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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31,
2003

Commission File Number 0-22141



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Covansys Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                      |  |                                  
|----------------------------------------------------------------------------------------------------- |  | ---------------------------------
|Michigan                                                                                              |  | 38-2606945                       
|(State or Other Jurisdiction of
    Incorporation or Organization)                                    |  | (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 o          No þ

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. þ

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

The aggregate
market value of common stock held by non-affiliates of the
registrant as of June 30, 2003 was $55,331,037

The aggregate
market value of common stock held by non-affiliates of the
registrant as of February 29, 2004 was $201,707,654.

The number of
shares outstanding of the registrants common stock as of
February 29, 2004 was 26,851,699.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement of the Registrant for its 2004 Annual
Meeting of Shareholders to the extent expressly so stated, are
incorporated by reference into Part III of this Report.



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Explanatory Note

The purpose of this Amendment No. 1 on Form
10-K/A to the Annual Report on Form 10-K of Covansys
Corporation (the Company) for the year ended
December 31, 2003 is to restate the Companys
consolidated financial statements for the years ended
December 31, 2003, 2002 and 2001, and related disclosures,
including the selected financial data included herein as of and
for the years ended December 31, 2003, 2002, 2001, 2000 and
1999.

Subsequent to the issuance of its financial
statements for the year ended December 31, 2003, the
Company identified various adjustments, primarily relating to
missing or obsolete equipment that required restatement of its
previously issued financial statements. In connection with this
restatement, the Company also made adjustments to prior years
for healthcare related reimbursements and for certain other
adjustments that had previously been recorded in incorrect
periods. Each of these adjustments is described further below:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Equipment:In
    connection with a physical inventory process of its computer
    equipment and related peripherals performed during the first
    half of 2004, and an assessment of its furniture and fixtures
    based upon recent office closings and other restructuring
    activities, the Company identified missing computers and related
    peripherals, equipment that was obsolete or had been disposed
    of, and maintenance contracts that were appropriately
    capitalized but assigned a life in excess of the maintenance
    period. In addition, the Company determined that the carrying
    value attributable to certain furniture and fixtures should have
    been written off during the prior periods as offices were
    closed. The total amount of the adjustment was $2,561,000. The
    net book value of the missing or obsolete equipment and
    furniture as of December 31, 2003 was $1,495,000 of which
    $45,000, $526,000 and $436,000 was identified as relating to
    2003, 2002 and 2001, respectively, and $488,000 was identified
    as relating to periods prior to 2001. The remaining amount of
    the charge of $1,066,000 was recorded in the first quarter of
    2004 related to missing equipment which could not be identified
    with any particular period ($742,000) and for equipment that was
    deemed to be obsolete in the first quarter of 2004 ($324,000).
|
| | Healthcare Related
    Reimbursement:The Company provides
    COBRA benefits to its former employees for the continuation of
    healthcare benefits. Payments for these benefits are paid by
    former employees directly to an external benefits administrator.
    In 2003, the Company discovered that these payments, which it
    believed were being used by its external benefits administrator
    to offset the Companys healthcare benefits expenses, were
    actually remitted to the Company but not deposited into its bank
    accounts on a timely basis. Of the $546,000 in payments recorded
    in 2003, $507,000 and $39,000 had been received and should have
    been initially recorded in 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Other Adjustments:Items included in this category include lease buyout costs and
    accruals for travel related costs and certain subcontractor
    costs that were initially recorded in a year other than the year
    to which the costs relate. Of the $225,000 in costs recorded in
    2003, $79,000 and $80,000 should have been initially recorded in
    2002 and 2001, respectively and $66,000 was identified as
    relating to periods prior to 2001. In addition, the Company
    recorded other corrections, resulting in a reduction to accrued
    liabilities of $148,000 and $78,000 as of December 31, 2003 and
    2002, and corresponding credits to earnings of $70,000 and
    $78,000 in 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

See Part II 
Item 7  Restated Managements
Discussion and Analysis of Financial Condition and Results of
Operations for a more detailed discussion of the
circumstances giving rise to the restatement and related
adjustments.

As a result of the foregoing, the Company has
restated its financial statements for each of the years ended
December 31, 2003, 2002 and 2001, including the
corresponding interim periods during those years, and has
restated the results for the quarterly periods ended
March 31, 2003, June 30, 2003 and September 30,
2003 in amendments filed concurrently herewith on
Forms 10-Q/A to its previously filed Forms 10-Q for
each of the periods then ended. The Company has not amended and
does not intend to amend its other previously filed annual
reports on Form 10-K or its other quarterly reports on
Form 10-Q for the periods affected by the restatement or
adjustments. For this reason, the consolidated financial
statements and related financial information contained in those
previously filed reports should no longer be relied upon.

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The following items have been amended as a result
of the restatement:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Part II  Item 6 
    Selected Restated Financial Data;                                                                  
|
| |  | Part II  Item 7 
    Restated Managements Discussion and Analysis of Financial
    Condition and Results of Operations;
|
| |  | Part II  Item 8 
    Restated Financial Statement and Supplementary Data;                                               
|
| |  | Part II  Item 9A 
    Controls and Procedures; and                                                                      
|
| |  | Part IV  Item 15 
    Exhibits, Financial Statement Schedules and Reports on Form 8-K.                                  

The Companys Chief Executive Officer and
Chief Financial Officer have also reissued their certifications
required by Sections 302 and 906 of the Sarbanes-Oxley Act.

Additional detail regarding the restatement is
included in Note 2 of the Notes to Consolidated Financial
Statements included in Part II  Item 8 of
this Amendment No. 1 on Form 10-K/A.

Except as required to reflect the effects of the
restatement, no attempt has been made in this Amendment
No. 1 to modify or update other disclosures presented in
the original report on Form 10-K. This Form 10-K/A
does not reflect events occurring after the filing of the
Form 10-K on March 30, 2004 or modify or update those
disclosures affected by subsequent events. Concurrently with the
filing of this Form 10-K/A, the Company is also filing its
Quarterly Report on Form 10-Q for the period ended
March 31, 2004, the filing of which had been delayed
pending the resolution of the accounting matters related to the
restatement.

ii



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COVANSYS CORPORATION AND
SUBSIDIARIES

FORM 10-K/A

For the Fiscal Year Ended December 31,
2003

INDEX

|                                       |  |                                                                                                        |    |  |    | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I                                
|Item 1.                                |  | Business                                                                                               |    |  | 2  | 
|Item 2.                                |  | Properties                                                                                             |    |  | 7  | 
|Item 3.                                |  | Legal Proceedings                                                                                      |    |  | 8  | 
|Item 4.                                |  | Submission of Matters to a
    Vote of Security Holders                                                |    |  | 8  | 
|PART II                               
|Item 5.                                |  | Market for the
    Registrants Common Equity and Related Stockholder
    Matters                      |    |  | 9  | 
|Item 6.                                |  | Selected Restated Financial
    Data                                                                   |    |  | 10 | 
|Item 7.                                |  | Restated Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |    |  | 12 | 
|Item 7A.                               |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |    |  | 27 | 
|Item 8.                                |  | Restated Financial Statement
    and Supplementary Data                                                |    |  | 28 | 
|Item 9.                                |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |    |  | 57 | 
|Item 9A.                               |  | Controls and Procedures                                                                                |    |  | 58 | 
|PART III                              
|Item 10.                               |  | Directors and Executive
    Officers of the Company                                                    |    |  | 59 | 
|Item 11.                               |  | Executive Compensation                                                                                 |    |  | 60 | 
|Item 12.                               |  | Security Ownership of
    Certain Beneficial Owners and Management                                     |    |  | 60 | 
|Item 13.                               |  | Certain Relationships and
    Related Transactions                                                     |    |  | 60 | 
|Item 14.                               |  | Principal Accountants Fees
    and Services                                                            |    |  | 60 | 
|PART IV                               
|Item 15.                               |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |    |  | 60 | 
|Signatures                             |  |                                                                                                        | 62 | 
|Subsidiaries                          
|Consent of PricewaterhouseCoopers LLP 
|Certification Pursuant to Section 302 
|Certification Pursuant to Section 302 
|Certification Pursuant to Section 1350
|Certification Pursuant to Section 1350



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PART I






|        |         
|------- | --------
|Item 1. | Business

Summary

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.

From the start, the company based itself in
high-quality software engineering principles and an unwavering
commitment to delivery. These twin strengths enable Covansys to
smoothly adapt to the rapid evolution of technology while
maintaining constant focus on the changing business needs of its
clients.

Covansys took a significant step in its evolution
in January of 1992 when it became one of the first known
U.S.-based IT services company to establish offshore facilities
in India to provide high-quality and cost-effective services for
its clients.

An industry leader in successfully integrating
offshore capabilities into its service offerings, Covansys
pioneered a global delivery model that is transparent, flexible
and seamless. Onsite project managers work hand-in-hand with
clients to ensure the successful delivery of offsite and
offshore projects.

Covansys offers 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 more than 20
offices worldwide and more than 50 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.

Covansys broad range of technical skills,
superior delivery and industry-specific solutions have attracted
and retained hundreds of satisfied clients. Currently, Covansys
has over 500 clients in industries such as public sector,
financial services, retail & distribution,
manufacturing, healthcare, and telco/ utilities/ transportation
and other representing 30.2%, 21.2%, 12.4%, 9.7%, 9.0%, and
17.5% of total annual revenues, respectively.

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              
|
| |  | Software Engineering                                                         

Covansys recognized early on that quality was a
top priority and has had its quality assurance rated by the top
organizations through the years. Covansys has earned all three
of the gold standards of quality assurance for software
development: Level 5 of the People Capability Maturity
Model (SEI-PCMM®), Level 5 of the SEI-CMM® and
ISO 9001:2000.

First in 1994, Covansys received ISO 9001
certification, and then in 1999, two of its development centers
in India achieved SEI-CMM® Level 5 on the first audit.
We continued our certification at two of our North American
delivery centers. Covansys center in Milpitas, California
is rated SEI-CMM® Level 4 and its center in Columbus,
Ohio is rated SEI-CMM® Level 3. In 2002, Covansys
India was also assessed at

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SEI-PCMM® Level 5, recognizing the
innovative people practices that provide a framework for
individuals and projects to improve our capability continuously
and meet client needs effectively and efficiently.


Also early in our history we recognized, along
with analysts and clients, that the quality of project
management is key in the successful delivery of IT services. We
have been recognized as a Project Management Institute
Registered Education Provider® and now have more than 190
PMI® PMP® certified project managers, the highest
standard of the project management profession.

Covansys has been active in strategic mergers and
acquisitions in recent years to grow or expand our service
offerings. In 2002 Covansys acquired PDA Software Services,
Inc., 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 (WIC) Program. This acquisition further expanded
our strong presence in the public sector market. In 1998
Covansys merged with C.W. Costello & Associates, Inc.
and Claremont Technology Group.

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.                                                                                                                                                                                                                                                           
|
| |  | 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 more than 20
    offices worldwide. 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

Covansys 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.                                                                                                                                                                                                           
|
| |  | 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 clients. Our knowledge and
experience contribute 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                          
|
| |  | Clarety Public Retirement Administration Package       

Financial Services:



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

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Telecommunications:



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

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

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; 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 profitable.
The result is an information strategy that reduces costs and
generates revenue for the client.

Our integration 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 application development, applications
maintenance and modernization to full application 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.
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 an important
supplier to middle market clients. In 2003, 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.

5



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

Banking and Financial Services

Bank One Corporation

GMAC


Guardian Life Insurance


Textron Financial Corporation


T. Rowe Price Investment Technologies, Inc.


UnumProvident Corporation


Healthcare

Henry Ford Health System

Kaiser Foundation Hospitals


Priority Health


Manufacturing

DaimlerChrysler AG

Ford Motor Company


General Motors Corporation


Trelleborg Automotive


Visteon Automotive Services


Retail and Distribution

The Kroger Company

Lands End, Inc.


Sears Roebuck & Company


Sirva, Inc.


Public Sector

City of Milwaukee

State of California


State of Nebraska


State of New Mexico


State of Ohio


State of Oregon


State of Rhode Island


Utilities and Telecommunications

Lucent Technologies, Inc.

South Carolina Electric and Gas Company


Southern California Edison


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 more than 50 sales and marketing
professionals, we identified and closed business in more than 50
new client accounts in 2003.

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.

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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, preventative 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.

We use aggressive recruitment strategies
throughout the United States and India to source well-qualified
and well-credentialed consultants. Our most successful candidate
sources include: Employee Referrals, College Campus Recruiting,
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, 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, 2003, we had
4,701 employees comprised of 4,353 IT professionals and 348
general and administrative personnel. As of December 31,
2003, we also had 394 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 access
licenses to over 250 titles in technical coursework. In addition
to technical skills in a variety of programming languages, we
offer courses in project management and methodology. More than
190 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.

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##### Table of Contents



We have principal offices in the following
locations:

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are, from time to time, involved in litigation
and various legal matters that arise in the ordinary course of
business. We do not believe that the ultimate resolution of any
of the pending matters will have a material adverse effect on
our financial condition, results of operations, or cash flows.
We believe the legal allegations levied against us are without
merit and intend to defend these matters vigorously.






|        |                                                        
|------- | -------------------------------------------------------
|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, 2003.

8



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##### Table of Contents






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 at the close of
each quarter:

|                              |                |                |   |       |     |  |   |      | 
|----------------------------- | -------------- | -------------- | - | ----- | --- |  | - | ---- | 
|                              |                |               
|                              |                | Price Range of |  
|                              |                | Common Stock   |  
|                              |                |                |  
|                              |                | High           |   |       | Low | 
|                              |                |                |   |       |     | 
|Year Ended December 31, 2003: |                |                |   |       |     |  |   |     
|                              | First Quarter  |                | $ | 4.00  |     |  | $ | 2.37 | 
|                              | Second Quarter |                | $ | 3.11  |     |  | $ | 2.20 | 
|                              | Third Quarter  |                | $ | 6.75  |     |  | $ | 3.12 | 
|                              | Fourth Quarter |                | $ | 11.00 |     |  | $ | 6.01 | 
|Year Ended December 31, 2002: |                |                |   |       |     |  |   |     
|                              | First Quarter  |                | $ | 10.35 |     |  | $ | 7.40 | 
|                              | Second Quarter |                | $ | 9.15  |     |  | $ | 5.56 | 
|                              | Third Quarter  |                | $ | 5.89  |     |  | $ | 1.70 | 
|                              | Fourth Quarter |                | $ | 4.05  |     |  | $ | 1.85 | 

As of February 23, 2004, there were
approximately 641 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.

9



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|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Restated Financial
    Data

The selected financial data presented below
(restated data followed by as originally reported information)
for the five years ended December 31, 2003, are derived
from our Consolidated Financial Statements and related Notes
thereto. The financial information for the years presented
herein have been adjusted for the impact of restatement
adjustments discussed in Note 2 of the Consolidated
Financial Statements. The selected financial data should be read
in conjunction with Restated 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/A.

|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |   |         |   |  |   |         |  
|----------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | -------- |  | - | -------- | - |  | -------- | ------- | - | -------- | - | ------- | - |  | - | ------- | -
|                              |                                                                                          |                                      
|                              |                                                                                          | Years Ended December 31,              |  
|                              |                                                                                          |                                       |  
|                              |                                                                                          | Restated                              |   |         | Restated |  |   | Restated |   |  | Restated |         |   | Restated |  
|                              |                                                                                          | 2003(b)                               |   |         | 2002(c)  |  |   | 2001     |   |  | 2000(d)  |         |   | 1999(e)  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              |                                                                                          |                                      
|                              |                                                                                          | (In thousands, except per share data) |  
|Statement of Operations Data: |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |   |         |   |  |   |        
|                              | Revenues                                                                                 |                                       | $ | 378,630 |          |  | $ | 383,053  |   |  | $        | 404,734 |   |          | $ | 419,641 |   |  | $ | 443,541 |  
|                              | Cost of revenues                                                                         |                                       |   | 286,183 |          |  |   | 284,427  |   |  |          | 290,658 |   |          |   | 308,233 |   |  |   | 297,171 |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Gross profit                                                                             |                                       |   | 92,447  |          |  |   | 98,626   |   |  |          | 114,076 |   |          |   | 111,408 |   |  |   | 146,370 |  
|                              | Selling, general and administrative expenses                                             |                                       |   | 82,599  |          |  |   | 97,833   |   |  |          | 115,321 |   |          |   | 143,730 |   |  |   | 98,870  |  
|                              | Restructuring, merger costs and other(a)                                                 |                                       |   |        |          |  |   |         |   |  |          | 23,665  |   |          |   | 21,507  |   |  |   | 5,367   |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Income (loss) from operations                                                            |                                       |   | 9,848   |          |  |   | 793      |   |  |          | (24,910 | ) |          |   | (53,829 | ) |  |   | 42,133  |  
|                              | Other income, net                                                                        |                                       |   | 1,781   |          |  |   | 4,110    |   |  |          | 5,531   |   |          |   | 6,060   |   |  |   | 3,737   |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Income (loss) from continuing operations before
    provision (benefit) for income taxes |                                       |   | 11,629  |          |  |   | 4,903    |   |  |          | (19,379 | ) |          |   | (47,769 | ) |  |   | 45,870  |  
|                              | Provision (benefit) for income taxes                                                     |                                       |   | 1,780   |          |  |   | 936      |   |  |          | (8,668  | ) |          |   | (11,332 | ) |  |   | 16,195  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Income (loss) from continuing operations                                                 |                                       |   | 9,849   |          |  |   | 3,967    |   |  |          | (10,711 | ) |          |   | (36,437 | ) |  |   | 29,675  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Income (loss) from discontinued operations, net
    of income taxes                      |                                       |   |        |          |  |   |         |   |  |          |        |   |          |   | (1,692  | ) |  |   | (15     | )
|                              | Gain on sale of discontinued operations, net of
    income taxes                         |                                       |   |        |          |  |   |         |   |  |          |        |   |          |   | 6,072   |   |  |   |        |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Net income (loss)                                                                        |                                       |   | 9,849   |          |  |   | 3,967    |   |  |          | (10,711 | ) |          |   | (32,057 | ) |  |   | 29,660  |  
|                              | Beneficial conversion feature                                                            |                                       |   |        |          |  |   |         |   |  |          |        |   |          |   | (23,651 | ) |  |   |        |  
|                              | Convertible redeemable preferred stock dividends                                         |                                       |   | (4,433  | )        |  |   | (4,298   | ) |  |          | (4,265  | ) |          |   | (2,569  | ) |  |   |        |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Net income (loss) available for common
    shareholders                                  |                                       | $ | 5,416   |          |  | $ | (331     | ) |  | $        | (14,976 | ) |          | $ | (58,277 | ) |  | $ | 29,660  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Basic weighted average shares outstanding                                                |                                       |   | 26,975  |          |  |   | 27,734   |   |  |          | 28,704  |   |          |   | 32,892  |   |  |   | 37,267  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Basic earnings (loss) per share                                                          |                                       | $ | 0.20    |          |  | $ | (.01     | ) |  | $        | (0.52   | ) |          | $ | (1.77   | ) |  | $ | 0.80    |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Diluted weighted average shares outstanding                                              |                                       |   | 27,204  |          |  |   | 27,734   |   |  |          | 28,704  |   |          |   | 32,892  |   |  |   | 38,212  |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  
|                              | Diluted earnings (loss) per share                                                        |                                       | $ | 0.20    |          |  | $ | (.01     | ) |  | $        | (0.52   | ) |          | $ | (1.77   | ) |  | $ | 0.78    |  
|                              |                                                                                          |                                       |   |         |          |  |   |          |   |  |          |         |   |          |  

|                    |                                              |                    |   |         |          |  |   |          |  |  |          |         |  |          |   |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | ------- | -------- |  | - | -------- |  |  | -------- | ------- |  | -------- | - | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31, |  
|                    |                                              |                    |  
|                    |                                              | Restated           |   |         | Restated |  |   | Restated |  |  | Restated |         |  | Restated |  
|                    |                                              | 2003               |   |         | 2002     |  |   | 2001     |  |  | 2000     |         |  | 1999     |  
|                    |                                              |                    |   |         |          |  |   |          |  |  |          |         |  |          |  
|                    |                                              |                   
|                    |                                              | (In thousands)     |  
|Balance Sheet Data: |                                              |                    |   |         |          |  |   |          |  |  |          |         |  |          |   |         |  |  |   |        
|                    | Cash and short term investments              |                    | $ | 127,475 |          |  | $ | 101,551  |  |  | $        | 123,794 |  |          | $ | 140,123 |  |  | $ | 91,236  | 
|                    | Working capital                              |                    |   | 188,271 |          |  |   | 164,899  |  |  |          | 187,270 |  |          |   | 206,940 |  |  |   | 166,051 | 
|                    | Total assets                                 |                    |   | 315,359 |          |  |   | 304,936  |  |  |          | 297,099 |  |          |   | 330,604 |  |  |   | 277,251 | 
|                    | Revolving credit facility and long-term debt |                    |   |        |          |  |   |         |  |  |          |        |  |          |   |        |  |  |   |        | 
|                    | Convertible redeemable preferred stock       |                    |   | 168,655 |          |  |   | 164,222  |  |  |          | 159,924 |  |          |   | 155,660 |  |  |   |        | 
|                    | Total shareholders equity                   |                    |   | 89,970  |          |  |   | 81,802   |  |  |          | 87,355  |  |          |   | 116,849 |  |  |   | 236,280 | 

