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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 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, 2002

Commission File Number 0-22141

COVANSYS CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                                                      |  |                                            
|----------------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Michigan(State or Other Jurisdiction of
    Incorporation or Organization)                            |  | 38-2606945(IRS Employer Identification No.)
|                                                                                                     
|32605 West Twelve Mile Road
    Farmington Hills, Michigan(Address of principal executive
    office) |  | 48334-3339(Zip Code)                       

Registrants telephone number, including
area code: (248) 488-2088

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

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

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 o

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

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Exchange Act
Rule 126-2)  Yes x  No o

The aggregate
market value of common stock held by non-affiliates of the
registrant as of February 20, 2003 was $56,670,157.

The number of
shares outstanding of the registrants common stock as of
February 20, 2003 was 27,221,049.

Documents Incorporated by Reference

Portions of the
Proxy Statement of the Registrant for its 2003 Annual Meeting of
Shareholders to the extent expressly so stated, are incorporated
by reference into Part III of this Report.



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TABLE OF CONTENTS



|                                                 |  |  |  |  |  |  |  | 
|------------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                          
|PART II                                         
|PART III                                        
|PART IV                                         
|SIGNATURES                                      
|Subsidiaries of Registrant                      
|Consent of PricewaterhouseCoopers LLP           
|906 Certification of the Chief Executive Officer
|906 Certification of the Chief Financial Officer



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COVANSYS CORPORATION AND
SUBSIDIARIES

FORM 10-K

For the Fiscal Year Ended December 31,
2002

INDEX

|           |  |                                                                                           |  |   
|---------- |  | ----------------------------------------------------------------------------------------- |  | --
|Part I     |  |                                                                                           |  |   
|Item 1.    |  | Business                                                                                  |  | 1 
|Item 2.    |  | Properties                                                                                |  | 6 
|Item 3.    |  | Legal Proceedings                                                                         |  | 7 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |  | 7 
|Part II    |  |                                                                                           |  |   
|Item 5.    |  | Market for the Registrants Common Equity
    and Related Stockholder Matters             |  | 8 
|Item 6.    |  | Selected Financial Data                                                                   |  | 9 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  | 11
|Item 8.    |  | Financial Statement and Supplementary Data                                                |  | 20
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  | 42
|Part III   |  |                                                                                           |  |   
|Item 10.   |  | Directors and Executive Officers of the Company                                           |  | 43
|Item 11.   |  | Executive Compensation                                                                    |  | 43
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  | 43
|Item 13.   |  | Certain Relationships and Related Transactions                                            |  | 43
|Item 14.   |  | Controls and Procedures                                                                   |  | 43
|Part IV    |  |                                                                                           |  |   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  | 44
|Signatures |  | 45                                                                                       



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PART I


Item 1. Business

Summary

On February 5, 2001, Complete Business
Solutions, Inc. announced that it began doing business under the
new name Covansys Corporation and changed its Nasdaq National
Market ticker symbol from CBSI to CVNS. Shareholder approval of
the name change occurred in July 2001.

Founded in 1985, Covansys Corporation is a global
technology services company, with a focus on industry-specific
solutions, strategic outsourcing and integration services. We
address the most challenging technology issues companies are
facing through a unique onsite, offsite, offshore delivery model
that helps clients achieve rapid deployment, world-class quality
and reduced costs.

We firmly believe that knowledge of a
clients industry is every bit as important as in-depth
technology expertise. Thats why our clients rely so
heavily on our industry specialists.

We offer high-level subject matter expertise in
the public sector industry, as well as years of experience in
retail, healthcare, distribution, manufacturing, financial
services, telecommunications and utilities. We specialize in
using our in-depth industry knowledge to help our customers
respond to current issues such as e-business, globalization,
deregulation and privacy.

We apply our industry-specific knowledge to
deliver a wide range of outsourcing and integration services,
which include:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Application Maintenance and Development
    Outsourcing (AMD/O)              
|
| |  | Custom Application Development                                               
|
| |  | Web-to-Enterprise Integration (WEISM)
    and traditional e-business services
|
| |  | Packaged Software Implementation, Upgrades and
    Enhancements              
|
| |  | Data Warehousing                                                             
|
| |  | Document Management                                                          

We are an industry leader in integrating these
service offerings with our offshore capabilities, having
pioneered a global delivery model that is transparent, flexible
and seamless.

We offer flexible, cost-effective project
delivery capabilities by providing our clients a choice among
any combination of the following options: (1) onsite at the
client facility; (2) offsite at one of our development
facilities in North America; or (3) offshore at one of our
development facilities in India. We believe that our U.S./India
infrastructure is one of the largest and best in the industry.
Our ability to deliver services globally is enhanced by our
local account management and recruiting infrastructure,
consisting of a geographically dispersed network of 24 offices
worldwide and 91 sales and client executives. Our
infrastructure allows us to act as a local partner, becoming an
integral member of a clients technology team. This
demonstrates our commitment to each market and enhances our
ability to attract locally based clients and consultants.

Our flexible delivery capabilities enable our
clients to determine their degree of project involvement and to
control the costs and speed of project delivery, consistent with
our team approach. Under this approach, we seek to establish
long-term relationships with our clients by serving as a virtual
extension of their organizations. Proven, innovative
methodologies combined with highly competent IT professionals
enable us to deliver flexible, team-oriented solutions to meet
our clients expectations.

1



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Our goal is to be the preferred, single-source
provider of IT services to an expanding base of clients by
establishing teams that quickly and cost effectively provide
strong industry-specific solutions. To achieve this goal, our
strategy is to:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Create awareness of our extensive capabilities in
    integration services and strategic outsourcing;                                                                                        
|
| |  | Capitalize on the marketing and development
    efforts of vertically focused industry solutions groups;                                                                                     
|
| |  | Expand the breadth and depth of our technical
    capabilities through a continued evaluation of emerging
    technologies and development of industry solutions;                            
|
| |  | Focus our infrastructure, both domestically and
    internationally, to serve local clients and capitalize on our
    significant investment in offsite and offshore development
    centers;
|
| |  | Create virtual partnerships with our clients to
    provide them with a broad range of IT solutions and establish
    cross-selling opportunities; and                                       
|
| |  | Seek acquisitions and investments that complement
    our core skills or expand our geographic reach and have the
    potential to increase our overall value.                               

The Covansys Advantage

The Covansys Advantage enables our clients to use
IT more effectively with their evolving business needs. The key
attributes of the Covansys Advantage are that we:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide flexible project deliveryby offering our clients any
    combination of the following options: (1) onsite at the
    client facility; (2) offsite at one of our development
    facilities in North America; or (3) offshore at one of our
    development facilities in India. This flexibility enables our
    clients to determine their degree of project involvement and to
    control the costs and speed of project delivery.                                                                                                                                                                                                                                                                                
|
| |  | Assure clients of the highest quality software
    services, by following industry
    standard best practices in quality assurance processes and
    project management practices. Each of our three wholly-owned
    development centers in India are ISO9001 certified. Our
    facilities in Bangalore and Chennai are SEI CMM® and
    PCMM® Level 5 certified. Our Milpitas, California
    delivery center is rated SEI CMM® Level 4 and our
    Columbus, Ohio delivery center is rated SEI CMM®
    Level 3. In addition to our quality assurance
    certifications, more than 100 of our project managers are
    PMI PMP® (Project Management Professionals) as
    assessed by the Project Management Institute.
|
| |  | Offer clients a single-source provider of a
    broad range of IT services,from
    advising them on IT business strategy and strategic technology
    plans to developing and implementing appropriate IT applications
    solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Offer a local presenceby delivering our services to clients
    through a geographically dispersed network of 24 offices
    worldwide and 127 sales and marketing professionals. Our
    presence allows us to demonstrate our commitment to the local
    market and enhances our ability to attract locally based clients
    and consultants.                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Recruit and train our consultants globallythrough our established domestic and
    international network. Consultants receive technical training in
    software engineering techniques and key technologies at one of
    our U.S. training centers or one of our overseas training
    centers in India. These centers are equipped with a variety of
    hardware, software and development tools.                                                                                                                                                                                                                                                                                                                        

Growth Strategy

Our goal is to become the preferred single-source
provider of IT services to an expanding base of clients by
establishing teams that quickly and cost effectively provide
industry-based IT applications solutions. To achieve this goal,
our strategy is to:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | Create awareness of our extensive capabilitiesin integration and strategic
    outsourcing services within defined industries.

2



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capitalize on the marketing and development
    efforts of vertically focused industry solutions
    groups.These groups develop solutions
    based on in-depth knowledge of particular industries and a
    detailed understanding of the clients business.                                                                                                                                                                                                                                          
|
| |  | Expand the breadth and depth of our technical
    capabilitiesthrough training existing
    personnel, recruiting experienced talent and acquiring
    complementary businesses. Our continued evaluation of emerging
    technologies enables us to add new service offerings and
    minimizes our dependence on any single technology.                                                                                                                                                               
|
| |  | Focus our
    infrastructure,both domestically and
    internationally, and capitalize on our significant investment in
    offsite and offshore development centers, as well as our
    systems, methodologies, training programs and marketing efforts.
    We believe that our existing development centers can be further
    leveraged to support a significantly larger number of
    consultants.                                                                                                
|
| |  | Create virtual partnerships with our
    clientsto provide them with IT
    solutions so that we become an extension of their organization.
    This strategy uses a team approach that makes the client an
    integral team member. We consider the impact of each project on
    the entire application to build a broader solution over time. We
    quickly assemble capable teams and use the strategic insights of
    the client to produce flexible, supportable business and IT
    solutions.
|
| |  | Seek acquisitions and
    investmentsin technology alliances
    that complement our core skills or expand our geographic reach
    and have the potential to increase our overall value, rather
    than merely increase our revenues. We believe that our
    diversified management organization allows us to efficiently
    integrate acquisitions.                                                                                                                                                

Industry Specific Solutions

In addition to these core categories of technical
services, we expect to achieve higher penetration in our
vertical markets, such as Public Sector, with our
industry-specific solutions. Our domain expertise and
intellectual property offers a higher level of subject matter
knowledge so that we can offer our clients additional value in
developing their IT solutions. Our industry knowledge helps
our customers respond to such technological issues as
e-business, globalization, deregulation and privacy. We offer
focused leadership in the public sector industry, as well as
years of technology delivery experience in retail, healthcare,
manufacturing, financial services and telecommunications.

We believe that knowledge of a clients
industry is as important as technology expertise. There is no
one-size-fits-all answer to many of the complex systems that
manage and compute data for our client companies. Our knowledge
and experience contributes to a shorter learning curve on the
path to a customized implementation. Our specialized teams focus
on the changes generated by such issues as e-business,
globalization and deregulation. We provide high-value,
client-driven and timely business solutions.

We have years of experience with a number of
industries, such as public sector, telecommunications, retail,
healthcare, manufacturing and financial services. In addition,
we have become recognized leaders in a number of industries with
proprietary software or methods that address very specific
business issues. Examples of our industry specific solutions
include:

Public Sector:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | Childcare Management                                   
|
| |  | Case Management                                        
|
| |  | Transportation                                         
|
| |  | Woman, Infant and Children (WIC) Program
    Management
|
| |  | Labor and Tax Revenue Systems                          
|
| |  | Public Retirement                                      



| |   |                                                 
| | - | ------------------------------------------------
| |  | Clarety Public Retirement Administration Package

3



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Healthcare:



| |   |                          
| | - | -------------------------
| |  | HIPAA Compliance Programs

Financial Services:



| |   |             
| | - | ------------
| |  | FloodConnect
|
| |  | AdvantAgent 

Telecommunications:



| |   |                                 
| | - | --------------------------------
| |  | Intelligent Network Applications

We have been committed to providing customized
and innovative solutions to more than 40 state governments
since 1985. In the 2002 edition of Washington Technology, a
leading industry trade journal for government IT systems
integrators and resellers, our leadership in the public sector
industry was recognized by inclusion in their Whos
Who in State and Local Government list.

Integration Services

We offer our clients a broad range of IT
services, from advising clients on strategic technology plans to
developing and implementing appropriate IT solutions. Our
systems integration capabilities include providing services in
custom application development, including client server
development; document management; data warehousing; business
process reengineering and packaged software implementation
services such as ERP implementation, upgrades and enhancements.
Integrating Web applications with core business systems is a
strategic competency.

We are well positioned to meet the challenge of
making independently designed application systems and packaged
systems work together, both within and across enterprises. We
offer the right technological infrastructure and experience to
evaluate and select middleware solutions. Our advanced
technology development skills, combined with our offshore
capabilities, offer clients looking for integration solutions
the right mix of pricing, productivity and resource deployment.

Web-to-Enterprise Integration (WEISM)
requires looking at the whole picture and the potential for
leveraging such solutions as ERP in order to create an
integrated customer-focused IT strategy. Our goal is to improve
efficiency, expedite key decisions, enrich customer
relationships and make our clients e-business a profitable
business. The result will be an information strategy that
reduces costs and generates revenue for the client.

This expertise, along with our ability to
evaluate and provide other e-commerce solutions, such as data
warehousing, enables us to maintain a valuable partnership with
our clients, provide business consulting services and meet their
IT demands.

Strategic Outsourcing

Speed, flexibility and round-the-clock
productivity are the hallmarks of our outsourcing services. Our
fast and flexible onsite, offsite, offshore delivery model lends
itself to a full spectrum of outsourcing services. We can
deliver requirements from applications maintenance and
modernization to full IT outsourcing with our unique global
delivery model.

In order to meet aggressive schedules, we offer
our clients one of the largest U.S.-owned offshore capabilities
in the world. This capability sets us apart from many
competitors who can only offer services based in the
US market. Our local partnership/ global delivery
philosophy enables us to quickly and cost-effectively complete
projects and deploy key applications. This allows our customers
to focus on their core business while relying on us to provide
complete IT services.

Clients

Using our strategic approach, we are quickly
becoming an important supplier to middle market clients. In
2002, we provided services to over 500 clients in North
America, Europe and Asia. Our strategy is to maximize our client
retention rate and to secure additional engagements by providing
quality services and by being responsive to our client needs.
For each of the past five years, existing clients from the
previous fiscal year generated more than 80% of our revenues.

4



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Certain of our representative clients in various
industries are listed in the following table:

Banking and Financial Services

American Century

Bank One Corporation


Textron Financial Corporation


T. Rowe Price Investment Technologies, Inc.


UnumProvident Corporation


Healthcare

CHA Health

Henry Ford Health System


The Permanente Medical Group


The Regence Group


Manufacturing

DaimlerChrysler AG

Ford Motor Company


General Motors Corporation


Johnson Controls, Inc.


Visteon Automotive Services


Retail and Distribution

The Kroger Company

Lands End, Inc.


Spartan Stores, Inc.


Sirva, Inc.


Public Sector

State of California

State of Indiana


State of Michigan


State of Nebraska


State of Ohio


State of Rhode Island


State of South Carolina


Utilities and Telecommunications

Lucent Technologies, Inc.

South Carolina Electric and Gas Company


Southern California Edison


Sprint Corporation


Sales and Marketing

We generate new sales by actively pursuing new
clients through focused marketing programs and cross-selling our
services to our existing clients.

Using 127 sales and marketing professionals, we
identified and closed business in more than 100 new client
accounts in 2002, and we continue to benefit by currently
securing repeat business from more than 90 percent of our
existing client base.

A centralized marketing department works closely
with the sales team. Marketing is responsible for supporting
sales efforts through branding and awareness campaigns,
including media and analyst relations, service offering
development, sales tool and collateral development.

The marketing team helps to create the visibility
and awareness needed to facilitate the sales process. The team
also works closely with IT industry analyst firms, such as
Gartner, Giga, Forrester, AMR and Meta, which play an important
role in providing market intelligence, validating strategies and
service offerings, and influencing prospective clients.

Human Resources

Our success depends in large part on our ability
to attract, develop, motivate and retain highly skilled IT
professionals. Our strategy for achieving career-based
employment includes career planning, thorough initial and
ongoing training, allocation of assignments in accordance with
employee skills and career objectives and a comprehensive
benefits package. This package includes a company-matched 401(k)
plan, stock purchase plan, health, dental and vision insurance,
preventive medical, short-term disability insurance, a flexible
spending account and tuition reimbursement. We also will
continue to grant stock options as part of our recruitment and
retention strategy. As part of our effort to minimize turnover
we emphasize:



| |   |                           
| | - | --------------------------
| |  | Human resource management;
|
| |  | Competitive salaries;     

5



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| |   |                            
| | - | ---------------------------
| |  | Comprehensive benefits; and
|
| |  | Employee stock options     

We use aggressive recruitment strategies to
source well-qualified and well-credentialed consultants
throughout the United States. Our most successful candidate
sources include: Employee Referrals, Management Referrals,
Internet Searching and Postings, On-line Career Fairs,
Traditional Career Fairs, Professional Organizations, Trade
Shows, Seminars, advertisements and articles in leading
newspapers, business periodicals, trade magazines, networking,
out-placement firms and search firms. In addition, our
recruiting activities seek to draw on an international pool of
IT talent. We actively recruit in a variety of countries
including India, England, Belgium, Italy, Germany, Spain, the
Netherlands and Singapore.

Our rigorous recruiting process includes
track-specific screening interviews, standardized on-line
assessments targeted to the specific technical skills and level
of expertise required, technical interviews conducted by our
employees, management interviews, and an extensive background
investigation process. Once employed, consultants are staffed on
client engagements and project teams based on business demand
and as appropriate to their skills and expertise.

Our consultants typically have Bachelors or
Masters degrees in Computer Science, Engineering or other
technical disciplines. As of December 31, 2002, we had
4,404 employees comprised of 3,925 IT professionals, 127 sales
and marketing personnel and 352 general and administrative
personnel. As of December 31, 2002, we also had 457
independent contractors working on client engagements.

We have employee training centers in a variety of
locations in the United States and in India. Between projects
and after business hours, our IT professionals may receive
training on a variety of technology platforms. We provide over
200 courses on our computer-based training system, which is
available 24 hours a day, 7 days a week. We have license to 250
titles with access to over 1,200 titles of technical coursework.
In addition to technical skills in a variety of programming
languages, we offer courses in project management and
methodology. More than 100 of our project managers are PMP
(Project Management Professionals) certified as assessed by the
Project Management Institute.

Available Information

Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K,
proxy statements and amendments to those reports, are available
free of charge on our internet website at
http://www.covansys.com as soon as reasonably practicable after
such reports are electronically filed with the Securities and
Exchange Commission.

