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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31,
2004

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 þ          No o

Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. 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, 2004 was $185,761,921.

The number of
shares outstanding of the registrants common stock as of
February 28, 2005 was 37,419,477.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement of the Registrant for its 2005 Annual
Meeting of Shareholders to the extent expressly so stated, are
incorporated by reference into Part III of this Report.



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COVANSYS CORPORATION AND
SUBSIDIARIES

FORM 10-K

For the Fiscal Year Ended December 31,
2004

INDEX






|                                      |  |                                                                                                                          |    |  |    | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I                               
|Item 1.                               |  | Business                                                                                                                 |    |  | 2  | 
|Item 2.                               |  | Properties                                                                                                               |    |  | 4  | 
|Item 3.                               |  | Legal Proceedings                                                                                                        |    |  | 5  | 
|Item 4.                               |  | Submission of Matters to a
    Vote of Security Holders                                                                  |    |  | 5  | 
|                                     
|PART II                              
|Item 5.                               |  | Market for the
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities |    |  | 6  | 
|Item 6.                               |  | Selected Financial Data                                                                                                  |    |  | 7  | 
|Item 7.                               |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                |    |  | 10 | 
|Item 7A.                              |  | Quantitative and Qualitative
    Disclosure About Market Risk                                                            |    |  | 25 | 
|Item 8.                               |  | Financial Statements and
    Supplementary Data                                                                          |    |  | 27 | 
|Item 9.                               |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                                 |    |  | 61 | 
|Item 9A.                              |  | Controls and Procedures                                                                                                  |    |  | 61 | 
|                                     
|PART III                             
|Item 10.                              |  | Directors and Executive
    Officers of the Company                                                                      |    |  | 66 | 
|Item 11.                              |  | Executive Compensation                                                                                                   |    |  | 66 | 
|Item 12.                              |  | Security Ownership of
    Certain Beneficial Owners and Management                                                       |    |  | 66 | 
|Item 13.                              |  | Certain Relationships and
    Related Transactions                                                                       |    |  | 66 | 
|Item 14.                              |  | Principal Accountants Fees
    and Services                                                                              |    |  | 66 | 
|                                     
|PART IV                              
|Item 15.                              |  | Exhibits, Financial
    Statement Schedules                                                                              |    |  | 67 | 
|Signatures                            |  |                                                                                                                          | 68 | 
|Subsidiaries of Registrant           
|Consent of PricewaterhouseCoopers LLP
|Certification Pursuant to Section 302
|Certification Pursuant to Section 302
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906



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PART I






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

Summary

Incorporated 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 our clients achieve rapid
deployment, world-class quality and reduced costs.

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 which have been successfully
operating since 1992. Our ability to deliver services globally
is enhanced by our local account management and recruiting
infrastructure, consisting of a geographically dispersed network
of worldwide offices 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
provides services to a broad spectrum of clients in a variety of
industries including financial services, retail &
distribution, manufacturing, healthcare, public sector, and
telco/ utilities/ transportation.

We apply our industry-specific knowledge to
deliver a wide range of systems integrations and outsourcing
services including:



| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Custom Application Development which may include
    the design, development and implementation of custom computer
    information systems.                                                                                                                                                        
|
| |  | Packaged Software Implementation, Upgrades and
    Enhancements including the configuration, customization,
    implementation and upgrade of packaged information system
    software products.                                                                                                   
|
| |  | Application Maintenance and Development
    Outsourcing (AMD/O) which may include the ongoing operations,
    enhancement and upgrade of custom or packaged information system
    software products.                                                                                              
|
| |  | Legacy Modernization which may include the
    migration of legacy applications to newer architecture platforms
    in order to reduce maintenance and operational costs, or
    extending customer legacy applications with new technology
    enhancements or components, such as web enablement.
|
| |  | Business Process Outsourcing including
    transaction processing services such as claims, invoices and
    document processing.                                                                                                                                                                   

Our strength in the financial services sector was
strengthened in 2004 through the Master Services Agreement the
Company entered into with Fidelity Information Services, Inc.
(FIS), a subsidiary of Fidelity National Financial,
Inc. The relationship with FIS, a related party as noted below,
demonstrates Covansys commitment to the financial services
clients and has provided us with new opportunities for continued
growth in this area.

Covansys recognized early on that quality was a
critical priority and has had its quality assurance rated by the
top organizations through the years. Covansys India 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.

In 2004, Covansys entered into a Stock Purchase
Agreement with FIS and a Recapitalization Agreement with a
private equity investment fund managed by Clayton,
Dubilier & Rice, Inc. (the CDR
Shareholder). The transactions are more fully discussed in
Note 3 of the Consolidated Financial Statements. The

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Recapitalization Agreement with the CDR
Shareholder restructured the ownership interest in the Company
that the CDR Shareholder had acquired in 2000.


Covansys augmented its public sector practice,
particularly in the insurance area, in 2002 through the
acquisition of PDA Services, Inc. (PDA). PDA has
allowed Covansys to become 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 and Business Process
Outsourcing.

In September 2000, we sold our contract
programming subsidiary to a related party as more fully set
forth in Note (c) included in Item 6 of this
Form 10-K.

Segment Information

Information regarding our segments, including
geographic information, appears in Note 18 of the notes to
Consolidated Financial Statements.

Competition

We believe the primary competitive factors in our
business are price, quality and scope of service. We believe our
principal competitive advantage lies in our offshore development
centers in India. Our competitors consist primarily of medium to
large information system integrators. Depending on the nature of
the engagement, our competitors are located domestically and
offshore.

Strategy

Covansys strategy has been to focus on its
core competencies and to deliver high quality solutions to its
clients in the commercial and public sectors. The Company offers
specific solutions designed for targeted vertical markets which
rely heavily upon systems integration and/or outsourcing
services. These solutions are primarily offered in the financial
services, retail and distribution, manufacturing, healthcare,
public sector, and telco/utilities/transportation sectors.

Consistent with this strategy, Covansys has
developed proprietary software and solution frameworks to meet
its clients needs. In all industries  whether
or not an industry specific solution has been
developed  Covansys offers customizable outsourcing
and integration services. Covansys strategic outsourcing
offerings include application maintenance and development
outsourcing (AMD/O), full outsourcing, and business process
outsourcing/information technology (BPO/IT) enabled services.
Integration services include customer development, e-business
solutions, data warehousing, legacy modernization, packaged
software implementation, upgrades and enhancement and document
management. Expenditures to develop our proprietary software in
the last three years have not been material.

Core to Covansys strategy is its ability to
offer clients the flexibility of opting to have services
delivered onsite, offsite, or offshore to optimally manage
business needs with cost structures while mitigating risks.

A unique differentiator for Covansys is that it
is a U.S.-based consulting and technology services provider that
offers clients the comfort of contracting with a domestic
corporation while offering cost-effective, high-quality offsite
and offshore services. This is a model that has been
successfully implemented not only in the United States, but also
Canada, Europe and Asia. The global, flexible delivery
capabilities Covansys has mastered during the last decade allow
clients to achieve rapid deployment, world-class quality and
reduced costs. The Company is well positioned to take advantage
of the offshore trend that is expected to continue as more and
more companies see the value of offshore that Covansys has been
offering for many years.

Clients

Using our strategic approach, we are an important
supplier to middle market clients. In 2004, we provided services
to over 330 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. This strategy has been
successful with over 90% of our revenue attributable to
recurring client

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business. Our top ten of our customers generate
approximately 44% of revenues with no one customer generating
more than approximately 10% of revenue.


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 grant stock options as part of our
recruitment and retention strategy.

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 a 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, 2004, we had
5,804 employees comprised of 5,466 IT professionals
and 338 general and administrative personnel. As of
December 31, 2004, we also had 383 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
265 courses on our computer-based training system, which is
available 24 hours a day, 7 days a week. We have access
licenses to over 185 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 214 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 office space throughout the world and
our headquarters is located in Farmington Hills, MI. Currently,
our facilities are adequate for our needs.

We have principal offices in the following
locations:

|              |                  |  |               |  |                   |       |  |  |                      |  |  |        |                  |  |  |  |                   | 
|------------- | ---------------- |  | ------------- |  | ----------------- | ----- |  |  | -------------------- |  |  | ------ | ---------------- |  |  |  | ----------------- | 
|              |                  | 
|North America |                  |  | International | 
|              |                  |  |               | 
|Commercial    |                  |  | Public Sector |  |                   | Other |  |  | India/Asia           |  |  | Europe |                 
|              |                  |  |               |  |                   |       |  |  |                      |  |  |        |                 
|              | Chicago, IL      |  |               |  | Calverton, MD     |       |  |  | Farmington Hills, MI |  |  |        | Bangalore, India |  |  |  | Brussels, Belgium | 
|              | Englewood, CO    |  |               |  | Columbus, OH      |       |  |  | Middletown, CT       |  |  |        | Chennai, India   |  |  |  | London, U.K.      | 
|              | Montreal, Canada |  |               |  | Lenexa, KS        |       |  |  |                      |  |  |        | Mumbai, India    |  |  |  | Madrid, Spain     | 
|              | Santa Clara, CA  |  |               |  | Marietta, GA      |       |  |  |                      |  |  |        | Singapore        |  |  |  | Munich, Germany   | 
|              |                  |  |               |  | Overland Park, KS |       |  |  |                      |  |  |        |                  |  |  |  | Rome, Italy       | 
|              |                  |  |               |  | Providence, RI    |       |  |  |                      |  |  |        |                  |  |  |  |                   | 
|              |                  |  |               |  | Sacramento, CA    |       |  |  |                      |  |  |        |                  |  |  |  |                   | 

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

The Companys independent registered public
accounting firm has notified the Company that it received a
letter from the Securities and Exchange Commission
(SEC) dated October 22, 2004 requesting certain
information about the Company relating to the period
January 1, 2001 to the present. At this time the Company
has no information regarding the scope or nature of the request
and the SEC has not requested any information from the Company.






|        |                                                        
|------- | -------------------------------------------------------
|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, 2004.

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PART II






|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities

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, 2004: |                |                |   |       |     |  |   |      
|                              | First Quarter  |                | $ | 12.20 |     |  | $ | 9.82  | 
|                              | Second Quarter |                | $ | 16.01 |     |  | $ | 8.62  | 
|                              | Third Quarter  |                | $ | 11.75 |     |  | $ | 7.00  | 
|                              | Fourth Quarter |                | $ | 15.87 |     |  | $ | 10.66 | 
|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  | 

As of February 28, 2005, there were
572 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.

The Company did not repurchase any shares during
the fourth quarter of 2004.

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

The selected financial data presented below
(restated data followed by as previously reported information
for each of the four years in the period ended December 31,
2003) for each of the five years in the period ended
December 31, 2004, are derived from our Consolidated
Financial Statements and related Notes thereto. The financial
information for each of the four years in the period ended
December 31, 2003 have been restated for the impact of
adjustments discussed in Note 2 of the Consolidated
Financial Statements. The selected financial data should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the Consolidated Financial Statements and related Notes
thereto included in this Form 10-K. The reports 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
and 2000 have not been reissued and do not address the changes
affected by the restatement of the Companys financial
statements reported in this Form 10-K.