10



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|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |   |         |   |  |   |         |  
|----------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | ---------- |  | - | ---------- | - |  | ---------- | ------- | - | ---------- | - | ------- | - |  | - | ------- | -
|                              |                                                                                          |                                      
|                              |                                                                                          | Years Ended December 31,              |  
|                              |                                                                                          |                                       |  
|                              |                                                                                          | As                                    |   |         | As         |  |   | As         |   |  | As         |         |   | As         |  
|                              |                                                                                          | Originally                            |   |         | Originally |  |   | Originally |   |  | Originally |         |   | Originally |  
|                              |                                                                                          | Reported                              |   |         | Reported   |  |   | Reported   |   |  | Reported   |         |   | Reported   |  
|                              |                                                                                          | 2003(b)                               |   |         | 2002(c)    |  |   | 2001       |   |  | 2000(d)    |         |   | 1999(e)    |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              |                                                                                          |                                      
|                              |                                                                                          | (In thousands, except per share data) |  
|Statement of Operations Data: |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |   |         |   |  |   |        
|                              | Revenues                                                                                 |                                       | $ | 378,630 |            |  | $ | 383,053    |   |  | $          | 404,734 |   |            | $ | 419,641 |   |  | $ | 443,541 |  
|                              | Cost of revenues                                                                         |                                       |   | 285,506 |            |  |   | 284,853    |   |  |            | 290,651 |   |            |   | 308,299 |   |  |   | 297,171 |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Gross profit                                                                             |                                       |   | 93,124  |            |  |   | 98,200     |   |  |            | 114,083 |   |            |   | 111,342 |   |  |   | 146,370 |  
|                              | Selling, general and administrative expenses                                             |                                       |   | 82,530  |            |  |   | 97,545     |   |  |            | 115,011 |   |            |   | 143,467 |   |  |   | 98,645  |  
|                              | Restructuring, merger costs and other(a)                                                 |                                       |   |        |            |  |   |           |   |  |            | 23,665  |   |            |   | 21,507  |   |  |   | 5,367   |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Income (loss) from operations                                                            |                                       |   | 10,594  |            |  |   | 655        |   |  |            | (24,593 | ) |            |   | (53,632 | ) |  |   | 42,358  |  
|                              | Other income, net                                                                        |                                       |   | 1,781   |            |  |   | 4,110      |   |  |            | 5,531   |   |            |   | 6,060   |   |  |   | 3,737   |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Income (loss) from continuing operations before
    provision (benefit) for income taxes |                                       |   | 12,375  |            |  |   | 4,765      |   |  |            | (19,062 | ) |            |   | (47,572 | ) |  |   | 46,095  |  
|                              | Provision (benefit) for income taxes                                                     |                                       |   | 2,055   |            |  |   | 880        |   |  |            | (8,544  | ) |            |   | (11,255 | ) |  |   | 16,283  |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Income (loss) from continuing operations                                                 |                                       |   | 10,320  |            |  |   | 3,885      |   |  |            | (10,518 | ) |            |   | (36,317 | ) |  |   | 29,812  |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Income (loss) from discontinued operations, net
    of income taxes                      |                                       |   |        |            |  |   |           |   |  |            |        |   |            |   | (1,692  | ) |  |   | (15     | )
|                              | Gain on sale of discontinued operations, net of
    income taxes                         |                                       |   |        |            |  |   |           |   |  |            |        |   |            |   | 6,072   |   |  |   |        |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Net income (loss)                                                                        |                                       |   | 10,320  |            |  |   | 3,885      |   |  |            | (10,518 | ) |            |   | (31,937 | ) |  |   | 29,797  |  
|                              | Beneficial conversion feature                                                            |                                       |   |        |            |  |   |           |   |  |            |        |   |            |   | (23,651 | ) |  |   |        |  
|                              | Convertible redeemable preferred stock dividends                                         |                                       |   | (4,433  | )          |  |   | (4,298     | ) |  |            | (4,265  | ) |            |   | (2,569  | ) |  |   |        |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Net income (loss) available for common
    shareholders                                  |                                       | $ | 5,887   |            |  | $ | (413       | ) |  | $          | (14,783 | ) |            | $ | (58,157 | ) |  | $ | 29,797  |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Basic weighted average shares outstanding                                                |                                       |   | 26,975  |            |  |   | 27,734     |   |  |            | 28,704  |   |            |   | 32,892  |   |  |   | 37,267  |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Basic earnings (loss) per share                                                          |                                       | $ | 0.22    |            |  | $ | (0.01      | ) |  | $          | (0.51   | ) |            | $ | (1.77   | ) |  | $ | 0.80    |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Diluted weighted average shares outstanding                                              |                                       |   | 27,204  |            |  |   | 27,734     |   |  |            | 28,704  |   |            |   | 32,892  |   |  |   | 38,212  |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  
|                              | Diluted earnings (loss) per share                                                        |                                       | $ | 0.22    |            |  | $ | (0.01      | ) |  | $          | (0.51   | ) |            | $ | (1.77   | ) |  | $ | 0.78    |  
|                              |                                                                                          |                                       |   |         |            |  |   |            |   |  |            |         |   |            |  

|                    |                                              |                    |   |         |            |  |   |            |  |  |            |         |  |            |   |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | ------- | ---------- |  | - | ---------- |  |  | ---------- | ------- |  | ---------- | - | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31, |  
|                    |                                              |                    |  
|                    |                                              | As                 |   |         | As         |  |   | As         |  |  | As         |         |  | As         |  
|                    |                                              | Originally         |   |         | Originally |  |   | Originally |  |  | Originally |         |  | Originally |  
|                    |                                              | Reported           |   |         | Reported   |  |   | Reported   |  |  | Reported   |         |  | Reported   |  
|                    |                                              | 2003               |   |         | 2002       |  |   | 2001       |  |  | 2000       |         |  | 1999       |  
|                    |                                              |                    |   |         |            |  |   |            |  |  |            |         |  |            |  
|                    |                                              |                   
|                    |                                              | (In thousands)     |  
|Balance Sheet Data: |                                              |                    |   |         |            |  |   |            |  |  |            |         |  |            |   |         |  |  |   |        
|                    | Cash and short term investments              |                    | $ | 127,475 |            |  | $ | 101,005    |  |  | $          | 123,755 |  |            | $ | 140,123 |  |  | $ | 91,236  | 
|                    | Working capital                              |                    |   | 188,198 |            |  |   | 164,383    |  |  |            | 187,157 |  |            |   | 206,900 |  |  |   | 166,051 | 
|                    | Total assets                                 |                    |   | 316,271 |            |  |   | 305,274    |  |  |            | 297,623 |  |            |   | 330,901 |  |  |   | 277,388 | 
|                    | Revolving credit facility and long-term debt |                    |   |        |            |  |   |           |  |  |            |        |  |            |   |        |  |  |   |        | 
|                    | Convertible redeemable preferred stock       |                    |   | 168,655 |            |  |   | 164,222    |  |  |            | 159,924 |  |            |   | 155,660 |  |  |   |        | 
|                    | Total shareholders equity                   |                    |   | 90,809  |            |  |   | 82,170     |  |  |            | 87,805  |  |            |   | 117,106 |  |  |   | 236,417 | 



|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | 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

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | $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.
|   
|(b) | On February 11, 2004, we issued a press
    release which announced our unaudited earnings for the three
    month period and year ended December 31, 2003, as well as
    the summarized balance sheet as of December 31, 2003.
    Subsequent to our earnings announcement, management identified
    certain necessary adjustments that decreased revenue, gross
    profit, income from operations, net income and basic and diluted
    earnings per share. These adjustments have been included in the
    amounts presented for 2003 in its previously filed
    Form 10-K and in this Form 10-K/A.                                                                                                                                                                                                                                                    
|   
|(c) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(d) | 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/A 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.                                                                                                                                                                                                                                                                                                              
|   
|(e) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          






|        |                                                                                                       
|------- | ------------------------------------------------------------------------------------------------------
|Item 7. | Restated 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/A.
With the exception of statements regarding historical matters
and statements concerning our current status, certain matters
discussed in this Restated 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 the demand for IT
services, public sector government budgetary constraints,
potential cost overruns on fixed-price projects, effective
application of the percentage of completion method of accounting
for fixed price contracts, risks related to merger, acquisition
and strategic investment strategy, variability of operating
results, government regulation of immigration, exposure to
regulatory, political and economic conditions in India and Asia,
competition in the IT services industry, the short-term nature
and termination provisions of contracts, economic conditions
unique to clients in specific industries and limited protection
of intellectual property rights.

Restatement of Consolidated Financial
Statements for the years ended December 31, 2003, 2002 and
2001.

The financial statements have been restated to
reflect adjustments to the Companys financial information
previously reported on Forms 10-K for the years ended
December 31, 2003, 2002 and 2001. The Companys 2003
and 2002 quarterly financial information also has been restated
to reflect adjustments to the Companys previously reported
financial information on Forms 10-Q for the quarters ended
March 31, 2003, June 30, 2003 and September 30,
2003.

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The adjustments giving rise to the Companys
need to restate its financial statements relate primarily to
missing or obsolete equipment that came to light as a result of
a physical inventory process that the Company commenced in the
first quarter of 2004 and completed in June 2004 in order to
facilitate the conversion of its property and equipment data
into a new property and equipment accounting system. The
Companys decision to migrate its current data from its
historic sub-ledger schedules to a property and equipment module
within SAP® (the Companys enterprise resource
planning solution) was aimed at improving data integrity,
increasing efficiency and reducing risk of manual error. Prior
to loading the data into the new module, the Company needed to
be assured that the data were accurate and asset specific. As
part of that endeavor, a physical inventory process was
undertaken. Missing furniture was quantified through an
assessment of furniture and fixtures based upon office closings
and other restructuring activities.

As a result of this inventory and assessment, the
Company became aware that its sub-ledger system did not include
uniform and adequate asset-specific information. Historically,
when equipment was purchased, it was recorded on the appropriate
fixed-asset sub-ledger. The sub-ledger schedules identified the
purchase date, invoice number, general description, cost and
annual and accumulated depreciation, However, because the
sub-ledger was only designed to track costs and depreciation for
accounting purposes, it did not include purchase order
information, asset location or relocation or serial number data
for asset tracking purposes.

To address this situation, the Company attempted
to recreate the appropriate accounting records by examining each
invoice and purchase order generated dating back to the most
recent year during which the Company performed a physical
inventory  1999. As a result of the physical
inventory process and the recreation of the accounting records,
the Company concluded that assets having a net book value of
$2.6 million were either missing, obsolete or had been
appropriately capitalized but were assigned a life in excess of
the maintenance period. The Company believes that the opening
and closing of offices, together with substantial employee
turnover, may have contributed to the lost equipment. The
Company also completed an exhaustive analysis to determine the
period or periods in which to attribute the charge related to
these assets. Because the portion of the charges attributed to
the 2002 financial statements is material, the Company concluded
that it was required to restate its financial statements for all
periods affected by the charge. The Company also decided to
correct other errors identified and corrected in 2003 which had
been previously deemed to be immaterial to the affected
financial statements. These other adjustments consist of
(1) $.5 million of COBRA payments received by the
Company from former employees (primarily in 2002) for
continuation of health care related benefits that were not
accounted for on a timely basis and (2) lease buyout costs
and accruals for travel related costs and certain subcontractor
costs (an aggregate of $.2 million) that were initially
recorded in a year other than the year to which the costs
relate. In addition, the Company recorded other corrections,
resulting in a reduction to accrued liabilities of $.2 million
and $.1 million as of December 31, 2003 and 2002, and
corresponding credits to earnings of $.1 million and $.1 million
in 2003 and 2002, respectively.

The Company has been unable to determine the
period or periods during which assets with a net book value of
$.7 million, as of January 1, 2004 left its
possession. Because the Company cannot determine the period or
periods to which the loss relates, the Company has recorded a
charge in that amount in its financial statements for its first
quarter 2004 in its Form 10-Q for the period ended
March 31, 2004, filed concurrently with this
Form 10-K/A.

As noted above, the Company restated its
financial statements for all periods affected by the charge
including the years ended December 31, 2000 and 1999, the
effect of which was to reduce (increase) income (loss) from
continuing operations before income taxes by ($.2 million)
and $.2 million in 2000 and 1999, respectively. Diluted
earnings per share were not affected in either period.

Additional detail with respect to the impact of
the restatement on the Companys results of operations is
reported in Note 2 (Restatement of Financial
Statements) to the Companys financial statements for
the years ended December 31, 2003 and 2002. As noted
therein, the report previously issued by Arthur Andersen LLP
(the Companys former independent accountants) on the
Companys consolidated financial statements for the years
ended December 31, 2001, 2000 and 1999 have not been
reissued and does not address the

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changes affected by the restatement of the
Companys financial statements reported in this
Form 10-K/A, which changes had an inconsequential effect on
the financial statements for those years.


Management has determined that the internal
control issue underlying the need to restate its financial
statements, as described above, constitutes a material weakness
in its system of internal accounting controls as defined under
standards established by the Public Company Accounting Oversight
Board and has implemented a plan to strengthen the recording and
tracking of its fixed assets as well as the recording of COBRA
payments received by the Company. (See Part II -
Item 9A of this Form 10-K/A.) The major components of
this plan include:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | The implementation of a fixed asset module and
    the integration of this module within the Companys ERP
    system.      
|
| |  | The development of a policy and procedure manual
    regrading the recording, tracking and depreciation of fixed
    assets.
|
| |  | Periodic physical inventories of fixed assets.                                                                              

Overview

We are a global technology services company, with
a focus on industry-specific solutions, strategic outsourcing
and integration solutions. We address the most challenging
technology issues companies are facing through a unique onsite,
offsite, offshore delivery model that helps clients achieve
rapid deployment and reduced costs. 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 apply our industry-specific knowledge to deliver a
wide range of outsourcing and integration services, including;
application maintenance and development outsourcing (AMD/O);
custom application development; e-business services; packaged
software implementation, upgrades and enhancements; and other
services. 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.

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,
2003, 2002 and 2001 approximately 42%, 42%, and 32%,
respectively, of our total revenues were generated from
fixed-price engagements.

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; and (3) internal systems.

In April 2003, the Company announced that it
would realign the organization. The realignment, which is now
complete, aligns sales, subject matter expertise and delivery
and provides a strong foundation for the future growth and
profitability for the Company. As part of the realignment, the
Company reduced headcount in the second quarter of 2003 by over
200 net positions in North America or approximately 8.5% of
domestic headcount. The reduction in headcount was split with
80% of the eliminated positions (billable and delivery
employees) coming from cost of revenue and the remaining 20%
coming from selling, general and administrative. These actions
generated total severance expense of $2.5 million and we
anticipate this action will generate an estimated fully loaded
annual cost savings of approximately $23 million.

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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 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/A.

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

Revenue Recognition.We recognize revenue in accordance
with Staff Accounting Bulletin No. 101, as modified by
Staff Accounting Bulletin No. 104, for our
time-and-materials and fixed price outsourcing contracts. For
those service contracts which are billed on a time and materials
basis, we recognize revenues as the services are performed. In
our time and materials contracts our effort, measured by our
time incurred, represents the contractual milestones or output
measure which is the contractual earnings pattern. For our fixed
price IT outsourcing and maintenance contracts, we recognize
revenue ratably over the applicable outsourcing or maintenance
period as the services are performed continuously over the
contract period.

For our contracts to design, develop or modify
complex information systems based upon the clients
specifications, we recognize revenue on a percentage of
completion basis in accordance with Statement of
Position 81-1. 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.

Covansys periodically enters into contracts that
include multiple-element arrangements, which may include any
combination of services, software, support/ maintenance, and the
re-sale of hardware or software. Contracts entered into after
June 30, 2003 containing multiple elements or deliverables
are segmented into separate units of accounting where the
separate elements represent separate earnings processes in
accordance with EITF 00-21. Revenues are allocated among the
elements based on the relative fair values of the elements and
are recognized in accordance with our policies for the separate
elements unless the undelivered elements are essential to the
functionality of the delivered elements. In circumstances where
an undelivered element is essential to the functionality of the
delivered element, no revenue is recognized for the delivered
element until the undelivered element is delivered.

Retainages, which are not material for any of the
periods presented, are included in revenue earned in excess of
billings in the accompanying condensed consolidated balance
sheets. Revenue earned in excess of

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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 require 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.

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. The
Company utilized domestic net operating loss carryforwards
during 2003 and expects to utilize the remaining net operating
loss carryforwards, to the extent not otherwise limited, during
2004. The effective tax rate was 15.3% for the full year 2003.
The tax rate for the full year included a $3.2 million
favorable tax adjustment related to the settlement of income tax
audits for the years 1998 through 2001. The Company estimates
that its effective tax rate in 2004 and beyond will be at, or
below, 37%. 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, |      
|                                             |  |                          |      
|                                             |  | Restated                 |       |   | Restated |  |       | Restated | 
|                                             |  | 2003                     |       |   | 2002     |  |       | 2001     | 
|                                             |  |                          |       |   |          |  |       |          | 
|Revenues                                     |  |                          | 100.0 | % |          |  | 100.0 | %        |  |  | 100.0 | % 
|Cost of revenues                             |  |                          | 75.6  |   |          |  | 74.3  |          |  |  | 71.8  |   
|                                             |  |                          |       |   |          |  |       |          | 
|Gross profit                                 |  |                          | 24.4  |   |          |  | 25.7  |          |  |  | 28.2  |   
|Selling, general and administrative expenses |  |                          | 21.8  |   |          |  | 25.5  |          |  |  | 28.5  |   
|Restructuring, merger costs and other        |  |                          | 0.0   |   |          |  | 0.0   |          |  |  | 5.8   |   
|                                             |  |                          |       |   |          |  |       |          | 
|Income (loss) from operations                |  |                          | 2.6   | % |          |  | 0.2   | %        |  |  | (6.1  | )%

16



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Revenue and gross profit by segment is as follows:

|               |               |                          |         |         |          |   |         |          |         |   |         |         |         |  
|-------------- | ------------- | ------------------------ | ------- | ------- | -------- | - | ------- | -------- | ------- | - | ------- | ------- | ------- | -
|               |               |                         
|               |               | Years Ended December 31, |        
|               |               |                          |        
|               |               | Restated                 |         |         | Restated |   |         | Restated |        
|               |               | 2003                     |         |         | 2002     |   |         | 2001     |        
|               |               |                          |         |         |          |   |         |          |        
|Revenues      |               |                          |         |         |          |   |         |          |         |   |         |        
|               | Commercial    |                          | $       | 241,202 |          |   | $       | 223,272  |         |   | $       | 252,990 |        
|               |               | Less intersegment        |         |         | (557     | ) |         |          |        |   |         |         |        |  
|               |               |                          |         |         |          |   |         |          |        
|               |               |                          | 240,645 |         |          |   | 223,272 |          |         |   | 252,990 |        
|               | Public Sector |                          |         | 112,913 |          |   |         | 130,591  |         |   |         | 118,953 |        
|               | India/Asia    |                          |         | 75,050  |          |   |         | 60,613   |         |   |         | 46,402  |        
|               |               | Less intersegment        |         |         | (61,601  | ) |         |          | (47,949 | ) |         |         | (31,036 | )
|               |               |                          |         |         |          |   |         |          |        
|               |               |                          | 13,449  |         |          |   | 12,664  |          |         |   | 15,366  |        
|               | Europe        |                          |         | 15,586  |          |   |         | 18,260   |         |   |         | 16,036  |        
|               |               | Less intersegment        |         |         | (3,686   | ) |         |          | (2,068  | ) |         |         |        |  
|               |               |                          |         |         |          |   |         |          |        
|               |               |                          | 11,900  |         |          |   | 16,192  |          |         |   | 16,036  |        
|               | Other         |                          |         | (277    | )        |   |         | 334      |         |   |         | 1,389   |        
|               |               |                          |         |         |          |   |         |          |        
|               |               | $                        | 378,630 |         |          | $ | 383,053 |          |         | $ | 404,734 |        
|               |               |                          |         |         |          |   |         |          |        
|Gross profit  |               |                          |         |         |          |   |         |          |         |   |         |        
|               | Commercial    |                          | $       | 61,508  |          |   | $       | 42,861   |         |   | $       | 45,304  |        
|               | Public Sector |                          |         | 21,666  |          |   |         | 38,430   |         |   |         | 45,342  |        
|               | India/Asia    |                          |         | 9,452   |          |   |         | 12,608   |         |   |         | 19,624  |        
|               | Europe        |                          |         | 3,747   |          |   |         | 4,593    |         |   |         | 5,730   |        
|               | Other         |                          |         | (3,926  | )        |   |         | 134      |         |   |         | (1,924  | )      
|               |               |                          |         |         |          |   |         |          |        
|               |               | $                        | 92,447  |         |          | $ | 98,626  |          |         | $ | 114,076 |        
|               |               |                          |         |         |          |   |         |          |        



| |                      
| | ---------------------
| | 2003 Compared to 2002

|                                             |              |          |       |      |          |   |       |           |   |   |           |      |   |   |       |      |  
|-------------------------------------------- | ------------ | -------- | ----- | ---- | -------- | - | ----- | --------- | - | - | --------- | ---- | - | - | ----- | ---- | -
|                                             |              |          |       |     
|                                             |              | Restated |       |      | Restated |  
|                                             |              | 2003     |       |      | 2002     |  
|                                             |              |          |       |      |          |  
|                                             |              | 1st Half |       |      | 2nd Half |   |       | Full Year |   |   | Full Year |     
|                                             |              |          |       |      |          |   |       |           |   |   |           |     
|Revenue                                      |              | $        | 192.8 |      |          | $ | 185.8 |           |   | $ | 378.6     |      |   | $ | 383.1 |     
|Gross profit                                 |              | $        | 44.4  |      |          | $ | 48.0  |           |   | $ | 92.4      |      |   | $ | 98.6  |     
|                                             | % of revenue |          |       | 23.0 | %        |   |       | 25.8      | % |   |           | 24.4 | % |   |       | 25.7 | %
|Selling, general and administrative expenses |              | $        | 44.8  |      |          | $ | 37.8  |           |   | $ | 82.6      |      |   | $ | 97.8  |     
|                                             | % of revenue |          |       | 23.2 | %        |   |       | 20.3      | % |   |           | 21.8 | % |   |       | 25.5 | %
|Income (loss) from operations                |              | $        | (0.4  | )    |          | $ | 10.2  |           |   | $ | 9.8       |      |   | $ | .8    |     
|                                             | % of revenue |          |       | (0.2 | )%       |   |       | 5.5       | % |   |           | 2.6  | % |   |       | 0.2  | %

The organizational realignment initiated during
the second quarter 2003 substantially modified the
companys reporting structure and requires the migration
from the traditional single segment reporting presentation to a
multi-segment presentation. This modified reporting format
presents revenue of each segment on a full attribution basis,
whereby the end customer invoice rate is presented, with
inter-segment eliminations separately identified. This
presentation reflects the importance and critical relationship
whereby India/ Asia supports, primarily, the
U.S. Commercial and Public Sector segments with services.
The segment operating results at the gross profit and income
from operations level utilizes the companys transfer
pricing methodology and thereby attributes a majority of the
margin to the segments where the end customers are located. Thus
the profitability of Commercial and Public Sector is enhanced
while the profitability of India/Asia is directly reduced.