Item 2. Properties

We lease approximately 70,000 square feet of
office space in Farmington Hills, Michigan for our headquarters
office. In addition to our headquarters, we lease office space
throughout the world. Currently, our facilities are adequate for
our needs.

We have principal offices in the following
locations:

|                                                                                                                             |  |                                                                                                                                                 |  |                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                             |  |                                                                                                                                                
|North America                                                                                                                |  | International                                                                                                                                  
|Atlanta, GA
    Chicago, IL
    Cleveland, OH
    Columbus, OH
    Farmington Hills, MI
    Indianapolis, IN
    Lansing, MI |  | Middletown, CT
    Milpitas, CA
    Montreal, Canada
    Overland Park, KS
    Portland, OR
    Providence, RI
    Sacramento, CA
    Tampa, FL |  | Bangalore, India
    Brussels, Belgium
    Chennai, India
    London, U.K.
    Madrid, Spain
    Mumbai, India
    Munich, Germany
    Rome, Italy
    Singapore

6



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Item 3. Legal Proceedings

We are, from time to time, party to ordinary,
routine litigation incidental to our business. We do not believe
that the ultimate resolution of any existing matter will have a
material adverse effect on our financial condition, results of
operations or cash flows.

In addition, many of our engagements involve
projects that are critical to the operations of our
clients businesses and provide benefits that may be
difficult to quantify. We attempt to contractually limit our
liability for damages arising from errors, mistakes, omissions
or negligent acts in rendering our services. We have undertaken
engagements for which the Company guarantees its performance
based upon defined client specifications or delivery dates.
Certain engagements have required us to obtain a performance
bond from a licensed surety, to guarantee performance, and to
post the performance bond with the client. As of
December 31, 2002, we had 15 performance bonds
outstanding and posted with clients, with an aggregate total
value of approximately $31.9 million. Two of these
performance bonds are secured by letters of credit totaling
approximately $5.3 million. We intend to satisfy all of our
performance obligations with our clients and do not anticipate
defaulting on any of these performance bonds or letters of
credit.

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

No matters were submitted to a vote of our
security holders during the fourth quarter of the year ended
December 31, 2002.

7



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PART II


Item 5. Market for the Registrants
Common Equity and Related Stockholder Matters

The following table sets forth, for the periods
indicated, the range of high and low bid prices for our common
stock as reported on the Nasdaq National Market.

|                              |                |                |   |       |  |  |   |      | 
|----------------------------- | -------------- | -------------- | - | ----- |  |  | - | ---- | 
|                              |                |               
|                              |                | Price Range of
|                              |                | Common Stock  
|                              |                |               
|                              |                | High           |   | Low  
|                              |                |                |   |      
|Year Ended December 31, 2001: |                |                |   |       |  |  |   |     
|                              | First Quarter  |                | $ | 13.19 |  |  | $ | 9.13 | 
|                              | Second Quarter |                | $ | 13.65 |  |  | $ | 8.61 | 
|                              | Third Quarter  |                | $ | 13.32 |  |  | $ | 7.45 | 
|                              | Fourth Quarter |                | $ | 9.98  |  |  | $ | 6.38 | 
|Year Ended December 31, 2002: |                |                |   |       |  |  |   |     
|                              | First Quarter  |                | $ | 10.69 |  |  | $ | 7.30 | 
|                              | Second Quarter |                | $ | 9.17  |  |  | $ | 5.28 | 
|                              | Third Quarter  |                | $ | 6.10  |  |  | $ | 1.70 | 
|                              | Fourth Quarter |                | $ | 4.24  |  |  | $ | 1.77 | 

On February 5, 2001, Complete Business
Solutions, Inc., announced that it began doing business under
the new name Covansys Corporation and changed its Nasdaq
National Market ticker symbol from CBSI to CVNS. Shareholder
approval of the name change occurred in July 2001.

As of February 20, 2003, there were
approximately 5,700 shareholders of record of our common
stock.

Since our initial public offering in
March 1997, we have not paid cash dividends on our common
stock. We currently anticipate that all of our earnings will be
retained for the continued development of our business and we do
not anticipate paying any cash dividends in the foreseeable
future.

8



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##### Table of Contents



Item 6. Selected Financial Data

The selected financial data presented below for
the five years ended December 31, 2002, are derived from
our Consolidated Financial Statements and related Notes thereto.
The selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related Notes thereto included in
Item 8 of this Form 10-K.

On May 31, 2002 we acquired all of the
capital stock of PDA Software Services, Inc. (PDA).
This acquisition was accounted for by the purchase method of
accounting and, accordingly, the operating results of PDA have
been included in the consolidated financial statements since the
date of acquisition.

On September 28, 2000, we sold Synova Inc.
(Synova), our contract programming subsidiary, to a
related party for a gain of $6.1 million, net of income
taxes. The consolidated balance sheets, statements of operations
and statements of cash flows of the Company included in this
Form 10-K have been retroactively restated to reflect
Synova as a discontinued operation. The net operating results of
Synova have been reported, net of income taxes, as Income
(loss) from discontinued operations.

On April 20, 1999, we acquired E-Business
Solutions.com, Inc. (EBS), formerly Impact
Innovations Group, Inc. This acquisition was accounted for by
the purchase method of accounting and, accordingly, the
operating results of EBS have been included in the consolidated
financial statements since the date of acquisition.

On January 27, 1998 and July 24, 1998,
we merged with c.w. Costello & Associates, inc.
(Costello) and Claremont Technology Group, Inc.
(Claremont), respectively. These mergers were
accounted for by the pooling of interests method of accounting
and accordingly, the consolidated balance sheets, statements of
operations, cash flows and shareholders equity and all
financial information included in this Form 10-K have been
retroactively restated.

|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |   |         |   |  |   |         |  
|--------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - | ------- | - | ------- | - |  | - | ------- | -
|                                  |                                                                                                                |                                      
|                                  |                                                                                                                | Years Ended December 31,              |  
|                                  |                                                                                                                |                                       |  
|                                  |                                                                                                                | 1998                                  |   |         | 1999 |  |   | 2000    |   |  | 2001 |         |   | 2002(b) |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  |                                                                                                                |                                      
|                                  |                                                                                                                | (In thousands, except per share data) |  
|Statement of Operations
    Data: |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |   |         |   |  |   |        
|                                  | Revenues                                                                                                       |                                       | $ | 361,667 |      |  | $ | 443,541 |   |  | $    | 419,641 |   |         | $ | 404,734 |   |  | $ | 383,053 |  
|                                  | Cost of revenues                                                                                               |                                       |   | 236,499 |      |  |   | 297,171 |   |  |      | 308,299 |   |         |   | 290,651 |   |  |   | 284,853 |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Gross profit                                                                                                   |                                       |   | 125,168 |      |  |   | 146,370 |   |  |      | 111,342 |   |         |   | 114,083 |   |  |   | 98,200  |  
|                                  | Selling, general and administrative expenses                                                                   |                                       |   | 83,233  |      |  |   | 98,645  |   |  |      | 143,467 |   |         |   | 115,011 |   |  |   | 96,221  |  
|                                  | Restructuring, merger costs and other(a)                                                                       |                                       |   | 28,250  |      |  |   | 5,367   |   |  |      | 21,507  |   |         |   | 23,665  |   |  |   | 1,324   |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Income (loss) from continuing operations                                                                       |                                       |   | 13,685  |      |  |   | 42,358  |   |  |      | (53,632 | ) |         |   | (24,593 | ) |  |   | 655     |  
|                                  | Other expense (income)                                                                                         |                                       |   | (2,927  | )    |  |   | (3,737  | ) |  |      | (6,060  | ) |         |   | (5,531  | ) |  |   | (4,110  | )
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Income (loss) from continuing operations before
    provision (benefit) for income taxes and minority interest |                                       |   | 16,612  |      |  |   | 46,095  |   |  |      | (47,572 | ) |         |   | (19,062 | ) |  |   | 4,765   |  
|                                  | Provision (benefit) for income taxes                                                                           |                                       |   | 9,962   |      |  |   | 16,283  |   |  |      | (11,255 | ) |         |   | (8,544  | ) |  |   | 880     |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Net income (loss) from continuing operations                                                                   |                                       |   | 6,650   |      |  |   | 29,812  |   |  |      | (36,317 | ) |         |   | (10,518 | ) |  |   | 3,885   |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Income (loss) from discontinued operations, net
    of income taxes                                            |                                       |   | 41      |      |  |   | (15     | ) |  |      | (1,692  | ) |         |   |        |   |  |   |        |  
|                                  | Gain on sale of discontinued operations, net of
    income taxes                                               |                                       |   |        |      |  |   |        |   |  |      | 6,072   |   |         |   |        |   |  |   |        |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Net income (loss)                                                                                              |                                       |   | 6,691   |      |  |   | 29,797  |   |  |      | (31,937 | ) |         |   | (10,518 | ) |  |   | 3,885   |  
|                                  | Beneficial conversion feature                                                                                  |                                       |   |        |      |  |   |        |   |  |      | (23,651 | ) |         |   |        |   |  |   |        |  
|                                  | Convertible redeemable preferred stock dividends                                                               |                                       |   |        |      |  |   |        |   |  |      | (2,569  | ) |         |   | (4,265  | ) |  |   | (4,298  | )
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Net income (loss) available for common
    shareholders                                                        |                                       | $ | 6,691   |      |  | $ | 29,797  |   |  | $    | (58,157 | ) |         | $ | (14,783 | ) |  | $ | (413    | )
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Basic weighted average shares outstanding                                                                      |                                       |   | 34,414  |      |  |   | 37,267  |   |  |      | 32,892  |   |         |   | 28,704  |   |  |   | 27,734  |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Basic earnings (loss) per share                                                                                |                                       | $ | 0.19    |      |  | $ | 0.80    |   |  | $    | (1.77   | ) |         | $ | (0.51   | ) |  | $ | (0.01   | )
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Diluted weighted average shares outstanding                                                                    |                                       |   | 36,211  |      |  |   | 38,212  |   |  |      | 32,892  |   |         |   | 28,704  |   |  |   | 27,734  |  
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  
|                                  | Diluted earnings (loss) per share                                                                              |                                       | $ | 0.18    |      |  | $ | 0.78    |   |  | $    | (1.77   | ) |         | $ | (0.51   | ) |  | $ | (0.01   | )
|                                  |                                                                                                                |                                       |   |         |      |  |   |         |   |  |      |         |   |         |  

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|                    |                                              |                    |   |         |      |  |   |         |  |  |      |         |  |         |   |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  | ------- | - | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31, |  
|                    |                                              |                    |  
|                    |                                              | 1998               |   |         | 1999 |  |   | 2000    |  |  | 2001 |         |  | 2002(b) |  
|                    |                                              |                    |   |         |      |  |   |         |  |  |      |         |  |         |  
|                    |                                              |                   
|                    |                                              | (In thousands)     |  
|Balance Sheet Data: |                                              |                    |   |         |      |  |   |         |  |  |      |         |  |         |   |         |  |  |   |        
|                    | Cash and cash equivalents                    |                    | $ | 60,732  |      |  | $ | 91,236  |  |  | $    | 140,123 |  |         | $ | 123,755 |  |  | $ | 87,742  | 
|                    | Working capital                              |                    |   | 108,857 |      |  |   | 166,051 |  |  |      | 206,900 |  |         |   | 187,157 |  |  |   | 164,383 | 
|                    | Total assets                                 |                    |   | 191,045 |      |  |   | 277,388 |  |  |      | 330,901 |  |         |   | 297,623 |  |  |   | 305,274 | 
|                    | Revolving credit facility and long-term debt |                    |   |        |      |  |   |        |  |  |      |        |  |         |   |        |  |  |   |        | 
|                    | Convertible redeemable preferred stock       |                    |   |        |      |  |   |        |  |  |      | 155,660 |  |         |   | 159,924 |  |  |   | 164,222 | 
|                    | Total shareholders equity                   |                    |   | 141,155 |      |  |   | 236,417 |  |  |      | 117,106 |  |         |   | 87,805  |  |  |   | 82,170  | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Fiscal year 2002 restructuring, merger costs and
    other consists of approximately $1.3 million related to
    costs associated with our organizational restructuring,
    including severance. Fiscal year 2001 restructuring, merger
    costs and other consists of approximately $14.7 million related
    primarily to the disposal of an equity investment and related
    note receivable based on managements determination that
    this investment no longer fit the strategic direction of the
    Company; approximately $7.3 million of costs associated with our
    organizational restructuring, including severances and lease
    terminations; and approximately $1.7 million in legal and
    advisory fees related to discontinued acquisition discussions.
    Fiscal year 2000 restructuring, merger costs and other consists
    of approximately $18.6 million of costs associated with our
    organizational restructuring, including severance and lease
    terminations, and approximately $2.9 million related primarily
    to the write-down of certain assets which we determined were no
    longer realizable. Fiscal year 1999 restructuring, merger costs
    and other consists of approximately $5.4 million of certain
    non-capitalizable merger and other costs, including lease
    termination and severance, related to the acquisition of EBS.
    Fiscal year 1998 consists of approximately $12.7 million in
    transaction costs related to the mergers with Costello and
    Claremont and approximately $15.6 million related primarily
    to the write-down of certain assets which Claremont determined,
    prior to June 30, 1998, were no longer realizable.
|   
|(b) | On January 31, 2002, we issued a press
    release which announced our unaudited earnings for the
    three month period and year ended December 31, 2002,
    as well as the summarized balance sheet as of December 31,
    2002. Subsequent to our earnings announcement, management
    identified certain necessary adjustments that were not of a
    material nature or amount and did not change reported net income
    or earnings per share. These adjustments have been included in
    the amounts presented for 2002 in this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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

The following section should be read in
conjunction with our Consolidated Financial Statements and
related Notes appearing in Item 8 of this Form 10-K.
With the exception of statements regarding historical matters
and statements concerning our current status, certain matters
discussed in this Managements Discussion and
Analysis of Financial Condition and Results of Operations
are forward-looking statements that involve substantial risks
and uncertainties. Such forward-looking statements may be
identified by the words anticipate,
believe, estimate, expect or
intend and similar expressions. Our actual results,
performance or achievements could differ materially from these
forward-looking statements. Factors that could cause or
contribute to such material differences include general economic
conditions and conditions in the IT industry such as our failure
to recruit and retain IT professionals, risks related to
our merger, acquisition and strategic investment strategy,
variability of our operating results, potential cost overruns on
fixed-price projects, exposure to regulatory, political and
economic conditions in India and Asia, competition in the IT
services industry, short-term nature and termination provisions
of contracts, economic conditions unique to clients in specific
industries, and limited protection of intellectual property
rights, each of which are discussed herein under the caption
Factors that may Affect Future Results.

Overview

We are a global technology services company. Our
strategy is to establish long-term client relationships and to
secure additional engagements with existing clients by providing
quality services and by being responsive to client needs. For
each of the past five years, over 80% of our revenues were
generated from existing clients from the previous fiscal year.

We offer our clients a focused range of
information technology (IT) services specializing in
industry-specific solutions, strategic outsourcing and
integration services. Our range of experience runs from advising
clients on IT business strategy and strategic plans to
developing and implementing appropriate IT applications
solutions.

We generally assume responsibility for project
management and may bill the client on either a
time-and-materials or fixed-price basis. We recognize revenues
on time-and-materials engagements as the services are performed.
On fixed-price engagements, we recognize revenues under the
percentage of completion method except for fixed-price
outsourcing contracts where we recognize revenues ratably over
the applicable period. For the years ended December 31,
2000, 2001 and 2002, approximately 20%, 32% and 42%,
respectively, of our total revenues were generated from
fixed-price engagements. The increase in the ratio of
fixed-price projects is due to long term development projects we
have with clients in the state and local government sector, the
increased level of outsourcing projects and an increase in
project work for other large clients.

Our most significant cost is project personnel
cost, which consists primarily of salaries, wages and benefits
for our IT professionals. We strive to maintain our gross profit
margin by controlling project costs and managing salaries and
benefits relative to billing rates. We use a human resource
management team to ensure that IT professionals are quickly
placed on assignments to minimize nonbillable time and are
placed on assignments that use their technical skills and allow
for maximum billing rates.

In an effort to sustain our growth and
profitability, we have made and continue to make substantial
investments in our infrastructure, including:
(1) development centers in the United States and India;
(2) system methodologies; (3) sales and marketing
teams; and (4) internal systems.

Critical Accounting Policies and
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures in
the consolidated financial statements and accompanying notes. We
regularly evaluate and discuss with our Audit Committee the
accounting policies and estimates we use to prepare our
consolidated financial statements. Estimates are used for, but
not limited to, revenue recognition under the
percentage-of-completion method, impairment assessments of
goodwill and

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other long-lived assets, realization of deferred
tax assets, allowance for doubtful accounts, and litigation
related contingencies. These estimates are based on historical
experience, project management, and various assumptions that we
believe to be reasonable given the particular facts and
circumstances. Although we believe that our estimates,
assumptions and judgments are reasonable, they are based upon
information presently available. Actual results could differ
significantly from these estimates under different assumptions,
judgments or conditions.


The Securities and Exchange Commission has
defined critical accounting policies as those that
are most important to the portrayal of a companys
financial condition and results of operations, and which require
the company to make its most difficult and subjective judgments,
often as a result of the need to make estimates. Based on this
definition, we have identified the critical accounting policies
discussed below. We have other significant accounting policies,
which also involve the use of estimates, judgments and
assumptions that are integral to understanding our results of
operations. For a complete discussion of all significant
accounting policies, see Note 1 of our Notes to
Consolidated Financial Statements included in Item 8 of
this Form 10-K.

The following is an overview discussion of our
critical accounting policies.

Revenue
Recognition.We recognize
professional service fee revenue on time-and-materials contracts
as the services are performed.

Except for fixed-price outsourcing contracts,
revenues on fixed-priced contracts are recognized using the
percentage of completion method. The percentage of completion is
determined by relating the actual cost of labor performed to
date to the estimated total cost of labor for each contract.
Estimates of total contract revenues and costs are continuously
monitored during the term of the contract, and recorded revenues
and costs are subject to revision as the contract progresses.
Such revisions, which may result in increases or decreases to
revenue and income, are reflected in the financial statements in
the period in which they are first identified. If the estimate
indicates a loss on a particular contract, a provision is made
for the entire estimated loss without reference to the
percentage of completion.

Revenues from fixed-price outsourcing contracts
are recognized ratably over the applicable outsourcing period.
Retainages, which are not material for any of the periods
presented, are included in revenue earned in excess of billings
in the accompanying consolidated balance sheets. Revenue earned
in excess of billings is primarily comprised of revenue
recognized on certain contracts in excess of contractual
billings on such contracts. Billings in excess of revenue earned
are classified as deferred revenue.

