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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission File No. 01-11779

[EDS LOGO]

ELECTRONIC DATA SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

5400 Legacy Drive, Plano, Texas 75024-3199

(Address of principal executive offices, including ZIP code)

Registrant’s telephone number, including area code: (972) 604-6000

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

Securities registered pursuant to Section 12(g) of the Act: None

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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer. Yes x No ¨

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. ¨

As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price on such date as reported on the New York Stock Exchange Composite Transactions) was approximately $10,250,000,000.

There were 481,421,936 shares of the registrant’s common stock outstanding as of January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2004 are incorporated by reference in Part III.

PART I

Overview

Electronic Data Systems Corporation, or EDS, is a leading global provider of information technology and business process outsourcing services. We bring together the world’s best technologies to help clients eliminate boundaries, collaborate in new ways, establish their customers’ trust and continuously seek improvement. A.T. Kearney, a high-value management consultancy, and UGS PLM Solutions, a leading provider of product lifecycle management, or PLM, software applications and related services, each operate as separate subsidiaries of EDS.

As of December 31, 2003, we employed approximately 132,000 persons in the United States and approximately 60 countries around the world. Our principal executive offices are located at 5400 Legacy Drive, Plano, Texas 75024, telephone number: (972) 604-6000.

Our predecessor was incorporated in Texas under the name Electronic Data Systems Corporation in 1962. In 1984, General Motors Corporation, or GM, acquired all of the capital stock of our predecessor, and we remained a wholly owned subsidiary of GM until our split-off in June 1996. As a result of the split-off, we became an independent, publicly held Delaware corporation. Unless the context otherwise requires, references to EDS include its predecessor and subsidiaries.

We make available free of charge on our Web site at www.eds.com/investor our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission, or SEC. We also make available on our Web site other reports filed with the SEC under the Securities Exchange Act of 1934, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. We do not intend for information contained in our Web site to be part of this Form 10-K.

EDS Services

Our primary business is information technology and business process outsourcing services. EDS founded the information technology, or IT, outsourcing industry more than 40 years ago. Today, we deliver infrastructure, application and business process outsourcing services to clients in the manufacturing, financial services, healthcare, communications, energy, transportation, and consumer and retail industries and to governments around the world.

During 2003, our IT and business process outsourcing services, which had been conducted through the Operations Solutions and Solutions Consulting lines of business, were transitioned to a unified portfolio within our new operating model comprised of our Global Sales & Client Solutions, Service Delivery and Portfolio Management organizations. This model is designed to allow us to go to market with a single face to the client, consolidate our global delivery capabilities, focus our product and portfolio management, and establish a competitive cost structure aligned with market demand. Our Global Sales & Client Solutions organization provides a single point of accountability for client relationships and serves as the center for EDS’ industry expertise. Our Service Delivery organization integrates and manages the delivery of our services on a global basis, taking advantage of the scale of our capacity as well as best practices, tools and processes to deliver high-quality service in a cost-effective and responsive fashion. Portfolio Management works with our other organizations to develop our range of service offerings and determines their strategic direction.

Infrastructure Services. EDS Infrastructure Services delivers hosting, storage, desktop, helpdesk, security and privacy, and communications services that enable clients to drive down their total cost of ownership and increase the productivity of their IT environment across the globe. Infrastructure Services include:

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Applications Services. EDS Applications Services helps organizations plan, develop, integrate and manage custom applications, packaged software and industry-specific solutions. We offer applications development and management services on an outsourced or project basis. Services range from outsourcing of all application development and systems integration to the management and implementation of EDS-owned or third-party industry applications. Benefits to clients for these services can include reduced costs, extended value of technology investments, information sharing and enhanced ability to adapt to market changes. Our Applications Services include the following:

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Applications Services offerings and capabilities are available via the EDS Global Delivery Model, including the EDS Best Shore^SM delivery approach which offers clients the ability to develop and manage applications in one or more of our solution centres strategically located in cost-effective countries. The delivery of our services with the EDS Best Shore^SM capability offers a lifecycle approach to on-shore, near-shore and offshore applications development and management with globally integrated, consistent work processes and tools and project-sharing at multiple facilities for 24 hours a day, seven days a week development.

Business Process Outsourcing Services. Business Process Outsourcing, or BPO, continues to be one of the fastest growing market segments in the IT services industry and an important element of our strategy to enlarge our business services footprint. BPO enables clients to achieve economies of scale by leveraging a shared-services model which allows them to trade fixed costs for variable costs. Our BPO service lines include: Administrative Process Management; Customer Relationship Management; Enterprise Shared Services, which is comprised of Human Resources, Finance and Accounting and Procurement; and Financial Process Management.

A.T. Kearney

A.T. Kearney, a leading global management consultancy, became a subsidiary of EDS in 1995. The firm provides clients with management consulting services related to strategy, organization, operations, and technology and transformation, as well as executive search services. A.T. Kearney addresses issues on the CEO’s agenda by developing and helping to implement innovative strategies that bring results.

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A.T. Kearney serves clients through practice teams focused on major industries, including: automotive; consumer products and retail; communications, media and entertainment; financial institutions; high tech; pharmaceuticals/healthcare; process industries; aerospace and defense; transportation and travel; utilities; and government. The firm works in collaboration with other EDS lines of business. Services provided by A.T. Kearney include the following:

UGS PLM Solutions

UGS PLM Solutions, the product lifecycle management (PLM) subsidiary of EDS, is a leading global provider of product data management, collaboration and product design software applications and related services. UGS PLM develops, markets and supports a comprehensive suite of applications that address all phases of the product lifecycle, including concept development, design, analysis and testing, manufacturing, service and maintenance, and retirement. Its software applications enable global manufacturing organizations to improve product design and quality, streamline product development and manufacturing processes, and optimize the management of product information, thereby reducing costs and time-to-market cycles and enhancing product innovation. UGS PLM’s customers use its applications to perform advanced product design and simulation utilizing three-dimensional, or 3-D, digital technology. The company’s collaborative applications allow users to share product-related information through Web-based collaborative technologies in real-time. These collaborative technologies allow for information sharing both among departments of an organization, including product design, manufacturing, procurement, finance and sales, as well as across its extended enterprise, including suppliers, outsourcing partners and customers. UGS PLM’s applications provide solutions for the four principal segments of the PLM software market:

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UGS PLM has more than 41,000 customers, consisting primarily of original equipment manufacturers and their suppliers, as well as educational institutions. Its applications are primarily used in industries with complex product development processes and intensive data sharing requirements, including the automotive and transportation, aerospace and defense, consumer products, equipment and machinery and electronics industries, as well as other industries.

In connection with our efforts to focus on our core IT outsourcing services business, we entered into a definitive agreement dated March 12, 2004 to sell a 100% equity interest in UGS PLM Solutions to a consortium of three private equity firms. The transaction is expected to close by the end of the second quarter of 2004, pending regulatory approvals.

Revenues

Our fees are generally paid pursuant to contracts with our clients. These contracts may provide for both fixed and variable fee arrangements. The terms of our client contracts generally range from less than one year in the management consulting business to up to 10 or more years in our IT outsourcing business.

Other than GM, no one client accounted for more than 10 percent of our total revenues in any of the past three years. Approximately 47% of our 2003 revenues were generated outside the United States.

Certain IT outsourcing agreements contain third-party benchmarking provisions which generally permit contractual rates to be compared to a range of market rates for comparable services on a periodic basis over the term of the agreement. We refer you to the “Overview – Client Contract Matters” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of these provisions.

Approximately $3.2 billion of our 2003 revenues were attributable to the U.S. federal government, including our Navy Marine Corps Intranet (“NMCI”) contract discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Contracts with the U.S. federal government are subject to various attributes that differ from other commercial contracts, including modifications in scope of work due to changing customer requirements, annual funding constraints of the federal government and the indefinite delivery/indefinite quantity characteristics of certain federal government contracts.

Services for General Motors

Approximately 10.5% of our total revenues in 2003 was attributable to GM and its affiliates. We are the primary provider of data processing and other IT services for GM and certain of its affiliates worldwide, including integrated information systems for health and benefits, engineering systems support, office automation, and plant automation functions. The loss of GM as an ongoing major customer would have a material adverse effect on EDS. We refer you to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding our revenues from GM.

Immediately prior to our split-off from GM in 1996, we entered into a Master Service Agreement, or MSA, with GM that serves as a framework for the negotiation and operation of service agreements for certain “in-scope” IT services (as defined in the MSA) we provide to GM on a worldwide basis. These “in-scope” services accounted for approximately $1.8 billion of the $2.3 billion of our GM revenues in 2003. The remainder was attributable to goods and services provided outside the scope of the MSA.

The term of the MSA will continue until June 2006 and may be extended by mutual agreement of the parties. In addition, the MSA may be terminated by GM if there occurs a “change of control” of EDS and other conditions are met (including a determination by GM’s Board of Directors that there is substantial uncertainty about our ability to perform our obligations under the MSA or any other significant threat to our business relationship with GM). A termination of the MSA would materially adversely affect our revenue and earnings from and after the date of such termination. The extent of such impact on our earnings will be based in part on our ability to reduce the fixed costs associated with our services to GM, including property, equipment and software. In addition, the extension of the MSA on terms less favorable to us than current terms would also adversely affect our revenue and earnings. We refer you to the MSA, which has been filed with the SEC, for a description of the other terms and conditions of that agreement, including certain market testing procedures to test the competitiveness of our services.

Strategic Alliances

We maintain multiple technology practices and platforms to enable us and our clients to select the right vendor for specific needs. The EDS Alliance Program focuses on building and managing global alliances that enable us to realize our strategic objectives and deliver competitive differentiation for our clients’ businesses. We believe our strategic alliances help us provide clients with the best solutions at a superior value. We have global enterprise-wide alliances with leading hardware, software, storage and networking firms, such as Cisco Systems, Dell, Microsoft, Sun Microsystems and Xerox. We also have business alliances with companies selected to provide specific, focused expertise within certain horizontal or industry segments and solution alliances that support a specific solution or offering in our portfolio.

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UGS PLM has established business alliance programs with complementary software, hardware and service providers to extend the scope of its application offerings into specialized areas of the PLM market and provide its customers with a broad base of support for implementation of applications. These programs leverage and extend its core application offerings and internal capabilities for providing service and support to customers. UGS PLM’s business alliance relationships focus on the promotion of its technologies as industry standards.

Competition

The IT services market remains fragmented and highly competitive. We face competition from companies providing IT outsourcing and business process outsourcing solutions. Our principal competitors in the infrastructure services market, including hosting services and desktop services, are IBM Global Services, Computer Sciences Corporation (“CSC”), Hewlett-Packard Services, Unisys Services and Fujitsu. Our principal competitors in the applications services market are IBM Global Services, Accenture Ltd., Bearing Point, Cap Gemini Ernst & Young, Deloitte Consulting and CSC. Our principal competitors in the BPO market are Accenture Ltd., Affiliated Computer Services, Convergys, Fiserv and Concord EFS. In addition to these competitors, we increasingly see competition from niche offshore providers, primarily India-based competitors.

A.T. Kearney typically competes against McKinsey & Company, Bain & Company, Booz Allen & Hamilton, Boston Consulting Group, Accenture Ltd. and Deloitte Consulting.

Principal competitors of UGS PLM Solutions include generalist computer-aided design, or CAD, and product development software vendors that offer broad-range systems, such as Dassault Systèmes S.A. and Parametric Technology Corporation. UGS PLM also experiences competition from niche product data management, or PDM, vendors such as Agile Software Corporation and MatrixOne, niche software vendors in the CAD, computer-aided manufacturing (CAM) or computer-aided engineering (CAE) markets, and enterprise resource planning software providers, such as SAP AG and Oracle Corporation.

Technology and its application within the business enterprise are in a rapid and continuing state of change as new technologies continue to be developed, introduced and implemented. We believe to continue to compete effectively we must develop and market offerings that meet changing user needs and respond to technological changes on a timely and cost-effective basis.