|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |   |         |      |   |   |         |       |  
|----------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | - | -------- | ---- | - | -------- | ---------- | --- | -------- | ---- | ------- | -------- | ---------- | - | ------- | ---- | - | - | ------- | ----- | -
|                              |                                                                                          |                                      
|                              |                                                                                          | Years Ended December 31,              |  
|                              |                                                                                          |                                       |  
|                              |                                                                                          |                                       |   | Restated |      |   | Restated |            |     | Restated |      |         | Restated |           
|                              |                                                                                          | 2004(d)                               |   |          | 2003 |   |          | 2002(b)(e) |     |          | 2001 |         |          | 2000(c)(f) |  
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              |                                                                                          |                                      
|                              |                                                                                          | (In thousands, except per share data) |  
|Statement of Operations Data: |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |   |         |      |   |   |        
|                              | Revenue                                                                                  |                                       | $ | 374,373  |      |   | $        | 378,630    |     |          | $    | 383,053 |          |            | $ | 404,734 |      |   | $ | 419,641 |      
|                              | Cost of revenue                                                                          |                                       |   | 281,114  |      |   |          | 286,183    |     |          |      | 284,427 |          |            |   | 290,658 |      |   |   | 308,233 |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Gross profit                                                                             |                                       |   | 93,259   |      |   |          | 92,447     |     |          |      | 98,626  |          |            |   | 114,076 |      |   |   | 111,408 |      
|                              | Selling, general and administrative expenses                                             |                                       |   | 72,342   |      |   |          | 82,731     |     |          |      | 97,957  |          |            |   | 115,774 |      |   |   | 144,248 |      
|                              | Restructuring, merger costs and other(a)                                                 |                                       |   |         |      |   |          |           |     |          |      |        |          |            |   | 23,665  |      |   |   | 21,507  |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Income (loss) from operations                                                            |                                       |   | 20,917   |      |   |          | 9,716      |     |          |      | 669     |          |            |   | (25,363 | )    |   |   | (54,347 | )    
|                              | Interest expense                                                                         |                                       |   | 245      |      |   |          |           |     |          |      |        |          |            |   |        |      |   |   |        |      
|                              | Other income, net                                                                        |                                       |   | 1,317    |      |   |          | 1,781      |     |          |      | 4,110   |          |            |   | 5,531   |      |   |   | 6,060   |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Income (loss) from continuing operations before
    provision (benefit) for income taxes |                                       |   | 21,989   |      |   |          | 11,497     |     |          |      | 4,779   |          |            |   | (19,832 | )    |   |   | (48,287 | )    
|                              | Provision (benefit) for income taxes                                                     |                                       |   | 4,485    |      |   |          | 1,378      |     |          |      | 886     |          |            |   | (7,211  | )    |   |   | (11,539 | )    
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Income (loss) from continuing operations                                                 |                                       |   | 17,504   |      |   |          | 10,119     |     |          |      | 3,893   |          |            |   | (12,621 | )    |   |   | (36,748 | )    
|                              | Loss from discontinued operations, net of income
    taxes                               |                                       |   |         |      |   |          |           |     |          |      |        |          |            |   |        |      |   |   | (1,692  | )    
|                              | Gain on sale of discontinued operations, net of
    income taxes                         |                                       |   |         |      |   |          |           |     |          |      |        |          |            |   |        |      |   |   | 6,072   |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Net income (loss)                                                                        |                                       |   | 17,504   |      |   |          | 10,119     |     |          |      | 3,893   |          |            |   | (12,621 | )    |   |   | (32,368 | )    
|                              | Beneficial conversion feature                                                            |                                       |   |         |      |   |          |           |     |          |      |        |          |            |   |        |      |   |   | (23,651 | )    
|                              | Convertible redeemable preferred stock dividends                                         |                                       |   | (3,221   | )    |   |          | (4,433     | )   |          |      | (4,298  | )        |            |   | (4,265  | )    |   |   | (2,569  | )    
|                              | Loss on redemption of convertible redeemable
    preferred stock                         |                                       |   | 28,674   |      |   |          |           |     |          |      |        |          |            |   |        |      |   |   |        |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Net income (loss) available for shareholders                                             |                                       |   | (14,391  | )    |   |          | 5,686      |     |          |      | (405    | )        |            |   | (16,886 | )    |   |   | (58,588 | )    
|                              | Amounts allocated to participating preferred
    shareholders                            |                                       |   |         |      |   |          | (1,385     | )   |          |      |        |          |            |   |        |      |   |   |        |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Net income (loss) available to common shareholders                                       |                                       | $ | (14,391  | )    |   | $        | 4,301      |     |          | $    | (405    | )        |            | $ | (16,886 | )    |   | $ | (58,588 | )    
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Earnings (loss) per share                                                                |                                       |   |          |      |   |          |            |     |          |      |         |          |            |   |         |      |   |   |         |      
|                              |                                                                                          | Basic                                 |   | $        | (.48 | ) |          | $          | .16 |          |      | $       | (.01     | )          |   | $       | (.59 | ) |   | $       | (1.78 | )
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              |                                                                                          | Diluted                               |   | $        | (.48 | ) |          | $          | .16 |          |      | $       | (.01     | )          |   | $       | (.59 | ) |   | $       | (1.78 | )
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Basic weighted average shares                                                            |                                       |   | 29,971   |      |   |          | 26,975     |     |          |      | 27,734  |          |            |   | 28,704  |      |   |   | 32,892  |      
|                              | Dilutive effect of options                                                               |                                       |   | (A       | )    |   |          | 229        |     |          |      |        |          |            |   |        |      |   |   |        |      
|                              | Convertible redeemable preferred stock                                                   |                                       |   | (A       | )    |   |          | (A         | )   |          |      | (A      | )        |            |   | (A      | )    |   |   | (A      | )    
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  
|                              | Diluted weighted average shares                                                          |                                       |   | 29,971   |      |   |          | 27,204     |     |          |      | 27,734  |          |            |   | 28,704  |      |   |   | 32,892  |      
|                              |                                                                                          |                                       |   |          |      |   |          |            |     |          |      |         |          |            |  



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

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|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |         |      |   |   |         |       |  
|----------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | ------------- |  | - | ------------- | ---- | - | ------------- | ------- | ---- | - | - | ------- | ----- | -
|                              |                                                                                          |                                      
|                              |                                                                                          | Years Ended December 31,              |  
|                              |                                                                                          |                                       |  
|                              |                                                                                          | As Previously                         |   |         | As Previously |  |   | As Previously |      |   | As Previously |        
|                              |                                                                                          | Reported                              |   |         | Reported      |  |   | Reported      |      |   | Reported      |        
|                              |                                                                                          | 2003                                  |   |         | 2002(b)(e)    |  |   | 2001          |      |   | 2000(c)(f)    |        
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              |                                                                                          |                                      
|                              |                                                                                          | (In thousands, except per share data) |  
|Statement of Operations Data: |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |         |      |   |   |        
|                              | Revenue                                                                                  |                                       | $ | 378,630 |               |  | $ | 383,053       |      |   | $             | 404,734 |      |   | $ | 419,641 |      
|                              | Cost of revenue                                                                          |                                       |   | 286,183 |               |  |   | 284,427       |      |   |               | 290,658 |      |   |   | 308,233 |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Gross profit                                                                             |                                       |   | 92,447  |               |  |   | 98,626        |      |   |               | 114,076 |      |   |   | 111,408 |      
|                              | Selling, general and administrative expenses                                             |                                       |   | 82,599  |               |  |   | 97,833        |      |   |               | 115,321 |      |   |   | 143,730 |      
|                              | Restructuring, merger costs and other(a)                                                 |                                       |   |        |               |  |   |              |      |   |               | 23,665  |      |   |   | 21,507  |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Income (loss) from operations                                                            |                                       |   | 9,848   |               |  |   | 793           |      |   |               | (24,910 | )    |   |   | (53,829 | )    
|                              | Other income, net                                                                        |                                       |   | 1,781   |               |  |   | 4,110         |      |   |               | 5,531   |      |   |   | 6,060   |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Income (loss) from continuing operations before
    provision (benefit) for income taxes |                                       |   | 11,629  |               |  |   | 4,903         |      |   |               | (19,379 | )    |   |   | (47,769 | )    
|                              | Provision (benefit) for income taxes                                                     |                                       |   | 1,780   |               |  |   | 936           |      |   |               | (8,668  | )    |   |   | (11,332 | )    
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Income (loss) from continuing operations                                                 |                                       |   | 9,849   |               |  |   | 3,967         |      |   |               | (10,711 | )    |   |   | (36,437 | )    
|                              | Loss from discontinued operations, net of income
    taxes                               |                                       |   |        |               |  |   |              |      |   |               |        |      |   |   | (1,692  | )    
|                              | Gain on sale of discontinued operations, net of
    income taxes                         |                                       |   |        |               |  |   |              |      |   |               |        |      |   |   | 6,072   |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Net income (loss)                                                                        |                                       |   | 9,849   |               |  |   | 3,967         |      |   |               | (10,711 | )    |   |   | (32,057 | )    
|                              | Beneficial conversion feature                                                            |                                       |   |        |               |  |   |              |      |   |               |        |      |   |   | (23,651 | )    
|                              | Convertible redeemable preferred stock dividends                                         |                                       |   | (4,433  | )             |  |   | (4,298        | )    |   |               | (4,265  | )    |   |   | (2,569  | )    
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Net income (loss) available for shareholders                                             |                                       |   | 5,416   |               |  |   | (331          | )    |   |               | (14,976 | )    |   |   | (58,277 | )    
|                              | Amounts allocated to participating preferred
    shareholders                            |                                       |   | (1,320  | )             |  |   |              |      |   |               |        |      |   |   |        |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Net income (loss) available to common shareholders                                       |                                       | $ | 4,096   |               |  | $ | (331          | )    |   | $             | (14,976 | )    |   | $ | (58,277 | )    
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Earnings (loss) per share                                                                |                                       |   |         |               |  |   |               |      |   |               |         |      |   |   |         |      
|                              |                                                                                          | Basic                                 |   | $       | .15           |  |   | $             | (.01 | ) |               | $       | (.52 | ) |   | $       | (1.77 | )
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              |                                                                                          | Diluted                               |   | $       | .15           |  |   | $             | (.01 | ) |               | $       | (.52 | ) |   | $       | (1.77 | )
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Basic weighted average shares                                                            |                                       |   | 26,975  |               |  |   | 27,734        |      |   |               | 28,704  |      |   |   | 32,892  |      
|                              | Dilutive effect of options                                                               |                                       |   | 229     |               |  |   |              |      |   |               |        |      |   |   |        |      
|                              | Convertible redeemable preferred stock                                                   |                                       |   | (A      | )             |  |   | (A            | )    |   |               | (A      | )    |   |   | (A      | )    
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        
|                              | Diluted weighted average shares                                                          |                                       |   | 27,204  |               |  |   | 27,734        |      |   |               | 28,704  |      |   |   | 32,892  |      
|                              |                                                                                          |                                       |   |         |               |  |   |               |      |   |               |        



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

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|                    |                                              |                    |   |          |      |  |          |         |  |          |      |         |          |      |   |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | -------- | ---- |  | -------- | ------- |  | -------- | ---- | ------- | -------- | ---- | - | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31, |  
|                    |                                              |                    |  
|                    |                                              |                    |   | Restated |      |  | Restated |         |  | Restated |      |         | Restated |     
|                    |                                              | 2004               |   |          | 2003 |  |          | 2002    |  |          | 2001 |         |          | 2000 |  
|                    |                                              |                    |   |          |      |  |          |         |  |          |      |         |          |      |  
|                    |                                              |                   
|                    |                                              | (In thousands)     |  
|Balance Sheet Data: |                                              |                    |   |          |      |  |          |         |  |          |      |         |          |      |   |         |  |  |   |        
|                    | Cash and short term investments              |                    | $ | 71,250   |      |  | $        | 127,475 |  |          | $    | 101,551 |          |      | $ | 123,794 |  |  | $ | 140,123 | 
|                    | Working capital                              |                    |   | 112,433  |      |  |          | 187,528 |  |          |      | 163,110 |          |      |   | 185,858 |  |  |   | 205,284 | 
|                    | Total assets                                 |                    |   | 248,802  |      |  |          | 314,871 |  |          |      | 304,936 |          |      |   | 297,099 |  |  |   | 330,604 | 
|                    | Revolving credit facility and long-term debt |                    |   |         |      |  |          |        |  |          |      |        |          |      |   |        |  |  |   |        | 
|                    | Convertible redeemable preferred stock       |                    |   |         |      |  |          | 168,655 |  |          |      | 164,222 |          |      |   | 159,924 |  |  |   | 155,660 | 
|                    | Total shareholders equity                   |                    |   | 174,191  |      |  |          | 87,726  |  |          |      | 78,565  |          |      |   | 84,192  |  |  |   | 115,596 | 

|                    |                                              |                    |   |         |               |  |   |               |  |  |               |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | ------- | ------------- |  | - | ------------- |  |  | ------------- | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31, |  
|                    |                                              |                    |  
|                    |                                              | As Previously      |   |         | As Previously |  |   | As Previously |  |  | As Previously |        
|                    |                                              | Reported           |   |         | Reported      |  |   | Reported      |  |  | Reported      |        
|                    |                                              | 2003               |   |         | 2002          |  |   | 2001          |  |  | 2000          |        
|                    |                                              |                    |   |         |               |  |   |               |  |  |               |        
|                    |                                              |                   
|                    |                                              | (In thousands)     |  
|Balance Sheet Data: |                                              |                    |   |         |               |  |   |               |  |  |               |         |  |  |   |        
|                    | Cash and short term investments              |                    | $ | 127,475 |               |  | $ | 101,551       |  |  | $             | 123,794 |  |  | $ | 140,123 | 
|                    | Working capital                              |                    |   | 188,271 |               |  |   | 164,899       |  |  |               | 187,270 |  |  |   | 206,940 | 
|                    | Total assets                                 |                    |   | 315,359 |               |  |   | 304,936       |  |  |               | 297,099 |  |  |   | 330,604 | 
|                    | 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 | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $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.
|   
|(b) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(c) | On September 28, 2000, we sold Synova Inc.
    (Synova), our contract programming subsidiary, to a
    related party for a gain of $6.1 million, net of income
    taxes. The consolidated balance sheets, statements of operations
    and statements of cash flows of the Company included in this
    Form 10-K have been retroactively restated to reflect
    Synova as a discontinued operation. The net operating results of
    Synova have been reported, net of income taxes, as Loss
    from discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(d) | In April 2004, we entered into a Stock
    Purchase Agreement with Fidelity Information Services, Inc.
    (FIS), a subsidiary of Fidelity National Financial,
    Inc. and a Recapitalization Agreement with a private equity
    investment fund managed by Clayton, Dubilier & Rice, Inc.
    (CDR) to restructure CDRs stock ownership. See
    Note 3 to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(e) | The Company adopted SFAS 142 effective
    January 1, 2002 and ceased amortizing goodwill. The Company
    completed the transitional goodwill impairment testing as
    required by SFAS 142, during 2002. These evaluations
    indicated that goodwill was not impaired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(f) | On March 17, 2000, the Company entered into
    an agreement with a fund managed by CDR whereby CDR invested
    $200.0 million in two transactions, to purchase
    200,000 shares of convertible redeemable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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






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

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

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

The consolidated financial statements have been
restated to reflect adjustments to the Companys
Consolidated Financial Statements for the years ended
December 31, 2003 and 2002 as previously reported on Form
10-K/A. The Companys 2004 and 2003 quarterly information
has also been restated to reflect adjustments to the
Companys previously reported financial information for the
quarters ended March 31, June 30 and
September 30, 2004 and 2003, as well as the quarter ended
December 31, 2003.