Computer
Software.We perform research to
develop software for various business applications. The costs of
such research are charged to expense when incurred. When the
technological feasibility of the product is established,
subsequent costs are capitalized. Capitalized software costs are
amortized on a product-by-product basis. Amortization is
recorded on the straight-line method over the estimated economic
life of the product, generally five years, commencing when such
product is available. The establishment of technological
feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with
respect to certain external factors including, but not limited
to, anticipated future gross product revenue, estimated economic
product lives and changes in software and hardware technology.
These assumptions are reevaluated and adjusted as necessary at
the end of each accounting period. Management reviews the
valuation and amortization of capitalized development costs. We
periodically consider the value of future cash flows
attributable to the capitalized development costs in evaluating
potential impairment of the asset. Amounts charged to expense
for research and development of computer software were not
material in the periods indicated.

Income
Taxes.Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

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Realization of deferred tax assets associated
with the Companys future deductible temporary differences
and net operating loss carryforwards is dependent upon
generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured,
management believes it is more likely than not that the deferred
tax assets will be realized through future taxable income. On a
quarterly basis, management assesses whether it remains more
likely than not that the deferred tax assets will be realized.

Results of Operations

The following table sets forth, for the periods
indicated, selected statement of operations data as a percentage
of revenues:

|                                             |  |              |       |    |      |  |       |      |  |  |       |  
|-------------------------------------------- |  | ------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | -
|                                             |  |             
|                                             |  | Years Ended  |      
|                                             |  | December 31, |      
|                                             |  |              |      
|                                             |  | 2000         |       |    | 2001 |  |       | 2002 | 
|Revenues                                     |  |              | 100.0 | %  |      |  | 100.0 | %    |  |  | 100.0 | %
|Cost of revenues                             |  |              | 73.5  |    |      |  | 71.8  |      |  |  | 74.4  |  
|                                             |  |              |       |    |      |  |       |      | 
|Gross profit                                 |  |              | 26.5  |    |      |  | 28.2  |      |  |  | 25.6  |  
|Selling, general and administrative expenses |  |              | 34.2  |    |      |  | 28.4  |      |  |  | 25.1  |  
|Restructuring, merger costs and other        |  |              | 5.1   |    |      |  | 5.8   |      |  |  | 0.3   |  
|                                             |  |              |       |    |      |  |       |      | 
|Income (loss) from continuing operations     |  |              | (12.8 | )% |      |  | (6.0  | )%   |  |  | 0.2   | %

2002 Compared to 2001

Revenues.Our
revenues decreased 5.4% to $383.1 million for fiscal 2002
compared to $404.7 million in fiscal 2001. This decrease
was largely attributable to slower demand caused by current
economic conditions, longer sales cycles, and lower bill rates
offset by revenue from PDA Software Services, Inc. (PDA)
representing 3.2% of revenue for the year ended
December 31, 2002. PDA was acquired on May 31, 2002.
For the year ended December 31, 2002, over 90% of our
revenues were generated from existing clients from the previous
year.

Gross
Profit.Gross profit consists of
revenues less cost of revenues. Cost of revenues consists
primarily of salaries (including nonbillable and training time),
benefits, travel and relocation for IT professionals. In
addition, cost of revenues includes depreciation and
amortization, direct facility costs, delivery management, and
contractual services. Gross profit decreased 13.9% to
$98.2 million in fiscal 2002 from $114.1 million in
fiscal 2001. Gross profit as a percentage of revenue decreased
from 28.2% in fiscal 2001 to 25.6% in fiscal 2002. These
decreases in gross profit and gross profit as a percentage of
revenues are primarily due to lower bill rates in the U.S. and
India resulting from increased market pressures, changes in
project mix and project phase, start-up costs on large new
projects, and the process to transition from onshore to offshore
delivery.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses consist primarily of costs associated
with our direct selling and marketing efforts, human resource
and recruiting departments, administration and indirect facility
costs. Selling, general and administrative expenses decreased
16.3% to $96.2 million in fiscal 2002 compared to
$115.0 million in fiscal 2001. As a percentage of revenues,
selling, general and administrative expenses decreased from
28.4% in fiscal 2001 to 25.1% in fiscal 2002. These decreases
are primarily due to close management of spending through
targeted actions in fiscal 2002, as well as the impact of
eliminating approximately $.6 million of goodwill
amortization resulting from the adoption of SFAS 142.
Selling, general and administrative expenses for the year ended
December 31, 2002 includes an approximate $1.2 million
charge for an operating lease which management determined was no
longer needed; $.6 million in severance associated with the
elimination of certain senior level positions; and $.8 million
for other legal costs including non-recurring expenses incurred
by a special committee of independent directors of our Board of
Directors in connection with the possible acquisition of all of
our outstanding Common Stock by an existing shareholder at a
price exceeding the current market price. These discussions were
terminated.

Other Expense
(Income).Other expense (income)
represents interest earned on cash equivalents, net of interest
expense on borrowings. Other income for fiscal 2002 was
$4.1 million compared to $5.5 million in

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fiscal 2001. The decrease is primarily due to
lower interest rates earned on the investment of funds and
reduced cash balances during the year.


Provision for Income
Taxes.The provision for income
taxes for fiscal 2002 was $.9 million compared to a benefit
for income taxes for fiscal 2001 of $8.5 million. During
fiscal 2002, we incurred taxable income in India which was
partially offset by tax losses in the United States. The
tax losses in the United States are in excess of tax
carrybacks. We benefited tax losses in the United States as
we expect to realize tax assets through future U.S. taxable
income. The effective rate for 2002 is the result of a lower tax
rate in India versus the United States.

2001 Compared to 2000

Revenues.Our
revenues decreased 3.6% to $404.7 million for fiscal 2001
from $419.6 in fiscal 2000. This decline in revenues is
primarily due to the continued soft U.S. economy and
elongated sales cycles as well as to the delay of some contracts
due to financial uncertainties felt by some of our clients. For
the year ended December 31, 2001, over 90% of our revenues
were generated from existing clients from the previous fiscal
year.

Gross
Profit.Gross profit increased
2.5% to $114.1 million in fiscal 2001 from
$111.3 million in fiscal 2000. Gross profit as a percentage
of revenues increased to 28.2% for fiscal 2001 from 26.5% in
fiscal 2000. The increase in gross profit and gross profit as a
percentage of revenues are due to increased utilization rates in
both the U.S. and India, an increased proportion of our
professional services being performed in India, and an increase
in the percentage of revenue from fixed-price engagements.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased 19.9% to $115.0 million
in fiscal 2001 from $143.5 million in fiscal 2000. As a
percentage of revenues, selling, general and administrative
expenses decreased to 28.4% in fiscal 2001 from 34.2% in fiscal
2000. This decrease is primarily due to the actions in 2000 to
write-down approximately $23.0 million of accounts
receivable from dot.com companies which had become uncollectible
as well as the write-down of approximately $15.3 million of
goodwill that we determined was no longer realizable. In 2001,
we continued to enhance our selling and marketing capabilities
and completed our branding campaign.

Other Expense
(Income).Other income for fiscal
2001 was $5.5 million compared to $6.1 million in
fiscal 2000. This decrease is primarily due to lower interest
rates earned on the investment of funds.

Benefit for Income
Taxes.During fiscal 2001 we
incurred substantial tax losses in the United States offset
partially by taxable income in India. The tax losses in the
United States are in excess of tax carrybacks. We benefit tax
losses and expect to realize tax assets through tax loss
carry-back and future U.S. taxable income. The effective tax
rate for the year is the result of a lower tax rate in India
versus the U.S.

Discontinued Operations and Gain on Sale of
Discontinued Operations

In June 2000, our board of directors adopted a
plan to sell the operations of our contract programming services
subsidiary, Synova, Inc. (Synova). Accordingly, the accompanying
consolidated financial statements have been reclassified to
reflect Synova as a discontinued operation. The net operating
results of Synova have been reported, net of income taxes, as
income (loss) from discontinued operations in the
accompanying consolidated statements of operations for all years
presented. The net cash flows of Synova have been included in
cash used in discontinued operations in the
accompanying consolidated statements of cash flows for all years
presented.

On September 28, 2000, we sold Synova to a
related party in exchange for 750,000 shares of our Common
Stock, which was determined to be the fair market value.

As a result of this exchange, we recorded a gain
on the sale of a discontinued operation of $6.1 million,
net of income taxes, in the accompanying consolidated statements
of operations.

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Restructuring, Merger and Other Related
Charges

In fiscal 2002, restructuring and other costs of
$1.3 million were recorded for severance and costs
associated with the reduction of 30 employees, including
employees from executive management and certain business units.

In fiscal 2001, the Company recorded
restructuring and other costs of $23.7 million, consisting
of the following:

|                                                                                                                           |  |   |      | 
|-------------------------------------------------------------------------------------------------------------------------- |  | - | ---- | 
|Write-down resulting from the disposal of an
    equity investment and related note receivable, plus transaction
    costs |  | $ | 14.7 | 
|Severance costs                                                                                                            |  |   | 5.3  | 
|Termination of lease obligations associated with
    consolidation of facilities                                           |  |   | 0.9  | 
|Discontinued acquisition discussions                                                                                       |  |   | 1.7  | 
|Other                                                                                                                      |  |   | 1.1  | 
|                                                                                                                           |  |   |     
|                                                                                                                           |  | $ | 23.7 | 
|                                                                                                                           |  |   |     

In fiscal 2000, we recorded restructuring and
other costs of $21.5 million, consisting of the following:

|                                                                                 |  |   |      | 
|-------------------------------------------------------------------------------- |  | - | ---- | 
|Severance costs                                                                  |  | $ | 8.8  | 
|Termination of lease obligations associated with
    consolidation of facilities |  |   | 5.8  | 
|Write-off of assets due to change in strategic
    direction                     |  |   | 2.9  | 
|Other                                                                            |  |   | 4.0  | 
|                                                                                 |  |   |     
|                                                                                 |  | $ | 21.5 | 
|                                                                                 |  |   |     

Related Party Transactions

Synova is an IT professional services
organization owned by a co-chairman of our Board of Directors.
For the year ended December 31, 2002, we provided services
to Synova totaling approximately $4.6 million. In addition,
Synova provided services to Covansys, for the year ended
December 31, 2002, totaling approximately $4.1 million. The
net balance due Covansys from Synova at December 31, 2002
was $.2 million. In addition, under the terms of a note
payable, Synova owes Covansys $8 million. The note is due in
September 2005, and interest is being paid quarterly in
accordance with its terms.

We paid approximately $.3 million, $.9 million
and $1.1 million to Clayton, Dubilier and Rice, Inc. (CDR), a
shareholder, for financial, management advisory, and executive
management services for the years ended December 31, 2000,
2001 and 2002, respectively.

In 2002, we entered into a ten year agreement to
provide IT outsourcing services to SIRVA, Inc., a company
related through common ownership by CDR. During the year ended
December 31, 2002, services provided by Covansys to SIRVA,
Inc. totaled approximately $2.8 million.

During the year ended December 31, 2002, we
provided IT services totaling $.2 million to Acterna
Corporation, a company related through common ownership by CDR.

We paid approximately $.7 million, $1.1 million
and $.2 million during the years ended December 31, 2000,
2001, and 2002, respectively, for merger and acquisition
consulting services provided by the Chesapeake Group, Inc., a
company owned by a director.

Praja, Inc. (Praja) is an information technology
professional services organization owned in part by a
co-chairman of our Board of Directors. During the year ended
December 31, 2002, we provided services to Praja totaling
$.1 million. In addition, during the year ended
December 31, 2002, Praja provided services and software to
Covansys totaling $.2 million.

15



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##### Table of Contents



We have a note receivable of $.6 million from a
director. This note bears interest at 8.25% and is due in
December 2006.

New Accounting Pronouncements

In April 2002, the FASB issued SFAS
No. 145 Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss
be evaluated for extraordinary classification under the criteria
of Accounting Principles Board No. 30 Reporting
Results of Operations. This statement also requires
sales-leaseback accounting for certain lease modifications that
have economic effects that are similar to sales-leaseback
transactions, and makes various other technical corrections to
existing pronouncements. This statement will be effective for
Covansys for the year ending December 31, 2003. The
adoption of this statement will not have a material effect on
our results of operations or financial position.

In July 2002, the FASB issued SFAS
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities. This statement requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of the commitment to
an exit or disposal plan. This statement will be effective for
Covansys for any exit or disposal activities initiated after
December 31, 2002. The adoption of this statement will
principally impact the ultimate timing of when activities are
recorded as expense.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and
107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of FASB Statement
No. 5, Accounting for Contingencies (FAS 5), relating
to the guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. Certain disclosure
requirements of FIN 45 are included in these consolidated
financial statements while the accounting requirements of
FIN 45 are effective January 1, 2003. While we have
not yet completed our evaluation of FIN 45, we do not
expect the adoption of FIN 45 to have a material effect on
our results of operations or financial position.

In December 2002, the FASB issued SFAS
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS
No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock
based compensation.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 provides guidance
on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights, which are referred to as variable-interest entities
(VIEs). FIN 46 is effective for Covansys for
the year ending December 31, 2003. While we have not yet
completed the evaluation of FIN 46, we do not expect the
adoption of FIN 46 to have a material effect on our results
of operations or financial position.

Liquidity and Capital Resources

As of December 31, 2002, we had cash and
short-term investments totaling $101.0 million. We generally
fund our operations and working capital needs through internally
generated funds. Cash provided by (used in) operating activities
was $(3.3) million, $18.3 million and
$16.0 million for the years ended December 31, 2000,
2001 and 2002, respectively. The improvement in cash provided by
operations in 2001 and 2002, from 2000, is primarily due to
improved operating income and the receipt of tax refunds in 2002.

The principal use of cash for investing
activities during the three years ended December 31, 2002
was for the purchase of property and equipment, primarily as
part of the development and enhancement of our offshore software
development centers, the acquisition of PDA, the purchase of
investment securities available

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##### Table of Contents



for sale and the payment of the
$13.6 million loan guarantee, which was related to the
investment in an affiliated management consulting firm (see
Note 1 Organization and Summary of Significant
Accounting Policies  Investments of the Notes
to Consolidated Financial Statements included in Item 8 of
this Form 10-K.)


To facilitate future cash flow needs, we have an
arrangement with a commercial bank, where we may borrow an
amount not to exceed $20.0 million with interest at the
banks prime interest rate, or the LIBOR rate plus
1 1/4%. $15.0 million of the $20.0 million is available for
standby letters of credit. As of December 31, 2002, we had
$5.3 million of standby letters of credit outstanding as
collateral for two performance bonds. Borrowings under this
facility are short-term, payable on demand and are
collateralized by all assets. During the three year period ended
December 31, 2002, we have not had any significant average
balances outstanding under this arrangement.

Net cash provided by (used in) financing
activities was $81.3 million, $(12.8) million and
$(5.9) million for years ended December 31, 2000, 2001
and 2002, respectively. The change in cash provided by financing
activities in 2000 was primarily due to the funds received in
connection with the issuance of Convertible Redeemable Preferred
Stock in 2000 of $185.7 million. A significant use of cash
in financing activities was for the repurchase of our Common
Stock. During the years ended December 31, 2000, 2001 and
2002, we repurchased 7,663,600, 1,482,700 shares and
1,124,376 shares, respectively, of our Common Stock, for
$111.8 million, $14.5 million and $6.6 million,
respectively.

Most of our revenues are billed in U.S. dollars.
We recognize transaction gains and losses in the period of
occurrence. Foreign currency fluctuations in 2000, 2001 and 2002
did not have a material impact on income (loss) from operations
as currency fluctuations on revenue denominated in a foreign
currency were offset by currency fluctuations on expenses
denominated in a foreign currency. There were no material
operating trends or effects on liquidity as a result of
fluctuations in the functional currency. We do not use
derivatives to hedge against foreign currency fluctuations, nor
do we speculate in foreign currency.

Revenues generated by our India and Asia
operations, including development centers, from both direct
services provided to clients in India and Asia as well as
services provided to customers in the United States, accounted
for 16.1% of our total 2002 revenues. In addition, services
provided by our other international operations, primarily in
Europe, accounted for 5.1% of our total revenues.

Inflation did not have a material impact on our
revenues or income (loss) from operations in fiscal years 2000,
2001 and 2002.

Factors That May Affect Future
Results

Failure to Recruit, Train and Retain Skilled
IT Professionals Could Increase Costs or Limit Growth

Our continued success depends upon our ability to
attract, develop, motivate and retain highly skilled IT
professionals and project managers with the necessary technical
skills and experience who may be in high demand worldwide. We
cannot be certain that we will be able to attract or retain the
IT professionals that we seek.

Failure to Properly Manage Acquisitions and
Strategic Investments

We have expanded, and plan to continue to expand
our operations through acquisitions of additional businesses.

Acquisitions involve a number of special risks,
including:

 Diversion of managements
attention;

 Failure to retain key personnel of
the acquired business;

 Assumption of unanticipated legal
liabilities and other problems; and

 Difficulties in integrating systems,
operations and cultures

17



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We have previously made investments in start-up
companies that have the potential to be successful and to
complement our current business. Investing in these companies is
a highly risky strategy. These companies frequently have a
limited operating history, unproven business plans and are
exposed to high start-up costs.

Variability of Operating Results

Our revenues and operating results can vary from
quarter to quarter depending on a number of factors, including:

 The timing and number of client
projects commenced and completed during a quarter;

 Employee hiring, attrition,
utilization and billing rates; and

 Progress on fixed-price projects
during a quarter;

Because a high percentage of our expenses are
fixed, such as personnel and facilities costs, a variation in
revenues may cause a significant variation in our quarterly
operating results and could result in losses.

Our Fixed-Price Projects Expose us to Cost
Overrun Risks

We realized approximately 32% and 42% of our
revenues from fixed-price projects during the years ended
December 31, 2001 and 2002, respectively. Significant cost
overruns can occur if we fail to:

 Adequately estimate the resources
required to complete a project;

 Properly determine the scope of an
engagement; or

 Complete our contractual obligation
in a manner consistent with the project plan.

We cannot be certain that any of our existing or
future fixed-price projects will be profitable.

Exposure to Regulatory, Political and General
Economic Conditions in India and Asia

Revenues generated by our India and Asia
operations from both direct services provided to clients in
India and Asia as well as services provided to customers in the
United States accounted for 16.1% of our 2002 revenues. In
addition, approximately 35% of our workforce was located in
India and Asia. We benefit directly from certain incentives
provided by the Indian government to encourage foreign
investment, including tax holidays (temporary exemptions from
taxation on operating income) and liberalized import and export
duties. If the Indian government changes any of these
incentives, it could negatively impact the profitability of our
Indian operations.

