reasonable and customary commission paid for the sale or transfer, and (iii) the verified amount of any income taxes paid or payable on the sale.

	(j)		“Option” means the right and option evidenced by this Agreement.

	(k)		“Participant” means the individual named on the first page of this Agreement.

	(l)		“Perot Systems” means Perot Systems Corporation, a Delaware corporation.

	(m)		“Plan” means Perot Systems’ 1991 Stock Option Plan, as amended and restated as of March 23, 2000, as further amended from time to time.

	(n)		“Purchased Stock” means any Common Stock purchased upon the exercise of this Option, together with any successor security, property or cash issued or distributed by Perot Systems or any successor entity, whether by way of merger, consolidation, share exchange, reorganization, liquidation, recapitalization or otherwise.

	(o)		“Termination for Substantial Misconduct” means termination of employment for conduct resulting in a felony conviction of the Participant; actions involving moral turpitude, theft, or dishonesty in a material matter; breach of any obligation under Section 5 of this Agreement; or failure by Participant to carry out the directions, instructions, policies, rules, regulations, or decisions of the Board of Directors of Perot Systems including, without limitation, those relating to business ethics and the ethical conduct of the business of the Company.

	(p)		“Total Disability” of Participant means a mental or physical disability of the Participant that the Committee, in its sole discretion, determines will permanently prevent the Participant from performing the duties of his or her current occupation with the Company or any other reasonable occupation (suitable for a person in good health having the Participant’s educational background, employment history, training, and skills) with the Company or any other employer, but does not include any condition that the Committee, in its sole discretion, determines to have resulted from the Participant’s use of alcohol, drugs, or other chemical substances, or from actions taken by Participant with the intention of causing self-injury or with reckless disregard for personal health and safety.



1991 Stock Option Plan	3	Stock Option Agreement

	(q)		“Transfer” or “transfer” or derivations thereof includes any sale, assignment, gift, exchange or any other disposition (other than dispositions caused by the foreclosure on a pledge, encumbrance, hypothecation, or mortgage where the successor holder remains subject to the transfer restrictions stated in this Agreement).

	(r)		“Vesting,” or “vesting” or derivations thereof with respect to any Option issued under this Agreement, means receiving the right to exercise the Option.

	(s)		“Vesting Period” means the period of time commencing on the Effective Date of this Agreement and ending on the date on which the entire Option has Vested.

Grant of Option; Exercise of Option; Purchase of Stock.

(a)

Subject to the terms, conditions, and restrictions set forth in the Plan (which is incorporated herein by reference) and this Agreement, Perot Systems hereby grants to Participant, and Participant hereby accepts from Perot Systems, the option to purchase from Perot Systems

(i) the number of shares of Common Stock specified as the “Option Shares” on the first page of this Agreement,

(ii) at the purchase price per share of Common Stock specified as the “Exercise Price” on the first page of this Agreement,

(iii) which option will Vest in Participant in accordance with the Vesting Schedule specified on the first page of this Agreement.

The Option shall continue to Vest only for so long as Participant is an employee of Company or has a Total Disability, unless the Committee, in its sole discretion, agrees in writing otherwise; provided, that if the Participant ceases to be an employee by reason of the Participant’s death or dies while having a Total Disability, the Option shall immediately Vest in full. Participant will have the right to exercise the Vested Option and purchase Common Stock after the Option Vests as provided in Section 2(d) below.

	(b)		The purchase price of shares as to which the Option is exercised must be paid to Perot Systems at the time of the exercise either in cash or in such other consideration as the Committee may approve having a total fair market value, as determined by the Committee, equal to the purchase price, or a combination of cash and such other consideration.

	(c)		The Committee may elect to assist Participant in satisfying an obligation to pay or withhold taxes required as a result of the exercise of this Option by accepting shares of Purchased Stock at Market Value to satisfy the tax obligation. The



1991 Stock Option Plan	4	Stock Option Agreement

			shares of Purchased Stock accepted may be either shares withheld upon the exercise of this Option or other shares already owned by Participant. In determining whether to approve acceptance of Purchased Stock to satisfy such a tax obligation, the Committee may consider whether the shares proposed to be delivered are subject to any holding period or other restrictions on transfer and may waive or arrange for the waiver of any such restrictions.

	(d)		The Option is only exercisable as to Vested Options. Once Vested, the Option may be exercised until the Expiration Date, provided, however, if the Participant ceases to provide services to the Company in any capacity, whether as a director, officer, employee or consultant, be an employee for any reason other than death or Total Disability, the Option may be exercised only for ninety days after the date Participant ceases to provide services to the Company, and in any case no later than the Expiration Date.

	(e)		The Option is exercisable by delivery of an exercise notice, in the form and format and by the method approved by Perot Systems’ stock administrator, which form and format may be electronic and solely available by access through Perot Systems internal computer network, which notice will state the election to exercise the Option, the number of Vested shares of Common Stock with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company in accordance with the terms of the Plan. The Option will be deemed to be exercised upon receipt by the Company of such exercise notice and the purchase price of the Vested shares of Common Stock as to which the Option is exercised, provided that Participant has concurrently made adequate provision for fulfilling all applicable tax withholding requirements and other tax obligations. If the Company in its sole discretion determines that it is necessary or desirable to withhold any amounts for taxes on Participant’s behalf, Participant shall reimburse the Company for such amounts immediately after being notified of them. If Participant does not reimburse the Company for such amounts, the Company may in its sole discretion either (i) recover such amounts by selling or canceling at Market Value sufficient shares of any Purchased Stock held by Participant or (ii) rescind the exercise.

Restrictions on Transfer. The Option may not be sold or otherwise transferred except (a) by will or the laws of descent and distribution, (b) with the written consent of the Committee, or (c) in a gratuitous transfer permitted under SEC Form S-8 to any one or more of the following permitted transferees (i) any one or more of Participant’s Family Members; (ii) a custodian, trustee, executor or other fiduciary in a custodial account, trust or other arrangement in which Participant and/or one or more Family Members of Participant collectively retain more than 50% of the beneficial interest; or (iii) a partnership, corporation, limited liability company or other entity in which Participant and/or one or more Family Members of Participant collectively retain more than 50% of the voting interests. For purposes of this Agreement, the term “Family Member” shall mean a spouse, former spouse, grandparent, parent, stepparent, parent of a spouse,



1991 Stock Option Plan	5	Stock Option Agreement

		child, stepchild, spouse of a child, grandchild, sibling, spouse of a sibling, niece, or nephew, and shall include adoptive relationships. The Option may be exercisable only by: Participant; a Permitted Transferee; the executors or administrators of Participant’s estate or a Permitted Transferee’s estate following his or her death; or the guardian of Participant’s property or a Permitted Transferee’s property if one is appointed by reason of Participant’s or a Permitted Transferee’s Total Disability. For purposes of this Agreement, references to Participant shall be deemed to include another person who is exercising the Option in accordance with this Section 3 or to whom the Option has been transferred in accordance with this Section 3. Perot Systems is not obligated to recognize any purported sale, other transfer, or exercise of the Option in violation of this Section 3 and; unless it elects to do otherwise, may treat any such purported sale, other transfer, or exercise as null, void, and of no effect.

4.		Rights to Buy Back Purchased Stock and to Require Payback of Certain Profits.

	(a)		If the Committee discovers that Participant has engaged in any conduct prohibited by Section 5 or if Participant ceases to be employed by the Company and the Committee, in its sole discretion, determines that Participant’s cessation of employment resulted from a Termination for Substantial Misconduct or would have resulted in a Termination for Substantial Misconduct had the relevant facts been known at the time of Participant’s cessation of employment, Perot Systems will have the right for 150 days after the Committee discovers the relevant facts to cancel any unexercised Option, whether or not Vested, and to buy back from Participant any shares of Purchased Stock then owned by Participant, at a purchase price equal to the price per share paid by Participant for the shares plus simple interest on such amount at the rate of 8% per annum from the date of payment by Participant to the date of tender of payment by Perot Systems as set forth in Section 4(b) below, and the right to require Participant to pay back to Perot Systems in cash the Net Investment Proceeds with respect to any shares of Purchased Stock that have been sold or otherwise transferred by Participant.

	(b)		Whenever Perot Systems has a right to buy back shares of Purchased Stock or to require Participant to pay back to Perot Systems Participant’s Net Investment Proceeds with respect to any shares of Purchased Stock under this Section 4, Perot Systems may exercise its right by notifying Participant or the subsequent holder of Perot Systems’ election to exercise its right within the designated exercise period. The giving of such notice will give rise to an obligation on the part of Participant or the subsequent holder to tender to Perot Systems, within 10 days, any previously issued certificate representing shares of Purchased Stock to be bought back, duly endorsed in blank or having a duly executed stock power attached in proper form for transfer. If any such certificate is not tendered within 10 days, Perot Systems may cancel any outstanding certificate representing shares to be bought back. Perot Systems is required to tender the purchase price for shares to be bought back under this Section 4 within 20 days of giving notice of its election to exercise its right to buy back shares. If the person from whom the shares are to be bought back has not complied with an obligation to return a



1991 Stock Option Plan	6	Stock Option Agreement

certificate representing shares to be bought back, however, Perot Systems is not required to tender the purchase price until 20 days after the certificate is returned or 20 days after it cancels the certificate, whichever occurs first.

Non-Competition and Non-Disclosure. Participant acknowledges that: (i) in the course and as a result of employment with the Company, Participant will obtain special training and knowledge and will come in contact with the Company’s current and potential customers, which training, knowledge, and contacts would provide invaluable benefits to competitors of the Company; (ii) the Company is continuously developing or receiving Confidential Information, and that during Participant’s employment he or she will receive Confidential Information from the Company, its customers and suppliers and special training related to the Company’s business methodologies; and (iii) Participant’s employment by Company creates a relationship of trust that extends to all Confidential Information that becomes known to Participant. Accordingly, and in consideration of Perot Systems’ granting this Option to Participant, Participant agrees that Perot Systems will be entitled to terminate all rights to exercise the Option and to exercise the rights specified in Section 4 above if Participant does any of the following without the prior written consent of the Company:

(a)

while employed by the Company or within one year thereafter:

	(i)		competes with, or engages in any business that is competitive with, the Company within 250 miles of any location at which Participant was employed by or provided services to the Company;

	(ii)		solicits or performs services, as an employee, independent contractor, or otherwise, for any person (including any affiliates or subsidiaries of that person) that is or was a customer or prospect of the Company during the two years before Participant’s employment with the Company ended if Participant solicited business from or performed services for that customer or prospect while employed by Company; or

	(iii)		recruits, hires, or helps anyone to recruit or hire anyone who was an employee of Perot Systems, or of any of its customers for whom Participant performed services of from whom Participant solicited business, within the six months before Participant’s employment with the Company ended; or

(b)

discloses or uses any Confidential Information, except in connection with the good faith performance of Participant’s duties as an employee or, solely with respect to the terms of this Agreement or the Plan, to Participant’s spouse; or fails to take reasonable precautions against the unauthorized disclosure or use of Confidential Information; or fails, upon Perot Systems’ request, to execute and comply with a third party’s agreement to protect its confidential and proprietary information; or solicits or induces the unauthorized disclosure or use of



1991 Stock Option Plan	7	Stock Option Agreement

Confidential Information.

If any court of competent jurisdiction finds any provision of this Section 5 to be unreasonable, then that provision shall be considered to be amended to provide the broadest scope of protection to the Company that such court would find reasonable and enforceable.

6.		Stock Certificates; Rights as Shareholder. Each certificate representing shares of Purchased Stock will bear such legends as the Committee determines are necessary or appropriate. Whether or not certificates representing shares of Purchased Stock have been issued or delivered, Participant will have all the rights of a shareholder of Purchased Stock, including voting, dividend and distribution rights, with respect to shares of Purchased Stock owned by Participant. Participant will not have any rights as a shareholder with respect to any shares of Purchased Stock subject to the Option before the date of issuance to Participant of shares upon exercise of the Option.

7.		Compliance with Plan. If the provisions of the Plan are inconsistent with the provisions of this Agreement, the provisions of the Plan supersede the provisions of this Agreement.

8.		Notices.

	(a)		All notices or other communications relating to this Plan or any other matter relating to this Agreement given to the Committee, Perot Systems, or any Company will be deemed delivered on the day the notice or other communication is received in tangible written form by the Stock Administrator at Perot Systems’ corporate headquarters address, provided that such notice is in the form specified by Perot Systems.

	(b)		All notices or other communications relating to this Plan or any other matter relating to this Agreement given to a Participant by the Committee, Perot Systems, or any Company will be deemed delivered on the first day the notice or other communication is (1) personally delivered to that person, (2) electronically transmitted to a person who on the date of that transmission either is an employee of any Company or has consented to receiving notices by electronic transmission to the last known electronic transmission address of that person, provided that an acknowledgement of receipt is returned, or (3) placed in the official government mail of the country of the sender in an envelope with proper postage paid addressed to the last known address of that person as reflected in Perot Systems’ personnel or stock records.

	(c)		Either party may at any time change its address for notification purposes by giving the other written notice of the new address and the date upon which it will become effective.



1991 Stock Option Plan	8	Stock Option Agreement

(d)

Consent to Electronic Delivery of Notices, Plan Documents and Prospectuses. By executing this Agreement, the Participant will be deemed to consent to receiving copies of all notices and other communications relating to the Plan and this Agreement by electronic transmission, including but not limited to the Prospectus relating to the Plan, all participation materials, and all other documents required to be delivered in connection with the Plan. Upon request, Perot Systems will provide any such documents to the Participant in tangible written form.

9.		Remedies. Perot Systems is entitled, in addition to any other remedies it may have at law or in equity, to temporary and permanent injunctive and otherwise equitable relief to enforce the provisions of this Agreement. Any action to enforce the provisions of, or otherwise relating to, this Agreement may be brought in the state or federal courts having jurisdiction in Dallas, Dallas County, Texas. By signing this Agreement, Participant consents to the personal jurisdiction of such courts in any such action.

10.		Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors, and assigns. However, Participant does not have the power or right to assign this Agreement without the prior written consent of Perot Systems.

11.		Attorneys’ Fees. If any legal proceeding is brought to enforce or interpret the terms of this Agreement, the prevailing party will be entitled to reasonable attorneys’ fees, costs, and necessary disbursements in addition to any other relief to which that party may be entitled.

12.		Severability. If any provision of this Agreement is held invalid or unenforceable for any reason, the validity and enforceability of all other provisions of this Agreement will not be affected.

13.		Headings. The section headings used herein are for reference and convenience only and do not affect the interpretation of this Agreement.

14.		Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Texas, without regard to the choice of law rules in such law. This Agreement shall be deemed to have been entered into and wholly performed in Dallas County, Texas. Venue of any disputes relating to this Agreement shall be in Dallas County, Texas. This Agreement has been written in English, which language will control in all respects. No translation of this Agreement into any other language will be of any force or effect in its interpretation or in a determination of the intent of either party. Each party waives, to the maximum extent permitted by applicable law, any right it may have under the laws of any country or other jurisdiction to have this Agreement written in any other language.



1991 Stock Option Plan	9	Stock Option Agreement

15.		Entire Agreement. This Agreement, together with the Plan and any procedure adopted by the Committee thereunder, constitutes the entire agreement between the parties with respect to its subject matter and may be waived or modified only in writing.

16.		Changes in Capitalization. If any change is made in the Common Stock (including, but not limited to, changes resulting from a stock dividend, stock split, merger, consolidation, reorganization, recapitalization, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by Perot Systems), the Committee will equitably adjust the number of shares of Common Stock and the Exercise Price for those shares that are subject to outstanding rights under this Agreement to preserve the rights of Participant under this Agreement. The determination of the Committee with respect to any such adjustments shall be final, binding and conclusive.

17.		No Guarantee of Continued Employment. Participant acknowledges and agrees that the Vesting of shares of Common Stock under this Agreement is earned only while continuing service to the Company as an employee at the will of the Company (and not through the act of being hired, being granted an Option or purchasing shares under this Agreement). Participant further acknowledges and agrees that this Agreement, the transactions contemplated hereunder and the Vesting schedule set forth herein do not constitute an express or implied promise of continued employment by the Company for the Vesting Period, for any period, or at all, and shall not interfere with Participant’s right or the Company’s right to terminate Participant’s employment relationship with the Company at any time, with or without cause.



1991 Stock Option Plan	10	Stock Option Agreement

EX-10.40 3 d43919exv10w40.htm STOCK PURCHASE AGREEMENT exv10w40

EXHIBIT 10.40

EXECUTION COPY

CONFIDENTIAL TREATMENT REQUESTED

STOCK PURCHASE AGREEMENT

by and among

PEROT SYSTEMS GOVERNMENT SERVICES, INC.

QSS GROUP, INC.

and

THE STOCKHOLDERS OF QSS GROUP INC.

December 18, 2006

EXECUTION COPY

CONFIDENTIAL TREATMENT REQUESTED

Table of Contents


	Page
ARTICLE I Definitions		1

ARTICLE II Purchase of Shares		10
2.1 Sale and Delivery of the Shares		10
2.2 Closing Date		10
2.3 Purchase Price and Payment of Purchase Price		10
2.4 Potential Purchase Price Adjustments		12
2.5 Closing Deliveries		15
2.6 Section 338(h)(10) Election		16
2.7 VRP Termination Payments		16
2.8 Special Closing Bonus Payments		17

ARTICLE III Representations and Warranties of Sellers		17
3.1 Organization		17
3.2 Authority		17
3.3 Organic Documents		17
3.4 Capitalization		17
3.5 Title to the Shares		18
3.6 Title to Tangible Assets		18
3.7 Sufficiency of Assets, Insurance		18
3.8 No Violation		19
3.9 Governmental Consents		19
3.10 Financial Statements		19
3.11 Limitation on Liabilities; Absence of Undisclosed Liabilities		20
3.12 Subsidiaries and Investments		20
3.13 Absence of Material Adverse Change		20
3.14 Taxes		21
3.15 Litigation		23
3.16 Compliance with Laws		23
3.17 Permits		24
3.18 Environmental Matters		24
3.19 Employee Matters		24
3.20 Employee Benefit Plans		25
3.21 Material Agreements		28
3.22 Government Contracts and Subcontracts		29
3.23 Customers		35
3.24 Intellectual Property Rights		36
3.25 Competing Interests		37
3.26 Accounts Receivable		37
3.27 Regulated Payments; Government Contracting		37
3.28 Interested Party Transactions		38
3.29 Exclusivity		38

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	Page
ARTICLE IV Representations and Warranties of Buyer		38
4.1 Organization		38
4.2 Authority		38
4.3 No Violation		38
4.4 Governmental Consents		39
4.5 Litigation		39
4.6 Available Funds		39

ARTICLE V Covenants and Agreements		39
5.1 Conduct of Business		39
5.2 Access and Information		39
5.3 Supplemental Disclosure		40
5.4 Notification of Certain Matters		40
5.5 Assistance with Permits, Filings and Consents		40
5.6 Fulfillment of Conditions by Sellers		40
5.7 Fulfillment of Conditions by Buyer		40
5.8 Publicity		41
5.9 Transaction Costs		41
5.10 No-Shop Provisions		41
5.11 Nondisclosure		41
5.12 Filing and Authorizations		42
5.13 Release by Each Stockholder		42
5.14 Uncollected Accounts Receivable		43
5.15 Company 401(k) Plan		43
5.16 Stockholder Non-Solicitation; Non-Competition; Confidentiality		44
5.17 Cooperation		45
5.18 Form 8-K		45
5.19 VRP Termination		46
5.20 Tax Matters		46
5.21 Certain Contract Matters		46

ARTICLE VI Closing Conditions		46
6.1 Conditions to Obligations of Buyer		46
6.2 Conditions to Obligations of Sellers		48

ARTICLE VII Indemnification		49
7.1 Indemnification of Buyer		49
7.2 Indemnification of Stockholders		50
7.3 Limitations on Indemnification		50
7.4 Survival		51
7.5 Notice		51
7.6 Defense of Claims		51
7.7 Holdback Amount; Right of Setoff		52
7.8 Insurance Recoveries		52
7.9 Mitigation		53
7.10 Exemplary or Punitive Damages		53

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	Page
ARTICLE VIII Tax Matters		53
8.1 Tax Returns		53
8.2 Certain Contest Rights		55
8.3 Cooperation on Tax Matters		56
8.4 Employment Taxes		56
8.5 Refunds		57
8.6 FIRPTA Certificate		57
8.7 Section 338(h)(10) Election		57
8.8 S Corporation Status		58

ARTICLE IX Miscellaneous		59
9.1 Termination		59
9.2 Notices		59
9.3 Attorneys’ Fees and Costs		60
9.4 Further Assurances		60
9.5 Brokers		60
9.6 Counterparts		61
9.7 Interpretation		61
9.8 Successors and Assigns; Assignment		61
9.9 Entire Agreement		61
9.10 Specific Performance		61
9.11 Governing Law; Jurisdiction; Legal Process		62
9.12 Drafting		62
9.13 Usage		62
9.14 Arbitration		62
9.15 Partial Invalidity		63
9.16 Stockholder Representative		63

EXHIBITS


Exhibit A		Escrow Agreement
Exhibit B		Sellers’ Legal Opinion
Exhibit C		VRP Termination and Release Agreement

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INDEX OF DISCLOSURE SCHEDULES


Schedule 2.3(b)(iii)		VRP Termination Payments (to be delivered 5 days prior to the Closing)
Schedule 2.3(b)(iv)		Special Closing Bonus Payments (to be delivered 5 days prior to the Closing)
Schedule 2.4(c)		Accounting Firms
Schedule 3.1		Jurisdictions – Qualified to do Business
Schedule 3.4		Options, Warrants, Convertible Securities
Schedule 3.5		Title to the Shares
Schedule 3.6(a)		Material Assets
Schedule 3.6(b)		Liens
Schedule 3.6(d)		Government Fixtures and Equipment
Schedule 3.6(e)		Sensitive Compartmented Information Facilities Lease Expiration
Schedule 3.7(b)		Insurance
Schedule 3.8		Conflict or Violation
Schedule 3.9		Governmental Consents
Schedule 3.10(a)		Financial Statements
Schedule 3.11(d)		Liabilities
Schedule 3.12		Past Investment
Schedule 3.13		Material Adverse Change
Schedule 3.14(a)		State and Local S Corporation Election(s)
Schedule 3.14(d)		State and Local Tax Return Filing Requirements
Schedule 3.14(e)		Tax Matters
Schedule 3.15		Litigation
Schedule 3.17		Permits
Schedule 3.18		Environmental Matters
Schedule 3.19(a)		Current Employees
Schedule 3.19(b)		Employee Claims
Schedule 3.19(d)		Employees with Security Clearances
Schedule 3.19(f)		Employee Agreements
Schedule 3.20(a)(i)		Employee Benefit Plans
Schedule 3.20(a)(ii)		Unaccrued Employee Benefits
Schedule 3.20(b)		Controlled Group Plans
Schedule 3.21(a)		Material Agreements
Schedule 3.21(b)		Breach, Violation or Default of Material Agreement
Schedule 3.21(c)		Material Agreements Terminating at or before the Closing
Schedule 3.21(d)		Material Agreement Representation
Schedule 3.22(a)		Current Government Contracts
Schedule 3.22(b)		Government Bids
Schedule 3.22(f)		Facility Security Clearances
Schedule 3.22(g)		Funding Limitations
Schedule 3.22(h)		Breach, Violation, Termination or Default of Government Contract or Subcontract
Schedule 3.22(j)		Teaming Agreements
Schedule 3.22(n)		Assignment of Government Contracts or Subcontracts
Schedule 3.22(p)		Status of Government Contracts and Subcontracts
Schedule 3.22(q)		Contract Liability

iv

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Schedule 3.22(r)		Government Fixtures and Equipment
Schedule 3.22(s)		Defense Articles
Schedule 3.23		Material Customers
Schedule 3.24(a)		Intellectual Property
Schedule 3.24(b)		Licensed Intellectual Property
Schedule 3.24(c)		Proprietary Intellectual Property
Schedule 3.25		Key Employees
Schedule 3.27		Audits
Schedule 5.12		Customer Visits
Schedule 5.16(b)		Non-Solicitation of Employees
Schedule 5.20(b)		Required Withholdings
Schedule 6.1(c)(i)		Third Party Consents
Schedule 6.1(c)(ii)		Third Party Notices
Schedule 6.1(f)		Employee Releases
Schedule 6.1(j)		Terminated Employment Agreements
Schedule 6.1(o)		Certain Employee Claims
Schedule 7.1(d)		Certain Indemnification Matters

EXECUTION COPY

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement (this “Agreement”) is made and entered into as of December 18, 2006, by and among Perot Systems Government Services, Inc., a Virginia corporation (“Buyer”), QSS Group, Inc., a Maryland corporation (the “Company”), Richard F. Bishop and the Richard F. Bishop Living Trust (together, “Bishop”), Frank F. Islam (together with Bishop, individually, a “Stockholder” and together, the “Stockholders”), and Frank F. Islam, in the capacity as the representative of all of the Stockholders (the “Stockholder Representative”). The Company and the Stockholders are referred to collectively herein as “Sellers”.

Background

The Stockholders own all of the issued and outstanding capital stock of the Company.

Buyer desires to purchase, and the Stockholders desire to sell, all of the shares of capital stock of the Company issued and outstanding as of the closing of such purchase and sale on the terms and subject to the conditions set forth in this Agreement.

The Company will receive substantial direct and indirect benefits from the transactions contemplated by this Agreement and Buyer has requested that the Company enter into this Agreement as a condition to Buyer’s execution and delivery of this Agreement.

In consideration of the foregoing premises and the mutual covenants and agreements contained in this Agreement, the parties, intending to be legally bound, agree as follows:

ARTICLE I
Definitions

“Affiliate” means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person; for purposes hereof, “control” means the possession directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person by virtue of ownership of voting securities, by contract or otherwise; provided, however, that MSI and FI Investment Group, LLC. shall only be deemed to be an Affiliate of Frank F. Islam or the Company for purposes of Sections 3.21, 3.25, 3.28, 3.29 and 5.10 of this Agreement.

“Agreement” means this stock purchase agreement.

“Arbitrator” means a certified public accountant who is a partner or employee of one of the accounting firms listed on Schedule 2.4(c) and who shall be chosen by the Buyer and Stockholder Representative within three (3) Business Days after the expiration of the twenty (20) day joint determination period specified in Section 2.4(c). In the event that Buyer and the Stockholder Representative are unable to mutually agree upon an Arbitrator within such three (3) Business Day period, then, within five (5) Business Days thereafter, Buyer and the Stockholder Representative shall jointly engage the first accounting firm listed on Schedule 2.4(c), which firm shall choose in its discretion one of its certified public accountant partners or employees

EXECUTION COPY

experienced in arbitration proceedings to serve as the Arbitrator. If the first accounting firm is unable to provide someone to serve as the Arbitrator, then Buyer and the Stockholder Representative shall proceed sequentially through the list in Schedule 2.4(c) until an accounting firm is found that can provide someone to serve as the Arbitrator. In the event that none of the firms listed in Schedule 2.4(c) can provide someone to serve as Arbitrator, then the Arbitrator shall be selected by the American Arbitration Association.

“Asserted Tax Claim” has the meaning set forth in Section 8.2(a).

“Asserted Tax Claim Proceeding” has the meaning set forth in Section 8.2(b).

“AWR” has the meaning set forth in Section 8.1(a).

“Bishop” means Richard F. Bishop together with the Richard F. Bishop Living Trust.

“Bishop Employment Agreement” has the meaning set forth in Section 5.13.

“Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of Delaware are authorized or obligated to close.

“Buyer” means Perot Systems Government Services, Inc.

“Buyer Documents” has the meaning set forth in Section 4.2.

“Buyer Parties” has the meaning set forth in Section 7.1.

“Cash Balances” means an amount equal to all of the Company’s unrestricted cash and cash equivalents as of the Closing determined in accordance with GAAP based on the Company’s accounting books and records. For the avoidance of doubt, the amount of any Cash Balances shall be (i) reduced by the amount of any checks issued by the Company on or before the Closing whether or not any such checks remain in the possession of the Company as of the Closing and (ii) increased by the amount of any checks received by the Company on or before the Closing whether or not they have been deposited or have cleared any bank holding procedures.

“Claim” has the meaning set forth in Section 7.5.

“Closing” has the meaning set forth in Section 2.2.

“Closing Balance Sheet” has the meaning set forth in Section 2.4(b).

“Closing Cash Balances” means the Cash Balances reflected on the Closing Balance Sheet.

“Closing Date” has the meaning set forth in Section 2.2.

“Closing Debt” means the Debt reflected on the Closing Balance Sheet.

“Closing Payment” has the meaning set forth in Section 2.3(b)(vi).


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

EXECUTION COPY

“Closing Purchase Price Adjustment” has the meaning set forth in Section 2.4(b).

“Closing Tangible Net Book Value” means the Tangible Net Book Value of the Company reflected on the Closing Balance Sheet.

“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

“Code” means the United States Internal Revenue Code of 1986, Title 26 of the U.S. Code (26 USC), as amended.

“Company” means QSS Group, Inc.

“Company 401(k) Plan” has the meaning set forth in Section 3.20(b)(iv).

“Competing Transaction” means any of the following (other than the transactions contemplated by this Agreement) involving the Company: (i) any merger, consolidation, share exchange, business combination, or similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition of five percent or more of the assets used in the business of the Company; or (iii) any offer to purchase any of the Shares.

“Confidential Information” has the meaning set forth in Section 5.11.

“Confidentiality Agreement” has the meaning set forth in Section 9.9.

“Controlled Group Plans” has the meaning set forth in Section 3.20(b).

“Current Customer” means any Person that the Company provides or has provided products and/or services to under contract (including end-users) during the Look-Back Period.