Revenues.Revenue
for fiscal 2003 was $378.6 million, down 1.2%, from
$383.1 million generated in 2002. This decline is primarily
attributable to lower average bill rates in India, due to
competitive price pressure, a decline in Public Sector revenue
in 2003 compared with 2002 and an increase in the revenue

17



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generated in India as a percent of total revenue.
In 2003, the US/India revenue mix was 80.2/19.8% as compared
with 84.2/15.8% in 2002. This split allocates revenue to India
on a full attribution basis. Full attribution revenue is
calculated using the end customer invoice rate on intersegment
engagements, as opposed to using the transfer rate. The average
bill rates in India are considerably lower than the average bill
rates in the U.S., thus generating less revenue per hour billed.
Despite a 9.8% increase in total hours worked in the U.S. and
India in 2003 to approximately 6.7 million hours up from
6.1 million hours in 2002, the combination of a lower
average bill rate in India and an increase in the revenue from
India based work resulted in lower revenue for 2003.


During the year the company realigned its
operations into four operating segments and other (see
Notes 15 and 18); Commercial, Public Sector, India/ Asia
and Europe. Revenue in the Commercial segment was
$240.6 million in 2003, a 7.7% increase over 2002 revenue
of $223.3 million. This increase is the result of the
combination of new logos and growth in several large
relationships. Public Sector revenue declined to
$112.9 million in 2003 from $130.6 million in 2002.
Public Sector 2003 revenue included an incremental
$8.9 million in revenue associated with the full year
benefit of PDA which was acquired May 31, 2002. The decline
in Public Sector revenue was the result of completion of
numerous projects during the year combined with a slow down in
requests for proposals (RFP) for potential new projects being
issued by the states during the second half of 2002 and first
half of 2003. The budgetary pressures at the state and local
government level impacted the number of projects initiated by
numerous state and local government entities during 2003. The
company experienced an increase in the level of RFPs
during the second half of 2003.

India/ Asia recorded an increase in revenues on a
full attribution basis of 23.8% to $75.1 million for 2003
compared to $60.6 million in 2002. This represents an
increase in the overall revenue derived from India based
resources to 19.8% of total revenue in 2003 up from 15.8% in
2002.

Revenue for Europe declined to $15.6 million
in 2003 from $18.3 million in 2002 primarily as a result of
an economic slowdown in Europe.

Gross Profit.Total
company gross profit was $92.4 million, or 24.4% of
revenue, in 2003 compared with $98.6 million, or 25.7% of
revenues, in 2002. Gross profit in 2003 was negatively impacted
by $1.8 million in severance and $6.2 million of
negative gross margin across four challenged projects in Public
Sector.

During the year the company realigned domestic
operations by removing redundant layers and overlapping
responsibilities while more effectively aligning resources
within our Commercial and Public Sector operating segments.
During the year, we substantially modified our delivery model
through the elimination of approximately 400 net positions in
the U.S. while increasing our billable headcount in India by
over 750 positions. The organizational realignment was
initiated during the second quarter when the company eliminated
over 200 net positions in North America. The additional
reduction in headcount during the third and fourth quarters was
driven by continued execution of the realignment combined with
the addition of more India-centric business. We established
utilization targets of 85% for the U.S. and a range of 77% to
79% for India. Utilization for 2003 was approximately 83% in the
U.S. and slightly over 76% in India for 2003. This compares
favorably with 79% in the U.S. and 73% in India for 2002.

The success of the actions initiated during the
second quarter are evident in the gross margin improvement from
23.0% in the first half of 2003 to 25.8% for the second half of
2003. The margin improvement is more pronounced when adjusted
for the challenged projects in Public Sector.

Gross profit for 2003 was negatively impacted by
$6.2 million on four fixed-price projects in the Public
Sector. These projects are being closely monitored and
reassessed on a periodic basis. The company has adopted several
new processes beginning in the fourth quarter 2003 to minimize
the potential for future large adjustments on fixed-price
projects including: the appointment of a fixed-price specialist,
the adoption of a more refined set of internal standard
practices and the centralization of Public Sector delivery under
a seasoned executive. Much of the success of these initiatives,
however, is predicated on actions required to be performed by
the Companys customers. If a customer does not perform as
anticipated, additional adjustments to the financial statements
may be required and such adjustments could be material. The
accumulated net investment in these projects, represented by
accounts receivable and revenue earned in excess of billings, was

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$14.0 million at December 31, 2003.
Such amounts will continue to increase, consistent with the
contractual payment terms, at least through the first and second
quarters of 2004.


The gross profit for the Commercial sector was
$61.5 million, or 25.6% of revenue, and was 43.4% higher
than the $42.9 million, or 19.1% of revenue, recorded for
2002. This improvement was driven by an increase in work
performed in India, a reduction in the transfer rate charged by
India and higher utilization in the U.S. The Commercial segment
also experienced improvement as several new accounts ramped up
through the year generating sequentially better margins.
Additionally, a targeted group of accounts was eliminated based
on inadequate gross margin.

Gross profit in the Public Sector was
$21.7 million, or 19.2% of revenue, in 2003 compared with
29.4% of revenue in 2002. This deterioration in gross margin was
the result of lower revenue, negative gross margin on four
challenged projects and competitive pressure on pricing. Actions
have been taken to reduce the cost structure of the Public
Sector to appropriately align costs with current revenue levels
and the current pricing environment. A comprehensive set of
actions has been implemented to address the issues related to
the aforementioned challenged projects within Public Sector.

India/Asia gross margin of $9.4 million for
2003 declined from the 2002 level of $12.6 million
primarily due to competitive price pressures in India and a
reduction in the transfer rate charged by India to the U.S. and
Europe.

Gross profit in Europe declined to
$3.7 million in 2003 from $4.6 million in 2002 as a
result of a lower revenue level in 2003.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses were $82.6 million or 21.8% of
revenue in 2003 inclusive of $2.4 million of severance and
lease termination costs, a decrease from $97.8 million or
25.5% of revenue for 2002 which included $1.4 million of
severance. Selling, general and administrative expense as a
percent of revenue declined from approximately 23.2% during the
first half of 2003 to approximately 20.3% for the second half of
2003. This 15.6% reduction in selling, general and
administrative from 2002 to 2003 was primarily the result of the
organizational realignment initiated during the second quarter
of 2003. Through the elimination of overlapping layers in the
organization as part of our organizational realignment we were
able to cut costs and better align our support structure with
our Commercial, Public Sector and India focus. The largest
component of selling, general and administrative expense is
labor costs. We reduced the total number of selling, general and
administrative employees from 479, representing 10% of our total
workforce, at the end of 2002 to 356, representing 7% of our
total workforce, at the end of 2003.

Income from
Operations.Income from operations was
$9.8 million or 2.6% of revenue for 2003 up substantially
from $0.8 million or 0.2% of revenue for 2002. The year
over year improvement was driven by the organizational
realignment initiated during the second quarter. The substantial
improvement in selling, general and administrative expenses
offset the year over year decline in gross margin. The actions
taken during the second quarter are highlighted by an increase
in income (loss) from operations as a percentage of revenue from
(0.2)% for the first half of 2003 to 5.5% for the second half of
2003. The actions included:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | Realignment and elimination of organizational
    layers and redundancies.                                               
|
| |  | Reduction of the domestic labor costs in both
    cost of revenue and selling, general and administrative
    categories.
|
| |  | Increased level of work being performed by India
    based employees.                                                    
|
| |  | Elimination of low margin customers.                                                                                     
|
| |  | Strengthening of processes and personnel
    associated with fixed price projects.                                       

Income from operations for the Commercial segment
was $38.4 million in 2003 compared with $6.1 million
for 2002. The substantial improvement was split between a
$18.6 million improvement in gross profit and a reduction
in selling, general and administrative expenses within the
Commercial segment of

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approximately $13.6 million. The
organizational realignment eliminated a significant number of
layers and redundancies that existed in the previous
organizational model.


Income from operations for the Public Sector was
$4.4 million in 2003 down from $19.2 million in 2002.
The gross profit deterioration of $16.8 million was
partially offset by lower selling, general and administrative
spending. The overall cost structure has been further realigned
to support the current revenue level.

Income from operations for India/Asia declined to
$4.9 million in 2003 from $7.6 million in 2002. The
profitability of this segment was directly affected by the
transfer pricing methodology utilized for work performed by
India on behalf of North American and European clients. A
majority of the profitability is allocated to the country where
the client is located. This allocation is based on the level of
sales, marketing, project management, contracting and credit
risk borne by the entity with the primary customer contract.

Income (loss) from operations for Europe improved
to $0.7 million in 2003 from a loss in 2002 of
($0.7) million. The improvement was the result of a
substantial reduction in selling, general and administrative
expenses in 2003 compared to 2002.

Other Income, Net.Other income, net represents interest earned on cash and short
term investments net of a recognized loss of approximately
$0.7 million on the sale of an investment carried at cost
in 2003. Other income, net for fiscal 2003, was
$1.8 million compared to $4.1 million in fiscal 2002.
The decrease is primarily related to the lower interest rates
earned on cash and short term investments and the aforementioned
loss on the sale of an investment.

Provision for Income
Taxes.The provision for income taxes
for fiscal 2003 was $1.8 million compared with
$0.9 million for fiscal 2002. The effective tax rate was
15.3% for 2003 compared with 19.1% for 2002. The effective rate
for 2002 incorporates the benefit of a lower blended tax rate in
India relative to the U.S. rate. The tax provision and tax rate
for 2003 included a $3.2 million favorable tax adjustment
related to the settlement of income tax audits for the years
1998 through 2001. The overall effective rate was negatively
impacted by permanent items such as subpart F income and travel
and entertainment expense. Federal and state cash taxes will be
limited as the company utilizes domestic net operating loss
carryforwards.



| |                      
| | ---------------------
| | 2002 Compared to 2001

The organizational realignment initiated during
the second quarter of 2003 substantially modified the
companys reporting structure. This realignment followed
several modest realignments implemented in 2002 and 2001. The
extensive nature of the realignment in 2003 requires the
application of numerous assumptions relative to the appropriate
activities attributed to various segments for 2002 and 2001. The
segment comparisons of 2002 and 2001 are based on the
realignment of our internal hierarchy in our ERP system and the
allocation of certain expenses to the newly identified
multi-segment organization. Activities and cost centers which
have been closed as a result of the realignment have been
attributed to Other as they have limited relevance in 2002 and
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 3.4% of revenue for the year ended December 31,
2002. PDA was acquired on May 31, 2002.

Revenue in the Commercial segment declined to
$223.3 million in 2002 from $253.0 million in 2001.
This decline was the result of slower economic conditions
combined with lower bill rates in both the U.S. and India in
2002 relative to 2001.

Public Sector recorded revenue in 2002 of
$130.6 million compared with $119.0 million in 2001.
Revenue excluding the impact of the PDA acquisition was flat
between 2002 and 2001 and was impacted by a slow down in new
project opportunities related to budgetary pressures in numerous
state and local governments.

India/Asia revenue, net of intersegment
eliminations, declined to $12.7 million in 2002 from
$15.4 million in 2001. This decline was primarily the
result of a reduction in bill rates in India due to competitive
pressures.

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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
13.5% to $98.6 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 25.7% 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.

Commercial segment gross profit was
$42.9 million or 19.2% of revenues in 2002 compared with
$45.3 million or 17.9% of revenues for 2001. The decline in
revenue in the Commercial segment was the primary driver of
lower gross profit. The 1.3% point improvement in gross profit
as a percentage or revenue was supported by a reduction in the
transfer price charged by India.

Public Sector gross profit was $38.4 million
in 2002 or 29.4% of revenue compared with $45.3 million or
38.1% of revenue in 2001. This substantial decline in gross
profit was the result of increased pricing pressure on large
state contracts where Covansys was the prime vendor for staffing
services, as well as price pressure on new project work due to
increased competitive pressures.

India/Asia gross profit was $12.6 million in
2002 compared with $19.6 million in 2001. The primary
driver of this decline in gross profit was a reduction in bill
rates in India due to competitive pressures and a modification
in the transfer rate charged by India to the U.S. and Europe.
The reduction in the transfer rate was driven by market
conditions for offshore sourced services and the refinement of
the cost plus transfer pricing methodology adopted by the
company.

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 15.2% to
$97.8 million in fiscal 2002 compared to
$115.3 million in fiscal 2001. As a percentage of revenues,
selling, general and administrative expenses decreased from
28.5% in fiscal 2001 to 25.5% 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.

Income (loss) from Operations.Income from operations was
$0.8 million for 2002 compared with a loss from operations
of ($24.9) million for 2001. The 2001 loss from operations
included a charge for restructuring, merger costs and other of
$23.7 million (See Note 18). The loss from operations
for 2001 excluding the restructuring, merger costs and other
charge was ($1.2) million. The improvement between 2002 and
2001 income (loss) from operations excluding restructuring,
merger costs and other is supported by the substantial reduction
in selling, general and administrative expenses offset by a
year-over-year decline in gross profit.

Income from operations for the Commercial segment
was $6.1 million in 2002 compared with a loss of
($9.0) million in 2001. This substantial improvement was
the result of targeted actions taken during 2002 to reduce
selling, general and administrative expenses, including the
elimination of executive positions, the elimination of redundant
or overlapping positions, the reduction in the overall size of
the sales organization and a reduction in variable compensation.

Income from operations for Public Sector declined
to $19.2 million for 2002 from $33.1 million for 2001
as a result of lower gross margin and an increase in selling,
general and administrative expenses attributed to Public Sector
through the reorganization. The acquisition of PDA during 2002
also contributed to the increase in selling, general and
administrative expenses compared to 2001.

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Income from operations for India/Asia was
$7.6 million in 2002 compared with $14.7 million in
2001. The decline is the result of the overall decline in gross
margin between years.

Other Income, Net.Other income, net represents interest
earned on cash equivalents, net of interest expense on
borrowings. Other income, net for fiscal 2002 was
$4.1 million compared to $5.5 million in 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 $8.7 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 benefit from
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.

Restructuring, Merger and Other Related
Charges

In April 2003, the Company announced it would
realign the organization. The realignment, which is now
complete, aligned sales, subject matter expertise and delivery
and provided a strong foundation for the future growth and
profitability for the Company. As part of the realignment, the
Company reduced headcount in the second quarter of 2003 by over
200 net positions in North America or approximately 8.5% of
domestic headcount. The reduction in headcount was split with
over 80% of the eliminated positions (billable and delivery
employees) coming from costs of revenue with the remaining
coming from selling, general and administrative.

In fiscal 2003, the Company recorded costs of
$4.2 million related to various headcount reductions,
including as discussed above, and termination of lease
obligations associated with the consolidation of facilities.
Amounts related to lease terminations will be paid out through
2006. Amounts related to severance will be paid through 2004.

In fiscal 2002, the Company recorded
restructuring and other costs of $1.3 million related to
the termination 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 (in millions):

|                                                                                                                           |  |   |      | 
|-------------------------------------------------------------------------------------------------------------------------- |  | - | ---- | 
|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                                           |  |   | .9   | 
|Discontinued acquisition discussions                                                                                       |  |   | 1.7  | 
|Other                                                                                                                      |  |   | 1.1  | 

Related Party Transactions

Synova is an IT professional services
organization owned by a co-chairman of our Board of Directors.
For the years ended December 31, 2003 and 2002, we provided
services to Synova totaling approximately $3.2 million and
$4.6 million, respectively. In addition, Synova provided
services to Covansys, for the year ended December 31, 2003
and 2002, totaling approximately $1.6 million and
$4.1 million, respectively. The net balance due Covansys
from Synova at December 31, 2003 and 2002 was
$.5 million and $.2 million, respectively. In
addition, under the terms of a note payable originated in 2000,
Synova owes Covansys $8 million. The note is due in
September 2005, and interest at a variable rate (4.67% in the
fourth quarter 2003) is paid quarterly in accordance with its
terms.

We paid approximately $.8 million,
$1.1 million and $.9 million to Clayton, Dubilier and
Rice, Inc. (CD&R), a shareholder, for financial, management
advisory, and executive management services for the years ended
December 31, 2003, 2002 and 2001, respectively.

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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 years ended
December 31, 2003 and 2002, services provided by Covansys
to SIRVA, Inc. totaled approximately $8.4 million and
$2.8 million, respectively. In addition, SIRVA provided
services to Covansys, for the years ended December 31, 2003
and 2002, totaling $.1 million and $.2 million,
respectively.

For the years ended December 31, 2002 and
2001, we provided IT services totaling $.2 million and
$1 million, respectively to Acterna Corporation, a company
related through common ownership by CDR.

We paid approximately $.2 million and
$1.1 million during the years ended December 31, 2002,
and 2001, 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, 2003, we did not provide any services to
Praja. In addition, Praja did not provide any services or
software to Covansys for the year ended December 31, 2003.
During the year ended December 31, 2002, we provided
services to Praja totaling $.1 million. Praja provided
services and software to Covansys totaling $.2 million for
the year ended December 31, 2002.

The Company has a note receivable in the amount
of $.6 million from a director. This note bears interest at
8.25% and is due in December 2006.

The Company has a note receivable in the amount
of $.4 million from an executive officer. This note bears
interest at 2.5%.

The Company has a non-interest bearing note
receivable in the amount of $.1 million from a co-chairman
of the Companys Board of Directors.

Recently Issued Financial Accounting
Standards

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, relating to the
guarantors accounting for, and disclosure of, the issuance
of certain types of guarantees. FIN 45 became effective on
January 1, 2003. The adoption of FIN 45 did not have a
material effect on our results of operations or financial
position.

In November 2002, the Emerging Issues Task Force
issued a final consensus on Issue 00-21: Accounting for
Revenue Arrangements with Multiple Deliverables.
Issue 00-21 provides guidance on how and when to recognize
revenues on arrangements requiring delivery of more than one
product or service. Issue 00-21 is effective prospectively
for arrangements entered into in fiscal periods beginning after
June 15, 2003. Companies may also elect to apply the
provisions of Issue 00-21 to existing arrangements and
record the income statement impact as the cumulative effect of a
change in accounting principle. We adopted Issue 00-21
prospectively for contracts entered into after June 30,
2003. The adoption of Issue 00-21 did not have a material
effect on the results of our operations or financial position
but may impact the timing of revenue recognition on contracts
entered into in future periods.

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). The Company adopted FIN 46 during 2003.
The adoption of FIN 46 had no effect on our results of
operations or financial position.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under FAS 133. The statement is
generally effective for contracts entered into or modified after
June 30, 2003 and

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for hedging relationships designated after
June 30, 2003. The adoption of this statement did not have
a material effect on our results of operations or financial
position.


In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement improves the accounting for certain financial
instruments that, under previous guidance, issuers could account
for as equity. The statement requires that those instruments be
classified as liabilities in statements of financial position.
This statement became effective for interim periods beginning
after June 15, 2003. Due to the conversion features of the
Companys convertible redeemable preferred stock, the
adoption of this statement had no effect on our financial
position or results of operations.

In December 2003, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104 (SAB
No. 104), Revenue Recognition, which codifies,
revises and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material
effect on our results of operations or financial position.