India has experienced significant inflation and
shortages of foreign exchange, and is subject to civil unrest
and acts of terrorism. Changes in interest rates, inflation
rates, tax rates and policies, or other social, political,
economic or diplomatic developments affecting India in the
future could have an adverse effect on our business.

We Operate in Highly Competitive
Markets

The IT services industry is highly competitive,
undergoing consolidation and is served by many national,
regional and local firms, all of which are either existing or
potential competitors. Many of our competitors have
substantially greater resources and greater name recognition
than we do. In addition, there are relatively few barriers to
entry into our markets. We have faced, and we expect to continue
to face, additional competition from new entrants into our
markets as well as intensive pricing pressures from that
competition. We cannot be certain that we will be able to
compete successfully with existing or new competitors.

Our Contracts are Short-Term and Contain
Termination Provisions

Although the terms of our contracts with clients
range from 90 days to 10 years, a typical contract
with a client has a term of less than one year. A client may
choose not to renew its contract when it terminates. Under our
contracts, clients may unilaterally reduce the use of our
services with little or no notice and without

18



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##### Table of Contents



penalty. Many of our contracts have termination
provisions and contracts with our public sector state and local
clients typically allow for termination for convenience which is
required by law. If we are unable to retain our existing
clients, our business could be adversely affected. An
unanticipated termination of a major project could result in a
loss of revenues and could require us to pay a number of
unassigned IT professionals until new engagements can be
obtained.


Some of Our Clients May Experience Unique
Economic Conditions that are Specific to Their Particular
Industry

We provide services to clients in a wide variety
of industries. Many of the industries are subject to factors and
economic conditions that are unique to the particular industry
and may not be reflected in the overall health of the economy in
general. Our revenue growth and the realizability of our
accounts receivable could be adversely affected if our clients
in these particular industries encounter economic difficulties.
Such difficulties could include:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | the inability of participants in the industry to
    access the capital or credit markets;
|
| |  | business slowdowns due to excess inventory; and                                           
|
| |  | shortfalls in demand for the product or service
    produced by a particular industry.    

In addition, we provide services to state and
local governments which may be subject to budget constraints
which could result in the termination of our contract.

Limited Protection of Intellectual Property
Rights

Our success depends in part upon certain of our
solutions and methodologies that we utilize in providing IT
services to our clients. We rely upon a combination of
nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect our proprietary
rights and the proprietary rights of third parties from whom we
license intellectual property. However, these may not be
adequate to protect our rights.

Item 7A. Quantitative and
Qualitative Disclosure About Market Risk

We are exposed to market risk for the effect of
foreign currency fluctuations and interest rate changes.
Information relating to quantitative and qualitative disclosure
about market risk is set forth below and in Item 7 of this
Form 10-K  Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

Foreign Exchange Risk

Most of our revenues are billed in U.S. dollars.
We recognize transaction gains and losses in the period of
occurrence. Foreign currency fluctuations in 2000, 2001 and 2002
did not have a material impact on income (loss) from operations
as currency fluctuations on revenue denominated in a foreign
currency were offset by currency fluctuations on expenses
denominated in a foreign currency. We do not generally use
derivatives to hedge against foreign currency fluctuations, nor
do we speculate in foreign currency.

Revenues generated by our India and Asia
operations, including development centers, from both direct
services provided to clients in India and Asia as well as
services provided to customers in the United States,
accounted for 16.1% of our total 2002 revenues. In addition,
services provided by our other international operations,
primarily in Europe, accounted for 5.1% of our total revenues.

Interest Rate Risk

Our exposure to market risk for changes in
interest rates relates primarily to our cash and short-term
investment portfolio, which was $101.0 million as of
December 31, 2002. All of our short-term investments are
designated as available-for-sale and, accordingly, are presented
at fair value in the consolidated balance sheet. A portion of
our short term investments are in mutual funds. Mutual funds may
have their fair market value adversely affected due to a rise in
interest rates, and we may suffer losses in principal if forced
to sell securities that have declined in market value due to
changes in interest rates.

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##### Table of Contents



Item 8. Financial Statement and
Supplementary Data

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Covansys Corporation:

In our opinion, the accompanying consolidated
balance sheet and the related consolidated statements of
operations, shareholders equity and cash flows present
fairly, in all material respects, the financial position of
Covansys Corporation and its subsidiaries at December 31,
2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion. The financial statements of Covansys
Corporation as of December 31, 2001, and for each of the
two years in the period ended December 31, 2001, prior to
the revisions described in Note 4, were audited by other
independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on
those financial statements in their report dated
January 31, 2002.

As described in Note 4 to the financial
statements, the Company changed its method of accounting for
goodwill effective January 1, 2002.

As discussed above, the financial statements of
Covansys Corporation as of December 31, 2001, and for each
of the two years in the period ended December 31, 2001,
were audited by other independent accountants who have ceased
operations. As described in Note 4, these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of
January 1, 2002. We audited the transitional disclosures
described in Note 4. In our opinion, the transitional
disclosures in Note 4 for 2001 and 2000 are appropriate.
However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a
whole.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

February 4, 2003


20



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##### Table of Contents



The following report is a copy of a report
previously issued by Arthur Andersen LLP and has not been
reissued by Arthur Andersen LLP. As explained in Note 4,
the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142) and has presented
the transitional disclosures for 2001 and 2000 required by SFAS
No. 142. The Arthur Andersen LLP report does not extend to
these changes to the 2001 and 2000 consolidated financial
statements. The adjustments to the 2001 and 2000 consolidated
financial statements were reported on by PricewaterhouseCoopers
LLP as stated in their report appearing herein.

To Covansys Corporation:

We have audited the accompanying consolidated
balance sheets of Covansys Corporation (a Michigan corporation
formerly named Complete Business Solutions, Inc.) and
subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations,
shareholders equity and cash flows for each of the
three years in the period ended December 31, 2001.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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 that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Covansys Corporation and subsidiaries as of
December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Detroit, Michigan

January 31, 2002


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COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


|                            |                                           |                                 |              |         |         |         |        |         |         |         | 
|--------------------------- | ----------------------------------------- | ------------------------------- | ------------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                            |                                           |                                
|                            |                                           | December 31,                    |             
|                            |                                           |                                 |             
|                            |                                           | 2001                            |              |         | 2002    |        
|                            |                                           |                                 |              |         |         |        
|                            |                                           |                                
|                            |                                           | (Dollars in thousands)          |             
|ASSETS                      |                                           |                                
|Current assets:             |                                           |                                 |              |         |         |         |        |        
|                            | Cash and cash equivalents                 |                                 | $            | 123,755 |         |         | $      | 87,742  |        
|                            | Short term investments                    |                                 |              |        |         |         |        | 13,263  |        
|                            |                                           |                                 |              |         |         |        
|                            |                                           | Cash and short term investments |              |         | 123,755 |         |        |         | 101,005 |        
|                            | Accounts receivable, net                  |                                 |              | 69,391  |         |         |        | 69,290  |        
|                            | Revenue earned in excess of billings, net |                                 |              | 30,755  |         |         |        | 42,500  |        
|                            | Deferred taxes                            |                                 |              | 7,824   |         |         |        | 4,235   |        
|                            | Prepaid expenses and other                |                                 |              | 5,101   |         |         |        | 6,107   |        
|                            |                                           |                                 |              |         |         |        
|                            | Total current assets                      |                                 |              | 236,826 |         |         |        | 223,137 |        
|                            |                                           |                                 |              |         |         |        
|Property and equipment, net |                                           |                                 | 32,560       |         |         |         | 36,422 |        
|Computer software, net      |                                           |                                 | 1,981        |         |         |         | 6,958  |        
|Goodwill, net               |                                           |                                 | 10,691       |         |         |         | 17,053 |        
|Deferred taxes              |                                           |                                 | 2,891        |         |         |         | 9,432  |        
|Other assets, net           |                                           |                                 | 12,674       |         |         |         | 12,272 |        
|                            |                                           |                                 |              |         |         |        
|                            |                                           |                                 | Total assets |         | $       | 297,623 |        |         | $       | 305,274 | 
|                            |                                           |                                 |              |         |         |        

|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |         |         |        |        |         | 
|------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | ------ | ------- | ------- | ------ | ------ | ------- | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                 |                                                                                                                                                                           |                           |                                            |        
|Current liabilities:                                                                                                                 |                                                                                                                                                                           |                           |                                            |         |        |         |         |       
|                                                                                                                                     | Accounts payable                                                                                                                                                          |                           | $                                          | 10,127  |        |         | $       | 10,754 |       
|                                                                                                                                     | Accrued payroll and related costs                                                                                                                                         |                           |                                            | 29,650  |        |         |         | 23,063 |       
|                                                                                                                                     | Other accrued liabilities                                                                                                                                                 |                           |                                            | 9,495   |        |         |         | 24,310 |       
|                                                                                                                                     | Deferred revenue                                                                                                                                                          |                           |                                            | 397     |        |         |         | 627    |       
|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |        
|                                                                                                                                     |                                                                                                                                                                           | Total current liabilities |                                            |         | 49,669 |         |         |        | 58,754 |        
|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |        
|Other liabilities                                                                                                                    |                                                                                                                                                                           |                           | 225                                        |         |        |         | 128     |       
|Commitments and contingencies                                                                                                        |                                                                                                                                                                           |                           |                                            |         |        |         |         |       
|Convertible redeemable preferred stock, no par
    value, 200,000 shares issued and outstanding as of
    December 31, 2001 and 2002 |                                                                                                                                                                           |                           | 159,924                                    |         |        |         | 164,222 |       
|Shareholders equity:                                                                                                                |                                                                                                                                                                           |                           |                                            |         |        |         |         |       
|                                                                                                                                     | Preferred stock, no par value, 1,000,000 shares
    authorized, 200,000 issued as convertible redeemable preferred
    stock                                              |                           |                                            |        |        |         |         |       |       
|                                                                                                                                     | Common stock, no par value, 200,000,000 shares
    authorized, 28,254,850 and 27,221,049 shares issued and
    outstanding as of December 31, 2001 and 2002, respectively |                           |                                            |        |        |         |         |       |       
|                                                                                                                                     | Additional paid-in capital                                                                                                                                                |                           |                                            | 108,946 |        |         |         | 98,631 |       
|                                                                                                                                     | Retained earnings (deficit)                                                                                                                                               |                           |                                            | (12,230 | )      |         |         | (8,345 | )     
|                                                                                                                                     | Stock subscriptions receivable                                                                                                                                            |                           |                                            | (2,362  | )      |         |         | (2,218 | )     
|                                                                                                                                     | Accumulated other comprehensive loss                                                                                                                                      |                           |                                            | (6,549  | )      |         |         | (5,898 | )     
|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |        
|                                                                                                                                     |                                                                                                                                                                           |                           | Total shareholders equity                 |         |        | 87,805  |         |        |        | 82,170  | 
|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |        
|                                                                                                                                     |                                                                                                                                                                           |                           | Total liabilities and shareholders equity |         | $      | 297,623 |         |        | $      | 305,274 | 
|                                                                                                                                     |                                                                                                                                                                           |                           |                                            |         |        |        

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

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |         |   |         |        |        |  
|---------------------------------------------------------------- | ----------------------------------- | -------------------------------------------------------------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------ | -
|                                                                 |                                     |                                                                                             
|                                                                 |                                     | Year Ended December 31,                                                                      |        
|                                                                 |                                     |                                                                                              |        
|                                                                 |                                     | 2000                                                                                         |         |        | 2001    |   |         | 2002   |        
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     |                                                                                             
|                                                                 |                                     | (In thousands, except per share data)                                                        |        
|Revenues                                                         |                                     | $                                                                                            | 419,641 |        |         | $ | 404,734 |        |         | $ | 383,053 |       
|Cost of revenues                                                 |                                     |                                                                                              | 308,299 |        |         |   | 290,651 |        |         |   | 284,853 |       
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Gross profit                                                                                 |         |        | 111,342 |   |         |        | 114,083 |   |         |        | 98,200 |  
|Selling, general and administrative expenses                     |                                     |                                                                                              | 143,467 |        |         |   | 115,011 |        |         |   | 96,221  |       
|Restructuring, merger costs and other                            |                                     |                                                                                              | 21,507  |        |         |   | 23,665  |        |         |   | 1,324   |       
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Income (loss) from continuing operations                                                     |         |        | (53,632 | ) |         |        | (24,593 | ) |         |        | 655    |  
|Other expense (income)                                           |                                     |                                                                                              | (6,060  | )      |         |   | (5,531  | )      |         |   | (4,110  | )     
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Income (loss) from continuing operations before
    provision
    (benefit) for income taxes |         |        | (47,572 | ) |         |        | (19,062 | ) |         |        | 4,765  |  
|Provision (benefit) for income taxes                             |                                     |                                                                                              | (11,255 | )      |         |   | (8,544  | )      |         |   | 880     |       
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Net income (loss) from continuing operations                                                 |         |        | (36,317 | ) |         |        | (10,518 | ) |         |        | 3,885  |  
|Loss from discontinued operations, net of income
    taxes       |                                     |                                                                                              | (1,692  | )      |         |   |        |        |         |   |        |       
|Gain on sale of discontinued operations, net of
    income taxes |                                     |                                                                                              | 6,072   |        |         |   |        |        |         |   |        |       
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Net income (loss)                                                                            |         |        | (31,937 | ) |         |        | (10,518 | ) |         |        | 3,885  |  
|Beneficial conversion feature                                    |                                     |                                                                                              | (23,651 | )      |         |   |        |        |         |   |        |       
|Convertible redeemable preferred stock dividends                 |                                     |                                                                                              | (2,569  | )      |         |   | (4,265  | )      |         |   | (4,298  | )     
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|                                                                 |                                     | Net loss available for common shareholders                                                   |         | $      | (58,157 | ) |         | $      | (14,783 | ) |         | $      | (413   | )
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|Basic and diluted earnings (loss) per share                     |                                     |                                                                                              |         |        |         |   |         |        |         |   |         |       
|                                                                 | Weighted average shares outstanding |                                                                                              |         | 32,892 |         |   |         | 28,704 |         |   |         | 27,734 |       
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|From continuing operations                                       |                                     | $                                                                                            | (1.10   | )      |         | $ | (0.37   | )      |         | $ | 0.14    |       
|From discontinued operations                                     |                                     |                                                                                              | (0.05   | )      |         |   |        |        |         |   |        |       
|From gain on sale of discontinued operations                     |                                     |                                                                                              | 0.18    |        |         |   |        |        |         |   |        |       
|From beneficial conversion feature and dividends                 |                                     |                                                                                              | (0.80   | )      |         |   | (0.14   | )      |         |   | (0.15   | )     
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        
|Basic and diluted loss per share                                 |                                     | $                                                                                            | (1.77   | )      |         | $ | (0.51   | )      |         | $ | (0.01   | )     
|                                                                 |                                     |                                                                                              |         |        |         |   |         |        |        

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

23



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |   |        |        |   |   |         |          |  
|--------------------------- | ------------------------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | - | ------- | --------- | - | ----------- | ------------- | ------- | - | ------------- | ------ | ------ | ------------- | - | ------ | ------ | - | - | ------- | -------- | -
|                            |                                                                     |                        |            |            |            |   |         |           |   | Accumulated |               |         |  
|                            |                                                                     | Common Stock           |            |            | Additional |   |         | Retained  |   |             | Stock         |         |   | Other         |        |        | Total         |  
|                            |                                                                     | Shares                 |            |            | Paid-in    |   |         | Earnings  |   |             | Subscriptions |         |   | Comprehensive |        |        | Shareholders |  
|                            |                                                                     | Outstanding            |            |            | Capital    |   |         | (Deficit) |   |             | Receivable    |         |   | Loss          |        |        | Equity        |  
|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |  
|                            |                                                                     |                       
|                            |                                                                     | (Dollars in thousands) |           
|Balance  December 31, 1999 |                                                                     |                        | 37,494,446 |            |            | $ | 182,816 |           |   | $           | 60,709        |         |   | $             | (5,599 | )      |               | $ | (1,509 | )      |   | $ | 236,417 |         
|                            | Net loss                                                            |                        |            |           |            |   |         |          |   |             |               | (31,937 | ) |               |        |       |               |   |        |       |   |   |         | (31,937  | )
|                            | Currency translation adjustment (loss)                              |                        |            |           |            |   |         |          |   |             |               |        |   |               |        |       |               |   |        | (2,901 | ) |   |         | (2,901   | )
|                            | Stock options exercised                                             |                        |            | 420,103    |            |   |         | 4,193     |   |             |               |        |   |               |        | (1,005 | )             |   |        |       |   |   |         | 3,188    |  
|                            | Repayment of stock subscriptions receivable                         |                        |            |           |            |   |         |          |   |             |               |        |   |               |        | 3,428  |               |   |        |       |   |   |         | 3,428    |  
|                            | Issuances of common stock                                           |                        |            | 76,479     |            |   |         | 724       |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         | 724      |  
|                            | Beneficial conversion feature                                       |                        |            |           |            |   |         |          |   |             |               | (23,651 | ) |               |        |       |               |   |        |       |   |   |         | (23,651  | )
|                            | Issuance of warrants                                                |                        |            |           |            |   |         | 56,306    |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         | 56,306   |  
|                            | Convertible redeemable preferred stock dividend                     |                        |            |           |            |   |         |          |   |             |               | (2,568  | ) |               |        |       |               |   |        |       |   |   |         | (2,568   | )
|                            | Receipt of common stock for
    sale of discontinued
    operations |                        |            | (750,000   | )          |   |         | (10,080   | ) |             |               |        |   |               |        |       |               |   |        |       |   |   |         | (10,080  | )
|                            | Repurchases of common
    stock                                     |                        |            | (7,663,600 | )          |   |         | (111,820  | ) |             |               |        |   |               |        |       |               |   |        |       |   |   |         | (111,820 | )
|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |  
|Balance  December 31, 2000 |                                                                     |                        | 29,577,428 |            |            |   | 122,139 |           |   |             | 2,553         |         |   |               | (3,176 | )      |               |   | (4,410 | )      |   |   | 117,106 |         
|                            | Net loss                                                            |                        |            |           |            |   |         |          |   |             |               | (10,518 | ) |               |        |       |               |   |        |       |   |   |         | (10,518  | )
|                            | Currency translation adjustment (loss)                              |                        |            |           |            |   |         |          |   |             |               |        |   |               |        |       |               |   |        | (2,139 | ) |   |         | (2,139   | )
|                            | Stock options exercised                                             |                        |            | 28,878     |            |   |         | 159       |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         | 159      |  
|                            | Repayment of stock subscriptions receivable                         |                        |            |           |            |   |         |          |   |             |               |        |   |               |        | 814    |               |   |        |       |   |   |         | 814      |  
|                            | Issuances of common stock and other                                 |                        |            | 131,244    |            |   |         | 1,118     |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         | 1,118    |  
|                            | Convertible redeemable preferred stock dividend                     |                        |            |           |            |   |         |          |   |             |               | (4,265  | ) |               |        |       |               |   |        |       |   |   |         | (4,265   | )
|                            | Repurchases of common
    stock                                     |                        |            | (1,482,700 | )          |   |         | (14,470   | ) |             |               |        |   |               |        |       |               |   |        |       |   |   |         | (14,470  | )
|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |  
|Balance  December 31, 2001 |                                                                     |                        | 28,254,850 |            |            |   | 108,946 |           |   |             | (12,230       | )       |   |               | (2,362 | )      |               |   | (6,549 | )      |   |   | 87,805  |         
|                            | Net income                                                          |                        |            |           |            |   |         |          |   |             |               | 3,885   |   |               |        |       |               |   |        |       |   |   |         | 3,885    |  
|                            | Currency translation adjustment                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |   |        | 460    |   |   |         | 460      |  
|                            | Unrealized gains on short term investments                          |                        |            |           |            |   |         |          |   |             |               |        |   |               |        |       |               |   |        | 191    |   |   |         | 191      |  
|                            | Stock options exercised                                             |                        |            | 2,518      |            |   |         | 40        |   |             |               |        |   |               |        | (13    | )             |   |        |       |   |   |         | 27       |  
|                            | Repayment of stock subscriptions receivable                         |                        |            |           |            |   |         |          |   |             |               |        |   |               |        | 157    |               |   |        |       |   |   |         | 157      |  
|                            | Issuances of common stock and other                                 |                        |            | 88,057     |            |   |         | 526       |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         | 526      |  
|                            | Convertible redeemable preferred stock dividend                     |                        |            |           |            |   |         | (4,298    | ) |             |               |        |   |               |        |       |               |   |        |       |   |   |         | (4,298   | )
|                            | Repurchases of common
    stock                                     |                        |            | (1,124,376 | )          |   |         | (6,583    | ) |             |               |        |   |               |        |       |               |   |        |       |   |   |         | (6,583   | )
|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |  
|Balance  December 31, 2002 |                                                                     |                        | 27,221,049 |            |            | $ | 98,631  |           |   | $           | (8,345        | )       |   | $             | (2,218 | )      |               | $ | (5,898 | )      |   | $ | 82,170  |         
|                            |                                                                     |                        |            |            |            |   |         |           |   |             |               |         |   |               |        |        |               |  