“Current Government Contract” means any Government Contract or Government Subcontract currently in effect or which has been active in performance during the three (3) year period ending on the Closing Date.

“DCAA” means the Defense Contract Audit Agency.

“Debt” means an amount, as of the Closing, equal to all of the Company’s debt for borrowed money, notes payable and all capital lease obligations (regardless of the materiality thereof), including the current and long term portions thereof, all determined in accordance with GAAP. For purposes of clarification, with respect to any capital lease obligations included as Debt, the Closing Date Balance Sheet shall include both the Liability and corresponding asset associated with such capital lease obligation.

“Direct Contract Costs” means, with respect to any period, the aggregate amounts of labor and other direct expenses, including, without limitation, expenses for materials, subcontracts, consultants and travel.

“Employee Plans” has the meaning set forth in Section 3.20(a).


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

EXECUTION COPY

“Environmental Law” means any Laws or agreement with any Governmental Body relating to (i) the protection, preservation or restoration of the environment, (ii) the use, storage, generation, transportation, processing, production, release, or disposal of Hazardous Substances, or (iii) the protection or preservation of public health, in each case as amended and in effect on the date of the Closing.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means the Company and each Person or other trade or business, whether or not incorporated, which is or has been treated as a single employer or controlled group member with the Company pursuant to Section 414 of the Code or Section 4001 of ERISA.

“Escrow” has the meaning set forth in Section 2.3(b)(i).

“Escrow Agent” has the meaning set forth in Section 2.3(b)(i).

“Escrow Agreement” has the meaning set forth in Section 2.3(b)(i).

“Estimated Balance Sheet” has the meaning set forth in Section 2.4(a).

“Estimated Cash Balances” means the Cash Balances reflected on the Estimated Balance Sheet.

“Estimated Debt” means the Debt reflected on the Estimated Balance Sheet.

“Estimated Purchase Price Adjustment” has the meaning set forth in Section 2.4(a).

“Estimated Tangible Net Book Value” means the Tangible Net Book Value of the Company reflected on the Estimated Balance Sheet.

“FAR” means the Federal Acquisition Regulations.

“Final Allocation Schedule” has the meaning set forth in Section 8.7(b).

“Financial Statements” has the meaning set forth in Section 3.10.

“GAAP” means generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for the period or periods indicated.

“Governmental Body” means any governmental or quasi-governmental agency, authority, commission, board, or other body of the United States or any of its respective States, or an agency of a foreign sovereign or agency of a provincial, regional or metropolitan government thereof.

“Government Bid” means any proposal or offer, solicited or unsolicited, made by the Company prior to the Closing Date which, if accepted would result in a Government Contract.


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

EXECUTION COPY

“Government Contract” means any contract between the Company and a Governmental Body, and any Government Subcontract.

“Government Prime Contractor” means a third party who has engaged the Company to provide goods and/or services required under a contract such third party has entered into with a Governmental Body.

“Government Subcontract” means any subcontract, joint venture, basic ordering agreement, or letter contract currently in effect between the Company and a Government Prime Contractor relating to a contract between such Government Prime Contractor and any Governmental Body.

“Hazardous Substance” means any substance presently or hereafter listed, defined, designated, or classified as hazardous, toxic, radioactive, or dangerous under any Environmental Law and any substance to which exposure is regulated by any Governmental Body or any Environmental Law, including without limitation any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance, or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, or asbestos containing material, urea formaldehyde, foam insulation, lead, or polychlorinated biphenyls.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

“Holdback Amount” has the meaning set forth in Section 2.3(b)(i).

“Indemnification Cap” has the meaning set forth in Section 7.3(a).

“Indemnified Party” has the meaning set forth in Section 7.5.

“Indemnification Threshold” has the meaning set forth in Section 7.3(a).

“Indemnifying Parties” has the meaning set forth in Section 7.5.

“Independent Accounting Firm” shall mean either Deloitte & Touche LLP (or Deloitte Tax LLP) or Ernst & Young LLP, as selected by the Stockholder Representative at such time as the engagement of an Independent Accounting Firm becomes necessary pursuant to the provisions of this Agreement; provided, however, that Buyer shall notify the Stockholder Representative if it or its Affiliates engage either firm as its or their independent auditor or primary tax advisor and in the event that both such firms have been so engaged in the prior two years, Stockholder Representative shall be allowed to select a different nationally recognized independent accounting firm.

“Indirect Costs” means any fringe benefits, general and administrative expenses and overhead expenses.

“Intellectual Property” has the meaning set forth in Section 3.24(i).

“Interim Period” has the meaning set forth in Section 5.1.


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

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“IRS” means the Internal Revenue Service.

“Key Employees” means each of the employees listed on Schedule 3.25.

“Latest Balance Sheet” has the meaning set forth in Section 3.10.

“Latest Balance Sheet Date” has the meaning set forth in Section 3.10.

“Laws” has the meaning set forth in Section 3.16.

“Leases” has the meaning set forth in Section 3.6(a).

“Liabilities” has the meaning set forth in Section 3.11.

“Lien” has the meaning set forth in Section 3.5; provided, however, that Lien shall not be deemed to include (i) Liens for Taxes, assessments or similar charges incurred in the Ordinary Course of Business that are not yet due and payable or are being contested in good faith; (ii) pledges or deposits made in the Ordinary Course of Business; (iii) Liens of mechanics, materialmen, warehousemen or other like Liens securing obligations incurred in the Ordinary Course of Business that are not yet due and payable or are being contested in good faith; or (iv) Liens incurred in connection with capital leases and purchase money financings solely with respect to properties so financed.

“Look-Back Period” means the two (2) year period immediately preceding any attempted solicitation or diversion.

“Losses” has the meaning set forth in Section 7.1.

“Material Adverse Effect” means any event, development, circumstance, change or effect that is materially adverse to the business, financial condition or results of operations of the Company, except for any such effects or changes arising out of or relating to (i) the announcement, existence or performance of this Agreement and the transactions contemplated hereby, (ii) changes in general economic or political conditions or the financial, credit or securities markets, as long as such changes do not substantially and disproportionately affect the Company, (iii) changes in Laws of any Governmental Body or interpretations thereof by any Governmental Body or changes in accounting rules applicable to the Company, (iv) changes affecting generally the industries in which the Company conducts business, as long as such changes do not substantially and disproportionately affect the Company, or (v) any outbreak or escalation of hostilities or war or any act of terrorism.

“Material Assets” has the meaning set forth in Section 3.6(a).

“Material Agreements” has the meaning set forth in Section 3.21(a).

“Material Customer” has the meaning set forth in Section 3.23.

“MSI” means Millennium Scan International, LLC, a Virginia limited liability company.


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

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“Net Tax Benefit” means an amount equal to the present value of the net reduction in the liability for Taxes of the Company during any period as a consequence of a Loss. The present value amount of the Net Tax Benefit shall be determined by: (i) using a discount rate equal to seven percent (7%), (ii) discounting back to the date on which the applicable indemnity payment is due, and (iii) assuming that the Net Tax Benefit is used to reduce net income after all other tax deductions, taking into account the receipt of the indemnity payment, and using such other reasonable assumptions regarding the date (or dates) on which such Net Tax Benefit will be realized.

“NISPOM” means the National Industrial Security Program Operating Manual.

“Non-Executing VRP Participant” has the meaning set forth in Section 2.3(b)(iii).

“Option Failure” has the meaning set forth in Section 5.21.

“Ordinary Course of Business” means the ordinary course of business of the Company, consistent with past practice, of an amount and type that were ordinarily incurred in past periods, and if required by GAAP, fully reflected in the Financial Statements, and does not include the incurrence of any Liability that results from any breach or default (or event that with notice or lapse of time would constitute a breach or default) by the Company under any agreement binding on it.

“Ordinary Course Taxes” means Taxes incurred in the Ordinary Course of Business and shall specifically exclude (i) any Taxes arising in connection with the transactions contemplated in this Agreement and (ii) any Taxes that are not comparable in type (taking into account the relevant jurisdiction), quantity and frequency with Taxes reflected in the Financial Statements except to the extent the Company has received a written assessment from any taxing authority that such Taxes are due and owing. Accordingly, any particular Sales Taxes would not be an Ordinary Course Tax unless the Financial Statements include a Sales Tax that is comparable in amount, type and frequency of payment that has been paid to the same jurisdiction or Seller determines that notwithstanding the lack of a written assessment it is appropriate to reflect a particular sales tax accrual.

“Permits” has the meaning set forth in Section 3.17.

“Person” means an individual, corporation, partnership, limited liability company, Governmental Body or other entity.

“Pre-Closing Periods” has the meaning set forth in Section 8.1(d).

“Prevailing Party” means, in connection with any arbitration, suit or other proceedings initiated pursuant to this Agreement (i) the party that initiated such proceeding and substantially obtained the relief it sought, either through a judgment or arbitration award or the losing party’s voluntary action before arbitration, trial, or judgment, (ii) the non-withdrawing party if the other party withdraws its action without substantially obtaining the relief it sought, or (iii) the party that did not initiate the proceeding if judgment is entered into for any party, but without substantially granting the relief sought by the initiating party or granting more substantial relief


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

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to the non-initiating party with respect to any counterclaim asserted by the non-initiating party in connection with such proceeding.

“Pro Rata Portion” has the meaning set forth in Section 2.3(a).

“Prospective Customer” means any Person that has been solicited by the Company for the provision of products and/or services under contract during the Look-Back Period.

“Purchase Price” has the meaning set forth in Section 2.3(a).

“Purchase Price Adjustment” means any adjustment to the Purchase Price pursuant to Section 2.4.

“Restrictive Period” shall mean, with respect to each Stockholder, the period of time beginning on the Closing Date and ending upon the later of (i) the third-year anniversary thereof or (ii) the one-year anniversary of such Stockholder’s termination of full-time employment with the Company.

“Sales Taxes” means any sales, use or similar Taxes imposed by any state or local jurisdiction of the United States or by any territory or possession thereof.

“SEC” means the U.S. Securities and Exchange Commission.

“Section 338(h)(10) Election” has the meaning set forth in Section 8.7(a).

“Section 7519 Taxes” means the amount of Tax required to be paid by the Company to the IRS pursuant to provisions of Section 7519 of the Code with respect to the period covered by the Company’s Short Period Returns.

“Sellers” mean the Stockholders and the Company.

“Seller Documents” has the meaning set forth in Section 3.2.

“Seller Transaction Costs” means an amount equal to all unpaid Liabilities as of the Closing relating to transaction costs and expenses incurred by or on behalf of the Sellers prior to the Closing arising from the negotiation, execution and performance of the transactions contemplated by this Agreement, including, without limitation any legal, accounting, broker and other professional fees.

“Sellers’ Knowledge” means the actual knowledge of any Stockholder or any officer or other member of the senior management of the Company set forth on Schedule 2.3(b)(iii) hereto after reasonable internal inquiry and review concerning the particular subject matter.

“Shares” has the meaning set forth in Section 3.4.

“Short Period Returns” has the meaning set forth in Section 8.1(a).


[*]		Indicates confidential text omitted and filed separately with the Securities and Exchange Commission.

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“Software” means computer software programs together with the source code, object code, executable code, routines, algorithms, class files, object files and other program listings, user manuals, technical manuals and supporting material, and other printed and electronic information.

“Special Closing Bonus Payments” mean an amount equal to the aggregate sum, not to exceed the amount listed on Schedule 2.3(b)(iv), of all bonuses and similar payments to be paid to the individuals to be listed on Schedule 2.3(b)(iv), including applicable payroll withholdings, plus the employer portion of any Taxes related thereto, in connection with the transactions contemplated by this Agreement.

“Stockholder” and “Stockholders” mean Bishop and Frank F. Islam, individually or together, as the case may be.

“Stockholder Parties” has the meaning set forth in Section 7.2.

“Stockholder Representative” means Frank F. Islam.

“Stockholder Returns” has the meaning set forth in Section 8.2(a).

“Straddle Period” has the meaning set forth in Section 8.1(b).

“Straddle Period Return” has the meaning set forth in Section 8.1(b).

“Tangible Net Book Value” means the book value of the Company’s tangible assets (net of depreciation or amortization), less the amount of Liabilities (excluding Debt and any Taxes other than Ordinary Course Taxes), determined in accordance with GAAP consistently applied in accordance with the Company’s past practices; provided that Liabilities shall not include (i) the amounts paid as Special Closing Bonus Payments, (ii) the amounts paid as VRP Termination Payments or (iii) any Liabilities that are paid on or prior to the Closing.

“Target Tangible Net Book Value” means $[*].

“Tax” or “Taxes” means any federal state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, premium, withholding, alternative or added minimum, ad valorem, value added, goods and services, inventory, transfer or excise tax, or any other tax, custom, duty, governmental fee, deposit or other like assessment or charge of any kind whatsoever (including payments made pursuant to Section 7519 of the Code), together with any interest, penalty or addition to tax, imposed by any Governmental Body.

“Tax Claim Notice” has the meaning set forth in Section 8.2(a).

“Tax Deposit” has the meaning set forth in Section 2.3(b)(i).

“Tax Return” means any report, return, statement, estimate, declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes.

“Uncollected A/R” has the meaning set forth in Section 2.4(b)(iv).


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“VRP” means the Company’s Value Reward Program for Senior Executives.

“VRP Escrow” has the meaning set forth in Section 2.3(b)(v).

“VRP Holdback Amount” has the meaning set forth in Section 2.3(b)(v).

“VRP Termination Payments” mean an amount equal to the aggregate sum, not to exceed the amount listed on Schedule 2.3(b)(iii), of all bonuses and similar payments to be paid to the individuals listed on Schedule 2.3(b)(iii), including applicable payroll withholdings, plus the employer portion of any Taxes related thereto, in connection with the transactions contemplated by this Agreement.

“VRP Termination and Release Agreements” mean the receipts and releases executed by each individual listed on Schedule 2.3(b)(iii), by which each such individual acknowledges the termination of the VRP, accepts his respective VRP Payment in complete satisfaction of any and all claims he may have under the VRP and releases the Company from any further liability with respect to the VRP in a form substantially similar to the form attached hereto as Exhibit C.

“WARN” means the Worker Adjustment and Retraining Notification Act, as amended.

ARTICLE II
Purchase of Shares

2.1 Sale and Delivery of the Shares. Pursuant to the terms, and subject to the conditions set forth herein, Buyer hereby agrees to purchase from the Stockholders, and the Stockholders hereby agree to sell to Buyer, the Shares for the consideration set forth in Section 2.3.

2.2 Closing Date. The closing (the “Closing”) of the sale and purchase of the Shares will take place at the Washington, DC office of Venable LLP, counsel to Buyer, at 10:00 a.m. local time on January 19, 2007, or at such other date, time and place as is mutually agreed among the parties unless this Agreement is terminated or, if all of the conditions to the obligations of the parties set forth in Article VI have not been satisfied or waived by January 19, 2007, and there is no agreement as to an alternative date among the parties, on the day which is two (2) Business Days following the date on which all such conditions have been satisfied or waived (such date and time of closing being herein called the “Closing Date”).

2.3 Purchase Price and Payment of Purchase Price.

(a) As consideration in full for the acquisition of the Shares from the Stockholders and subject to the terms and conditions of this Agreement, Buyer will pay or cause to be paid to or on behalf of the Stockholders an aggregate amount equal to $250,000,000, as such amount may potentially be adjusted at the Closing and after the Closing pursuant to Section 2.4 (such amount, as so adjusted, the “Purchase Price”). In the manner set forth in Section 2.3(b), the Purchase Price will be payable ratably to the Stockholders in accordance with their ownership percentage of the Shares as set forth on Schedule 3.5, each percentage amount being such Stockholder’s “Pro Rata Portion”.


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(b) On the Closing Date, Buyer shall:

(i) Deposit an amount equal to the sum of (A) [*]Dollars ($[*]) plus (B) an amount (the “Tax Deposit”) determined by the Sellers in good faith with such determination provided to Buyer at least five (5) days prior to the Closing Date equal to the amount of Section 7519 Taxes (collectively, the “Holdback Amount”) into an interest bearing escrow (the “Escrow”) held pursuant to an escrow agreement substantially in the form of Exhibit A (the “Escrow Agreement”). The Escrow shall be held, maintained and disbursed by the escrow agent provided for in the Escrow Agreement (the “Escrow Agent”) and shall serve as security for the potential Purchase Price Adjustments described herein, for any potential claims of Buyer for indemnification under Article VII and Section 5.14 and as a source of funds for the Company to pay the Section 7519 Taxes to the IRS when due and payable. To the extent the Holdback Amount held in Escrow is not applied to or reserved for any such Purchase Price Adjustment, claims for indemnification or payment when due for the Section 7519 Taxes, it shall be released from the Escrow to the Stockholders on a pro rata basis, together with all accrued interest and other income earned thereon, on the date that is eighteen (18) months after the Closing Date in accordance with the terms of the Escrow Agreement; provided, however, that to the extent that the amount of the Tax Deposit is determined to be in excess of the amount of Section 7519 Taxes, such excess shall be distributed to the Stockholders from the Escrow on a pro rata basis within ten (10) days of such determination.

(ii) Pay any unpaid Seller Transaction Costs to the Person to whom such unpaid amounts are owed that have not been paid by Sellers prior to the Closing and are identified on the Closing Certificate and Flow of Funds Memorandum delivered to Buyer pursuant to Section 2.3(c).

(iii) Pay an amount equal to the sum of the VRP Termination Payments to the Company by wire transfer of immediately available funds, which, immediately thereafter, shall be paid at the Closing by the Company, net of withholdings set forth on Schedule 2.3(b)(iii), to the individuals listed on Schedule 2.3(b)(iii) who have executed their respective VRP Termination and Release Agreement on or prior to the Closing. Not less than five (5) Business Days prior to the Closing Date, the Company shall deliver to Buyer an updated Schedule 2.3(b)(iii) listing opposite the name of each individual the amount of the award to which such individual is entitled under the VRP and, assuming such individual executes the VRP Termination and Release Agreement, the amount to be paid (or previously paid in accordance with Section 2.7) to such individual net of all applicable withholding amounts and payroll taxes. This updated Schedule 2.3(b)(iii) also shall list the employer portion of Taxes related to the payment of the VRP Termination Payments. If any individual listed on Schedule 2.3(b)(iii) does not execute and deliver the VRP Termination and Release Agreement to Buyer prior to or at the Closing (each such individual, a “Non-Executing VRP Participant”), then Buyer shall deposit the VRP Termination Payment to be paid to such Non-Executing VRP Participant into the VRP Escrow in accordance with Sections 2.3(b)(v) and 2.7.

(iv) Pay an amount equal to the sum of the Special Closing Bonus Payments to the Company by wire transfer of immediately available funds, which immediately thereafter shall be paid at the Closing by the Company, net of withholdings set forth on Schedule 2.3(b)(iv), to the individuals listed on Schedule 2.3(b)(iv). Not less than five (5) Business Days


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prior to the Closing Date, the Company shall deliver to Buyer Schedule 2.3(b)(iv) listing the name of each individual to receive Special Closing Bonus Payments, the amount to be paid to each such individual net of all applicable withholding amounts and payroll taxes, and the employer portion of Taxes related to the Special Closing Bonus Payments.

(v) If there are one (1) or more Non-Executing VRP Participants, deposit the sum equal to the aggregate amount(s) determined in good faith by the Sellers to be due and payable to such Non-Executing VRP Participant(s) under the VRP (such aggregate amount(s), the “VRP Holdback Amount”) into an interest bearing escrow (the “VRP Escrow”) held pursuant to the Escrow Agreement. The VRP Escrow shall be held, maintained and disbursed by the Escrow Agent and shall serve as a source of funds for payment to any such Non-Executing VRP Participants. To the extent that Buyer or the Company suffer or incur any Losses as a result of or relating to claims of the Non-Executing VRP Participants under the VRP in addition to the VRP Holdback Amount, then such Losses shall be payable from the Holdback Amount; provided, however, that the Stockholders shall restore all such payments in excess of the VRP Holdback Amount to the Holdback Amount pursuant to the provisions of Section 7.7.

(vi) Pay each of the Stockholders his Pro Rata Portion of an amount (the “Closing Payment”) equal to the Purchase Price, as potentially adjusted pursuant to Section 2.4(a), minus the sum of the Holdback Amount, Seller Transaction Costs paid under Section 2.3(b)(ii), VRP Termination Payments, Special Closing Bonus Payments, and, if applicable, the VRP Holdback Amount. The Closing Payment will be made by wire transfer of immediately available funds to the account of the Stockholders specified in the certificate specified in Section 2.3(c).

(c) Closing Certificate and Flow of Funds Memorandum. No less than five (5) Business Days prior to the scheduled Closing Date, the Stockholder Representative shall deliver to Buyer a certified statement signed by the Company and the Stockholder Representative setting forth the amount of unpaid Seller Transaction Costs, the amount of the Tax Deposit, the aggregate amount of the VRP Termination Payment (and the amount to be paid to each VRP participant at the Closing), the aggregate amount of the Special Closing Bonus Payments (and the amount to be paid to each recipient thereof at the Closing), the amount of the VRP Holdback Amount if applicable and the amount of the Closing Payment payable to each Stockholder, all in a form reasonably acceptable to Buyer. Such certificate shall also contain wire instructions for all of the forgoing payments (or instructions to pay certain amounts by check) and all of the other payments referenced in Section 2.3. Sellers agree to use their best efforts to pay all Seller Transaction Costs before the Closing in order to limit to the greatest extent possible the amount of any Seller Transaction Costs to be paid at or after the Closing. Within thirty (30) days of notification from Buyer (which notification shall include copies of invoices or such other reasonable detail of the applicable Seller Transaction Costs), the Stockholders shall reimburse Buyer for any and all Seller Transaction Costs paid by Buyer after the Closing.

2.4 Potential Purchase Price Adjustments.

(a) No less than five (5) Business Days prior to the scheduled Closing Date, the Company will prepare and furnish Buyer with a good faith estimate of the Closing Balance


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Sheet (the “Estimated Balance Sheet”) reasonably acceptable to Buyer, which will be prepared in accordance with Section 2.4(b) and in reasonable detail and accompanied by such financial information and methods of calculation as may reasonably be necessary for Buyer to understand the calculations included therewith. For purposes of calculating the Closing Payment, included with the Estimated Balance Sheet will be calculations of the Estimated Tangible Net Book Value, Estimated Cash Balances and Estimated Debt. The Purchase Price will be reduced at the Closing by the amount of Estimated Debt and will be increased or decreased, as the case may be, on a dollar-for-dollar basis to the extent the Estimated Tangible Net Book Value is greater or less than the Target Tangible Net Book Value; provided, however, an increase in the Closing Payment attributable to Estimated Tangible Net Book Value exceeding Target Tangible Net Book Value shall not exceed the amount of the Estimated Cash Balances. The net adjustment to the Closing Payment arising from the Estimated Debt, Estimated Tangible Net Book Value and Estimated Cash shall be referred to herein as the “Estimated Purchase Price Adjustment.”

(b) Within 150 days after the Closing, Buyer will furnish the Stockholder Representative with a balance sheet of the Company as of the Closing Date (the “Closing Balance Sheet”) prepared by Buyer, which will be in reasonable detail and accompanied by such other financial information and methods of calculation as may be reasonably necessary for the Stockholder Representative to evaluate the accuracy thereof. The Closing Balance Sheet will (i) be prepared by Buyer in accordance with GAAP, applied on a basis consistent with the Company audited financial statements as of September 30, 2005; (ii) be based solely on transactions arising or resulting solely from the operation of the Company’s business and will not include any amounts arising from Buyer’s acquisition of the Company (including, without limitation, any amounts paid by Buyer to or on behalf of the Sellers on or before the Closing, any Taxes resulting from this transaction, any Seller Transaction Costs, any VRP Termination Payments, any Special Closing Bonus Payments and any Holdback Amounts); (iii) exclude any assets that have been or will be assigned or distributed to the Stockholders in connection with this transaction; (iv) exclude any accounts receivable billed as of the Closing Date but not collected within 150 days after the Closing Date (the “Uncollected A/R”); and (v) exclude Taxes other than Ordinary Course Taxes. The Closing Balance Sheet also will set forth the calculation of Closing Tangible Net Book Value, Closing Cash Balances, Closing Debt, and if applicable, the “Closing Purchase Price Adjustment,” which shall mean the amount obtained employing the same methodology as used to determine the Estimated Purchase Price Adjustment, but using Closing Debt, Closing Tangible Net Book Value and Closing Cash amounts rather than Estimated Debt, Estimated Tangible Net Book Value and Estimated Cash amounts. Buyer shall use commercially reasonable efforts to furnish the Closing Balance Sheet as soon as practicable within such 150-day period after the Closing, but in the event Buyer, using such efforts, is not able to furnish the Closing Balance Sheet within such period, the Parties agree that the time period for delivery of the Closing Balance Sheet shall be extended to the extent reasonably necessary for (i) Buyer to determine the proper amount of any asset or liability of the Company that may not have been correctly recorded by the Company in past periods and (ii) Buyer to obtain and incorporate into the Closing Balance Sheet such information from the Stockholder Representative as may be reasonably necessary to complete the Closing Balance Sheet, which information shall be furnished in a timely manner. Buyer will notify the Stockholder Representative in writing as soon as reasonably practicable if it determines that it will not be able to furnish the Closing Balance Sheet within such 150-day period and will include in such notice a list of all information required from the Stockholder Representative as may be reasonably


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necessary to complete the Closing Balance Sheet. With respect to any failure to timely provide the Closing Balance Sheet to the Stockholder Representative, the Stockholders will receive only actual damages (if any) caused by such failure. Buyer shall cooperate with the Stockholder Representative in furnishing information, documents and such other assistance as is reasonably requested by the Stockholder Representative to facilitate its review of the Closing Balance Sheet. The Stockholder Representative will have a period of forty-five (45) days after receipt of the Closing Balance Sheet to notify Buyer in writing of their election to accept or reject (and in the case of a rejection, there must be included in such notice the reasons for rejection in reasonable detail) the Closing Balance Sheet and any Closing Purchase Price Adjustment determined therefrom. In the event no written notice is received by Buyer during such forty-five (45)-day period, Buyer’s calculation of Closing Tangible Net Book Value, Closing Cash Balances, Closing Debt, and any Closing Purchase Price Adjustment will be deemed accepted by the Stockholder Representative and final and binding on the parties hereto. In the event that any document or action required to be delivered or taken by the Stockholder Representative as a prerequisite to the delivery of a report on the Closing Balance Sheet is not timely delivered or taken, such failure shall be deemed to be a rejection of the Closing Balance Sheet by the Stockholder Representative and the provisions of Section 2.4(c) shall apply.

(c) In the event the Stockholder Representative timely and duly rejects Buyer’s Closing Balance Sheet and any Closing Purchase Price Adjustment, Buyer and the Stockholder Representative will promptly (and in any event within twenty (20) days following the date upon which the Stockholder Representative rejects Buyer’s Closing Balance Sheet) attempt to make a joint determination of the Closing Balance Sheet and any Closing Purchase Price Adjustment. If the Stockholder Representative and Buyer are able to jointly determine the Closing Balance Sheet, any Closing Purchase Price Adjustment amount resulting therefrom will be made immediately after such determination and will be final and binding on the parties hereto. If the parties are unable to agree upon the final determination of the Closing Balance Sheet within such twenty (20)-day period, then Buyer and the Stockholder Representative will submit the issues in dispute to the Arbitrator, who will act as the sole arbitrator of the issues in dispute. The determination by the Arbitrator will be final and binding upon the parties. The Arbitrator, in the Arbitrator’s sole discretion, will allocate the fees and expenses of the accountants and the Arbitrator to the Stockholders and Buyer.

(d) To the extent the amount of the Estimated Purchase Price Adjustment is different than the amount of the Closing Purchase Price Adjustment (determined in accordance with either Section 2.4(b) or Section 2.4(c), as the case may be), then either the Buyer shall pay or refund the Stockholders or the Stockholders, on a pro rata basis, shall pay or refund the Buyer, as the case may be, such amount as is necessary to cause the amount by which the Closing Payment was adjusted using the Estimated Purchase Price Adjustment to equal the amount by which the Closing Payment would have been adjusted using the Closing Purchase Price Adjustment. By way of example, if the Estimated Purchase Price Adjustment resulted in a decrease of the Closing Payment by $500,000 and use of the Closing Purchase Price Adjustment rather than the Estimated Purchase Price Adjustment would have resulted in an increase of the Closing Payment by $1,000,000, then the Buyer shall pay the Stockholders an amount equal to $1,500,000 pursuant to this Section 2.4(d). In addition, within thirty (30) days of notification from Buyer (which notification shall include copies of invoices or such other reasonable detail of the applicable Seller Transaction Costs), the Stockholders shall reimburse Buyer for any and all


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Seller Transaction Costs paid by Buyer after the Closing. Any amount up to [*] Dollars ($[*]) payable by the Stockholders in the aggregate under this Section 2.4(d) shall be paid out of the Holdback Amount. Any amount in excess of [*] Dollars ($[*]) payable by the Stockholders in the aggregate under this Section 2.4(d) shall be paid by the Stockholders to the Buyer in accordance with Section 2.4(e).

(e) Any amounts required to be paid by one party to the other pursuant to Section 2.4(d) shall be treated as a Purchase Price Adjustment. Any payments due to Buyer pursuant to Section 2.4(d) shall be paid out of the Holdback Amount and/or by the Stockholders, as applicable, to Buyer in immediately available funds within three (3) Business Days after final determination of the Closing Purchase Price Adjustment. Any payments due to the Stockholders shall be paid by Buyer to the Stockholders in immediately available funds within three (3) Business Days after final determination of the Closing Purchase Price Adjustment in accordance with each Stockholder’s Pro Rata Portion.