The adjustments giving rise to the Companys
need to restate its financial statements for the years ended
December 31, 2003 and 2002 relate to the following areas:

Lease Accounting.During the 2004 year end closing
process, the Company initiated and completed an analysis of its
lease accounting in order to determine if its historical
practices have deviated from the lease accounting standards
discussed in SFAS 13, Accounting for Leases. As
part of that analysis, the Company determined that it had not
properly accounted for the operating lease for its US
headquarters signed in 1993 in accordance with the guidance set
forth in FASB Technical Bulletin 85-3, Accounting for
Operating Leases with Scheduled Rent Increases and FASB
Technical Bulletin 88-1, Issues Relating to Accounting for
Leases. The Company assessed the impact of the resulting
errors on its historical financial statements and concluded that
it was required to restate its financial statements for all
periods affected by the matter. As a result, the Company
restated its Consolidated Financial Statements for the years
ended December 31, 2003 and 2002, the effect of which was
to reduce income from continuing operations before income taxes
by $.1 million and $.1 million, respectively. The
impact of this matter on our Consolidated Financial Statements
for the years prior to December 31, 2001 is reflected in
the Consolidated Statement of Shareholders Equity as a
reduction to retained earnings of $1.5 million as of
December 31, 2001.

Income Tax Accounting.In connection with its 2004 year end
closing process, the Company performed a calculation of the
cumulative temporary difference for property and equipment and
capitalized software development costs and concluded that the
net deferred tax liability of $1.6 million required to be
recorded for

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these differences had been misclassified in its
financial statements as a contingent tax reserve since
December 31, 2001. Upon discovery of the error, the Company
evaluated its accounting treatment for contingent tax reserves
from December 31, 2001 through 2004. This analysis
concluded that the Company did not have sufficient tax reserves
at December 31, 2001 due to this error and it had excess
reserves at December 31, 2003 due to other errors. The
analysis of prior periods identified tax reserves for items that
should have been released in the year ended December 31,
2003 due to the settlement of two issues reviewed under IRS
examination offset partially by an error in recording state tax
valuation allowances determined to be necessary in 2003 and one
other less significant computational error. The Company assessed
the impact of these errors on its historical financial
statements and concluded that it was required to restate its
financial statements for all periods affected by the matters. As
a result, the Company restated its Consolidated Financial
Statements for the year ended December 31, 2003, the
principal effect of which was to increase net income from
continuing operations by $.3 million. The impact of this
matters on our Consolidated Financial Statements for the years
prior to December 31, 2001 is reflected in the Consolidated
Statement of Shareholders Equity as a reduction to
retained earnings of $1.6 million as of December 31,
2001.


Fixed Asset Accounting.In connection with its 2004 year end
closing process, the Company discovered that a consolidating
entry to properly state property and equipment on the balance
sheet at December 31, 2003 was classified as accumulated
other comprehensive income in error. The classification of the
amount ($.7 million) has been corrected and has the effect
of increasing property and equipment and reducing accumulated
other comprehensive loss by $.7 million as of
December 31, 2003. The correction had no impact on income
from continuing operations or net income.

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 consolidated financial
statements.

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 retail, healthcare, distribution,
manufacturing, financial services, telecommunications, utilities
and public sector clients. We apply our industry-specific
knowledge to deliver a wide range of outsourcing and integration
services, including; 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 revenue on
time-and-materials engagements as the services are performed and
after we have a signed contract. On fixed-price engagements, we
recognize revenue under the percentage of completion method
except for fixed-price outsourcing contracts where we recognize
revenue ratably over the applicable period. For the years ended
December 31, 2004, 2003 and 2002 approximately 40%, 42%,
and 42%, respectively, of our total revenue was 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 global 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.

11



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In 2004, Covansys entered into a Stock Purchase
Agreement with FIS and a Recapitalization Agreement with a
private equity investment fund managed by Clayton,
Dubilier & Rice, Inc. (the CDR
Shareholder). The transactions, which are more fully
discussed in Note 3 of the Financial Statements. The
Recapitalization Agreement with the CDR Shareholder restructured
the ownership interest in the Company that the CDR Shareholder
had acquired in 2000.

Critical Accounting Policies and
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, revenue 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.

Revenue Recognition.We recognize revenue in accordance
with 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 revenue as the services are performed and
after we have a signed contract. 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, maintenance contracts and transaction processing 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. This method is
followed where reasonably dependable estimates of revenue and
cost can be made. Estimates of total contract revenue and cost
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. Revenue is allocated among the
elements based on the relative fair values of the elements

12



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##### Table of Contents



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 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 cost of such
research is charged to expense when incurred. When the
technological feasibility of the product is established,
subsequent costs are capitalized in accordance with SFAS 86
Computer Software to be Sold, Leased or Otherwise
Marketed. 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.

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. 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.
The results of the Companys annual impairment analysis
concluded that no impairment existed at December 31, 2004.

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 2004. The effective tax rate was 20.4% for the full year
2004. On a quarterly basis, management assesses whether it
remains more likely than not that the deferred tax assets will
be realized.

13



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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 |     
|                                             |  | 2004                     |       |          | 2003 |  |          | 2002 | 
|                                             |  |                          |       |          |      |  |          |      | 
|Revenue                                      |  |                          | 100.0 | %        |      |  | 100.0    | %    |  |  | 100.0 | %
|Cost of revenue                              |  |                          | 75.1  |          |      |  | 75.6     |      |  |  | 74.3  |  
|                                             |  |                          |       |          |      |  |          |      | 
|Gross profit                                 |  |                          | 24.9  |          |      |  | 24.4     |      |  |  | 25.7  |  
|Selling, general and administrative expenses |  |                          | 19.3  |          |      |  | 21.8     |      |  |  | 25.5  |  
|                                             |  |                          |       |          |      |  |          |      | 
|Income from operations                       |  |                          | 5.6   | %        |      |  | 2.6      | %    |  |  | 0.2   | %

Revenue and gross profit by segment is as follows:

|               |               |                          |         |         |         |   |         |         |         |   |         |         |         |  
|-------------- | ------------- | ------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|               |               |                         
|               |               | Years Ended December 31, |        
|               |               |                          |        
|               |               | 2004                     |         |         | 2003    |   |         | 2002    |        
|               |               |                          |         |         |         |   |         |         |        
|Revenue       |               |                          |         |         |         |   |         |         |         |   |         |        
|               | Commercial    |                          | $       | 242,941 |         |   | $       | 241,202 |         |   | $       | 223,272 |        
|               |               | Less intersegment        |         |         | (651    | ) |         |         | (557    | ) |         |         |        |  
|               |               |                          |         |         |         |   |         |         |        
|               |               |                          | 242,290 |         |         |   | 240,645 |         |         |   | 223,272 |        
|               | Public Sector |                          |         | 91,199  |         |   |         | 112,913 |         |   |         | 130,591 |        
|               | India/Asia    |                          |         | 106,140 |         |   |         | 75,050  |         |   |         | 60,613  |        
|               |               | Less intersegment        |         |         | (77,765 | ) |         |         | (61,601 | ) |         |         | (47,949 | )
|               |               |                          |         |         |         |   |         |         |        
|               |               |                          | 28,375  |         |         |   | 13,449  |         |         |   | 12,664  |        
|               | Europe        |                          |         | 14,434  |         |   |         | 15,586  |         |   |         | 18,260  |        
|               |               | Less intersegment        |         |         | (2,577  | ) |         |         | (3,686  | ) |         |         | (2,068  | )
|               |               |                          |         |         |         |   |         |         |        
|               |               |                          | 11,857  |         |         |   | 11,900  |         |         |   | 16,192  |        
|               | Other         |                          |         | 652     |         |   |         | (277    | )       |   |         | 334     |        
|               |               |                          |         |         |         |   |         |         |        
|               |               | $                        | 374,373 |         |         | $ | 378,630 |         |         | $ | 383,053 |        
|               |               |                          |         |         |         |   |         |         |        
|Gross profit  |               |                          |         |         |         |   |         |         |         |   |         |        
|               | Commercial    |                          | $       | 66,334  |         |   | $       | 61,508  |         |   | $       | 42,861  |        
|               | Public Sector |                          |         | 10,718  |         |   |         | 21,666  |         |   |         | 38,430  |        
|               | India/Asia    |                          |         | 15,515  |         |   |         | 9,452   |         |   |         | 12,608  |        
|               | Europe        |                          |         | 3,853   |         |   |         | 3,747   |         |   |         | 4,593   |        
|               | Other         |                          |         | (3,161  | )       |   |         | (3,926  | )       |   |         | 134     |        
|               |               |                          |         |         |         |   |         |         |        
|               |               | $                        | 93,259  |         |         | $ | 92,447  |         |         | $ | 98,626  |        
|               |               |                          |         |         |         |   |         |         |        

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| |                      
| | ---------------------
| | 2004 Compared to 2003

Revenue.Revenue in
2004 was $374.4 million, down 1.1% from $378.6 million in
2003. The decline is primarily due to a continued decline in our
Public Sector and European businesses from $112.9 million
in 2003 to $91.2 million in 2004 and $15.6 million in
2003 to $14.4 million in 2004, respectively. The decline in
these segments was offset by increases in revenue in our
Commercial and India businesses, including an increase of
$1.2 million of revenue recorded in 2004 in connection with
an agreement signed with SIRVA related to services previously
provided and a decrease of approximately $3.5 million in
2004 related to the Companys determination not to
recognize revenue for services provided to a significant
customer after reaching the authorized spending limit on the
related time and material contract.

The Companys total hours worked in 2004
increased by 10% over hours worked in 2003. While the Company
continued to increase its hours worked in certain segments of
its US commercial business, the majority of the net increase in
hours are in the Companys India operations. The average
bill rates in India are considerably lower than the average US
bill rates. Despite the increase in hours, the combination of
lower average bill rates in India, the increase in the revenue
from India based work and the decline in Public Sector revenue
resulted in relatively flat revenue for 2004.

Commercial segment revenue increased 0.7% to
$242.3 million in 2004 from $240.6 million in 2003.
The increase resulted from the addition of new clients,
including the revenue from the Companys Master Services
Agreement with FIS signed in 2004, $1.2 million of revenue
recorded in connection with the agreement signed with SIRVA
related to services previously provided, and expansion of work
with existing clients offset by the completion of existing
projects. In addition, during the fourth quarter of 2004, the
Company continued to perform services for one of its significant
customers after it had reached the authorized spending limit on
a time and material contract. While the Company believed it
would be paid for these services, management concluded that it
did not have a legally enforceable contractual right to the
revenue as of December 31, 2004. As a result, in accordance with
the Companys revenue recognition policies, and Staff
Accounting Bulletin 104, the Company recognized the costs of
providing the services, but did not recognize any revenue for
these services in 2004. Gross profit in the Commercial sector
was negatively impacted in the fourth quarter by approximately
$3.5 million. In 2005, the Company received a contract
which covered these services and will recognize the revenue in
the first quarter of 2005, with a corresponding increase in
gross profit.