Liquidity and Capital Resources

As of December 31, 2003, we had cash and
short-term investments totaling $127.5 million. We
generally fund our operations and working capital needs through
internally generated funds. Cash provided by operating
activities was $35.0 million, $16.5 million, and
$18.4 million for the years ended December 31, 2003,
2002 and 2001, respectively. The significant increase in cash
flow was generated from earnings and depreciation and
amortization in excess of capital investment.

The principal use of cash for investing
activities during the three years ended December 31, 2003
was for the purchase of property and equipment, primarily as
part of the development and enhancement of our offshore software
development centers and the purchase of short-term investments.

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 minus 0.5%, or the Eurodollar
rate plus 1.20%. $15.0 million of the $20.0 million is
available for standby letters of credit. As of December 31,
2003, we had $6.2 million of standby letters of credit
outstanding as collateral for five 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, 2003, we have not had any significant average
balances outstanding under this arrangement.

Net cash used in financing activities was
$.6 million, $5.9 million and $12.8 million in
2003, 2002, and 2001, respectively. A significant use of cash in
financing activities was for the repurchase of our Common Stock.
During 2003, 2002 and 2001, we repurchased 557,200, 1,124,376
and 1,482,700 shares, respectively, of our Common Stock,
for $1.5 million, $6.6 million and $14.5 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 2003, 2002 and 2001
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.

Inflation did not have a material impact on our
revenues or income (loss) from operations in fiscal years 2003,
2002 and 2001.

Covansys has no off-balance sheet transactions.

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The following table presents a summary of
payments due for our contractual obligations for operating
leases as of December 31, 2003:

Period After December 31, 2003

|                 |  |                |        |        |        |   |       |              |  |   |              |  |  |               |       |  |  |   |        | 
|---------------- |  | -------------- | ------ | ------ | ------ | - | ----- | ------------ |  | - | ------------ |  |  | ------------- | ----- |  |  | - | ------ | 
|                 |  |                |        | Within |        |   |       |              |  |   |             
|                 |  | Total          |        |        | 1 Year |   |       | 1 to 3 Years |  |   | 3 to 5 Years |  |  | After 5 Years |      
|                 |  |                |        |        |        |   |       |              |  |   |              |  |  |               |      
|                 |  |               
|                 |  | (In thousands) |       
|Operating leases |  | $              | 44,504 |        |        | $ | 6,955 |              |  | $ | 10,570       |  |  | $             | 6,823 |  |  | $ | 20,156 | 

Factors That May Affect Future
Results



| |                                                         
| | --------------------------------------------------------
| | Improperly Estimate and Execute Fixed-Price
    Projects

We realized approximately 42% of our revenues
from fixed-price projects during both the year ended
December 31, 2003 and 2002, respectively. These projects
expose us to risk if we fail to:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Adequately estimate the resources required to
    complete a project;                         
|
| |  | Effectively develop and maintain detailed project
    plans;                                  
|
| |  | Properly determine the scope of an engagement; or                                             
|
| |  | Complete our contractual obligation in a manner
    consistent with the detailed project plan.

We cannot be certain that any of our existing or
future fixed-price projects will be profitable. These projects
generally contain payment terms that are tied to the successful
achievement of delivered milestones. These milestones frequently
require a substantial level of work and thus expose the Company
to large unbilled balances. The ultimate payment of these
balances is dependent on the acceptance of the deliverables
contractually agreed to relative to each milestone. These
unbilled balances are frequently very large and create
collection risk if project milestones are not accepted by the
customer.



| |                                     
| | ------------------------------------
| | Public Sector Budget
    Constraints

Contracts with state and local government clients
generated approximately 30% and 34% of our revenue during the
years ended December 31, 2003, and 2002 respectively. Our
public sector clients are experiencing significant budget
constraints which could result in contract termination and a
decrease is the amount of business generated in the future by
these customers.



| |                                     
| | ------------------------------------
| | 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;
|
| |  | Changes in the rates we charge clients for
    services;                              
|
| |  | 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.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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 and Europe accounted for 19.8% of our 2003
revenues. In addition, over 50% of our workforce is 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.

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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.

Our operations in Europe and India are subject to
currency exchange rate fluctuations, foreign exchange
restrictions and related issues that may adversely impact our
operating results. In addition, if we fail to manage our
geographically dispersed operations we may not meet our
financial objectives.



| |                                             
| | --------------------------------------------
| | 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.



| |                                                                      
| | ---------------------------------------------------------------------
| | 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         

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 is
exposed to high start-up costs.



| |                                                                    
| | -------------------------------------------------------------------
| | Our Contracts are Short-Term and Contain
    Termination Provisions

Many of our contracts have terms of less than one
year. A client may choose not to renew its contract when it
terminates. Under some of our contracts, clients may
unilaterally reduce the use of our services with little or no
notice and without 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.    



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | 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

26



---



##### Table of Contents



demand worldwide. We cannot be certain that we
will be able to attract or retain the IT professionals that we
seek.




| |                                                       
| | ------------------------------------------------------
| | 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/A  Restated 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 2003, 2002 and 2001
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. The company does not
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 19.8% of our total 2003 revenues. In addition, services
provided by our other international operations, primarily in
Europe, accounted for 4.1% 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 $127.5 million as of
December 31, 2003. 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.

Derivative Risk

From time to time, the Company hedges certain of
its forecasted foreign currency exposure using forward contracts
with durations no greater than 3 months. The notional
amount and fair value of such contracts was immaterial at
December 31, 2003.

27



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##### Table of Contents






Item 8.     Restated
Financial Statement and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Covansys Corporation:

In our opinion, the accompanying consolidated
balance sheets 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,
2003 and 2002, and the results of their operations and their
cash flows for each of the two years in the period ended
December 31, 2003 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 audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. The consolidated
financial statements of Covansys Corporation for the year ended
December 31, 2001, prior to the revisions described in
Note 5 and Note 15, 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 5 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill effective January 1, 2002.

As described in Note 2 to the consolidated
financial statements, the Company has restated its previously
issued consolidated financial statements.

As discussed above, the consolidated financial
statements of Covansys Corporation for the year ended
December 31, 2001, were audited by other independent
accountants who have ceased operations. As described in
Note 5 and Note 15, 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 and to revise
the disclosures required by Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, resulting from a
change in the composition of the Companys reportable
segments. We audited, for 2001, the transitional disclosures
described in Note 5 and the adjustments to revise the
disclosures described in Note 15. In our opinion, the
transitional disclosures in Note 5 are appropriate and the
adjustments described in Note 15 are appropriate and have
been properly applied. However, we were not engaged to audit,
review, or apply any procedures to the 2001 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 financial statements taken as a whole.



| |                               
| | ------------------------------
| | /s/ PricewaterhouseCoopers LLP

Detroit, Michigan

March 30, 2004 except for Note 2, as to
which the date is August 3, 2004


28



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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 described in Note 2,
the consolidated financial statements for the year ended
December 31, 2001 have been restated for certain
adjustments as described therein. As described in Note 5
and Note 15, the consolidated financial statements for the
year ended December 31, 2001 have been modified 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 and to revise the disclosures required by
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information, resulting from a change in the composition of
the Companys reportable segments. The Arthur Andersen LLP
report does not extend to these changes to the consolidated
financial statements for the year ended December 31, 2001.
The modifications to the consolidated financial statements for
the year ended December 31, 2001 as included in
Notes 5 and 15, were reported on by PricewaterhouseCoopers
LLP as stated in their report appearing herein. Note that the
report previously issued by Arthur Andersen LLP includes certain
fiscal years that are not required to be presented in the
accompanying consolidated financial statements as of and for the
year ended December 31, 2003.

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


29



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |         |         |        |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------ | -------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                                                                                     |                                                                                                                                                                           |                                
|                                                                                                                                     |                                                                                                                                                                           | December 31,                    |                                           
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                           
|                                                                                                                                     |                                                                                                                                                                           | Restated                        |                                            |        | Restated |        
|                                                                                                                                     |                                                                                                                                                                           | 2003                            |                                            |        | 2002     |        
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                
|                                                                                                                                     |                                                                                                                                                                           | (Dollars in thousands)          |                                           
|ASSETS                                                                                                                               |                                                                                                                                                                           |                                 |                                            |        |          |         |         |       
|Current assets:                                                                                                                      |                                                                                                                                                                           |                                 |                                            |        |          |         |         |       
|                                                                                                                                     | Cash and cash equivalents                                                                                                                                                 |                                 | $                                          | 89,671 |          |         | $       | 88,288 |        
|                                                                                                                                     | Short term investments                                                                                                                                                    |                                 |                                            | 37,804 |          |         |         | 13,263 |        
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           | Cash and short term investments |                                            |        | 127,475  |         |         |        | 101,551 |        
|                                                                                                                                     | Accounts receivable, net                                                                                                                                                  |                                 |                                            | 69,755 |          |         |         | 69,290 |        
|                                                                                                                                     | Revenue earned in excess of billings                                                                                                                                      |                                 |                                            | 32,127 |          |         |         | 42,500 |        
|                                                                                                                                     | Deferred taxes                                                                                                                                                            |                                 |                                            | 9,396  |          |         |         | 4,235  |        
|                                                                                                                                     | Prepaid expenses and other                                                                                                                                                |                                 |                                            | 5,363  |          |         |         | 6,107  |        
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                 | Total current assets                       |        |          | 244,116 |         |        |         | 223,683 | 
|Property and equipment, net                                                                                                          |                                                                                                                                                                           |                                 | 31,253                                     |        |          |         | 34,972  |       
|Computer software, net                                                                                                               |                                                                                                                                                                           |                                 | 5,430                                      |        |          |         | 6,958   |       
|Goodwill                                                                                                                             |                                                                                                                                                                           |                                 | 18,441                                     |        |          |         | 17,053  |       
|Deferred taxes                                                                                                                       |                                                                                                                                                                           |                                 | 4,231                                      |        |          |         | 9,998   |       
|Other assets                                                                                                                         |                                                                                                                                                                           |                                 | 11,888                                     |        |          |         | 12,272  |       
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                 | Total assets                               |        | $        | 315,359 |         |        | $       | 304,936 | 
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                    
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                             |                                                                                                                                                                           |                                 |                                            |        |          |         |         |       
|Current Liabilities:                                                                                                                 |                                                                                                                                                                           |                                 |                                            |        |          |         |         |       
|                                                                                                                                     | Accounts payable                                                                                                                                                          |                                 | $                                          | 11,290 |          |         | $       | 10,754 |        
|                                                                                                                                     | Accrued payroll and related costs                                                                                                                                         |                                 |                                            | 21,462 |          |         |         | 23,063 |        
|                                                                                                                                     | Other accrued liabilities                                                                                                                                                 |                                 |                                            | 21,854 |          |         |         | 24,340 |        
|                                                                                                                                     | Deferred revenue                                                                                                                                                          |                                 |                                            | 1,239  |          |         |         | 627    |        
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                 | Total current liabilities                  |        |          | 55,845  |         |        |         | 58,784  | 
|Other liabilities                                                                                                                    |                                                                                                                                                                           |                                 | 889                                        |        |          |         | 128     |       
|Commitments and contingencies                                                                                                        |                                                                                                                                                                           |                                 |                                            |        |          |         |         |       
|Convertible redeemable preferred stock, no par
    value, 200,000 shares issued and outstanding as of
    December 31, 2003 and 2002 |                                                                                                                                                                           |                                 | 168,655                                    |        |          |         | 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, 26,792,547 and 27,221,049 shares issued and
    outstanding as of December 31, 2003 and 2002, respectively |                                 |                                            |       |          |         |         |       |        
|                                                                                                                                     | Additional paid-in capital                                                                                                                                                |                                 |                                            | 93,165 |          |         |         | 98,631 |        
|                                                                                                                                     | Retained earnings (deficit)                                                                                                                                               |                                 |                                            | 1,136  |          |         |         | (8,713 | )      
|                                                                                                                                     | Stock subscriptions receivable                                                                                                                                            |                                 |                                            | (1,790 | )        |         |         | (2,218 | )      
|                                                                                                                                     | Accumulated other comprehensive loss                                                                                                                                      |                                 |                                            | (2,541 | )        |         |         | (5,898 | )      
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                 | Total shareholders equity                 |        |          | 89,970  |         |        |         | 81,802  | 
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        
|                                                                                                                                     |                                                                                                                                                                           |                                 | Total liabilities and shareholders equity |        | $        | 315,359 |         |        | $       | 304,936 | 
|                                                                                                                                     |                                                                                                                                                                           |                                 |                                            |        |          |        

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

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COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                 |                                                               |                                       |         |        |          |   |         |          |   |   |         |         |  
|------------------------------------------------ | ------------------------------------------------------------- | ------------------------------------- | ------- | ------ | -------- | - | ------- | -------- | - | - | ------- | ------- | -
|                                                 |                                                               |                                      
|                                                 |                                                               | Year Ended December 31,               |        
|                                                 |                                                               |                                       |        
|                                                 |                                                               | Restated                              |         |        | Restated |   |         | Restated |  
|                                                 |                                                               | 2003                                  |         |        | 2002     |   |         | 2001     |  
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 |                                                               |                                      
|                                                 |                                                               | (In thousands, except per share data) |        
|Revenues                                         |                                                               | $                                     | 378,630 |        |          | $ | 383,053 |          |   | $ | 404,734 |        
|Cost of revenues                                 |                                                               |                                       | 286,183 |        |          |   | 284,427 |          |   |   | 290,658 |        
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 | Gross profit                                                  |                                       |         | 92,447 |          |   |         | 98,626   |   |   |         | 114,076 |  
|Selling, general and administrative expenses     |                                                               |                                       | 82,599  |        |          |   | 97,833  |          |   |   | 115,321 |        
|Restructuring, merger costs and other            |                                                               |                                       |        |        |          |   |        |          |   |   | 23,665  |        
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 | Income (loss) from operations                                 |                                       |         | 9,848  |          |   |         | 793      |   |   |         | (24,910 | )
|Other (income), net                              |                                                               |                                       | (1,781  | )      |          |   | (4,110  | )        |   |   | (5,531  | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 | Income (loss) before provision (benefit) for
    income taxes |                                       |         | 11,629 |          |   |         | 4,903    |   |   |         | (19,379 | )
|Provision (benefit) for income taxes             |                                                               |                                       | 1,780   |        |          |   | 936     |          |   |   | (8,668  | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 | Net income (loss)                                             |                                       |         | 9,849  |          |   |         | 3,967    |   |   |         | (10,711 | )
|Convertible redeemable preferred stock dividends |                                                               |                                       | (4,433  | )      |          |   | (4,298  | )        |   |   | (4,265  | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|                                                 | Net income (loss) available for common
    shareholders       |                                       | $       | 5,416  |          |   | $       | (331     | ) |   | $       | (14,976 | )
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|Earnings (loss) per share:                       |                                                               |                                       |         |        |          |   |         |          |   |   |         |        
|Basic earnings (loss) per share                  |                                                               | $                                     | 0.20    |        |          | $ | (0.01   | )        |   | $ | (0.52   | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|Diluted earnings (loss) per share                |                                                               | $                                     | 0.20    |        |          | $ | (0.01   | )        |   | $ | (0.52   | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|Basic weighted average shares outstanding        |                                                               |                                       | 26,975  |        |          |   | 27,734  |          |   |   | 28,704  |        
|Dilutive effect of options                       |                                                               |                                       | 229     |        |          |   |        |          |   |   |        |        
|Convertible redeemable preferred stock           |                                                               |                                       | (A      | )      |          |   | (A      | )        |   |   | (A      | )      
|                                                 |                                                               |                                       |         |        |          |   |         |          |  
|Diluted weighted average shares outstanding      |                                                               |                                       | 27,204  |        |          |   | 27,734  |          |   |   | 28,704  |        
|                                                 |                                                               |                                       |         |        |          |   |         |          |  



|    |              
|--- | -------------
|(A) | Anti-dilutive

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

31



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                       |                                                                              |                        |            |            |            |          |         |           |   |   |               |         |   |               |        |     |               |   |        |        |   |   |         |         |  
|------------------------------------------------------ | ---------------------------------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | -------- | ------- | --------- | - | - | ------------- | ------- | - | ------------- | ------ | --- | ------------- | - | ------ | ------ | - | - | ------- | ------- | -
|                                                       |                                                                              |                        |            |            |            | Restated |         |           |   |   | Accumulated   |         |   | Restated      |       
|                                                       |                                                                              | 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, 2000 as
    originally reported |                                                                              |                        | 29,577,428 |            |            | $        | 122,139 |           |   | $ | 2,553         |         |   | $             | (3,176 | )   |               | $ | (4,410 | )      |   | $ | 117,106 |        
|                                                       | Effect of restatement on periods ending on or
    prior to December 31, 2000 |                        |            |           |            |          |         |          |   |   |               | (257    | ) |               |        |    |               |   |        |       |   |   |         | (257    | )
|                                                       |                                                                              |                        |            |            |            |          |         |           |   |   |               |         |   |               |        |     |               |  
|Balance  December 31, 2000 as
    restated            |                                                                              |                        | 29,577,428 |            |            |          | 122,139 |           |   |   | 2,296         |         |   |               | (3,176 | )   |               |   | (4,410 | )      |   |   | 116,849 |        
|                                                       | Net loss as restated                                                         |                        |            |           |            |          |         |          |   |   |               | (10,711 | ) |               |        |    |               |   |        |       |   |   |         | (10,711 | )
|                                                       | Currency translation adjustment                                              |                        |            |           |            |          |         |          |   |   |               |        |   |               |        |    |               |   |        | (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 |           |   |   | (12,680       | )       |   |               | (2,362 | )   |               |   | (6,549 | )      |   |   | 87,355  |        
|                                                       | Net income as restated                                                       |                        |            |           |            |          |         |          |   |   |               | 3,967   |   |               |        |    |               |   |        |       |   |   |         | 3,967   |  
|                                                       | 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  |           |   |   | (8,713        | )       |   |               | (2,218 | )   |               |   | (5,898 | )      |   |   | 81,802  |        
|                                                       | Net income as restated                                                       |                        |            |           |            |          |         |          |   |   |               | 9,849   |   |               |        |    |               |   |        |       |   |   |         | 9,849   |  
|                                                       | Currency translation adjustment                                              |                        |            |            |            |          |         |           |   |   |               |         |   |               |        |     |               |   |        | 3,548  |   |   |         | 3,548   |  
|                                                       | Reclassification of unrealized gains on short
    term investments           |                        |            |           |            |          |         |          |   |   |               |        |   |               |        |    |               |   |        | (191   | ) |   |         | (191    | )
|                                                       | Stock options exercised                                                      |                        |            | 30,021     |            |          |         | 83        |   |   |               |        |   |               |        |    |               |   |        |       |   |   |         | 83      |  
|                                                       | Repayment of stock subscriptions receivable                                  |                        |            |           |            |          |         |          |   |   |               |        |   |               |        | 428 |               |   |        |       |   |   |         | 428     |  
|                                                       | Issuances of common stock and other                                          |                        |            | 98,677     |            |          |         | 369       |   |   |               |        |   |               |        |    |               |   |        |       |   |   |         | 369     |  
|                                                       | Convertible redeemable preferred stock dividend                              |                        |            |           |            |          |         | (4,433    | ) |   |               |        |   |               |        |    |               |   |        |       |   |   |         | (4,433  | )
|                                                       | Repurchases of common stock                                                  |                        |            | (557,200   | )          |          |         | (1,485    | ) |   |               |        |   |               |        |    |               |   |        |       |   |   |         | (1,485  | )
|                                                       |                                                                              |                        |            |            |            |          |         |           |   |   |               |         |   |               |        |     |               |  
|Balance  December 31, 2003                            |                                                                              |                        | 26,792,547 |            |            | $        | 93,165  |           |   | $ | 1,136         |         |   | $             | (1,790 | )   |               | $ | (2,541 | )      |   | $ | 89,970  |        
|                                                       |                                                                              |                        |            |            |            |          |         |           |   |   |               |         |   |               |        |     |               |  