(f) In the event that the Closing is to occur on other than a month-end, the Buyer and the Stockholders shall in good faith attempt to agree on reasonable mid-month closing accounting procedures and conventions.

(g) Buyer shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to the Stockholders such amounts as Buyer or the Company is required to deduct and withhold with respect to the making of such payment under the Code, or any applicable provision of state, local or foreign Tax law. To the extent that amounts are so withheld and paid over to the appropriate taxing authority by Buyer, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Stockholders in respect of which such deduction and withholding was made by the Company.

2.5 Closing Deliveries. At the Closing:

(a) Buyer will deliver to the Stockholders the Closing Payment by wire transfer of immediately available funds and will delver to the Company the amount of any VRP Termination Payments and Special Closing Bonus Payments payable at the Closing by wire transfer of immediately available funds.

(b) Buyer will deliver to the Escrow Agent (i) the Holdback Amount, and (ii) if applicable, the VRP Holdback Amount by wire transfer of immediately available funds and Buyer, the Stockholders and the Escrow Agent will deliver the Escrow Agreement.

(c) The Stockholders will deliver to Buyer certificates representing all of the Shares to be purchased by Buyer, together with duly executed stock powers for transfer.

(d) Each director and officer of the Company will deliver to Buyer his or her written resignation from such office unless otherwise requested by Buyer.

(e) The Company will have delivered to Buyer a closing certificate executed by an executive officer of the Company, in form and substance reasonably satisfactory to Buyer, attached to which are the original articles of incorporation, bylaws, minute books, stock ledger


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and other ownership records of the Company, and the “good standing” certificates evidencing the matters included in Section 3.1.

(f) Sellers will deliver to Buyer the other Seller Documents in form and substance reasonably satisfactory to Buyer.

(g) Buyer will deliver to Sellers the other Buyer Documents in form and substance reasonably satisfactory to Sellers.

(h) Sellers will deliver to Buyer the VRP Termination and Release Agreements as have been received from the individuals listed on Schedule 2.3(b)(iii), duly executed by the Company and each such individual, and a list of Non-Executing VRP Participants.

(i) Sellers will deliver to Buyer a copy of IRS Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases, executed by each Stockholder.

2.6 Section 338(h)(10) Election. Buyer and Sellers agree that Sellers shall take, or cause to be taken, any and all action necessary and to do, or cause to be done, or to execute, or cause to be executed, such documents as may be necessary or desirable to effect any Section 338(h)(10) Election, with respect to Buyer’s acquisition of all of the capital stock of the Company, in accordance with the provisions of Section 8.7.

2.7 VRP Termination Payments. Prior to the Closing, the Company shall determine the amounts that the individuals set forth on Schedule 2.3(b)(iii) are to receive as VRP Termination Payments and any conditions to be satisfied by such individuals in connection therewith. At least five (5) Business Days prior to the Closing, the Company shall deliver to each participant a copy of such participant’s VRP Termination and Release Agreement that includes the amount determined by the Company to be due and payable to such VRP Participants under the VRP. The Company will deliver the updated Schedule 2.3(b)(iii) to Buyer with the amounts, if any, that each of such individuals is to receive at least five (5) days prior to the Closing along with copies of the VRP Termination and Release Agreement delivered to the participants as described above. The Company may pay a VRP Termination Payment to an individual listed on the updated Schedule 2.3(b)(iii) immediately prior to the Closing, subject to the Company obtaining and delivering to Buyer prior to such payment a duly executed VRP Termination and Release Agreement from such individual. If there are any Non-Executing VRP Participants as of the Closing, then the VRP Holdback Amount shall be deposited in the VRP Escrow and held and disbursed in accordance with the Escrow Agreement. The Parties agree and understand that the Company shall have the responsibility and authority to obtain the VRP Termination and Release Agreements prior to the Closing and that the Stockholder’s Representative shall continue to have such responsibility and authority for up to eighteen (18) months after the Closing with respect to any Non-Executing VRP Participants so long as he continues to actively negotiate and attempt to obtain said VRP Termination and Release Agreement(s). At the expiration of the eighteen month period or in the event that the Stockholders Representative fails to actively negotiate and attempt to obtain any outstanding VRP Termination and Release Agreements, the Parties agree that any such VRP Participants shall be treated as third parties having Claims against the Company and the disposition of such


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Claims shall be further subject to the provisions of Section 7.6; provided, however, that when all VRP Termination and Release Agreements have been obtained and, if applicable, all Claims related to the VRP Termination Payments have been fully and finally settled, any funds remaining in the VRP Holdback shall be distributed to the Stockholders on a pro rata basis.

2.8 Special Closing Bonus Payments. Prior to the Closing, the Company shall determine the amounts that the individuals to be set forth on Schedule 2.3(b)(iv) are to receive as a one-time discretionary bonus in connection with closing of the transaction. The names of the individual recipients and the amounts each of them is to receive at the Closing will be provided to Buyer at least five (5) Business Days prior to the Closing.

ARTICLE III
Representations and Warranties of Sellers

Sellers, jointly and severally, represent and warrant to Buyer as follows:

3.1 Organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of its organization. The Company has full power to own its properties and to conduct its business as presently conducted. The Company is duly authorized or qualified to do business as a foreign corporation and is in good standing in each State or other jurisdiction in which its assets are located or in which its business or operations as presently conducted make such authorization or qualification necessary, except in such States or other jurisdictions where failure to be so authorized or qualified could not reasonably be expected to have a Material Adverse Effect. The Company is required to be qualified to do business as a foreign corporation only in the jurisdictions set forth on Schedule 3.1. Set forth on Schedule 3.1 is a list of all assumed names under which the Company operates and all jurisdictions in which any of the assumed names are registered.

3.2 Authority. Each Seller has all requisite power and authority, corporate, shareholder or otherwise, to execute, deliver, and perform under this Agreement and the other agreements, certificates, and instruments to be executed by it in connection with or pursuant to this Agreement (together with this Agreement, the “Seller Documents”). The execution, delivery, and performance by each Seller of each Seller Document to which it is a party has been duly authorized by all necessary action, corporate, shareholder or otherwise, on the part of such Seller. This Agreement has been, and at the Closing the other Seller Documents will be, duly executed and delivered by each Seller party thereto. This Agreement is, and upon execution and delivery, each of the other Seller Documents will be, a legal, valid, and binding agreement of each Seller party thereto, enforceable against such Seller in accordance with their respective terms.

3.3 Organic Documents. The Company has provided Buyer a true, correct, and complete copy of the Company’s articles of incorporation, bylaws, minute books, stock ledger and other ownership records. Such corporate records include minutes or consents reflecting all actions taken by the directors (including any committees) and stockholders of the Company.

3.4 Capitalization. The authorized capital stock of the Company consists solely of (i) three million (3,000,000) shares of common stock, par value $0.03333 per share, of which


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2,354,000 shares are issued and outstanding (such issued and outstanding shares, the “Shares”). All of the Shares are validly issued, fully paid and non-assessable and were issued free and clear of preemptive or similar rights. As of the Closing, the Shares constitute all of the issued and outstanding capital stock of the Company. Except as set forth on Schedule 3.4, there are no outstanding options, warrants, convertible securities or other rights, agreements, arrangements or commitments obligating the Company, the Stockholders or any other person or entity to issue or sell any securities or ownership interests in the Company. Except as set forth on Schedule 3.4, there are no stockholders’ agreements, voting agreements, voting trusts or similar agreements binding on any Stockholder’s interests in the Company or applicable to any of the Shares. All of the outstanding securities of the Company have been offered and sold in compliance with all applicable securities Laws.

3.5 Title to the Shares. The Stockholders own the Shares of record and beneficially in the share amounts set forth on Schedule 3.5 free and clear of any Liabilities, obligations, liens, claims, charges, mortgages, spousal interests (community or otherwise), security interests, assignment of rights or interests, encumbrances or contingencies of any nature (collectively, “Liens”). Upon the sale of the Shares to Buyer at the Closing, Buyer will acquire the entire legal and beneficial interest in all of the Shares free and clear of any Liens.

3.6 Title to Tangible Assets.

(a) Set forth in Schedule 3.6(a) is a complete list (including the street address, where applicable) of all real property leased by the Company (the “Leases”). The Company has provided Buyer with a list of items of personal property owned by or used in the business of the Company having a book or market value in excess of $5,000 (together with the real property on Schedule 3.6(a), the “Material Assets”).

(b) The Company has good and marketable title to all of the Material Assets it owns and holds a valid leasehold interest in all leased assets that are included within the Material Assets. The Material Assets (including its rights under the Material Agreements and Government Contracts and Government Subcontracts) are free and clear of any Liens, other than the Liens described in Schedule 3.6(b). Any Liens on the Material Assets to remain after the Closing are specifically identified on Schedule 3.6(b).

(c) The Company does not own, nor has it owned at any time in the past, any real property or, except for the Leases, any interest in real property.

(d) Except as set forth on Schedule 3.6(d), no equipment or fixtures have been loaned, bailed or otherwise furnished to or held by the Company by or on behalf of any Governmental Body.

(e) Except as set forth on Schedule 3.6(e), the Company’s Sensitive Compartmented Information Facilities have lease expiration dates that extend through the term of the applicable Government Contracts and Government Subcontracts to which they relate.

3.7 Sufficiency of Assets; Insurance.


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(a) The Material Assets constitute all tangible assets reasonably necessary for the conduct of the business of the Company as now conducted. The Company’s tangible assets are in good condition and repair, ordinary wear and tear excepted, and (where applicable) are in good working order and have been properly and regularly maintained in all material respects.

(b) Schedule 3.7(b) sets forth a true and complete list and brief description (including all applicable premiums and deductibles) of all policies of, and binders evidencing, life, fire, workmen’s compensation, product liability, errors and omissions, general liability and other forms of insurance, including title insurance, owned or maintained by the Company. No notice of cancellation or termination or nonrenewal has been received with respect to any such policy.

3.8 No Violation. Except as described in Schedule 3.8, neither the execution or delivery of the Seller Documents nor the consummation of the transactions contemplated by the Seller Documents, including without limitation the sale of the Shares to Buyer, will conflict with or result in the breach of any term or provision of, or violate or constitute a default under (or an event that with notice or lapse of time or both could constitute a breach or default), or result in the creation of any Lien on the Shares or any Material Assets or any dissenters or similar rights pursuant to, or relieve any third party of any obligation to the Company, or give any third party the right to terminate or accelerate any obligation under, any charter provision, bylaw, Government Contract, Government Subcontract or Government Bid, Material Agreement, Permit or material Law to which the Company is a party or by which the Company or any Material Asset is in any way bound or obligated, or to Sellers’ Knowledge, create an organizational or other conflict of interest regarding any Government Contract, Government Subcontract or Government Bid. No Seller nor any other Person having colorable authority to bind the Company or to enter into any obligation with respect to the Company or its assets has entered into any agreement, arrangement or understanding that purports to grant to any Person any right to approve of, or consent to any transaction contemplated by this Agreement or that alters or accelerates any material obligation of the Company or adversely affects the Shares or any Material Assets upon the consummation of the transactions contemplated by this Agreement.

3.9 Governmental Consents. Except for consents and approvals of, or filings or registrations with, the Federal Trade Commission and the Antitrust Division of the United States Department of Justice pursuant to the HSR Act and except as set forth in Schedule 3.9, no consent, approval, novation, order, or authorization of, or registration, qualification, designation, declaration, or filing with, any Governmental Body is required on the part of Sellers in connection with the sale of the Shares to Buyer or any of the other transactions contemplated by the Seller Documents.

3.10 Financial Statements. Attached as Schedule 3.10(a) are true and complete copies of (a) the unaudited consolidated balance sheet of the Company (the “Latest Balance Sheet”) as of September 30, 2006 (the “Latest Balance Sheet Date”), and the related unaudited consolidated statements of income and cash flows of the Company for the fiscal year then ended, and (b) the audited consolidated balance sheets of the Company as of September 30, 2004, and September 30, 2005, and the related audited consolidated statements of income and cash flows of the Company for the fiscal years then ended (clauses (a) and (b) collectively, the “Financial Statements”). The Financial Statements present fairly the financial condition of the Company at


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the dates specified and the results of its operations for the periods specified and have been prepared in accordance with GAAP, consistently applied, subject in the case of the unaudited statements to the absence of footnote disclosure, accompanying notes and other presentation items and to changes resulting from normal period-end adjustments for recurring accruals, which are not material individually or in the aggregate, and further subject in the case of the September 30, 2006, unaudited statements to the absence of accruals for the VRP Termination Payments and the Special Closing Bonus Payments. The Financial Statements do not contain any items of a special or nonrecurring nature, except as expressly stated in the Financial Statements. The Financial Statements have been prepared from the books and records of the Company, which accurately and fairly reflect the transactions of, acquisitions, and dispositions of assets by, and incurrence of liabilities by the Company; provided that the September 30, 2006, financial statements may not reflect accruals for the VRP Termination Payments or the Special Closing Bonus Payments.

3.11 Limitation on Liabilities; Absence of Undisclosed Liabilities. The Company does not have any direct or indirect debts, obligations or liabilities of any nature, whether absolute, accrued, contingent, liquidated or otherwise, and whether due or to become due, asserted or unasserted, known or unknown and whether or not of a nature that would be required, if known, to be disclosed, reflected or reserved against on a consolidated balance sheet of the Company prepared in accordance with GAAP or the notes thereto (collectively, “Liabilities”), except for (a) Liabilities set forth on the Latest Balance Sheet or any notes thereto, (b) Liabilities incurred in, or as a result of, the Ordinary Course of Business since the Latest Balance Sheet Date through the Closing, (c) Liabilities incurred in the Ordinary Course of Business under Material Contracts, Government Contracts and Government Subcontracts), (d) Liabilities set forth on Schedule 3.11(d) and other Liabilities that are individually or in the aggregate immaterial, or (e) Liabilities incurred solely in connection with the transaction contemplated in this Agreement.

3.12 Subsidiaries and Investments. The Company does not own or hold, and, except as set forth on Schedule 3.12, has not since its inception owned or held, any direct or indirect equity or debt interest or any form of ownership interest in any Person, including without limitation any Person in which the Company directly or indirectly beneficially owns at least fifty percent (50%) of either the equity interest in, or the voting control of, such Person or any option or other right to acquire any such interest.

3.13 Absence of Material Adverse Change. Since the Latest Balance Sheet Date, except as expressly contemplated by this Agreement or as set forth on Schedule 3.13, there has not been (a) any change, event or other condition that could reasonably be expected to result in a Material Adverse Effect; (b) any declaration, setting aside, or payment of any dividends or distributions in respect of any securities of the Company (other than cash dividends or distributions that will have been paid to the Stockholders, on a pro rata basis, prior to Closing and will be given effect to on the Estimated Balance Sheet) or any redemption, purchase, or other acquisition by the Company of any of its securities; (c) any payment or transfer of assets (including without limitation any distribution or any repayment of indebtedness) to or for the benefit of any security holder of the Company (other than cash dividends or distributions that will have been paid to the Stockholders, pro rata, in proportion to their respective shares in the Company prior to the Closing and will be given effect to on the Estimated Balance Sheet); (d) any revaluation by the Company of any of its assets, including, without limitation, the writing


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down or off of notes or accounts receivable, other than in the Ordinary Course of Business; (e) any entry by the Company into any commitment or transaction material to the Company, including, without limitation, incurring or agreeing to incur capital expenditures in excess of $25,000, individually or in the aggregate; (f) any increase in indebtedness for borrowed money other than working capital borrowing in the Ordinary Course of Business; (g) any breach or default (or event that with notice or lapse of time could constitute a breach or default), termination, or threatened termination under any Material Agreement, Government Contract or Government Subcontract by the Company, or, to the Sellers’ Knowledge, by any third party; (h) any change by the Company in its accounting methods, principles, or practices; (i) any increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, or other employee benefit plan, or any increase in the compensation payable or to become payable to directors, officers, employees, or consultants of the Company other than bonuses and salary increases to employees other than the Stockholders in the Ordinary Course of Business; (j) the termination of employment (whether voluntary or involuntary) of any officer or Key Employee of the Company or the termination of employment (whether voluntary or involuntary) of employees of the Company materially in excess of historical attrition in personnel; (k) any material theft, condemnation, or eminent domain proceeding or any material damage, destruction, or casualty loss affecting any asset used in the business of the Company not adequately covered by insurance; (l) any sale, assignment, or transfer of any Material Asset or any provision of services that are not provided in the Ordinary Course of Business; (m) any waiver by the Company or the Stockholders of any material rights related to the Company’s business, operations, or assets; (n) any other transaction, agreement or commitment entered into or affecting the Company’s business, operations, or assets, except in the Ordinary Course of Business; or (o) any agreement or understanding to do or resulting in any of the foregoing.

3.14 Taxes.

(a) Since October 1, 1994, the Company is and has been and will be at all times through the Closing Date, an “S” corporation within the meaning of Section 1361(a) of the Code and within the meaning of analogous state or local provisions in the jurisdictions set forth on Schedule 3.14(a) except to the extent that the “S” status of the Company is terminated as a result of the purchase of Shares or the Section 338(h)(10) Election contemplated by this Agreement. Other than in connection with this Share purchase, none of the Sellers has taken or omitted or caused to be taken or omitted to take any actions which could cause the Company to cease to be treated as an “S” corporation for federal and applicable state and local income Tax purposes.

(b) All federal, state, local, and other Tax Returns required to be filed by the Company relating to or involving transactions with the Company are true, complete and correct in all material respects and were prepared in compliance with applicable Laws and duly and timely filed, and all Taxes required to be paid, or required to be collected by the Company and remitted to a taxing authority, with respect to the periods covered by any such Tax Returns have been timely paid, except to the extent that such failure to file or pay is covered by a reserve on the Financial Statements or has been taken into account in computing a purchase price adjustment under Section 2.4 of the Agreement. In particular, none of the foregoing Tax Returns contains any position which is or would be subject to penalties under Section 6662 of the Code


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(or any corresponding provision of state or local Law). Furthermore, the Company has not entered into any arrangements that are considered a “reportable transaction” as determined by Treasury Regulation § 1.6011-4. No Tax deficiency has been proposed or assessed against the Company and the Company has not executed any waiver of any statute of limitations on the assessment or collection of any Tax, which Tax has not been paid. No Tax audit, action, suit, proceeding, investigation, or claim is now pending or, to the Sellers’ Knowledge, threatened against the Company, and, within the past three years, no issue has been raised in writing to the Company in any examination by a taxing authority with regard to any income or any material non-income Taxes which is expected to result in the assertion of a Tax deficiency against the Company for any Tax periods ending after the Closing Date. The Company has complied in all material respects with all applicable Laws related to the withholding of Taxes except to the extent that such failure to file or pay is covered by a reserve on the Financial Statements or is reflected in the liabilities set forth on the Closing Balance Sheet.

(c) To the extent required by GAAP, the most recent audited Financial Statements for the Company reflect an adequate reserve, established in accordance with GAAP, for all Tax Liabilities of the Company for all taxable periods and portions thereof through the date of such Financial Statements, and, since the date of the Financial Statements, there has not been any material change in the tax accounting methods followed by the Sellers in respect of the Company (other than such changes that have been required by Law or GAAP or that have been caused by the purchase of Company Shares or the Section 338(h)(10) Election contemplated by this Agreement), and in the case of Taxes owed as of the date hereof, to the extent required by GAAP an adequate reserve is (and until the Closing Date will continue to be) reflected in the accruals for Taxes payable on the most recent balance sheets of the Company assuming such reserve is adjusted for the passage of time and in accordance with past custom and practice of the Company, other than accruals established to reflect timing differences and accruals reflected only in the notes thereto.

(d) Schedule 3.14(d) lists each state, local, county, municipal or foreign jurisdiction in which the Company files or is or has been determined by any Governmental Body to be required to file a Tax Return or is or has been determined by a Governmental Body to be liable for any Tax on a “nexus” basis at any time for a taxable period for which the statute of limitations has not expired.

(e) Except as set forth on Schedule 3.14(e), or to the extent reflected in the Financial Statements or the Closing Balance Sheet, (1) no claim in writing has ever been made by an authority in a jurisdiction where the Company does not file Tax Returns that it is subject to taxation by that jurisdiction; (2) there are no Liens on any assets of the Company that arose in connection with any failure to pay any Tax required to have been paid; (3) the Company is not a party to any Tax allocation or sharing agreement relating to Taxes imposed on a consolidated, combined, unitary or similar basis on members of a group of entities that include the Company; (4) the Company (x) has not been a member of an affiliated group filing a consolidated federal income Tax Return or (y) is not liable for the Taxes of any Person under Treasury Regulation § 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise; (5) the Company will not be required to include any item of income in (or with respect to clause (ii) below, exclude any item of deduction from) taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in


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method of accounting agreed to by the Company on or before the Closing Date or required to be made for a taxable period ending on or prior to the Closing Date under Section 481(c) of the Code (or any corresponding or similar provision of state, local or foreign income Tax Law) other than any such change arising in connection with the purchase of Company Shares or the Section 338(h)(10) Election contemplated by this Agreement, (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign income Tax Law) executed on or prior to the Closing Date, (iii) installment sale or open transaction disposition made on or prior to the Closing Date or (iv) by reason of the receipt before the Closing Date of any prepaid amounts; and (6) no taxes have been or will be for periods through the Closing Date, including the consequences of the Section 338(h)(10) Election, imposed on the Company pursuant to Sections 1374 or 1375 of the Code.

(f) The Company has delivered or made available to Buyer (i) complete and correct copies of all Tax Returns of the Company, and of all examination reports and statements of deficiencies assessed against or agreed to by the Company for all taxable periods for which the applicable statute of limitations has not yet expired, and (ii) complete and correct copies of all private letter rulings, revenue agent reports, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, or pending ruling requests submitted by, received by, agreed to by or on behalf of the Company with respect to any audit, investigation, examination or other administrative procedure related to Taxes that is currently pending.

(g) The Stockholders have provided Buyer access to all opinions issued by law firms or accountants provided to the Company or the Stockholders, all work papers in the possession of the Company or the Stockholders and any other materials in the possession of the Company or the Stockholders that address the qualification of the Company as an S corporation.

(g) The Company does not have, and since October 1, 1994, has not had, any subsidiaries.

3.15 Litigation. Except as described in Schedule 3.15, there are no pending or, to the Sellers’ Knowledge, threatened, lawsuits, administrative proceedings, arbitrations, reviews, or formal or informal complaints or investigations by any Person against or relating to the Company or any of its directors, officers, employees, agents, or Affiliates (in their capacities as such), or to which any of the Shares are subject or relating to the transactions contemplated by this Agreement or the consummation thereof, nor, to the Sellers’ Knowledge, is there any basis therefore. The Company is not subject to or bound by any currently existing judgment, order, writ, injunction, or decree.

3.16 Compliance with Laws. Except as set forth on Schedule 3.20(b), the Company is currently complying in all material respects with, and has at all times complied in all material respects with, each applicable statute, law, ordinance, code, decree, order, permit, judgment, requirement, rule, or regulation of any Governmental Body, including without limitation, all federal, state, and local laws, and the applicable laws of any foreign jurisdiction, relating to zoning and land use, occupational health and safety, product quality and safety and employment and labor matters (collectively, “Laws”).


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3.17 Permits. The Company owns or possesses all right, title and interest in all material permits, licenses, authorizations, approvals, quality certifications, franchises, or rights issued by any Governmental Body necessary to conduct the business of the Company as currently conducted (collectively, “Permits”). Each of such Permits is listed and described in Schedule 3.17. No loss or expiration of any Permit on Schedule 3.17 will result from the transactions contemplated by this Agreement and no loss or expiration of any Permit listed on Schedule 3.17 is otherwise pending or, to the Sellers’ Knowledge, threatened, or reasonably foreseeable, other than expiration of such Permits in accordance with their terms that may be renewed in the Ordinary Course of Business without lapsing.

3.18 Environmental Matters. Without limiting the generality of the other representations and warranties set forth in this Article III, except as could not reasonably be expected to have a Material Adverse Effect and as described in Schedule 3.18, (i) the Company has conducted its business in compliance with all applicable Environmental Laws, including without limitation by having all Permits required under any Environmental Laws for the operation of the Company’s business; (ii) to the Sellers’ Knowledge, no Hazardous Substances are present on any Real Property; (iii) Sellers have not received any notices, demand letters, or requests for information from any Governmental Body or other Person indicating that the Company is or may be in violation of, or liable under, any Environmental Law or relating to any of the Material Assets or former material assets of the Company; (iv) no reports have been filed, or are required to be filed, by (or relating to) the Company concerning the release or threatened release of any Hazardous Substance or the threatened or actual violation of any Environmental Law; (v) no Hazardous Substance has been disposed of, released or transported by the Company in violation of any applicable Environmental Law to or from any Real Property or as a result of any activity of Sellers; (vi) there have been no environmental investigations, studies, audits, tests, reviews, or other analyses regarding compliance or noncompliance with any Environmental Law conducted by or for or which are in the possession of Sellers relating to the activities of the Company or any of the Real Property that have not been delivered or disclosed to Buyer; (vii) to the Sellers’ Knowledge, there are no underground storage tanks on, in, or under any of the Real Property, and no underground storage tanks have been closed or removed from any of the Real Property; (viii) to the Seller’s Knowledge, there is no asbestos present in any of the Real Property, and no asbestos has been removed from any of the Real Property; (ix) neither the Company nor any Material Assets are subject to any Liabilities or expenditures relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment, or claim asserted or arising under any Environmental Law; (x) to the Sellers’ Knowledge, no Hazardous Substance is present and there are no violations of any Environmental Laws involving property adjacent to the Real Property; and (xi) the Company has not used any of the Material Assets or any other assets or premises of the Company for the handling, treatment, storage or disposal of any Hazardous Substances.

3.19 Employee Matters.

(a) Set forth on Schedule 3.19(a) is a complete list of all current employees of the Company, including category (e.g., regular, full-time, temporary, part-time, etc.), date of employment, current title, compensation, the date and amount of last increase in compensation, accrued vacation and any accrued bonuses payable to such employee. The Company does not have any collective bargaining, union, or labor agreements, contracts, or other arrangements with


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any group of employees, labor union, or employee representative and, to the Sellers’ Knowledge, there is no organization effort currently being made threatened by or on behalf of any labor union with respect to employees of the Company. The Company has not experienced, and, to the Sellers’ Knowledge, there is no basis for any strike, material labor trouble, work stoppage, slow down, or other interference with or impairment of the business of the Company. To the Sellers’ Knowledge, no employee of the Company is subject to any agreement or obligation that restricts or limits his or her ability to compete or to devote his or her full talents and efforts to the Company after the Closing.

(b) Except as listed in Schedule 3.19(b), the Company is not subject to any currently pending or to the Sellers’ Knowledge, threatened, material claims, charges, demands or suits arising under or based upon wages, commissions or benefits owed; covenants of fair dealing and good faith; material claims for torts, including but not limited to defamation, intentional infliction of emotional distress, negligence and any other wrongful conduct; material claims for wrongful discharge or retaliation; material claims under the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Civil Rights Acts of 1866 and 1873, the Family Medical Leave Act of 1993, the Age Discrimination in Employment Act, ERISA, WARN, COBRA. To the Sellers’ Knowledge, the Company is not the subject of any currently ongoing, or to the Sellers’ Knowledge, threatened investigations or audits by any Governmental Body for employment-related violations, including any investigations or audits by or on behalf of the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the IRS, Department of Labor or any analogous Governmental Body.

(c) Except as set forth on Schedule 3.20(b), the Company is and has been in material compliance with all applicable employment-related Laws. To the extent permitted by Law, the Company has made available to Buyer any and all documents required to be kept by the Company pursuant to any Laws governing employment, including EEO-1 statements, resumes, applications, employee handbooks, personnel files, I-9 forms and employee medical records.

(d) Set forth on Schedule 3.19(d) is (i) a complete list of all current regular, full time and/or permanent employees of the Company that hold security clearances other than top secret, indicating the type of security clearance held by each employee, and (ii) the aggregate number of current regular, full time and/or permanent employees that hold security clearances of top secret or higher.

(e) Except for the payments to be set forth on Schedules 2.3(b)(iii)-(iv), the Company has not paid nor is obligated to pay any retention or change of control bonuses. Schedules 2.3(b)(iii) and 2.3(b)(iv), respectively, will list the aggregate sum of all bonuses and similar payments to be paid to the individuals listed on those schedules in the amounts specified therein, any Taxes related thereto.

(f) Except as set forth on Schedule 3.19(f), there are no employment agreements, written or oral, between the Company and any employee, and all such employees are employed on an “at will” basis.

3.20 Employee Benefit Plans.


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(a) Set forth in Schedule 3.20(a)(i) is a complete list of all “employee benefit plans” (as defined in Section 3(3) ERISA), all plans or policies providing for “fringe benefits” (including but not limited to vacation, paid holidays, personal leave, employee discount, educational benefit, or similar programs), and all other bonus, incentive, compensation, profit-sharing, stock, severance, retirement, health, life, disability, group insurance, employment, fringe benefit, or any other similar plan, agreement, policy, or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow, or other agreement related thereto, which (i) is maintained or contributed to by the Company, or with respect to which the Company has or may have any Liability or (ii) provides benefits to any director, former director, consultant, former consultant, officer, employee, former officer, or former employee of the Company, or the dependents of any of the foregoing, regardless of whether funded (collectively, the “Employee Plans”). Except as disclosed on Schedule 3.20(a)(ii), no legally binding representations have been made to any employee or former employee of the Company promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life, or disability coverage for any period of time beyond the end of the current plan year or for retiree coverage under any such plan (except to the extent of coverage required under COBRA or applicable state law). Liabilities for Employee Plans have been accounted for in accordance with GAAP. Except as disclosed on Schedules 2.3(b)(iii)-(iv), the consummation of the transactions contemplated by this Agreement will not accelerate the time of payment or vesting, or increase the amount of, compensation (including bonuses), or result in any payment or benefit that is contingent on consummation of the transactions contemplated by this Agreement and that would be characterized as a “parachute payment” within the meaning of Section 280G of the Code (without regard to clause (b)(2)(A)(ii) thereof) to, any director, officer, consultant or employee (in each case, current or former) of the Company.