Public Sector revenue decreased 19.2% in 2004 as
compared with 2003. The decline in Public Sector revenue is due
to the completion of numerous projects in 2004, combined with a
slow down in the requests for proposal on new projects issued by
state governments, particularly in the first part of 2004. We
have recently seen some increase in the level of requests for
proposal and have been awarded new projects that started in the
fourth quarter of 2004 or that will start in early 2005. Revenue
was also negatively impacted by the adjustment to the fixed
price projects discussed below.

During 2004 we made adjustments to the estimated
cost to complete for certain fixed price contracts for which we
recognize revenue on the percentage of completion basis. Revenue
was negatively impacted by $5.5 million related to our
reassessment of the collectability of outstanding billed and
unbilled receivables associated with two troubled projects. In
accordance with the application of percentage of completion
accounting, we reflected the changes as a contract price
adjustment, and accordingly, as a reduction in revenue.

Revenue from India/Asia on a full attribution
basis increased 41.4% for 2004 over 2003 to $106.1 million
as compared with $75.1 million, respectively. This is due
to additional resources added and a higher utilization of Indian
resources on existing customer relationships and the transfer of
certain commercial segment customer relationships to this
region. The Company anticipates, based on its current strategic
plan, that the majority of its revenue growth in the next few
years will be in this segment.

The Company had approximately $8.4 million
in revenue in 2004 from a customer that is in the process of a
merger. While the Company has not been informed of any intent to
do so, the customer or its acquirer have the right to terminate
the arrangement. The Company believes that should such a
termination occur, the customer would need to transition the
services either in-house or to another provider over some period
of time.

15



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##### Table of Contents



European revenue decreased slightly as a result
of economic conditions and the completion of a significant
contract.

Gross Profit.Gross
profit for 2004 was $93.3 million or 24.9% of revenue as
compared with $92.4 million or 24.4% of revenue for 2003.
Gross profit increased both in dollars and as a percent of
revenue due to the full year effect of our aggressive cost
control and realignment activities in 2004 which commenced
during 2003 in addition to lower health care related cost due to
better experience and changes in plan design. Gross profit for
2004 was negatively impacted by reassessment of costs of a loss
contract, adjustments to estimates to complete for certain
Public Sector contracts, and the adjustment of certain unbilled
fixed price contract receivables in the Public Sector based on
perceived collection risk as previously discussed. These
adjustments had a negative impact of approximately
$11.2 million in 2004. Gross profit in 2003 was negatively
impacted by $6.2 million on four fixed price projects in
the Public Sector and $1.8 million in severance costs
resulting from our realignment.

Commercial segment gross profit improved to
$66.3 million in 2004 from $61.5 million in 2003 or
27.4% as compared with 25.6% of revenue, respectively. The gross
profit improvements resulted from additional offshore work
performed by resources in India, cost control, the addition of
new clients, and new work for existing clients with better
margins. The additional revenue from a customer previously
discussed increased gross profit by $1.2 million. During
the fourth quarter of 2004, the Company continued to perform
services for one of its significant customers after it had
reached the authorized spending limit on a time and material
contract. While the Company believed it would be paid for these
services, management concluded that it did not have a legally
enforceable contractual right to the revenue as of December 31,
2004. As a result, in accordance with the Companys revenue
recognition policies, and Staff Accounting Bulletin 104, the
Company recognized the costs of providing the services, but did
not recognize any revenue for these services in 2004. Gross
profit in the Commercial sector was negatively impacted in the
fourth quarter by approximately $3.5 million. In 2005, the
Company received a contract which covered these services and
will recognize the revenue in the first quarter of 2005, with a
corresponding impact in gross profit.

Public Sector gross profit decreased to
$10.7 million in 2004 from $21.7 million in 2003.
Gross profit as a percent of revenue also decreased to 11.8% of
revenue in 2004 as compared with 19.2% in 2003. The decrease in
2004 in Public Sector gross profit, both in dollars and as a
percent of revenue, was the result of negative gross profit on
challenged projects and competitive pricing pressures. Two of
these challenged projects have been completed and actions have
been taken to address the remaining challenged project.

India/Asia gross profit on a full attribution
basis increased $6.0 million or 64.1% to $15.5 million from
$9.5 million for 2004 as compared with 2003. As a
percentage of revenue, gross profit for 2004 increased to 14.6%
of revenue from 12.6% of revenue in 2003. These results reflect
the increased amount of work performed in India at higher
billing rates offset by higher labor rates.

European gross margins increased slightly in
total in 2004 to $3.9 million from $3.7 million in
2003 on flat revenues. This improvement is the result of cost
control activities implemented during 2004.

Selling, general and administrative expenses
decreased by $10.4 million in 2004 to $72.3 million
from $82.7 million in 2003. SG&A as a percentage of
revenue improved to 19.3% in 2004, compared with 21.8% in 2003.
This improvement represents the full year results of our
organizational realignment efforts completed in 2003 and
continued cost reduction activities in 2004 in addition to lower
health care related costs due to better experience and changes
in plan design. In 2004, the Company continued to aggressively
move pieces of its internal information systems support to India
based employees, eliminated much of its internal marketing staff
and hired lower cost employees to replace those employees that
resigned or eliminated the position. The decline in SG&A was
achieved despite a number of charges in 2004, which are more
fully discussed in the notes to the consolidated financial
statements including:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.1 million in professional fees associated
    with consultation and external auditing for the implementation
    of Sarbanes-Oxley Section 404
|
| |  | $1.7 million in lease termination costs
    (compared with $.4 in 2003) (See Note 20 to
    Consolidated Financial Statements)                   

16



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| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.3 million in severance (compared with
    $2.1 million in 2003) (See Note 20 to Consolidated
    Financial Statements)                     
|
| |  | $1.3 million in impairment charges for
    investments and internally developed software (See Note 1
    to Consolidated Financial Statements)
|
| |  | $1.0 million in loss on disposal and
    obsolescence of property and equipment (See Note 10 to
    Consolidated Financial Statements)        
|
| |  | $.7 million in professional fees associated
    with the recapitalization (See Note 3 to Consolidated
    Financial Statements)               
|
| |  | $.7 million in professional fees for the
    fixed asset analysis (See Note 10 to Consolidated Financial
    Statements)                      

We have presented these charges in order to
provide additional information to the reader of the financial
statements. We caution that while a number of these charges
could be viewed as non-recurring in nature, we can
give no assurances that these or other non-recurring
charges will not be incurred in the future.

Income from
Operations.Income from operations
increased by $11.2 million or 115.3% in 2004 to
$20.9 million from $9.7 million in 2003. The
significant improvement in 2004 results from the increase in the
percentage of work performed in India at more favorable margins,
addition of new customers and new work for existing clients, and
the improvements in SG&A offset by the revenue adjustments
previously discussed.

Commercial income from operations increased by
$13.4 million or 34.9% to $51.8 million in 2004 as
compared with $38.4 million in 2003. Of the increase,
approximately $.4 million is due to margin on increased
sales and approximately $4.4 is due to improved margins with the
remainder due to decreases in SG&A.

Public Sector income from operations was a loss
of $2.1 million in 2004 as compared with income of
$4.4 million in 2003. The decrease is due to the completion
of projects and slow down in requests for proposal on new work
in addition to revenue adjustments of approximately
$5.5 million related to troubled projects and negative
gross profit on troubled projects.

India/Asia income from operations increased by
$5.6 million, a 113.1% increase to $10.5 million for
2004 as compared with $4.9 million for 2003. The increase
is due to approximately $10.5 million gross profit on new
revenue offset by approximately $4.4 million reduction in
gross profit on comparable prior year revenue due to increased
wages and SG&A increases to support an expanding
infrastructure and operations.

European operating income decreased by
$0.2 million to $0.5 million for 2004 as compared with
$0.7 million in 2003. This is due to reduced revenue and
stable SG&A costs.

Interest Expense.Interest expense of $.3 million recorded in 2004 relates to
interest on a $17.5 million note issued in connection with
the FIS/CDR transaction (Note 3) and fees in connection
with the Credit Agreement (Note 12).

Other Income Net.Other income net represents net earnings on investments offset
by foreign currency losses of approximately $1.0 million.
Other income net decreased by $0.5 million to
$1.3 million in 2004 as compared with $1.8 million in
2003 due to lower interest rates earned on investments and a
decrease in cash and short term investments in September due to
the FIS/CDR transaction as well as foreign currency translation
and transaction losses.

Provision for Income
Taxes.The provision for income taxes
was $4.5 million in 2004 as compared with $1.4 million
in 2003, an effective tax rate of 20.4% compared with 12.0%,
respectively. The effective tax rate increased due to the
completion of tax holidays for certain locations in India and a
$4.3 million favorable tax adjustment related to settlement
of income tax audits for the years 1998 through 2001 in 2003
offset by the inclusion of $2.2 million reduction in a
valuation allowance in 2004.

17



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

Revenue.Revenue in
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
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.

Revenue in the Commercial segment was
$240.6 million in 2003, a 7.8% 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 revenue on a
full attribution basis of 23.8% to $75.1 million for 2003
compared with $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
revenue, 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 2003 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

18



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##### Table of Contents



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 $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 43.5% higher
than the $42.9 million, or 19.2% 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 profit.

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 profit was
the result of lower revenue, negative gross profit 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 $82.7 million or 21.8% of
revenue in 2003 inclusive of $2.4 million of severance and
lease termination costs, a decrease from $98.0 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 15.5% 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
$9.7 million or 2.6% of revenue for 2003 up substantially
from $0.7 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

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profit and a reduction in selling, general and
administrative expenses within the Commercial segment of
approximately $13.7 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 in 2003, was $1.8 million
compared to $4.1 million in 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 2003 was $1.4 million compared with $0.9 million
for 2002. The effective tax rate was 12.0% for 2003 compared
with 18.5% 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
$4.3 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.

Restructuring and Other Related
Charges

In 2004, the Company recorded $1.7 million
of lease termination costs and $1.3 million related to
severance as the company continued to reduce costs in line with
overall revenue expectations. Amounts related to severance will
be paid through 2005 and amounts related to lease terminations
will be paid out through June 2011.

In 2003, the Company recorded costs of
$4.2 million related to various headcount reductions and
termination of lease obligations associated with the
consolidation of facilities and its organizational realignment.
Amounts related to lease terminations will be paid out through
2006. Amounts related to severance incurred in 2003 were paid
through 2004.

In 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.

Related Party Transactions

On September 15, 2004, the company issued
8,700,000 shares of common stock and 4,000,000 warrants to
FIS for $95.7 million (See Note 3 to Consolidated
Financial Statements). In the second quarter of 2004, the
Company entered into a Master Services Agreement with FIS to
provide services over a five year period. In connection with the
recapitalization, the company reimbursed FIS $1.0 million
for certain out-of-pocket fees and expenses. Services provided
by the Company to FIS during 2004 totaled approximately
$5.1 million. The balance owed to the Company by FIS at
December 31, 2004 was $2.3 million.

Synova is an IT professional services
organization owned by the Companys Chief Executive
Officer. For the years ended December 31, 2004, 2003 and
2002, we provided services to Synova totaling approximately

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$2.5 million, $3.2 million and
$4.6 million, respectively. In addition, Synova provided
services to Covansys, for the year ended December 31, 2004,
2003 and 2002, totaling approximately $2.1 million,
$1.6 million and $4.1 million, respectively. The net
balance due to (from) Covansys with Synova at December 31,
2004 and 2003 was $(.2) million and $.5 million,
respectively. In addition, under the terms of a note payable
originated in 2000 (originally $8.0 million), Synova owes
Covansys $3.0 million. The note is due in September 2005,
and interest at a variable rate (6.5% in the fourth quarter
2004) is paid quarterly in accordance with its terms.


We paid approximately $.6 million,
$.8 million and $1.1 million to Clayton, Dubilier and
Rice, Inc. (CDR), a shareholder, for financial, management
advisory, and executive management services for the years ended
December 31, 2004, 2003 and 2002, respectively. During
2004, the Company entered into a recapitalization transaction
(Note 3 to Consolidated Financial Statements) in which
CDRs ownership interest in Covansys, including
$168.7 million of Convertible Redeemable Preferred Stock,
was redeemed and exchanged for consideration valued at
$227.7 million, including $177.5 million of cash,
2,000,000 shares of Covansys common stock, $17.5 million of
subordinated notes and five-year warrants for 5,000,000 shares
of common stock at a strike price of $18 per share. In
connection with the recapitalization, the Company reimbursed CDR
$.5 million for certain out-of-pocket fees and expenses.