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

32



---



##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |         |        |         |  
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | -------- | -------- | ------- | ------- | -------- | ------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                                                           |                                                                   |                                                                  
|                                                                                                           |                                                                   | Year Ended December 31,                                           |                                          
|                                                                                                           |                                                                   |                                                                   |                                          
|                                                                                                           |                                                                   | Restated                                                          |                                           |          | Restated |         |         | Restated |        
|                                                                                                           |                                                                   | 2003                                                              |                                           |          | 2002     |         |         | 2001     |        
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|                                                                                                           |                                                                   |                                                                  
|                                                                                                           |                                                                   | (Dollars in thousands)                                            |                                          
|Cash flows provided by (used in) operating
    activities                                                 |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |        
|Net income (loss)                                                                                          |                                                                   | $                                                                 | 9,849                                     |          |          | $       | 3,967   |          |         | $       | (10,711 | )      
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |        
|                                                                                                           | Depreciation and amortization                                     |                                                                   |                                           | 15,198   |          |         |         | 14,884   |         |         |         | 11,696  |       
|                                                                                                           | Loss on disposal and obsolescence of property and
    equipment   |                                                                   |                                           | 944      |          |         |         | 532      |         |         |         | 256     |       
|                                                                                                           | Provision for doubtful accounts                                   |                                                                   |                                           | 875      |          |         |         | 815      |         |         |         | 1,626   |       
|                                                                                                           | Write-down of equity investment and receivable
    from affiliate |                                                                   |                                           |         |          |         |         |         |         |         |         | 19,384  |       
|                                                                                                           | Provision (benefit) for deferred income taxes                     |                                                                   |                                           | 1,824    |          |         |         | (1,139   | )       |         |         | (695    | )     
|                                                                                                           | Gain from sale of short term investments                          |                                                                   |                                           | (1,008   | )        |         |         |         |         |         |         |        |       
|                                                                                                           | Loss on sale of investment                                        |                                                                   |                                           | 680      |          |         |         |         |         |         |         |        |       
|                                                                                                           | Change in assets and liabilities:                                 |                                                                   |                                           |          |          |         |         |          |         |         |         |         |       
|                                                                                                           |                                                                   | Accounts receivable and revenue earned in excess
    in billings  |                                           |          | 9,033    |         |         |          | (8,643  | )       |         |         | 2,778  |        
|                                                                                                           |                                                                   | Prepaid expenses and other assets                                 |                                           |          | 995      |         |         |          | 267     |         |         |         | (644   | )      
|                                                                                                           |                                                                   | Accounts payable, accrued payroll and related
    costs and other |                                           |          | (4,015   | )       |         |          | 5,712   |         |         |         | (4,050 | )      
|                                                                                                           |                                                                   | Deferred revenue                                                  |                                           |          | 612      |         |         |          | 133     |         |         |         | (1,257 | )      
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|                                                                                                           |                                                                   |                                                                   | Net cash provided by operating activities |          |          | 34,987  |         |          |         | 16,528  |         |         |        | 18,383  |  
|Cash flows provided by (used in) investing
    activities                                                 |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |        
|                                                                                                           | Investment in property, equipment and other                       |                                                                   |                                           | (9,292   | )        |         |         | (16,058  | )       |         |         | (8,174  | )     
|                                                                                                           | Payment of loan guarantee for affiliate                           |                                                                   |                                           |         |          |         |         |         |         |         |         | (13,608 | )     
|                                                                                                           | Investment in computer software                                   |                                                                   |                                           | (909     | )        |         |         | (1,021   | )       |         |         | (124    | )     
|                                                                                                           | Proceeds from sale of available for sale
    securities           |                                                                   |                                           | 170,149  |          |         |         |         |         |         |         |        |       
|                                                                                                           | Purchases of available for sale securities                        |                                                                   |                                           | (192,948 | )        |         |         | (13,072  | )       |         |         |        |       
|                                                                                                           | Business acquisitions and investments, net of
    cash acquired   |                                                                   |                                           |         |          |         |         | (16,011  | )       |         |         |        |       
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|                                                                                                           |                                                                   |                                                                   | Net cash used in investing activities     |          |          | (33,000 | )       |          |         | (46,162 | )       |         |        | (21,906 | )
|Cash flows provided by (used in) financing
    activities                                                 |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |        
|                                                                                                           | Net proceeds from issuances of common stock and
    other         |                                                                   |                                           | 370      |          |         |         | 526      |         |         |         | 969     |       
|                                                                                                           | Net proceeds from exercise of stock options                       |                                                                   |                                           | 511      |          |         |         | 185      |         |         |         | 695     |       
|                                                                                                           | Repurchases of common stock                                       |                                                                   |                                           | (1,485   | )        |         |         | (6,583   | )       |         |         | (14,470 | )     
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|                                                                                                           |                                                                   |                                                                   | Net cash used in financing activities     |          |          | (604    | )       |          |         | (5,872  | )       |         |        | (12,806 | )
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|Increase (decrease) in cash and cash
    equivalents                                                       |                                                                   |                                                                   | 1,383                                     |          |          |         | (35,506 | )        |         |         | (16,329 | )      
|Cash and cash equivalents at beginning of period                                                           |                                                                   |                                                                   | 88,288                                    |          |          |         | 123,794 |          |         |         | 140,123 |        
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|Cash and cash equivalents at end of period                                                                 |                                                                   | $                                                                 | 89,671                                    |          |          | $       | 88,288  |          |         | $       | 123,794 |        
|                                                                                                           |                                                                   |                                                                   |                                           |          |          |         |         |          |        
|Supplemental disclosure of cash flow information:                                                          |                                                                   |                                                                   |                                           |          |          |         |         |          |         |         |         |        
|                                                                                                           | Cash paid (received) during the period for:                       |                                                                   |                                           |          |          |         |         |          |         |         |         |         |       
|                                                                                                           |                                                                   | Income taxes                                                      |                                           | $        | 3,775    |         |         | $        | (10,339 | )       |         | $       | 662    |        

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

33



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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.



| |                                                 
| | ------------------------------------------------
| | 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, |      
|                                                                   |                                   |                         |      
|                                                                   |                                   | Restated                |       |        | Restated |   |       | Restated | 
|                                                                   |                                   | 2003                    |       |        | 2002     |   |       | 2001     | 
|                                                                   |                                   |                         |       |        |          |   |       |          | 
|Net income (loss)                                                  |                                   | $                       | 9,849 |        |          | $ | 3,967 |          |  | $ | (10,711 | )      
|Currency translation adjustment                                    |                                   |                         | 3,548 |        |          |   | 460   |          |  |   | (2,139  | )      
|Unrealized gains on short term investments                         |                                   |                         |      |        |          |   | 191   |          |  |   |        |        
|Reclassification of unrealized gains on short
    term investments |                                   |                         | (191  | )      |          |   |      |          |  |   |        |        
|                                                                   |                                   |                         |       |        |          |   |       |          | 
|                                                                   | Total comprehensive income (loss) |                         | $     | 13,206 |          |   | $     | 4,618    |  |   | $       | (12,850 | )
|                                                                   |                                   |                         |       |        |          |   |       |          | 



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents include investments
which have original maturities less than 90 days at the time of
their purchase.



| |                       
| | ----------------------
| | Short Term Investments

Short term investments consist principally of
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 component of other comprehensive income within
shareholders equity.

34



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The unrealized gains on these investments
included in accumulated other comprehensive income 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 the
Companys financial instruments, primarily short term
investments, are approximately equivalent due to the short term
nature of the instruments.



| |            
| | -----------
| | Investments

The Company accounts for certain investments in
equity instruments on the cost method. The Company continually
evaluates whether events and circumstances have occurred that
indicate a decline in the market value of the investments 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 following table summarizes of the
Companys investments which are carried at cost or under
the equity method of accounting as of December 31, 2003 and
2002 (original values are indicated parenthetically after each
name):

|               |                                   |              |       |       |      |   |       |       | 
|-------------- | --------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | 
|               |                                   |             
|               |                                   | December 31, |      
|               |                                   |              |      
|               |                                   | 2003         |       |       | 2002 |  
|               |                                   |              |       |       |      |  
|Cost Method:   |                                   |              |       |       |      |   |       |      
|               | Webtone* ($1,000)                 |              | $     |      |      |   | $     | 1,000 | 
|               | JP Systems* ($1,000)              |              |       | 1,000 |      |   |       | 1,000 | 
|               | Investcare* ($420)                |              |       | 857   |      |   |       | 707   | 
|               |                                   |              |       |       |      |  
|               |                                   |              | 1,857 |       |      |   | 2,707 |      
|Equity Method: |                                   |              |       |       |      |   |       |      
|               | Note Receivable  Bridge Strategy |              |       |      |      |   |       | 321   | 
|               |                                   |              |       |       |      |  
|               |                                   | $            | 1,857 |       |      | $ | 3,028 |      
|               |                                   |              |       |       |      |  



---

* Covansys ownership percentage is
less than 5% in this privately held entity.

The investment in Webtone was sold in August
2003, (see Note 18). In the second quarter of fiscal 2003,
we made an additional $150 investment in Investcare increasing
the balance to $857. In addition, the note receivable from
Bridge was paid in full in 2003.

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

35



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |         
| | --------
| | 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 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.

Goodwill amortization was $561 for the year ended
December 31, 2001. Accumulated amortization at
December 31, 2003 and 2002 was $3,235 and $3,801,
respectively.



| |                       
| | ----------------------
| | 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

We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, as modified by Staff
Accounting Bulletin No. 104, for our time-and-materials and
fixed price outsourcing contracts. For those service contracts
which are billed on a time and materials basis, we recognize
revenues as the services are performed. In our time and
materials contracts our effort, measured by our time incurred,
represents the contractual milestones or output measure which is
the contractual earnings pattern. For our fixed price IT
outsourcing and maintenance contracts, we recognize revenue
ratably over the applicable outsourcing or maintenance period as
the services are performed continuously over the contract period.

For our contracts to design, develop or modify
complex information systems based upon the clients
specifications, we recognize revenue on a percentage of
completion basis in accordance with Statement of Position 81-1.
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.

Covansys periodically enters into contracts that
include multiple-element arrangements, which may include any
combination of services, software, support/ maintenance, and the
re-sale of hardware or software. Contracts entered into after
June 30, 2003 containing multiple elements or deliverables
are segmented into separate units of accounting where the
separate elements represent separate earnings processes in
accordance

36



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with EITF 00-21. Revenues are allocated
among the elements based on the relative fair values of the
elements and are recognized in accordance with our policies for
the separate elements unless the undelivered elements are
essential to the functionality of the delivered elements. In
circumstances where an undelivered element is essential to the
functionality of the delivered element, no revenue is recognized
for the delivered element until the undelivered element is
delivered.

Retainages, which are not material for any of the
periods presented, are included in revenue earned in excess of
billings in the accompanying condensed 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 the 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.

Amounts capitalized were $909, $1,016 and $124
for the years ended December 31, 2003, 2002 and 2001,
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 $2,437, $1,737 and $1,026 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Accumulated amortization on computer software
amounted to $7,289 and $4,852 as of December 31, 2003 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 Income, Net

Other income, net, represents interest earned and
realized gains and losses on cash and short-term investments,
loss from sale of investment carried at cost and foreign
currency transaction and translation gains/losses.

37



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Net Income (Loss) Per Share

For the years ended December 31, 2003 and
2002, the effect of convertible redeemable preferred stock has
not been used in the calculation of diluted net income (loss)
per share because to do so would be anti-dilutive. The
calculation of diluted loss per share for the year ended
December 31, 2002 excludes 8,695,652 of common stock
equivalents related to the convertible redeemable preferred
stock, 5,300,000 of warrants issued to CD&R and 5,211,229 of
average stock options outstanding. The calculation of diluted
earnings per share for the year ended December 31, 2003
excludes 8,695,652 of common stock equivalents related to the
convertible redeemable preferred stock, 5,300,000 of warrants
issued to CD&R and 2,844,570 of average 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, (2) impairment
assessments of goodwill and other long-lived assets,
(3) realization of deferred tax assets and assessment of
tax reserves recorded, (4) allowance for doubtful accounts
and (5) litigation-related contingencies. These estimates
are discussed further throughout the accompanying notes to the
consolidated financial statements. The company has formal
variable compensation plans for sales, delivery and management
employees. These plans are structured to pay out quarterly,
semi-annually or annually depending on the plan. Amounts are
accrued on a monthly basis relative to actual performance
compared to performance targets.



| |              
| | -------------
| | 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

38



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS No. 123, the Companys pro forma
net income (loss) and pro forma earnings (loss) per common share
would have been reduced to the amounts indicated below:

|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |   |  |   |         |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | -------- | - | ----- | -------- |  | - | -------- | - |  | - | ------- | -
|                                                         |                                                                                                                                     | Restated |   |       | Restated |  |   | Restated |  
|                                                         |                                                                                                                                     | 2003     |   |       | 2002     |  |   | 2001     |  
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|Net income (loss) available for common
    shareholders: |                                                                                                                                     |          |   |       |          |  |   |          |   |  |   |        
|                                                         | As reported                                                                                                                         |          | $ | 5,416 |          |  | $ | (331     | ) |  | $ | (14,976 | )
|                                                         | Stock-based employee compensation cost included
    in the determination of net income (loss) available for common
    shareholders |          |   |      |          |  |   |         |   |  |   |        |  
|                                                         | Stock-based employee compensation cost had the
    fair value method been used                                                      |          |   | 4,422 |          |  |   | 11,493   |   |  |   | 14,479  |  
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |          | $ | 994   |          |  | $ | (11,824  | ) |  | $ | (29,455 | )
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|Basic earnings (loss) per share:                         |                                                                                                                                     |          |   |       |          |  |   |          |   |  |   |        
|                                                         | As reported                                                                                                                         |          | $ | 0.20  |          |  | $ | (.01     | ) |  | $ | (0.52   | )
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |          | $ | 0.04  |          |  | $ | (.43     | ) |  | $ | (1.03   | )
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|Diluted earnings (loss) per share:                       |                                                                                                                                     |          |   |       |          |  |   |          |   |  |   |        
|                                                         | As reported                                                                                                                         |          | $ | 0.20  |          |  | $ | (.01     | ) |  | $ | (0.52   | )
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |          | $ | 0.04  |          |  | $ | (.43     | ) |  | $ | (1.03   | )
|                                                         |                                                                                                                                     |          |   |       |          |  |   |          |  

Recently Issued Financial Accounting
Standards

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, relating to the
guarantors accounting for, and disclosure of, the issuance
of certain types of guarantees. FIN 45 became effective on
January 1, 2003. The adoption of FIN 45 did not have a
material effect on our results of operations or financial
position.

In November 2002, the Emerging Issues Task Force
issued a final consensus on Issue 00-21: Accounting for
Revenue Arrangements with Multiple Deliverables.
Issue 00-21 provides guidance on how and when to recognize
revenues on arrangements requiring delivery of more than
one product or service. Issue 00-21 is effective
prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. Companies may also elect to
apply the provisions of Issue 00-21 to existing
arrangements and record the income statement impact as the
cumulative effect of a change in accounting principle. We
adopted Issue 00-21 prospectively for contracts entered
into after June 30, 2003. The adoption of Issue 00-21
did not have a material effect on the results of our operations
or financial position but may impact the timing of revenue
recognition on contracts entered into in future periods.

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). The Company adopted FIN 46 during 2003.
The adoption of FIN 46 had no effect on our results of
operations or financial position.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under FAS 133. The statement is
generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of this statement did not
have a material effect on our results of operations or financial
position.

39



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement improves the accounting for certain financial
instruments that, under previous guidance, issuers could account
for as equity. The statement requires that those instruments be
classified as liabilities in statements of financial position.
This statement became effective for interim periods beginning
after June 15, 2003. Due to the conversion features of the
Companys convertible redeemable preferred stock, the
adoption of this statement had no effect on our financial
position or results of operations.

In December 2003, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104 (SAB
No. 104), Revenue Recognition, which codifies,
revises and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material
effect on our results of operations or financial position.

2.     Restatement of
Financial Statements

Subsequent to the issuance of its financial
statements for the year ended December 31, 2003, the
Company identified various adjustments, primarily relating to
missing or obsolete equipment that required restatement of its
previously issued financial statements for 2003, 2002 and 2001.
In connection with this restatement, the Company also made
adjustments to prior years for healthcare related reimbursements
and for certain other adjustments that had previously been
recorded in incorrect periods. Each of these adjustments is
described further below:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Equipment:In
    connection with a physical inventory process of its computer
    equipment and related peripherals performed during the first
    half of 2004, and an assessment of its furniture and fixtures
    based upon recent office closings and other restructuring
    activities, the Company identified missing computers and related
    peripherals, equipment that was obsolete or had been disposed
    of, and maintenance contracts that were appropriately
    capitalized but assigned a life in excess of the maintenance
    period. In addition, the Company determined that the carrying
    value attributable to certain furniture and fixtures should have
    been written off during the prior periods as offices were
    closed. The net book value of the missing or obsolete equipment
    and furniture as of December 31, 2003 was $1,495 of which
    $45, $526 and $436 was identified as relating to 2003, 2002 and
    2001, respectively and $488 was identified as relating to
    periods prior to 2001. An additional charge of $1,066 was
    recorded in the first quarter of 2004 relating to missing
    equipment which could not be identified with any particular
    period ($742) and for equipment deemed to be obsolete in the
    first quarter of 2004 ($324).
|
| | Healthcare Related
    Reimbursement:The Company provides
    COBRA benefits to its former employees for the continuation of
    healthcare benefits. Payments for these benefits are paid by
    former employees directly to an external benefits administrator.
    In 2003, the Company discovered that these payments, which it
    believed were being used by its external benefits administrator
    to offset the Companys healthcare benefits expenses, were
    actually remitted to the Company but not deposited into its bank
    accounts on a timely basis. Of the $546 in payments recorded in
    2003, $507 and $39 had been received and should have been
    initially recorded in 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Other Adjustments:Items included in this category include lease buyout costs and
    accruals for travel related costs and certain subcontractor
    costs that were initially recorded in a year other than the year
    to which the costs relate. Of the $225 in costs recorded in
    2003, $79 and $80 should have been initially recorded in 2002
    and 2001, respectively and $66 was identified as relating to
    periods prior to 2001. In addition, the Company recorded other
    corrections, resulting in a reduction to accrued liabilities of
    $148 and $78 as of December 31, 2003 and 2002, and corresponding
    credits to earnings of $70 and $78 in 2003 and 2002,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

40



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following schedule reconciles net income
(loss) available for common shareholders for 2003, 2002 and 2001
as originally reported, to the corresponding amounts on a
restated basis, after giving effect to the adjustments described
above.

|                                                                               |                                  |                         |       |     |      |   |       |      |   |   |         |     |  
|------------------------------------------------------------------------------ | -------------------------------- | ----------------------- | ----- | --- | ---- | - | ----- | ---- | - | - | ------- | --- | -
|                                                                               |                                  |                        
|                                                                               |                                  | Year Ended December 31, |      
|                                                                               |                                  |                         |      
|                                                                               |                                  | 2003                    |       |     | 2002 |   |       | 2001 |  
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|                                                                               |                                  |                        
|                                                                               |                                  | (In thousands,          |      
|                                                                               |                                  | except per share data)  |      
|Net income (loss) available for common
    shareholders as originally reported |                                  | $                       | 5,887 |     |      | $ | (413  | )    |   | $ | (14,783 | )  
|Adjustments (pre-tax)                                                          |                                  |                         |       |     |      |   |       |      |   |   |         |    
|                                                                               | Property and equipment           |                         |       | 45  |      |   |       | 526  |   |   |         | 436 |  
|                                                                               | Healthcare related reimbursement |                         |       | 546 |      |   |       | (507 | ) |   |         | (39 | )
|                                                                               | Other adjustments                |                         |       | 155 |      |   |       | (157 | ) |   |         | (80 | )
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Total adjustments (pre-tax)                                                    |                                  |                         | 746   |     |      |   | (138  | )    |   |   | 317     |    
|Tax effect of restatement adjustments                                          |                                  |                         | 275   |     |      |   | (56   | )    |   |   | 124     |    
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Total net adjustments                                                          |                                  |                         | 471   |     |      |   | (82   | )    |   |   | 193     |    
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Net income (loss) available for common
    shareholders as restated            |                                  | $                       | 5,416 |     |      | $ | (331  | )    |   | $ | (14,976 | )  
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Earnings (loss) per share                                                      |                                  |                         |       |     |      |   |       |      |   |   |         |    
|Basic earnings (loss) per share as originally
    reported                     |                                  | $                       | 0.22  |     |      | $ | (0.01 | )    |   | $ | (0.51   | )  
|Effect of adjustments                                                          |                                  |                         | (0.02 | )   |      |   |      |      |   |   | (0.01   | )  
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Basic earnings (loss) per share as restated                                    |                                  | $                       | 0.20  |     |      | $ | (0.01 | )    |   | $ | (0.52   | )  
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Diluted earnings (loss) per share as
    originally
    reported               |                                  | $                       | 0.22  |     |      | $ | (0.01 | )    |   | $ | (0.51   | )  
|Effect of adjustments                                                          |                                  |                         | (0.02 | )   |      |   |      |      |   |   | (0.01   | )  
|                                                                               |                                  |                         |       |     |      |   |       |      |  
|Diluted earnings (loss) per share as restated                                  |                                  | $                       | 0.20  |     |      | $ | (0.01 | )    |   | $ | (0.52   | )  
|                                                                               |                                  |                         |       |     |      |   |       |      |  