Patents, Proprietary Rights and Licenses

We hold a number of patents and pending patent applications in the United States and other countries. Our policy generally is to pursue patent protection we consider necessary or advisable for the patentable inventions and technological improvements of our business. We also significantly rely on trade secrets, copyrights, technical expertise and know-how, continuing technological innovations and other means, such as confidentiality agreements with employees, consultants and clients, to protect and enhance our competitive position.

Some of our business areas are highly patent-intensive. Many of our competitors have obtained, and may obtain in the future, patents that cover or affect services or products directly or indirectly related to those we offer. We routinely receive communications from third parties asserting patent or other rights covering our products and services. We may not be aware of all patents containing claims that may pose a risk of infringement by our products and services. In general, if one or more of our products or services infringe patents held by others, we would be required to cease developing or marketing such products or services, obtain licenses from the holders of the patents, or redesign our products or services to avoid infringing the patent claims. There is no assurance that we would be able to take any of such remedial actions or, if we are able to do so, that the costs incurred would not be significant.

We are not aware of any pending patent or proprietary right disputes that would have a material adverse effect on our consolidated financial position or results of operations.

Regulation

Various aspects of our business are subject to governmental regulation in the United States and other countries in which we operate. Failure to comply with such regulation may, depending upon the nature of the noncompliance, result in the suspension or revocation of any license or registration at issue, the termination or loss of any contract at issue or the imposition of contractual damages, civil fines or criminal penalties. We have experienced no material difficulties in complying with the various laws and regulations affecting our business.

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As of December 31, 2003, we operated approximately 321 locations in 44 states and 237 cities in the United States and 419 locations in 244 cities in 43 countries outside the United States. At such date, we owned approximately 6.9 million square feet of space and leased from third parties approximately 22.6 million square feet of space. Our global headquarters campus in Plano, Texas, contains approximately 3.2 million square feet of office and data center space. Other than the 1.6 million square foot EDS Centre building, which we lease for an initial term expiring in 2022 (with certain fixed price purchase options during and at the end of the initial term), we own all buildings and real estate comprising the Plano campus.

We operate 15 large scale Service Management Centers, or SMCs, to service our IT outsourcing operations in locations throughout the United States and in Australia, Brazil, Canada, France, Germany, the Netherlands and the United Kingdom. In addition, we operate approximately 94 Solution Centres in locations throughout the world from which our staff provides applications services. We also operate service delivery centers, or SDCs, at customer-owned sites or EDS-owned or leased facilities throughout the world. SDCs usually support a single or small number of clients with more specialized requirements than those supported at the large scale, multiple customer SMCs or our Solution Centres. Our leased properties consist primarily of office, warehouse, Solutions Centre, SDC and non-U.S. SMC facilities. Lease terms are generally five years or, for leases related to a specific client contract, generally have a term concurrent with that contract. We do not anticipate any difficulty in obtaining renewals or alternative space upon expiration of our existing leases. In addition to our owned and leased properties, we occupy office space at client locations throughout the world. Such space is generally occupied pursuant to the terms of the relevant client contract.

We believe that our facilities are suitable and adequate for our business. We periodically review our space requirements and consolidate and dispose of or sublet facilities we no longer require for our business and acquire new space to meet the needs of our business.

We and certain of our former officers are defendants in numerous purported shareholder class action suits filed from September through December 2002 in response to our September 18, 2002 earnings pre-announcement, publicity about certain equity hedging transactions that we had entered into, and the drop in the price of EDS common stock. The cases allege violations of various federal securities laws and common law fraud based upon purported misstatements and/or omissions of material facts regarding our financial condition. In addition, five purported class action suits were filed on behalf of participants in the EDS 401(k) Plan against us, certain of our current and former officers and, in some cases, our directors, alleging the defendants breached their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) and made misrepresentations to the class regarding the value of EDS shares. Our motions to centralize all of the foregoing cases in the U.S. District Court for the Eastern District of Texas have been granted.

Representatives of two committees responsible for administering the EDS 401(k) Plan notified us of their demand for payment of amounts they believe are owing to plan participants under Section 12(a)(1) of the Securities Act of 1933 (the “Securities Act”) as a result of an alleged failure to register certain shares of EDS common stock sold pursuant to the plan during a period of approximately one year ending on November 18, 2002. The committee representatives have asserted that plan participants to whom shares were sold during the applicable period are entitled to receive a return of the amounts paid for the shares, plus interest and less any income received, upon tender of the shares to us. We believe we can assert arguments and defenses that could significantly reduce or eliminate any liability. However, some of the legal principles involved in these arguments and defenses are subject to significant uncertainties.

On July 7, 2003, the lead plaintiff in the consolidated securities action described above and the lead plaintiffs in the consolidated ERISA action described above each filed a consolidated class action complaint. The amended consolidated complaint in the securities action alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. The plaintiffs allege that we and certain of our former officers made false and misleading statements about our financial condition, particularly with respect to the NMCI contract and the accounting for that contract. The class period is alleged to be from February 7, 2001 to September 18, 2002. The consolidated complaint in the ERISA action alleges violation of fiduciary duties under ERISA by some or all of the defendants and violation of Section 12(a)(1) of the Securities Act by selling unregistered EDS shares to plan participants. The named defendants are EDS and, with respect to the ERISA claims, certain of our current and former officers, members of the Compensation and Benefits Committee of our Board of Directors, and certain current and former members of the two committees responsible for administering the plan. Our motions to dismiss the consolidated securities action and the consolidated ERISA action were denied by the U.S. District Court for the Eastern District of Texas on January 13, 2004 and February 3, 2004, respectively. We intend to defend these actions vigorously. As these actions are in an early stage, we are not able to determine the actual impact on us or our consolidated financial statements.

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In addition, there are three derivative complaints filed by shareholders in the District Court of Collin County, Texas against our directors and certain former officers and naming us as a nominal defendant. The actions allege breach of fiduciary duties, abuse of control and gross mismanagement based upon purported misstatements and/or omissions of material facts regarding our financial condition similar to those raised in the purported class actions described above. These cases have been consolidated into a single action in the District Court of Collin County, Texas. This action will be defended vigorously. As this action is in an early stage, we are not able to determine the actual impact on our consolidated financial statements.

On February 25, 2004, a derivative complaint was filed by a shareholder against certain current and former directors in the United States District Court for the Eastern District of Texas. The plaintiff relies upon substantially the same factual allegations as the consolidated securities action discussed above. However, the plaintiff brings the suit on behalf of EDS against the named defendants claiming that they breached their fiduciary duties by failing in their oversight responsibilities and by making and/or permitting material, false and misleading statements to be made concerning our business prospects, financial condition and expected financial results which artificially inflated our stock and resulted in numerous class action suits. Plaintiff seeks contribution and indemnification from the defendants for the claims and litigation resulting from the defendants’ alleged breach of their fiduciary duties. This action will be defended vigorously. As this action is in an early stage, we are not able to determine the actual impact on our consolidated financial statements.

The SEC staff is conducting a formal investigation relating to our purchase and settlement of forward contracts in connection with our program to manage the future stock issuance requirements of our employee stock incentive plans, customer contracts that contain prepayment provisions, and the events leading up to our third quarter 2002 earnings guidance announcement. The SEC staff has also requested certain documents related to our NMCI contract, including information regarding the write-off of deferred costs related to that contract in the fourth quarter of 2003. The investigation is ongoing, and we will continue to cooperate with the SEC staff. We are unable to predict the outcome of the investigation, the SEC’s views of the issues being investigated or any action that the SEC might take.

From time to time, we are involved in various other litigation matters arising in the ordinary course of our business. We do not believe that disposition of any such current matter will have a material adverse effect on our consolidated financial position or results of operations.

None submitted.

EXECUTIVE OFFICERS OF EDS

The following sets forth certain information with respect to the executive officers of EDS as of March 1, 2004:

Michael H. Jordan, 67, has been Chairman and Chief Executive Officer of EDS since March 2003. Mr. Jordan was Chairman and Chief Executive Officer of CBS Corporation (formerly Westinghouse Electric Corporation) from July 1993 until December 1998. Prior to joining Westinghouse, he was a principal with the investment firm of Clayton, Dubilier and Rice from September 1992 through June 1993, Chairman of PepsiCo International from December 1990 through July 1992 and Chairman of PepsiCo World-Wide Foods from December 1986 to December 1990.

Jeffrey M. Heller, 64, rejoined EDS in March 2003 as President and Chief Operating Officer and a director. Mr. Heller retired from EDS in February 2002 as Vice Chairman, a position he had held since November 2000. He had served as President and Chief Operating Officer of EDS from 1996 to November 2000, Senior Vice President from 1984 to 1996, and Chairman of EDS’ UGS PLM Solutions subsidiary (then operating as Unigraphics Solutions Inc.) from January 1999 to February 2001. Mr. Heller joined EDS in 1968 and has served in numerous technical and management capacities. Mr. Heller is a director of Trammell Crow Company.

Anthony Affuso, 57, has been President and Chief Executive Officer of our UGS PLM Solutions subsidiary since July 2000. He had served as Vice President and later as Executive Vice President of Products and Operations of UGS PLM Solutions from January 1998 to July 2000, and as Vice President of Software Development and Marketing of that business, then operated as a division of EDS, from March 1992 to December 1997. Mr. Affuso joined EDS in 1984 as Director of Strategic Planning and Technology Development. Before joining EDS, he was responsible for design and manufacturing automation with Xerox Corporation for 12 years.

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David M. Clementz, 58, has been Executive Vice President, Service Delivery since December 2003. He has oversight responsibility for the integration and management of the delivery of our IT outsourcing services on a global basis. Prior to joining EDS in December 2003, Mr. Clementz was employed at ChevronTexaco Corp. and Chevron Corp. for more than 30 years, most recently as Enterprise Chief Information Officer and President of ChevronTexaco Information Company from September 2001 to August 2003, President of Chevron eBusiness Development Company from 2000 to September 2001, President of Chevron Information Technology Company from 1997 to September 2001, and President of Chevron Petroleum Technology Company from 1994 to 1997.

Charles S. Feld, 61, has been Executive Vice President, Portfolio Management of EDS since January 2004. Mr. Feld has oversight responsibility for the development and strategic direction of our service offerings. From 1992 to January 2004, he served as Chief Executive Officer and President of The Feld Group, Inc., a technology management firm founded by him and acquired by EDS in January 2004. During that period, Mr. Feld served in technology positions at numerous Feld Group clients, including as Chief Information Officer at First Data Resources, a division of First Data Corp., from 2000 to 2002 and Chief Information Officer of Delta Air Lines from 1997 to 2000. Prior to establishing The Feld Group, Mr. Feld had served as Chief Information Officer of the Frito-Lay subsidiary of PepsiCo, Inc. since 1981. His association with that company began in 1970 as a systems engineer for International Business Machines Corporation.

D. Gilbert Friedlander, 57, has been Executive Vice President and General Counsel of EDS since October 2003 and served as Senior Vice President and General Counsel from June 1996 to October 2003 and Vice President and General Counsel from October 1992 to June 1996. He has been Secretary of EDS since 1996. Mr. Friedlander has oversight responsibility for our legal affairs on a global basis and is responsible for our Office of Ethics and Business Conduct. Prior to joining EDS in 1992, Mr. Friedlander was a shareholder in a Dallas law firm specializing in corporate, securities and general business law.

Heinz (Henner) L. Klein, 58, has been Chief Executive Officer of A.T. Kearney, our management consultancy subsidiary, since December 2003. He had been designated unit leader of A.T. Kearney’s Northern Europe Profit Center from January 2001 to December 2003 and Unit Head of A.T. Kearney Benelux from September 1997 to December 2001. Prior to joining A.T. Kearney in 1982, Mr. Klein was the Director of Distribution in the consumer products industry for a division of Dr. Oetker from January 1979 to 1981, and worked in various management positions with the Buying Distribution department of Procter & Gamble Germany from March 1973 to December 1978. He is a German citizen.