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

24



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |         |         |        |         |  
|------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------- | ------- | ------- | ------- | ------ | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                                                                                      |                                                                                       |                                                                  
|                                                                                                                                      |                                                                                       | Year Ended December 31,                                           |                                                                  
|                                                                                                                                      |                                                                                       |                                                                   |                                                                  
|                                                                                                                                      |                                                                                       | 2000                                                              |                                                                   |                                                                                  | 2001    |         |         | 2002    |       
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|                                                                                                                                      |                                                                                       |                                                                  
|                                                                                                                                      |                                                                                       | (Dollars in thousands)                                            |                                                                  
|Cash flows provided by (used in) operating
    activities                                                                            |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |        
|Net income (loss)                                                                                                                     |                                                                                       | $                                                                 | (31,937                                                           | )                                                                                |         | $       | (10,518 | )       |        | $      | 3,885   |        
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities from
    continuing operations: |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |        
|                                                                                                                                      |                                                                                       | Depreciation and amortization                                     |                                                                   |                                                                                  | 11,967  |         |         |         | 11,516 |        |         |         | 14,890  |       
|                                                                                                                                      |                                                                                       | Provision for doubtful accounts                                   |                                                                   |                                                                                  | 19,849  |         |         |         | 1,626  |        |         |         | 815     |       
|                                                                                                                                      |                                                                                       | Write-down of goodwill, computer software and
    other assets    |                                                                   |                                                                                  | 23,481  |         |         |         |       |        |         |         |        |       
|                                                                                                                                      |                                                                                       | Write-down of equity investment and receivable
    from affiliate |                                                                   |                                                                                  |        |         |         |         | 19,384 |        |         |         |        |       
|                                                                                                                                      |                                                                                       | Benefit for deferred taxes                                        |                                                                   |                                                                                  | (7,031  | )       |         |         | (526   | )      |         |         | (1,163  | )     
|                                                                                                                                      |                                                                                       | Loss from discontinued operations                                 |                                                                   |                                                                                  | 1,692   |         |         |         |       |        |         |         |        |       
|                                                                                                                                      |                                                                                       | Non-cash gain on sale of discontinued operations                  |                                                                   |                                                                                  | (10,106 | )       |         |         |       |        |         |         |        |       
|                                                                                                                                      |                                                                                       | Change in assets and liabilities:                                 |                                                                   |                                                                                  |         |         |         |         |        |        |         |         |         |       
|                                                                                                                                      |                                                                                       |                                                                   | Accounts receivable and revenue earned in excess
    of billings  |                                                                                  |         | (20,741 | )       |         |        | 2,778  |         |         |         | (8,643 | )      
|                                                                                                                                      |                                                                                       |                                                                   | Prepaid expenses and other assets                                 |                                                                                  |         | (804    | )       |         |        | (644   | )       |         |         | 267    |        
|                                                                                                                                      |                                                                                       |                                                                   | Accounts payable, accrued payroll and related
    costs and other |                                                                                  |         | 9,675   |         |         |        | (4,015 | )       |         |         | 5,837  |        
|                                                                                                                                      |                                                                                       |                                                                   | Deferred revenue                                                  |                                                                                  |         | 637     |         |         |        | (1,257 | )       |         |         | 133    |        
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   | Net cash provided by (used in) operating
    activities of continuing operations |         |         | (3,318  | )       |        |        | 18,344  |         |         |        | 16,021  |  
|Cash flows used in investing
    activities                                                                                          |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |        
|                                                                                                                                      | Investment in property, equipment and other                                           |                                                                   |                                                                   | (11,895                                                                          | )       |         |         | (8,174  | )      |        |         | (16,058 | )      
|                                                                                                                                      | Payment of loan guarantee for affiliate and other                                     |                                                                   |                                                                   |                                                                                 |         |         |         | (13,608 | )      |        |         |        |        
|                                                                                                                                      | Investment in computer software                                                       |                                                                   |                                                                   | (3,580                                                                           | )       |         |         | (124    | )      |        |         | (1,021  | )      
|                                                                                                                                      | Investment in available-for-sale securities                                           |                                                                   |                                                                   |                                                                                 |         |         |         |        |        |        |         | (13,072 | )      
|                                                                                                                                      | Business acquisitions and investments, net of
    cash acquired                       |                                                                   |                                                                   | (11,653                                                                          | )       |         |         |        |        |        |         | (16,011 | )      
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   | Net cash used in investing activities of
    continuing operations               |         |         | (27,128 | )       |        |        | (21,906 | )       |         |        | (46,162 | )
|Cash flows provided by (used in) financing
    activities                                                                            |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |        
|                                                                                                                                      | Net proceeds from issuances of common stock and
    other                             |                                                                   |                                                                   | 724                                                                              |         |         |         | 969     |        |        |         | 526     |        
|                                                                                                                                      | Net proceeds from issuance of convertible
    redeemable preferred stock and warrants |                                                                   |                                                                   | 185,747                                                                          |         |         |         |        |        |        |         |        |        
|                                                                                                                                      | Net proceeds from exercise of stock options, net
    of tax benefit                   |                                                                   |                                                                   | 6,616                                                                            |         |         |         | 695     |        |        |         | 185     |        
|                                                                                                                                      | Repurchases of common stock                                                           |                                                                   |                                                                   | (111,820                                                                         | )       |         |         | (14,470 | )      |        |         | (6,583  | )      
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   | Net cash provided by (used in) financing
    activities of continuing operations |         |         | 81,267  |         |        |        | (12,806 | )       |         |        | (5,872  | )
|Cash used in discontinued operations                                                                                                  |                                                                                       |                                                                   | (1,934                                                            | )                                                                                |         |         |        |         |        |        |        |        
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|Increase (decrease) in cash and cash equivalents                                                                                      |                                                                                       |                                                                   | 48,887                                                            |                                                                                  |         |         | (16,368 | )       |        |        | (36,013 | )      
|Cash and cash equivalents at beginning of period                                                                                      |                                                                                       |                                                                   | 91,236                                                            |                                                                                  |         |         | 140,123 |         |        |        | 123,755 |        
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|Cash and cash equivalents at end of period                                                                                            |                                                                                       | $                                                                 | 140,123                                                           |                                                                                  |         | $       | 123,755 |         |        | $      | 87,742  |        
|                                                                                                                                      |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |       
|Supplemental disclosures of cash flow information:                                                                                    |                                                                                       |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |        
|                                                                                                                                      | Cash paid (received) during the period for:                                           |                                                                   |                                                                   |                                                                                  |         |         |         |         |        |        |         |         |        
|                                                                                                                                      |                                                                                       | Income taxes                                                      |                                                                   | $                                                                                | 4,224   |         |         | $       | 662    |        |         | $       | (10,339 | )     

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

25



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Dollars in thousands, except per share
data)

1. Organization and Summary of
Significant Accounting Policies

Operations

Covansys Corporation was founded in 1985.
Covansys Corporation and its wholly-owned subsidiaries (the
Company) provide information technology (IT) services worldwide
to large and mid-size organizations. The Company offers its
clients a focused range of IT services specializing in
industry-specific solutions, strategic outsourcing and
integration services. The Companys range of experience
runs from advising clients on IT business strategy and strategic
technology plans to developing and implementing appropriate IT
applications solutions. During 2001, the Company changed its
name to Covansys Corporation from Complete Business Solutions,
Inc.

Principles
of Consolidation and Organization

The consolidated financial statements include the
accounts of the Company and all of its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the accompanying
consolidated financial statements.

Foreign
Currency

For significant foreign operations, the local
currencies have been designated as the functional currencies.
The financial statements of these subsidiaries are translated
into U.S. dollars using exchange rates in effect at year end for
assets and liabilities and at the average exchange rate during
the year for revenues and expenses. The resulting foreign
currency translation adjustment is reflected as a separate
component of shareholders equity.

Transaction gains and losses, which were not
significant in the years presented, are reflected in the
consolidated statements of operations in other expense (income).

Comprehensive
Income (Loss)

Total comprehensive income (loss) is summarized
as follows:

|                                           |                                   |              |         |         |      |   |         |         |   |   |       |       | 
|------------------------------------------ | --------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | - | - | ----- | ----- | 
|                                           |                                   |             
|                                           |                                   | Year Ended   |        
|                                           |                                   | December 31, |        
|                                           |                                   |              |        
|                                           |                                   | 2000         |         |         | 2001 |   |         | 2002    |  
|                                           |                                   |              |         |         |      |   |         |         |  
|Net income (loss)                          |                                   | $            | (31,937 | )       |      | $ | (10,518 | )       |   | $ | 3,885 |      
|Currency translation adjustment            |                                   |              | (2,901  | )       |      |   | (2,139  | )       |   |   | 460   |      
|Unrealized gains on short term investments |                                   |              |        |         |      |   |        |         |   |   | 191   |      
|                                           |                                   |              |         |         |      |   |         |         |  
|                                           | Total comprehensive income (loss) |              | $       | (34,838 | )    |   | $       | (12,657 | ) |   | $     | 4,536 | 
|                                           |                                   |              |         |         |      |   |         |         |  

Cash
and Cash Equivalents

Cash and cash equivalents include investments in
highly liquid money market funds and commercial paper.

Short
Term Investments

Short term investments consist principally of
short-term mutual funds. The Company classifies such securities
as available-for-sale. Securities classified as
available-for-sale are required to be reported at fair value
with unrealized gains and losses, net of taxes, excluded from
earnings and shown separately as a

26



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


component of other comprehensive income within
shareholders equity. Realized gains and losses on the sale
of available-for-sale securities are determined using the
specific-identification method.

The unrealized gains on these investments
included in accumulated other comprehensive loss at
December 31, 2002, are as follows:

|                       |  |   |        | 
|---------------------- |  | - | ------ | 
|Fair value             |  | $ | 13,263 | 
|Cost                   |  |   | 13,072 | 
|Gross unrealized gains |  |   | 191    | 

Financial
Instruments

The fair values and carrying amounts of certain
of the Companys financial instruments, primarily accounts
receivable and payable and accrued liabilities are approximately
equivalent due to the short term nature of the instruments.

Investments

The Company accounts for certain investments in
common stock on the cost method. The Company continually
evaluates whether events and circumstances have occurred that
indicate a decline in the market value of the common stock is
judged to be other than temporary. When factors indicate that
the decline in market value is other than temporary, the cost
basis is written down to fair market value.

The Company had an equity investment in a
management consulting firm and also provided a guarantee of the
consulting firms bank debt. In the second quarter of 2001,
the Company determined that the equity investment did not fit
the strategic direction of the Company. In connection with that
determination, the Company also decided to terminate its
guarantee of the consulting firms bank debt. This decision
resulted in the Company being required to pay the bank debt in
the approximate amount of $13,600. In return, the Company
received a note receivable from the consulting firm in such
amount. On July 31, 2001, the Company entered into an
agreement with the consulting firm to terminate its ownership
interest, eliminate any future equity investments and reduce the
$13,600 note receivable to $1,400. The Company also agreed to
continue to guarantee a property lease for office space of the
consulting firm and assumed $250 of liabilities of the
consulting firm. Simultaneously with the closing of this
agreement the consulting firm paid $500 of the $1,400 note
receivable. Accordingly, during the second quarter of 2001, the
Company recorded a charge of $14,700 related primarily to the
impairment of the equity investment and note receivable and
related transaction fees recorded in restructuring, merger costs
and other in the accompanying statement of operations. During
the fourth quarter of 2002, the Company was required to perform
on its guarantee of the office space for the consulting firm. As
such, the Company recorded a charge of $1,200 which represented
the discounted net liability for the remaining term of the lease.

In the third and fourth quarter of 2000, the
Company determined that certain investments in the technology
sector had experienced declines in market value which were
judged to be other than temporary. As a result, the Company
recorded an adjustment of approximately $3,773 to reduce these
investments to their estimated fair market value. This
write-down is included in selling, general and administrative
expenses in the accompanying consolidated statements of
operations.

Goodwill

Goodwill represents the excess of cost over the
net tangible and identifiable intangible assets related to
businesses acquired and the acquisition of shares of a
subsidiary. Goodwill is carried at cost, less accumulated
amortization, and through December 31, 2001, was amortized
on a straight-line basis over periods ranging from 20 to 30
years. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that
the remaining balance

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


may not be recoverable. The Company tests for
impairment of its reporting units by comparing fair value to
carrying value. Fair value is determined using a discounted cash
flow methodology.

In the fourth quarter of 2000, the Company
determined that the goodwill that originated from certain of its
acquisitions was impaired due to the Companys strategic
decision to refocus its service offerings and eliminate certain
product line offerings on a Company-wide basis. As a result, the
Company estimated the present value of expected future cash
flows related to this goodwill and recorded an adjustment of
approximately $15,292 to reduce these assets to their estimated
fair value. This write-down is included in selling, general and
administrative expenses in the accompanying consolidated
statements of operations.

Goodwill amortization was $858 and $561 for the
years ended December 31, 2000 and 2001, respectively.
Accumulated amortization at December 31, 2001 and 2002 was
$3,801.

Property
and Equipment

Property and equipment are stated at cost.
Depreciation is provided primarily using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the expected life of the asset
or term of the lease, whichever is shorter.

Internally developed computer software is
recorded at cost and includes purchased, internally developed
and externally developed software to be used in the
Companys operations.

Revenue
Recognition

The Company recognizes professional service fee
revenue on time-and-materials contracts as the services are
performed.

Except for fixed-price outsourcing contracts,
revenues on fixed-priced contracts are recognized using the
percentage of completion method. The percentage of completion is
determined by relating the actual cost of labor performed to
date to the estimated total cost of labor for each contract.
Estimates of total contract revenues and costs are continuously
monitored during the term of the contract, and recorded revenues
and costs are subject to revision as the contract progresses.
Such revisions, which may result in increases or decreases to
revenue and income, are reflected in the financial statements in
the period in which they are first identified. If the estimate
indicates a loss on a particular contract, a provision is made
for the entire estimated loss without reference to the
percentage of completion.

Revenues from fixed-price outsourcing contracts
are recognized ratably over the applicable outsourcing period.
Retainages, which are not material for any of the years
presented, are included in revenue earned in excess of billings
in the accompanying consolidated balance sheets. Revenue earned
in excess of billings is primarily comprised of revenue
recognized on certain contracts in excess of contractual
billings on such contracts. Billings in excess of revenue earned
are classified as deferred revenue.

Computer
Software

The Company performs research to develop software
for various business applications. The costs of such research
are charged to expense when incurred. When the technological
feasibility of the product is established, subsequent costs are
capitalized. Capitalized software costs are amortized on a
product-by-product basis. Amortization is recorded on the
straight-line method over the estimated economic life of the
product, generally five years, commencing when such product is
available. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to
certain external factors, including, but not limited to,
anticipated future gross product revenue, estimated economic
product lives and changes in software and hardware technology.
These assumptions are reevaluated and adjusted as necessary at
the end of each accounting period. On an ongoing basis,
management reviews the valuation and amortization of capitalized
development costs. As part of this

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


review, the Company considers the value of future
cash flows attributable to the capitalized development costs in
evaluating potential impairment of the asset.

Amounts capitalized were $748, $124 and $1,016
for the years ended December 31, 2000, 2001 and 2002,
respectively.

During the year ended December 31, 2002, in
connection with the acquisition of PDA Software Services, Inc.
(see Note 3), the Company acquired computer software
totaling $5,694.

The amortization of software development costs
was $1,245, $1,026 and $1,737 for the years ended
December 31, 2000, 2001 and 2002, respectively.

Accumulated amortization on computer software
amounted to $2,682 and $4,852 as of December 31, 2001 and
2002, respectively.

Amounts charged to expense for research and
development of computer software were not material in the
periods presented.