41



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the effect of the
adjustments described above on the consolidated statement of
operations for each of the years ended December 31, 2003,
2002 and 2001:

|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |   |         |         |   |   |         |         |  
|------------------------------------------------ | ------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ----------------- | - | ------- | ----------------- | - | - | -------- | ------ | - | ---------- | ------- | ------ | -------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                 |                                                               |                                       |         |        |                   |  
|                                                 |                                                               | Year Ended                            |         |        | Year Ended        |   |         | Year Ended        |  
|                                                 |                                                               | December 31, 2003                     |         |        | December 31, 2002 |   |         | December 31, 2001 |  
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |  
|                                                 |                                                               | As                                    |         |        |                   |   | As      |                   |   |   |          | As     |   |            |        
|                                                 |                                                               | Originally                            |         |        | As                |   |         | Originally        |   |   | As       |        |   | Originally |         |        | As       |  
|                                                 |                                                               | Reported                              |         |        | Restated          |   |         | Reported          |   |   | Restated |        |   | Reported   |         |        | Restated |  
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 |                                                               |                                      
|                                                 |                                                               | (In thousands, except per share data) |        
|Revenues                                         |                                                               | $                                     | 378,630 |        |                   | $ | 378,630 |                   |   | $ | 383,053  |        |   | $          | 383,053 |        |          | $ | 404,734 |         |   | $ | 404,734 |        
|Cost of revenues                                 |                                                               |                                       | 285,506 |        |                   |   | 286,183 |                   |   |   | 284,853  |        |   |            | 284,427 |        |          |   | 290,651 |         |   |   | 290,658 |        
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Gross profit                                                  |                                       |         | 93,124 |                   |   |         | 92,447            |   |   |          | 98,200 |   |            |         | 98,626 |          |   |         | 114,083 |   |   |         | 114,076 |  
|Selling, general and administrative expenses     |                                                               |                                       | 82,530  |        |                   |   | 82,599  |                   |   |   | 97,545   |        |   |            | 97,833  |        |          |   | 115,011 |         |   |   | 115,321 |        
|Restructuring, merger costs and other            |                                                               |                                       |        |        |                   |   |        |                   |   |   |         |        |   |            |        |        |          |   | 23,665  |         |   |   | 23,665  |        
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Income (loss) from operations                                 |                                       |         | 10,594 |                   |   |         | 9,848             |   |   |          | 655    |   |            |         | 793    |          |   |         | (24,593 | ) |   |         | (24,910 | )
|Other (income), net                              |                                                               |                                       | (1,781  | )      |                   |   | (1,781  | )                 |   |   | (4,110   | )      |   |            | (4,110  | )      |          |   | (5,531  | )       |   |   | (5,531  | )      
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Income (loss) before provision (benefit) for
    income taxes |                                       |         | 12,375 |                   |   |         | 11,629            |   |   |          | 4,765  |   |            |         | 4,903  |          |   |         | (19,062 | ) |   |         | (19,379 | )
|Provision (benefit) for income taxes             |                                                               |                                       | 2,055   |        |                   |   | 1,780   |                   |   |   | 880      |        |   |            | 936     |        |          |   | (8,544  | )       |   |   | (8,668  | )      
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Net income (loss)                                             |                                       |         | 10,320 |                   |   |         | 9,849             |   |   |          | 3,885  |   |            |         | 3,967  |          |   |         | (10,518 | ) |   |         | (10,711 | )
|Convertible redeemable preferred stock dividends |                                                               |                                       | (4,433  | )      |                   |   | (4,433  | )                 |   |   | (4,298   | )      |   |            | (4,298  | )      |          |   | (4,265  | )       |   |   | (4,265  | )      
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Net income (loss) available for common
    shareholders       |                                       | $       | 5,887  |                   |   | $       | 5,416             |   |   | $        | (413   | ) |            | $       | (331   | )        |   | $       | (14,783 | ) |   | $       | (14,976 | )
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|Earnings (loss) per share:                       |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |   |         |         |   |   |         |        
|                                                 | Basic earnings (loss) per share                               |                                       | $       | 0.22   |                   |   | $       | 0.20              |   |   | $        | (0.01  | ) |            | $       | (0.01  | )        |   | $       | (0.51   | ) |   | $       | (0.52   | )
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Diluted earnings (loss) per share                             |                                       | $       | 0.22   |                   |   | $       | 0.20              |   |   | $        | (0.01  | ) |            | $       | (0.01  | )        |   | $       | (0.51   | ) |   | $       | (0.52   | )
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Basic weighted average shares outstanding                     |                                       |         | 26,975 |                   |   |         | 26,975            |   |   |          | 27,734 |   |            |         | 27,734 |          |   |         | 28,704  |   |   |         | 28,704  |  
|                                                 | Dilutive effect of options                                    |                                       |         | 229    |                   |   |         | 229               |   |   |          |       |   |            |         |       |          |   |         |        |   |   |         |        |  
|                                                 | Convertible redeemable preferred stock                        |                                       |         | (A     | )                 |   |         | (A                | ) |   |          | (A     | ) |            |         | (A     | )        |   |         | (A      | ) |   |         | (A      | )
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  
|                                                 | Diluted weighted average shares outstanding                   |                                       |         | 27,204 |                   |   |         | 27,204            |   |   |          | 27,734 |   |            |         | 27,734 |          |   |         | 28,704  |   |   |         | 28,704  |  
|                                                 |                                                               |                                       |         |        |                   |   |         |                   |   |   |          |        |   |            |         |        |          |  



---



|    |              
|--- | -------------
|(A) | Anti-dilutive

In addition, the Company restated its financial
statements for the years ended December 31, 2000 and 1999.
The effect of the restatement reduced income (increased loss)
from continuing operations before provision (benefit) by ($197)
(from $(47,572) to $(47,769)) and $225 (from $46,095 to $45,870)
and net income (loss) available for common shareholders by
($120) (from ($58,157) to ($58,277) and $137 (from $29,797 to
$29,660), in 2000 and 1999, respectively. The net effect of
these restatements of $257 is reflected in the Consolidated
Statement of Shareholders Equity as an adjustment to the
balance of retained earnings as of December 31, 2000.
Management believes that the effect of the adjustments for each
of the years 2001, 2000 and 1999 is inconsequential.

See Note 20 for the effects of the
adjustments discussed above on the unaudited supplemental
quarterly financial information for the quarters ended
March 31, June 30, September 30 and
December 31, 2003 and 2002, respectively.

42



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the effects of the
restatement adjustments discussed above on the consolidated
balance sheets at December 31, 2003 and 2002.

|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |        |         |         |         |        |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------ | ----------------- | ------- | ------- | ---------- | ------- | ------- | -------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |       
|                                                                                                                                     |                                                                                                                                                                              | December 31, 2003               |                                            |        | December 31, 2002 |        
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |        
|                                                                                                                                     |                                                                                                                                                                              | As                              |                                            |        |                   |         | As      |            |         |        
|                                                                                                                                     |                                                                                                                                                                              | Originally                      |                                            |        | As                |         |         | Originally |         |         | As       |       
|                                                                                                                                     |                                                                                                                                                                              | Reported                        |                                            |        | Restated          |         |         | Reported   |         |         | Restated |       
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                
|                                                                                                                                     |                                                                                                                                                                              | (Dollars in thousands)          |                                           
|ASSETS                                                                                                                              
|Current assets:                                                                                                                      |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |        |         |         |         |       
|                                                                                                                                     | Cash and cash equivalents                                                                                                                                                    |                                 | $                                          | 89,671 |                   |         | $       | 89,671     |         |         | $        | 87,742 |         |         | $       | 88,288 |        
|                                                                                                                                     | Short term investments                                                                                                                                                       |                                 |                                            | 37,804 |                   |         |         | 37,804     |         |         |          | 13,263 |         |         |         | 13,263 |        
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              | Cash and short term investments |                                            |        | 127,475           |         |         |            | 127,475 |         |          |        | 101,005 |         |         |        | 101,551 |        
|                                                                                                                                     | Accounts receivable, net                                                                                                                                                     |                                 |                                            | 69,755 |                   |         |         | 69,755     |         |         |          | 69,290 |         |         |         | 69,290 |        
|                                                                                                                                     | Revenue earned in excess of billings                                                                                                                                         |                                 |                                            | 32,127 |                   |         |         | 32,127     |         |         |          | 42,500 |         |         |         | 42,500 |        
|                                                                                                                                     | Deferred taxes                                                                                                                                                               |                                 |                                            | 9,396  |                   |         |         | 9,396      |         |         |          | 4,235  |         |         |         | 4,235  |        
|                                                                                                                                     | Prepaid expenses and other                                                                                                                                                   |                                 |                                            | 5,363  |                   |         |         | 5,363      |         |         |          | 6,107  |         |         |         | 6,107  |        
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                 | Total current assets                       |        |                   | 244,116 |         |            |         | 244,116 |          |        |         | 223,137 |         |        |         | 223,683 | 
|Property and equipment, net                                                                                                          |                                                                                                                                                                              |                                 | 32,748                                     |        |                   |         | 31,253  |            |         |         | 36,422   |        |         |         | 34,972  |       
|Computer software, net                                                                                                               |                                                                                                                                                                              |                                 | 5,430                                      |        |                   |         | 5,430   |            |         |         | 6,958    |        |         |         | 6,958   |       
|Goodwill                                                                                                                             |                                                                                                                                                                              |                                 | 18,441                                     |        |                   |         | 18,441  |            |         |         | 17,053   |        |         |         | 17,053  |       
|Deferred taxes                                                                                                                       |                                                                                                                                                                              |                                 | 3,648                                      |        |                   |         | 4,231   |            |         |         | 9,432    |        |         |         | 9,998   |       
|Other assets                                                                                                                         |                                                                                                                                                                              |                                 | 11,888                                     |        |                   |         | 11,888  |            |         |         | 12,272   |        |         |         | 12,272  |       
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                 | Total assets                               |        | $                 | 316,271 |         |            | $       | 315,359 |          |        | $       | 305,274 |         |        | $       | 304,936 | 
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                    
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                            
|Current Liabilities                                                                                                                  |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |        |         |         |         |       
|                                                                                                                                     | Accounts payable                                                                                                                                                             |                                 | $                                          | 11,290 |                   |         | $       | 11,290     |         |         | $        | 10,754 |         |         | $       | 10,754 |        
|                                                                                                                                     | Accrued payroll and related costs                                                                                                                                            |                                 |                                            | 21,462 |                   |         |         | 21,462     |         |         |          | 23,063 |         |         |         | 23,063 |        
|                                                                                                                                     | Other accrued liabilities                                                                                                                                                    |                                 |                                            | 21,927 |                   |         |         | 21,854     |         |         |          | 24,310 |         |         |         | 24,340 |        
|                                                                                                                                     | Deferred revenue                                                                                                                                                             |                                 |                                            | 1,239  |                   |         |         | 1,239      |         |         |          | 627    |         |         |         | 627    |        
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                 | Total current liabilities                  |        |                   | 55,918  |         |            |         | 55,845  |          |        |         | 58,754  |         |        |         | 58,784  | 
|Other liabilities                                                                                                                    |                                                                                                                                                                              |                                 | 889                                        |        |                   |         | 889     |            |         |         | 128      |        |         |         | 128     |       
|Commitments and contingencies                                                                                                        |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |        |         |         |         |       
|Convertible redeemable preferred stock, no par
    value, 200,000 shares issued and outstanding as of
    December 31, 2003 and 2002 |                                                                                                                                                                              |                                 | 168,655                                    |        |                   |         | 168,655 |            |         |         | 164,222  |        |         |         | 164,222 |       
|Shareholders equity:                                                                                                                |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |        |         |         |         |       
|                                                                                                                                     | Preferred stock, no par value,
    1,000,000 shares authorized                                                                                                               |                                 |                                            |       |                   |         |         |           |         |         |          |       |         |         |         |       |        
|                                                                                                                                     | Common stock, no par value
    200,000,000 shares authorized, 26,792,547 and
    27,221,049 shares issued and outstanding as of
    December 31, 2003 and 2002, respectively |                                 |                                            |       |                   |         |         |           |         |         |          |       |         |         |         |       |        
|                                                                                                                                     | Additional paid-in capital                                                                                                                                                   |                                 |                                            | 93,165 |                   |         |         | 93,165     |         |         |          | 98,631 |         |         |         | 98,631 |        
|                                                                                                                                     | Retained earnings (deficit)                                                                                                                                                  |                                 |                                            | 1,975  |                   |         |         | 1,136      |         |         |          | (8,345 | )       |         |         | (8,713 | )      
|                                                                                                                                     | Stock subscriptions receivable                                                                                                                                               |                                 |                                            | (1,790 | )                 |         |         | (1,790     | )       |         |          | (2,218 | )       |         |         | (2,218 | )      
|                                                                                                                                     | Accumulated other comprehensive loss                                                                                                                                         |                                 |                                            | (2,541 | )                 |         |         | (2,541     | )       |         |          | (5,898 | )       |         |         | (5,898 | )      
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                 | Total shareholders equity                 |        |                   | 90,809  |         |            |         | 89,970  |          |        |         | 82,170  |         |        |         | 81,802  | 
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       
|                                                                                                                                     |                                                                                                                                                                              |                                 | Total liabilities and shareholders equity |        | $                 | 316,271 |         |            | $       | 315,359 |          |        | $       | 305,274 |         |        | $       | 304,936 | 
|                                                                                                                                     |                                                                                                                                                                              |                                 |                                            |        |                   |         |         |            |         |         |          |       

43



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                
|-- | -------------------------------
|3. | Common Stock Repurchase Program

The Companys board of directors has
authorized the repurchase of up to 14,000,000 shares of the
companys common stock. During the years ended
December 31, 2003, 2002 and 2001, the Company repurchased
557,200 shares, 1,124,376 shares and
1,482,700 shares for cash, at a total cost of $1,485,
$6,583 and $14,470, respectively. Through December 31,
2003, the Company has repurchased 11,181,876 shares of its
common stock for cash, at a total cost of $139,572. As of
December 31, 2003, 2,818,124 shares remain available
for repurchase under the board of directors authorization.



|   |             
|-- | ------------
|4. | 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 | 



|   |         
|-- | --------
|5. | Goodwill

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible Assets.
SFAS 142 requires that goodwill and certain intangibles no
longer be amortized, but instead be tested for impairment at
least annually.

44



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the reconciliation
of reported net income (loss) available for common shareholders
to adjusted net income (loss) available for common shareholders
for the years ended December 31, 2003, 2002 and 2001, had
SFAS 142 been applied.

|                                                        |                                                             |          |       |        |          |   |      |          |   |   |         |        |  
|------------------------------------------------------- | ----------------------------------------------------------- | -------- | ----- | ------ | -------- | - | ---- | -------- | - | - | ------- | ------ | -
|                                                        |                                                             | Restated |       |        | Restated |   |      | Restated |  
|                                                        |                                                             | 2003     |       |        | 2002     |   |      | 2001     |  
|                                                        |                                                             |          |       |        |          |   |      |          |  
|Net income (loss) available for common
    shareholders |                                                             | $        | 5,416 |        |          | $ | (331 | )        |   | $ | (14,976 | )     
|Goodwill amortization, net of tax                       |                                                             |          |      |        |          |   |     |          |   |   | 561     |       
|                                                        |                                                             |          |       |        |          |   |      |          |  
|Net income (loss) available for common
    shareholders |                                                             | $        | 5,416 |        |          | $ | (331 | )        |   | $ | (14,415 | )     
|                                                        |                                                             |          |       |        |          |   |      |          |  
|Basic income (loss) per common share:                   |                                                             |          |       |        |          |   |      |          |   |   |         |       
|                                                        | Weighted average shares outstanding                         |          |       | 26,975 |          |   |      | 27,734   |   |   |         | 28,704 |  
|                                                        | Income (loss) available for common shareholders             |          | $     | 0.20   |          |   | $    | (0.01    | ) |   | $       | (0.52  | )
|                                                        | Goodwill amortization, net of tax                           |          |       |       |          |   |      |         |   |   |         | 0.02   |  
|                                                        |                                                             |          |       |        |          |   |      |          |  
|                                                        | Basic income (loss) available for common
    shareholders   |          | $     | 0.20   |          |   | $    | (0.01    | ) |   | $       | (0.50  | )
|                                                        |                                                             |          |       |        |          |   |      |          |  
|Diluted income (loss) per common share:                 |                                                             |          |       |        |          |   |      |          |   |   |         |       
|                                                        | Weighted average shares outstanding                         |          |       | 27,204 |          |   |      | 27,734   |   |   |         | 28,704 |  
|                                                        | Income (loss) available for common shareholders             |          | $     | 0.20   |          |   | $    | (0.01    | ) |   | $       | (0.52  | )
|                                                        | Goodwill amortization, net of tax                           |          |       |       |          |   |      |         |   |   |         | 0.02   |  
|                                                        |                                                             |          |       |        |          |   |      |          |  
|                                                        | Diluted income (loss) available for common
    shareholders |          | $     | 0.20   |          |   | $    | (0.01    | ) |   | $       | (0.50  | )
|                                                        |                                                             |          |       |        |          |   |      |          |  

The following table summarizes the change in the
carrying amount of goodwill for the two years ended
December 31, 2003:

|                                        |  |   |        | 
|--------------------------------------- |  | - | ------ | 
|Goodwill balance at January 1, 2002     |  | $ | 10,691 | 
|Acquisition of PDA                      |  |   | 6,362  | 
|                                        |  |   |       
|Goodwill balance at December 31, 2002   |  |   | 17,053 | 
|Foreign currency translation adjustment |  |   | 1,388  | 
|                                        |  |   |       
|Goodwill balance at December 31, 2003   |  | $ | 18,441 | 
|                                        |  |   |       

The Company tested for impairment of its
reporting units by comparing estimated fair value to carrying
value. Fair value was determined using a discounted cash flow
methodology. The Company performed this analysis as part of its
annual assessment as of December 31, 2003 and 2002. These
evaluations indicated that goodwill was not impaired.



|   |                                    
|-- | -----------------------------------
|6. | Accounts Receivable and Credit Risk

The allowance for doubtful accounts is as follows:

|                              |  |      |       |   |      |   |        |      |  |   |         |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                              |  | 2003 |       |   | 2002 |   |        | 2001 | 
|                              |  |      |       |   |      |   |        |      | 
|Balance  beginning of period |  | $    | 1,353 |   |      | $ | 1,771  |      |  | $ | 17,653  |  
|Provision                     |  |      | 875   |   |      |   | 815    |      |  |   | 1,626   |  
|Charge-offs                   |  |      | (439  | ) |      |   | (1,233 | )    |  |   | (17,508 | )
|                              |  |      |       |   |      |   |        |      | 
|Balance  end of period       |  | $    | 1,789 |   |      | $ | 1,353  |      |  | $ | 1,771   |  
|                              |  |      |       |   |      |   |        |      | 

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.

45



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|7. | Property and Equipment

As of December 31, 2003, 2002 and 2001,
property and equipment consisted of the following:

|                                                             |  |              |         |   |           |   |         |        |  |  |           | 
|------------------------------------------------------------ |  | ------------ | ------- | - | --------- | - | ------- | ------ |  |  | --------- | 
|                                                             |  |              |         |  
|                                                             |  | December 31, |         |   |          
|                                                             |  |              |         |   | Estimated |  
|                                                             |  | Restated     |         |   | Restated  |   |         | Useful | 
|                                                             |  | 2003         |         |   | 2002      |   |         | Lives  | 
|                                                             |  |              |         |   |           |   |         |        | 
|Equipment and purchased software                             |  | $            | 69,653  |   |           | $ | 64,957  |        |  |  | 3-5 years | 
|Internally developed computer software and
    related costs |  |              | 10,480  |   |           |   | 9,706   |        |  |  | 5-9 years | 
|Furniture and fixtures                                       |  |              | 7,465   |   |           |   | 8,129   |        |  |  | 5-7 years | 
|Leasehold Improvements                                       |  |              | 8,468   |   |           |   | 7,362   |        |  |  | 5-7 years | 
|Automobiles                                                  |  |              | 1,475   |   |           |   | 1,457   |        |  |  | 5 years   | 
|Buildings                                                    |  |              | 1,033   |   |           |   | 981     |        |  |  | 31 years  | 
|                                                             |  |              |         |   |           |   |         |        | 
|                                                             |  |              | 98,574  |   |           |   | 92,592  |        |  |  |           | 
|Accumulated depreciation                                     |  |              | (67,321 | ) |           |   | (57,620 | )      |  |  |           | 
|                                                             |  |              |         |   |           |   |         |        | 
|Property and equipment, net                                  |  | $            | 31,253  |   |           | $ | 34,972  |        |  |  |           | 
|                                                             |  |              |         |   |           |   |         |        | 

Depreciation expense totaled $12,761, $13,147,
and $10,109, for the years ended December 31, 2003, 2002
and 2001, respectively.



|   |                           
|-- | --------------------------
|8. | 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, 2003 and 2002, the Company provided services
to Synova totaling approximately $3,175 and $4,643,
respectively. In addition, Synova provided services to the
Company, for the year ended December 31, 2003 and 2002,
totaling approximately $1,609 and $4,126, respectively. The net
balance owed to the Company by Synova at December 31, 2003
and 2002 was $471 and $207, respectively. In addition, under the
terms of a note payable originated in 2000, Synova owes the
Company $8,000. The note is due in September 2005, and interest,
at a variable rate (4.67% in the fourth quarter 2003) is paid
quarterly in accordance with its terms.

The Company paid approximately $779, $1,111 and
$949 to Clayton, Dubilier and Rice, Inc. (CDR), a shareholder,
for financial, management advisory, and executive management
services for the years ended December 31, 2003, 2002 and
2001, 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
years ended December 31, 2003 and 2002, services provided
by the Company to SIRVA, Inc. totaled approximately $8,386 and
$2,753, respectively. In addition, SIRVA provided services to
Covansys for the years ended December 31, 2003 and 2002,
totaling $71 and $185, respectively.

For the years ended December 31, 2002 and
2001, the Company provided IT services totaling $185 and $971,
respectively, to Acterna Corporation, a company related through
common ownership by CDR.