Stephen F. Schuckenbrock, 43, has been Executive Vice President, Global Sales & Client Solutions of EDS since January 2004. Mr. Schuckenbrock has oversight responsibility for our sales organizations and centers of industry expertise. Prior to joining EDS, he had served as Chief Operating Officer of The Feld Group, Inc., a technology management firm acquired by EDS in January 2004, since July 2000. Before joining The Feld Group in July 2000, Mr. Schuckenbrock led several technology organizations within PepsiCo, Inc., including serving as Chief Information Officer of PepsiCo from April 1998 to June 2000 and Chief Information Officer of its Frito-Lay subsidiary from June 1995 to April 1998. Before joining PepsiCo, he was a partner of The Feld Group from 1993 to 1995. Mr. Schuckenbrock began his career at International Business Machines Corporation in 1983, where he was employed in a variety of sales and technology management positions for 10 years.

Tina Sivinski, 47, has been Executive Vice President, Human Resources of EDS since October 2003 and served as Senior Vice President, Human Resources from October 2002 to October 2003. She has oversight responsibility for our compensation and benefits, diversity, center of learning, and HR business partner functions. Prior to that time, she was President of EDS’ Global Energy Industry Solutions group from August 2001 to October 2002. Before joining EDS, Ms. Sivinski was Vice President of Strategic Marketing, Sales and Business Development for GrandBasin, a Halliburton Company, from November 2000 to May 2001, a Vice President of Science Applications International from January 2000 to November 2000 and was employed by Data General Corp from 1980 to December 1999, most recently as a Vice President.

Robert H. Swan, 43, has been Executive Vice President and Chief Financial Officer of EDS since February 2003. Mr. Swan has oversight responsibility for our treasury, enterprise productivity, financial analysis, tax, controller, administration, global sourcing, merger and acquisition, investor relations and audit functions. Prior to joining EDS, he was Executive Vice President and Chief Financial Officer of TRW Inc. from July 2001 to December 2002. Mr. Swan served in executive positions at Webvan Group, Inc. from 1999 to 2001, including Chief Executive Officer from April to July 2001, Chief Operating Officer from September 2000 to July 2001 and Chief Financial Officer from October 1999 to July 2001. (Webvan filed a voluntary petition for Chapter 11 bankruptcy in July 2001.) He held various financial positions in General Electric Company from 1985 to 1999, including Chief Financial Officer, GE Lighting, from May 1998 to October 1999, Vice President, Finance, GE Medical Systems Europe, from January 1997 to May 1998 and Chief Financial Officer, GE Transportation Systems from October 1994 to January 1997.

Executive officers serve at the discretion of our Board of Directors.

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PART II

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “EDS.” The table below shows the range of reported per share sales prices on the NYSE Composite Tape for the common stock for the periods indicated.

The last reported sale price of the common stock on the NYSE on March 1, 2004 was $19.00 per share. As of that date, there were approximately 129,000 record holders of common stock.

EDS declared quarterly dividends on the common stock at the rate of $0.15 per share for each quarter of 2002 and 2003.

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(in millions, except per share amounts)

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The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this document.

Overview

We are a leading global information technology outsourcing services company. Our primary business is infrastructure services, including hosting and desktop services, applications services and business process outsourcing services. In addition to our core information technology and business process outsourcing operations, we own two subsidiary businesses: A.T. Kearney, a high-value management consultancy, and UGS PLM Solutions, a leading provider of product lifecycle management software applications and related services. In connection with our efforts to focus on our core outsourcing business, we entered into a definitive agreement dated March 12, 2004 to sell a 100% equity interest in UGS PLM Solutions. We refer you to Note 20 in the notes to our consolidated financial statements.

This section provides an overview of our business including a discussion of our priorities in 2003 and going forward, the material issues that impacted our historical results and the material risks and opportunities we anticipate going forward. This discussion refers to our core IT and business process outsourcing operations, except where we specifically refer to A.T. Kearney and/or UGS PLM Solutions.

2003 Priorities

Our principal objectives in 2003 were to stabilize our core IT outsourcing business, strengthen our balance sheet, and expand our business process outsourcing (“BPO”) business and transformational capabilities.

Stabilize Core IT Outsourcing Business. Our efforts to stabilize our core IT outsourcing business have focused on stabilizing the problem contracts that have negatively impacted our earnings since 2002, simplifying our operating model and improving our cost structure. Our problem contracts, though they represent only approximately 10% of overall revenue and an even smaller percentage of the number of our contracts, have had a significant adverse impact on our earnings and cash flow since late 2002. By the end of 2003, about half of our problem contracts had been stabilized and, in some cases, their performance improved. This does not include our Navy Marine Corps Intranet (“NMCI”) contract, for which progress has been significantly slower than anticipated. That contract is discussed in detail below.

Our efforts to improve our cost structure focused in particular on reducing excess high-cost capacity in our EMEA (Europe, Middle East and Africa) region, which represented the bulk of the $457 million in restructuring charges we announced in the second half of 2003, accelerating our Best Shore^SM initiative, leveraging common processes and tools in our data centers to be more productive, and reducing our selling, general and administrative (“SG&A”) expenses.

During 2003, we streamlined our organizational structure by transitioning our Operations Solutions and Solutions Consulting lines of business to a unified IT business including information technology outsourcing, business process outsourcing and applications management. These efforts simplified our go-to-market model and will allow us to better build on our industry expertise. We also began implementation of an initiative to reduce our costs and exit certain operating activities. These efforts are designed to improve our cost competitiveness and involve the elimination of excess capacity, primarily in Europe, and the consolidation of back-office capabilities. We plan to complete the initiative in 2004 and estimate a total of approximately 5,200 employees will be involuntarily terminated pursuant to the initiative. These efforts will allow us to migrate more of our work to our leveraged data centers to improve labor productivity and more effectively leverage common processes and tools. This initiative is complemented by our efforts to accelerate our Best Shore^SM practice by improving our capabilities and capacity in lower cost areas.

Our efforts to simplify our operating model and reduce our cost structure began to generate savings in 2003. We estimate this initiative will generate additional savings up to an annualized amount of approximately $350 million.

The performance of our IT outsourcing business in 2003 was adversely affected by losses recognized on our NMCI contract and another significant commercial contract, both of which are discussed below. We initiated several actions in 2003 to mitigate the risk inherent in our contracts including the simplification of our organization to drive more accountability, changing approval levels on higher risk transactions, and developing standard contract language around key contract risk terms. We believe improvements in our contract and risk management efforts will reduce the risk of additional problem contracts.

Strengthen Our Balance Sheet. We improved our liquidity in 2003 by generating $230 million in free cash flow and $224 million from the divestiture of certain non-core assets, primarily the sale of our Credit Union Industry Group (“CUIG”) in the third quarter, and by raising $1.8 billion through the sale of debt securities in the second quarter. Our free cash flow for 2003 reflected approximately $1.1 billion generated by our operations, excluding NMCI, offset by cash usage of $824 million for the NMCI contract. We refer you to “Liquidity and Capital Resources” below for a definition and further discussion of free cash flow. We

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repaid $1.7 billion in debt during the year including $733 million of our zero-coupon convertible notes and $406 million under our secured accounts receivable, or A/R, facility. In addition, we renegotiated and extended our credit facilities as well as the securitization facility under which we finance the purchase of assets related to our NMCI contract. At December 31, 2003, we had total liquidity of approximately $3.3 billion comprised of $1.9 billion in unrestricted cash and marketable securities and availability of up to $1.4 billion under our unsecured committed credit and secured A/R facilities.

Expand BPO and Transformational Capabilities. A key element of our strategy is our focus on growing our BPO and business transformation capabilities and providing greater value-add services for our clients’ total business. Our new executive management team is focused on leveraging our core outsourcing services business, serving our clients more effectively and improving our cost structure and global capacity. Our acquisition of The Feld Group in January 2004 improved our transformational capabilities and enables us to provide greater value-add services to clients. We expect business process outsourcing to play a much bigger role in extending our position in the marketplace over the next several years. We believe the steps we are taking to improve our cost structure and competitiveness are necessary for our growth in this market.

Priorities and Expectations for 2004

In 2004, we plan to build on our efforts to stabilize and improve our core business by accelerating our cost initiatives, continuing our efforts to stabilize problem contracts and migrating from stabilizing those contracts to improving them, and using a stronger balance sheet and a better cost structure to improve our win rate.

We expect 2004 revenues of approximately $21-22 billion with a decline in organic revenues of 3-5% from 2003. The expected decline in 2004 organic revenues reflects base (non-GM) revenues, excluding NMCI, flat to up to 2%, offset by an anticipated decrease in organic revenues from GM. Base revenues in 2004 will be negatively impacted by approximately $400 million due to the loss of certain contracts, including our contract with U.K. Government’s Inland Revenue department (effective mid-year 2004) and our State of Texas Medicaid contract (effective early 2004), and the renegotiation of other contracts during 2003. We expect the decrease in base revenues to be offset by the impact of new business signed during 2003 and expected in 2004. Revenues from the NMCI contract are expected to be flat in 2004 compared with 2003. We refer you to “Results of Operations” below for a definition of organic revenues.

Our earnings per share in 2004 will be impacted by several key factors. We expect earnings per share to be positively impacted by improvements in the performance of certain problem accounts and, to a lesser extent, lower SG&A expenses and productivity improvements in our service delivery areas. The expected improvement in the performance of problem accounts includes significant anticipated improvements in the performance of the “other commercial contract” discussed below. We refer you to “Client Contract Matters – Other Commercial Contract” below for a discussion of that contract, including certain risks we face under the contract. However, we expect that positive earnings impact to be substantially offset by the impact of decreased revenues from terminating and renegotiated contracts and a relatively weak level of new business signings in 2003, as well as increased financing costs attributable to our 2003 initiatives to strengthen our balance sheet. We expect the earnings impact of NMCI to be flat in 2004 relative to 2003, when it accounted for a loss of $0.52 per share (excluding the impact of the write-off of deferred costs related to that contract in the fourth quarter referred to below).

Operating margins for our base business are expected to improve in 2004 as our problem contracts stabilize and operating efficiencies and restructuring benefits begin to be realized. Our operating margins will be negatively impacted by the expected decline in revenues discussed above. Operating margins from our GM business are expected to decline slightly from current levels as GM continues to limit its IT spending. Operating margins could also be affected by the disposition of various businesses, most notably our UGS PLM Solutions subsidiary. In addition, operating margins may also be impacted in late 2004 or early 2005 by the recognition of a loss of up to $75 million on the final settlement of our pension obligations associated with the transition of our U.K. Inland Revenue workforce to that client’s new service provider.

We will continue our efforts to strengthen our balance sheet in 2004 and expect significant improvements in free cash flow over 2003. We anticipate generating free cash flow of $500-600 million in 2004, comprised of $750-850 million from our core operations excluding NMCI, offset by estimated cash usage of $250 million for NMCI. Our forecast reflects cash funding of approximately $200 million associated with our restructuring initiatives and a one-time tax-related payment of approximately $245 million associated with tax periods prior to our split-off from GM. We expect our liquidity position to continue to improve in 2004. We refer you to “Liquidity and Capital Resources” below for a discussion of the factors that we expect will impact liquidity in 2004.

The foregoing estimates for 2004 financial performance rely on management’s current assumptions, including assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside the control of management, that could cause actual results to differ materially from such estimates. For a discussion of certain of these factors, we

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refer you to the discussion under “Client Contract Matters” and “Factors that May Affect Future Results” below. Such estimates do not reflect the impact of divestitures (including UGS PLM Solutions) or, with the exception of cash flows, restructuring charges.