Income
Taxes

Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.

Other
Expenses (Income)

Other expenses (income) represents interest
earned and realized gains and losses on cash and short-term
investments.

Net
Income (Loss) Per Share

Basic and diluted net income (loss) per share is
computed in accordance with SFAS No. 128, Earnings
Per Share, by dividing the net income (loss) allocable to
common shareholders by the weighted average number of shares of
common stock outstanding. For the years 2000, 2001 and 2002, the
effect of convertible redeemable preferred stock, stock options
and warrants outstanding for the purchase of shares of common
stock has not been used in the calculation of diluted net loss
per share because to do so would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic and
diluted net loss per share allocable to common stockholders are
equal. The calculation of diluted loss per share for 2002
excludes 8,695,121 of common stock equivalents related to the
convertible redeemable preferred stock, 5,300,000 of warrants
issued to CD&R, and 5,211,229 average number of stock
options outstanding.

Use
of Estimates in the Preparation of Financial
Statements

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Estimates and assumptions which, in the opinion
of management, are significant to the underlying amounts
included in the financial statements and for which it would be
reasonably possible that future events or information could
change those estimates include: (1) revenue recognition
under the percentage-of-completion method,

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


(2) impairment assessments of goodwill and
other long-lived assets, (3) realization of deferred tax
assets, (4) allowance for doubtful accounts and
(5) litigation-related contingencies. These estimates are
discussed further throughout the accompanying notes to the
consolidated financial statements.

Stock
Options

The Company has elected to account for stock
options using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As supplemental information, the
Company has elected to provide the pro forma disclosures, as
permitted under the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123).
Accordingly, no additional compensation expense has been
recognized for the Plan within the accompanying consolidated
statements of operations. Had compensation expense for the Plan
been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the
Companys pro forma net income (loss) from continuing
operations and pro forma diluted earnings (loss) per common
share would have been reduced to the amounts indicated below:

|                                                                  |                                                                                                                                          |      |   |         |   |      |   |         |   |  |   |        |  
|----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | -
|                                                                  |                                                                                                                                          | 2000 |   | 2001    |   | 2002
|                                                                  |                                                                                                                                          |      |   |         |   |     
|Net income (loss) from continuing operations:                     |                                                                                                                                          |      |   |         |   |      |   |         |   |  |   |       
|                                                                  | As reported                                                                                                                              |      | $ | (36,317 | ) |      | $ | (10,518 | ) |  | $ | 3,885  |  
|                                                                  | Stock-based employee compensation cost included
    in the determination of net income (loss) from continuing
    operations as reported |      | $ |        |   |      | $ |        |   |  | $ |       |  
|                                                                  | Stock-based employee compensation cost had the
    fair value method been used                                                           |      | $ | 12,197  |   |      | $ | 14,479  |   |  | $ | 11,493 |  
|                                                                  | SFAS No. 123 pro forma                                                                                                                   |      | $ | (48,514 | ) |      | $ | (24,997 | ) |  | $ | (7,608 | )
|Diluted earnings (loss) per share from continuing
    operations: |                                                                                                                                          |      |   |         |   |      |   |         |   |  |   |       
|                                                                  | As reported                                                                                                                              |      | $ | (1.10   | ) |      | $ | (0.37   | ) |  | $ | 0.14   |  
|                                                                  | SFAS No. 123 pro forma                                                                                                                   |      | $ | (1.47   | ) |      | $ | (0.87   | ) |  | $ | (0.27  | )

New
Accounting Pronouncements

In April 2002, the FASB issued SFAS
No. 145 Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss
be evaluated for extraordinary classification under the criteria
of Accounting Principles Board No. 30 Reporting
Results of Operations. This statement also requires
sales-leaseback accounting for certain lease modifications that
have economic effects that are similar to sales-leaseback
transactions, and makes various other technical corrections to
existing pronouncements. This statement will be effective for
Covansys for the year ending December 31, 2003. The
adoption of this statement will not have a material effect on
our results of operations or financial position.

In July 2002, the FASB issued SFAS
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities. This statement requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of the commitment to
an exit or disposal plan. This statement will be effective for
Covansys for any exit or disposal activities initiated after
December 31, 2002. The adoption of this statement will
principally impact the ultimate timing of when activities are
recorded as expense.

In December 2002, the FASB issued SFAS
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this
statement

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


amends the disclosure requirements of SFAS
No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of
stock-based compensation.

In November 2002, the FASB issued
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of
FASB Statement No. 5, Accounting for Contingencies
(FAS 5), relating to the guarantors accounting for,
and disclosure of, the issuance of certain types of guarantees.
Certain disclosure requirements of FIN 45 are included in
these consolidated financial statements while the accounting
requirements of FIN 45 are effective January 1, 2003.
While the Company has not yet completed its evaluation of
FIN 45, the Company does not expect the adoption of
FIN 45 to have a material effect on its results of
operations or financial position.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 provides guidance
on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights, which are referred to as variable-interest entities
(VIEs). FIN 46 is effective for the Company for
the year ending December 31, 2003. While the Company has
not yet completed its evaluation of FIN 46, the Company
does not expect the adoption of FIN 46 to have a material
effect on its results of operations or financial position.

2. Common Stock Repurchase
Program

In October 2002, the Companys board of
directors authorized the repurchase of an additional 2,000,000
shares of the Companys common stock, bringing the total
authorization to 14,000,000 shares. During the years ended
December 31, 2000, 2001 and 2002, the Company repurchased
7,663,600, 1,482,700 shares and 1,124,376 shares for cash, at a
total cost of $111,820, $14,470 and $6,583, respectively.
Through December 31, 2002, the Company has repurchased
10,624,676 shares of its common stock for cash, at a total cost
of $138,087. As of December 31, 2002, 3,375,324 shares
remain available for repurchase under the board of directors
authorization.

3. Acquisitions

On May 31, 2002, the Company acquired all of
the outstanding capital stock of PDA Software Services, Inc
(PDA). PDA is a market leader in the development,
implementation and maintenance of systems for states required to
meet federal tracking and reporting mandates of the Women,
Infants & Children Program. The acquisition expands the
Companys portfolio of capabilities for state governments
and strengthens the Companys business process outsourcing
capabilities. For financial statement purposes the acquisition
was accounted for as a purchase and, accordingly, PDAs
results are included in the consolidated financial statements
since the date of acquisition. Pro forma information related to
this acquisition is not included because the impact is
considered immaterial. The aggregate purchase price was
approximately $15,914, net of cash acquired. The aggregate
purchase price, which was funded through available working
capital, has been allocated to the acquired assets and
liabilities based upon their respective fair values as follows:.

|                                  |  |   |       | 
|--------------------------------- |  | - | ----- | 
|Accounts receivable, net          |  | $ | 3,816 | 
|Prepaids and other current assets |  |   | 281   | 
|Property and equipment, net       |  |   | 956   | 
|Computer software                 |  |   | 5,694 | 
|Other assets                      |  |   | 35    | 
|Goodwill                          |  |   | 6,362 | 
|Accounts payable                  |  |   | 223   | 
|Accrued payroll and other         |  |   | 1,007 | 

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


4. Goodwill

Effective January 1, 2002, the Company
adopted SFAS No. 141 Business Combinations and SFAS
No. 142 Goodwill and Other Intangible Assets. SFAS 141
requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of
accounting. SFAS 142 requires that goodwill and certain
intangibles no longer be amortized, but instead be tested for
impairment at least annually.

The following table summarizes the reconciliation
of reported net loss available for common shareholders to
adjusted net loss available for common shareholders for the
years ended December 31, 2000 and 2001, had SFAS 142
been applied.

|                                         |                                     |                         |         |        |      |   |         |        |   |   |      |        |  
|---------------------------------------- | ----------------------------------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ---- | ------ | -
|                                         |                                     |                        
|                                         |                                     | Year Ended December 31, |        
|                                         |                                     |                         |        
|                                         |                                     | 2000                    |         |        | 2001 |   |         | 2002   |  
|                                         |                                     |                         |         |        |      |   |         |        |  
|Net loss as reported                     |                                     | $                       | (58,157 | )      |      | $ | (14,783 | )      |   | $ | (413 | )     
|Goodwill amortization, net of tax        |                                     |                         | 858     |        |      |   | 561     |        |   |   |     |       
|                                         |                                     |                         |         |        |      |   |         |        |  
|Net loss as adjusted                     |                                     | $                       | (57,299 | )      |      | $ | (14,222 | )      |   | $ | (413 | )     
|                                         |                                     |                         |         |        |      |   |         |        |  
|Basic and diluted loss per common share: |                                     |                         |         |        |      |   |         |        |   |   |      |       
|                                         | Weighted average shares outstanding |                         |         | 32,892 |      |   |         | 28,704 |   |   |      | 27,734 |  
|                                         | Loss as reported                    |                         | $       | (1.77  | )    |   | $       | (0.51  | ) |   | $    | (0.01  | )
|                                         | Goodwill amortization, net of tax   |                         |         | 0.03   |      |   |         | 0.02   |   |   |      |       |  
|                                         |                                     |                         |         |        |      |   |         |        |  
|                                         | Basic and diluted loss as adjusted  |                         | $       | (1.74  | )    |   | $       | (0.49  | ) |   | $    | (0.01  | )
|                                         |                                     |                         |         |        |      |   |         |        |  

The Company completed the transitional goodwill
impairment testing, as required by SFAS No. 142, during
2002. The Company tested for impairment of its reporting units
by comparing fair value to carrying value. Fair value was
determined using a discounted cash flow methodology. The Company
updated this analysis as part of its annual assessment as of
December 31, 2002. These evaluations indicated that
goodwill was not impaired.

5. Accounts Receivable and Credit
Risk

The allowance for doubtful accounts is as follows:

|                              |  |      |        |   |      |   |         |      |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                              |  | 2000 |        |   | 2001 |   |         | 2002 | 
|                              |  |      |        |   |      |   |         |      | 
|Balance  beginning of period |  | $    | 4,204  |   |      | $ | 17,653  |      |  | $ | 1,771  |  
|Provision                     |  |      | 19,849 |   |      |   | 1,626   |      |  |   | 815    |  
|Charge-offs                   |  |      | (6,400 | ) |      |   | (17,508 | )    |  |   | (1,233 | )
|                              |  |      |        |   |      |   |         |      | 
|Balance  end of period       |  | $    | 17,653 |   |      | $ | 1,771   |      |  | $ | 1,353  |  
|                              |  |      |        |   |      |   |         |      | 

The Company grants credit to clients based upon
managements assessment of their creditworthiness.
Substantially all of the Companys receivables are from
large and mid-size companies, major systems integrators and
governmental agencies.

During the year ended December 31, 2000, the
Company recorded a $18,730 provision to write-down certain
accounts receivable, primarily due to receivables from dot.com
companies which had become uncollectible.

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


6. Property and Equipment

As of December 31, 2001 and 2002, property and
equipment consisted of the following:

|                                                             |  |              |         |   |           |   |         |       |  |  |           | 
|------------------------------------------------------------ |  | ------------ | ------- | - | --------- | - | ------- | ----- |  |  | --------- | 
|                                                             |  |              |         |  
|                                                             |  | December 31, |         |   | Estimated |  
|                                                             |  |              |         |   | Useful    |  
|                                                             |  | 2001         |         |   | 2002      |   |         | Lives | 
|                                                             |  |              |         |   |           |   |         |       | 
|Equipment and purchased software                             |  | $            | 51,610  |   |           | $ | 68,299  |       |  |  | 3-5 years | 
|Internally developed computer software and
    related costs |  |              | 8,639   |   |           |   | 9,706   |       |  |  | 9 years   | 
|Furniture and fixtures                                       |  |              | 6,914   |   |           |   | 8,559   |       |  |  | 5-7 years | 
|Leasehold improvements                                       |  |              | 6,285   |   |           |   | 7,362   |       |  |  | 5-7 years | 
|Automobiles                                                  |  |              | 1,197   |   |           |   | 1,457   |       |  |  | 5 years   | 
|Buildings                                                    |  |              | 981     |   |           |   | 981     |       |  |  | 31 years  | 
|                                                             |  |              |         |   |           |   |         |       | 
|                                                             |  |              | 75,626  |   |           |   | 96,364  |       |  |  |           | 
|Accumulated depreciation                                     |  |              | (43,066 | ) |           |   | (59,942 | )     |  |  |           | 
|                                                             |  |              |         |   |           |   |         |       | 
|Property and equipment, net                                  |  | $            | 32,560  |   |           | $ | 36,422  |       |  |  |           | 
|                                                             |  |              |         |   |           |   |         |       | 

Depreciation expense totaled $9,864, $9,929, and
$13,153, for the years ended December 31, 2000, 2001 and
2002, respectively.

7. Related Party Transactions

Synova, Inc. and subsidiaries (Synova) are an
IT professional services organization owned by a
co-chairman of the Companys Board of Directors. For the
year ended December 31, 2002 the Company provided services
to Synova totaling approximately $4,643. In addition, Synova
provided services to the Company, for the year ended
December 31, 2002, totaling approximately $4,107. The net
balance owed to the Company by Synova at December 31, 2002
was $226. In addition, under the terms of a note payable, Synova
owes the Company $8,000. The note is due in September 2005, and
interest, at 8.5%, is paid quarterly in accordance with its
terms.

The Company paid approximately $333, $949 and
$1,111 to Clayton, Dubilier and Rice, Inc. (CDR), a shareholder,
for financial, management advisory, and executive management
services for the years ended December 31, 2000, 2001 and
2002, respectively.

In 2002, the Company entered into a ten-year
agreement to provide IT outsourcing services to SIRVA, Inc., a
company related through common ownership by CDR. During the year
ended December 31, 2002, services provided by the Company
to SIRVA, Inc. totaled approximately $2,753.

During the year ended December 31, 2002, the
Company provided IT services totaling $185 to Acterna
Corporation, a company related through common ownership by CDR.

The Company paid approximately $717, $1,118 and
$237 during the years ended December 31, 2000, 2001, and
2002, respectively, for merger and acquisition consulting
services provided by the Chesapeake Group, Inc., a company owned
by a director.

Praja, Inc. (Praja) is an information technology
professional services organization owned in part by a
co-chairman of the Companys Board of Directors. During the
year ended December 31, 2002, the Company provided services
to Praja totaling $63. In addition, during the year ended
December 31, 2002, Praja provided services and software to
the Company totaling $183.

The Company has a note receivable in the amount
of $558 from a director. This note bears interest at 8.25% and
is due in December 2006.

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


8. Revolving Credit Facility

Under a credit arrangement with a commercial
bank, the Company may borrow an amount not to exceed $30,000 at
the banks prime interest rate, or LIBOR plus 1 1/4%.
$15,000 of the $30,000 is available for standby letters of
credit. Borrowings under the facility are short-term, payable on
demand and are collateralized by all assets of the Company.
There were no amounts outstanding under this agreement at
December 31, 2001 and $5,250 of standby letters of credit
were outstanding at December 31, 2002 as collateral for
two performance bonds  see Note 15.

Subsequent to December 31, 2002, the
Companys credit arrangement expired. The Company is
currently finalizing a new credit arrangement, whereby the
Company may borrow an amount not to exceed $20,000. All other
significant terms and conditions will remain substantially the
same as the previous credit arrangement.

9. Self-Insurance

The Company is self-insured in the U.S. for
health and dental benefits up to $100 per member annually.
Insurance coverage is carried for risks in excess of this
amount. The Company recognized health and dental benefits
expense in the U.S. of approximately $10,805, $12,612, and
$12,500 for the years ended December 31, 2000, 2001 and
2002, respectively. Estimated claims incurred but not reported
were $2,000 as of December 31, 2001 and 2002 and are
included in other accrued liabilities in the accompanying
consolidated balance sheets.

10. Leases

The Company leases its headquarters, regional
offices, equipment and automobiles under noncancelable,
operating leases.

Rent expense for the years ended
December 31, 2000, 2001 and 2002 amounted to approximately
$10,120, $7,764, and $9,177, respectively. The future minimum
lease payments required under these operating leases for the
years ending December 31, are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 8,643  | 
|2004       |  |   | 7,181  | 
|2005       |  |   | 6,311  | 
|2006       |  |   | 4,831  | 
|2007       |  |   | 3,470  | 
|Thereafter |  |   | 5,843  | 
|           |  |   |       
|           |  | $ | 36,279 | 
|           |  |   |       

11. Stock Options

The Company maintains a Stock Option Plan (the
Plan). Under the Plan, eligible employees and directors may be
granted either incentive stock options (ISOs) or non-incentive
stock options (NISOs) at the discretion of the Compensation
Committee of the Board of Directors. At December 31, 2002
there are 13,247,454 shares of Common Stock authorized for grant
under the Plan. Options under the Plan are granted at fair value
on the date of grant. The options vest over periods determined
by the Compensation Committee of the Board of Directors.

The Plan agreements provide for the option holder
to exercise the options in exchange for cash, or a promissory
note payable to the Company over a period of up to five years
for NISOs and up to two years for ISOs. These notes are
collateralized by the underlying common stock, are full
recourse, and bear interest at the prime rate of interest
determined at the date of exercise. Interest on the loans is
payable every six months. The loan provision was eliminated from
all new option grants effective May 2002. Outstanding loans of
$2,218

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


at December 31, 2002 have been classified as
stock subscriptions, receivable in the accompanying consolidated
balance sheet.

In October 2002, the Board of Directors approved
a plan under which certain option holders were permitted to
exchange existing stock options for a number of stock options to
be calculated using the Black-Scholes valuation methodology. The
new stock options will be issued no sooner than six months and a
day from the date the original options were cancelled. The new
stock options will be granted with an exercise price equal to
the fair market value of the Companys common stock on the
date of grant. A total of 5,203,162 options were available for
cancellation under this program. 2,590,527 options were
cancelled effective December 13, 2002 and will ultimately
be replaced with 790,373 options to be issued no sooner than
6 months and 1 day from the date of cancellation. This
will result in 1,800,154 options becoming available for future
grant.