(b) Except as disclosed on Schedule 3.20(b), with respect to each Employee Plan and each other “employee benefit plan” (as defined in Section 3(3) of ERISA) maintained or contributed to, currently or in the past by the Company or any ERISA Affiliate, or with respect to which the Company or any ERISA Affiliate has Liability (collectively, the “Controlled Group Plans”):

(i) there are no unfunded Liabilities existing under any Controlled Group Plan, which are not reflected in the respective financial statements of the Company or the ERISA Affiliate, and each Controlled Group Plan could be terminated as of the Closing Date, subject to compliance with applicable notice provisions, with no Liability to either Buyer, the Company or any ERISA Affiliate;

(ii) no Controlled Group Plan is a defined benefit plan (as defined in Section 3(35) of ERISA), a multiemployer plan (as defined in Section 3(37) of ERISA) or that is subject to Section 412 of the Code;

(iii) each Controlled Group Plan has been operated in material compliance with its terms, ERISA, applicable tax qualification requirements (including without limitation Section 401(a) of the Code), COBRA requirements (including Section 4980B of the Code and Sections 601-609 of ERISA) and all other applicable Laws;


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(iv) the only Controlled Group Plan which is intended to be qualified under Section 401(a) of the Code is the QSS Group, Inc. 401(k) Retirement Plan (the “Company 401(k) Plan”). The Company is entitled to rely on a current opinion letter from the IRS with respect to the Company 401(k) Plan documents and no event has occurred that would be reasonably likely to result in disqualification of such plan; and

(v) except to the extent that any failure would not reasonably be expected to result in material liability to the Company, all required returns, forms, notices and other disclosure materials have been filed with the appropriate Governmental Body or distributed to participants and their beneficiaries, as applicable.

(c) With respect to each Employee Plan, the Company has made available to Buyer true, correct, and complete copies of (i) the plan documents and summary plan description; (ii) the most recent determination or opinion letters received from the IRS (iii) the annual reports required to be filed for the three most recent plan years of each such Employee Plan; (iv) all related trust agreements, insurance contracts, or other funding agreements that implement such Employee Plan; (v) all material reports and other documents (including the most recent actuarial and/or other analysis, if any) relating to the claims experience under any fully or partially self-funded Employee Plan that is an “employee welfare benefit plan” as defined in ERISA Section 3(1), including without limitation claims experience for the respective period and “incurred but not reported claims” at the end of the period; and (vi) all other material documents, records, or other materials related thereto reasonably requested by Buyer to the extent that disclosure is permitted by Law.

(d) None of the Company, any ERISA Affiliate nor any plan fiduciary of any Employee Plan has engaged in any transaction in violation of Section 406(a) or (b) of ERISA or any “prohibited transaction” (as defined in Section 4975(c)(1) of the Code) that would subject the Company or Buyer to any material Taxes, penalties, or other Liabilities resulting from such transaction.

(e) Except for routine claims for benefits arising in the Ordinary Course of Business, there are no actions, suits, claims, audits, or investigations pending or to the Sellers’ Knowledge, threatened against, or with respect to, any of the Employee Plans or their assets; and all contributions required to be made to the Employee Plans have been made in material compliance with the terms of such plans and applicable Law. To Sellers’ Knowledge, claims experience for the current plan year of Employee Plans described in Section 3.20(c)(v) is reasonably consistent with prior plan years.

(f) The individuals listed on Schedule 2.3(b)(iii) are the only participants in the VRP, and the award amounts to be set forth opposite such individual’s name will constitute in aggregate the only unpaid awards under the VRP and the maximum award amount to which such individual is entitled. The net payment amounts to be set forth opposite each individual name will have been accurately calculated taking into account all applicable Taxes and all applicable federal, state and local Tax withholdings. The aggregate amount of employer Taxes related to the VRP Termination Payments will have been accurately calculated in accordance with all applicable federal, state and local Law.


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(g) To Sellers’ Knowledge, any Employee Plan which constitutes “nonqualified deferred compensation” under Section 409A of the Code has been operated in compliance with Section 409A as interpreted by IRS Notice 2005-1 and Proposed Treasury Regulations §§ 1.409A-1 through 1.409A-6.

3.21 Material Agreements.

(a) Schedule 3.21(a) lists each agreement, arrangement and understanding (whether written or oral and including all amendments thereto), excluding Government Contracts and Government Subcontracts, relating to the business of the Company to which the Company is a party or a beneficiary or by which the Company or any Material Asset is bound that is material to the Company’s current or proposed operations (collectively, the “Material Agreements”), including without limitation the following: (i) agreements pursuant to which the Company sells or distributes any products or services or that are otherwise material to the Company’s current or proposed operations; (ii) real estate leases; (iii) agreements evidencing, securing or otherwise relating to any indebtedness for borrowed money for which the Company is, directly or indirectly, liable; (iv) capital or operating leases or conditional sales agreements relating to vehicles, equipment, or other Material Assets having an aggregate value in excess of $25,000; (v) agreements pursuant to which the Company is entitled or obligated to acquire any capital assets from a third party; (vi) insurance policies, including account numbers for monopolistic state workers compensation insurance; (vii) employment, consulting, non-competition, separation, collective bargaining, union, or labor agreements or arrangements; (viii) agreements with or for the benefit of the Stockholders or any director, manager, officer, employee, or consultant (or any Person that, to the Sellers’ Knowledge, claims or has any basis to claim any rights as such) of the Company or any Affiliate or immediate family member of the foregoing; (ix) supply agreements or arrangements pursuant to which the Company is entitled or obligated to acquire any assets from a third party having an aggregate value in excess of $25,000 (other than supply agreements or other arrangements entered into solely in connection with the performance of a Government Contract or Government Subcontract); (x) any partnership, joint venture, consortium, or other similar arrangements or agreements; (xi) noncompetition, confidentiality and non-disclosure agreements to which the Company is a party or a beneficiary; and (xii) any other agreement pursuant to which the Company could be required to make or entitled to receive aggregate payments or other aggregate value in excess of $25,000 (other than an agreements entered into solely in connection with the performance of a Government Contract or Government Subcontract).

(b) Except as set forth in Schedule 3.21(b), the entering into of the Seller Documents and the consummation of the transactions contemplated by the Seller Documents, without notice to or consent or approval of any Governmental Body or other Person, will not constitute a breach of, violation of, or default under any provision of any Material Agreement.

(c) Schedule 3.21(c) identifies any Material Agreements that will be terminated or expire in accordance with its scheduled termination date at or prior to the Closing.

(d) Sellers have delivered to Buyer a copy of each written Material Agreement and a written summary of each oral Material Agreement. Except as described in Schedule 3.21(d), (i) each Material Agreement is valid, binding, and in full force and effect and

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enforceable against the Company, if applicable, and, to the Sellers’ Knowledge, the other parties thereto in accordance with its terms; (ii) the Company has performed all of its material obligations under each Material Agreement, and there exists no material breach or default (or event that with notice or lapse of time would constitute a breach or default) on the part of the Company or, to the Sellers’ Knowledge, on the part of any other party under any Material Agreement; (iii) there has been no termination (whether for default, convenience or otherwise), investigation, notice of default, show cause or cure notice or, to the Sellers’ Knowledge, any threatened termination or investigation or basis for any termination or investigation under any Material Agreement; (iv) no party (including the Company) has terminated, cancelled or waived any material term or condition of any Material Agreement and (v) to the Sellers’ Knowledge, no party to a Material Agreement intends to alter its relationship with the Company as a result of or in connection with the transactions contemplated by the Seller Documents or has been threatened with bankruptcy or insolvency.

(e) The cost accounting, estimating, property, and procurement systems relating to any Material Agreement are in compliance in all material respects with applicable Laws and contract provisions, including applicable cost principles and applicable cost accounting standards. None of the Material Agreements has currently incurred or is currently projected to incur any cost overrun. To Sellers’ Knowledge, there are no material delivery or performance issues or problems on the part of the Company under any Material Agreement.

3.22 Government Contracts and Subcontracts.

(a) Schedule 3.22(a) lists each Current Government Contract. For this purpose, a task, purchase or delivery order under a Government Contract or Government Subcontract shall not constitute a separate contract, for purposes of this definition, but shall be part of the Government Contract or Government Subcontract to which it relates. With respect to each such Government Contract or Government Subcontract, Schedule 3.22(a) accurately lists: (i) the contract name; (ii) the award date; (iii) the customer; (iv) the contract end date; (v) the contract ceiling; (vi) the contract’s current funded value; and (vii) as applicable, whether the current Government Contract or Government Subcontract requires by its terms for award the Company’s small business status, small disadvantaged business status, protégé status, or other preferential status. Attached to Schedule 3.22(a) is the “contract data sheet” or similar document maintained by the Company for each Current Government Contract or Government Subcontract listed on Schedule 3.22(a). Sellers do not represent or warrant that the data on the “contract data sheet” or similar document attached to Schedule 3.22(a) is accurate, current or complete.

(b) Schedule 3.22(b) lists all Government Bids. A Government Bid: (i) includes any proposal or offer made by the Company but has not resulted in a Government Contract prior to the Closing Date; and (ii) does not include any proposal or offer made by the Company that has been accepted and has resulted in a Government Contract prior to the Closing Date. With respect to each such Government Bid, Schedule 3.22(b) accurately lists: (i) the customer agency and title; (ii) the request for proposal (RFP) or other solicitation number or, if such Government Bid is for a task order under a prime contract, the applicable prime contract number; (iii) the date of proposal submission; (iv) the expected award date, if known; (v) the estimated period of performance; (vi) the estimated value based on the proposal, if any; and (vii) whether such Government Bid is premised on the Company’s small business status, small

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disadvantaged business status, veteran owned status, protégé status, or other preferential status. The Company has delivered to Buyer or provided access to Buyer true, correct and complete copies of all Government Contracts, Government Subcontracts and Government Bids, and provided access to Buyer to true and correct copies of all documentation related thereto requested by Buyer.

(c) With respect to each Government Contract or Government Subcontract, (i) the Company has fully complied with all terms and conditions of such contracts, including all clauses, provisions and requirements incorporated expressly by reference or by operation of Law therein (including, without limitation, compliance with the requirements of the Service Contract Act and payment of any required contract fees, industrial funding fees, revenue sharing fees or other fees), (ii) all information, data, representations, statements and certifications as submitted or provided to any Governmental Body by the Company relative to any Government Contract or Government Subcontract were correct and accurate as of the date submitted by the Company (including invoices, requests for progress payments or provisional costs, claims or other requests for payments and any certification regarding procurement integrity) and the Company has fully complied with all such certifications, (iii) there exists no breach or default (or event with notice or lapse of time would constitute a breach or default) on the part of the Company and no Governmental Body or Government Prime Contractor, subcontractor or other Person has notified the Company that the Company has breached or violated any Law, certification, representation, clause, provision or requirement pertaining to any such contract, (iv) the Company has not received, verbally or in writing, any notice of termination for convenience, notice of termination for default, cure notice or show cause notice with respect to any Government Contract or Government Subcontract; no event, condition or omission has occurred or exists that would constitute grounds for a termination for default with respect to any Government Contract or Government Subcontract; and to the Sellers’ Knowledge no party to any Current Government Contract or Government Subcontract has threatened to terminate such Current Government Contract or Government Subcontract for convenience; (v) no cost incurred by the Company pertaining to any such contract has, to the Sellers’ Knowledge, been challenged or questioned or has been disallowed by any Governmental Body, nor to the Sellers’ Knowledge is any such cost the subject of any audit or investigation, (vi) no payment due to the Company pertaining to any Government Contract or Government Subcontract has been withheld or set off, nor has any written claim been made to withhold payment or otherwise set off money due to the Company, (vii) no Government Bid was bid knowing that when accepted it would result in a loss or based on assumptions not believed by the Company’s management to be reasonable, (viii) the Company has complied with the Limitation of Costs and Limitation of Funds clauses as required by FAR part 52; (ix) the Company has not received written notice in the two (2) years prior to date hereof of any unsatisfactory or otherwise negative past performance evaluation and no past performance evaluation received by the Company with respect to any such contract has set forth any event, condition or omission that would constitute a default or other failure to perform thereunder or termination for default thereof; and (x) all indirect and general and administrative rates are being billed consistent with the terms of the applicable Government Contract or the approved rates or provisional rate agreements as are applicable.

(d) Neither the Company nor any of its directors, officers, agents or employees in their capacities as such has been charged with, or engaged in conduct that could lead to being charged, or received or been advised, either orally or in writing, of any


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administrative, civil or criminal investigation, charge or claim, nor has the Company or any of its respective directors, officers, agents or employees in their capacities as such been subject to any criminal indictment, or audit by any Governmental Body with respect to any alleged act, irregularity, misstatement or omission arising under or relating to any Government Contract or Government Subcontract, including, but not limited to: (i) defective pricing within the meaning of the Truth in Negotiations Act, as amended; (ii) accounting, estimating, inventory, material requirements planning, material management and accounting systems, government property records or purchasing system deficiencies; (iii) mischarging of Direct Contract Costs or Indirect Costs; (iv) delivery to the Government or to a Government prime or subcontractor of material, components, items or services that do not or did not meet specifications or standards therefor, or delivery to the Government or to a Government prime or subcontractor of foreign-made material, components or items where domestic-made material, components or items were required; (v) improperly soliciting, obtaining, attempting to solicit or obtain or making or attempting to make any payment for any non-public proprietary or source selection information; (vi) unallowable costs, including unallowable Direct Contract Costs or Indirect Costs; (vii) improper testing or test reports; (viii) failure to abide by the terms of a Customer Contract, Government Contract or a Government Bid; or (ix) Laws relating to any Customer Contract or Government Contract or Government Bid, including the following: (A) the False Statements Act (18 U.S.C. 1001), (B) the False Claims Act (18 U.S.C. 287), (C) the False Claims Act (31 U.S.C. 3729), (D) the Bribery, Gratuities and Conflicts of Interest Act (18 U.S.C. 201 and 5 U.S.C. 7353), (E) the Anti-Kickback Act (41 U.S.C. 51, 54), (F) the Anti-Kickback Enforcement Act of 1986 (Pub. L. 99-634), (G) the Arms Export Control Act (22 U.S.C. 277 et. seq.), (H) the Foreign Corrupt Practices Act (15 U.S.C. 78 m, 78 dd-1, 78 ff), (I) the Export Administration Act (50 U.S.C. App. 2401 et. seq.), (J) the War and National Defense Act (18 U.S.C. 793), (K) the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. 1961-68) or of any statute the violation of which would constitute “racketeering activity” within the meaning of such act, (L) the Conspiracy to Defraud the Government Act (18 U.S.C. 371), (M) the Program Fraud Civil Remedies Act (Pub. L. 99-509), (N) the Byrd Amendment, Pub. L. 101-121, (O) “revolving door” legislation (37 U.S.C. 801, 41 U.S.C. 423, 18 U.S.C. 207, 18 U.S.C. 208, 18 U.S.C. 218, 18 U.S.C. 281, 10 U.S.C. 2397, 10 U.S.C. 2397a, 10 U.S.C. 2397b, 10 U.S.C. 2397), (P) the Defense Production Act (50 U.S.C. App. 2061), (Q) United States antiboycott laws (the Ribicoff Amendment to the 1976 Tax Reform Act, and the 1979 Export Administration Act), (R) the Defense Industrial Regulation (DoD 5220.22-R) or National Industrial Security Program Operating Manual (DoD 5220.22-M), or any agreement with the Defense Security Service, (S) Federal Acquisition Regulations (“FAR”), any applicable supplements thereto, alternative regulations applicable in lieu thereof, or applicable predecessor regulations, (T) the Service Contract Act of 1965, as amended, (U) Cost Accounting Standards, (V) Treasury Department embargo and sanctions regulations, 31 C.F.R. Part 500 et. seq., (W) the Small Business Act, as amended, (X) Executive Order 11246, as amended, and corresponding Department of Labor regulations, (Y) the Anti-Assignment Act, 41 U.S.C. § 15, (Z) the Davis-Bacon Act, as amended, (AA) the Fair Labor Standards Act, as amended, (BB) the Walsh-Healey Act, as amended or (CC) the Drug-Free Workplace Act, as amended. With the exception of audited costs and audited claims for costs that have been resolved and closed prior to the Closing Date, all costs and/or claim for costs submitted by the Company on a cost-reimbursement basis were allowable, correct and accurate; and no payment will result from audits of the Company with respect to the Government Contracts by any Government Body. Neither the Company nor any of its directors,


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officers, agents or employees has paid any fines, penalties, restitution or settlements to any Governmental Body with respect to any violation or alleged violation arising under or relating to any Government Contract, Government Subcontract or Government Bid. The Company has not conducted any internal investigation or other inquiry in connection any Government Contract, Government Subcontract, or Government Bid, or in connection with any suspected, alleged or actual violation of applicable Law, whether on its own or with the assistance of any legal counsel, auditor, accountant or investigator outside the Company. To the Sellers’ Knowledge, the Company’s directors, officers, or employees have not engaged any outside legal counsel, auditor, accountant or investigator, or made any disclosure to any Governmental Body or other customer or prime contractor or higher-tier subcontractor related to any suspected, alleged or possible violation of a contract requirement or violation of Law with respect to any Government Contract, Government Subcontract, or Government Bid.

(e) Neither the Company nor, to Sellers’ Knowledge, any of its directors, officers, agents or employees has been debarred or suspended, or been proposed for debarment or suspension, from participation in the award of contracts with any Governmental Body and to the Sellers’ Knowledge, no such action has been threatened or commenced. To the Sellers’ Knowledge, there exist no facts or circumstances that would warrant the institution of suspension or debarment proceedings or the finding of nonresponsibility or ineligibility on the part of the Company, or any of its directors, officers, agents or employees. The Company has never been declared nonresponsible or ineligible, or otherwise excluded from participation in the award of any Government Contract, Government Subcontract or Government Bid, and the Company is a responsible contractor.

(f) Schedule 3.22(f) sets forth all facility security clearances held by Company, including any Company Affiliate. To the Sellers’ Knowledge, the Company has a sufficient number of employees with appropriate security clearances to satisfy the Company’s current obligations under its Government Contracts and Government Subcontracts, except for an immaterial number of openings that arise in the ordinary course of business in performing such Government Contracts and Government Subcontracts. The Company is in compliance with all national security obligations applicable to it, including but not limited to those specified in the National Industrial Security Program Operating Manual (“NISPOM”), DOD 5220.22-M (January 1995), and any supplements, amendments or revised editions thereof. The Company maintains any required security clearances needed to perform any classified contracts to which it is a party. The Company has filed, to the extent required by applicable Laws, an Affirmative Action plan and all compliance reports associated with that plan and have made a good faith effort to implement the policies set forth in the plan. Neither the Company nor, to the Sellers’ Knowledge, any of its directors, officers, agents or employees has violated any legal, administrative or contractual restriction concerning the employment of (or discussions concerning possible employment with) current or former officials or employees of a Governmental Body (regardless of the branch of government), including (not limited to) the so-called “revolving door” restrictions set forth at 18 U.S.C. § 207. The Company has made representations and certifications to the federal government in accordance with FAR 52.212-3 and other applicable law, and all such representations and certifications were accurate and complete when made, and to Sellers’ Knowledge, all such representations and certifications remain accurate and complete as of the date when made. No payment has been made by Company or by a Person acting on Company’s behalf, to any Person (other than to any bona fide


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employee or agent of Company, as defined in subpart 3.4 of the FAR) which is or was improperly contingent upon the award of any Government Contract or which would otherwise be in violation of any applicable procurement law or regulation or any other Laws. The Company is not subject to any “forward pricing” agreements as defined in FAR 2.101. Neither the Company nor any of its employees, officers, or agents in their capacities as such have committed (or taken any action to promote or conceal) any violation of the Foreign Corrupt Practices Act, 15 U.S.C. § 78(dd)1, -2.

(g) The Company maintains systems of internal controls (including, but not limited to, cost accounting systems, estimating systems, purchasing systems, proposal systems, billing systems and material management systems) to the extent required by and that are in compliance in with all requirements of all of the Government Contracts and Government Subcontracts and applicable United States Laws and regulations. The Company has never been, nor is now subject to full and/or modified cost accounting standards coverage. The cost accounting, estimating, property and procurement systems relating to any Government Contract or Government Subcontract are in compliance in all material respects with applicable Laws and contract provisions, including any applicable cost principles and applicable cost accounting standards. Such compliance includes, but is not limited to, the following: (i) assumptions underlying the recognition of revenue under the percentage of completion method on fixed price contracts are considered reasonable and all forward losses, if any, have been properly accounted for in the period that they have become known; (ii) income and expense recognition practices used to record income and expenses associated with contracts with the federal government and/or that are being paid for with federal funds are consistent with contract terms and, if applicable, with federal regulatory requirements and the cost accounting standards; (iii) incentives recognized in financial statements from contract incentive clauses of Government Contracts and Government Subcontracts have been calculated consistent with the contract terms and the provisions of relevant federal regulations; (iv) for Government Contracts and Government Subcontracts funded with federal funds, estimates have been made consistent with terms contained in the contract and, to the extent applicable, on a basis consistent with federal regulations; (v) except as set forth on Schedule 3.22(g), all revenue has been recognized within funding limitations/provisions within the contract; (vi) all indirect cost rates are being billed consistent with DCAA-approved rates or provisional rate agreements; and (vii) Company has reached agreement with the cognizant government audit agency approving and “closing” all indirect costs charged to Government Contracts or Government Subcontracts with respect to fiscal year 2002 and all prior fiscal years. To the Sellers’ Knowledge, no costs charged to the Company by any subcontractor or lower tier subcontractor have been, or will be, deemed to be unallowable.

(h) Except as set forth on Schedule 3.22(h), the entering into of the Seller Documents and the consummation of the transactions contemplated by the Seller Documents, without notice to or consent or approval of any Governmental Body or other Person, will not constitute a breach of, violation of, or default under any provision of any Government Contract or Government Subcontract or will not give rise to a right to terminate any Government Contract or Government Subcontract for default. Except as set forth on Schedule 3.22(h), to the Sellers’ Knowledge, no Governmental Body intends to alter its relationship with the Company as a result of or in connection with the transactions contemplated by the Seller Documents.


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(i) The Company has never been and is not now involved in a False Claims Act or a qui tam whistleblower action involving the Company or any of its directors, officers, agents or employees, nor is the Company aware of any event, act or omission that would constitute a reasonable basis for such an action.

(j) Schedule 3.22(j) lists all teaming agreements currently in effect as to which the Company is a party. The Company is in compliance in all material respects with the terms of each teaming agreement and, to Sellers’ Knowledge, the other party to each teaming agreement is also in compliance in all material respects with the terms of the teaming agreement.

(k) All completed contracts or task orders of the Company with any Governmental Body and all completed subcontracts of the Company and a third party relating to a contract between such third party and a Governmental Body were completed in all material respects in accordance with the terms thereof and there exists no basis for any customer to reject acceptance. The Company has no pending or anticipated claims, requests for equitable adjustment or requests for waiver or deviation from contract requirements with respect to any Government Contract or Government Subcontract, and to the Sellers’ Knowledge, there are no claims or anticipated claims against the Company by any Governmental Body with respect to any Government Contract, Government Subcontract, or Government Bid. The Company has not received written notification, nor, to Sellers’ Knowledge, oral notification of cost, schedule, technical or quality problems that result in claims against the Company (or successors in interest) by a Governmental Authority, a prime contractor or a higher-tier subcontractor. No Person has notified the Company in writing or, to Sellers’ Knowledge, orally that any Governmental Authority, prime contractor or higher-tier subcontractor under a Government Contract or Government Subcontract, intends to seek the Company’s agreement to lower rates under any such contract, including, but not limited to, any task order under any Government Contract.

(l) No warranty claim or breach of warranty claim has been made or threatened against the Company in the past five (5) years, and no warranty claim or breach of warranty claim is pending or, to the Sellers’ Knowledge, threatened, nor, to the Sellers’ Knowledge, is there any reasonable basis for any such claim.

(m) Except as set forth on Schedule 3.22(a) above, none of the Company’s Current Government Contracts, Government Subcontracts or Government Bids by their terms require for award the Company’s status as a small business, small disadvantaged business, protégé, or other preferential status, nor, to the Sellers’ Knowledge, did any Governmental Authority, prime contractor or higher-tier subcontractor under a Government Contract or Government Subcontract rely upon the Company’s small business status, small disadvantaged business status, protégé status, or other preferential status in evaluating any of the Company’s quotations, bids, or proposals, or in making award of any such contract to the Company. Each representation and/or certification made by Company that it was a small business concern and/or was qualified for other preferential status in each of its Government Contracts, Government Subcontracts and Government Bids was current and accurate as of its effective date.

(n) Except as set forth on Schedule 3.22(n), the Company has not assigned or otherwise conveyed or transferred, or agreed to assign, to any Person, any Current Government Contracts or Government Subcontracts or any rights related thereto, or any account receivable


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relating thereto, whether a security interest or otherwise. No personal property, equipment or fixtures are loaned, bailed or otherwise furnished to the Company by or on behalf of the United States Government.

(o) The Company has not had access to non-public information, nor provided systems engineering, technical direction, consultation, technical evaluation, source selection services or services of any type, nor prepared specifications or statements of work, nor engaged in any other conduct that, in each instance, to Sellers’ Knowledge, would create an organizational conflict of interest as defined in the FAR for purposes of any Current Government Contract.

(p) Except as set forth on Schedule 3.22(p), (i) all of the Government Contracts and Government Subcontracts are binding on the Company and, to the Sellers’ Knowledge, were legally awarded, are binding on the other parties thereto, and are in full force and effect; and (ii) the Government Contracts or Government Subcontracts are not currently the subject of bid or award protest proceedings, and no Government Contracts, Government Subcontracts or Government Bids are reasonably likely to become the subject of bid or award protest proceedings.

(q) Except as set forth in Schedule 3.22(q), the Company has not taken any action and is not a party to any litigation that could reasonably be expected to give rise to (i) Liability under the False Claims Act; (ii) Liability for price adjustment under the Truth in Negotiations Act; or (iii) a reduction in the price of any Government Contract or Government Subcontract, including but not limited to reductions based on actual or alleged defective pricing. There exists no basis for a claim of any liability of the Company by any Governmental Authority as a result of defective cost and pricing data submitted to any Governmental Authority.

(r) Except as set forth in Schedule 3.22(r), no personal property, equipment or fixtures are loaned, bailed or otherwise furnished to the Company by or on behalf of the United States Government.

(s) Except as set forth on Schedule 3.22(s), since Company’s inception, it has not manufactured “defense articles,” exported “defense articles” or furnished “defense services” or “technical data” to foreign nationals in the United States or abroad, as those terms are defined in 22 Code of Federal Regulations Sections 120.6, 120.9 and 120.10, respectively.

3.23 Customers Set forth on Schedule 3.23 is a complete list of the Company’s customers during the fiscal years ended September 30, 2005, and September 30, 2006, indicating the amount of revenues attributable to each customer during each period. No such customer that accounted for more than $50,000 in revenues for either of such periods (each, a “Material Customer”) has notified in writing any Seller of any intention to, or, to the Sellers’ Knowledge, threatened to, terminate its relationship with the Company, in whole or in part, prior to a scheduled termination date or materially alter its relationship with the Company, and there has been no material dispute with a Material Customer since January 1, 2003. To the Sellers’ Knowledge, there is no basis for any termination prior to a scheduled termination date, or for any alteration of the Company’s relationship with any Material Customer. No written notice or, to the Sellers’ Knowledge, other communication has been received in any form regarding the


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Company’s actual or threatened disqualification, suspension, or debarment from contracting with a Governmental Body, including, without limitation, any show cause notice or cure notice, notice of termination for default or convenience, or notice for deductive change.

3.24 Intellectual Property Rights.

(a) Set forth on Schedule 3.24(a) are all the Company’s worldwide intangible legal rights or interests evidenced by or embodied in (i) any patents (including provisional patents) and patent applications (including provisional patent applications); (ii) any registered copyrights or mask works; and (iii) any trademarks, trade names, service marks, trade designations, trade dress and associated goodwill.

(b) Set forth on Schedule 3.24(b) is all Intellectual Property (other than off-the-shelf Software with an initial license or other fee and/or annual renewal fee of less than $25,000) that is used by the Company pursuant to a written license from a third party (e.g., third party Software). If any third-party Intellectual Property is used without a written license (in the case of third party patents, to the Sellers’ Knowledge), a description of such Intellectual Property and the reason that a written license does not exist is set forth on Schedule 3.24(b).

(c) Set forth on Schedule 3.24(c) is all Intellectual Property that is proprietary to the Company and is licensed in writing by the Company to a third party (other than Intellectual Property licensed by the Company to the United States Government pursuant to a Government Contract). If a third party, to the Sellers’ Knowledge, uses or has access to Intellectual Property without a written license, a description of such Intellectual Property and the reason that a written license does not exist is set forth on Schedule 3.24(c).

(d) The Company owns, or holds valid licenses to, all Intellectual Property required to conduct its business as currently conducted, including all Intellectual Property described on Schedule 3.24(a) and Schedule 3.24(b).