Accounting Changes

During the third quarter of 2003, we adopted the provisions of Emerging Issues Task Force (“EITF”) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, on a cumulative basis as of January 1, 2003. The adoption of EITF 00-21 resulted in a non-cash adjustment of $1.42 billion, net of tax, resulting primarily from the reversal of unbilled revenue associated with our IT service contracts which we had been accounting for using the percentage-of-completion method of revenue recognition. The adjustment also reflects the deferral and subsequent amortization of system construction costs which were previously expensed as incurred and included in the percentage-of-completion model for the respective contracts. We refer you to “Results of Operations” below for additional information related to the adoption of this new accounting standard.

The cumulative adoption of EITF 00-21 changed the way we recognize revenue and certain expenses on our services contracts. The new method of revenue recognition results in a closer alignment of results of operations with the cash flows generated by our contracts. EITF 00-21 does not allow the restatement of prior period results, however, the “Results of Operations” discussion below presents selected financial information on a pro forma basis as if the accounting change had been applied to all of our contracts from contract inception. In addition, the discussion contained in that section is based upon 2003 reported results and historical pro forma results for 2002 and 2001. We believe the adoption of EITF 00-21 on a cumulative rather than prospective basis enhances the transparency of our financial statements.

Total Contract Value of New Business

A key metric used by management to monitor new business activity is the total contract value, or TCV, of our contract signings. TCV is our estimate of the total revenue expected over the term of a client contract. Contract signings include contracts with new clients and renewals, extensions and add-on business with existing clients. TCV does not include potential revenues that could be earned from a client relationship as a result of future expansion of service offerings to that client, nor does it reflect option years under non-governmental contracts that are subject to client discretion. TCV reflects a number of management assumptions regarding the contract, and is subject to changes in the scope of the contract as well as currency fluctuations. The following table presents the TCV of contract signings, including contracts signed by A.T. Kearney and UGS PLM Solutions, by quarter for the last five years (in billions):

The decrease in contract signings in each of 2003 and 2002 has negatively impacted our 2003 revenues and will continue to impact revenue in 2004 and 2005 as a significant portion of our revenue is generated by long-term IT services contracts that require transition periods of three to 18 months. We refer you to the discussion of revenues in “Results of Operations” below.

Client Contract Matters

NMCI. We provide end-to-end IT infrastructure on a seat management basis to the Department of Navy (the DON), which includes the U.S. Navy and Marine Corps, under a contract that has been extended through September 2007. Seats are ordered on a governmental fiscal year basis, which runs from October 1 through September 30. At December 31, 2003, we had approximately 302,000 computer seats under management that were then billable, and approximately 147,000 of these seats had been switched over (or cutover) to the new environment. We are currently working with the client to finalize the cutover schedule for 2004. Prior to September 30, 2003, the number of computer seats that the DON was allowed to order had been limited to 310,000 seats, until such time the DON had successfully completed its operational evaluation (“OPEVAL”) of the NMCI system. OPEVAL is intended to assess the operational effectiveness and suitability of the NMCI system. In October 2003, the DON and the Department of Defense reached an agreement, based on prior testing and the pre-testing for the operational evaluation of the NMCI system, to separate OPEVAL from the acquisition decision to order seats beyond 310,000, and the DON is now authorized to order the number of seats required to meet mission requirements. However, the OPEVAL is still a program requirement and will be used to identify issues needing ongoing improvement. OPEVAL was conducted in the fourth quarter of 2003 and we expect the final report to be issued by April 2004. We do not believe any significant operational issues were identified during the evaluation.

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Amounts to be billed per seat are based on the type of seat ordered. In addition, certain milestones must be met before we can bill 100% of the seat price included in the pricing schedule. Seats under management are generally billed at 85% of the associated seat price included in the pricing schedule until we meet service performance levels as defined in the contract. Upon meeting such service levels, seats operating under the NMCI environment are billed at 100% of the seat price while those operating under the pre-existing, or “legacy”, network environment continue to be billed at 85% of the price. Achievement of service levels for targeted sites is required for us to bill 100% of the seat price for seats at those sites. As of December 31, 2003, no seats were billed at 100%.

We developed the pricing for the NMCI contract based on an assumption we would receive revenues and seat orders in the types and amounts and during the periods projected in the contract’s pricing schedule. For a number of reasons, the roll-out schedule on which we based our pricing has been delayed significantly since contract inception. These reasons include additional testing requirements imposed subsequent to the contract’s signing, delay in the receipt of orders from the DON and inefficient program management. Seat deployment schedules utilized in developing the estimated revenues and costs for the remaining term of the contract are based on orders received to date and discussions with the DON.

During the fourth quarter of 2003, we received seat orders from the DON for the 2004 program year that were comprised of a different mix of seats with lower average seat prices than that which had been expected and previously communicated by the DON. This change in average seat price had a material impact on our revenue projections, and together with continued seat cutover delays, led us to re-evaluate planned seat cutover schedules and the associated capital spending necessary to fully deploy the NMCI infrastructure. Key factors considered in determining revised capital spending and deployment schedules included the current pace of seat cutovers, maximization of existing infrastructure, and ongoing discussions with the DON regarding contract service levels and reimbursement of certain legacy system costs. While this approach limits the amount of additional capital at risk until these discussions are satisfactorily resolved, it resulted in a revision of future revenue and expense estimates for the remaining contract term. As a result, we concluded that net deferred contract costs of $559 million at December 31, 2003 associated with infrastructure construction activities were not likely to be recovered through future cash flows from the contract. Accordingly, we wrote off such costs in the fourth quarter of 2003. Remaining long-term assets associated with the contract totaled approximately $750 million at December 31, 2003. If seat cutovers fall below their current pace, we do not pass OPEVAL, or discussions with the DON regarding contract service levels and legacy cost reimbursement are not satisfactorily resolved, a material portion of such assets could become impaired. In such event, recovery of such costs will depend on the success of our pursuit of such amounts through a legally intensive claims process. We continue to pursue several opportunities to improve the financial performance of this contract, including efforts to improve average seat price, accelerate 100% payment on seats already deployed on the network, obtain compensation on legacy applications, qualify for performance incentives under the contract and achieve productivity improvements. We believe our opportunities to improve the performance of this contract over its remaining term outweigh the risks we currently face under the contract.

For the year ended December 31, 2003, we reported pre-tax losses associated with the NMCI contract of $945 million, including the aforementioned write-down of deferred costs, and free cash flow usage from the contract was $824 million. On a pro forma basis adjusted for accounting changes, pre-tax losses for the contract for the years ended December 31, 2002 and 2001 were $524 million and $178 million, respectively, and free cash flow usage from the contract for those years was $872 million and $699 million, respectively. We expect free cash flow usage from the contract to be approximately $250 million in 2004, assuming seats are cutover at their current rate and discussions with the DON regarding contract service levels and legacy cost reimbursement are satisfactorily resolved no later than the second quarter of 2004.

Due to the significant impact this contract has had on our earnings and cash flow, we intend to disclose our revenues, earnings and cash flow from this contract separately from our other operations for the foreseeable future.

Benchmarking. Certain long-term outsourcing agreements contain provisions which permit a client to request a benchmark study by a mutually acceptable third-party benchmarker. Typically, benchmarking may not be conducted during the initial years of the contract term but may be requested by a client periodically thereafter, subject to restrictions which limit benchmarking to certain groupings of services and limit the number of times benchmarking may be elected during the term of the contract. Generally, the benchmarking compares the contractual price of our services against the price of similar services offered by other specified providers to a peer comparison group, subject to agreed upon adjustment and normalization factors. Generally, if the benchmarking shows that our pricing has a difference outside a specified range, and the difference is not due to the unique requirements of the client, 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.

Our client agreements generally provide for pricing during the beginning of the contract term at what we believe are market rates, with contractual rates changing over time to levels that are expected to be consistent with future market rates over the contract term. Because we have been successful historically in achieving these operating efficiencies and other cost reductions consistent with the changes in market rates, benchmarking provisions have not had a material impact on our results of operations or

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cash flow, and we do not expect these provisions to have a material impact on our results of operations or cash flow in 2004. However, there can be no assurance such activities would not negatively impact our results of operations or cash flow in 2004 or thereafter to a greater extent than has been our prior experience.

Airline Industry Relationships. We are the leading IT outsourcing provider to the airline industry. Our largest IT agreement in that industry is with American Airlines. We had $46 million in receivables and $100 million in operating assets associated with that contract at December 31, 2003. During 2003, we amended our IT agreement with American Airlines in connection with its efforts to avoid bankruptcy. This amendment has resulted in a decrease in revenues and earnings from this client. In addition to our IT agreement with American, our exposure to aircraft leveraged lease investments with American is $23 million. Our remaining exposure to investments in aircraft leases totals approximately $131 million.

We also provide IT services to US Airways through a long-term agreement. US Airways filed for bankruptcy protection in 2002. In March 2003, we entered into a new contract with US Airways to provide IT services which superseded our previous contract with the airline, and wrote off our pre-bankruptcy receivables from that client which had been reserved for in 2002. The new long-term agreement provides for reduced services and pricing. Total receivables outstanding under such agreement, net of reserves, were approximately $35 million at December 31, 2003. We own equipment and other assets having a net book value at December 31, 2003 of approximately $34 million deployed on the US Airways services agreement.

At December 31, 2003, we had $86 million in receivables and $80 million of contract-related assets attributable to seven other U.S. and international airline and travel-related clients.

Construct Contracts. Some of our client contracts require significant investment in the early stages which is recovered through billings over the life of the respective contracts. These contracts often involve the construction of new computer systems and communications networks and the development and deployment of new technologies. Substantial performance risk exists in each contract with these characteristics, and some or all elements of service delivery under these contracts are dependent upon successful completion of the development, construction and deployment phases. We are currently performing construct activities on 13 contracts and, in most cases, concurrently providing various IT services using the legacy IT systems acquired from the clients. At December 31, 2003, we had net deferred contract and set-up costs of $870 million and other assets, including prepaid expenses, equipment and software, of $1.4 billion associated with these contracts, the most significant of which is the NMCI contract. Some of these contracts, including the NMCI contract and a commercial contract discussed below, have experienced delays in their development and construction phases, and certain milestones have been missed. We are currently in discussions with the Department of the Navy and the other commercial client regarding modification of deployment schedules and contract terms. While we believe we can deliver the required systems and services and our net assets at December 31, 2003 for each of these contracts will be recovered over their respective terms, significant further delays in development and construction, or termination or significant amendment of the respective contract, could result in a material impairment of a portion of the associated assets.

Other Commercial Contract. We have previously referred to a significant commercial contract under which we provide various IT services using the legacy IT systems acquired from the client while developing and deploying a new IT system dedicated to that client. At December 31, 2003, we had invested net assets of approximately $150 million, including receivables, prepaid expenses, equipment, deferred contract costs, software and accrued liabilities, associated with this contract. These assets are expected to be recovered through cash flows from the contract over its remaining term. This contract has experienced delays in its development and construction phases, and milestones in the contract have been missed. The client has indicated that it believes we are in default of our obligations and that the contract is subject to termination by the client. Throughout the contract period we have been negotiating with the client to resolve critical issues, including those associated with the pricing and technical specifications for the new IT system. These issues remain unresolved. As a result, we believe material portions of the contract may have become unworkable in that the original intent of the parties as to pricing and other essential terms is being frustrated. If we are able to reach a negotiated solution with the client, we expect that would occur during the first half of 2004. If a negotiated solution cannot be reached, the parties may each seek appropriate legal remedies to resolve these issues, including the possible discontinuation of the relationship. In such event, the contract could be terminated and legal recourse pursued. This may result in losses that could be material. It is possible that even if the parties reach a negotiated solution, the impact of that agreement could result in an impairment of some of the associated assets. Any impairment of associated assets related to this contract could be material. We recognized operating losses of $255 million under this contract in 2003 and $309 million on a comparable pro forma basis in 2002 as if the aforementioned accounting change had been applied to this contract at inception. We expect a significant improvement in the level of operating losses under this contract in 2004, assuming satisfactory completion of negotiations with the client and final proof of concept of the technology of the new IT system and its deployment resulting in the elimination of the costs to operate this client’s legacy systems.