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, 2004, 2003 and 2002, services provided by
Covansys to SIRVA, Inc. totaled approximately
$10.0 million, $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. No services
were provided by SIRVA to the Company during the year ended
December 31, 2004. In the fourth quarter of 2004, the Company
executed an agreement with SIRVA regarding fees for services
provided in prior periods. In connection with the agreement, the
Company recognized revenue of $1.2 million.

For the year ended December 31, 2002, we
provided IT services totaling $.2 million to Acterna
Corporation, a company related through common ownership by CDR.
During the years ended 2004 and 2003 we provided no services to
Acterna.

We paid approximately $.9 million during the
year ended December 31, 2004 for consultation and advisory
services in connection with the recapitalization transaction and
$.2 million during the year ended December 31, 2002
for merger and acquisition consulting services provided by the
Chesapeake Group, Inc., a company owned by a director. Nothing
was owed by the Company to the Chesapeake Group, Inc. at
December 31, 2004.

Praja, Inc. (Praja) is an information technology
professional services organization owned in part by the
Companys Chief Executive Officer. During the years ended
December 31, 2004 and 2003, we did not provide any services
to Praja. In addition, Praja did not provide any services or
software to Covansys for the years ended December 31, 2004
and 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 loans of $1.2 million at
both December 31, 2004 and 2003 to its employees in India
to assist them with the purchase of automobiles and houses. The
loans, which bear interest at below market rates, are
collateralized by the property and repaid through payroll
deductions.

Recently Issued Financial Accounting
Standards

In December 2004 the FASB issued FAS 123R,
Share-Based Payment, that requires companies to
expense the value of employee stock options and similar awards.
The effective date for application by public companies is
interim and annual periods beginning after June 15, 2005.
FAS 123R applies to all outstanding and unvested
share-based payment awards at a companys adoption date.
FAS 123R allows alternative transition methods. The Company
has not yet selected a transition method. Management is
presently reviewing the impact on our results of operation and
financial position from implementing FAS 123R.

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In December 2004, the FASB issued a FASB Staff
Position (FSP) 109-2 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Program within the
American Job Creation Act of 2004, which provides
accounting and disclosure guidance for the foreign earnings
repatriation provision within the American Jobs Creation Act of
2004. The Act provides special one-time dividends received
deduction on the repatriation of certain foreign earnings to a
U.S. taxpayer. FSP FASB 109-2 provides for a period of time
beyond the financial reporting period of enactment for a company
to evaluate the effect of the Act on its plan for reinvestment
or repatriation of foreign earnings. The Company is in the
process of evaluating the one-time repatriation opportunities
provided by the Act. At the time of filing these statements, the
Company cannot reasonably estimate the income tax effects of
such repatriation under the Act.

Liquidity and Capital Resources

As of December 31, 2004, we had cash and
short-term investments totaling $71.2 million. We generally
fund our operations and working capital needs through internally
generated funds. Cash provided by operating activities was
$39.4 million, $35.7 million, and $16.5 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. The significant increase in cash flow was due to
an increase in earnings of $7.4 million and the collection
of $5.0 million on an outstanding note receivable from
Synova. Restructuring, merger and other related changes used
$2.7 million, $4.7 million and $7.3 million of
operating cash for the years ended December 31, 2004, 2003
and 2002, respectively.

The principal use of cash for investing
activities during the three years ended December 31, 2004
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, the Company
has a credit facility which provides for borrowings or standby
and commercial letters of credit up to $30.0 million
through December 28, 2005.

The Credit Agreement contains financial covenants
which require the Company to maintain a certain interest
coverage ratio, leverage ratio and a minimum total
capitalization. At December 31, 2004, the Company was in
compliance with these ratios. At December 31, 2004, the
Company had no borrowings and $7,808 in outstanding letters of
credit under this Credit Agreement. The Credit Agreement also
includes a covenant which restricts the Companys ability
to repurchase shares of its common stock without the prior
approval of the Lender.

Net cash used in financing activities was
$86.3 million, $.6 million and $5.9 million in
2004, 2003, and 2002, respectively. The redemption of the
convertible redeemable preferred stock and warrants used
$179.1 million of cash which was partially funded from the
proceeds from the issuance of common stock, principally from FIS
and proceeds from the exercise of stock options of
$95.3 million. See Note 3 to Consolidated Financial
Statements for further details concerning the recapitalization.
A significant use of cash in financing activities was for the
repurchase of our Common Stock. During 2004, 2003 and 2002, we
repurchased 253,100, 557,200 and 1,124,376 shares,
respectively, of our Common Stock, for $2.4 million,
$1.5 million and $6.6 million, respectively.

Most of our revenue is billed in U.S. dollars. We
recognize transaction gains and losses in the period of
occurrence. Foreign currency fluctuations in 2003 and 2002 did
not have a material impact on income (loss) from operations as
currency fluctuations on revenue denominated in a foreign
currency were offset by currency fluctuations on expenses
denominated in a foreign currency. In 2004, foreign currency
translation and transaction losses were $1.0 million. 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
revenue or income from operations in fiscal years 2004, 2003 and
2002.

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 and debt as of December 31, 2004:

Period After December 31, 2004

|                 |  |                |        |        |        |   |        |              |  |   |              |  |  |               |       |  |  |   |        | 
|---------------- |  | -------------- | ------ | ------ | ------ | - | ------ | ------------ |  | - | ------------ |  |  | ------------- | ----- |  |  | - | ------ | 
|                 |  |                |        | Within |        |   |        |              |  |   |             
|                 |  | Total          |        |        | 1 Year |   |        | 1 to 3 Years |  |   | 3 to 5 Years |  |  | After 5 Years |      
|                 |  |                |        |        |        |   |        |              |  |   |              |  |  |               |      
|                 |  |               
|                 |  | (In thousands) |       
|Operating leases |  | $              | 44,518 |        |        | $ | 8,667  |              |  | $ | 11,254       |  |  | $             | 6,996 |  |  | $ | 17,601 | 
|Debt             |  |                | 17,500 |        |        |   | 17,500 |              |  |   |             |  |  |               |      |  |  |   |       | 
|                 |  |                |        |        |        |   |        |              |  |   |              |  |  |               |      
|                 |  | $              | 62,018 |        |        | $ | 26,167 |              |  | $ | 11,254       |  |  | $             | 6,996 |  |  | $ | 17,601 | 
|                 |  |                |        |        |        |   |        |              |  |   |              |  |  |               |      

The Company anticipates that it will use cash on
hand to pay its contractual obligations in 2005.

Factors That May Affect Future
Results



| |                            
| | ---------------------------
| | Internal Control Weaknesses

The Company has identified a number of internal
control weaknesses where its existing internal controls do not
reduce to a relatively low level the risk that a misstatement
caused by an accounting error may occur in an amount that would
be material relative to the financial statements (See
Item 9A). Such a misstatement may not be detected timely by
employees in the normal course of performing their assigned
functions. The Companys financial reporting process
contains a number of systems which are not fully integrated and
rely on manual processes. The loss of key financial personnel
exposes the Company to the risk that key internal controls may
not operate effectively during the transition to new personnel.



| |                                                           
| | ----------------------------------------------------------
| | Impact of Changes in Estimates on Fixed
    Price Projects

The Company realized approximately 40.5% of its
revenue from fixed price contracts (percentage of completion as
well as fixed price IT outsourcing and maintenance).
Approximately 12.8% of the Companys revenue was realized
from fixed price contracts with respect to which we recognize
revenue on a percentage of completion basis.

Changes in estimated costs to complete could be
unfavorable and change our estimates of the ultimate
profitability on these projects. 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.



| |                                     
| | ------------------------------------
| | Variability of Operating
    Results

Our revenue 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;                        
|
| |  | Progress on fixed-price projects during a
    quarter; and                            
|
| |  | Our ability to obtain a written contract prior to
    the end of 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.

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

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



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

Revenue generated by our India and Asia
operations, as calculated on a full attribution basis, 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 28.4% of our 2004 revenue. In addition, over 67%
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.

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.



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



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



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

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| |                                                    
| | ---------------------------------------------------
| | Decline in Profitability of European
    Operations

The income from operations of our European
operations in 2004 declined approximately 35% from 2003. While
management concluded that the goodwill allocated to these
operations was not impaired as of December 31, 2004, a
continued decline in these operations could result in a future
impairment charge.



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

Contracts with state and local government clients
generated approximately 24% and 30% of our revenue during the
years ended December 31, 2004, and 2003 respectively. Our
public sector clients are experiencing significant budget
constraints which could result in a decrease in the amount of
business generated in the future by these customers.



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



| |                                                                      
| | ---------------------------------------------------------------------
| | 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 are
exposed to high start-up costs.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

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

Foreign Exchange Risk

Most of our revenue is billed in
U.S. dollars. We recognize transaction gains and losses in
the period of occurrence. Foreign currency fluctuations in 2003
and 2002 did not have a material impact on income from
operations as currency fluctuations on revenue denominated in a
foreign currency were offset by currency fluctuations on
expenses denominated in a foreign currency. During 2004, the
Company experience foreign currency translation and transaction
losses of approximately $1.0 million. The Company does not
speculate in foreign currency.

Revenue 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,

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accounted for 28.4% of our total 2004 revenue. In
addition, services provided by our other international
operations, primarily in Europe, accounted for 3.2% of our total
revenue.


Interest Rate Risk

Our exposure to market risk for changes in
interest rates relates primarily to our cash and short-term
investment portfolio, a short term note receivable and debt (all
due within one year), which were $71.2 million,
$3.0 million and $17.5 million, respectively, as of
December 31, 2004. 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. The note receivable and debt are
priced with variable interest rates which approximate market.

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. We had no such
contracts outstanding at December 31, 2004 or 2003.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Covansys Corporation:

We have completed an integrated audit of Covansys
Corporations 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits are presented
below.

Consolidated
financial statements

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of Covansys Corporation and its subsidiaries
at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004 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 of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As described in Note 2 to the consolidated
financial statements, the Company has restated its previously
reported 2003 and 2002 consolidated financial statements,
related primarily to certain income tax and leasing matters.

Internal
control over financial reporting

Also, we have audited managements
assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A,
that Covansys Corporation did not maintain effective internal
control over financial reporting as of December 31, 2004,
because of the effect of material weaknesses relating to the
Companys revenue recognition, percentage-of completion
accounting, property and equipment, income taxes and leasing,
based on criteria established in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions
on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based
on our audit.

We conducted our audit of internal control over
financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we
consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over

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financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.


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

A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
The following material weaknesses have been identified and
included in managements assessments.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The Company did not maintain effective controls
    over the validity and accuracy of contract revenue and the
    related billed and unbilled accounts receivable. Specifically,
    the Company did not maintain effective controls over obtaining a
    signed contract or determining that a contract amendment was
    authorized at the time revenue is recognized; and that all
    original or amended contract terms (primarily customer
    acceptance conditions and fee limitation clauses) are accurately
    reflected within the consolidated financial statements. This
    control deficiency resulted in the Company recording a material
    adjustment to the fourth quarter 2004 financial statements.
    Additionally, this control deficiency could result in a
    misstatement to the revenue accounts that would result in a
    material misstatement to annual or interim financial statements
    that would not be prevented or detected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 2. | The Company did not maintain effective controls
    over the completeness and accuracy of revenue accounted for
    under the percentage-of-completion method and the associated
    revenue in excess of billings balance sheet account. The Company
    accounts for a portion of its fixed price contracts using the
    percentage-of-completion method. Under this accounting method,
    revenue to be recognized is dependent upon, among other things,
    managements ability to reasonably estimate the costs to
    complete the contract. The Companys
    percentage-of-completion accounting control procedures were not
    designed to require the use of a consistent risk-adjusted method
    to estimate the costs to complete. Additionally, the
    Companys controls over cost to complete estimates were not
    operating effectively because project management and accounting
    personnel did not consistently document manual adjustments to
    cost estimates and percentage-of-completion accounting records
    and they did not in limited instances provide written
    certifications attesting to the accuracy of their cost to
    complete estimates. The control deficiency did not result in any
    adjustments to the 2004 annual or interim consolidated financial
    statements. However, this control deficiency could result in a
    misstatement to the revenue and revenue in excess of billings
    accounts that would result in a material misstatement to annual
    or interim financial statements that would not be prevented or
    detected.
|
| | 3. | The Company did not maintain effective controls
    over the completeness and accuracy of the Companys net
    property and equipment balance and the related depreciation
    expense. Specifically, substantially all of the Companys
    property and equipment records are maintained using databases
    and spreadsheets, which are not integrated with the
    Companys underlying information technology system and do
    not have adequate controls to ensure that assets, asset values,
    capitalization dates and useful lives are complete, accurate and
    recorded on a timely basis. Additionally, reconciliation
    controls over inter-company fixed asset transactions were not
    operating effectively. This control deficiency resulted in the
    restatement of the Companys consolidated financial
    statements for 2003, 2002, and 2001 and for each of the quarters
    for the two years in the period ended December 31, 2003,
    and in the Company recording an adjustment to the fourth quarter
    2004 financial statements. Additionally, this control                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents



| |  |                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deficiency could result in a misstatement to the
    property and equipment and related depreciation expense accounts
    that would result in a material misstatement to annual or
    interim financial statements that would not be prevented or
    detected.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. | The Company did not maintain effective controls
    over the accuracy of the Companys current tax payable
    account, the deferred tax asset and liability balances,
    valuation allowance and income tax expense. Specifically, the
    Company did not have controls in place to ensure that the
    Company had sufficient supporting documentation for these income
    tax balances and that its income tax accounts were periodically
    reconciled to supporting documentation. This control deficiency
    resulted in the restatement of the Companys consolidated
    financial statements for 2003, 2002, and 2001, for each of the
    quarters for the two years in the period ended December 31,
    2003 and for the first, second and third quarters for 2004, and
    in the Company recording an audit adjustment to the fourth
    quarter 2004 financial statements. Additionally, this control
    deficiency could result in a misstatement to the current tax
    payable account, the deferred tax asset and liability balances,
    valuation allowance and to income tax expense that would result
    in a material misstatement to the annual or interim financial
    statements that would not be prevented or detected.                                     
|
| | 5. | The Company did not maintain effective controls
    over the completeness and accuracy of its accrued lease
    liability and related lease expense. Specifically, the Company
    did not have controls in place to ensure the accounting
    implications for new or amended leases were consistently
    evaluated and reviewed by management. Additionally, the
    Companys controls over its selection and monitoring of its
    accounting policy for lease accounting were ineffective. The
    Company incorrectly applied generally accepted accounting
    principles to lease agreements with step increases in rental
    payments resulting in an error in the accrued lease liability
    and related lease expense. This control deficiency resulted in
    the restatement of the Companys consolidated financial
    statement for 2003, 2002 and 2001, for each of the quarters for
    the two years in the period ended December 31, 2003 and for
    the first, second and third quarters for 2004. Additionally,
    this control deficiency could result in a misstatement to the
    accrued lease liability and lease expense that would result in a
    material misstatement to annual or interim financial statements
    that would not be prevented or detected.

These material weaknesses were considered in
determining the nature, timing, and extent of audit tests
applied in our audit of the 2004 consolidated financial
statements, and our opinion regarding the effectiveness of the
Companys internal control over financial reporting does
not affect our opinion on those consolidated financial
statements.

In our opinion, managements assessment that
Covansys Corporation did not maintain effective internal control
over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal Control  Integrated Frameworkissued by the COSO. Also, in our opinion, because of the
effects of the material weaknesses described above on the
achievement of the objectives of the control criteria, Covansys
Corporation has not maintained effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control 
Integrated Frameworkissued by the COSO.

PricewaterhouseCoopers LLP

Detroit, Michigan


March 11, 2005


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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         |  |         |        |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ------- | ------ | ------- | 
|                                                                                                                                                  |                                                                                                                                                                            |                                           
|                                                                                                                                                  |                                                                                                                                                                            | December 31,                               |       
|                                                                                                                                                  |                                                                                                                                                                            |                                            |       
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        | Restated |        
|                                                                                                                                                  |                                                                                                                                                                            | 2004                                       |        |          | 2003    | 
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            |                                           
|                                                                                                                                                  |                                                                                                                                                                            | (Dollars in thousands)                     |       
|ASSETS                                                                                                                                            |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|Current assets:                                                                                                                                   |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|                                                                                                                                                  | Cash and cash equivalents                                                                                                                                                  |                                            | $      | 49,841   |         |  | $       | 89,671 |        
|                                                                                                                                                  | Short term investments                                                                                                                                                     |                                            |        | 21,409   |         |  |         | 37,804 |        
|                                                                                                                                                  | Accounts receivable, net of allowance for
    doubtful accounts
    of $1,532 and $1,789 at December 31, 2004 and 2003                                                     |                                            |        | 75,388   |         |  |         | 67,245 |        
|                                                                                                                                                  | Revenue earned in excess of billings                                                                                                                                       |                                            |        | 24,613   |         |  |         | 32,127 |        
|                                                                                                                                                  | Deferred taxes                                                                                                                                                             |                                            |        | 5,105    |         |  |         | 9,396  |        
|                                                                                                                                                  | Prepaid expenses and other                                                                                                                                                 |                                            |        | 7,226    |         |  |         | 5,668  |        
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            | Total current assets                       |        |          | 183,582 |  |         |        | 241,911 | 
|Property and equipment, net                                                                                                                       |                                                                                                                                                                            |                                            | 29,762 |          |         |  | 31,976  |       
|Computer software, net                                                                                                                            |                                                                                                                                                                            |                                            | 3,706  |          |         |  | 5,430   |       
|Goodwill                                                                                                                                          |                                                                                                                                                                            |                                            | 19,148 |          |         |  | 18,441  |       
|Deferred taxes                                                                                                                                    |                                                                                                                                                                            |                                            | 5,808  |          |         |  | 3,020   |       
|Other assets                                                                                                                                      |                                                                                                                                                                            |                                            | 6,796  |          |         |  | 14,093  |       
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            | Total assets                               |        | $        | 248,802 |  |         | $      | 314,871 | 
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                          |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|Current liabilities:                                                                                                                              |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|                                                                                                                                                  | Current portion of long-term debt                                                                                                                                          |                                            | $      | 17,500   |         |  | $       |       |        
|                                                                                                                                                  | Accounts payable                                                                                                                                                           |                                            |        | 14,052   |         |  |         | 11,290 |        
|                                                                                                                                                  | Accrued payroll and related costs                                                                                                                                          |                                            |        | 16,744   |         |  |         | 21,462 |        
|                                                                                                                                                  | Taxes payable                                                                                                                                                              |                                            |        | 3,481    |         |  |         | 6,531  |        
|                                                                                                                                                  | Other accrued liabilities                                                                                                                                                  |                                            |        | 18,331   |         |  |         | 13,861 |        
|                                                                                                                                                  | Deferred revenue                                                                                                                                                           |                                            |        | 1,041    |         |  |         | 1,239  |        
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            | Total current liabilities                  |        |          | 71,149  |  |         |        | 54,383  | 
|Other liabilities                                                                                                                                 |                                                                                                                                                                            |                                            | 3,462  |          |         |  | 4,107   |       
|Commitment and contingencies                                                                                                                      |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|Convertible redeemable preferred stock, no par
    value, 0 shares and 200,000 shares issued and
    outstanding as of December 31, 2004 and 2003 |                                                                                                                                                                            |                                            |       |          |         |  | 168,655 |       
|Shareholders equity:                                                                                                                             |                                                                                                                                                                            |                                            |        |          |         |  |         |       
|                                                                                                                                                  | Preferred stock, no par value, 1,000,000 shares
    authorized, 0 shares and 200,000 issued as convertible
    redeemable preferred stock as of December 31, 2004 and 2003 |                                            |        |         |         |  |         |       |        
|                                                                                                                                                  | Common stock, no par value, 200,000,000 shares
    authorized, 37,418,764 and 26,792,547 shares issued and
    outstanding as of December 31, 2004 and 2003, respectively  |                                            |        |         |         |  |         |       |        
|                                                                                                                                                  | Additional paid-in capital                                                                                                                                                 |                                            |        | 165,983  |         |  |         | 93,165 |        
|                                                                                                                                                  | Retained earnings                                                                                                                                                          |                                            |        | 6,433    |         |  |         | (1,831 | )      
|                                                                                                                                                  | Stock subscriptions receivable                                                                                                                                             |                                            |        |         |         |  |         | (1,790 | )      
|                                                                                                                                                  | Accumulated other comprehensive income (loss)                                                                                                                              |                                            |        | 1,775    |         |  |         | (1,818 | )      
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            | Total shareholders equity                 |        |          | 174,191 |  |         |        | 87,726  | 
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 
|                                                                                                                                                  |                                                                                                                                                                            | Total liabilities and shareholders equity |        | $        | 248,802 |  |         | $      | 314,871 | 
|                                                                                                                                                  |                                                                                                                                                                            |                                            |        |          |         | 

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 |       
|                                                                 |                                          | 2004                                  |         |          | 2003 |   |          | 2002   | 
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 |                                          |                                      
|                                                                 |                                          | (In thousands, except per share data) |        
|Revenue                                                          |                                          | $                                     | 374,373 |          |      | $ | 378,630  |        |  | $ | 383,053 |       
|Cost of revenue                                                  |                                          |                                       | 281,114 |          |      |   | 286,183  |        |  |   | 284,427 |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 | Gross profit                             |                                       |         | 93,259   |      |   |          | 92,447 |  |   |         | 98,626 |  
|Selling, general and administrative expenses                     |                                          |                                       | 72,342  |          |      |   | 82,731   |        |  |   | 97,957  |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 | Income from operations                   |                                       |         | 20,917   |      |   |          | 9,716  |  |   |         | 669    |  
|Interest expense                                                 |                                          |                                       | 245     |          |      |   |         |        |  |   |        |       
|Other income, net                                                |                                          |                                       | (1,317  | )        |      |   | (1,781   | )      |  |   | (4,110  | )     
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 | Income before provision for income taxes |                                       |         | 21,989   |      |   |          | 11,497 |  |   |         | 4,779  |  
|Provision for income taxes                                       |                                          |                                       | 4,485   |          |      |   | 1,378    |        |  |   | 886     |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 | Net income                               |                                       |         | 17,504   |      |   |          | 10,119 |  |   |         | 3,893  |  
|Convertible redeemable preferred stock dividends                 |                                          |                                       | (3,221  | )        |      |   | (4,433   | )      |  |   | (4,298  | )     
|Loss on redemption of convertible redeemable
    preferred stock |                                          |                                       | 28,674  |          |      |   |         |        |  |   |        |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|Net income (loss) available for shareholders                     |                                          |                                       | (14,391 | )        |      |   | 5,686    |        |  |   | (405    | )     
|Amounts allocated to participating preferred
    shareholders    |                                          |                                       |        |          |      |   | (1,385   | )      |  |   |        |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|Net income (loss) available to common shareholders               |                                          | $                                     | (14,391 | )        |      | $ | 4,301    |        |  | $ | (405    | )     
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|Earnings (loss) per share                                        |                                          |                                       |         |          |      |   |          |        |  |   |         |       
|                                                                 | Basic                                    |                                       | $       | (.48     | )    |   | $        | .16    |  |   | $       | (.01   | )
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|                                                                 | Diluted                                  |                                       | $       | (.48     | )    |   | $        | .16    |  |   | $       | (.01   | )
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|Basic weighted average shares                                    |                                          |                                       | 29,971  |          |      |   | 26,975   |        |  |   | 27,734  |       
|Dilutive effect of options                                       |                                          |                                       | (A      | )        |      |   | 229      |        |  |   |        |       
|Convertible redeemable preferred stock                           |                                          |                                       | (A      | )        |      |   | (A       | )      |  |   | (A      | )     
|                                                                 |                                          |                                       |         |          |      |   |          |        | 
|Diluted weighted average shares                                  |                                          |                                       | 29,971  |          |      |   | 27,204   |        |  |   | 27,734  |       
|                                                                 |                                          |                                       |         |          |      |   |          |        | 