The Company has elected to account for stock
options using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As supplemental information, the
Company has elected to provide the pro forma disclosures, as
permitted under the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123). Accordingly, no
additional compensation expense has been recognized for the Plan
within the accompanying consolidated statements of operations.
Had compensation expense for the Plan been determined based on
the fair value at the grant date consistent with the provisions
of SFAS No. 123, the Companys pro forma net income
(loss) from continuing operations and pro forma diluted earnings
(loss) per common share would have been reduced to the amounts
indicated below:

|                                                                  |                        |      |   |          |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- | ---------------------- | ---- | - | -------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                  |                        | 2000 |   |          | 2001 |  |   | 2002    |  
|                                                                  |                        |      |   |          |      |  |   |         |  
|Net income (loss) from continuing operations:                     |                        |      |   |          |      |  |   |         |   |  |   |       
|                                                                  | As reported            |      | $ | (36,317  | )    |  | $ | (10,518 | ) |  | $ | 3,885  |  
|                                                                  | SFAS No. 123 pro forma |      | $ | $(48,514 | )    |  | $ | (24,997 | ) |  | $ | (7,608 | )
|Diluted earnings (loss) per share from continuing
    operations: |                        |      |   |          |      |  |   |         |   |  |   |       
|                                                                  | As reported            |      | $ | (1.10    | )    |  | $ | (0.37   | ) |  | $ | 0.14   |  
|                                                                  | SFAS No. 123 pro forma |      | $ | (1.47    | )    |  | $ | (0.87   | ) |  | $ | (0.27  | )

A summary of option activity is as follows
(number of options in thousands):

|                                |  |                     |        |                  |                |   |                  |             |  |               |                 |  |  |   |       | 
|------------------------------- |  | ------------------- | ------ | ---------------- | -------------- | - | ---------------- | ----------- |  | ------------- | --------------- |  |  | - | ----- | 
|                                |  |                     |        |                  |                |  
|                                |  | Options Outstanding |        |                  |                |   |                 
|                                |  |                     |        |                  |                |   | Weighted Average |            
|                                |  |                     |        | Weighted Average |                |   | Options          |             |  | Fair Value of |                
|                                |  | Shares              |        |                  | Exercise Price |   |                  | Exercisable |  |               | Options Granted | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 1999      |  |                     | 4,651  |                  |                | $ | 16.37            |             |  |               | 975             |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options granted                 |  |                     | 4,382  |                  |                |   | 22.02            |             |  |               |                 |  |  | $ | 11.97 | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options exercised               |  |                     | (349   | )                |                |   | 9.14             |             |  |               |                 |  |  |   |       | 
|Options cancelled and forfeited |  |                     | (1,521 | )                |                |   | 18.27            |             |  |               |                 |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 2000      |  |                     | 7,163  |                  |                | $ | 18.33            |             |  |               | 1,608           |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options granted                 |  |                     | 1,152  |                  |                |   | 10.95            |             |  |               |                 |  |  | $ | 9.26  | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options exercised               |  |                     | (29    | )                |                |   | 4.03             |             |  |               |                 |  |  |   |       | 
|Options cancelled and forfeited |  |                     | (1,518 | )                |                |   | 16.78            |             |  |               |                 |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 2001      |  |                     | 6,768  |                  |                | $ | 19.01            |             |  |               | 2,552           |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options granted                 |  |                     | 833    |                  |                |   | 14.45            |             |  |               |                 |  |  | $ | 4.37  | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options exercised               |  |                     | (3     | )                |                |   | 3.81             |             |  |               |                 |  |  |   |       | 
|Options cancelled and forfeited |  |                     | (4,595 | )                |                |   | 20.67            |             |  |               |                 |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 2002      |  |                     | 3,003  |                  |                | $ | 15.22            |             |  |               | 1,621           |  |  |   |       | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for the 2000, 2001 and
2002 grants: risk-free rate of interest

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


of 6.2%, 4.9% and 4.2% in 2000, 2001 and 2002,
respectively, dividend yield of 0%, and expected lives of 4 to
5 years. A volatility factor of 87%, 147% and 92% was used
in 2000, 2001 and 2002, respectively.

A summary of options outstanding at
December 31, 2002, is as follows (number of options in
thousands):

|               |  |                     |       |          |                     |  |      |          |  |   |                |  |  |          |       |  |  |   |       | 
|-------------- |  | ------------------- | ----- | -------- | ------------------- |  | ---- | -------- |  | - | -------------- |  |  | -------- | ----- |  |  | - | ----- | 
|               |  |                     |       |         
|               |  | Options Outstanding |       |          | Options Exercisable | 
|               |  |                     |       |          |                     | 
|               |  |                     |       | Weighted |                     |  |      |          | 
|               |  | Number              |       |          | Average             |  |      | Weighted |  |   | Number         |  |  | Weighted |      
|               |  | Outstanding at      |       |          | Remaining           |  |      | Average  |  |   | Exercisable at |  |  | Average  |      
|               |  | December 31,        |       |          | Contractual         |  |      | Exercise |  |   | December 31,   |  |  | Exercise |      
|Range of       |  | 2002                |       |          | Life                |  |      | Price    |  |   | 2002           |  |  | Price    |      
|Exercise Price |  |                     |       |          |                     |  |      |          |  |   |                |  |  |          |      
|$ 0.01 -  6.00 |  |                     | 207   |          |                     |  | 7.03 |          |  | $ | 3.37           |  |  |          | 86    |  |  | $ | 4.33  | 
|$ 6.01 - 14.99 |  |                     | 1,449 |          |                     |  | 7.49 |          |  |   | 11.42          |  |  |          | 765   |  |  |   | 12.71 | 
|$15.00 - 19.34 |  |                     | 224   |          |                     |  | 5.98 |          |  |   | 17.26          |  |  |          | 178   |  |  |   | 17.30 | 
|$19.35 - 22.75 |  |                     | 1,034 |          |                     |  | 7.41 |          |  |   | 21.15          |  |  |          | 503   |  |  |   | 21.56 | 
|$22.76 - 34.58 |  |                     | 89    |          |                     |  | 5.19 |          |  |   | 30.55          |  |  |          | 89    |  |  |   | 30.55 | 
|               |  |                     |       |          |                     |  |      |          |  |   |                |  |  |          |      
|               |  |                     | 3,003 |          |                     |  |      |          |  |   |                |  |  |          | 1,621 |  |  |   |       | 
|               |  |                     |       |          |                     |  |      |          |  |   |                |  |  |          |      

12. Benefit Plans

The Company maintains the Covansys Corporation
Incentive Savings Plan and Trust (the 401(k) plan). All U.S.
employees of the Company are eligible to participate in the
401(k) plan on their first day of service if they have attained
age 21. The 401(k) plan is a defined contribution plan,
qualified as a profit sharing plan under Section 401(k) of
the Internal Revenue Code. Through December 31, 2001, the
401(k) plan allowed eligible employees to contribute up to 18%
of their compensation with the Company matching a percentage of
the contributions. Effective January 1, 2002, the 401(k)
plan was amended to allow eligible employees to contribute up to
50% of their compensation. For the years ended December 31,
2000, 2001 and 2002, the Company matched 40% of the
employees contribution up to a maximum of 2.4% of the
employees compensation.

Matching contributions made by the Company
amounted to approximately $1,914, $2,850 and $2,880 for the
years ended December 31, 2000, 2001 and 2002, respectively.
The Company may also make an additional contribution, at its
discretion, to the 401(k) plan. No such additional contributions
have been made to date.

The Company maintains various employee retention
programs. The expense related to these programs is recognized as
the compensation is earned.

13. Income Taxes

Covansys Mauritius is incorporated in Mauritius
and is not subject to income taxes. Covansys India is an Indian
corporation subject to income taxes and receives certain
exemptions from Indian income taxes under free trade zone and
software exporters provisions of Indian tax law. Covansys
Indias tax provision has been included in the consolidated
statements of operations as part of the provision (benefit) for
income taxes. The Company considers all undistributed earnings
of its foreign subsidiaries to be permanently invested.
Therefore, no United States income taxes have been provided on
these earnings.

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COVANSYS CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


The provision (benefit) for income taxes consists
of:

|           |                 |                         |                           |        |        |         |   |        |        |        |   |        |        |     | 
|---------- | --------------- | ----------------------- | ------------------------- | ------ | ------ | ------- | - | ------ | ------ | ------ | - | ------ | ------ | --- | 
|           |                 |                        
|           |                 | Year Ended December 31, |                          
|           |                 |                         |                          
|           |                 | 2000                    |                           |        | 2001   |         |   | 2002   |       
|           |                 |                         |                           |        |        |         |   |        |       
|Current   |                 |                         |                           |        |        |         |   |        |        |        |   |       
|           | Federal         |                         | $                         | (4,258 | )      |         | $ | (8,365 | )      |        | $ |       |       
|           | State and local |                         |                           | (547   | )      |         |   | (882   | )      |        |   |       |       
|           | Foreign         |                         |                           | 581    |        |         |   | 1,228  |        |        |   | 2,043  |       
|           |                 |                         |                           |        |        |         |   |        |       
|           |                 | Total current           |                           |        | (4,224 | )       |   |        | (8,019 | )      |   |        | 2,043  |    
|Deferred  |                 |                         |                           |        |        |         |   |        |        |        |   |       
|           | Federal         |                         |                           | (6,733 | )      |         |   | (255   | )      |        |   | (1,130 | )     
|           | State and local |                         |                           | (866   | )      |         |   | (270   | )      |        |   | (33    | )     
|           | Foreign         |                         |                           | 568    |        |         |   |       |        |        |   |       |       
|           |                 |                         |                           |        |        |         |   |        |       
|           |                 | Total deferred          |                           |        | (7,031 | )       |   |        | (525   | )      |   |        | (1,163 | )  
|           |                 |                         |                           |        |        |         |   |        |       
|           |                 |                         | Total provision (benefit) |        | $      | (11,255 | ) |        | $      | (8,544 | ) |        | $      | 880 | 
|           |                 |                         |                           |        |        |         |   |        |       

For 2002, $(4,857) of income from continuing
operations before income taxes was from U.S. sources, and $9,622
was from non-U.S. sources.

The items accounting for the difference
between income taxes computed at the federal statutory rate and
the consolidated effective rate are as follows:

|                       |                                                                      |                         |    |     |      |  |    |      |   |  |    |     |  
|---------------------- | -------------------------------------------------------------------- | ----------------------- | -- | --- | ---- |  | -- | ---- | - |  | -- | --- | -
|                       |                                                                      |                        
|                       |                                                                      | Year Ended December 31, |   
|                       |                                                                      |                         |   
|                       |                                                                      | 2000                    |    |     | 2001 |  |    | 2002 |  
|                       |                                                                      |                         |    |     |      |  |    |      |  
|Federal statutory rate |                                                                      |                         | 35 | %   |      |  | 35 | %    |   |  | 35 | %  
|Effect of             |                                                                      |                         |    |     |      |  |    |      |   |  |    |    
|                       | Tax rate differences on foreign earnings not
    subject to U.S. tax |                         |    | 1   |      |  |    | 22   |   |  |    | (30 | )
|                       | Foreign tax credits                                                  |                         |    |    |      |  |    |     |   |  |    | (9  | )
|                       | Nondeductible expenses                                               |                         |    |    |      |  |    |     |   |  |    | 7   |  
|                       | Goodwill write down                                                  |                         |    | (6  | )    |  |    |     |   |  |    |    |  
|                       | State income taxes, net of federal tax effect                        |                         |    | 4   |      |  |    | 3    |   |  |    | 1   |  
|                       | Taxes on distributions from foreign subsidiaries                     |                         |    |    |      |  |    | (8   | ) |  |    | 22  |  
|                       | Other, net                                                           |                         |    | (10 | )    |  |    | (7   | ) |  |    | (8  | )
|                       |                                                                      |                         |    |     |      |  |    |      |  
|                       |                                                                      |                         | 24 | %   |      |  | 45 | %    |   |  | 18 | %  
|                       |                                                                      |                         |    |     |      |  |    |      |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities are presented below:

|                           |                                        |                                      |                         |        |        |        |   |        |        |        | 
|-------------------------- | -------------------------------------- | ------------------------------------ | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                           |                                        |                                     
|                           |                                        | December 31,                         |                        
|                           |                                        |                                      |                        
|                           |                                        | 2001                                 |                         |        | 2002   |       
|                           |                                        |                                      |                         |        |        |       
|Deferred tax assets       |                                        |                                      |                         |        |        |        |   |       
|                           | Accrued expenses                       |                                      | $                       | 4,338  |        |        | $ | 3,186  |       
|                           | Allowance for doubtful accounts        |                                      |                         | 655    |        |        |   | 473    |       
|                           | Net operating loss carryforwards, net  |                                      |                         | 5,909  |        |        |   | 11,057 |       
|                           | Restructuring reserves                 |                                      |                         | 2,639  |        |        |   | 575    |       
|                           | Property and equipment                 |                                      |                         | 919    |        |        |   | 487    |       
|                           | Other                                  |                                      |                         | 209    |        |        |   | 664    |       
|                           |                                        |                                      |                         |        |        |       
|                           |                                        | Total gross deferred tax assets      |                         |        | 14,669 |        |   |        | 16,442 |       
|Deferred tax liabilities  |                                        |                                      |                         |        |        |        |   |       
|                           | Capitalized software development costs |                                      |                         | (3,732 | )      |        |   | (2,775 | )     
|                           | Other                                  |                                      |                         | (222   | )      |        |   |       |       
|                           |                                        |                                      |                         |        |        |       
|                           |                                        | Total gross deferred tax liabilities |                         |        | (3,954 | )      |   |        | (2,775 | )     
|                           |                                        |                                      |                         |        |        |       
|                           |                                        |                                      | Net deferred tax assets |        | $      | 10,715 |   |        | $      | 13,667 | 
|                           |                                        |                                      |                         |        |        |       

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COVANSYS CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


Realization of deferred tax assets associated
with the Companys future deductible temporary differences
and net operating loss carryforwards is dependent upon
generating sufficient taxable income prior to their expiration.
Although realization of the deferred tax assets is not assured,
management believes it is more likely than not that the deferred
tax assets will be realized through future taxable income. On a
quarterly basis, management assesses whether it remains more
likely than not that the deferred tax assets will be realized.
Included in other accrued liabilities at December 31, 2002
is approximately $9,600 of taxes payable.

At December 31, 2002, the Company had
available U.S. Federal net operating loss carryforwards of
approximately $23,400, which expire between 2011 and 2021.

14. Segment Information

The Company is a provider of IT services, and is
organized geographically throughout North America, India and
Asia, and other international locations. The chief operating
decision-makers evaluate each locations performance based
primarily on its revenues, gross margin and operating income due
to the similarity of the nature of services provided to clients.
Under this organization, the operating segments have been
aggregated into one reportable segment. The accounting policies
of the operating segments are the same as those described in the
summary of significant accounting policies.

The following table summarizes selected financial
information of the Companys operations by geographic
location.

|                    |                     |                         |        |         |         |   |        |         |         |   |        |         |         |  
|------------------- | ------------------- | ----------------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                    |                     |                        
|                    |                     | Year Ended December 31, |       
|                    |                     |                         |       
|                    |                     | 2000                    |        |         | 2001    |   |        | 2002    |        
|                    |                     |                         |        |         |         |   |        |         |        
|Revenues           |                     |                         |        |         |         |   |        |         |         |   |        |        
|                    | North America       |                         | $      | 396,726 |         |   | $      | 373,298 |         |   | $      | 351,301 |        
|                    | India and Asia      |                         |        | 36,577  |         |   |        | 44,755  |         |   |        | 45,251  |        
|                    |                     | Less intersegment       |        |         | (25,037 | ) |        |         | (30,293 | ) |        |         | (32,972 | )
|                    |                     |                         |        |         |         |   |        |         |        
|                    |                     |                         | 11,540 |         |         |   | 14,462 |         |         |   | 12,279 |        
|                    | Other international |                         |        | 11,375  |         |   |        | 16,974  |         |   |        | 19,473  |        
|                    |                     |                         |        |         |         |   |        |         |        
|                    |                     |                         |        | $       | 419,641 |   |        | $       | 404,734 |   |        | $       | 383,053 |  
|                    |                     |                         |        |         |         |   |        |         |        
|Long-Lived Assets  |                     |                         |        |         |         |   |        |         |         |   |        |        
|                    | North America       |                         | $      | 49,162  |         |   | $      | 42,559  |         |   | $      | 34,056  |        
|                    | India and Asia      |                         |        | 6,994   |         |   |        | 7,352   |         |   |        | 10,352  |        
|                    | Other international |                         |        | 1,373   |         |   |        | 195     |         |   |        | 216     |        
|                    |                     |                         |        |         |         |   |        |         |        
|                    |                     | Total                   |        | $       | 57,529  |   |        | $       | 50,106  |   |        | $       | 44,624  |  
|                    |                     |                         |        |         |         |   |        |         |        

Long-lived assets for 2000 and 2001 included
deferred taxes of $0 and $2,891 respectively and financial
instruments consisting of the Companys note receivable
from Synova and its investments in equity affiliates of $17,110
and $11,510, respectively. The Companys 2002 long-lived
asset disclosure excludes deferred taxes of $9,432 and financial
instruments of $11,027.

15. Commitments, Contingencies and
Potential Liability to Clients

The Company is, from time to time, party to
ordinary, routine litigation incidental to the Companys
business. After discussion with its legal counsel, the Company
does not believe that the ultimate resolution of any existing
matter will have a material adverse effect on its financial
condition, results of operations or cash flows.

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COVANSYS CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


In addition, many of the Companys
engagements involve projects that are critical to the operations
of its clients businesses and provide benefits that may be
difficult to quantify. The Company attempts to contractually
limit its liability for damages arising from errors, mistakes,
omissions or negligent acts in rendering its services. The
Company has undertaken engagements for which the Company
guarantees its performance based upon defined client
specifications on delivery dates. Certain engagements have
required the Company to obtain a performance bond from a
licensed surety, to guarantee performance, and to post the
performance bond with the client. As of December 31, 2002,
the Company had 15 performance bonds outstanding and posted with
clients, with an aggregate total value of $31,937. Two of these
performance bonds are secured by letters of credit totaling
$5,250. The Company intends to satisfy all of its performance
obligations with its clients and does not anticipate defaulting
on any of these performance bonds or letters of credit.

16. Convertible Redeemable Preferred
Stock

On March 17, 2000, the Company entered into
an agreement with a fund managed by CDR whereby CDR invested
$200,000, in two transactions, to purchase 200,000 shares of
convertible redeemable preferred stock (Preferred Stock)
convertible into 8,695,652 shares of Covansys Common Stock and
also issued warrants to purchase 5,300,000 shares of the
Companys Common Stock.

The Preferred Stock is convertible at any time
subsequent to issuance at a price of $23 per share, subject to
certain adjustments, and may be redeemed, at CDRs option,
if not converted within ten years of the date of issuance. The
warrants consist of seven-year warrants to purchase 3,500,000
shares at $25 per share and ten-year warrants to purchase
1,800,000 shares at $31 per share. All of the warrants become
exercisable upon the earlier of the third anniversary of the
date of issuance or the Companys stock price exceeding a
predetermined price for twenty consecutive trading days.