MCI. We provide IT services to MCI, the majority of which are provided under an 11-year services agreement signed in October 1999. MCI filed for bankruptcy protection in July 2002. As a result of the bankruptcy, we recorded net reserves and asset write-downs of $118 million during 2002. During the second quarter of 2003, the bankruptcy court affirmed revised agreements

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with MCI which reflect changes in its service requirements, reductions to certain existing rates and settlement of pre-petition amounts owed to us. Based on the actions of the bankruptcy court, we reversed $98 million of the reserve established for pre-bankruptcy receivables due from MCI in the second quarter of 2003. We received payment of the $98 million from MCI during July 2003. In an unrelated transaction, we entered into a fiber optic equipment leveraged lease with a subsidiary of MCI in 1988. During the fourth quarter of 2003, we reached an agreement with MCI on amended terms that do not differ materially from the previous lease arrangement.

Mega-Deal Contracts. Our Outsourcing segment generates a substantial majority of its revenues from long-term IT outsourcing agreements, including a number of “mega-deals” which are defined as contracts with TCV greater than $250 million. A number of these outsourcing agreements have terms that expire in coming years, including our Master Service Agreement with GM which expires in 2006. The termination of any of these agreements will materially adversely impact our results of operations from and after the date of such termination. The extent of such impact on our earnings and cash flow will be based in part on our ability to reduce the fixed costs associated with these agreements, including property, equipment and software, and/or sign new business with new or existing customers. In addition, the extension of any such agreement on terms less favorable to us than current terms would also adversely affect our revenue, earnings and cash flow.

Mega-deals generally require more capital during the transition phases of the contracts due to the assumption of the clients’ existing IT infrastructure, including the associated workforce and subcontractor agreements, the purchase of the clients’ existing IT assets and the costs of transition to a more efficient infrastructure. As a result, our free cash flow is adversely impacted during the transition period for mega-deals. TCV of mega-deals signed during each of the years in the five-year period ended December 31, 2003 was: 2003 – $2.8 billion; 2002 – $8.7 billion; 2001 – $13.5 billion; 2000 – $17.2 billion; and 1999 – $13.3 billion. The most significant mega-deal signed during this period was the NMCI contract with a TCV of $6.9 billion which was signed in October 2000 and amended in October 2002. The Company’s capital investment in net assets on these contracts is expected to be recovered subsequent to the transition periods.

Results of Operations

From time to time, we present information regarding our net income and margins excluding the impact of certain quantified special items, in addition to presenting such information on a GAAP basis. Net income and margins excluding such items are non-GAAP financial measures and are disclosed to investors to facilitate comparisons of business performance across periods. Such information is also used by management to facilitate comparisons of business performance across periods and relative to internal targets.

During the third quarter of 2003, we adopted the provisions of EITF 00-21 on a cumulative basis as of January 1, 2003. EITF 00-21 modified the application of existing contract accounting literature followed by us prior to that date. EITF 00-21 governs how to identify whether goods or services, or both, to be delivered separately in a bundled sales arrangement should be accounted for separately. In most circumstances, EITF 00-21 also limits the recognition of revenue in excess of amounts billed (e.g., unbilled revenue) to the amount that would be received if the client contract were terminated for any reason. The adoption of EITF 00-21 resulted in a non-cash adjustment reported as a cumulative effect of a change in accounting principle of $1.42 billion ($2.24 billion before tax). The adjustment resulted primarily from the reversal of unbilled revenue associated with our IT service contracts which had been accounted for as a single unit using the percentage-of-completion method of revenue recognition. Such reversal resulted from the fact that typical termination provisions of an IT service contract do not provide for the recovery of unbilled revenue in the event the contract is terminated for our nonperformance. The adjustment also reflects the deferral and subsequent amortization of system construction costs. Such costs were previously expensed as incurred and included in the percentage-of-completion model for the respective contracts. See “Application of Critical Accounting Policies” for further discussion of revenue recognition.

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The following table reflects financial information for the year ended December 31, 2003 as reported in our financial statements, and selected financial information on a pro forma basis for the years ended December 31, 2002 and 2001 as if the aforementioned accounting change had been applied to all contracts at inception (in millions, except per share amounts):

Revenues. The following table displays revenues from contracts with our base (non-GM) clients and revenues from GM as reported in the consolidated statements of operations for the year ended December 31, 2003. The table reflects the 2002 and 2001 financial information on an as reported and comparable pro forma basis as if the 2003 accounting changes (discussed above) had been applied to all contracts at inception (in millions):

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The following table displays our revenue growth percentages calculated using revenues as reported in the consolidated statement of operations for the year ended December 31, 2003 and on a comparable pro forma basis for 2002 and 2001, and further adjusted for the impact of foreign currency translation, acquisitions and those divestitures not accounted for as discontinued operations (“organic revenue growth”):

Constant currency revenue growth is calculated by removing from as reported/pro forma revenues the impact of the change in exchange rates between the local currency and the U.S. dollar from the current period and the comparable prior period. Organic revenue growth further excludes revenue growth due to acquisitions in the period presented if the comparable prior period had no revenues from the same acquisition, and revenue decreases due to businesses divested in the period presented or the comparable prior period.

2003 vs. 2002. The increase in base organic revenues in 2003 was primarily attributable to our Outsourcing segment which had organic revenue growth of approximately $940 million, or 6%, in 2003. Approximately $820 million of that increase was attributable to the U.S. Government unit, of which $664 million was attributable to the NMCI contract. The remaining increase in base revenues in 2003 was primarily attributable to contracts in Europe. The decrease in revenues from GM was primarily the result of GM’s continued reduction in discretionary IT spending as well as the impact of the renegotiation of the GMNA, GMAC and Global Mainframe Compute sector agreements completed in the second half of 2002. Constant currency base revenues were flat in our UGS PLM Solutions subsidiary and decreased $169 million in our A.T. Kearney subsidiary.

2002 vs. 2001. Base organic revenues were flat in 2002 compared with 2001. Growth in our Outsourcing segment from contracts signed with base clients during 2001 and 2002 was offset by declines in our clients’ discretionary spending in our UGS PLM Solutions and A.T. Kearney subsidiaries. The decrease in UGS PLM Solutions was due to lower software and services revenues resulting from soft market conditions in the software industry. The decrease in A.T. Kearney was due to weaker demand for high-value management consulting services. The decrease in GM revenues in 2002 was primarily due to the continued reductions in discretionary spending by that client.

Gross margin. The following table displays our gross margin percentages [(revenues less cost of revenues)/revenues] based on the results as reported in the consolidated statement of operations for the year ended December 31, 2003 and on an as reported and comparable pro forma basis for the years ended December 31, 2002 and 2001:

2003 vs. 2002. Our gross margin in 2003 and 2002 was adversely affected by operating losses and the write-down of deferred costs on the NMCI contract. The NMCI contract had a 510 basis point negative impact on our 2003 gross margin percentage and a 290 basis point negative impact on our 2002 gross margin percentage adjusted on a pro forma basis for accounting changes. Our gross profit in 2003 was favorably impacted by a $98 million (50 basis point) reversal of MCI receivable reserves and lower operating losses on the “other commercial contract” discussed above (30 basis points). Our gross profit in 2002 was adversely affected by receivable reserves and asset write-downs related to our contractual relationships with MCI and US Airways, both of which filed for bankruptcy during the third quarter of 2002. Such reserves and asset write-downs had a 90 basis point negative impact on our reported 2002 gross margin and on our gross margin adjusted on a pro forma basis for accounting changes. Our gross margin in 2003 was also negatively impacted by declines in our GM business (60 basis points) and our A.T. Kearney and UGS PLM Solutions subsidiaries (50 basis points), additional annual pension and healthcare costs (80 basis points), increased software costs (50 basis points) and an increase in costs related to current initiatives for future productivity (30 basis points). The remaining decrease in our gross margin in 2003 was primarily due to declines in higher margin discretionary IT applications spending by our clients as a result of general economic conditions and an increasingly competitive environment.

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2002 vs. 2001. Our gross profit in 2002 was adversely affected by receivable reserves and asset write-downs related to our contractual relationships with MCI and US Airways, both of which filed for bankruptcy during the third quarter of 2002. Such reserves and asset write-downs had a 90 basis point negative impact on our reported 2002 gross margin and on our gross margin adjusted on a pro forma basis for accounting changes. Our gross profit in 2001 was adversely affected by amortization expense related to goodwill and certain intangible assets no longer amortized. Such amortization had an 80 basis point negative impact on our reported 2001 gross margin and a 90 basis point negative impact on our gross margin adjusted on a pro forma basis for accounting changes. Approximately $160 million of the decrease in our reported gross profit in 2002 was due to loss accruals related to the financial performance of certain contracts, primarily in Europe. Our reported gross margin and our gross margin adjusted on a pro forma basis for accounting changes in 2002 also decreased due to our inability to transition, in the timeframe originally planned, from existing IT cost structures inherited from certain clients to the final, more efficient planned IT operating environments, and due to declines in higher margin discretionary IT applications spending by certain clients. These decreases were partially offset by an improvement resulting from reduced sales commission and employee bonus expense due to the slowdown in new contract signings and our failure to achieve specified operating performance targets.

Selling, General and Administrative. SG&A expenses as a percentage of revenues were 8.9%, 8.8% and 8.9% in 2003, 2002 and 2001, respectively. The 2002 and 2001 percentages were 9.3% and 9.4%, respectively, after adjusting the results on a pro forma basis for the impact of accounting changes. The decrease in the 2003 percentage compared with the pro forma 2002 percentage is primarily due to the restructuring initiatives implemented in 2003. We expect to continue to reduce our SG&A percentage in 2004 based on these efforts.

Restructuring Activities. During 2003, we began implementation of an initiative to reduce our costs, streamline our organizational structure and exit certain operating activities. These efforts are designed to improve our cost competitiveness and involve the elimination of excess capacity, primarily in Europe, and the consolidation of back-office capabilities. We plan to complete the initiative in 2004 and estimate a total of approximately 5,200 employees will be involuntarily terminated pursuant to the initiative, consisting of individuals employed in managerial, professional, clerical, consulting and technical positions. As a result of the initiative, we recorded restructuring charges of $252 million during 2003, consisting of $248 million resulting from the involuntary termination of approximately 3,700 employees and $4 million resulting from the exit of certain business activities and the consolidation of facilities. In addition, we recorded asset write-downs of $36 million during 2003. The 2003 initiative is expected to require total charges of $457 million and generate savings up to an annualized amount of approximately $350 million.

Other operating gains (losses). We sold our CUIG business in July 2003 for $218 million in cash, excluding approximately $10 million of retained receivables, and recognized a $139 million gain on the sale in our results of operations. The net results of the CUIG business are not included in discontinued operations in the consolidated statement of operations due to our level of continuing involvement as an IT service provider to the business. CUIG generated approximately $160 million in processing and services revenues in 2002. Also during 2003, we recognized a one-time severance charge totaling $48 million related to the termination of employment of our former CEO. This charge was comprised of a $12 million cash payment, a non-cash charge of $16 million associated with previously deferred compensation for 344,000 restricted stock units and retirement benefits with a present value of $20 million. We could have additional gains and losses in 2004 related to divestitures or other non-recurring items.

Other income (expense). Other income (expense) includes interest expense, interest and dividend income, investment gains and losses, minority interest expense, and foreign currency transaction gains and losses. Following is a summary of other income (expense) for the years ended December 31, 2003, 2002 and 2001 (in millions):

Interest expense increased in 2003 due to the increase in our outstanding debt balance. See “Financial Position” and “Liquidity and Capital Resources” for a further discussion of our outstanding debt. Interest income and other in 2003 includes net investment gains of $6 million and other income of $29 million. Interest income and other in 2002 includes net investment losses of $119 million and other income of $30 million. Interest income and other in 2001 includes net investment gains of $29 million and other income of $3 million. Net investment losses in 2002 include write-downs of $76 million relating to our leveraged lease investments as a result of the US Airways and United Airlines bankruptcies.