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

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

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                       |                                                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |   |        |       |   |   |         |         |  
|------------------------------------------------------ | ----------------------------------------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | - | ------- | --------- | - | ----------- | ------------- | ------ | - | ------------- | ------ | ----- | ------------- | - | ------ | ----- | - | - | ------- | ------- | -
|                                                       |                                                                                     |                        |            |            |            |   |         |           |   | Accumulated |               |        |  
|                                                       |                                                                                     | Common Stock           |            |            | Additional |   |         | Retained  |   |             | Stock         |        |   | Other         |        |       | Total         |  
|                                                       |                                                                                     | Shares                 |            |            | Paid-In    |   |         | Earnings  |   |             | Subscriptions |        |   | Comprehensive |        |       | Shareholders |  
|                                                       |                                                                                     | Outstanding            |            |            | Capital    |   |         | (Deficit) |   |             | Receivable    |        |   | Loss          |        |       | Equity        |  
|                                                       |                                                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |  
|                                                       |                                                                                     |                       
|                                                       |                                                                                     | (Dollars in thousands) |           
|Balance as previously reported 
    December 31, 2001 |                                                                                     |                        | 28,254,850 |            |            | $ | 108,946 |           |   | $           | (12,680       | )      |   | $             | (2,362 | )     |               | $ | (6,549 | )     |   | $ | 87,355  |        
|                                                       | Effect of restatement on periods ending on or
    prior to December 31, 2001        |                        |            |           |            |   |         |          |   |             |               | (3,163 | ) |               |        |      |               |   |        |      |   |   |         | (3,163  | )
|                                                       |                                                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |  
|Balance as restated  December 31,
    2001            |                                                                                     |                        | 28,254,850 |            |            |   | 108,946 |           |   |             | (15,843       | )      |   |               | (2,362 | )     |               |   | (6,549 | )     |   |   | 84,192  |        
|                                                       | Net income as restated                                                              |                        |            |           |            |   |         |          |   |             |               | 3,893  |   |               |        |      |               |   |        |      |   |   |         | 3,893   |  
|                                                       | 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 as restated  December 31,
    2002            |                                                                                     |                        | 27,221,049 |            |            |   | 98,631  |           |   |             | (11,950       | )      |   |               | (2,218 | )     |               |   | (5,898 | )     |   |   | 78,565  |        
|                                                       | Net income as restated                                                              |                        |            |           |            |   |         |          |   |             |               | 10,119 |   |               |        |      |               |   |        |      |   |   |         | 10,119  |  
|                                                       | Currency translation adjustment                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |   |        | 4,271 |   |   |         | 4,271   |  
|                                                       | 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 as restated  December 31,
    2003            |                                                                                     |                        | 26,792,547 |            |            |   | 93,165  |           |   |             | (1,831        | )      |   |               | (1,790 | )     |               |   | (1,818 | )     |   |   | 87,726  |        
|                                                       | Net income                                                                          |                        |            |           |            |   |         |          |   |             |               | 17,504 |   |               |        |      |               |   |        |      |   |   |         | 17,504  |  
|                                                       | Currency translation adjustment                                                     |                        |            |           |            |   |         |          |   |             |               |       |   |               |        |      |               |   |        | 3,622 |   |   |         | 3,622   |  
|                                                       | Unrealized losses on short-term investments                                         |                        |            |           |            |   |         |          |   |             |               |       |   |               |        |      |               |   |        | (29   | ) |   |         | (29     | )
|                                                       | Stock options exercised                                                             |                        |            | 170,942    |            |   |         | 1,385     |   |             |               |       |   |               |        |      |               |   |        |      |   |   |         | 1,385   |  
|                                                       | Repayment of stock subscriptions receivable                                         |                        |            | (56,534    | )          |   |         | (961      | ) |             |               |       |   |               |        | 1,790 |               |   |        |      |   |   |         | 829     |  
|                                                       | Issuances of common stock and other                                                 |                        |            | 64,909     |            |   |         | 712       |   |             |               |       |   |               |        |      |               |   |        |      |   |   |         | 712     |  
|                                                       | Repurchase of common stock                                                          |                        |            | (253,100   | )          |   |         | (2,408    | ) |             |               |       |   |               |        |      |               |   |        |      |   |   |         | (2,408  | )
|                                                       | Convertible redeemable preferred stock dividend                                     |                        |            |           |            |   |         | (2,268    | ) |             |               | (953   | ) |               |        |      |               |   |        |      |   |   |         | (3,221  | )
|                                                       | Net proceeds from issuance of common stock and
    warrants to FIS                  |                        |            | 8,700,000  |            |   |         | 92,832    |   |             |               |       |   |               |        |      |               |   |        |      |   |   |         | 92,832  |  
|                                                       | Net effect of redemption of convertible
    redeemable preferred stock and warrants |                        |            | 2,000,000  |            |   |         | (16,474   | ) |             |               | (8,287 | ) |               |        |      |               |   |        |      |   |   |         | (24,761 | )
|                                                       |                                                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |  
|Balance  December 31, 2004                            |                                                                                     |                        | 37,418,764 |            |            | $ | 165,983 |           |   | $           | 6,433         |        |   | $             |       |       |               | $ | 1,775  |       |   | $ | 174,191 |        
|                                                       |                                                                                     |                        |            |            |            |   |         |           |   |             |               |        |   |               |        |       |               |  

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

32



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |         |         |         |  
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                                                                |                                                                                                      |                                                                              
|                                                                                                |                                                                                                      | Year Ended December 31,                                                       |                                                        
|                                                                                                |                                                                                                      |                                                                               |                                                        
|                                                                                                |                                                                                                      |                                                                               |                                                         | Restated |        |         | Restated |         
|                                                                                                |                                                                                                      | 2004                                                                          |                                                         |          | 2003   |         |          | 2002     |       
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|                                                                                                |                                                                                                      |                                                                              
|                                                                                                |                                                                                                      | (Dollars in thousands)                                                        |                                                        
|Cash flows provided by (used in) operating
    activities                                      |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|Net income                                                                                      |                                                                                                      | $                                                                             | 17,504                                                  |          |        | $       | 10,119   |          |        | $       | 3,893   |        
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|                                                                                                | Depreciation and amortization                                                                        |                                                                               |                                                         | 13,391   |        |         |          | 15,198   |        |         |         | 14,884  |        
|                                                                                                | Loss on disposal and obsolescence of property and
    equipment                                      |                                                                               |                                                         | 1,395    |        |         |          | 944      |        |         |         | 532     |        
|                                                                                                | Provision for doubtful accounts                                                                      |                                                                               |                                                         | 892      |        |         |          | 875      |        |         |         | 815     |        
|                                                                                                | Provision (benefit) for deferred income taxes                                                        |                                                                               |                                                         | 770      |        |         |          | 2,462    |        |         |         | (1,157  | )      
|                                                                                                | Impairment of long-lived assets                                                                      |                                                                               |                                                         | 1,225    |        |         |          |         |        |         |         |        |        
|                                                                                                | Gain from sale of short term investments                                                             |                                                                               |                                                         | (153     | )      |         |          | (1,008   | )      |         |         |        |        
|                                                                                                | Loss on sale of investment                                                                           |                                                                               |                                                         |         |        |         |          | 680      |        |         |         |        |        
|                                                                                                | Stock option modification expense and other                                                          |                                                                               |                                                         | 271      |        |         |          |         |        |         |         |        |        
|                                                                                                | Change in assets and liabilities:                                                                    |                                                                               |                                                         |          |        |         |          |          |        |         |         |         |        
|                                                                                                |                                                                                                      | Accounts receivable and revenue earned in excess
    in billings              |                                                         |          | 799    |         |          |          | 9,220  |         |         |         | (7,967  | )      
|                                                                                                |                                                                                                      | Prepaid expenses and other assets                                             |                                                         |          | 5,073  |         |          |          | 1,531  |         |         |         | (409    | )      
|                                                                                                |                                                                                                      | Accounts payable, accrued payroll and related
    costs and other liabilities |                                                         |          | (1,776 | )       |          |          | (4,311 | )       |         |         | 5,937   |        
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|                                                                                                |                                                                                                      |                                                                               | Net cash provided by operating activities               |          |        | 39,391  |          |          |        | 35,710  |         |         |         | 16,528  |  
|Cash flows provided by (used in) investing
    activities                                      |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|                                                                                                | Investment in property, equipment and other                                                          |                                                                               |                                                         | (10,167  | )      |         |          | (10,015  | )      |         |         | (16,058 | )      
|                                                                                                | Investment in computer software                                                                      |                                                                               |                                                         | (208     | )      |         |          | (909     | )      |         |         | (1,021  | )      
|                                                                                                | Proceeds from sale of available for sale
    securities                                              |                                                                               |                                                         | 112,750  |        |         |          | 170,149  |        |         |         |        |        
|                                                                                                | Purchases of available for sale securities                                                           |                                                                               |                                                         | (95,427  | )      |         |          | (192,948 | )      |         |         | (13,072 | )      
|                                                                                                | Business acquisitions and investments, net of
    cash acquired                                      |                                                                               |                                                         |         |        |         |          |         |        |         |         | (16,011 | )      
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|                                                                                                |                                                                                                      |                                                                               | Net cash provided by (used in) investing
    activities |          |        | 6,948   |          |          |        | (33,723 | )       |         |         | (46,162 | )
|Cash flows provided by (used in) financing
    activities                                      |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|                                                                                                | Net proceeds from issuances of common stock and
    other                                            |                                                                               |                                                         | 93,906   |        |         |          | 370      |        |         |         | 526     |        
|                                                                                                | Net proceeds from exercise of stock options and
    other                                            |                                                                               |                                                         | 1,385    |        |         |          | 511      |        |         |         | 185     |        
|                                                                                                | Repurchases of common stock                                                                          |                                                                               |                                                         | (2,408   | )      |         |          | (1,485   | )      |         |         | (6,583  | )      
|                                                                                                | Redemption of convertible redeemable preferred
    stock
    and warrants                            |                                                                               |                                                         | (179,139 | )      |         |          |         |        |         |         |        |        
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|                                                                                                |                                                                                                      |                                                                               | Net cash used in financing activities                   |          |        | (86,256 | )        |          |        | (604    | )       |         |         | (5,872  | )
|Effect of exchange rate changes on cash                                                         |                                                                                                      |                                                                               | 87                                                      |          |        |         |         |          |        |         |        |        
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|Increase (decrease) in cash and cash
    equivalents                                            |                                                                                                      |                                                                               | (39,830                                                 | )        |        |         | 1,383    |          |        |         | (35,506 | )      
|Cash and cash equivalents at beginning of period                                                |                                                                                                      |                                                                               | 89,671                                                  |          |        |         | 88,288   |          |        |         | 123,794 |        
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|Cash and cash equivalents at end of period                                                      |                                                                                                      | $                                                                             | 49,841                                                  |          |        | $       | 89,671   |          |        | $       | 88,288  |        
|                                                                                                |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |       
|Supplemental disclosure of cash flow information:                                               |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|                                                                                                | Cash paid (received) during the period for:                                                          |                                                                               |                                                         |          |        |         |          |          |        |         |         |         |        
|                                                                                                |                                                                                                      | Income taxes                                                                  |                                                         | $        | 5,604  |         |          | $        | 3,775  |         |         | $       | (10,339 | )      
|                                                                                                |                                                                                                      | Interest                                                                      |                                                         | $        |       |         |          | $        |       |         |         | $       |        |        
|Noncash financing activities                                                                  |                                                                                                      |                                                                               |                                                         |          |        |         |          |          |        |         |         |        
|                                                                                                | Debt issued in connection with redemption of
    convertible redeemable preferred stock and warrants |                                                                               | $                                                       | 17,500   |        |         | $        |         |        |         | $       |        |        

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 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 revenue 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 income, net.



| |                     
| | --------------------
| | Comprehensive Income

Total comprehensive income is summarized as
follows:

|                                                                   |  |                         |        |          |      |   |          |      |  |   |       | 
|------------------------------------------------------------------ |  | ----------------------- | ------ | -------- | ---- | - | -------- | ---- |  | - | ----- | 
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31, |       
|                                                                   |  |                         |       
|                                                                   |  |                         |        | Restated |      |   | Restated |     
|                                                                   |  | 2004                    |        |          | 2003 |   |          | 2002 | 
|                                                                   |  |                         |        |          |      |   |          |      | 
|Net income                                                         |  | $                       | 17,504 |          |      | $ | 10,119   |      |  | $ | 3,893 | 
|Currency translation adjustment                                    |  |                         | 3,622  |          |      |   | 4,271    |      |  |   | 460   | 
|Unrealized gains (loss) on short term investments                  |  |                         | (29    | )        |      |   |         |      |  |   | 191   | 
|Reclassification of unrealized gains on short
    term investments |  |                         |       |          |      |   | (191     | )    |  |   |      | 
|                                                                   |  |                         |        |          |      |   |          |      | 
|Comprehensive income                                               |  | $                       | 21,097 |          |      | $ | 14,199   |      |  | $ | 4,544 | 
|                                                                   |  |                         |        |          |      |   |          |      | 



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

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

34



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




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

The unrealized gains and losses on these
investments included in accumulated other comprehensive income
for December 31, 2004 and 2003 are as follows:

|                      |  |              |        |   |      |   |        | 
|--------------------- |  | ------------ | ------ | - | ---- | - | ------ | 
|                      |  |             
|                      |  | December 31, |       
|                      |  |              |       
|                      |  | 2004         |        |   | 2003 |  
|                      |  |              |        |   |      |  
|Fair value            |  | $            | 21,409 |   |      | $ | 37,804 | 
|Cost                  |  |              | 21,438 |   |      |   | 37,804 | 
|Gross unrealized loss |  |              | (29    | ) |      |   |       | 



| |                      
| | ---------------------
| | Financial Instruments

The fair values and carrying amounts of the
Companys financial instruments, short term investments, a
note receivable and a note payable, are approximately equivalent
due to the short term nature of the instruments and the variable
interest rates on the notes.



| |            
| | -----------
| | 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. During 2004, the
Company fully reserved for its investment in JP Systems.
The impairment loss of $1,000 before tax is included in selling,
general and administrative expenses in the income statement and
is included in the other category for segment reporting.