(e) The Company has entered into appropriate written assignment agreements with all past and present independent contractors, and all Software, systems, designs, schematics, algorithms, architecture or other materials and related Intellectual Property rights developed by such independent contractors on behalf of or for the Company are owned by the Company or have been assigned by the Company to the government customer for which they were developed pursuant to the applicable Government Contract. Further, all Software, systems, designs, schematics, algorithms, architecture or other materials and related Intellectual Property rights developed by any employee and used by the Company was developed within such employee’s scope of work at the Company.

(f) Except as set forth on Schedule 3.24(c), the Company possesses and owns the Intellectual Property rights to the source code for all its proprietary Software programs, and such source code has not been released or made available to any third party other than the customer for whom the Software was developed, if any, pursuant to the applicable Government Contract. The use, modification and distribution, if any, by the Company of any open source code, shared source code, freeware or similar openly available software code has been in compliance with the applicable licensing regime for such code.


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(g) All applicable royalties, honoraria, development fees or other fees with respect to the use and/or ownership of the Intellectual Property by the Company have been paid in full through the date hereof.

(h) The existence or use of the Intellectual Property by the Company does not infringe on the rights of any Person, and to Sellers’ Knowledge, no Person is infringing on the Intellectual Property of the Company. Commercially reasonable steps have been taken to ensure the continued proprietary nature of the Intellectual Property of the Company and nothing has transpired that would compromise or call into question that proprietary nature. The Company has not received any written notice or demand or been made the subject of a claim or action alleging that Intellectual Property used by it in the conduct of its business infringes or misappropriates the Intellectual Property rights of a third party, and no such claim or action is now pending.

(i) For purposes of this Agreement, the term “Intellectual Property” means all the worldwide intangible legal rights or interests evidenced by or embodied in (i) any idea, design, concept, method, process, technique, apparatus, Software, invention, discovery, or improvement, including any patents (including provisional patents), patent applications (including provisional patent applications), trade secrets, and know-how; (ii) any work of authorship, including any copyrights, industrial designs, mask works or moral rights; and (iii) any trademarks, trade names, service marks, trade designations, trade dress and associated goodwill.

3.25 Competing Interests. Except for the ownership of less than one percent (1%) of the capital stock or other securities of one or more public companies, no Seller nor any director or officer of the Company, nor, to the Sellers’ Knowledge, any Key Employee listed on Schedule 3.25 hereto or Affiliate or immediate family member of any of the foregoing (a) owns, directly or indirectly, an interest in any Person that is a competitor, customer, or supplier of the Company or that otherwise has material business dealings with the Company or (b) is a party to, or otherwise has any direct or indirect interest opposed to the Company under, any Material Agreement or other business relationship or arrangement.

3.26 Accounts Receivable. All billed and unbilled accounts receivable reflected on the Latest Balance Sheet and all billed and unbilled accounts receivable arising since the Latest Balance Sheet Date constitute bona fide, valid, binding and to the Sellers’ Knowledge, collectable claims (net of reserves) arising in the Ordinary Course of Business out of arms length transactions with third parties unrelated to Sellers. To the Sellers’ Knowledge, there is no circumstance or condition (including the transactions contemplated by this Agreement), which after the Closing would result in an increase in uncollectible accounts receivables or pattern materially inconsistent with historical experience with regards to cancellations by such customers or uncollectible or doubtful account expenses.

3.27 Regulated Payments; Government Contracting. No Seller nor any director, officer, agent, or employee of the Company, nor, to the Sellers’ Knowledge, any Affiliate or immediate family member of any of the foregoing has (a) used any funds of the Company for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity, (b) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns, or (c) made any other


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unlawful gift, contribution or payment. To Sellers’ Knowledge, except as set forth on Schedule 3.27 and for audits and reviews in the ordinary course of business by Governmental Bodies, none of the Company nor any of its directors, officers, agents or employees has been under administrative, civil or criminal investigation or indictment or audit by any Governmental Body with respect to any alleged irregularity, misstatement or omission arising under or relating to any contract with a Governmental Body.

3.28 Interested Party Transactions. Since the Latest Balance Sheet Date, there have not been any business dealings or transactions between the Company and the Stockholders or any Affiliate or family member of the Stockholders, other than transactions between the Company, as employer, and such Person, as employee, in the usual, regular and Ordinary Course of Business.

3.29 Exclusivity. Since July 19, 2006, neither the Stockholders nor the Company has initiated, solicited, or encouraged (including by way of furnishing information or assistance), or taken any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction, or entered into discussions or negotiate with any Person in furtherance of such inquiries, or endorsed or agreed to endorse any Competing Transaction, or authorized or permitted any of the officers, directors, managers or employees of the Company or any investment banker, financial advisor, attorney, accountant, or other representative retained by a Stockholder or the Company, or any of their Affiliates, to take any such action.

ARTICLE IV
Representations and Warranties of Buyer

Buyer hereby represents and warrants to the Sellers as follows:

4.1 Organization. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of Delaware.

4.2 Authority. Buyer has all requisite power and authority to execute, deliver, and perform under this Agreement and the other agreements, certificates, and instruments to be executed by Buyer in connection with or pursuant to this Agreement (together with this Agreement, the “Buyer Documents”). The execution, delivery, and performance by Buyer of each Buyer Document to which it is a party have been duly authorized by all necessary action, corporate or otherwise, on the part of Buyer. This Agreement has been, and at the Closing the other Buyer Documents will be, duly executed and delivered by Buyer, to the extent each is a party thereto. This Agreement is, and upon execution and delivery, each of the other Buyer Documents will be, a legal, valid, and binding agreement of Buyer, as the case may be, enforceable against Buyer in accordance with their respective terms.

4.3 No Violation. The execution, delivery, and performance of the Buyer Documents by Buyer will not conflict with or result in the breach of any term or provision of, or violate, or constitute a default under any charter provision, bylaw or regulation or under any material agreement, instrument, order, law, or regulation to which Buyer is a party or by which Buyer is in any way bound or obligated.


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4.4 Governmental Consents. No consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with, any Governmental Body is required on the part of Buyer in connection with the transactions contemplated by the Buyer Documents.

4.5 Litigation. There are no pending or, to the knowledge of Buyer, threatened, lawsuits, administrative proceedings, arbitrations, reviews, or formal or informal complaints or investigations by any Person that in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement.

4.6 Available Funds. Buyer has, and on the Closing Date and on any other date on which a portion of the Purchase Price is payable will have, sufficient funds to enable it to consummate the transactions contemplated hereby.

ARTICLE V
Covenants and Agreements

5.1 Conduct of Business. During the period commencing on the date of this Agreement and ending on the earlier to occur of the Closing or the termination of this Agreement in accordance with its terms (the “Interim Period”), unless Buyer otherwise consents in writing (which consent shall not be unreasonably withheld), and except as otherwise expressly contemplated by this Agreement, the Company will, and the Stockholders will cause the Company to, (a) operate in the Ordinary Course of Business and use its reasonable best efforts to preserve the goodwill of the Company and of its employees, customers, suppliers, Governmental Bodies and others having business dealings with the Company; (b) not engage in any transaction outside the Ordinary Course of Business, including without limitation by making any material expenditure, investment, or commitment or arrangement of any kind; (c) not increase the compensation of any employee or officer or make any bonus payments or other distributions except in the Ordinary Course of Business or as contemplated pursuant to the provisions of Sections 2.7 and 2.8; (d) maintain all insurance policies and all Permits that are required for the Company to carry on its business; (e) timely file Tax Returns required in the Ordinary Course of Business; (f) maintain books of account and records in the usual, regular, and ordinary manner and consistent with past practices; and (g) not take any action that would result in, or otherwise allow, any of the changes or other events described in Section 3.13 or any a breach of any of the representations and warranties set forth in Article III.

5.2 Access and Information. During the Interim Period, the Company will permit Buyer and its representatives to have reasonable access to the Company’s directors, officers, Key Employees, agents, assets, and properties and all relevant books, records, and documents of or relating to the business and assets of the Company during normal business hours upon reasonable advance notice and will furnish to Buyer such information, financial and tax records, and other documents relating to the Company and its operations and businesses as Buyer may reasonably request. The Sellers will permit Buyer and its representatives reasonable access to the Company’s accountants, auditors, customers, and suppliers for consultation or verification of any information obtained by Buyer and will use their best efforts to cause such Persons to cooperate with Buyer and its representatives in such consultations and in verifying such information.


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5.3 Supplemental Disclosure. During the Interim Period, Sellers will promptly supplement or amend in writing each of the Schedules to this Agreement with respect to any matter of which Sellers become aware that arises or is discovered after the date of this Agreement that, if existing or known at the date of this Agreement, would have been required to be set forth or listed in the Schedules to this Agreement; provided that, for purposes of determining whether a breach exists with respect to any of the representations and warranties set forth in this Agreement, any such supplemental or amended disclosure will be deemed not to have been disclosed to Buyer unless Buyer otherwise expressly consents in writing.

5.4 Notification of Certain Matters. Sellers and Buyer will give prompt notice to the other party of (a) the occurrence, or failure to occur, of any event that could cause representations or warranties of the Sellers, the Company or the Buyer contained in this Agreement to be untrue or inaccurate at any time during the Interim Period, and (b) any failure of party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

5.5 Assistance with Permits, Filings and Consents. The parties hereto shall use reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper, or advisable under applicable Law to consummate and make effective the transactions contemplated by this Agreement including, without limitation, (a) in seeking approval from any Governmental Body with regard to certain employees of Buyer or any of their Affiliates obtaining access to classified documents, (b) in seeking approval from any Governmental Body to enable Buyer or any of their Affiliates to store classified data and documents, (c) in obtaining any Permits, or (d) in obtaining any contractually required consents to change in ownership that Buyer determines in its reasonable judgment will be required in connection with the operation of the Company’s business immediately after the Closing.

5.6 Fulfillment of Conditions by Sellers. Sellers agree not to take any action that would cause the conditions on the obligations of the parties to effect the transactions contemplated by this Agreement and the Seller Documents not to be fulfilled, including without limitation, by taking or causing to be taken any action (other than actions permitted under Section 5.1) that would cause the representations and warranties made by Sellers in this Agreement not to be true and correct as of the Closing. Sellers will take all reasonable steps within their power to cause to be fulfilled the conditions precedent to Buyer’s obligations to consummate the transactions contemplated by this Agreement that are dependent on the actions of Sellers.

5.7 Fulfillment of Conditions by Buyer. Buyer agrees not to take any action that would cause the conditions on the obligations of the parties to effect the transactions contemplated by this Agreement not to be fulfilled, including without limitation by taking or causing to be taken any action that would cause the representations and warranties made by Buyer in this Agreement not to be true and correct as of the Closing. Buyer will take all reasonable steps within its power to cause to be fulfilled the conditions precedent to the obligations of Sellers to consummate the transactions contemplated by this Agreement that are dependent on the actions of Buyer; provided, however, that neither Buyer nor any of its Affiliates will be required to make any material monetary expenditure, commence or be a plaintiff in any litigation or offer or grant any material accommodation (financial or otherwise) to


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any third Person, including, without limitation, the offer for sale of any business or assets to any Person.

5.8 Publicity. Promptly after execution of this Agreement, Buyer shall issue a press release relating to this Agreement. Thereafter, prior to the Closing, Buyer and Sellers will maintain the confidentiality of the transactions contemplated by this Agreement and neither Buyer nor Sellers will issue or make, or allow to have issued or made, any further press release or public announcement concerning the transactions contemplated by this Agreement, except as required by applicable Law or stock market requirements. Buyer and the Stockholders will cooperate with each other in the development and distribution of all news releases and other public disclosures relating to the announcement promptly after the Closing of the transactions contemplated by this Agreement. Neither Buyer nor Sellers will issue or make, or allow to have issued or made, any press release or public announcement concerning the announcement of the transactions contemplated by this Agreement without giving the other party a reasonable opportunity to comment on such release or announcement in advance, and any such public announcement will be consistent with applicable Law and stock market requirements.

5.9 Transaction Costs. Buyer will pay all transaction costs and expenses (including legal, accounting, and other professional fees) that it incurs in connection with the negotiation, execution, and performance of this Agreement and the transactions contemplated by this Agreement. The Stockholders will pay all Seller Transaction Costs incurred by Sellers; provided, however, that Seller Transaction Costs may be paid by the Company or, pursuant to Section 2.3(b)(ii), by Buyer on the Company’s behalf; further, provided, that the Stockholders shall reimburse Buyer for any Seller Transaction Costs paid by Buyer after the Closing for such costs incurred by the Company but not paid by the Company or Buyer (on behalf of the Company pursuant to Section 2.3(b)(ii)) on or prior to the Closing Date.

5.10 No-Shop Provisions. Each of Sellers hereby represents, covenants and agrees that all times during the Interim Period, it will not, and will not permit any of its Affiliates to, initiate, solicit, or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction, or enter into discussions or negotiate with any Person in furtherance of such inquiries or to obtain a Competing Transaction, or endorse or agree to endorse any Competing Transaction, or authorize or permit any of the officers, directors, managers or employees of Sellers or any investment banker, financial advisor, attorney, accountant, or other representative retained by Sellers, or any of their Affiliates to take any such action. The Sellers will notify Buyer immediately after receipt by any Seller (or any of their officers, directors, advisors or other representatives) of any bona fide proposal for or written bona fide inquiry respecting any Competing Transaction, or any request for nonpublic information in connection with such proposal or inquiry or for access to the assets, properties, books or records of the Company by any Person that informs or has informed any Seller that it is considering making or has made such a proposal or inquiry. Such notice to Buyer shall indicate in reasonable detail the identity of the Person making such proposal or inquiry and the terms and conditions of such proposal or inquiry.

5.11 Nondisclosure. The parties acknowledge and agree that all customer, prospect, and marketing lists, sales data, intellectual property, proprietary information, trade secrets, and


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other confidential information of the Company (collectively, “Confidential Information”) are valuable, special and unique assets of the Company and are, and following the Closing will continue to be, owned exclusively by the Company. Each party agrees to, and agrees to cause its representatives to, treat the Confidential Information, together with any other confidential information furnished to it by such other party, as confidential and not to make use of such information for its own purposes or for the benefit of any other Person (other than the Company). Without limiting the generality of the foregoing, the parties expressly acknowledge and agree that the existence of and material terms of this Agreement (including, without limitation, the amount of the Purchase Price) constitute Confidential Information, and, in any event, unless otherwise publicly disclosed by Buyer, each party hereby agrees not to disclose the existence of this Agreement or such terms to any Person, except to the extent required by Law, in which case the other party will be given as much advance notice as reasonably possible with respect to the nature of such required disclosure.

5.12 Filing and Authorizations. As promptly as practicable, Buyer and Sellers will make, or cause to be made, such filings and submissions under Laws applicable to it, as may be required to consummate the transactions contemplated herein, and will use commercially reasonable efforts to obtain, or cause to be obtained, all authorizations, approvals, consents and waivers from all Governmental Bodies necessary to be obtained by Buyer and Sellers, respectively. During the Interim Period, the Company will use commercially reasonable efforts to meet together with Buyer and appropriate representatives of any Governmental Bodies set forth on Schedule 5.12 that are customers of the Company to obtain the consents, approvals, or novations, or deliver notices that are legally or contractually required in connection with the transactions contemplated by this Agreement. Further, to the extent that Buyer discovers during the Interim Period that in addition to those Governmental Bodies set forth on Schedule 5.12, consents, approvals, novations, or notices are required with respect to Governmental Bodies that are customers of the Company, then the Sellers will use commercially reasonable efforts to meet together with Buyer and appropriate representatives of any such Governmental Bodies to obtain or deliver such required consents, approvals, novations, or notices. In furtherance and not in limitation of the foregoing, as promptly as practicable, and in any event within one (1) Business Day following the execution and delivery of this Agreement by the Buyer the Stockholders and the Company, Buyer and the Stockholders shall prepare and file any required notification and report form under the HSR Act in connection with the transactions contemplated hereby. Buyer and the Company shall request early termination of the waiting period thereunder. Buyer and the Company shall respond with reasonable diligence to any request for additional information made in response to such filings. Any filing fee incurred with respect to such required notification and report form pursuant to this Section 5.12 shall be shared equally by the Buyer and the Sellers.

5.13 Release by Each Stockholder. In consideration of the Purchase Price, and other good and valuable consideration, effective upon the Closing, each Stockholder, for himself and his heirs, executors, administrators, successors and assigns, hereby fully, unconditionally and knowingly releases and forever discharges and holds harmless the Company and its employees, officers, directors, successors and assigns from any and all claims, demands, losses, costs, expenses (including reasonable attorneys’ fees and expenses), obligations, liabilities and/or damages of every kind and nature whatsoever, whether now existing or known, arising out of the operation or conduct of the Company’s business or a transaction or circumstance occurring or existing or related to the period of time prior to the Closing, relating in any way, directly or


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indirectly, to the Company, this Agreement, the employment agreement by and between Richard F. Bishop and the Company dated December 21, 1999 (the “Bishop Employment Agreement”), or the transactions contemplated hereby, that such Stockholder may now have or may hereafter claim to have against the Company or any of such employees, officers, directors, successors or assigns; provided, that, the foregoing release will not affect any obligations of Buyer to the Stockholders under this Agreement or any other Buyer Document or, if a Stockholder remains employed by the Company after the Closing, (i) any accrued employee benefits (other than any salary, bonus or payment under the VRP) included on the Closing Balance Sheet, and (ii) obligations accruing after Closing that solely arise or result from such post-Closing employment. In furtherance of the foregoing and for the avoidance of doubt, the Company and Richard F. Bishop expressly agree that the Bishop Employment Agreement will be terminated at the Closing and of no further force or effect.

5.14 Accounts Receivable. Buyer will cause the Company to use commercially reasonable efforts to bill and collect all accounts receivable included in the Closing Balance Sheet; provided, that, such commercially reasonable efforts will not be deemed to be more than the Company’s historical practices. If Buyer receives any payments with respect to Uncollected A/R during the period beginning on the date that is one hundred fifty one (151) days after the Closing and ending on the date that is eighteen (18) months after the Closing, then Buyer shall remit such payments to the Stockholder Representative, on behalf of the Stockholders, as soon as reasonably practicable thereafter. Further, to the extent that any unbilled accounts receivable that were included on the Closing Balance Sheet, but have not been collected by the date that is twenty four (24) months after the Closing Date, then the Stockholders shall pay to Buyer an amount equal to the aggregate face amount of uncollected unbilled accounts receivable in excess of any reserves for uncollectible unbilled accounts receivable on the Closing Balance Sheet as soon as reasonably practicable therafter.

5.15 Company 401(k) Plan. Prior to the Closing, the Company will cause its Board of Directors to adopt resolutions to terminate the Company 401(k) Plan, contingent upon the Closing. Following the date of such termination, no contributions will be made to the Company 401(k) Plan other than contributions that have been accrued on behalf of participants prior to the termination or are otherwise based on compensation earned before the termination. Such resolutions will provide (to the extent required under Section 411 of the Code) that all participants be fully vested in their account balances under the Company 401(k) Plan. Such resolutions will also authorize distributions of Company 401(k) Plan balances to participants as soon as practicable following the receipt of a favorable determination letter from IRS covering the termination.


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5.16 Stockholder Non-Solicitation; Non-Competition; Confidentiality.

(a) Non-Solicitation of Customers. During the Restrictive Period and without regard for whether a Stockholder is employed by the Company or Buyer, each Stockholder agrees not to directly or indirectly: (i) induce or attempt to induce any Current Customer or Prospective Customer of the Company to reduce or terminate its business with the Company; (ii) interfere or attempt to interfere with the Company’s business relationship with a Current Customer or Prospective Customer of the Company; (iii) solicit, divert or attempt to divert from the Company, any of the following types of business from a Current Customer or Prospective Customer of the Company:

(i) contract work being performed by the Company as a prime contractor, subcontractor, or participant in a joint venture during the Restrictive Period;

(ii) “follow-on” or “spin-off” contract work that is derived from contracts described in (i) above; and

(iii) contract work that may result from proposals or bids prepared or submitted by the Company during the Look-Back Period.

(b) Non-Solicitation of Employees. During the applicable Restrictive Period and without regard for whether the Stockholder is employed by the Company or Buyer, except with respect to the employees listed on Schedule 5.16(b), each Stockholder agrees not to directly or indirectly: (i) induce or attempt to induce any employee, officer or consultant of the Company or Buyer to terminate his or her employment or engagement with the Company or Buyer; (ii) interfere with or disrupt the Company’s or Buyer’s relationship with its respective employees, officers or consultants; or (iii) solicit, entice, engage or hire away any such employee, officer or consultant who is at that time or was within the previous six (6) months employed or engaged by the Company or Buyer without the express, written consent of Buyer, which consent Buyer may in its absolute discretion withhold.

(c) Non-Competition. During the applicable Restrictive Period and without regard for whether a Stockholder is employed by the Company or Buyer, each Stockholder agrees not to engage, directly or indirectly, in any business activity position or function with any entity that directly or indirectly competes with Buyer or the Company that is the same or similar to any business activity, position or function that he or she performed on behalf of the Company, or be interested, directly or indirectly (as a shareholder (other than as a holder of less than one percent (1%) of the common stock of any publicly traded corporation), partner, officer, director, employee or consultant) in any business organization that is engaged or becomes engaged in any business activity that the Company or Buyer is conducting at the Closing Date or has conducted at any time during the two (2)-year period immediately preceding the Stockholder’s attempted engagement in such activity or that the Company or Buyer has notified the Stockholder that it proposes to conduct or that the Stockholder has knowledge that the Company intends to conduct. The foregoing shall not restrict any Stockholder from serving on the board of directors or similar governing body of any entity that does not compete directly or indirectly with the Company or the Buyer.


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(d) Confidentiality. Each Stockholder recognizes and acknowledges that he has in the past, currently has, and in the future may possibly have, access to certain confidential information of the Company and Buyer such as lists of customers, operational policies, and pricing and cost policies, that are valuable, special and unique assets of the Company’s and the Buyer’s respective businesses. Each of the Stockholders agrees that it will not disclose confidential information with respect to the Buyer at any time, nor with respect to the Company’s business after the Closing Date, to any Person for any purpose or reason whatsoever (except to authorized representatives of such Stockholder and to counsel and other advisers, provided that such advisors (other than counsel) agree to the confidentiality provisions of this Section 5.16(d)), unless (i) such information becomes known to the public generally through no fault of any Stockholder, (ii) such information becomes available to such Stockholder on a non-confidential basis from a source other than the Stockholder, provided that such source is not known by such Stockholder to be subject to any other confidentiality obligation, or (iii) any Stockholder reasonably believes that such disclosure is required or advisable under applicable Law or in connection with the defense of a lawsuit against any Stockholder or for certification or state licensure purposes; provided that prior to disclosing any information pursuant to clause (iii) above, such Stockholder shall, if possible, give prior written notice thereof to Buyer and provide Buyer with the opportunity to contest such disclosure.

(e) Purchase Price Allocation. The parties agree that the portion of the Purchase Price allocated in respect of the covenants and agreements contained in this Section 5.16 shall be determined in accordance with the general Purchase Price Allocation provision of Section 8.7(b).

5.17 Cooperation. Each party will cooperate as and to the extent reasonably requested by any other party hereto in connection with governmental inquiries, filings or litigation, including but not limited to audits and administrative proceedings. Such cooperation will include the provision of records and information which are reasonably relevant to any such matters and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder.

5.18 Form 8-K. The Company and the Stockholders agree to assist, and to cause the Company’s officers to assist, Buyer, its auditors and counsel in the preparation of a Form 8-K or Forms 8-K for filing with the SEC disclosing the transactions contemplated by this Agreement. Additionally, the Company and the Stockholders will use commercially reasonable efforts to cause the Company’s independent accountant, to (a) deliver to Buyer any opinion of such firm required in accordance with Rule 2-02 of Regulation S-X promulgated by the SEC, and a written consent to the filing of its opinion with the SEC in connection with the filing of the Form 8-K contemplated by this Section 5.18; (b) provide such information and assistance as reasonably required by Buyer in connection with the preparation by Buyer and its independent accountants of pro forma financial statements required under applicable SEC regulations; (c) facilitate the review of any Company audit or review work papers, including the examination of selected interim financial statements and data; and (d) deliver such representations as may be reasonably requested by Buyer’s independent accountants. Buyer will be responsible for any reasonable third party expenses that may be incurred in support of the Stockholder assistance contemplated herein.


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5.19 VRP Termination. No awards under the VRP shall be made by the Company on or after the date hereof except as provided in Section 2.7 and Schedule 2.3(b)(iii). The Company and Stockholders will cause to be adopted prior to the Closing resolutions of the Company’s Board of Directors to terminate the VRP effective on the Closing Date. Following the date of such termination, no award, bonus or other payment of any kind will be paid by the Company or anyone else pursuant to the VRP except as expressly provided in this Agreement or the Escrow Agreement.

5.20 Tax Matters.

(a) Without the prior written consent of Buyer, neither the Stockholders nor the Company shall make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to the Company, surrender any right to claim a refund of Taxes, or consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to the Company if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of materially increasing the Tax liability of the Company for any period ending after the Closing Date; provided, however, that nothing in this Section 5.20 or otherwise shall preclude the Company from filing any Tax Returns required to be filed by it.

(b) At least fifteen (15) days prior to the Closing, the Stockholders shall provide Schedule 5.20(b) to the Buyer showing the amount of required withholding to which each Stockholder is subject as a result of being a nonresident of a state in which the Company does business and any other required withholding.

5.21 Certain Contract Matters. If, prior to March 1, 2007, the U.S. Department of the Army either (i) fails to exercise the option on the order for the Army Reserve Network Support (ARNET) or exercises such option on the order for the ARNET but fails to fund it at a level substantially equal to or higher than the immediately preceding contract year or (ii) in lieu of exercising such option, fails to extend the current order of the Army Reserve Network Support (ARNET), whether through one or more contract extensions, for a period of at least six (6) months after March 1, 2007 (an “Option Failure”),then (i) the Buyer or the Company will promptly advise the Stockholders of such failure in writing accompanied by any written correspondence from the customer related to the Option Failure and (ii) not later than thirty (30) days after receipt of the notification of the occurrence of such Option Failure, the Stockholders shall pay, on a pro-rata basis, Five Million Dollars ($5,000,000) from funds to be disbursed from the Holdback Amount in accordance with the terms of the Escrow Agreement.

ARTICLE VI
Closing Conditions

6.1 Conditions to Obligations of Buyer. The obligations of Buyer under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions, but Buyer may waive compliance with any such conditions in writing:

(a) All representations and warranties of Sellers contained in this Agreement will be true and correct in all material respects (if not qualified by materiality) or in all respects


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(if qualified by materiality) at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing, except for those representations and warranties which address matters only as of a particular date (which will be true and correct only as of such date), and Buyer will have received a certificate to such effect, in form and substance reasonably satisfactory to Buyer, executed on behalf of the Company by an executive officer of the Company and by the Stockholders.

(b) Sellers will have performed and complied in all material respects with all the covenants and agreements required by this Agreement to be performed or complied with by them at or prior to the Closing, including without limitation the delivery of all items required to be delivered by them pursuant to Section 2.5, and Buyer will have received a certificate to such effect, in form and substance reasonably satisfactory to Buyer, executed on behalf of the Company by an executive officer of the Company and by the Stockholders.

(c) All contractual and governmental consents, approvals, orders, licenses, bonds or authorizations (including, without limitation, those under the HSR Act) set forth on Schedule 6.1(c)(i) will have been obtained and all contractual or governmental notices set forth on Schedule 6.1(c)(ii) will have been given.

(d) There will be no pending or threatened litigation in any court or any proceeding before or by any Governmental Body to restrain or prohibit or obtain damages or other relief with respect to this Agreement or the other Seller Documents or the consummation of the transactions contemplated by this Agreement or as a result of which Buyer could be required to dispose of any assets or operations of Buyer or its Affiliates (including any Material Assets or material operations to be acquired) or to comply with any material restriction on the manner in which Buyer or its Affiliates conduct their operations (including the operations of the Company).

(e) All Liens on the assets of the Company or the Shares, other than Liens on assets identified on Schedule 3.6(b) to remain after the Closing, and any guaranty of the Company (including, without limitation, any guaranty for obligations of MSI) will have been released or the Stockholders shall have agreed to indemnify the Buyer with respect to any payments that become due thereunder without regard to any limitations on indemnification set forth in Article VII and Sellers will have delivered to Buyer executed UCC-3 termination statements or other releases satisfactory to Buyer to evidence such releases.

(f) Seller will have obtained releases in a form reasonably satisfactory to the Buyer with respect to the employees listed on Schedule 6.1(f) and the matters set forth opposite such employees’ names.

(g) Sellers will have delivered to Buyer a legal opinion of Sellers’ counsel, substantially in the form of Exhibit B.

(h) As evidenced by a binder or endorsement issued by the insurance company for each applicable policy, the Company will have purchased a three-year extended reporting period on the Company’s current policy that covers directors’ and officers’ insurance and indemnification, employment practices liability and fiduciary liability insurance.


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(i) The Company 401(k) Plan shall have been terminated as described in Section 5.15.

(j) The employment related agreements described on Schedule 6.1(j) shall have been either terminated or amended as set forth on Schedule 6.1(j).

(k) The VRP shall have been terminated as described in Section 5.19.

(l) The Stockholders shall have executed and delivered to Buyer a copy of IRS Form 8023.

(m) The Stockholders shall have terminated the stockholder’s agreement listed on Schedule 3.4 and the Company shall have terminated the stock option plan listed on Schedule 3.4.

(n) The Company shall have terminated the Amended and Restated Revolving Line of Credit Loan Agreement and Security Agreement dated September 29, 2005, as amended, with Wachovia Bank, National Association, and all agreements relating thereto.

(o) The Company shall have reported the matter set forth on Schedule 6.1(o) as a claim under its employment practices liability insurance.