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Effective January 1, 2001, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Upon the adoption of SFAS No. 133, we reclassified certain available-for-sale securities into the trading securities classification resulting in the recognition of a pre-tax gain of $315 million in our statement of operations.

Income taxes. Our effective tax rates on income (loss) from continuing operations were 35.2%, 34.0% and 37.0%, respectively, for the years ended December 31, 2003, 2002 and 2001. Our effective tax rate in 2003 was impacted favorably by research tax credit benefits that did not significantly decrease in comparison to the decrease in pre-tax income. This was offset by the reduction of benefits for tax losses of certain foreign subsidiaries which we determined were unlikely to be realized and nondeductible goodwill attributed to the CUIG business. The decrease in our effective tax rate in 2002 compared to 2001 was due to acquired in-process R&D expense in 2001 which was not deductible in the computation of the provision for income taxes, and the reduction in nondeductible goodwill amortization expense associated with the new accounting standard for goodwill adopted January 1, 2002. Nondeductible acquired in-process R&D and goodwill amortization expense increased our income tax rate on income (loss) from continuing operations by 2.7% in 2001. See “Application of Critical Accounting Policies” for a discussion of factors effecting income tax expense.

Discontinued operations. Income (loss) from discontinued operations, net of income taxes, was $(14) million, $110 million and $28 million, respectively, for the years ended December 31, 2003, 2002 and 2001. Discontinued operations represents the net results of our European Technology Solutions business sold during the fourth quarter of 2003, the subscription fulfillment business sold during the second quarter of 2003 and the Consumer Network Services unit sold during the fourth quarter of 2002. Income (loss) from discontinued operations includes a net after-tax gain (loss) on sale of $(9) million in 2003 and $87 million in 2002.

Net income (loss). Net income (loss) decreased to $(1,698) million in 2003, compared with $1,116 million in 2002 and $1,363 million in 2001. Basic earnings (loss) per share decreased to $(3.55) in 2003 compared with $2.33 in 2002 and $2.90 in 2001. Diluted earnings (loss) per share decreased to $(3.55) in 2003 compared with $2.28 in 2002 and $2.81 in 2001.

In addition to the previously disclosed adoption of accounting changes associated with EITF 00-21, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003. SFAS No. 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The majority of our retirement obligations relate to leases which require the facilities be restored to original condition at the expiration of the leases. The adoption of SFAS No. 143 resulted in a reduction of income reported as a cumulative effect of a change in accounting principle of $25 million ($17 million after tax). Additionally, the fair value of the liability recorded on January 1, 2003 was $48 million.

Effective January 1, 2002, we fully adopted SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. During 2001, we recognized amortization expense of $173 million related to assets for which amortization was discontinued effective January 1, 2002 upon adoption of SFAS No. 142.

Segment Information. We refer you to Note 12 in the notes to our consolidated financial statements for a summary of certain financial information related to our Outsourcing, UGS PLM Solutions and A.T. Kearney reportable segments for 2003, 2002 and 2001, as well as certain financial information related to our operations by geographical regions for such years.

Financial Position

At December 31, 2003, we held cash and marketable securities of $2.3 billion, had negative working capital of $650 million, and had a current ratio of 0.9-to-1. This compares to cash and marketable securities of $1.9 billion, working capital of $3.1 billion, and a current ratio of 1.5-to-1 at December 31, 2002. The decrease in working capital in 2003 was primarily due to the cumulative adjustment resulting from the retroactive adoption of accounting changes which reduced current assets by $2.6 billion, including a reduction in accounts receivable of $2.9 billion, and increased current liabilities by $183 million. Working capital also decreased $1.6 billion in 2003 due to the reclassification of our June 2001 senior notes from long-term to current liabilities. However, this decrease will be offset by an increase of $1.6 billion in 2004 due to the receipt of cash proceeds resulting from the execution of the forward stock sale contracts associated with these notes as discussed below. Approximately 18% of our cash and cash equivalents and marketable securities at December 31, 2003 were not available for debt repayment due to various commercial limitations on the use of these assets.

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Days sales outstanding for trade receivables were 51 days at December 31, 2003 compared to 55 days at December 31, 2002. Days sales outstanding for trade receivables were 56 days at December 31, 2002 on a pro forma basis as adjusted for accounting changes. Days sales outstanding were 56 days at December 31, 2003 after including other assets related to certain collections for the NMCI contract and work in process related to our A.T. Kearney subsidiary. This compares with 60 days at December 31, 2002 on a pro forma basis as adjusted for accounting changes. Days payable outstanding at December 31, 2003 decreased to 20 days from 28 days at December 31, 2002. Days payable outstanding were 18 days at December 31, 2002 on a pro forma basis as adjusted for accounting changes. We expect days payable outstanding to increase in the future as a result of our efforts to improve working capital management.

Total debt increased to $5.8 billion at December 31, 2003 from $5.4 billion at December 31, 2002 primarily due to our issuance in 2003 of $1.1 billion aggregate principal amount of 6.0% Senior Notes due 2013 and $690 million aggregate principal amount of 3.875% Convertible Senior Notes due 2023, offset by the redemption of $733 million principal amount of our zero-coupon convertible senior notes due 2021 (see “Liquidity and Capital Resources” below). Total debt consists of notes payable, capital leases and commercial paper, and included $1.6 billion of our June 2001 senior notes at December 31, 2003 and 2002 that we expect to settle with funds obtained from outstanding forward contracts for the sale of 27 million shares of our common stock at $59.31 per share. The forward contract is 100% collateralized by the holders of the convertible notes. The total debt-to-capital ratio (which includes total debt and minority interests as components of capital) was 49% at December 31, 2003 compared to 43% at December 31, 2002. In conjunction with the issuance of the senior notes in June 2003, we entered into interest rate swap fair value hedges with a notional amount of $1.1 billion under which we receive fixed rates of 6.0% and pay floating rates equal to the six-month London Interbank Offering Rate (1.22% at December 31, 2003) plus 2.275% to 2.494%.

Off-Balance Sheet Arrangements and Contractual Obligations

During 2003, we extended and expanded a securitization facility under which we finance the purchase of capital assets for our NMCI contract. The facility, originally established in 2001, was amended to, among other things, increase availability thereunder from $600 million to $900 million and extend the term from 2005 to 2007 to be more aligned with the term of the NMCI contract. Under the terms of this facility, we finance the purchase of capital assets for the NMCI contract by selling certain financial assets resulting from that contract to a trust (“Trust”) classified as a qualifying special purpose entity for accounting purposes. At December 31, 2003, the Trust had external borrowings of $728 million and our beneficial interest was $264 million. The aggregate dollar values of assets purchased under the securitization facility were $668 million, $109 million and $147 million, respectively, during the years ended December 31, 2003, 2002 and 2001. The facility used for such borrowings is subject to annual renewal in October of each year, with a repayment period of up to 36 months for outstanding borrowings in the event of non-renewal, and terminates in April 2007. A non-renewal does not trigger recourse to us, but would preclude additional financial asset purchases by the Trust. We have no effective control over the activities of the Trust, and it is legally isolated from us.

Client payments are made directly to the Trust, with the excess of the amounts due then paid to us. If the client does not make the required payments under the NMCI contract, we are not obligated to acquire the underlying assets except upon receipt of notification of the client’s intention to terminate the contract due to our breach or the material inaccuracy of certain representations made by us. Certain events give the Trust’s lenders the right to require all client contract payments be retained in the Trust’s account and used to repay external borrowings. These events include the cancellation of the NMCI contract by the client, our performance default of any payment obligation or of any covenant under the facility, a material adverse change in our operations that materially adversely affects our ability to perform our duties under the transaction documents, our failure to be in compliance with the financial covenants in our credit facilities, or client payments under the NMCI contract falling below minimum levels. We are obligated to pay any remaining amounts due and not collected through contract payments approximately 180 days (90 days in certain circumstances) after termination of the NMCI contract. We consider the likelihood of the occurrence of any of these events to be remote.

In connection with certain service contracts, we may arrange a client supported financing transaction (“CSFT”) with our client and an independent third-party financial institution or its designee. The use of these transactions enables us to offer clients more favorable financing terms. These transactions also enable the preservation of our capital and allow us to avoid client credit risk relating to the repayment of the financed amounts. Under these transactions, the independent third-party financial institution finances the purchase of certain IT-related assets and simultaneously leases those assets for use in connection with the service contract. The use of a CSFT on a service contract results in lower contract revenue and expense to EDS over the contract term.

In CSFT transactions, client payments are made directly to the financial institution providing the financing. If the client does not make the required payments under the service contract, under no circumstances do we have an ultimate obligation to acquire the underlying assets unless our nonperformance under the service contract would permit its termination, or we fail to comply with certain customary terms under the financing agreements, including, for example, covenants we have undertaken regarding the use of the assets for their intended purpose. We consider the possibility of our failure to comply with any of these terms to be remote.

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At December 31, 2003, the estimated future asset purchases to be financed under existing arrangements were $313 million. The aggregate dollar values of assets purchased under our CSFT arrangements were $72 million, $212 million and $417 million during 2003, 2002 and 2001, respectively. As of December 31, 2003, there were outstanding an aggregate of $601 million under CSFTs yet to be paid by our clients. In the event a client contract is terminated due to nonperformance, we would be required to acquire only those assets associated with the outstanding amounts for that contract. Net of repayments, the estimated future maximum amount outstanding under existing financing arrangements is not expected to exceed $1.4 billion. We believe we have sufficient alternative sources of capital to directly finance the purchase of capital assets to be used for our current and future client contracts without the use of these arrangements.

The following table summarizes CSFT and securitization financing activities since we began using these arrangements in 1995 (in millions):

Performance guarantees. In the normal course of business, we may provide certain clients, principally governmental entities, with financial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general, we would be liable for the amounts of these guarantees in the event our nonperformance permits termination of the related contract by our client, the likelihood of which we believe is remote. We believe we are in compliance with our performance obligations under all service contracts for which there is a performance guarantee.

The following table summarizes the estimated expiration of financial guarantees outstanding as of December 31, 2003 (in millions):

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Contractual obligations. The following table summarizes payments due in specified periods related to our contractual obligations as of December 31, 2003 (in millions):

Liquidity and Capital Resources

Our cash commitments include payments related to our long-term debt, operating leases and minimum purchase obligations. Refer to “Contractual Obligations” above for a summary of payments due in future periods related to these obligations. We also have historically paid dividends to shareholders in the annual amount of $0.60 per share, or approximately $285 million. We do not anticipate any change in our dividend policy in 2004.

Our principal source of liquidity is cash on hand and cash flow from operations. In addition, we have unsecured committed credit facilities in the aggregate of $1.0 billion and a secured A/R facility with availability of up to $400 million. There were no amounts outstanding under our unsecured committed credit facilities at December 31, 2003 and 2002. There were no amounts outstanding under our secured A/R facility at December 31, 2003, and $406 million was outstanding under such facility at December 31, 2002. In addition, we expect to generate significant additional cash proceeds from the disposition of non-core assets in 2004, including our UGS PLM Solutions subsidiary, as well as approximately $1.6 billion from the proceeds of the sale of shares of common stock pursuant to the terms of our Income Prides in 2004.

We expect the principal use of funds for the foreseeable future will be for capital expenditures, working capital, debt repayment and dividends. Capital expenditures may consist of purchases of computer and telecommunications equipment, software, land, buildings and facilities.