The Company paid approximately $237 and $1,118
during the years ended December 31, 2002, and 2001,
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, 2003, the Company did not provide
any services to Praja. In addition, Praja did not provide any
services or software to Covansys for the year ended
December 31, 2003. During the year ended December 31,
2002, the Company provided

46



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

services to Praja totaling $63. Praja provided
services and software to the Company totaling $183 for the year
ended December 31, 2002.

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

The Company has a note receivable in the amount
of $439 from an executive officer. This note bears interest at
2.5%.

The Company has a non-interest bearing note
receivable in the amount of $83 from a co-chairman of the
Companys Board of Directors.



|   |                          
|-- | -------------------------
|9. | Revolving Credit Facility

Under a credit arrangement with a commercial
bank, the Company may borrow an amount not to exceed $20,000 at
the Eurodollar rate plus 1.20% or banks prime interest
rate less .50%. $15,000 of the $20,000 is available for standby
letters of credit. Borrowings under the facility are short-term,
payable on demand and are collateralized by all domestic assets
of the Company. $6,206 of standby letters of credit were
outstanding as collateral for five performance bonds at
December 31, 2003. There were no amounts outstanding under
this agreement at December 31, 2003 and 2002. See
Note 16.



|    |               
|--- | --------------
|10. | 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 $12,678, $11,993, and
$12,573 for the years ended December 31, 2003, 2002 and
2001, respectively. Estimated claims incurred but not reported
were $1,989 and $2,000 as of December 31, 2003 and 2002,
respectively, and are included in other accrued liabilities in
the accompanying consolidated balance sheets.



|    |       
|--- | ------
|11. | Leases

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

Rent expense for the years ended
December 31, 2003, 2002 and 2001 amounted to approximately
$8,753, $9,177, and $7,764, respectively. The future minimum
lease payments required under these operating leases, net of
sublease commitments of $2,652, for the years ending
December 31, are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 6,955  | 
|2005       |  |   | 5,552  | 
|2006       |  |   | 5,018  | 
|2007       |  |   | 3,724  | 
|2008       |  |   | 3,099  | 
|Thereafter |  |   | 20,156 | 
|           |  |   |       
|           |  | $ | 44,504 | 
|           |  |   |       

47



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |              
|--- | -------------
|12. | 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, 2003
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
$1,790 at December 31, 2003 have been classified as stock
subscriptions receivable in the accompanying consolidated
balance sheet.

On July 1, 2003, the Company completed a
stock option exchange program under which certain option holders
were permitted to exchange existing stock options for a number
of stock options calculated using the Black-Scholes valuation
methodology. 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 were replaced
with 686,407 options issued on July 1, 2003. The new stock
options were granted with an exercise price of $3.12 per share,
equal to the close price of the Companys common stock on
that date.

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, January 1, 2001        |  |                     | 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           |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options granted                 |  |                     | 985    |                  |                |   | 3.51             |             |  |               |                 |  |  | $ | 2.02 | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options exercised               |  |                     | (30    | )                |                |   | 6.26             |             |  |               |                 |  |  |   |      | 
|Options cancelled and forfeited |  |                     | (1,043 | )                |                |   | 14.95            |             |  |               |                 |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 2003      |  |                     | 2,915  |                  |                | $ | 11.83            |             |  |               | 1,610           |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 

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 2003, 2002 and
2001 grants: risk-free rate of interest of 3.3%, 4.2% and 4.9%
in 2003, 2002 and 2001, respectively, dividend yield of 0%, and
expected lives of 4 to 5 years. A volatility factor of 86%,
92%, and 147% was used in 2003, 2002 and 2001, respectively.

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of options outstanding at
December 31, 2003, is as follows (number of options in
thousands):

|                        |  |                     |       |  |                     |  |      |          |  |   |                |  |  |          |       |  |  |   |       | 
|----------------------- |  | ------------------- | ----- |  | ------------------- |  | ---- | -------- |  | - | -------------- |  |  | -------- | ----- |  |  | - | ----- | 
|                        |  |                     |       | 
|                        |  | Options Outstanding |       |  | Options Exercisable | 
|                        |  |                     |       |  |                     | 
|                        |  | Number              |       |  | Weighted            |  |      | Weighted |  |   | Number         |  |  | Weighted |      
|                        |  | Outstanding at      |       |  | Average             |  |      | Average  |  |   | Exercisable at |  |  | Average  |      
|                        |  | December 31,        |       |  | Remaining           |  |      | Exercise |  |   | December 31,   |  |  | Exercise |      
|Range of Exercise Price |  | 2003                |       |  | Contractual Life    |  |      | Price    |  |   | 2003           |  |  | Price    |      
|                        |  |                     |       |  |                     |  |      |          |  |   |                |  |  |          |      
|$ 0.01 - 6.00           |  |                     | 892   |  |                     |  | 9.06 |          |  | $ | 3.23           |  |  |          | 156   |  |  | $ | 3.19  | 
|$ 6.01 - 14.99          |  |                     | 1,135 |  |                     |  | 6.52 |          |  |   | 11.43          |  |  |          | 745   |  |  |   | 12.52 | 
|$15.00 - 19.34          |  |                     | 169   |  |                     |  | 5.17 |          |  |   | 16.99          |  |  |          | 169   |  |  |   | 16.99 | 
|$19.35 - 22.75          |  |                     | 644   |  |                     |  | 6.60 |          |  |   | 20.91          |  |  |          | 465   |  |  |   | 21.25 | 
|$22.76 - 34.58          |  |                     | 75    |  |                     |  | 4.19 |          |  |   | 30.77          |  |  |          | 75    |  |  |   | 30.77 | 
|                        |  |                     |       |  |                     |  |      |          |  |   |                |  |  |          |      
|                        |  |                     | 2,915 |  |                     |  |      |          |  |   |                |  |  |          | 1,610 |  |  |   |       | 
|                        |  |                     |       |  |                     |  |      |          |  |   |                |  |  |          |      

13.     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, 2003, 2002 and 2001, 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 $2,541, $2,880 and $2,850 for the
years ended December 31, 2003, 2002 and 2001, 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.

14.     Income
Taxes

Covansys operates in numerous tax jurisdictions
throughout the world with primary operations in the U.S. and
India. The Company also has operations in Canada and throughout
Europe. 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. 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
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision (benefit) for income taxes
consists of:

|           |                 |                         |                           |        |          |       |   |          |        |     |   |        |        |        |  
|---------- | --------------- | ----------------------- | ------------------------- | ------ | -------- | ----- | - | -------- | ------ | --- | - | ------ | ------ | ------ | -
|           |                 |                        
|           |                 | Year Ended December 31, |                          
|           |                 |                         |                          
|           |                 | Restated                |                           |        | Restated |       |   | Restated |       
|           |                 | 2003                    |                           |        | 2002     |       |   | 2001     |       
|           |                 |                         |                           |        |          |       |   |          |       
|Current   |                 |                         |                           |        |          |       |   |          |        |     |   |       
|           | Federal         |                         | $                         | (3,412 | )        |       | $ |         |        |     | $ | (8,323 | )     
|           | State and local |                         |                           | 1,143  |          |       |   |         |        |     |   | (878   | )     
|           | Foreign         |                         |                           | 2,225  |          |       |   | 2,043    |        |     |   | 1,228  |       
|           |                 |                         |                           |        |          |       |   |          |       
|           |                 | Total current           |                           |        | (44      | )     |   |          | 2,043  |     |   |        | (7,973 | )     
|Deferred  |                 |                         |                           |        |          |       |   |          |        |     |   |       
|           | Federal         |                         |                           | 2,064  |          |       |   | (1,074   | )      |     |   | (408   | )     
|           | State and local |                         |                           | (116   | )        |       |   | (33      | )      |     |   | (287   | )     
|           | Foreign         |                         |                           | (124   | )        |       |   |         |        |     |   |       |       
|           |                 |                         |                           |        |          |       |   |          |       
|           |                 | Total deferred          |                           |        | 1,824    |       |   |          | (1,107 | )   |   |        | (695   | )     
|           |                 |                         |                           |        |          |       |   |          |       
|           |                 |                         | Total provision (benefit) |        | $        | 1,780 |   |          | $      | 936 |   |        | $      | (8,668 | )
|           |                 |                         |                           |        |          |       |   |          |       

For 2003 and 2002, $3,476 and $(4,797),
respectively, of income (loss) from operations before income
taxes was from U.S. sources, and $8,083 and $9,622,
respectively, 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, |   
|                       |                                                                      |                         |   
|                       |                                                                      | Restated                |    |     | Restated |  |    | Restated |  
|                       |                                                                      | 2003                    |    |     | 2002     |  |    | 2001     |  
|                       |                                                                      |                         |    |     |          |  |    |          |  
|Federal statutory rate |                                                                      |                         | 35 | %   |          |  | 35 | %        |   |  | 35 | % 
|Effect of             |                                                                      |                         |    |     |          |  |    |          |   |  |    |   
|                       | Tax rate differences on foreign earnings not
    subject to U.S. tax |                         |    | (6  | )        |  |    | (30      | ) |  |    | 22 |  
|                       | Foreign tax credits                                                  |                         |    | (1  | )        |  |    | (9       | ) |  |    |   |  
|                       | Nondeductible expenses                                               |                         |    | 2   |          |  |    | 8        |   |  |    |   |  
|                       | State taxes, net of federal tax effect                               |                         |    | 5   |          |  |    | 1        |   |  |    | 3  |  
|                       | Taxes on distributions from foreign subsidiaries                     |                         |    | 5   |          |  |    | 22       |   |  |    | (8 | )
|                       | Adjustment of tax reserves                                           |                         |    | (27 | )        |  |    |         |   |  |    |   |  
|                       | Other, net                                                           |                         |    | 2   |          |  |    | (8       | ) |  |    | (7 | )
|                       |                                                                      |                         |    |     |          |  |    |          |  
|                       |                                                                      |                         | 15 | %   |          |  | 19 | %        |   |  | 45 | % 
|                       |                                                                      |                         |    |     |          |  |    |          |  

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,                    |                        
|                           |                                        |                                 |                        
|                           |                                        | Restated                        |                         |        | Restated |       
|                           |                                        | 2003                            |                         |        | 2002     |       
|                           |                                        |                                 |                         |        |          |       
|Deferred tax assets       |                                        |                                 |                         |        |          |        |   |       
|                           | Accrued expenses                       |                                 | $                       | 3,137  |          |        | $ | 3,186  |       
|                           | Allowance for doubtful accounts        |                                 |                         | 714    |          |        |   | 473    |       
|                           | Net operating loss carryforwards       |                                 |                         | 7,008  |          |        |   | 11,057 |       
|                           | Restructuring reserves                 |                                 |                         | 667    |          |        |   | 575    |       
|                           | Property and equipment                 |                                 |                         | 2,260  |          |        |   | 1,053  |       
|                           | Other                                  |                                 |                         | 2,701  |          |        |   | 664    |       
|                           |                                        |                                 |                         |        |          |       
|                           |                                        | Total gross deferred tax assets |                         |        | 16,487   |        |   |        | 17,008 |       
|Deferred tax liabilities  |                                        |                                 |                         |        |          |        |   |       
|                           | Capitalized software development costs |                                 |                         | (2,860 | )        |        |   | (2,775 | )     
|                           |                                        |                                 |                         |        |          |       
|                           |                                        |                                 | Net deferred tax assets |        | $        | 13,627 |   |        | $      | 14,233 | 
|                           |                                        |                                 |                         |        |          |       

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. The
Company utilized domestic net operating loss carryforwards
during 2003 and expect to utilize the remaining net operating
loss carryforwards, to the extent not otherwise limited, during
2004. The effective tax rate was 15.3% for the full year 2003.
The tax rate for the year included a $3,200 favorable tax
adjustment related to the settlement of income tax audits for
the years 1998 through 2001. On a quarterly basis, management
assesses whether it remains more likely than not that the
deferred tax assets will be realized.

The Company has four business units in India
which are entitled to a tax holiday for 10 consecutive years
commencing with the year the business unit started producing
computer software or until the Indian tax year ending
March 31, 2009, whichever is earlier. Once the tax holiday
period has expired, these business units are eligible to deduct
a portion of the profits attributable to export activities. The
deduction for export activities is currently 30% and will expire
during the Indian tax year ended March 31, 2004. The tax
holiday period for one of the business units has expired and
this business unit is now subject to the deduction for export
activities.

The remaining business units are subject to the
tax holiday for various periods ranging from March 31, 2005
through March 31, 2009 and will not be able to avail
themselves of the deduction for export activities. As the tax
holiday expires, the Companys overall effective tax rate
will be negatively impacted.

The Company had available U.S. Federal net
operating loss carryforwards of approximately $11,748 as of
December 31, 2003. This net operating loss carryforward
will expire between 2011 and 2022.

15.     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-maker evaluates each locations performance based
primarily on its revenues and income (loss) from operations due
to the similarity of the nature of services provided to clients.
Revenue for the India/ Asia operation is evaluated based on the
full attribution of bill rates charged to the end customer. The
segment revenue figures disclosed below are stated at full
attribution. Full attribution revenue is calculated using the
end customer invoice rate on intersegment engagements, as

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

opposed to using the transfer price rate.
Geographic revenue is presented using the transfer price rate.
The chief operating decision-maker does not evaluate segment
performance based on assets. Assets, including the related
depreciation and amortization expense, are managed primarily by
corporate management. Under this organization, the operating
segments have been aggregated into the following four operating
segments and other.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Public Sector includes all services provided to
    domestic state and local municipalities.                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Commercial includes all North American services
    provided to non public sector customers. Commercial includes
    application services for maintenance and development outsourcing
    (AMD/O), retail, healthcare, distribution, manufacturing,
    financial services, telecommunications, utilities, e-business,
    packaged software implementation and other services. Commercial
    also includes telecommunication services provided in Europe.
|
| |  | India/Asia includes all services performed in
    India or Asia.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Europe includes services performed in Europe.
    Telecommunication services performed in Europe are excluded from
    the Europe figures as such services are included in the
    Commercial segment.                                                                                                                                                                                                                                                     
|
| |  | Other consists primarily of the labor and
    supporting expenses for the Corporate functions, depreciation
    and amortization expenses, lease expenses for corporate
    headquarters and costs attributable to closed and overlapping
    cost centers in 2002 and 2001. See realignment discussion below.                                                                                                                                             

The accounting policies of the operating segments
are the same as those described in the summary of significant
accounting policies.

The organizational realignment initiated during
the second quarter 2003 substantially modified the
companys reporting structure and requires the migration
from the traditional single segment reporting presentation to a
multi-segment presentation. This modified reporting format
presents revenue of each segment on a full attribution basis,
whereby the end customer invoice rate is presented, with
inter-segment eliminations separately identified. This
presentation reflects the importance and critical relationship
whereby India/ Asia supports, primarily, the U.S. Commercial and
Public Sector segments with services. The segment operating
results at the income from operations level utilizes the
companys transfer pricing methodology and thereby
attributes a majority of the margin to the segments where the
end customers are located. Thus the profitability of Commercial
and Public Sector is enhanced while the profitability of India/
Asia is directly reduced.

India/Asia: India/Asia supplies substantial
resources to North American and European customers. The rate
charged by India to U.S. and Europe has been developed utilizing
a cost plus transfer pricing methodology. This results in a
large component of the available gross margin accruing to North
America or Europe where the end customer is located.

Commercial and Public Sector segment revenue for
2002 and 2001 is presented using the 2003 reporting structure
(see Realignment below).

Other segment contribution margin for 2001
includes $23,665 related to restructuring charges (see
Note 18).



| |            
| | -----------
| | Realignment

The organizational realignment initiated during
the second quarter of 2003 substantially modified the
companys reporting structure. This realignment followed
several modest realignments implemented in 2002 and 2001. The
extensive nature of the realignment in 2003 requires the
application of certain assumptions relative to the appropriate
activities attributed to the segments for 2002 and 2001. The
segment results for 2002 and 2001 are based on the realignment
of our internal hierarchy in our ERP system and the allocations
of certain expenses in the newly identified multi-segment
organization. Activities and cost centers which have

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

been closed as a result of the realignment have
been attributed to Other as they have limited relevance in 2002
and 2001. As part of the realignment, the Company increased the
number of reportable segments from one to four operating
segments and other. Segment information is presented below based
on the new reporting structure. Revenue and income (loss) from
operations by segment is as follows:

|                              |                                                               |                         |         |         |          |   |         |          |         |   |         |         |         |  
|----------------------------- | ------------------------------------------------------------- | ----------------------- | ------- | ------- | -------- | - | ------- | -------- | ------- | - | ------- | ------- | ------- | -
|                              |                                                               |                        
|                              |                                                               | Year Ended December 31, |        
|                              |                                                               |                         |        
|                              |                                                               | Restated                |         |         | Restated |   |         | Restated |        
|                              |                                                               | 2003                    |         |         | 2002     |   |         | 2001     |        
|                              |                                                               |                         |         |         |          |   |         |          |        
|Revenues                     |                                                               |                         |         |         |          |   |         |          |         |   |         |        
|                              | Commercial                                                    |                         | $       | 241,202 |          |   | $       | 223,272  |         |   | $       | 252,990 |        
|                              |                                                               | Less intersegment       |         |         | (557     | ) |         |          |        |   |         |         |        |  
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              |                                                               |                         | 240,645 |         |          |   | 223,272 |          |         |   | 252,990 |        
|                              | Public Sector                                                 |                         |         | 112,913 |          |   |         | 130,591  |         |   |         | 118,953 |        
|                             
|                              | India/Asia                                                    |                         |         | 75,050  |          |   |         | 60,613   |         |   |         | 46,402  |        
|                              |                                                               | Less intersegment       |         |         | (61,601  | ) |         |          | (47,949 | ) |         |         | (31,036 | )
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              |                                                               |                         | 13,449  |         |          |   | 12,664  |          |         |   | 15,366  |        
|                             
|                              | Europe                                                        |                         |         | 15,586  |          |   |         | 18,260   |         |   |         | 16,036  |        
|                              |                                                               | Less intersegment       |         |         | (3,686   | ) |         |          | (2,068  | ) |         |         |        |  
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              |                                                               |                         | 11,900  |         |          |   | 16,192  |          |         |   | 16,036  |        
|                              | Other                                                         |                         |         | (277    | )        |   |         | 334      |         |   |         | 1,389   |        
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              |                                                               | $                       | 378,630 |         |          | $ | 383,053 |          |         | $ | 404,734 |        
|                              |                                                               |                         |         |         |          |   |         |          |        
|Income (Loss) From Operations |                                                               |                         |         |         |          |   |         |          |         |   |         |        
|                              | Commercial                                                    |                         | $       | 38,409  |          |   | $       | 6,146    |         |   | $       | (9,042  | )      
|                              | Public Sector                                                 |                         |         | 4,372   |          |   |         | 19,245   |         |   |         | 33,090  |        
|                              | India/Asia                                                    |                         |         | 4,902   |          |   |         | 7,596    |         |   |         | 14,724  |        
|                              | Europe                                                        |                         |         | 742     |          |   |         | (665     | )       |   |         | 301     |        
|                              | Other                                                         |                         |         | (38,577 | )        |   |         | (31,529  | )       |   |         | (63,983 | )      
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              |                                                               |                         | 9,848   |         |          |   | 793     |          |         |   | (24,910 | )      
|Other Income, net             |                                                               |                         | (1,781  | )       |          |   | (4,110  | )        |         |   | (5,531  | )      
|                              |                                                               |                         |         |         |          |   |         |          |        
|                              | Income (Loss) Before Provision (Benefit) For
    Income Taxes |                         | $       | 11,629  |          |   | $       | 4,903    |         |   | $       | (19,379 | )      
|                              |                                                               |                         |         |         |          |   |         |          |        

As described in Note 2, the Company has
restated its previously issued financial statements for 2003,
2002 and 2001. The impact of the restatement did not affect the
Companys four operating segments. The restatement change
the loss from operations- other, as defined above, from
($37,831) to ($38,577) in 2003, from ($31,667) to ($31,529) in
2002 and from ($63,666) to ($63,983) in 2001.