Upon closing of the transactions, the proceeds
were allocated to the convertible Preferred Stock and the
warrants based on their relative fair values, with the
convertible Preferred Stock classified outside of
stockholders equity and the warrants as additional paid-in
capital on the consolidated balance sheet. Any difference
between the fair value allocated to the convertible Preferred
Stock and the fair value of the Companys Common Stock is
considered a beneficial conversion feature. The beneficial
conversion feature, which does not affect net income, is
accounted for as a dividend on the convertible Preferred Stock
in the period it is issued and as a reduction of income
available to common shareholders in the computation of basic and
fully diluted earnings per share.

The Preferred Stock is not redeemable at the
option of the holder until after ten years from the date of
issuance. Due to the redeemable nature of the Preferred Stock,
the difference between the proceeds allocated to the Preferred
Stock and the amount of the redemption ($200,000) is being
accreted to Preferred Stock over the redemption period as a
dividend on Preferred Stock. The Preferred Stock ranks senior to
common stock in the event of liquidation, has voting rights
equal to the number of common shares into which it is
convertible and is entitled to the same dividend as common stock
if a dividend is declared.

17. Discontinued Operations and Gain on
Sale of Discontinued Operations

In June 2000, the Companys board of
directors adopted a plan to sell the operations of its contract
programming services subsidiary, Synova. Accordingly, the
accompanying consolidated financial statements have been
reclassified to reflect Synova as a discontinued operation. The
net operating results of Synova have been reported, net of
income taxes, as income (loss) from discontinued
operations in the accompanying consolidated statements of
operations for 2000. The net cash flows of Synova have been
included in cash used in discontinued operations in
the accompanying consolidated statements of cash flows for 2000.

39



---



##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


Summarized financial information for the
discontinued operations of Synova are as follows:

|                     |  |               |        |  
|-------------------- |  | ------------- | ------ | -
|                     |  | Nine Months   |       
|                     |  | Ended         |       
|                     |  | September 30, |       
|                     |  | 2000          |       
|                     |  |               |       
|Revenues             |  | $             | 39,204 |  
|Loss from operations |  |               | (2,685 | )

On September 28, 2000, the Company sold
Synova to a co-chairman of the Companys Board of Directors
in exchange for 750,000 shares of the Companys Common
Stock, determined to be the fair market value. As a result of
this exchange, the Company recorded a gain on the sale of a
discontinued operation of $6,072, net of income taxes, in the
accompanying consolidated statements of operations.

In connection with the sale of Synova, certain
receivables due to the Company were converted into a note
receivable from Synova of $8,000 which is included in Other
Assets on the accompanying consolidated balance sheet. The note
receivable is due in September 2005, is guaranteed by the
co-chairman of the Companys Board of Directors and
interest, at 8.5%, is being paid quarterly in accordance with
its terms.

18. Restructuring, Merger and Other
Related Charges

In fiscal 2000, the Company recorded
restructuring and other costs of $21,507, consisting of the
following:

|                                                                                 |  |   |       | 
|-------------------------------------------------------------------------------- |  | - | ----- | 
|Severance costs                                                                  |  | $ | 8,800 | 
|Termination of lease obligations associated with
    consolidation of facilities |  |   | 5,800 | 
|Write-off of assets due to change in strategic
    direction                     |  |   | 2,900 | 
|Other                                                                            |  |   | 4,007 | 

In fiscal 2001, the Company recorded
restructuring and other costs of $23,665, consisting of the
following:

|                                                                                                                           |  |   |        | 
|-------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
|Write-down resulting from the disposal of an
    equity investment and related note receivable, plus transaction
    costs |  | $ | 14,700 | 
|Severance costs                                                                                                            |  |   | 5,300  | 
|Termination of lease obligations associated with
    consolidation of facilities                                           |  |   | 900    | 
|Discontinued acquisition discussions                                                                                       |  |   | 1,700  | 
|Other                                                                                                                      |  |   | 1,055  | 

In fiscal 2002, the Company recorded
restructuring and other costs of $1,324 related to the
termination of 30 employees, including employees from
executive management and certain business units.

The following is a roll forward of the accrual
balance for Restructuring, Merger and Other Related charges:

|                               |  |      |         |   |      |   |         |      |  |   |        |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                               |  | 2000 |         |   | 2001 |   |         | 2002 | 
|                               |  |      |         |   |      |   |         |      | 
|Balance, beginning of period   |  | $    |        |   |      | $ | 7,541   |      |  | $ | 7,431  |  
|Provision                      |  |      | 21,507  |   |      |   | 23,665  |      |  |   | 1,324  |  
|Write-down/write-off of assets |  |      | (3,100  | ) |      |   | (15,250 | )    |  |   |       |  
|Cash payments and other        |  |      | (10,866 | ) |      |   | (8,525  | )    |  |   | (7,285 | )
|                               |  |      |         |   |      |   |         |      | 
|Balance, end of period         |  | $    | 7,541   |   |      | $ | 7,431   |      |  | $ | 1,470  |  
|                               |  |      |         |   |      |   |         |      | 

The balance of $1,470 as of December 31,
2002 is comprised primarily of remaining lease termination costs
which are scheduled to be paid through 2005.

Cash payments and other includes $1,700 of
liabilities that were reclassified within accrued other
liabilities based upon the nature of the item.

40



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


19. Supplemental Quarterly Information
(Unaudited)

The following quarterly information is unaudited.

|                                                        |  |               |         |         |  |              |         |             |  |   |         |   |  |   |        |  
|------------------------------------------------------- |  | ------------- | ------- | ------- |  | ------------ | ------- | ----------- |  | - | ------- | - |  | - | ------ | -
|                                                        |  |              
|2001                                                    |  | Quarter Ended
|                                                        |  |              
|                                                        |  | March 31      |         | June 30 |  | September 30 |         | December 31
|                                                        |  |               |         |         |  |              |         |            
|Revenues                                                |  | $             | 104,671 |         |  | $            | 104,412 |             |  | $ | 100,136 |   |  | $ | 95,515 |  
|Gross profit                                            |  |               | 27,526  |         |  |              | 29,617  |             |  |   | 28,683  |   |  |   | 28,257 |  
|Loss from continuing operations                         |  |               | (4,758  | )       |  |              | (15,838 | )           |  |   | (204    | ) |  |   | (3,793 | )
|Net income (loss)                                       |  |               | (1,950  | )       |  |              | (11,269 | )           |  |   | 1,024   |   |  |   | 1,677  |  
|Net income (loss) available for common
    shareholders |  | $             | (3,003  | )       |  | $            | (12,330 | )           |  | $ | (46     | ) |  | $ | 599    |  
|Basic net income (loss) per share                       |  | $             | (0.11   | )       |  | $            | (0.43   | )           |  | $ |        |   |  | $ | 0.02   |  
|Diluted net income (loss) per share                     |  | $             | (0.11   | )       |  | $            | (0.43   | )           |  | $ |        |   |  | $ | 0.02   |  

|                                                        |  |               |        |         |  |              |        |             |  |   |        |   |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | 
|                                                        |  |              
|2002                                                    |  | Quarter Ended
|                                                        |  |              
|                                                        |  | March 31      |        | June 30 |  | September 30 |        | December 31
|                                                        |  |               |        |         |  |              |        |            
|Revenues                                                |  | $             | 90,768 |         |  | $            | 94,658 |             |  | $ | 99,273 |   |  | $ | 98,354 | 
|Gross profit                                            |  |               | 24,283 |         |  |              | 25,424 |             |  |   | 23,838 |   |  |   | 24,655 | 
|Income from continuing operations                       |  |               | 83     |         |  |              | 95     |             |  |   | 191    |   |  |   | 286    | 
|Net income                                              |  |               | 1,517  |         |  |              | 325    |             |  |   | 750    |   |  |   | 1,293  | 
|Net income (loss) available for common
    shareholders |  | $             | 431    |         |  | $            | (770   | )           |  | $ | (353   | ) |  | $ | 280    | 
|Basic net income (loss) per share                       |  | $             | 0.01   |         |  | $            | (0.03  | )           |  | $ | (0.01  | ) |  | $ | 0.01   | 
|Diluted net income (loss) per share                     |  | $             | 0.01   |         |  | $            | (0.03  | )           |  | $ | (0.01  | ) |  | $ | 0.01   | 

41



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##### Table of Contents



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

In April 2002, the Board of Directors of the
Company dismissed Arthur Andersen LLP (Andersen) as
its independent public accountants, and appointed
PricewaterhouseCoopers LLP(PwC) as its new
independent accountants. The appointment of PwC was ratified by
the Companys shareholders at the 2002 Annual Meeting.

During the two most recent fiscal years of the
Company ended December 31, 2001, and the subsequent interim
period through April 26, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting
principles or practices, financial disclosure or auditing scope
or procedure, which disagreements, if not resolved to
Andersens satisfaction would have caused Andersen to make
reference to the subject matter of the disagreement in
connection with its reports and there were no reportable events
as defined in Item 304(a)(1)(v) of Regulation S-K.
None of Andersens reports on the Companys
consolidated financial statements for the fiscal years ended
December 31, 2001 and 2000 contained an adverse opinion or
disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope or accounting principles.

42



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##### Table of Contents








PART III


Item 10. Directors and Executive Officers
of the Company

The information required by this item is included
in our Proxy Statement for our 2003 Annual Meeting of
Shareholders under the caption Directors and Executive Officers
and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this item is included
in our Proxy Statement for our 2003 Annual Meeting of
Shareholders under the caption Executive Compensation and is
incorporated herein by reference.

Item 12. Security Ownership of Certain
Beneficial Owners and Management

The information required by this item is included
in our Proxy Statement for our 2003 Annual Meeting of
Shareholders under the caption Director and Executive Officer
Ownership of Covansys Corporation Common Stock and is
incorporated herein by reference.

Item 13. Certain Relationships and
Related Transactions

The information required by this item is included
in our Proxy Statement for our 2003 Annual Meeting of
Shareholders under the caption Certain Relationships and Related
Transactions and is incorporated herein by reference.

Item 14. Controls and
Procedures

Disclosure Controls and Procedures

The Company maintains controls and procedures
designed to ensure that it is able to collect the information
that is required to be disclosed in the reports it files with
the SEC, and to process, summarize and disclose this information
within the time period specified by the rules of the SEC. The
Companys Chief Executive Officer and the Chief Financial
Officer are responsible for establishing, maintaining and
enhancing these procedures. They are also responsible, as
required by the rules established by the SEC, for the evaluation
of the effectiveness of these procedures.

Based on their evaluation of the Companys
disclosure controls and procedures which took place as of a date
within 90 days of the filing of this report, the Chief Executive
Officer and the Chief Financial Officer believe that these
procedures are effective to ensure that the Company is able to
collect, process and disclose the information it is required to
disclose in the reports it files with the SEC within the
required time period.

Internal Controls

The Company maintains a system of internal
controls designed to provide reasonable assurance that:
transactions are executed in accordance with managements
general or specific authorization; transactions are recorded as
necessary to (1) permit preparation of financial statements
in conformity with generally accepted accounting principles, and
(2) maintain accountability for assets. Access to assets is
permitted only in accordance with managements general or
specific authorization.

Since the date of the most recent evaluation of
the Companys internal controls by the Chief Executive
Officer and the Chief Financial Officer, there have been no
significant changes in such controls or in other factors that
could have significantly affected those controls, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

During managements evaluation of internal
controls, certain deficiencies were identified involving
manually intensive processes, concentration of knowledge and the
need to increase training of financial staff. Management is
currently addressing these deficiencies through the
implementation of a consolidation and financial reporting tool,
standardization and automation of processes and procedures, and
enhancing the skill sets of financial and operational staff
through hiring and expanded training programs.

43



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##### Table of Contents








PART IV


Item 15. Exhibits, Financial Statement
Schedules and Reports on Form 8-K



|    |                                         
|--- | ----------------------------------------
|(a) | Documents filed as a part of the report:



|   |                                  
|-- | ---------------------------------
|1. | Consolidated Financial Statements



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | The following consolidated financial statements
    of the Company and its subsidiaries are filed herewith:

|                                                                                                                     |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                     |  | Page
|                                                                                                                     |  |     
|Report of Independent Public Accountants                                                                             |  |      | 20 | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                     |  |      | 22 | 
|Consolidated Statements of Operations for each of
    the years ended December 31, 2000, 2001 and 2002               |  |      | 23 | 
|Consolidated Statements of Shareholders
    Equity for each of the years ended December 31, 2000, 2001
    and 2002 |  |      | 24 | 
|Consolidated Statements of Cash Flows for each of
    the years ended December 31, 2000, 2001 and 2002               |  |      | 25 | 
|Notes to Consolidated Financial Statements                                                                           |  |      | 26 | 

2. Financial Statement Schedules

None

3. (a) Exhibits

|        |      |             |  |                                                                                                                                                                                                
|------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        | 3.1* |             |  | Restated Articles of Incorporation of the
    Company, as amended.                                                                                                                             
|        | 3.2* |             |  | Bylaws of the Company.                                                                                                                                                                         
|        | 4.1* |             |  | See Exhibits 3.1 and 3.2 for provisions of the
    Restated Articles of Incorporation and Restated Bylaws of the
    Company defining rights of the holders of Common Stock of the
    Company.
|        | 4.2* |             |  | Specimen Stock Certificate.                                                                                                                                                                    
|        | 16.1 |             |  | Letter re. Change in Certifying Accountant**.                                                                                                                                                  
|        | 21.1 |             |  | Subsidiaries of Registrant. (Filed Herein)                                                                                                                                                     
|        | 23.1 |             |  | Consent of PricewaterhouseCoopers LLP (Filed
    Herein)                                                                                                                                       
|        | 99.1 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                
|        | 99.2 |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                
|        | (b)  |             |  | Reports on Form 8-K.                                                                                                                                                                           
|        |      |             |  | Per report on Form 8-K filed
    November 6, 2002.                                                                                                                                             
|        |      |             |  | Per report on Form 8-K filed
    October 15, 2002.                                                                                                                                             




|   |                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Incorporated herein by reference to exhibit of
    the same number in the Form S-1 Registration Statement of
    the Registrant (Registration No. 333-18413) dated as of
    December 20, 1996, as amended.
|  
|** | Incorporated herein by reference to Form 8-K
    dated May 3, 2002.                                                                                                                                        

44



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##### Table of Contents








SIGNATURES


Pursuant to the requirements of Sections 13
and 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                     
| | --------------------
| | COVANSYS CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ MARTIN C. CLAGUE

| |                                   
| | ----------------------------------
| |                                   
| | Martin C. Clague                  
| | Chief Executive Officer, President
| | and Director                      
| | March 12, 2003                    

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

|                                               |  |                                                                                                                                                    |  |               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|/s/ NED C. LAUTENBACHNed C. Lautenbach         |  | Co-Chairman and Director                                                                                                                           |  | March 12, 2003
|/s/ RAJENDRA B. VATTIKUTIRajendra B. Vattikuti |  | Co-Chairman, Director                                                                                                                              |  | March 12, 2003
|/s/ MARTIN C. CLAGUEMartin C. Clague           |  | Chief Executive Officer, President
    and Director                                                                                                |  | March 12, 2003
|/s/ MICHAEL S. DUFFEYMichael S. Duffey         |  | Executive Vice President of Finance and
    Administration and Chief Financial Officer, Treasurer
    (Principal Financial and Accounting Officer) |  | March 12, 2003
|/s/ WILLIAM BROOKSWilliam Brooks               |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ KEVIN CONWAYKevin Conway                   |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ DOUGLAS S. LANDDouglas S. Land             |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ RONALD K. MACHTLEYRonald K. Machtley       |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ JOHN A. STANLEYJohn A. Stanley             |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ FRANK D. STELLAFrank D. Stella             |  | Director                                                                                                                                           |  | March 12, 2003
|/s/ DAVID WASSERMANDavid Wasserman             |  | Director                                                                                                                                           |  | March 12, 2003

45



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##### Table of Contents



I, Martin C. Clague, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Covansys Corporation;                                                                                                                                                                                                                                                              
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                     
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                         



| |     |                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a). | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b). | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c). | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date:                                                                                                                                



| |    |                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent function);



| |     |                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a). | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and report
    financial data and have identified for the registrants
    auditors any material weaknesses in internal controls; and
|
| | b). | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                               



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                      
| | -------------------------------------
| | /s/ Martin C. Clague                 
| |                                      
| | Chief Executive Officer and President

Date: March 12, 2003

46



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##### Table of Contents



I, Michael S. Duffey, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Covansys Corporation;                                                                                                                                                                                                                                                              
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                     
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                         



| |     |                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a). | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b). | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c). | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date:                                                                                                                                



| |    |                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent function);



| |     |                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a). | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and report
    financial data and have identified for the registrants
    auditors any material weaknesses in internal controls; and
|
| | b). | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                               



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                               
| | ------------------------------
| | /s/ Michael S. Duffey         
| |                               
| | Executive Vice President of   
| | Finance and Administration and
| | Chief Financial Officer       

Date: March
12, 2003


47



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##### Table of Contents



EXHIBIT INDEX

|        |      |   |             |                                                                                                                                                                                                
|------- | ---- | - | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |   |            
|No.     |      |   | Description
|        |      |   |            
|        | 3.1  | * |             | Restated Articles of Incorporation of the
    Company, as amended.                                                                                                                             
|        | 3.2  | * |             | Bylaws of the Company.                                                                                                                                                                         
|        | 4.1  | * |             | See Exhibits 3.1 and 3.2 for provisions of the
    Restated Articles of Incorporation and Restated Bylaws of the
    Company defining rights of the holders of Common Stock of the
    Company.
|        | 4.2  | * |             | Specimen Stock Certificate.                                                                                                                                                                    
|        | 16.1 |   |             | Letter re. Change in Certifying Accountant.**                                                                                                                                                  
|        | 21.1 |   |             | Subsidiaries of Registrant. (Filed Herein)                                                                                                                                                     
|        | 23.1 |   |             | Consent of PricewaterhouseCoopers LLP. (Filed
    Herein)                                                                                                                                      
|        | 99.1 |   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                
|        | 99.2 |   |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                




|   |                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Incorporated herein by reference to exhibit of
    the same number in the Form S-1 Registration Statement of
    the Registrant (Registration No. 333-18413) dated as of
    December 20, 1996, as amended.
|  
|** | Incorporated herein by reference to Form 8-K
    dated May 3, 2002.                                                                                                                                        

48