The following table summarizes our cash flows for the years ended December 31, 2003, 2002 and 2001 (in millions):

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Operating Activities. The decrease in net cash provided by operating activities in 2003 compared to 2002 was due to a $366 million decrease in earnings, as adjusted to exclude non-cash operating items, and a $494 million change in operating assets and liabilities. The change in operating assets and liabilities is primarily the result of lower net customer prepayments in 2003 as compared to 2002. Operating cash flows in 2003 were comprised $2,094 million in cash provided by our core IT outsourcing business and our A.T. Kearney and UGS PLM Solutions subsidiaries, offset by $708 million in cash used by our NMCI contract. The use of cash by NMCI was primarily due to operating losses associated with the extended transition phase and costs associated with the build-out of the client’s network infrastructure. The increase in cash flow from operating activities in 2002 was due to a $626 million change in operating assets and liabilities, partially offset by a $102 million decrease in earnings, adjusted to exclude non-cash operating items.

Investing Activities. The decrease in net cash used in investment activities in 2003 compared to 2002 was partially due to a reduction in purchases of property and equipment due to an increase in the use of leased equipment, the utilization of the NMCI securitization facility and reduced contract signings relative to prior years. In addition, net proceeds related to investments in marketable securities increased in 2003 due to the sale of securities which had been held as a requirement of our State of Texas Medicaid contract which terminated in 2003. The decrease in net cash used in investing activities in 2003 was somewhat offset by an increase in payments for the purchase of software due primarily to the prepayment of our remaining minimum commitment under a software subscription agreement of $227 million during 2003. The decrease in net cash used in investing activities in 2002 was due to a decrease in capital expenditures (excluding capital lease payments) of $294 million, a decrease in payments for acquisitions of $2.0 billion and an increase in proceeds from divested assets of $275 million.

Financing Activities. The decrease in net cash used in financing activities in 2003 compared to 2002 was primarily due to the $380 million purchase of treasury shares in 2002, offset by a decrease in net proceeds from long-term debt and other borrowings in 2003. The decrease in net cash used in financing activities in 2002 was due to a decrease in net borrowings of $1.6 billion, a decrease in payments for redeemable stock of $163 million, an increase in payments for the purchase of treasury shares of $380 million and a decrease in proceeds related to employee stock transactions. During 2004, we expect debt repayments of approximately $560 million, assuming our June 2001 $1.6 billion senior notes are successfully remarketed, and dividend payments of approximately $290 million. In addition, we expect proceeds of approximately $1.6 billion resulting from the aforementioned execution of forward stock sale contracts associated with those notes.

Free Cash Flow. We define free cash flow as net cash provided by operating activities, less capital expenditures. Capital expenditures is the sum of (i) net cash used in investing activities, excluding proceeds from sales of marketable securities, proceeds from divested assets, payments related to acquisitions, net of cash acquired, and payments for purchases of marketable securities, and (ii) capital lease payments. Free cash flow is a non-GAAP measure and should be viewed together with our Consolidated Statements of Cash Flows. We report free cash flow to enable investors to differentiate between cash generated by our ongoing business operations and cash generated or used by events or transactions unrelated to those operations. Free cash flow is also used by management in establishing internal performance targets.

Free cash flow in 2003, 2002 and 2001 reflects net cash provided by operating activities of $1.4 billion, $2.2 billion, and $1.7 billion, respectively, less capital expenditures of $1.2 billion, $1.3 billion, and $1.5 billion, respectively.

Capital Expenditures. During 2003, 2002 and 2001, capital expenditures (as defined above) totaled $1.2 billion, $1.3 billion and $1.5 billion, respectively. In addition, CSFTs, securitization and leasing transactions during those years provided the estimated capital equivalent of $1.1 billion, $0.8 billion and $1.1 billion, respectively. Capital expenditures for 2003 are comprised of gross capital requirements of $2.2 billion offset by proceeds from CSFTs, securitization and leasing arrangements of $1.1 billion. Gross capital requirements related to the NMCI contract were $769 million in 2003 offset by proceeds from the NMCI securitization transaction and leasing arrangements of $653 million. We estimate capital expenditures will total approximately $1.4 billion in 2004. In addition, we estimate CSFTs, securitization and leasing transactions will provide the estimated capital equivalent of approximately $585 million in 2004. Total capital expenditures may vary significantly and will be based principally on capital requirements for new business and the level of acquisition and joint venture activities, if any. We anticipate that cash reserves, cash flows from operations, proceeds from divestitures, availability under CSFTs and our securitization facility, and unused borrowing capacity under our existing lines of credit will provide sufficient funds to meet our needs for the foreseeable future.

During October 2003, we redeemed $733 million principal amount of our zero-coupon convertible notes due 2021 at the request of the holders of such notes in accordance with the terms thereof. The remaining $39 million principal amount of such notes may be redeemed at the option of the holders thereof in October 2004 and periodically thereafter.

In June 2003, we completed the offer and sale of $1.1 billion aggregate principal amount of our 6.0% Senior Notes due 2013 and $690 million aggregate principal amount of our 3.875% Convertible Senior Notes due 2023 in concurrent offerings. Proceeds from the offerings were used for debt repayment and general corporate purposes. In the event the credit ratings assigned to the 6.0% Senior Notes fall to below Baa3 by Moody’s Investor Services, Inc. (“Moody’s”) or BBB- by Standard & Poor’s

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Rating Services (“S&P”), the interest rate payable on such notes will be increased to 6.5%. If, following such a downgrade, Moody’s or S&P subsequently increases the ratings assigned to the notes to at least Baa3 and BBB-, respectively, the interest rate payable on such notes will be decreased to the initial interest rate.

In 2002, EDS Information Services, LLC, a wholly owned subsidiary of EDS, contributed to the capital of and sold certain trade receivables to Legacy Receivables, LLC, a limited liability company of which it is the sole member (the “LLC”), which then entered into a $500 million revolving secured financing arrangement collateralized by those trade receivables. The secured A/R facility was reduced to $400 million during 2003. No amounts were outstanding under this facility at December 31, 2003. Maximum borrowings under the facility vary based on the eligible trade receivables held by the LLC, however outstanding borrowings under the facility cannot exceed $400 million. The facility will expire in December 2005, subject to annual renewal. In the event certain stated criteria are not complied with and a waiver is not granted, the facility may be terminated and amounts outstanding would be repaid through collection of the collateralized trade receivables. Events of termination under the facility include, but are not limited to, events or collection trends materially negatively impacting the collateral. We do not expect to utilize this facility for the foreseeable future.

Covenants. In addition to the aforementioned performance guarantees and NMCI securitization facility covenants, our unsecured credit facilities, secured A/R facility and the indentures governing our long-term notes contain certain covenants, including restrictions on mergers, consolidations and sales of substantially all of our assets. In addition, our unsecured credit facilities and secured A/R facility contain certain financial and other restrictive covenants that would allow any amounts outstanding under the facilities to be accelerated in the event of noncompliance. The financial covenants include a minimum net worth requirement, a fixed charge coverage requirement and a leverage ratio requirement. The minimum net worth requirement is calculated each calendar quarter as the sum of: a) 85% of net worth as of September 30, 2003, plus b) 50% of consolidated net income (as defined in the agreement), if positive, after September 30, 2003, plus c) 80% of any increase in net worth resulting from issuances of equity interests, plus d) 100% of any increase in net worth resulting from issuances of equity interests related to our June 2001 senior notes due in 2004, less e) 50% of one-time charges (as defined in the agreement) after September 30, 2003 up to a maximum reduction of $625 million, less f) $100 million. The leverage ratio requirement limits our leverage ratio (as defined in the agreement) to not exceed 2.75-to-1 through June 2004, 2.25-to-1 from July 2004 through June 2005, and 2.00-to-1 from July 2005 thereafter. The fixed charge coverage covenant requires us to maintain a fixed charges ratio (as defined in the agreement) of no less than 1.10-to-1 through June 2004 and 1.25-to-1 thereafter. We were in compliance with all covenants at December 31, 2003.

The following table presents the financial covenant requirements under our credit facilities and the calculated amount or ratios at December 31, 2003 (dollars in millions):

Our unsecured credit facilities, the indentures governing our long-term notes, our secured A/R facility, the securitization facility for the NMCI contract and certain other debt instruments contain cross-default provisions with respect to a default in any payment under, or resulting in the acceleration of, indebtedness greater than $50 million. The obligation of the lenders under our unsecured credit facilities and secured A/R facility to extend credit is subject to there not having occurred a material adverse effect with respect to EDS.

The following table summarizes our senior long-term debt and commercial paper credit ratings by Moody’s, S&P and Fitch at December 31, 2003:

On February 5, 2004, S&P announced that it placed our long-term credit rating of BBB on CreditWatch with negative implications. On February 6, 2004, Moody’s placed our long-term credit rating of Baa3 on review for possible downgrade, and Fitch placed our BBB senior unsecured debt rating on Rating Watch Negative. These credit rating agencies could take further adverse actions with respect to our ratings. A negative change in our credit rating could increase our cost of capital and could result in an increase in the interest rates payable under certain indebtedness discussed above. At December 31, 2003, we have no recognized or contingent material liabilities that would be subject to accelerated payment in the event one or more of the rating agencies downgrades our credit ratings. We do not believe a negative change in our credit ratings would have a material adverse impact on the Company under the terms of our client agreements.

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We expect to file a universal, or unallocated, shelf registration with the SEC for up to $1.0 billion in the first half of 2004 to enhance our financial flexibility.

Application of Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are used include, but are not limited to, revenue recognition, accounts receivable collectibility, accounting for long-lived assets, deferred income taxes, retirement plans, performance guarantees and litigation.

Revenue recognition. We provide IT and business process outsourcing services under time-and-material, unit-price and fixed-price contracts, which may extend up to 10 or more years. Services provided over the term of these arrangements may include one or more of the following: IT infrastructure support and management; IT system and software maintenance; application hosting; the design, development, and/or construction of software and systems (“Construct Service”); transaction processing; and business process management.

If a contract involves the provision of a single element, revenue is generally recognized when the product or service is provided and the amount becomes billable currently or upon any contract termination event. If the service is provided evenly during the contract term but service billings are irregular, revenue is recognized on a straight-line basis over the contract term. However, if the single service is a Construct Service, revenue is recognized under the percentage-of-completion method using a zero-profit methodology. Under this method, costs are deferred until contractual milestones are met, at which time the milestone billing is recognized as revenue and an amount of deferred costs is recognized as expense so that cumulative profit equals zero. If the milestone billing exceeds deferred costs, then the excess is recorded as deferred revenue. When the Construct Service is completed and the final milestone met, all unrecognized costs, milestone billings, and profit are recognized in full. If the contract does not contain contractual milestones, costs are expensed as incurred and revenue is recognized in an amount equal to costs incurred until completion of the Construct Service, at which time any profit would be recognized in full. If total costs are estimated to exceed revenue for the Construct Service, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

If a contract involves the provision of multiple service elements, total estimated contract revenue is allocated to each element based on the relative fair value of each element. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for single-element contracts, except revenue recognized on a straight-line basis for a non-Construct Service will not exceed amounts currently billable unless the excess revenue is recoverable from the client upon any contract termination event. If the amount of revenue allocated to a Construct Service is less than its relative fair value, costs to deliver such service equal to the difference between allocated revenue and the relative fair value are deferred and amortized over the contract term. If total Construct Service costs are estimated to exceed the relative fair value for the Construct Service contained in a multiple-element arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

We also defer and subsequently amortize certain set-up costs related to activities that enable the provision of contracted services to the client. Such activities include the relocation of transitioned employees, the migration of client systems or processes, and the exit of client facilities. Deferred contract costs, including set-up costs, are amortized on a straight-line basis over the remaining original contract term unless billing patterns indicate a more accelerated method is appropriate. The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, including contract concessions paid to the client, the deferred contract costs and contract concessions are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after reducing the balance of the deferred contract costs and contract concessions to zero, any remaining long-lived assets are evaluated for impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

Accounts receivable. Reserves for uncollectible trade receivables are established when collection of amounts due from clients is deemed improbable. Indicators of improbable collection include client bankruptcy, client litigation, industry downturns, client cash flow difficulties or ongoing service or billing disputes. Receivables more than 180 days past due are automatically reserved unless collection is deemed probable. Our allowances for doubtful accounts as a percentage of total gross trade receivables, excluding unbilled receivables, were 4.0%, 7.7% and 2.7% at December 31, 2003, 2002 and 2001, respectively. The

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increase in the allowance in 2002 resulted from the recognition of reserves in connection with the WorldCom and US Airways bankruptcies. Excluding these reserves, the allowance percentage was 2.7% at December 31, 2002.