6.2 Conditions to Obligations of Sellers. The obligations of Sellers under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions, but Sellers may waive compliance with any such conditions in writing:

(a) All representations and warranties of Buyer contained in this Agreement will be true and correct in all material respects (if not qualified by materiality) or in all respects (if qualified by materiality) at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing, except for those representations and warranties that address matters only as a particular date (which will be true and correct only as of such date) and Sellers will have received a certificate to such effect, in form and substance reasonably satisfactory to Sellers’ executed on behalf of Buyer by an executive officer of Buyer.

(b) Buyer will have performed and complied in all material respects with all the covenants and agreements required by this Agreement to be performed or complied with by it at or prior to the Closing, including without limitation the delivery of all items required to be delivered by it pursuant to Section 2.5, and Sellers will have received a certificate to such effect in form and substance reasonably satisfactory to Sellers executed on behalf of Buyer by an executive officer of Buyer.


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ARTICLE VII
Indemnification

7.1 Indemnification of Buyer. Subject to the other provisions of this Article VII, the Stockholders, on a pro-rata basis, will indemnify and hold Buyer, its Affiliates (including the Company from and after the Closing) and their respective directors, officers, employees, and agents (collectively, the “Buyer Parties”) harmless from any and all Liabilities, obligations, claims, losses, contingencies, damages, costs, and expenses, including all court costs and reasonable attorneys’ fees but after deduction for any Net Tax Benefit to any of the Buyer Parties relating to such indemnification (collectively, “Losses”), that any Buyer Party suffers or incurs as a result of or relating to:

(a) the breach or inaccuracy of any representation or warranty made by any Seller in this Agreement or any other Seller Document;

(b) the breach or non-fulfillment of any covenant or agreement made by any Seller in this Agreement or any other Seller Document;

(c) Tax liabilities (other than any Tax liability reflected in the Closing Balance Sheet): (i) of the Company for Tax allocable to any taxable period (or any portion thereof) ending on or before the Closing Date and the portion of the Straddle Period attributable to the Stockholders under the principles of Section 8.1(c); (ii) for Taxes of any Person other than the Company imposed, or required to be collected and remitted to a taxing authority by the Company, on the Company for any taxable period (or any portion thereof) ending on or before the Closing Date or that portion of the Straddle Period that ends on or before the Closing Date as a transferee or successor, by contract or pursuant to any Law, which relates to an event or transaction occurring before the Closing; (iii) pursuant to Section 8.9, for one-half of the transfer Taxes incurred in connection with the purchase of Shares contemplated by this Agreement; (iv) imposed on the Company as a result of the Company’s failure to qualify as a subchapter S corporation or a qualified Subchapter S subsidiary, as the case may be, for any taxable period; (v) any Tax imposed on the Company or the Stockholders as a result of the Section 338(h)(10) Election (except for one-half of any transfer taxes as provided in Section 8.9).

(d) any Liability, lawsuit, claim or proceeding arising from the items listed on Schedule 7.1(d).

The Stockholders’ obligation to indemnify Buyer for any Tax Liabilities shall be offset by any amount that is collected from customers of the Company. In the case of any indemnity obligation that relates to Sales Taxes, the Stockholders shall have the right to mitigate such indemnity obligation by contacting, jointly with Buyer, any such customer who is a Governmental Body to discuss a Claim for Sales Taxes and request payment from such customer, but shall not contact such customer individually with respect to any such Claim.

Notwithstanding anything to the contrary in this Agreement, the Stockholders shall not be responsible for and shall not have any obligation to indemnify any Buyer Parties (whether pursuant to any provision of this Section 7.1 or otherwise) for any obligation for or relating to Taxes to the extent that such obligation is reflected in the liabilities in the Closing Balance Sheet


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or any Taxes that are otherwise subject to an indemnity obligation by Buyer pursuant to Section 7.2(c).

7.2 Indemnification of Stockholders. Subject to the other provisions of this Article VII, Buyer will indemnify and hold each Stockholder, his Affiliates and his agents (collectively, the “Stockholder Parties”) harmless from any and all Losses that any Stockholder Party suffers or incurs as a result of or relating to:

(a) the breach of any representation or warranty made by a Buyer in this Agreement or any other Buyer Document or any allegation by a third party that, if true, would constitute such a breach;

(b) the breach or non-fulfillment of any covenant or agreement made by Buyer in this Agreement or any other Buyer Document;

(c) Tax liabilities (i) pursuant to Section 8.9, for one-half of the transfer Taxes incurred in connection with the purchase of Shares contemplated by this Agreement; (ii) with respect to which a reserve has been established on the Closing Balance Sheet, (iii) to the extent that the amount of the Tax Deposit exceeds the amount of Section 7519 Taxes determined to be due and payable with respect to the Short Period Returns (iv) to the extent the Company receives a payment from the IRS of the Section 7519 Payments previously paid to the IRS; or

(d) Liabilities of the Company that arise after the Closing, except to the extent that such Liabilities are attributable to (i) any event or circumstance for which any Buyer Party is entitled to indemnification pursuant to Section 7.1 or (ii) any actions, omissions or other facts or circumstances taken or existing on or prior to the Closing.

7.3 Limitations on Indemnification.

(a) Notwithstanding any contrary provisions of Section 7.1, except as set forth in the following sentence, (i) the Stockholders will not be liable for any Losses with respect to Section 7.1(a) unless the aggregate amount of Losses the Stockholders are liable for thereunder exceeds [*] percent ([*]%) of the Purchase Price (the “Indemnification Threshold”), and in such event, the Stockholders will only be liable for the amount of such Losses in excess of the Indemnification Threshold, and (ii) the total aggregate Liability of the Stockholders for Losses with respect to Section 7.1(a) will not exceed [*] percent ([*]%) of the Purchase Price (the “Indemnification Cap”). Notwithstanding the foregoing, the Indemnification Threshold will not apply to any Losses arising out of Section [*]. The Indemnification Cap shall not apply to any Losses arising out of [*].

(b) Notwithstanding any contrary provisions of Section 7.2, (i) Buyer will not be liable for any Losses with respect to Section 7.2(a) unless the aggregate amount of Losses Buyer is liable for thereunder exceeds the Indemnification Threshold and (ii) the total aggregate liability of Buyer for Losses with respect to Section 7.2(a) will not exceed the Indemnification Cap.

(c) Other than as expressly provided in any other Article of this Agreement, including, without limitation, Articles II and VIII and Sections 5.9 and 5.12, indemnification


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under this Article VII will constitute the sole remedy under this Agreement, except that the foregoing will in no way limit the rights of an Indemnified Party for equitable relief (including, without limitation, in accordance with the provisions of Section 9.10) or for any fraud or intentional misconduct by a party in connection with this Agreement, the documents executed in connection herewith or the transactions contemplated hereby.

7.4 Survival. Notwithstanding any investigation or contrary knowledge by Buyer, the representations and warranties of Sellers and Buyer made in or pursuant to this Agreement and the other documents delivered at the Closing, and the respective parties’ indemnification obligations with respect thereto, will survive the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement until the [*] year anniversary of the Closing Date, except for the representations and warranties set forth in (a) [*] and the indemnification obligations with respect thereto, which will survive until 60 days after the expiration of the applicable period of limitations, and (b) [*] and the indemnification obligations with respect thereto, which will survive indefinitely. Notwithstanding the foregoing, any representation or warranty the violation of which is made the basis of a claim for indemnification pursuant to Section 7.1 or Section 7.2 will survive until such claim is finally resolved if the Indemnified Party notifies the Indemnifying Party of such claim in reasonable detail prior to the date on which such representation or warranty and the respective indemnification obligation would otherwise expire under this Agreement.

7.5 Notice. Any party entitled to receive indemnification under this Article VII (the “Indemnified Party”) agrees to give prompt written notice to the party or parties required to provide such indemnification (the “Indemnifying Parties”) upon the occurrence of any identifiable Loss or the assertion of any claim (including, without limitation, any Asserted Tax Claim) or the commencement of any action or proceeding or Tax or other government audit or investigation in respect of which such a Loss may reasonably be expected to occur (a “Claim”), but the Indemnified Party’s failure to give such notice will not affect the obligations of the Indemnifying Parties under this Article VII except to the extent that the Indemnifying Parties are prejudiced thereby. Such written notice will include a reference to the event or events forming the basis of such Loss or Claim and the amount involved, unless such amount is uncertain or contingent, in which event the Indemnified Party will give a later written notice when the amount becomes fixed.

7.6 Defense of Claims. The Indemnifying Parties may elect to assume and control the defense of any Claim, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of expenses related to such Claim, if (a) the Indemnifying Parties acknowledge their obligation to indemnify the Indemnified Party for any Losses resulting from such Claim and provide reasonable evidence to the Indemnified Party of its financial ability to satisfy such obligation; (b) the Claim does not seek to impose any Liability or obligation on the Indemnified Party other than for money damages; and (c) the Claim does not or could not reasonably be expect to adversely affect the Indemnified Party’s relationship with its customers or employees (other than any Claim for Sales Taxes that relate to the Indemnified Party’s relationship with a Governmental Body as its customer, in which case any election to control the defense of such Claim shall constitute an election for joint control with the Indemnified Party).


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If such conditions are satisfied and the Indemnifying Parties elect to assume and control the defense of a Claim, then (i) the Indemnifying Parties will not be liable for any settlement of such Claim effected without their consent, which consent will not be unreasonably withheld; (ii) the Indemnifying Parties may settle such Claim without the consent of the Indemnified Party; and (iii) the Indemnified Party may employ separate counsel and participate in the defense of such Claim, but the Indemnified Party will be responsible for the fees and expenses of such counsel unless (A) the Indemnifying Parties have failed to adequately assume the defense of such Claim or to employ counsel with respect thereto or (B) there is a conflict of interest (as reasonably determined in writing by counsel to the Indemnified Party) between the interests of the Indemnified Party and the Indemnifying Parties that requires representation by separate counsel, in which case the fees and expenses of such separate counsel will be paid by the Indemnifying Parties, provided that in no event will the Indemnifying Parties be required to pay the fees and expenses of more than one counsel for the Indemnified Party with respect to any Claim. If such conditions are not satisfied, the Indemnified Party may assume and control the defense of the Claim; provided, however, that if the Indemnifying Party is not permitted to assume and control the defense of the Claim as a result of subsection (c) to this Section 7.6, then the Indemnified Party shall not settle any such Claim without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld, delayed or conditioned.

7.7 Holdback Amount; Right of Setoff. All finally determined due and owing Claims Buyer has under this Article VII will first be deducted from the Holdback Amount and distributed to Buyer in accordance with the terms of the Escrow Agreement. To the extent the amount owed to Buyer for a Claim is more than the remaining Holdback Amount, the Stockholders, on a pro rata basis, will pay the balance of such Claim to Buyer in immediately available funds within ten (10) days after final determination of the amount due. In addition, and for the avoidance of doubt, to the extent the Stockholders have any payment obligations to Buyer arising under this Agreement that the Stockholders fail to pay in accordance with the terms and conditions of this Agreement, then, upon Buyer’s request, such unpaid amounts will be withdrawn from the Holdback Amount and distributed to Buyer in accordance with the terms of the Escrow Agreement but at no time shall any amounts be released from the Escrow unless agreed by both parties. The Escrow Agent will promptly provide written notice of any such distribution to the Stockholder Representative and, with respect to all payment obligations arising under Articles II (except for Tax Deposits) and Sections 5.9, 5.12, 8.1(a), 8.1(b) and 8.7(c), the Stockholders will pay the amount of any such distribution to the Escrow Agent for addition to the Holdback Amount in immediately available funds within ten (10) days after receipt of such notice: provided, however, that such payment to the Escrow shall not be required until the aggregate amount required to be paid to the Escrow exceeds $*, and then only to the extent that such required payments exceed $*. For the avoidance of doubt, no Claims will be made against the Tax Deposit, which will be paid either to the IRS or to the Stockholders in accordance with the written instruction of the Stockholder Representative.

7.8 Insurance Recoveries. If any Loss related to a claim by an Indemnified Party is covered by one or more third party insurance policies held by the Indemnified Party and the Indemnified Party actually receives a full or partial recovery under such insurance policies, the Indemnified Party shall refund amounts received from the Indemnifying Party up to the amount of indemnification actually received from the Indemnifying Party with respect to such Loss to the extent the Indemnified Party receives any insurance payment under such third party insurance with


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respect to such Loss (net of (i) any costs of collecting such insurance payment, including the amount of any co-payment or deductible; (ii) an amount equal to the amount of Loss for which indemnification was not received by reason of the application of Section 7.3(a); and (iii) that portion of any premium increase in the next policy period of the applicable insurance policy or replacement insurance policy that results directly from the assertion of such claim, as determined by correspondence from the insurance carrier or insurance broker to the Indemnified Party, a copy which shall have been provided to the Indemnifying Party); provided, however, that the existence of an insurance claim does not require an Indemnified Party to pursue an insurance claim prior to making an indemnification claim under this Article VII.

7.9 Mitigation. An Indemnified Party shall use commercially reasonable efforts to mitigate, to the extent reasonably practicable (including, without limitation, pursuing available claims for insurance), any indemnifiable Losses upon and after the conscious awareness of such Indemnified Party or the executive officers of such Indemnified Party of any event that could reasonably be expected to give rise to any Losses under this Agreement; provided, however, that the existence of mitigation does not require an Indemnified Party to pursue such mitigation prior to making an indemnification claim under this Article VII

7.10 Certain Damages. An Indemnifying Party shall in no event be liable to any Indemnified Party for any exemplary or punitive damages, provided that any damages required to be paid by a Buyer Indemnified Party to any third party that is not an Affiliate of a Buyer Indemnified Party pursuant to a final judgment or order of a court of competent jurisdiction arising out of a Claim may be considered direct damages to the Buyer Indemnified Party, and may constitute Losses for purposes of this Agreement. Additionally, the Stockholders shall in no event be liable to any Buyer Party for any consequential damages from a breach of any representation or warranty occurring during the period between the date of this Agreement and the Closing Date if such breach is disclosed to Buyer in writing prior to the Closing.

ARTICLE VIII
Tax Matters

8.1 Tax Returns.

(a) Tax Periods Ending On or Before the Closing Date. The Company or, following the Closing, the Stockholders, on behalf of the Company, shall timely file (including without limitation extensions of time to file) all federal, state, local and other Tax Returns for taxable periods ending on or prior to the Closing Date and have paid or will pay all Taxes attributable to such periods (the “Short Period Returns”). Such returns will be prepared and filed in accordance with applicable Laws and in a manner consistent with past practices of the Company. Prior to filing any Short Period income Tax Return after the Closing Date, Argy, Wiltse & Robinson, P.C. (“AWR”) shall provide a letter to Buyer indicating that AWR has examined the Tax Return, including accompanying schedules and statements, and the Return is based on all information of which AWR has any knowledge, and to the best of AWR’s knowledge and belief, the Return is true, correct, and complete in all material respects. Prior to filing any Short Period non-income Tax Return after the Closing Date, the Stockholders shall provide such Tax Returns to the Buyer at least fifteen (15) days prior to their due date (taking into account extensions) for the Buyer’s review and comment. The Buyer shall have seven (7)


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Business Days to comment on each non-income Tax Return described in this Section 8.1(a). The Stockholders shall make such revisions to any such non-income Tax Returns filed after the Closing Date as are reasonably requested by Buyer to ensure that such returns have been prepared in a manner consistent with the past reporting practices of the Company and in accordance with applicable Law. For this purpose, Buyer’s comments shall be deemed reasonable if (x) the Stockholders agree to them, (y) in the written opinion of an Independent Accounting Firm, the reporting position initially proposed by Stockholders is not “more likely than not” to prevail, as defined in Treas. Reg. Section 1.6662-4(d)(2) and the alternative reporting position proposed by Buyer is “more likely than not” to prevail, or (z) in the written opinion of an Independent Accounting Firm, the reporting positions proposed by the Stockholders and Buyer are both “more likely than not” to prevail, and the position proposed by Buyer is consistent with past practice (it being understood that such standard shall be applied for purposes of this Section 8.1 whether or not the underlying Tax Return is a Tax Return with respect to income Taxes). Buyer shall reimburse the Stockholders for any Taxes of the Company or the Stockholders for which Buyer has an indemnification obligation pursuant to Section 7.2(c) of this Agreement within fifteen (15) Business Days after payment of such Taxes by the Company or the Stockholders.

(b) Tax Periods Beginning Before and Ending After the Closing Date. Buyer shall file or cause to be filed any Tax Returns of the Company for tax periods that begin before the Closing Date and end after the Closing Date (a “Straddle Period” and such Tax Returns, a “Straddle Period Return”) and pay all Taxes owed by the Company for such periods. Prior to filing any Straddle Period Return, Buyer shall provide the Stockholder Representative with copies of such Tax Returns at least fifteen (15) days prior to their due date (taking into account extensions) for the Stockholder Representative’s review and comment. The Stockholder Representative shall have seven (7) Business Days to comment on each Tax Return described in this Section 8.1(b). Buyer shall make such revisions to any such Tax Returns filed for the Straddle Period as are reasonably requested by the Stockholder Representative to ensure that such returns have been prepared in a manner consistent with the past reporting practices of the Company and in accordance with applicable Law. For this purpose, the Stockholder Representative’s comments shall be deemed reasonable if (x) Buyer agrees to them, (y) in the written opinion of an Independent Accounting Firm, the reporting position initially proposed by Buyer is not “more likely than not” to prevail, as defined in Treas. Reg. Section 1.6662-4(d)(2) and the alternative reporting position proposed by the Stockholders Representative is “more likely than not” to prevail, or (z) in the written opinion of an Independent Accounting Firm, the reporting positions proposed by the Stockholder Representative and Buyer are both “more likely than not” to prevail, and the position proposed by the Stockholder Representative is consistent with past practice. The Stockholders shall reimburse Buyer for any Taxes of the Company or the Buyer for which the Stockholders have an indemnification obligation pursuant to Section 7.1(c) of this Agreement within fifteen (15) Business Days after payment of such Taxes by the Company or Buyer.

(c) Tax Allocation. For purposes of this Agreement and subject to Section 7.2(c), in the case of any Taxes that are payable by the Company for any Straddle Period, the portion of such Tax payable by the Company which relates to the portion of such taxable period ending on the Closing Date shall (i) in the case of any Taxes other than Taxes based upon or


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related to income or receipts, be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction the numerator of which is the number of days in the taxable period ending on the Closing Date and the denominator of which is the number of days in the entire taxable period, and (ii) in the case of any Tax based upon or related to income or receipts be equal to the amount which would be payable by the Company if the relevant taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company (taking into account the Tax status of the Company for such period, including its S corporation status for federal income tax purposes and any similar status for other Tax purposes).

(d) Amended Tax Returns. Notwithstanding anything to the contrary contained in this Agreement, no Tax Return or amended Tax Return shall be filed (and waiver or extension of the statute of limitations for filing such returns or assessing Taxes and no election shall otherwise be made) with respect to any taxable periods (or portions thereof) ending on or prior to the Closing Date (“Pre-Closing Periods”) without the consent of the Stockholders.

8.2 Certain Contest Rights.

(a) Promptly after receipt by Buyer, the Company or the Stockholders of a written notice of any demand, claim or circumstance that, either at such time or after the lapse of time, might give rise to an adjustment or audit of any Tax Return of the Company for periods ending on or prior to the Closing Date (“Stockholder Returns”), or Straddle Period Returns, the party receiving such notice shall in turn provide notice (the “Tax Claim Notice”) to the other parties hereunder. The Tax Claim Notice shall contain factual information (to the extent known to the party receiving the inquiry or notice from the taxing authority) describing such demand, claim or circumstance, including any asserted tax liability (an “Asserted Tax Claim”) in reasonable detail and shall include copies of any notice or other document received in respect of any such Asserted Tax Claim.

(b) Subject to the Buyer’s right to participate in any tax proceeding as described below, the Stockholders, at their own cost and expense, shall have the power and authority to control the conduct of the Company in respect of any audit or investigation relating to the Company for a Pre-Closing Tax Period, including without limitation any Asserted Tax Claim, to the extent it relates to any Pre-Closing Period Taxes with respect to which the Stockholders have an indemnification obligation pursuant to this Agreement. Buyer shall have the right to participate in any such Asserted Tax Claim proceedings, such as a tax audit, examination, appeal or litigation (collectively, a “Asserted Tax Claim Proceeding”) at its expense, if the resolution of the matter at issue in such tax proceeding could materially adversely affect the Company with respect to any period after the Closing. In no event shall the Stockholders settle any such tax proceeding without Buyer’s consent (which consent shall not unreasonably be withheld) if such settlement could materially adversely affect the Company with respect to any period after the Closing or could reasonably be expected to result in any material Liability on the part of the Company or such successor in interest for which the Stockholders are not obligated to indemnify the Buyer pursuant to Section 7.1 of this Agreement. In the event the Stockholders determine not to challenge an Asserted Tax Claim, to the extent such Claim could have a material adverse effect on the Company with respect to any period after the Closing, the Buyer shall have the right to assume the powers and authority listed in this Section 8.2(b).


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Notwithstanding anything contrary in this Agreement, then in no event shall Buyer or, after the Closing Date, the Company, settle any audit or investigation relating to Pre-Closing Period Taxes in a manner which could reasonably be expected to cause any Stockholder to incur a liability (by virtue of its indemnification obligations under this Agreement or otherwise) unless the Stockholders provide prior written consent (which consent shall not unreasonably be withheld). In the event that the terms of Section 8.2(a) or this Section 8.2(b) are inconsistent with the terms of Section 7.6 hereof, the terms of Section 8.2(a) and this Section 8.2(b) shall control.

(c) Except as provided below, Buyer and the Stockholders, each at their own cost and expense, shall have the right to jointly control the conduct of the Company in respect of any audit or investigation relating to a Straddle Period Tax Return. Buyer and the Stockholders shall jointly participate in any Asserted Tax Claim Proceedings relating to a Straddle Period Tax Return. In the event the Buyer and the Stockholders cannot agree on the resolution of an issue relating to a Straddle Period Tax Return, then the party (Buyer or the Stockholders, as the case may be) that has the greater Tax obligation with respect to such Straddle Period Return shall have the right to control the resolution of such issue (including a settlement of such issue), but only with the consent of the other party, such consent not to be unreasonably withheld.

8.3 Cooperation on Tax Matters. After the Closing Date, Buyer, on the one hand, and the Stockholders, on the other hand, will cooperate with one another and each shall make available to the other, as reasonably requested in writing, all information, records or documents relating to the payment of any Taxes in accordance with this Agreement, and the conduct of any Tax audit or other litigation involving Taxes for all periods prior to or including the Closing Date and all Straddle Periods and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof. For the avoidance of doubt, except to the extent contemplated in this Agreement, the Stockholders shall not cause the Company to make any additional federal tax elections under the Code with respect to the Company for any tax period ending after the Closing Date. The cooperation contemplated hereunder shall include providing, upon request, as promptly as practicable, such information relating to the Company (including access to books and records) as is reasonably necessary for the filing of any Tax Returns, the making of any election related to Taxes, the preparation for any audit by any taxing authority, and the prosecution or defense of any claim, suit or proceeding relating to any Tax Return. Buyer shall retain all books and records with respect to Taxes pertaining to the Company until the applicable period for assessment under applicable law (giving effect to any and all extensions or waivers) has expired, and to abide by or cause the abidance with all record retention agreements entered into with any Taxing Authority. Buyer shall cause the Company to give the Stockholders reasonable notice prior to transferring, discarding or destroying any such books and records relating to Tax matters and, if any Stockholder so requests, the Company shall allow the Stockholder to take possession of such books and records. Buyer shall cooperate with the Stockholders in the conduct of any audit or other proceeding related to Taxes involving the Company for any Pre-Closing Period.

8.4 Employment Taxes. Any payment made pursuant to the VRP in accordance with Section 2.3(b)(iii) will be treated as made by the Company to the participants as compensation for past services and will be subject to applicable employment Taxes including, without limitation, withholding, FUTA and FICA Taxes. The full amount of any such required


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employment Taxes shall be paid by the Stockholders to the Company at or immediately prior to the Closing Date.

8.5 Refunds.

(a) In the event that the Stockholders receive a refund or credit of Tax of the Company for which Buyer or the Company made a payment pursuant to Section 7.2(c) of this Agreement, then, within twenty (20) days of receipt, the Stockholders shall pay to Buyer or the Company, as the case may be, the amount of such refund or credit (including any accrued interest paid in respect of such refunded Tax) to the extent the refund or credit represents payments made by or for Buyer with respect to its obligations under Section 7.2(c). Buyer agrees that as a condition to receiving any such refund or credit, in the event that any refund or credit of Taxes for which a payment has been made to Buyer pursuant to this Section 8.5 is subsequently reduced or disallowed, to indemnify and hold harmless the Stockholders for any Tax liability assessed against such Stockholder by reason of the reduction or disallowance.

(b) In the event that Buyer or the Company receives a refund or credit of Tax or receives any reimbursements from customers of Sales Taxes of the Company and such items relate to any Pre-Closing Period or to any Taxes for which the Sellers are responsible pursuant to Section 7.1(c) or any other provision of this Agreement, then, within twenty (20) days of receipt, Buyer shall pay to the Stockholders, the amount of such refund, credit or reimbursement (including any accrued interest paid in respect of such amounts). Upon repayment to the Company of the amount of Section 7519 Taxes earlier paid by the Company to the IRS, the Company shall promptly pay such amount to the Stockholder Representative. For purposes of this Agreement, the term “refund” shall mean the receipt of cash, an actual reduction in tax paid and the use of an overpayment as a credit or other Tax offset by Buyer or the Company.

8.6 FIRPTA Certificate. At the Closing, (a) the Company shall deliver to Buyer a statement (in such form as may be reasonably requested by counsel to Buyer) conforming to the requirements of Treas. Reg. §§ 1.897-2(c)(3) and 1.897-2(h) of the United States Treasury Regulations and (b) the Company shall deliver to Buyer a letter authorizing Buyer to deliver on behalf of the Company the notification required under Section 1.897-2(h)(2) of the United States Treasury Regulations.

8.7 Section 338(h)(10) Election.

(a) The Stockholders shall join with Buyer in making the elections under Section 338(h)(10) of the Code or any analogous provision of state or local Law (each such election, a “Section 338(h)(10) Election”), with respect to Buyer’s purchase of all of the capital stock of the Company. The Stockholders agree to take, or cause to be taken, any and all action necessary and to do, or cause to be done, or to execute, or cause to be executed, such documents as may be necessary or desirable to effect any Section 338(h)(10) Election, with respect to Buyer’s acquisition of all the capital stock of the Company. At the Closing, the parties shall execute IRS Form 8023 (or any successor form(s) thereto), with all attachments.

(b) Buyer and Sellers agree that the Purchase Price will be allocated to the assets of the Company in accordance with Sections 338 and 1060 of the Code and the regulations


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thereunder. Within fifteen (15) days after the final determination of the Closing Balance Sheet, the parties shall retain the Independent Accounting Firm to prepare a final schedule (the “Final Allocation Schedule”) allocating the Purchase Price among the assets of the Company. The Final Allocation Schedule shall be an allocation of the Purchase Price among the assets of the Company in a manner consistent with Sections 338 and 1060 of the Code and the regulations thereunder. Buyer and the Stockholders will cooperate and Buyer shall cause the Company to cooperate, to provide the Independent Accounting Firm with such information within Buyer’s, the Stockholders’ or the Company’s possession that may be reasonably requested in writing by such Independent Accounting Firm for purposes of its evaluation hereunder. The Independent Accounting Firm will keep confidential all information disclosed by Buyer, the Stockholders and the Company in the course of conducting its evaluation, and, to that end, will execute such customary documentation as the parties may reasonably request with respect to such confidentiality obligation. Buyer and the Stockholders shall have full access to the Independent Accounting Firm and shall be entitled to submit information to the Independent Accounting Firm. The Independent Accounting Firm will be directed to comply with the provisions of this Section 8.7(b), and to that end each of Buyer and Sellers will provide the Independent Accounting Firm with a complete and correct copy of this Section 8.7(b) (and the definitions of capitalized terms used in this Section 8.7(b) that are defined elsewhere in this Agreement). Buyer and Sellers shall be bound by the determination by the Independent Accounting Firm, absent manifest error. Buyer and Sellers acknowledge and agree that, upon termination of the Escrow Agreement, the Final Allocation Schedule shall be revised consistent with the applicable provisions of the Code and Treasury Regulations. Buyer and Sellers shall file all Tax Returns (including amended returns and claims for refund), IRS Form 8883 and any information reports in a manner consistent therewith. The cost of engaging the Independent Accounting Firm for purposes of preparing the Final Allocation Schedule shall be borne by Buyer to the extent such costs are incurred in periods after the execution of this Agreement. The parties acknowledge that the Stockholders may retain the Independent Accounting Firm, at their own cost and expense, to prepare a preliminary schedule allocating the Purchase Price among the assets of the Company in a manner consistent with Sections 338 and 1060 of the Code and the regulations thereunder.

(c) Each Stockholder shall include any income, gain, loss, deduction, or other tax item resulting from the Section 338(h)(10) Election on his tax returns to the extent required by applicable Law. Each Stockholder shall also pay any Tax imposed on the Company attributable to the making of the Section 338(h)(10) Election, including any Tax imposed under Section 1374 of the Code or the failure of any jurisdiction to conform to federal income Tax treatment for the Section 338(h)(10) Election.