53



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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes selected financial
information of the Companys operations by geographic
location. Revenue by geographic location represents local third
party business plus work performed on behalf of other segments
and charged at the transfer rate. Other international is
primarily Europe, including European telecommunications activity
which is included in the Commercial segment.

|                    |                     |                         |         |         |          |   |         |          |         |   |         |         |         |  
|------------------- | ------------------- | ----------------------- | ------- | ------- | -------- | - | ------- | -------- | ------- | - | ------- | ------- | ------- | -
|                    |                     |                        
|                    |                     | Year Ended December 31, |        
|                    |                     |                         |        
|                    |                     | Restated                |         |         | Restated |   |         | Restated |        
|                    |                     | 2003                    |         |         | 2002     |   |         | 2001     |        
|                    |                     |                         |         |         |          |   |         |          |        
|Revenues           |                     |                         |         |         |          |   |         |          |         |   |         |        
|                    | North America       |                         | $       | 348,005 |          |   | $       | 351,273  |         |   | $       | 373,332 |        
|                   
|                    | India/Asia          |                         |         | 51,431  |          |   |         | 45,250   |         |   |         | 46,402  |        
|                    |                     | Less intersegment       |         |         | (37,982  | ) |         |          | (32,586 | ) |         |         | (31,036 | )
|                    |                     |                         |         |         |          |   |         |          |        
|                    |                     |                         | 13,449  |         |          |   | 12,664  |          |         |   | 15,366  |        
|                    | Europe              |                         |         | 21,418  |          |   |         | 21,184   |         |   |         | 16,036  |        
|                    |                     | Less intersegment       |         |         | (4,242   | ) |         |          | (2,068  | ) |         |         |        |  
|                    |                     |                         |         |         |          |   |         |          |        
|                    |                     |                         | 17,176  |         |          |   | 19,116  |          |         |   | 16,036  |        
|                    |                     |                         |         |         |          |   |         |          |        
|                    |                     | $                       | 378,630 |         |          | $ | 383,053 |          |         | $ | 404,734 |        
|                    |                     |                         |         |         |          |   |         |          |        
|Long-Lived Assets  |                     |                         |         |         |          |   |         |          |         |   |         |        
|                    | North America       |                         | $       | 26,333  |          |   | $       | 32,606   |         |   | $       | 27,109  |        
|                    | India/Asia          |                         |         | 11,398  |          |   |         | 10,352   |         |   |         | 7,352   |        
|                    | Other international |                         |         | 191     |          |   |         | 216      |         |   |         | 320     |        
|                    |                     |                         |         |         |          |   |         |          |        
|                    |                     | $                       | 37,922  |         |          | $ | 43,174  |          |         | $ | 34,781  |        
|                    |                     |                         |         |         |          |   |         |          |        

16.     Commitments,
Contingencies and Potential Liability to Clients

We are, from time to time, involved in litigation
and various legal matters that arise in the ordinary course of
business. We do not believe that the ultimate resolution of
these matters will have a material adverse effect on our
financial condition, results of operations, or cashflows. We
believe the legal allegations levied against us are without
merit and intend to defend these matters vigorously.

We have certain contracts with our state and
local clients that require us to provide a surety bond as a
guarantee of performance. As of December 31, 2003, we had
ten performance bonds outstanding and posted with clients, with
an aggregate total value of approximately $36,096 to secure
performance of contractual obligations with our clients. Five of
these performance bonds are secured by letters of credit
totaling $6,206. In general, we would only be liable for the
amount of these guarantees in the event of default in the
performance of our obligations under each contract, the
probability of which we believe is remote. We believe that we
have sufficient capacity in the surety markets and liquidity
from our cash flow and revolving credit facility to meet ongoing
business needs and to respond to future requests for proposals
from state and local governments.

17.     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

54



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 are exercisable.

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. The difference
between the fair value allocated to the convertible Preferred
Stock and the fair value of the Companys Common Stock was
considered a beneficial conversion feature. The beneficial
conversion feature, which did not affect net income, was
accounted for as a dividend on the convertible Preferred Stock
in 2000 and as a reduction of income available to common
shareholders in the computation of basic and 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.

18.     Restructuring,
Merger and Other Related Charges

In April 2003, the Company announced it would
realign the organization. The realignment which is complete,
aligned sales, subject matter expertise and delivery and
provided a strong foundation for the future growth and
profitability for the Company. As part of the realignment, the
Company reduced headcount in the second quarter of 2003 by over
200 net positions in North America or approximately 8.5% of
domestic headcount. The reduction in headcount was split with
over 80% of the eliminated positions (billable and delivery
employees) coming from costs of revenue with the remaining
coming from selling, general and administrative.

In fiscal 2003, the Company recorded costs of
$4,208, split $1,834 included in cost of revenue and $2,374
included in selling, general and administrative expenses,
related to various headcount reductions, including the
reductions implemented during the second quarter as discussed
above, and termination of lease obligations associated with the
consolidation of facilities. Amounts related to lease
terminations will be paid out through 2006. Amounts related to
severance will be paid through 2004.

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.

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                                                                                                                      |  |   | 1,065  | 

55



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a roll forward of the accrual
balance for restructuring, merger and other related charges:

|                          |  |           |        |       |              |   |        |       |  |   |         |   |  |   |         |  
|------------------------- |  | --------- | ------ | ----- | ------------ | - | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                          |  |           |        | Lease |              |   |        |       | 
|                          |  | Severance |        |       | Terminations |   |        | Other |  |   | Total   |  
|                          |  |           |        |       |              |   |        |       |  |   |         |  
|Balance January 1, 2001   |  | $         | 7,541  |       |              | $ |       |       |  | $ |        |   |  | $ | 7,541   |  
|Expense                   |  |           | 5,300  |       |              |   | 900    |       |  |   | 17,465  |   |  |   | 23,665  |  
|Payments and other        |  |           | (8,274 | )     |              |   | 1,905  |       |  |   | (17,406 | ) |  |   | (23,775 | )
|                          |  |           |        |       |              |   |        |       |  |   |         |  
|Balance December 31, 2001 |  |           | 4,567  |       |              |   | 2,805  |       |  |   | 59      |   |  |   | 7,431   |  
|Expense                   |  |           | 1,354  |       |              |   | 1,094  |       |  |   | (30     | ) |  |   | 2,418   |  
|Payments and other        |  |           | (5,913 | )     |              |   | (1,372 | )     |  |   |        |   |  |   | (7,285  | )
|                          |  |           |        |       |              |   |        |       |  |   |         |  
|Balance December 31, 2002 |  |           | 8      |       |              |   | 2,527  |       |  |   | 29      |   |  |   | 2,564   |  
|Expense                   |  |           | 3,819  |       |              |   | 389    |       |  |   |        |   |  |   | 4,208   |  
|Payments and other        |  |           | (3,456 | )     |              |   | (1,248 | )     |  |   | (29     | ) |  |   | (4,733  | )
|                          |  |           |        |       |              |   |        |       |  |   |         |  
|Balance December 31, 2003 |  | $         | 371    |       |              | $ | 1,668  |       |  | $ |        |   |  | $ | 2,039   |  
|                          |  |           |        |       |              |   |        |       |  |   |         |  

Included in the balance at December 31, 2003
is $1,506 of lease termination costs related to terminations in
years prior to 2003. Such amounts will be paid through October
2006.

19.     Other Income,
Net

In August, 2003, the Company was notified that
the Board of Directors and majority shareholders of one of the
Companys investments carried at cost had agreed to merge
with another entity. The merger consummated in August, 2003 and
the Company recognized a loss of approximately $680 which is
included in other income, net.

20.     Supplemental
Quarterly Information (Unaudited)

As described in Note 2, the quarterly
information for 2003 and 2002 has been restated. The effects of
this restatement are reflected below.

|                                                        |  |               |        |   |          |   |        |              |  |   |             |  |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------ | ------------ |  | - | ----------- |  |  | - | ------ | 
|                                                        |  |              
|                                                        |  | Quarter Ended |       
|                                                        |  |               |       
|                                                        |  | Restated      |        |   | Restated |   |        | Restated     |  |   | Restated    | 
|2003                                                    |  | March 31      |        |   | June 30  |   |        | September 30 |  |   | December 31 | 
|                                                        |  |               |        |   |          |   |        |              |  |   |             | 
|Revenues                                                |  | $             | 96,559 |   |          | $ | 96,240 |              |  | $ | 94,355      |  |  | $ | 91,476 | 
|Gross profit                                            |  |               | 21,782 |   |          |   | 22,629 |              |  |   | 25,837      |  |  |   | 22,199 | 
|Income (loss) from operations(b)                        |  |               | (206   | ) |          |   | (186   | )            |  |   | 6,580       |  |  |   | 3,660  | 
|Net income(a)                                           |  |               | 179    |   |          |   | (16    | )            |  |   | 4,100       |  |  |   | 5,586  | 
|Net income (loss) available for
    common shareholders |  | $             | (916   | ) |          | $ | (1,120 | )            |  | $ | 2,987       |  |  | $ | 4,465  | 
|Basic net income (loss) per share                       |  | $             | (0.03  | ) |          | $ | (0.04  | )            |  | $ | 0.11        |  |  | $ | 0.17   | 
|Diluted net income (loss) per share                     |  | $             | (0.03  | ) |          | $ | (0.04  | )            |  | $ | 0.11        |  |  | $ | 0.16   | 

56



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                        |  |               |        |   |            |   |        |              |  |   |             |  |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ | - | ---------- | - | ------ | ------------ |  | - | ----------- |  |  | - | ------ | 
|                                                        |  |              
|                                                        |  | Quarter Ended |       
|                                                        |  |               |       
|                                                        |  | As            |        |   | As         |   |        | As           |  |   | As          | 
|                                                        |  | Originally    |        |   | Originally |   |        | Originally   |  |   | Originally  | 
|                                                        |  | Reported      |        |   | Reported   |   |        | Reported     |  |   | Reported    | 
|2003                                                    |  | March 31      |        |   | June 30    |   |        | September 30 |  |   | December 31 | 
|                                                        |  |               |        |   |            |   |        |              |  |   |             | 
|Revenues                                                |  | $             | 96,559 |   |            | $ | 96,240 |              |  | $ | 94,355      |  |  | $ | 91,476 | 
|Gross profit                                            |  |               | 21,714 |   |            |   | 23,098 |              |  |   | 26,118      |  |  |   | 22,194 | 
|Income (loss) from operations(b)                        |  |               | (473   | ) |            |   | 649    |              |  |   | 6,793       |  |  |   | 3,625  | 
|Net income(a)                                           |  |               | 11     |   |            |   | 510    |              |  |   | 4,234       |  |  |   | 5,565  | 
|Net income (loss) available for
    common shareholders |  | $             | (1,084 | ) |            | $ | (594   | )            |  | $ | 3,121       |  |  | $ | 4,444  | 
|Basic net income (loss) per share                       |  | $             | (0.04  | ) |            | $ | (0.02  | )            |  | $ | 0.12        |  |  | $ | 0.17   | 
|Diluted net income (loss) per share                     |  | $             | (0.04  | ) |            | $ | (0.02  | )            |  | $ | 0.12        |  |  | $ | 0.16   | 

|                                                        |  |               |        |  |          |   |        |              |  |   |             |   |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ |  | -------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | 
|                                                        |  |              
|                                                        |  | Quarter Ended |       
|                                                        |  |               |       
|                                                        |  | Restated      |        |  | Restated |   |        | Restated     |  |   | Restated    |  
|2002                                                    |  | March 31      |        |  | June 30  |   |        | September 30 |  |   | December 31 |  
|                                                        |  |               |        |  |          |   |        |              |  |   |             |  
|Revenues                                                |  | $             | 90,768 |  |          | $ | 94,658 |              |  | $ | 99,273      |   |  | $ | 98,354 | 
|Gross profit                                            |  |               | 24,385 |  |          |   | 25,584 |              |  |   | 23,903      |   |  |   | 24,754 | 
|Income (loss) from operations(c)                        |  |               | 156    |  |          |   | (173   | )            |  |   | 364         |   |  |   | 446    | 
|Net income                                              |  |               | 1,561  |  |          |   | 162    |              |  |   | 855         |   |  |   | 1,389  | 
|Net income (loss) available for common
    shareholders |  | $             | 475    |  |          | $ | (933   | )            |  | $ | (248        | ) |  | $ | 375    | 
|Basic net income (loss) per share                       |  | $             | 0.02   |  |          | $ | (0.03  | )            |  | $ | (0.01       | ) |  | $ | 0.01   | 
|Diluted net income (loss) per share                     |  | $             | 0.02   |  |          | $ | (0.03  | )            |  | $ | (0.01       | ) |  | $ | 0.01   | 

|                                                        |  |               |        |  |            |   |        |              |  |   |             |   |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ |  | ---------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | 
|                                                        |  |              
|                                                        |  | Quarter Ended |       
|                                                        |  |               |       
|                                                        |  | As            |        |  | As         |   |        | As           |  |   | As          |  
|                                                        |  | Originally    |        |  | Originally |   |        | Originally   |  |   | Originally  |  
|                                                        |  | Reported      |        |  | Reported   |   |        | Reported     |  |   | Reported    |  
|2002                                                    |  | 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 operations(c)                               |  |               | 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   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The tax provision for the quarter and year ended
    December 31, 2003 included a $3,200 favorable tax
    adjustment related to the settlement of income tax audits for
    the years 1998 through 2001.                                                                                                                                                                                 
|   
|(b) | In the quarter ended June 30, 2003, the
    Company announced a realignment of its organization which
    required total severance of $2,528 during the quarter ended
    June 30, 2003.                                                                                                                                                                                                  
|   
|(c) | Selling, general and administrative expenses for
    the quarter ended June 30, 2002, included $1,407 in
    severance costs associated with an organizational restructuring.
    Selling, general and administrative expenses for the quarter
    ended December 31, 2002, included a charge of $1,094 for an
    operating lease which management determined was no longer
    required.




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

None.

57



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##### Table of Contents






Item 9A.     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 controls and procedures. Based on their
evaluation of the Companys disclosure controls and
procedures on December 31, 2003 they concluded that the
Companys controls procedures were not adequately designed
to timely notify them of material information that the Company
is required to disclose in the reports it files with the SEC
insofar as it relates to matters noted below under Changes in
Internal Controls.

Changes in Internal Controls

Since the date of the most recent evaluation of
the Companys internal controls by the Chief Executive
Officer and the Chief Financial Officer, management has
continued to take actions to enhance internal controls and has
increased oversight of other factors that could have
significantly affected those controls, including the corrective
actions with regard to significant deficiencies and material
weaknesses.

During managements evaluation of internal
controls, certain deficiencies were identified including
manually intensive processes and information flows,
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, implementation of the fixed asset
module and integration of this module within the Companys
ERP system, standardization and automation of information flows,
processes and procedures, and enhancing the skill sets of
financial and operational staff through hiring and expanded
training programs.

During the first quarter of 2004, the Company
commenced a physical inventory process of its personal computer
equipment and peripherals and an assessment of furniture and
fixtures. At the conclusion of these processes in June 2004, the
Company identified a charge of $2.6 million for assets that
could not be located or were no longer in use resulting in a
restatement of previously reported amounts for 2003, 2002 and
2001. Of this amount, $0.7 million was recorded in the
first quarter of 2004 relating to missing equipment which could
not be identified with any particular period. Management has
determined that this internal control issue constitutes a
material weakness in its system of internal accounting controls
as defined under standards established by the Public Company
Accounting Oversight Board and has implemented a plan to
strengthen the recording and tracking of its fixed assets. The
major components of this plan include:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | The implementation of a fixed asset module and
    the integration of this module within the Companys ERP
    system.      
|
| |  | The development of a policy and procedure manual
    regarding the recording, tracking and depreciation of fixed
    assets.
|
| |  | Periodic physical inventories of fixed assets.                                                                              

The Company provides COBRA benefits to its former
employees for the continuation of healthcare benefits. Payments
for these benefits are paid directly to an external benefits
administrator. In 2003, the Company discovered that these
payments, which it believed were being used by its external
benefits administrator to offset its healthcare benefits
expenses, were actually remitted to the Company but not
deposited into its bank accounts on a timely basis. Management
believes that it did not have adequate internal controls to
prevent the issue from occurring or to identify it in a timely
manner once it had occurred and has implemented internal
controls necessary to strengthen the control over handling of
COBRA payments. The Company now requires that COBRA payments go
directly from the external benefits administrator to the
Companys lockbox.

In addition, management and the Companys
Audit Committee was informed by the Companys independent
accountants in November 2003 of certain matters involving
internal controls that the Companys

58



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##### Table of Contents



independent accountants consider to be a material
weakness. This material weakness focused on the Companys
application of the percentage of completion method of accounting
for its fixed price contracts. The Company has implemented a
multi-part plan to strengthen management of fixed price
contracts and to enhance the processes supporting application of
the percentage of completion method of accounting for its fixed
price contracts. The major components of this plan include:




| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Standardization and continuous improvement of the
    use of three primary estimating tools.                                                                                                       
|
| |  | Standardization and codification of three primary
    delivery methodologies.                                                                                                                      
|
| |  | Periodic project reviews with executive
    management.                                                                                                                                            
|
| |  | Enhanced training addressing revenue recognition,
    contract management and project tracking and reporting.                                                                                      
|
| |  | Migration of project plans and project reporting
    to a standard workbook.                                                                                                                       
|
| |  | The addition of a fixed price specialist to
    assist the project management teams on use of the standard
    workbook along with being available to address project related
    reporting issues.
|
| |  | Monthly certification by individual project
    managers attesting to the appropriateness of their monthly
    estimate to complete submissions.                                                   
|
| |  | Centralization of public sector delivery under a
    seasoned executive hired from the outside.                                                                                                    

We have retained the services of another
independent registered public accounting firm to assist us in
reviewing, outlining areas for potential remediation and testing
internal controls associated with the requirements delineated in
Section 404 of the Sarbanes-Oxley Act.




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.

Audit Committee

Covansys has a separately designated standing
Audit Committee in accordance with Section 3(a)(58)(A) of
Regulation S-K of the Sec of the Securities and Exchange
Act of 1934, as amended (Exchange Act). Each member
of the Audit Committee is independent within the meaning of
Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
The members of the Audit Committee are William C. Brooks
(Chairman), Frank D. Stella and Ronald K. Machtley.

Audit Committee Financial Expert

The Board of Directors has determined that
William C. Brooks of the Audit Committee is an audit committee
financial expert as defined by Item 401(h) of
Regulation S-K of the Exchange Act.

Section 16(a) Beneficial Ownership
Reporting Compliance

The information required by this item is included
in our Proxy Statement for our 2004 Annual Meeting of
Shareholders under the caption Directors and Executive Officers
of the Company and is incorporated herein by reference.

Code of Ethical Conduct

Covansys has adopted a Code of Ethical Conduct
(Code) for all executive and financial officers. The
Code is available on our website at www.covansys.com.
Stockholders may request a free copy of the Code from: Covansys,
32605 West 12 Mile, Farmington Hills, MI 48334,
Attention VP-Investor Relations.

59



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##### Table of Contents



Covansys has not waived compliance with any
aspect of the Code.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is included
in our Proxy Statement for our 2004 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 2004 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 2004 Annual Meeting of
Shareholders under the caption Certain Relationships and Related
Transactions and is incorporated herein by reference.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountants Fees and
    Services

The information required by this item is included
in our Proxy Statement for our 2004 Annual Meeting of
Shareholders under the caption Principal Accountants Fees and
Services and is incorporated herein by reference.




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 Registered Public
    Accounting Firm                                                          |  |      | 28 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                     |  |      | 30 | 
|Consolidated Statements of Operations for each of
    the years ended December 31, 2003, 2002 and 2001               |  |      | 31 | 
|Consolidated Statements of Shareholders
    Equity for each of the years ended December 31, 2003, 2002
    and 2001 |  |      | 32 | 
|Consolidated Statements of Cash Flows for each of
    the years ended December 31, 2003, 2002 and 2001               |  |      | 33 | 
|Notes to Consolidated Financial Statements                                                                           |  |      | 34 | 

60



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##### Table of Contents



2.     Financial
Statement Schedules

None

3.(a) Exhibits

|        |    |     |             |                                                                                                                                                                                                
|------- | -- | --- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                    
|        | 21 | .1  |             | Subsidiaries of Registrant.                                                                                                                                                                    
|        | 23 | .1  |             | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                         
|        | 31 | .1  |             | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                   
|        | 31 | .2  |             | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                   
|        | 32 | .1  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                
|        | 32 | .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 17, 2003

Per report on Form 8-K filed
October 20, 2003




---



|  |                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

61



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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

August 4, 2004

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                                                                   |  | August 4, 2004
|                                              
|/s/ RAJENDRA B. VATTIKUTIRajendra B. Vattikuti |  | Co-Chairman, Director                                                                      |  | August 4, 2004
|                                              
|/s/ MARTIN C. CLAGUEMartin C. Clague           |  | Chief Executive Officer, President and Director                                            |  | August 4, 2004
|                                              
|/s/ JAMES S. TROUBAJames S. Trouba             |  | Vice President and Chief Financial Officer
    (Principal Financial Officer)               |  | August 4, 2004
|                                              
|/s/ THOMAS E. LINDSEYThomas E. Lindsey         |  | Vice President, Controller and Chief Accounting
    Officer (Principal Accounting Officer) |  | August 4, 2004
|                                              
|/s/ WILLIAM BROOKSWilliam Brooks               |  | Director                                                                                   |  | August 4, 2004
|                                              
|/s/ KEVIN CONWAYKevin Conway                   |  | Director                                                                                   |  | August 4, 2004
|                                              
|/s/ DOUGLAS S. LANDDouglas S. Land             |  | Director                                                                                   |  | August 4, 2004
|                                              
|/s/ RONALD K. MACHTLEYRonald K. Machtley       |  | Director                                                                                   |  | August 4, 2004
|                                              
|/s/ JOHN A. STANLEYJohn A. Stanley             |  | Director                                                                                   |  | August 4, 2004

62



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##### Table of Contents



|                                   |  |          |  |                |  | 
|---------------------------------- |  | -------- |  | -------------- |  | 
|                                  
|/s/ FRANK D. STELLAFrank D. Stella |  | Director |  | August 4, 2004
|                                  
|/s/ DAVID WASSERMANDavid Wasserman |  | Director |  | August 4, 2004

63



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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.                                                                                                                                                                    
|        | 21 | .1  |             | Subsidiaries of Registrant.                                                                                                                                                                    
|        | 23 | .1  |             | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                         
|        | 31 | .1  |             | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                   
|        | 31 | .2  |             | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                   
|        | 32 | .1  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                
|        | 32 | .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.