Long-lived assets. Our property and equipment, software and definite-lived intangible asset policies require the amortization or depreciation of assets over their estimated useful lives. An asset’s useful life is the period over which the asset is expected to contribute directly or indirectly to our future cash flows. The useful lives of property and equipment are limited to the standard depreciable lives or, for certain assets dedicated to client contracts, the related contract term. The useful lives of capitalized software are limited to the shorter of the license period or the related contract term. The estimated useful lives of definite-lived intangible assets are based on the expected use of the asset and factors that may limit the use of the asset. We may utilize the assistance of a third-party appraiser in the assessment of the useful life of an intangible asset.

Goodwill is not amortized, but instead tested for impairment at least annually. The first step of the goodwill impairment test is a comparison of the fair value of a reporting unit to its carrying value. The fair value of a reporting unit is the amount which the unit as a whole could be bought or sold in a current transaction between willing parties. We conducted an annual goodwill impairment test as of December 1, 2003. The goodwill impairment test requires us to identify our reporting units and obtain estimates of the fair values of those units as of the testing date. Our reporting units are our lines of business or the geographic components of our lines of business that share similar economic characteristics. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures and working capital for each unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data. We utilize our weighted-average cost of capital to discount the estimated expected future cash flows of each unit. The estimated fair value of each of our reporting units exceeded its respective carrying value in 2003 indicating the underlying goodwill of each unit was not impaired at the respective testing dates.

We plan to conduct our annual impairment test as of December 1 of each year when our budgets and operating plans for the forthcoming year are expected to be finalized. The timing and frequency of additional goodwill impairment tests are based on an ongoing assessment of events and circumstances that would more than likely reduce the fair value of a reporting unit below its carrying value. We will continue to monitor our goodwill balance for impairment and conduct formal tests when impairment indicators are present. A decline in the fair value of any of our reporting units below its carrying value is an indicator that the underlying goodwill of the unit is potentially impaired. This situation would require the second step of the goodwill impairment test to determine whether the unit’s goodwill is impaired. The second step of the goodwill impairment test is a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. An impairment loss is required for the amount which the carrying value of a reporting unit’s goodwill exceeds its implied fair value. The implied fair value of the reporting unit’s goodwill would become the new cost basis of the unit’s goodwill.

Deferred income taxes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Factors considered in making this determination include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances will be subject to change in each future reporting period as a result of changes in one or more of these factors. A majority of the tax assets are associated with tax jurisdictions in which we have a large scale of operations and long history of generating taxable income, thereby reducing the estimation risk associated with recoverability analysis. However, in smaller tax jurisdictions in which we have less historical experience or smaller scale of operations, the assessment of recoverability of tax assets is largely based on projections of taxable income over the expiration period of the tax asset and is subject to greater estimation risk. Accordingly, the recoverability of tax assets in these smaller jurisdictions could be impaired as a result of poor operating performance over extended periods of time or a future decision to reduce or eliminate operating activity in such jurisdictions. Such an impairment would result in an increase in our effective tax rate and related tax expense in the period of impairment.

Retirement plans. We offer pension and other postretirement benefits to our employees through multiple global pension plans. Our largest pension plans are funded through our cash contributions and earnings on plan assets. We use the actuarial models required by SFAS No. 87, Employers’ Accounting for Pensions, to account for our pension plans. Two of the most significant actuarial assumptions used to calculate the net periodic pension benefit expense and the related pension benefit obligation for our defined pension benefit plans are the expected long-term rate of return on plan assets and the discount rate assumptions.

SFAS No. 87 requires the use of an expected long-term rate of return that, over time, will approximate the actual long-term returns earned on pension plan assets. We base this assumption on historical five-year actual returns as well as anticipated future returns based on our investment mix. Given our relatively young workforce, we are able to take a long-term view of our pension investment strategy. Accordingly, plan assets are weighted heavily towards equity investments. Equity investments are susceptible to significant short-term fluctuations but have historically outperformed most other investment alternatives on a long-term basis. At December 31, 2003, approximately 80% of pension assets were invested in public and private equity and real estate investments with the remaining assets being invested in fixed income securities. Such mix is consistent with that assumed in

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determining the expected long-term rate of return on plan assets. Rebalancing our actual asset allocations to our planned allocations based on actual performance has not been a significant issue.

An 8.7% weighted-average expected long-term rate of return on plan assets assumption was used for the 2003 pension plan actuarial valuations compared to a 9.6% rate used in 2002. A 100 basis point increase or decrease in this assumption results in an estimated pension expense decrease or increase, respectively, of $55 million in the subsequent year’s pension expense (based on the most recent pension valuation and assuming all other variables are constant).

An assumed discount rate is required to be used in each pension plan actuarial valuation. This rate reflects the underlying rate determined on the measurement date at which the pension benefits could effectively be settled. High-quality bond yields on our measurement date, October 31, 2003, with maturities consistent with expected pension payment periods are used to determine the appropriate discount rate assumption. Such maturities are currently estimated to be 19 years. A 6.0% discount rate assumption was used for the 2003 pension plan actuarial valuations. The methodology used to determine the appropriate discount rate assumption has been consistently applied. A 100 basis point increase in the discount rate assumption will result in an estimated decrease of approximately $170 million in the subsequent year’s pension expense, and a 100 basis point decrease in the discount rate assumption will result in an estimated increase of approximately $183 million in the subsequent year’s pension expense (based on the most recent pension valuation and assuming all other variables are constant).

Negative financial market returns in 2001 and 2002 caused our actual pension plan asset returns in those years to be less than the expected returns reflected in our assumptions. Our long-standing policy of making consistent cash pension plan contributions provided some protection against negative short-term market returns. In addition, positive financial market returns in 2003 resulted in our actual pension plan asset returns exceeding expected returns reflected in our assumptions. However, despite increased contributions and positive returns in 2003, the change in the fair value of our plan assets and declining discount rates over the last several years have caused a significant decline in our pension plans’ funded status, which as of October 31, 2003, reflected total plan assets of $4.9 billion and total accumulated benefit obligations under all plans of $5.7 billion. As a result, under the requirements of SFAS No. 87, we have an additional minimum pension plan liability of $584 million at December 31, 2003 with a corresponding reduction, net of tax, in the accumulated other comprehensive loss component of shareholders’ equity.

Our weighted-average long-term rate of return assumption for plan assets as of January 1, 2004 is 8.6%. Our 2004 pension expense will slightly decrease from 2003. Our required minimum amount of 2004 contributions will not exceed actual contributions made in 2003. However, we may elect to increase the level of contributions in 2004 over 2003 levels based on a number of factors, including performance of pension investments, changes in interest rates and changes in workforce compensation.

Other Liabilities. In the normal course of business, we may provide certain clients, principally governmental entities, with financial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general, we would only be liable for the amounts of these guarantees in the event that our nonperformance permits termination of the related contract by our client, the likelihood of which we believe is remote. At December 31, 2003, we had $384 million of outstanding standby letters of credit and surety bonds relating to these performance guarantees. In addition, we had $1.3 billion outstanding under CSFT and securitization transactions that are supported by performance guarantees. We believe we are in compliance with our performance obligations under all service contracts for which there is a performance guarantee. In addition, we had $24 million of other financial guarantees outstanding at December 31, 2003 relating to indebtedness of others.

There are various claims and pending actions against EDS arising in the ordinary course of our business. See Note 15 to the consolidated financial statements for a discussion of current litigation. Certain of these actions seek damages in significant amounts. Among other things, we consider the period in which the underlying cause of the claim occurred, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the loss to determine whether a loss accrual and/or disclosure in our consolidated financial statements is required. The degree of probability and the loss related to a particular claim are typically estimated with the assistance of legal counsel.

New Accounting Standards

In May 2003, the EITF reached a consensus on Issue 01-8, Determining Whether an Arrangement Contains a Lease. Under the provisions of EITF 01-8, arrangements conveying the right to control the use of specific property, plant or equipment must be evaluated to determine whether they contain a lease. The Company enters into contracts for the long-term supply and sale of IT services and systems that, depending on the facts and circumstances, could be subject to EITF 01-8. The new rules are being applied prospectively to such contracts entered into or modified after July 1, 2003. Accordingly, the impact of EITF 01-8 on our future results of operations and financial position will depend on the terms contained in contracts signed after such date. The impact of EITF 01-8 on our results of operations and financial position during 2003 was not material.

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Factors That May Affect Future Results

The statements in this Report that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding estimated revenues, operating margins, restructuring charges, earnings, cash flows and capital expenditures, the TCV of new business signings, the impact of the adoption of accounting standards and other forward-looking financial information. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future financial and operating performance, short- and long-term revenue and earnings, the timing of the revenue, earnings and cash flow impact of new and existing contracts, liquidity, estimated future revenues from existing clients, the value of new contract signings, business pipeline, industry growth rates and our performance relative thereto, the impact of acquisitions and divestitures, and the impact of client bankruptcies. Any forward-looking statement may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements. These include, but are not limited to, the following:

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We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law.

We are exposed to market risk from changes in interest rates, equity prices and foreign currency exchange rates. We enter into various hedging transactions to manage this risk. We do not hold or issue derivative financial instruments for trading purposes. A discussion of our accounting policies for financial instruments, and further disclosure relating to financial instruments, are included in the notes to the consolidated financial statements.

Interest rate risk. Interest rate risk is managed through our debt portfolio of fixed- and variable-rate instruments including interest rate swaps. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If these rates average 10% more in 2004 than in 2003, there would be no material adverse impact on our results of operations or financial position. During 2003, had short-term market interest rates averaged 10% more than in 2002, there would have been no material adverse impact on our results of operations or financial position.

Equity price sensitivity. Our financial position is affected by changes in equity prices as a result of certain investments. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in the value of our equity security investments. If the market price of our investments in equity securities in 2004 were to fall by 10% below the level at the end of 2003, there would be no material adverse impact on our results of operations or financial position. During 2003, declines in the market price of our equity securities did not have a material adverse impact on our results of operations or financial position.

Foreign exchange risk. We conduct business in the United States and around the world. Our most significant foreign currency transaction exposures relate to Canada, the United Kingdom, Western European countries that use the euro as a common currency, Australia and New Zealand. The primary purpose of our foreign currency hedging activities is to protect against foreign currency exchange risk from intercompany financing and trading transactions. We enter into foreign currency forward contracts and currency options with durations of generally less than 30 days to hedge such transactions. We have not entered into foreign currency forward contracts for speculative or trading purposes.

Generally, foreign currency forward contracts are not designated as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. In addition, since we enter into forward contracts only as an economic hedge, any change in currency rates would not result in any material gain or loss, as any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in foreign currency rates against the U.S. dollar. If these rates average 10% more in 2004 than in 2003, there would be no material adverse impact on our results of operations or financial position. During 2003, had foreign currency rates averaged 10% more than in 2002, there would have been no material adverse impact on our results of operations or financial position.

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors

Electronic Data Systems Corporation:

We have audited the accompanying consolidated balance sheets of Electronic Data Systems Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electronic Data Systems Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, during 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 141, Business Combinations, and certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. In 2002, the Company fully adopted the provisions of SFAS No. 142, as required for goodwill and intangible assets resulting from business combinations consummated before July 1, 2001. In 2003, the Company adopted the provisions of Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, and SFAS No. 143, Accounting for Asset Retirement Obligations.

KPMG LLP

Dallas, Texas

February 3, 2004, except as to

Note 20, which is as of

March 13, 2004

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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)