8.8 S Corporation Status. Neither the Company nor the Stockholders shall revoke the Company’s election to be taxed as an S corporation for purposes of federal or any applicable state or local Law within the meaning of Sections 1361 and 1362 of the Code and any applicable state or local provision. Furthermore, except as contemplated by this Agreement, neither the Company nor the Stockholders shall take any or allow any action that would result in the termination of a Company’s status as a validly electing S corporation within the meaning of Sections 1361 and 1362 of the Code and any applicable state or local provision. Buyer acknowledges that the Company shall lose its status as an S Corporation upon the Closing.


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8.9 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration and other similar Taxes and other governmental charges (including, without limitation, charges for or in connection with the recording of any instrument or document as provided in this Agreement and any state or local transfer Taxes, if any, arising in connection with the Section 338(h)(10) Election) payable in connection with the transfer of the Stock as contemplated by this Agreement shall be borne equally by the Stockholders and Buyer.

ARTICLE IX
Miscellaneous

9.1 Termination. This Agreement and the transactions contemplated by this Agreement may be terminated and abandoned (a) at any time prior to the Closing by mutual written consent of Buyer and Sellers; (b) except as provided below, by either Buyer, on the one hand, or Sellers, on the other hand, if a condition to performance by either party under this Agreement has not been satisfied or waived prior to the date that is ninety (90) days after the date hereof; (c) by either Buyer, on the one hand, or Sellers, on the other hand, if a condition to performance by either party under this Agreement has not been satisfied or waived prior to the date that is one hundred eighty (180) days after the date hereof, or (d) except as provided below, by Buyer, on the one hand, or Sellers, on the other hand, at any time, if there is pending or threatened litigation in any court or any proceeding before or by any Governmental Body to restrain or prohibit or obtain damages or other relief with respect to this Agreement or the consummation of the transactions contemplated by this Agreement or as a result of which Buyer could be required to dispose of any assets or operations of Buyer (including the operations of the Company) or their Affiliates or to comply with any restriction on the manner in which Buyer or their Affiliates conduct their operations (including any operations of the Company); provided, that, except for a termination pursuant to Section 9.1 (a) or (c), (i) Buyer may not terminate this Agreement if the Closing has not occurred because of Buyer’s failure to perform or observe any of its covenants or agreements set forth in this Agreement or if Buyer is, at such time, in breach of this Agreement, and such breach constitutes a failure of the conditions set forth in Section 6.1(a) or Section 6.1(b), as the case may be; and (ii) Sellers may not terminate this Agreement if the Closing has not occurred because of Sellers’ failure to perform or observe any of their respective covenants or agreements set forth in this Agreement or if either of Sellers is, at such time, in breach of this Agreement, and such breach constitutes a failure of the conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may be. In the event of termination of this Agreement by any party hereto as provided in this Section 9.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of any party hereto except (x) under the Confidentiality Agreement, (y) with respect to this Section 9.1, Section 5.8, Section 5.9 or Section 5.11, and (z) to the extent that such termination results from the willful breach by a party hereto of any of its representations and warranties or of any of its covenants or agreements contained in this Agreement.

9.2 Notices. All notices that are required or may be given pursuant to this Agreement must be in writing and delivered personally, by a recognized courier service, by a recognized overnight delivery service, by facsimile or by registered or certified mail, postage prepaid, to the parties at the following addresses (or to the attention of such other Person or such other address as any party may provide to the other parties by notice in accordance with this Section 9.2):


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		if to Buyer:		with copies to:

		Perot Systems Government Services, Inc.		Venable LLP
		8270 Willow Oaks Corporate Drive		575 7th Street, NW
		Fairfax, VA 22031		Washington, DC 20004
		Attn: President		Attn: Wallace E. Christner, Esq.
		Fax: (703) 289 8017		Facsimile: (202) 344-8300

		and:

		Perot Systems Corporation
		2300 West Plano Parkway
		Plano, TX 75075-8427
		Attn: General Counsel
		Fax: (972) 577 6085

		if to Sellers:		with copies to:

		Frank F. Islam		Pillsbury Winthrop Shaw Pittman LLP
				1650 Tysons Boulevard
				McLean, VA 22102
				Attn: Craig E. Chason, Esq.
				Facsimile: (703) 770-7901

Any such notice or other communication will be deemed to have been given and received (whether actually received or not) on the day it is personally delivered or delivered by courier or overnight delivery service or sent by facsimile or, if mailed, when actually received.

9.3 Attorneys’ Fees and Costs. If attorneys’ fees or other costs are incurred to secure performance of any obligations under this Agreement, or to establish damages for the breach thereof or to obtain any other appropriate relief, whether by way of prosecution or defense, the Prevailing Party will be entitled to recover reasonable attorneys’ fees and costs incurred in connection therewith.

9.4 Further Assurances. Each party agrees to execute any and all documents and to perform such other acts as may be necessary or expedient to further the purposes of this Agreement and the transactions contemplated by this Agreement. Without limiting the foregoing, the Stockholders will execute and deliver to Buyer such further instruments of conveyance and transfer as Buyer may reasonably request in order more effectively to convey and transfer the Shares to Buyer and to put Buyer in operational control of the business of the Company.

9.5 Brokers. Each party to this Agreement represents to the other parties that it has not incurred and will not incur any liability for brokers’ or finders’ fees or agents’ commissions in connection with this Agreement or the transactions contemplated by this Agreement. Each party to this Agreement agrees that it will indemnify and hold harmless the other parties, without


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regard to the limitations set forth in Article VII, against any claim for brokerage and finders’ fees or agents’ commissions in connection with the negotiation or consummation of the transactions contemplated by this Agreement, including, the Stockholders holding Buyer and the Company harmless for the fees owing to the Sellers’ Broker.

9.6 Counterparts. This Agreement may be executed in one or more counterparts for the convenience of the parties, all of which together will constitute one and the same instrument.

9.7 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and will not in any way affect the meaning or interpretation of this Agreement. References in this Agreement to Articles, Sections, Exhibits, and Schedules are to the Articles, Sections, Exhibits, and Schedules of this Agreement unless the context requires otherwise.

9.8 Successors and Assigns; Assignment. This Agreement will bind and inure to the benefit of the parties named in this Agreement and their respective successors and assigns. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned or delegated by Buyer or any Seller without the prior written consent of the other parties and any purported assignment or delegation will be null and void; except that Buyer may assign its rights under this Agreement to a direct or indirect subsidiary as long as it remains liable for its obligations hereunder. This Agreement is not intended to confer any rights or benefits on any Person other than the parties to this Agreement and, to the extent provided in Article VII, the Buyer Parties and the Stockholder Parties.

9.9 Entire Agreement. This Agreement, the Buyer Documents, the Seller Documents, and the related documents contained as Exhibits and Schedules to this Agreement or expressly contemplated by this Agreement, together with that certain Confidentiality and Non-Disclosure Agreement between Buyer and the Company dated May 4, 2006 (the “Confidentiality Agreement”), contain the entire understanding of the parties relating to the subject matter of this Agreement and supersede all prior written or oral and all contemporaneous oral agreements and understandings relating to the subject matter of this Agreement. This Agreement may not be modified or amended except in writing signed by the party against whom enforcement is sought. All statements of Sellers contained in any schedule, certificate, or other writing required under this Agreement to be delivered in connection with the transactions contemplated by this Agreement will constitute representations and warranties of Sellers under this Agreement. The Exhibits and Schedules to this Agreement are hereby incorporated by reference into and made a part of this Agreement for all purposes. Unless otherwise expressly stated in this Agreement, no right or remedy described or provided in this Agreement is intended to be exclusive or to preclude a party from pursuing other rights and remedies to the extent available under this Agreement, at law, or in equity.

9.10 Specific Performance. The parties hereby acknowledge and agree that the failure of any party to perform its agreements and covenants under this Agreement, including its failure to take all required actions on its part necessary to consummate the transactions contemplated by this Agreement, will cause irreparable injury to the other parties for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to compel performance of


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such party’s obligations and to the granting by any court of the remedy of specific performance of its obligations under this Agreement.

9.11 Governing Law; Jurisdiction; Legal Process. This Agreement will be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. Each of the parties hereby irrevocably submits to arbitration in the City of Wilmington, Delaware and to the jurisdiction of the federal and state courts located in the City of Wilmington, Delaware in any arbitration, action, suit or proceeding (as determined pursuant to Section 9.14) arising out of this Agreement or any Seller Document or Buyer Document, agrees to accept service of legal process pursuant to Section 9.2 in any such arbitration, action, suit or proceeding, and hereby waives, and agree not to assert, as a defense in any such arbitration, action, suit or proceeding that it is not subject thereto or that such arbitration, action, suit or proceeding may not be brought or is not maintainable in said location or courts or that the venue thereof may not be appropriate or that this Agreement or any such Seller Document or Buyer Document may not be enforced in or by arbitration in such location or by said courts.

9.12 Drafting. Neither this Agreement nor any provision contained in this Agreement will be interpreted in favor of or against any party hereto because such party or its legal counsel drafted this Agreement or such provision.

9.13 Usage. Where appropriate, the singular shall include the plural and the masculine shall include the feminine and the neuter, and vice versa. The term “or” will not be interpreted as excluding any of the items described. The term “include” or any derivative of such term does not mean that the items following such term are the only types of such items.

9.14 Arbitration. Any controversy, dispute, or claim arising under this Agreement (other than pursuant to Section 9.10 or as otherwise provided in Section 2.4 or Section 8.1) will be finally settled by arbitration conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date of this Agreement. Notwithstanding any provision of the American Arbitration Association Commercial Arbitration Rules, any such arbitration will be conducted before and decided by one arbitrator. The parties to the arbitration will request that the American Arbitration Association provide the parties with a list of five potential arbitrators. Each party will then strike from the list names one after another until one name is left. After the rights to strike are exercised, the individual remaining on the list will be the arbitrator. Any such arbitration will take place in the City of Wilmington, Delaware. The arbitrators in any such arbitration will apply the laws of the State of Delaware and the United States of America. In any arbitration under this Agreement, this Agreement will be deemed to have been made in, and will be governed by and construed under the laws of, the State of Delaware and the United States of America. Any decision rendered by the arbitrator will be final and binding and judgment thereon may be entered in any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. The parties intend that this agreement to arbitrate be irrevocable and the exclusive means of settling all disputes under this Agreement, whether for money damages or equitable relief. If arbitration is invoked in accordance with the provisions of this Agreement, the Prevailing Party


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in the arbitration will be entitled to recover from the other all costs, fees, and expenses pertaining or attributable to such arbitration, including reasonable attorneys’ fees.

9.15 Partial Invalidity. Wherever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable Law, but in case any one or more of the provisions contained in this Agreement will, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such provision will be ineffective to the extent, but only to the extent, of such invalidity, illegality, or unenforceability without invalidating the remainder of such invalid, illegal, or unenforceable provision or provisions or any other provisions of this Agreement, unless such a construction would be unreasonable.

9.16 Stockholder Representative .

(a) By the execution and delivery of this Agreement, each Stockholder hereby irrevocably constitutes and appoints Frank F. Islam as the true and lawful agent and attorney-in-fact of such Stockholder with full powers of substitution to act in the name, place and stead of thereof with respect to the performance on behalf of such Stockholder under the terms and provisions of this Agreement, as the same may be from time to time amended, and to do or refrain from doing all such further acts and things, and to execute all such documents on behalf of the Stockholders, if any, as the Stockholder Representative shall deem necessary or appropriate in connection with any of the transactions contemplated under this Agreement, including:

(i) to agree upon or compromise any matter related to the calculation of any adjustments, under this Agreement;

(ii) to direct the distribution of the Purchase Price;

(iii) to act for the Stockholders with respect to all indemnification matters referred to in this Agreement, including the right to compromise on behalf of the Stockholders any indemnification claim made by or against the Stockholders, if any;

(iv) to act for the Stockholders with respect to all post-Closing matters including to consent to the payment of funds in the Escrow to Buyer and/or to petition the Escrow Agent for the release of any or all funds due the Stockholders under the Escrow Agreement;

(v) to terminate, amend, or waive any provision of this Agreement; provided that any such action, if material to the rights and obligations of the Stockholders in the reasonable judgment of the Stockholder Representative, shall be taken in the same manner with respect to all the Stockholders unless otherwise agreed by each of the Stockholders who is subject to any disparate treatment of a potentially adverse nature;

(vi) to employ and obtain the advice of legal counsel, accountants and other professional advisors as the Stockholder Representative, in his sole discretion, deems necessary or advisable in the performance of his duties as the Stockholder Representative and to rely on their advice and counsel;


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(vii) to retain a portion of the Purchase Price as a reserve against the payment of expenses incurred in his capacity as the Stockholder Representative;

(viii) to sign any releases or other documents with respect to and dispute or remedy arising under this Agreement or any of the Seller Documents or Buyer Documents; and

(ix) to do or refrain from doing any further act or deed on behalf of the Stockholders which the Stockholder Representative deems necessary or appropriate in his sole discretion relating to the subject matter of this Agreement as fully and completely as any of the Stockholders could do if personally present and acting.

(b) The appointment of the Stockholder Representative shall be deemed coupled with an interest and shall be irrevocable, and any other Person may conclusively and absolutely rely, without inquiry, upon any actions of the Stockholder Representative as the acts of the Stockholders hereunder appointing the Stockholder Representative in all matters referred to in this Agreement. Each of the Stockholders appointing the Stockholder Representative hereby ratifies and confirms all that the Stockholder Representative shall do or cause to be done by virtue of such Stockholder Representative’s appointment as Stockholder Representative of the Stockholders. The Stockholder Representative shall act for the Stockholders appointing the Stockholder Representative on all of the matters set forth in this Agreement in the manner the Stockholder Representative believes to be in the best interest of the Stockholders but the Stockholder Representative shall not be responsible to the Company nor any of the Stockholders for any loss or damage that the Company or any of the Stockholders may suffer by reason of the performance by the Stockholder Representative of such Stockholder Representative’s duties under this Agreement and any other agreement appointing such Stockholder Representative, other than loss or damage arising from willful misconduct or fraud in the performance of such Stockholder Representative’s duties under this Agreement.

(c) Each of the Stockholders appointing the Stockholder Representative hereunder hereby expressly acknowledges and agrees that any Person shall be entitled to rely on any and all action taken by the Stockholder Representative under this Agreement without liability to, or obligation to inquire of, any of the Stockholders. If the Stockholder Representative resigns or ceases to function in such capacity for any reason whatsoever, then the successor Stockholder Representative shall be Richard F. Bishop. The Stockholders appointing the Stockholder Representative do hereby jointly and severally agree to indemnify and hold the Stockholder Representative harmless from and against any and all Loss (including without limitation attorneys’ fees) reasonably incurred or suffered as a result of the performance of such Stockholder Representative’s duties under this Agreement, except for any such Loss arising out of the gross negligence or willful misconduct of the Stockholder Representative.

[signatures appear on following page]


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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.


		BUYER:

		PEROT SYSTEMS GOVERNMENT SERVICES, INC.

		By:		/s/ James Ballard
		Name:		James Ballard
		Title:		President of PSGS

		SELLERS:

		QSS GROUP, INC.

		By:		/s/ Frank F. Islam
		Name:		Frank F. Islam
		Title:		Chief Executive Officer

		STOCKHOLDER REPRESENTATIVE

		/s/ Frank F. Islam
		Frank F. Islam

		/s/ Frank F. Islam
		Frank F. Islam

		/s/ Richard F. Bishop
		Richard F. Bishop

		THE RICHARD F. BISHOP LIVING TRUST

		By:		/s/ Richard F. Bishop
		Name:		Richard F. Bishop
		Title:		Trustee


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EX-10.41 4 d43919exv10w41.htm INFORMATION TECHNOLOGY SERVICES AGREEMENT exv10w41

EXHIBIT 10.41

INFORMATION TECHNOLOGY SERVICES AGREEMENT

This Information Technology Services Agreement (“Agreement”), dated as of January 1, 2007 (the “Effective Date”), is between Perot Systems Corporation, a Delaware corporation (“Perot Systems”), and Hillwood Enterprises, L.P., a Texas limited partnership (“Client”).

RECITALS

WHEREAS, Client and Perot Systems have entered into a Master Agreement for Information Services dated April 1, 2001 (including the Schedules and the Appendices thereto, (the “Prior Agreement”) pursuant to which Perot Systems provides certain information technology services to Client; and

WHEREAS, Client and Perot Systems desire to restate the terms and conditions of the Prior Agreement and to amend the terms and conditions of their business relationship in this Agreement as of the date hereof;

NOW, THEREFORE, for and in consideration of the agreements set forth below, Perot Systems and Client agree as follows:

Article 1
Agreement and Term

1.1		Agreement. Perot Systems will provide to Client the information technology services described in Schedule A and any additional services mutually agree to by the parties.

1.2		Term. The term of this Agreement will begin on the Effective Date and will end on the tenth anniversary of the Effective Date (the “Initial Term”) unless earlier terminated in accordance with the terms of this Agreement. The Agreement will automatically extend at the end of the Initial Term for consecutive one-year renewal terms (“Renewal Terms”) unless either party provides to the other party at least six months prior written notice that the Agreement will not be extended. The Initial Term and the Renewal Terms are collectively referred to herein as the “Term.”

Article 2
Account Management and Personnel

2.1		Client Executive. Perot Systems will designate a representative (“Client Executive”) who will be directly responsible for coordinating and managing the delivery of the Services and will have full authority to act on Perot Systems’ behalf with respect to all matters relating to this Agreement. The Client Executive will work with the Client Representative to address Client’s information technology issues and strategies and the parties’ relationship under this Agreement. Before designating or replacing its Client Executive, Perot Systems will consult with and obtain the approval of Client, which shall not be unreasonably delayed or withheld.

2.2		Client Representative. Client will designate a representative (“Client Representative”) who will be directly responsible for supervising the delivery of the Services and have full authority to act on

		Client’s behalf with respect to all matters relating to this Agreement. The Client Representative will work with the Client Executive to address Client’s information technology issues and strategies and the parties’ relationship under this Agreement.

2.3		Subcontractors. Without limiting Perot Systems’ obligations under this Agreement, the parties acknowledge and agree that Perot Systems may, upon prior agreement of Client, use subcontractors or affiliates to perform certain of its obligations under this Agreement. Unless otherwise agreed, Perot Systems shall be responsible for the performance of any affiliate or subcontractor personnel providing Services to the same extent as if such personnel were Perot Systems employees. Notwithstanding the foregoing, Perot Systems may subcontract to a subsidiary of Perot Systems, or any corporation or entity in which the Perot Systems has at least a fifty percent (50%) ownership interest.

2.4		Assignment, Qualifications, Retention and Replacement of Perot Systems Personnel

	(a)		Before assigning a dedicated individual to Client’s account, Perot Systems will notify Client of the proposed assignment, introduce the individual to appropriate Client representatives (and, upon request, provide those representatives with the opportunity to interview the individual) and provide Client with a résumé and any other information about the individual that Client reasonably requests. If Client objects to the proposed assignment such individual will not be assigned to Client’s account.

	(b)		The personnel Perot Systems assigns to support Client’s account will be properly educated, trained and qualified for the services they are to perform.

	(c)		During the first 2 years of assignment Perot Systems will not replace or reassign any dedicated individual assigned to Client’s account unless Client consents to such reassignment or replacement, or such person voluntarily resigns from Perot Systems, is dismissed by Perot Systems for cause, fails to perform his or her duties and responsibilities pursuant to this Agreement, or dies or is unable to work due to his or her disability. Such reassignment or replacement shall occur only after a suitable replacement has been approved by Client. Perot Systems will replace such individual with an individual who has equivalent qualifications in Client’s Software applications to perform the applicable services.

	(d)		Prior to incurring training costs for a dedicated individual assigned to Client’s account related to Client specific applications or systems, Perot Systems will share with Client the individual development plan of the applicable individual including any possible future reassignments. The parties agree that if the individual is transferred by Perot Systems without Client’s consent during the first 2 years of assignment, then Client will not be responsible for the replacement individual’s training costs related to Client specific applications or systems.

	(e)		If Client determines in good faith that the continued assignment of any of the Perot Systems Personnel to Client’s account is not in Client’s best interests, then Client will give Perot Systems notice to that effect. After receiving that notice, Perot Systems will have a reasonable period of time in which to investigate the matters stated in that notice, discuss its findings with Client, and resolve any problems with such person.

	(f)		Any Perot Systems’ employee assigned to Client’s account shall execute a confidentiality agreement in the form of the attached Schedule C.

Article 3
Services

3.1		Base Services. During the Term, Perot Systems will provide to Client the services, software, equipment and other resources described in Schedule A (the “Base Services”) and other related services that are mutually agreed to by the parties and that are within the IS Annual Budget for the Base Services (as set forth in Appendix B-2 of Schedule B).

3.2		Additional Services. Client may from time to time during the Term request that Perot Systems provide additional services, functions and responsibilities not within the Perot Systems IS Annual Budget for the scope of the Base Services (“Additional Services”). Any such Additional Services will be provided under Task Order.

Article 4
Client Responsibilities

4.1		Cooperation. Client shall reasonably cooperate with Perot Systems by, among other things, making available, as reasonably requested by Perot Systems, management decisions, information, approvals or disapprovals, and acceptances or rejections in a reasonably timely manner so that Perot Systems may fulfill its obligations under this Agreement.

4.2		Software. Client will provide Perot Systems with access to, and the necessary rights to operate, modify, and enhance, (a) the Client proprietary software described in Schedule A and such other proprietary software as is necessary for Perot Systems to perform its obligations under the Agreement (“Client Proprietary Software”) and (b) the third party software described in Schedule A and such other vendor software as is necessary for Perot Systems to perform its obligations under the Agreement (“Client Vendor Software”). Client Proprietary Software and Client Vendor Software are collectively referred to herein as “Client Software.” Client will pay all license, maintenance and other fees associated with the Client Software and any access or other fees associated with obtaining such rights to the Client Software.

4.3		Access to Client Facilities. Client shall provide Perot Systems access to its facilities and will provide at such facilities such office furnishings, janitorial service, telephone service, utilities (including air conditioning) and office-related equipment, supplies, and duplicating services as Perot Systems may reasonably require in connection with the activities contemplated hereunder. Client will provide such access 24 hours a day, seven days a week. Perot Systems shall obey all generally applicable rules and procedures at any Client facility of which Client has notified Perot Systems.

4.4		Other Technology. Client will provide Perot Systems with access to the hardware, equipment, and technology related items and services listed in Schedule A and such other hardware, equipment and technology related items and services as otherwise reasonably necessary for Perot Systems to perform its obligations under the Agreement (the “Client Technology”). Client will pay all license, maintenance and other fees associated with the Client Technology and any access or other fees associated with obtaining such rights to the Client Technology.

Article 5
Payments to Perot Systems

5.1		Base Charges. During the Term, Client will pay Perot Systems each month for the Base Services the amounts set forth in Schedule B (“Base Charges”).

5.2		Additional Services Charges. During the Term, Client will pay Perot Systems each month for the Additional Services the amounts set forth in the applicable Task Order.

5.3		Reimbursable Expenses. Client will pay or reimburse Perot Systems for its reasonable out-of-pocket travel and travel related expenses incurred in connection with its performance of the Services, which have received Client’s prior approval. Perot Systems will provide documentation to Client in support of Perot Systems’ reimbursable expenses.

5.4		Taxes. There will be added to any charges under this Agreement, and Client will pay or reimburse to Perot Systems, amounts equal to any taxes, however designated or levied based upon such charges, the Services, or this Agreement, including state and local taxes, and any taxes or amounts in lieu thereof paid or payable by Perot Systems in respect of the foregoing, excluding franchise taxes and taxes based on the net income or net margin of Perot Systems. Each party will cooperate with the other in minimizing any applicable tax and, in connection therewith, Client will provide Perot Systems any resale certificates, information regarding out-of-state use of materials, services or sales, or other exemption certificates or information reasonably requested by Perot Systems.

5.5		Invoicing and Payment Terms.

	(a)		Invoicing. Perot Systems will invoice Client monthly in arrears for all charges due. Perot Systems will compute periodic charges on a calendar month basis and prorate those charges for any partial month of the Term.

	(b)		Payment Terms. All charges shall be paid within one month after the date of the applicable Perot Systems invoice.

	(c)		Late Payments. Any amount not paid when due will thereafter bear interest at the lesser of (i) 1.5% per month or (ii) the highest rate allowed by law. Client will be responsible for any and all costs of collection, including reasonable attorney’s fees, for any breach of Client’s obligations to pay amounts owed under this Agreement.

5.6

Financial Audit. Perot Systems will retain records supporting its charges under this Agreement for three years following its expiration or termination. Client and its auditors (including internal audit staff and external public accounting firm auditors) may audit the relevant financial records of Perot Systems on reasonable prior notice, provided that any external auditor executes a non-disclosure agreement with Perot Systems.

Article 6
Confidentiality, Proprietary Rights and Audit Rights

6.1

Client Data. All data and information provided by or on behalf of Client to Perot Systems in connection with the Services will remain the property of Client. Perot Systems will use such data or

information solely in connection with the activities contemplated by this Agreement. Upon any termination of this Agreement, Perot Systems shall provide to Client all copies of such data and information in its possession, and shall also provide to Client copies of other documentation used exclusively in support of Client.

6.2

Confidential Information.

	(a)		Confidential Information. All Confidential Information relating to Client or Perot Systems will be held in confidence by the other party to the same extent and in at least the same manner as such party protects its own confidential or proprietary information. Neither Perot Systems nor Client may disclose, publish, release, transfer or otherwise make available Confidential Information of the other party to, or for the use or benefit of, any third party without the other party’s written consent. The term “Confidential Information” is defined to mean, with respect to Client and Perot Systems, all confidential or proprietary information, documentation, data, material or know-how concerning or in any way relating to Client or Perot Systems, respectively, or to Perot Systems’ or Client’s respective business, customers or suppliers that is proprietary or is not, on the date such information is disclosed, publicly available, including, without limitation (i) with respect to Client, the information relating to Client or its customers that is contained in the data files of Client and the Client Proprietary Software, (ii) with respect to Perot Systems, all costing and pricing information of Perot Systems, the Perot Systems Software and the Perot Systems Tools, and (iii) with respect to each party, the terms of this Agreement.

	(b)		Certain Permitted Disclosures. Each of Perot Systems and Client will, however, be permitted to disclose relevant aspects of the other party’s Confidential Information to its respective officers, agents, subcontractors and employees to the extent that such disclosure is reasonably necessary for the performance of its duties and obligations under this Agreement; provided, however, that such party will take reasonable measures to prevent, and shall remain responsible for, the disclosure of Confidential Information of the other party in contravention of the provisions of this Agreement by such officers, agents, subcontractors (except as otherwise specifically provided in this Agreement) and employees.

	(c)		Disclosures Required by Law. Perot Systems or Client, as the case may be, may disclose Confidential Information of the other party if required pursuant to an order or requirement of a court, administrative agency or other governmental body, provided that (i) Perot Systems or Client, as the case may be, will give the other party written notice of such order or requirement as soon as practicable after it has knowledge thereof and in any event prior to disclosure of the Confidential Information, and (ii) Perot Systems or Client, as the case may be, will disclose no more Confidential Information than is required by such order or requirement.

	(d)		Exclusions. The provisions of this Section 6.2 will not apply with respect to information which (i) is developed by the other party without violating the disclosing party’s proprietary rights, (ii) is or becomes publicly known (other than through unauthorized disclosure), (iii) is disclosed by the owner of such information to a third party free of any obligation of confidentiality, (iv) is already known by such party, as determined by dated documentation, without an obligation of confidentiality other than pursuant to this Agreement, or (v) is rightfully received by a party free of any obligation of confidentiality.

(e)

Obligations upon Termination or Expiration. Upon the termination or expiration of this Agreement, except as provided in Section 6.5 with respect to the Developed Software, Perot Systems or Client, as the case may be, will return to the other party or destroy any Confidential Information of the other party then held by Client or by Perot Systems, as the case may be.

6.3		Client Proprietary Software. Client Proprietary Software, including any modifications to any Client Proprietary Software, will be and remain the property of Client, and Perot Systems will have no rights or interests therein except as required to perform the Services.

6.4		Perot Systems Software and Perot Systems Tools. Any software that is proprietary to Perot Systems that Perot Systems uses or to which Perot Systems provides Client access (“Perot Systems Software”) and any tools or methodologies which are proprietary to Perot Systems and used in connection with the activities contemplated by this Agreement (“Perot Systems Tools”), including any modifications to any Perot Systems Software and the Perot Systems Tools, will be and remain the property of Perot Systems, and Client will have no rights or interests therein. Upon termination or expiration of this Agreement, Client may request that Perot Systems grant to Client a license to any of the Perot Systems Software and the Perot Systems Tools then being used on the Client account for itself on such commercially reasonable terms as the parties agree. Perot Systems agrees that it will not refuse to grant such license.

6.5		Rights in Developed Software.

	(a)		Copyright. Perot Systems and Client agree that Client will own the copyright to software developed by Perot Systems hereunder and that is delivered to Client by Perot Systems but excluding modifications that are not a derivative of Client Software and any Perot Systems Software and any Embedded Software (“Developed Software”). Perot Systems may from time to time request that Client grant to Perot Systems a license to the Developed Software for itself and for its customers on such terms as the parties agree. Client agrees that it will not unreasonably refuse to grant such license, unless such grant would materially impair a competitive advantage to Client or grant a material competitive advantage to a competitor of Client. For purposes of this Section 6.5(a) a competitor of Client is any company that competes (or whose affiliates compete) directly with the (i) then current businesses or (ii) planned businesses.

	(b)		Embedded Software. The term “Embedded Software” is defined to mean pre-existing software that is owned by Perot Systems or licensed by Client or Perot Systems from a third party that is embedded in the Developed Software. Perot Systems will retain its rights to any Embedded Software that is owned by Perot Systems, provided, however, that Perot Systems grants to Client a perpetual, transferable, non-exclusive, paid up, royalty-free license to use, modify, and enhance the Embedded Software that is owned by Perot Systems as part of the Developed Software. If any Embedded Software is owned by a third party, then the terms of the applicable license will define each party’s rights to such Embedded Software.

6.6

Residual Knowledge. Client acknowledges that Perot Systems is in the business of providing information technology services. Without limiting Perot Systems’ obligations under Section 6.2, nothing in this Agreement will limit Perot Systems’ right to provide services or resources to Perot Systems’ other customers or other third parties that are similar to the activities performed or resources provided by Perot Systems hereunder, and Perot Systems will be free to use residual information

retained by Perot Systems in a nontangible form; provided, however, that any such residual knowledge shall not include Client’s Confidential Information.

6.7

Audit of Client’s Business. Perot Systems shall provide reasonable support to Client in connection with an audit of Client’s business. Perot Systems shall not be obligated by this Agreement to disclose to Client or any other person or entity any information which is not reasonably necessary to conduct an audit of Client’s business, nor shall Perot Systems be obligated to divulge any Confidential Information of Perot Systems or any third party. In no event shall Perot Systems be obligated to disclose any Confidential Information to any competitor, or affiliate of a competitor, of Perot Systems. Client may utilize third parties to conduct such audit subject to such third party or parties entering into a confidentially agreement reasonably satisfactory to Client and Perot Systems.

Article 7
Performance Review and Termination

7.1		Performance Review. The Client Executive and Client Representative will meet as often as reasonably requested by either party to review the performance of the parties under this Agreement. Each party will bear its own costs and expenses incurred in connection with such review.

7.2		Dispute Resolution. If any continuing dispute between the parties is not resolved after reasonable attempts to resolve such dispute are made by either party, then, upon the written request of either party, each party will appoint an officer who does not spend most of his or her time on activities relating to this Agreement, to meet with the other party’s officer for the purpose of resolving the dispute. The officers will negotiate in good faith to resolve the dispute without the necessity of any formal proceeding. During the course of such negotiations, all reasonable requests made by one party to the other for information will be honored. Both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved, except to the extent that such obligations are in dispute, unless and until this Agreement expires or is terminated in accordance with its terms. If any such dispute is not resolved by negotiations within 30 days of the commencement of negotiations, unless a party makes a good faith determination that litigation is necessary to avoid the expiration of an applicable limitations period or to preserve a superior position with respect to other creditors, the dispute shall be resolved by binding arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association provided that a single neutral arbitrator agreed to by the parties or selected in accordance with those Commercial Arbitration Rules will conduct the arbitration. Such arbitration shall be held in the jurisdiction of the responding party, and the testimony of the parties and all pleadings or other materials submitted in connection with the proceedings shall be considered Confidential Information of the parties. The prevailing party in any such dispute shall be awarded reasonable costs and expenses, including attorneys’ fees.

7.3		Termination for Cause. If either party breaches its material obligations under this Agreement (excluding Client’s obligation to pay Perot Systems) and fails to cure such breach within 30 days (or such longer period if such breach can not be reasonably cured within such 30 day period) after receipt of written notice from the other party identifying such breach, then the nonbreaching party may terminate this Agreement by providing the breaching party with prior written notice of termination.

7.4		Termination for Non-Payment. If Client fails to pay Perot Systems any amounts due hereunder and fails to cure such nonpayment within 10 days after receipt of written notice from Perot Systems

		identifying such nonpayment, then Perot Systems party may, at its option, suspend some or all of the Services and/ or terminate this Agreement by providing Client with prior written notice of the same.

7.5		Termination for Insolvency. ANY LICENSE CONTEMPLATED BY THIS AGREEMENT, SHALL BE DEEMED AN EXECUTORY CONTRACT UNDER SECTION 365(n) OF TITLE 11 TO THE U.S. BANKRUPTCY CODE AND SHALL REMAIN IN FULL AND FORCE AND EFFECT UPON THE LICENSEE’S ELECTION AND THE LICENSEE’S SUBSTANTIAL PERFORMANCE HEREUNDER, NOTWITHSTANDING ANY BANKRUPTCY OR INSOLVENCY OF THE LICENSOR. If either party is declared insolvent or bankrupt, is the subject of any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors, or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations, then the other party may, by giving prior written notice thereof to such party, terminate this Agreement as of a date specified in such notice of termination.

7.6		Termination for Convenience. Client may terminate this Agreement for its convenience at any time upon 6 months prior written notice to Perot Systems.

7.7		Termination Obligations.

(a)

Termination Assistance. During the Termination Assistance Period (hereinafter defined), Perot Systems will provide to Client the termination assistance described below as reasonably requested by Client (“Termination Assistance”). The term “Termination Assistance Period” is defined as (i) if this Agreement expires under Section 1.2, the six month period prior to the expiration date, or (ii) if this Agreement is terminated under Section 7.3, 7.4, 7.5, or 7.6, the period beginning on the date on which a notice of termination is delivered by either party through the termination date or, upon Client’s written request prior to the termination date, through the date six months after the termination date. The Termination Assistance to be provided to Client by Perot Systems will consist of the following:

	(i)		Continuing to perform any or all of the Services then being performed by Perot Systems.

	(ii)		Working with Client to develop a plan for the transition of services from Perot Systems to Client.

	(iii)		Providing training for personnel of Client in the performance of the Services then being transitioned to Client or other service provider.

	(iv)		With respect to any equipment owned by Perot Systems and used solely to perform the Services, Client may purchase any such equipment at Perot Systems’ then-current book value on an “as is — where is” basis. With respect to any equipment leased by Perot Systems and used solely to perform the Services, subject to the terms of any applicable lease, Perot Systems will assign to Client Perot Systems’ rights and obligations with respect to any such equipment leased by Perot Systems; provided, however, that the lessor under the lease agrees to release Perot Systems from all liability under the lease as of the date of assignment.

(v)

With respect to any third party services acquired by Perot Systems and used solely to perform the Services, subject to the terms of any applicable third party services agreement, Perot Systems will assign to Client Perot Systems’ rights and obligations with respect to any such third party services used by Perot Systems; provided, however, that such third party service provider under the third party service agreement agrees to release Perot Systems from all liability under the third party service agreement as of the date of assignment.

(b)

Payment for Termination Assistance. Client will pay Perot Systems for such Termination Assistance on a cost plus basis in accordance with the existing IS Annual Budget and terms of this Agreement or on any other mutually acceptable basis. Notwithstanding Section 5.6, Client shall pay Perot Systems for any Termination Assistance in advance on the first day of each month of the Termination Assistance Period an amount equal to Perot Systems’ reasonable estimate of the total amount payable to Perot Systems for such Termination Assistance for that month adjusted, as necessary, to reflect the reconciliation based on the actual charges for Termination Assistance provided during the prior month. Perot Systems will provide Client with an invoice each month evidencing the estimate of the total amount payable to Perot Systems for Termination Assistance for the next month and a reconciliation with the actual charges for the Termination Assistance provided to Client during the prior month. Perot Systems’ obligations to provide termination assistance are conditional on Client’s being and remaining current with its payment obligations under this Agreement.

Article 8
Indemnities and Liability

8.1		Cross Indemnity. Each party will indemnify, defend and hold harmless the other and the other’s affiliates, and their officers, directors, employees, agents, successors, and assigns, from any and all losses, liabilities, damages and claims, and all related costs and expenses including reasonable legal fees and disbursements and costs of investigation, litigation, settlement, judgment, interest and penalties (“Losses”) and threatened Losses, arising out of third party claims alleging (i) the death or bodily injury of any agent, employee, customer, business invitee or business visitor of the indemnitor, provided such claims do not arise out of any act or omission of indemnitee, (ii) the damage, loss or destruction of any tangible personal property caused by the indemnitor, provided such damage, loss or destruction does not arise out of any act or omission of indemnitee, (iii) any claim, demand, charge, action, cause of action or other proceeding asserted against the indemnitee by a person that results from an act or omission of the indemnitor in its capacity as an employer of the person, provided such claim, demand, charge, action, cause of action or other proceeding does not arise out of any act or omission of indemnitee

8.2		Intellectual Property Indemnity.

(a)

By Perot Systems. Perot Systems will indemnify, defend and hold harmless Client and its Affiliates, and their officers, directors, employees, agents, successors, and assigns, from any and all Losses and threatened Losses arising from third party claims alleging:

(i)

Perot Systems’ failure to perform any obligations to be performed on or after the Effective Date by Perot Systems under any contracts, including third party

			software licenses and third party service contracts where Perot Systems has expressly agreed under this Agreement to perform those obligations; and

	(ii)		Any claims of infringement of any United States patent, trade secret, copyright or other proprietary rights enforceable in the United States or other proprietary rights, alleged to have occurred because of (i) software or other resources selected by Perot Systems and provided by Perot Systems to Client, or (ii) Perot Systems’ activities under this Agreement (other than claims based on Perot Systems’ use of software or resources provided by Client).

(b)

By Client. Client will indemnify, defend and hold harmless Perot Systems and its Affiliates and their respective officers, directors, employees, agents, successors, and assigns, from any and all losses and threatened Losses arising from third party claims alleging:

	(i)		Client’s failure to observe or perform any obligations to be performed by Client under any contracts, including third party software licenses and third party service contracts, excluding those obligations under any of those contracts where Perot Systems has expressly agreed under this Agreement to perform those duties or obligations; and

	(ii)		Any claims of infringement of any patent, trade secret, copyright or other proprietary rights, alleged to have occurred because of (i) software or other resources selected by customer or provided by Client to Perot Systems, or (ii) Client’s activities under this Agreement (other than claims based on Client’s use of software or resources provided by Perot Systems).

	(c)		Infringement. If either party is obligated to indemnify the other party under Section 8.2(a) or (b), then such party (the “Indemnifying Party”) will, in addition to indemnifying the other party as provided in this Article 8 and to the other rights the other party may have under this Agreement, promptly at the Indemnifying Party’s expense use all commercially reasonable efforts to secure the right to continue using the item or to replace or modify the item to make it non-infringing, provided that any replacement or modification will not degrade the performance or quality of the affected component of the Services. If the Indemnifying Party can accomplish neither of those actions, and only in that event, then the Indemnifying Party will cease using the infringing item, and the parties will work in good faith to equitably adjust the Services, and Perot Systems’ charges under this Agreement.

	(d)		Indemnification Procedures. With respect to any third party claims for which either party is entitled to indemnification under this Article 8 (an “Indemnifiable Claim”), the following procedures will apply:

(i)

Notice. After any entity entitled to indemnification under this Article 8 receives notice of the commencement or threatened commencement of any civil, criminal, administrative, or investigative action or proceeding involving an Indemnifiable Claim for which the indemnitee will seek indemnification under this Article, the indemnitee will promptly notify the indemnitor of that claim in writing. However, failing to notify an indemnitor of a claim will not relieve the

			indemnitor of its obligations under this Agreement except to the extent the indemnitor is prejudiced thereby. As soon as reasonably practicable after receiving written notice of the claim, the indemnitor will notify the indemnitee in writing as to whether the indemnitor elects to assume control of the defense and settlement of that claim (a “Notice of Election”).

	(ii)		Procedure Following Notice of Election. If the indemnitor delivers a Notice of Election relating to any Indemnifiable Claim at least 10 days before the date on which any response to a complaint or summons is due, the indemnitor is entitled to have sole control over the defense and settlement of that claim. However, the indemnitee may participate in defending that claim and may employ counsel at its own expense to assist in defending the claim. The indemnitor will obtain the prior written approval of the indemnitee before entering into any settlement of the claim or ceasing to defend against the claim.

	(iii)		Procedure Where No Notice of Election Is Delivered. If the indemnitor does not deliver a Notice of Election electing to assume the defense of an Indemnifiable Claim at least 10 days before the date on which any response to a complaint or summons is due, the indemnitee may defend the claim in any manner as it may deem appropriate, at the cost and expense of the indemnitor. The indemnitor will promptly reimburse the indemnitee for all those costs and expenses.

	(iv)		Subrogation. If an indemnitor is obligated to indemnify an indemnitee under this Article 8, then upon paying that indemnity in full, the indemnitor will be subrogated to all rights of the indemnitee concerning the claims to which the indemnification relates.

	8.4		Limitation of Liability. Except with respect to (i) Client’s obligations to make payments to Perot Systems and under this Agreement (including without limitation any obligation to make payments in the future under this Agreement), and (ii) the indemnification obligations of each party under this Agreement, and (iii) damages caused by willful tortuous misconduct or Gross Negligence of a party, with respect to all claims arising out of, under or in connection with this Agreement, each party’s liability will not exceed, in the aggregate, an amount equal to the charges actually paid by Client to Perot Systems during the first twelve months after the Effective Date (excluding amounts paid as reimbursement of expenses and taxes). For purposes of this Section 8.4 “Gross Negligence” is defined as an act or omission: (a) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.

	8.5		Limitation on Type of Damages. Except with respect to Client’s obligations to make payments to Perot Systems under this Agreement (including without limitation any obligation to make payments in the future under this Agreement), with respect to all claims arising out of, under or in connection with this Agreement, the measure of damages payable by Perot Systems or Client will not include, and neither Perot Systems nor Client will be liable for, any amounts for indirect, incidental, reliance, special, consequential (including without limitation lost profits, income or revenue) or punitive damages of Perot Systems or Client, as applicable, or any third parties, whether in tort or contract, and whether or not such damages are foreseen. Notwithstanding the forgoing, any final judgments awarded to any third party against an indemnified party by a court of competent jurisdiction and any settlement amounts to which an indemnifying party agrees in writing, in each case in

			connection with a claim covered by an indemnity provision in this Article 8, shall be considered direct damages.

	8.6		Disclaimer of Warranty. IF PEROT SYSTEMS ACQUIRES ANY THIRD-PARTY SOFTWARE, HARDWARE OR SERVICES FOR CLIENT UNDER THIS AGREEMENT, PEROT SYSTEMS WILL PROVIDE SUCH THIRD-PARTY SOFTWARE, HARDWARE OR SERVICES ON AN “AS IS” BASIS, BUT PEROT SYSTEMS WILL USE REASONABLE COMMERCIAL EFFORTS TO ASSIST CLIENT IN ENFORCING ANY THIRD-PARTY WARRANTY. EXCEPT AS MAY BE SPECIFICALLY PROVIDED IN THIS AGREEMENT, PEROT SYSTEMS DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF THE MERCHANTABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR RESULTS TO BE DERIVED FROM THE USE OF ANY RESOURCES, SERVICES OR MATERIALS PROVIDED PURSUANT TO THIS AGREEMENT.

	8.7		Force Majeure. Each party will be excused from the performance of its obligations under this Agreement (other than Client’s obligation to make payments to Perot Systems hereunder) for any period and to the extent that such performance is prevented, in whole or in part, as a result of delays caused by the other party or any act of God, civil disturbance, court order, labor dispute, third party nonperformance or other cause beyond its reasonable control, and such nonperformance will not be a default hereunder or grounds for termination hereof.

Article 9
Miscellaneous

9.1

Notices. All consents, notices, requests, demands, and other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed given when delivered personally against receipt, on the next business day when sent by overnight courier, and on the fifth business day after being mailed by certified mail, return receipt requested, to each party at the following address (or to such other address as that party may have specified by notice given to the other pursuant to this provision):

If to Perot Systems:

Perot Systems Corporation
2300 West Plano Parkway
Plano, Texas 75075
Attn: President

With a copy to:
Perot Systems Corporation
2300 West Plano Parkway
Plano, Texas 75075
Attn: General Counsel

If to Client:

Hillwood Enterprises, L.P.
3 Lincoln Center
5430 LBJ Freeway
Suite 800
Dallas, Texas 75248
Attn: CFO

With a copy to:

Hillwood Enterprises, L.P.
3 Lincoln Center
5430 LBJ Freeway
Suite 800
Dallas, Texas 75248
Attn: General Counsel

	9.2		Assignment. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of each party and its respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder will be assigned by either party without the prior written consent of the other.

	9.3		Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be deemed restated to reflect the original intentions of the parties as nearly as possible in accordance with applicable law, and, if capable of substantial performance, the remaining provisions of this Agreement will be enforced as if this Agreement was entered into without the invalid provision.

	9.4		Captions. The captions used in this Agreement are for convenience of reference only and do not constitute a part of this Agreement and will not be deemed to limit, characterize or in any way affect any provision of this Agreement, and all provisions of this Agreement will be enforced and construed as if no caption had been used in this Agreement.

	9.5		Counterparts. This Agreement may be executed in one or more counterparts all of which taken together will constitute one and the same instrument.

	9.6		Relationship of Parties. Perot Systems, in furnishing services to Client hereunder, is acting only as an independent contractor. Perot Systems does not undertake by this Agreement or otherwise to perform any obligation of Client, whether regulatory or contractual, or to assume any responsibility for Client’s business or operations, and Perot Systems has the sole right and obligation to supervise, manage, contract, direct, procure, perform or cause to be performed, all work to be performed by Perot Systems hereunder unless otherwise provided herein.

	9.7		Approvals and Similar Actions. Where agreement, approval, acceptance, consent or similar action by either party is required by any provision of this Agreement, such action will not be unreasonably delayed or withheld unless otherwise expressly provided.

	9.8		Modification; Waiver. This Agreement may be modified only by a written instrument duly executed by or on behalf of each party. No delay or omission by either party to exercise any right or power

			hereunder will impair such right or power or be construed to be a waiver thereof. A waiver by either party of any of the obligations to be performed by the other or any breach thereof will not be construed to be a waiver of any succeeding breach thereof or of any other obligation herein contained.

	9.9		No Third-Party Beneficiaries. The parties agree that this Agreement is for the benefit of the parties hereto and is not intended to confer any rights or benefits on any third-party, including any employee of either party, and that there are no third-party beneficiaries to this Agreement or any part or specific provision of this Agreement.

	9.10		Governing Law; Jury Trial Waiver. The laws of the State of Texas, other than its rules on conflicts of laws, shall govern the interpretation and construction of this Agreement. The parties waive their rights to a jury trial of any claim or issue arising out of or related to this Agreement.

	9.11		Entire Agreement. This Agreement, including any Schedules referred to herein and attached hereto (and any Appendices referred to therein and attached thereto), each of which is incorporated herein for all purposes, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, whether written or oral, with respect to the subject matter contained in this Agreement. No change, waiver, or discharge hereof shall be valid unless in writing and signed by an authorized representative of the Party against which such change, waiver or discharge is sought to be enforced. The Prior Agreement is hereby terminated.

	9.12		Media Releases. All media releases, public announcements and public disclosures by Client or Perot Systems relating to this Agreement, including without limitation, promotional or marketing material (but not including any announcement intended solely for internal distribution within Client or Perot Systems, as the case may be, or any disclosure required by legal, accounting or regulatory requirements beyond the reasonable control of Client or Perot Systems, as the case may be) will be coordinated with and approved by the other prior to the release thereof.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and delivered by their duly authorized representative as of the date first set forth above.


HILLWOOD ENTERPRISES, L.P.,		PEROT SYSTEMS CORPORATION
a Texas limited partnership

By:	AHB, LLC,
a Texas limited liability company,
its general partner

By:	/s/James C. Swain	By:	/s/ Steven R. Curts


Name:	James C. Swain	Name:	Steven R. Curts


Title:	EVP/CFO	Title:	Vice President

SCHEDULE B
CHARGES

1. GENERAL PROVISIONS

1.1 General

The Base Charges described in Section 5.1 of the Agreement shall consist of the Baseline Service Charge described in Section 2.1.

1.2 Definitions


“Monthly Resource Cost:		shall mean the sum of (1) compensation (salary, including salary increases based on Perot Systems’ standard compensation policies, overtime pay), (2) fringe allocation (3) standard and reasonable bonus allocation (Perot Systems’ Global Variable Pay Program), (4) training allocation and (5) contractor and intracompany allocation for each resource providing Base Services to Client during the calendar month.

“Monthly Computer Services Related Cost”		shall mean the sum of (1) IS rates based costs (PSC Data Center), and (2) other computer costs (software, equipment, communications, offsite storage) related to the Base Services provided to Client during the calendar month.

“Office Related Cost”		shall mean the sum of (1) employee related, (2) facilities (Client approved, voice communications, communication depreciation, communication equipment, mobile phone and pagers), (3) Client approved travel and (4) other administrative costs (postage, freight and delivery, outside reproduction, business gifts) related to the Base Services provided to Client during the calendar month.

“Multiplier”		shall mean 1.23.

2. BASE CHARGES

2.1 Charges for Base Services

Client will pay Perot Systems as consideration for providing the Base Services the amounts specified below.

	(a)		The aggregate Monthly Resource Cost times the Multiplier.

	(b)		The aggregate Monthly Computer Services Related Cost times the Multiplier.

	(c)		The aggregate Monthly Office Related Cost times the Multiplier.

2.2 Base Charges Reporting

Perot Systems shall provide to Client a monthly report of its costs related to the Base Services in the categories listed below. The Monthly Base Charges Report shall be substantially in the form of Appendix B-1.

	(a)		Compensation (salary, overtime pay)

	(b)		Fringe Allocation

	(c)		Global Variable Pay Allocation (Bonus)

	(d)		Training Allocation

	(e)		Contractors/Inter-company

	(f)		IS Rates Based Charges (PSC Data Center)

	(g)		Other Computer Costs (software, equipment, communications)

	(h)		Employee Related Facilities

	(i)		Allocation

	(j)		Travel

	(k)		Other Administrative

	(l)		Headcount — Perot Systems

	(m)		Headcount — Subcontractor

2.3 Non-Allowable Costs

In no event will Client be responsible for Perot Systems’ employee search fees or any other expenses relating to hiring Perot Systems employees without the prior written consent of Client.

3. CHARGES FOR ADDITIONAL SERVICES

As described in Section 3.2 of the Agreement, certain Services will be performed as Additional Services. Perot Systems will provide up to $37,500 of Additional Services at no charge to Client. Thereafter, such Additional Services will be performed on a cost plus or other mutually acceptable basis depending on the nature of the Additional Services, in each case as specified in the applicable Task Order.

4. BUDGET PROCESS

(a)

During each year this Agreement is in force, the Client Executive will develop and submit to the Client Representative a Services Plan that describes in reasonable detail, among other things, (A) Client’s requirements for Services for Client’s next fiscal year, including but not limited to Client’s requirements for Services staffing, project staffing,

			and equipment, (B) the relative priority of the items included in the Services Plan, (C) proposed changes to Client’s existing information technology systems, including changes that will require development projects not included within the scope of the Services, (D) an Annual IS Budget for the following year which will identify Perot Systems’ forecasted expenditures to the same detail level set forth in Appendix B-2. The Annual IS Budget for Perot Systems related costs shall be substantially in the form of the IS Annual Budget for the first contract year that is attached as Appendix B-2.

	(b)		After the Client Executive submits the proposed Annual IS Budget and during the period Client develops its annual business plan and the supporting operations budgets, the parties will work together to review and, to the extent necessary, revise the Services Plan, and related costs to complete the definitive Annual IS Budget. Client in its sole discretion will determine the amount of the Annual IS Budget and Perot Systems in its sole discretion will determine the Services to be provided in accordance with such Annual IS Budget.

EX-21.1 5 d43919exv21w1.htm SUBSIDIARIES OF THE COMPANY exv21w1

EXHIBIT 21.1

Subsidiaries of Perot Systems Corporation
JURISDICTION OF


SUBSIDIARY		INCORPORATION

Advanced Receivables Strategy, Inc.		Delaware
Delphi Consulting Group LLC		Delaware
Eagle Delaware Corp.		Delaware
Health Systems Design Corp.		California
Hospital Revenue Associates LLC		Delaware
Kay Software, Inc.		California
perot.com inc.		Delaware
Perot Systems A.G.		Switzerland
Perot Systems Asia Pacific Pte Ltd.		Singapore
Perot Systems BPS, LLC		Delaware
Perot Systems Business Process Solutions, Inc.		Texas
Perot Systems Business Process Solutions India Private Limited		India
Perot Systems B.V.		The Netherlands
Perot Systems (Canada) Corporation		Canada
Perot Systems Communication Services, Inc.		Delaware
Perot Systems (Czech Republic) s.r.o.		Czech Republic
Perot Systems Europe (Energy Services) Limited		England & Wales
Perot Systems Europe Limited		England & Wales
Perot Systems FS Limited Partnership		Texas
Perot Systems GmbH		Germany
Perot Systems Government Healthcare Solutions, Inc.		Delaware
Perot Systems Government Services, Inc.		Virginia
Perot Systems Government Solutions, Inc.		Delaware
Perot Systems Healthcare Services LLC		Delaware
Perot Systems Holdings Pte Ltd.		Singapore
Perot Systems Hong Kong Limited		Hong Kong
Perot Systems India Foundation		India
Perot Systems Investments B.V.		The Netherlands
Perot Systems (Japan) Ltd.		Japan
Perot Systems Luxembourg S.a.r.l.		Luxembourg
Perot Systems México, S. de R.L. de C.V.		Mexico
Perot Systems Nederland BV		The Netherlands
Perot Systems Philippines, Inc.		Philippines
Perot Systems Romania SRL		Romania
Perot Systems S.A.S.		France
Perot Systems Services Mexico, S.C.		Mexico
Perot Systems (Shanghai) Consulting Co., Ltd.		Republic of China
Perot Systems S.r.l.		Italy
Perot Systems TSI (America), Inc.		Delaware
Perot Systems TSI (Bermuda) Ltd.		Bermuda
Perot Systems TSI (Germany) GmbH		Germany
Perot Systems TSI (Hungary) Liquidity Management LLC		Hungary
Perot Systems TSI (India) Limited		India
Perot Systems TSI (Malaysia) Sdn.Bhd		Malaysia
Perot Systems TSI (Mauritius) Pvt. Ltd.		Mauritius
Perot Systems TSI (Middle East) FZ-LLC		Dubai-United Arab Emirates
Perot Systems TSI (Netherlands) B.V.		The Netherlands
Perot Systems TSI (Singapore) Pte. Ltd.		Singapore
Perot Systems TSI (Switzerland) GmbH		Switzerland
Perot Systems TSI (UK) Ltd.		England & Wales
Persys Ireland Limited		Republic of Ireland
Persys TSI (Ireland) Limited		Ireland
Protega Services, LLC		Virginia


SUBSIDIARY		INCORPORATION
PrSM Corporation		Tennessee
PS BP Services LLC		Delaware
PS Connecticut, LLC		Delaware
PS eServ Corp.		Delaware
PS Information Resource (Ireland) Limited		Republic of Ireland
PSC GP Corporation		Delaware
PSC Healthcare Software, Inc.		Delaware
PSC LP Corporation		Delaware
PSC Management Limited Partnership		Texas
PSC Security, Inc.		Delaware
QSS Group, Inc.		Maryland
Queequeg A.G.		Switzerland
Solutions Consulting LLC		Delaware
Technical Management, Inc.		Nebraska
The Technical Resource Connection, Inc.		Delaware
Third Party Administration Group, Inc.		Nebraska
Transaction Applications Group, Inc.		Nebraska
TXZ Holding Company Limited		Bermuda
Vision Business Process Solutions, Inc.		Delaware

EX-23.1 6 d43919exv23w1.htm CONSENT OF PRICEWATERHOUSECOOPERS LLP exv23w1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-82869), Form S-4 (Nos. 333-30068 and 333-110387), and Form S-8 (Nos. 333-30401, 333-70267, 333-31278, 333-45474, 333-60644, 333-110871 and 333-134629) of Perot Systems Corporation of our report dated February 28, 2007 relating to the consolidated financial statements and financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

Dallas, Texas
February 28, 2007

EX-31.1 7 d43919exv31w1.htm RULE 13A-14 CERTIFICATION BY PETER A. ALTABEF exv31w1

EXHIBIT 31.1

Certification Pursuant to Rule 13A-14
Under the Securities Exchange Act of 1934, As Amended
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Peter A. Altabef, certify that:

I have reviewed this Annual Report of Perot Systems Corporation on Form 10-K for the period ended December 31, 2006;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: February 28, 2007	/s/ Peter A. Altabef
	Peter A. Altabef
	President and Chief Executive Officer

EX-31.2 8 d43919exv31w2.htm RULE 13A-14 CERTIFICATION BY RUSSELL FREEMAN exv31w2

EXHIBIT 31.2

Certification Pursuant to Rule 13A-14
Under the Securities Exchange Act of 1934, As Amended
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Russell Freeman, certify that:

I have reviewed this Annual Report of Perot Systems Corporation on Form 10-K for the period ended December 31, 2006;

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: February 28, 2007	/s/ Russell Freeman
	Russell Freeman
	Vice President and Chief Financial Officer

EX-32.1 9 d43919exv32w1.htm SECTION 1350 CERTIFICATION BY PETER A. ALTABEF exv32w1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 (AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of Perot Systems Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter A. Altabef, President and Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of February 28, 2007.



	/s/ Peter A. Altabef
	Peter A. Altabef
	President & Chief Executive Officer

EX-32.2 10 d43919exv32w2.htm SECTION 1350 CERTIFICATION BY RUSSELL FREEMAN exv32w2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 (AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002)

In connection with the Annual Report of Perot Systems Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Russell Freeman, Vice President and Chief Financial Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of February 28, 2007.



	/s/ Russell Freeman
	Russell Freeman
	Vice President & Chief Financial Officer

EX-99.1 11 d43919exv99w1.htm SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS exv99w1

EXHIBIT 99.1

Schedule II — Valuation and Qualifying Accounts

VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in millions)


	Balance at						Balance at
	beginning				Deductions		end of
	of period		Additions		(Write-offs)		period
December 31, 2006	$	7	$	3	$	2	$	8
December 31, 2005	$	6	$	2	$	1	$	7
December 31, 2004	$	5	$	2	$	1	$	6

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