The following table summarizes of the
Companys investments which are carried at cost as of
December 31, 2004 and 2003:

|             |             |              |     |     |      |   |       |       | 
|------------ | ----------- | ------------ | --- | --- | ---- | - | ----- | ----- | 
|             |             |             
|             |             | December 31, |    
|             |             |              |    
|             |             | 2004         |     |     | 2003 |  
|             |             |              |     |     |      |  
|Cost Method: |             |              |     |     |      |   |       |      
|             | JP Systems* |              | $   |    |      |   | $     | 1,000 | 
|             | Investcare* |              |     | 915 |      |   |       | 857   | 
|             |             |              |     |     |      |  
|             |             | $            | 915 |     |      | $ | 1,857 |      
|             |             |              |     |     |      |  

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



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

35



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


its reporting units by comparing fair value to
carrying value. Fair value is determined using a discounted cash
flow methodology. The results of the Companys annual
impairment analysis concluded that no impairment existed at
December 31, 2004.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation is provided 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. Renewal periods of leases have been
included in the lease term if the renewals are reasonably
assured.

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.



| |                  
| | -----------------
| | Long-Lived Assets

We evaluate the recoverability of long-lived
assets (excluding goodwill) in accordance with SFAS 144
whenever events or changes in circumstances indicate that the
carrying amounts may be impaired. The impairment evaluation is
performed by comparing their carrying values to the undiscounted
cash flows expected to be derived from such long-lived assets.
If such evaluation indicated an impairment, we use discounted
cash flows to measure fair value in determining the amount of
the long-lived assets that should be written-off.



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue in accordance with 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, maintenance and transaction processing contracts,
we recognize revenue ratably over the applicable 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. This method is followed where
reasonably dependable estimates of revenue and cost can be made.
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 (See Note 5).

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

36



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


essential to the functionality of the delivered
element, no revenue is recognized for the delivered element
until the undelivered element is delivered.

Retainages 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 in accordance with SFAS 86 Computer
Software to be Sold, Leased or Otherwise Marketed.
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. Based on these analyses and evaluations, the
Company has identified and recorded an impairment loss of $225
for its Claims Connect software product. Amounts charged to
expense for research and development of computer software were
not material in the periods indicated.

Amounts capitalized were $208, $909 and $1,021
for the years ended December 31, 2004, 2003 and 2002,
respectively.

During the year ended December 31, 2002, in
connection with the acquisition of PDA Software Services, Inc.
(see Note 7), the Company acquired computer software
totaling $5,694.

The amortization of software development costs
was $1,707, $2,437 and $1,737 for the years ended
December 31, 2004, 2003 and 2002, respectively.

Accumulated amortization on computer software
amounted to $8,892 and $7,289 as of December 31, 2004 and
2003, respectively.



| |             
| | ------------
| | 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 gains/losses.

37



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




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

Basic and diluted net income (loss) per share is
computed in accordance with SFAS No. 128, Earnings
Per Share, as amended by Emerging Issues Task Force
(EITF) Issue 03-6 by dividing net income (loss)
available for common shareholders by the weighted average number
of shares of common stock outstanding. The calculation of
dilutive net income (loss) per share excludes the following
common stock equivalents for the respective periods because
their impact was anti-dilutive.

|                                                                               |  |                         |           |  |      |  |           |      |  |  |           | 
|------------------------------------------------------------------------------ |  | ----------------------- | --------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                                                                               |  |                        
|                                                                               |  | Year Ended December 31, |          
|                                                                               |  |                         |          
|                                                                               |  | 2004                    |           |  | 2003 |  |           | 2002 | 
|                                                                               |  |                         |           |  |      |  |           |      | 
|Common stock equivalents related to convertible
    redeemable preferred stock |  |                         | 6,140,060 |  |      |  | 8,695,652 |      |  |  | 8,695,652 | 
|Warrants issued to CDR to purchase
    5,300,000 shares of common stock        |  |                         | 3,742,366 |  |      |  | 5,300,000 |      |  |  | 5,300,000 | 
|Warrants issued to CDR to purchase
    5,000,000 shares of common stock        |  |                         | 1,469,466 |  |      |  |          |      |  |  |          | 
|Warrants issued to FIS to purchase
    4,000,000 shares of common stock        |  |                         | 1,175,573 |  |      |  |          |      |  |  |          | 
|Average number of stock options outstanding                                    |  |                         | 3,056,541 |  |      |  | 2,844,570 |      |  |  | 5,211,229 | 

The Companys Series A Voting
Convertible Preferred Stock was a participating security as
defined in Issue 03-6. Issue 03-6 is effective for periods
beginning after March 31, 2004. The Company adopted
Issue 03-6 in the second quarter ended June 30, 2004
and restated EPS for all prior periods presented. The adoption
of Issue 03-6 results in a reduction in EPS available for
common shareholders in periods where the Company has income and
has no impact in periods where the Company has a loss. The
Companys Series A Voting Convertible Preferred Stock
was redeemed as part of the Recapitalization Agreement with the
CDR Shareholder (see Note 3).



| |                                                                
| | ---------------------------------------------------------------
| | 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 revenue 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

38



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


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 compensation expense other than expense required
for changes to stock option grants has been recognized for the
Plan within the accompanying consolidated statements of
operations. Had compensation expense for the Plan been
determined based on the fair value at the grant date consistent
with the provisions of SFAS No. 123, the Companys pro
forma net income (loss) and pro forma earnings (loss) per common
share would have been reduced to the amounts indicated below:

|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |   |  |   |         |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | - | -------- | ---- |  | -------- | ----- | - |  | - | ------- | -
|                                                         |                                                                                                                                     |                        
|                                                         |                                                                                                                                     | Year Ended December 31, |  
|                                                         |                                                                                                                                     |                         |  
|                                                         |                                                                                                                                     |                         |   | Restated |      |  | Restated |      
|                                                         |                                                                                                                                     | 2004                    |   |          | 2003 |  |          | 2002  |  
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|Net income (loss) available for common
    shareholders: |                                                                                                                                     |                         |   |          |      |  |          |       |   |  |   |        
|                                                         | As reported                                                                                                                         |                         | $ | (14,391  | )    |  | $        | 4,301 |   |  | $ | (405    | )
|                                                         | Stock-based employee compensation cost included
    in the determination of net income (loss) available for common
    shareholders |                         |   | 243      |      |  |          |      |   |  |   |        |  
|                                                         | Stock-based employee compensation cost had the
    fair value method been used                                                      |                         |   | 1,698    |      |  |          | 4,422 |   |  |   | 11,493  |  
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |                         | $ | (15,846  | )    |  | $        | (121  | ) |  | $ | (11,898 | )
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|Basic earnings (loss) per share:                         |                                                                                                                                     |                         |   |          |      |  |          |       |   |  |   |        
|                                                         | As reported                                                                                                                         |                         | $ | (.48     | )    |  | $        | 0.16  |   |  | $ | (.01    | )
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |                         | $ | (.53     | )    |  | $        |      |   |  | $ | (.43    | )
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|Diluted earnings (loss) per share:                       |                                                                                                                                     |                         |   |          |      |  |          |       |   |  |   |        
|                                                         | As reported                                                                                                                         |                         | $ | (.48     | )    |  | $        | 0.16  |   |  | $ | (.01    | )
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  
|                                                         | SFAS No. 123 pro forma                                                                                                              |                         | $ | (.53     | )    |  | $        |      |   |  | $ | (.43    | )
|                                                         |                                                                                                                                     |                         |   |          |      |  |          |       |  

During 2004, the Company made amendments to the
stock option grants of two employees upon their termination. In
connection with the amendments, the Company recorded a charge of
$243.

Recently Issued Financial Accounting
Standards

In December 2004 the FASB issued FAS 123R,
Share-Based Payment, that requires companies to
expense the value of employee stock options and similar awards.
The effective date for application by public companies is
interim and annual periods beginning after June 15, 2005.
FAS 123R applies to all outstanding and unvested
share-based payment awards at a Companys adoption date.
FAS 123R allows alternative transition methods. The Company
has not yet selected a transition method. Management is
presently reviewing the impact on our results of operations and
financial position from implementing FAS 123R.

In December 2004, the FASB issued an FASB Staff
Position (FSP) 109-2 Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004, which provides
accounting and disclosure guidance for the foreign earnings
repatriation provision within the American Jobs Creation Act of
2004. The Act provides special one-time dividends received
deduction on the repatriation of certain foreign earnings to a
U.S. taxpayer. FSP FASB 109-2 provides for a period of time
beyond the financial reporting period of enactment for a company
to evaluate the effect of the Act on its plan for reinvestment
or repatriation of foreign earnings. The Company is in the
process of evaluating the effects of one-time repatriation
opportunities provided by the Act. At the time of filing these
statements, the Company cannot reasonably estimate the income
tax effects of such repatriation under the Act.

39



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




|   |                                    
|-- | -----------------------------------
|2. | Restatement of Financial Statements

Subsequent to the issuance of its financial
statements for the years ended December 31, 2003 and 2002,
the Company identified adjustments related to leases, income
taxes and fixed assets that required restatement of its
previously issued financial statements. Each of these
adjustments is described further below.



| |                 
| | ----------------
| | Lease Accounting

During the 2004 year end closing process, the
Company initiated and completed an analysis of its lease
accounting in order to determine if its historical practices
have deviated from the lease accounting standards discussed in
SFAS 13, Accounting for Leases. As part of that
analysis, the Company determined that it had not properly
accounted for the operating lease for its US headquarters signed
in 1993 in accordance with the guidance set forth in FASB
Technical Bulletin 85-3, Accounting for Operating
Leases with Scheduled Rent Increases and FASB Technical
Bulletin 88-1, Issues Relating to Accounting for
Leases. The Company assessed the impact of the resulting
errors on its historical financial statements and concluded that
it was required to restate its financial statements for all
periods affected by the matter. As a result, the Company
restated its Consolidated Financial Statements for the years
ended December 31, 2003 and 2002, the effect of which was
to reduce income from continuing operations before income taxes
by $132 and $124 respectively.

The impact of this matter on the Companys
Consolidated Financial Statements for the years prior to
December 31, 2001 is reflected in the Consolidated
Statement of Shareholders Equity as a reduction to
retained earnings of $1,525 as of December 31, 2001.



| |                      
| | ---------------------
| | Income Tax Accounting

In connection with its 2004 year end closing
process, the Company performed a calculation of the cumulative
temporary difference for property and equipment and capitalized
software development costs and concluded that the net deferred
tax liability of $1,638 required to be recorded for these
differences had been misclassified in its financial statements
as a contingent tax reserve since December 31, 2001. Upon
discovery of the error, the Company evaluated its accounting
treatment for contingent tax reserves from December 31,
2001 through 2004. This analysis concluded that the Company did
not have sufficient tax reserves at December 31, 2001 due
to this error and it had excess reserves at December 31,
2003 due to other errors. The analysis of prior periods
identified tax reserves for items that should have been released
in the year ended December 31, 2003 due to the settlement
of two issues reviewed under IRS examination offset partially by
an error in recording state tax valuation allowances determined
to be necessary in 2003 and one other less significant
computational error. The Company assessed the impact of these
errors on its historical financial statements and concluded that
it was required to restate its financial statements for all
periods affected by the matters. As a result, the Company
restated its Consolidated Financial Statements for the year
ended December 31, 2003, the principal effect of which was
to increase net income from continuing operations by $349.

The impact of these matters on the Companys
Consolidated Financial Statements for the years prior to
December 31, 2001 is reflected in the Consolidated
Statement of Shareholders Equity as a reduction to
retained earnings of $1,638 as of December 31, 2001.



| |                       
| | ----------------------
| | Fixed Asset Accounting

In connection with its 2004 year end closing
process, the Company discovered that a consolidating entry to
properly state property and equipment on the balance sheet at
December 31, 2003 was classified as accumulated other
comprehensive income in error. The classification of the amount
($723) has been corrected and has the effect of increasing
property and equipment and reducing accumulated other

40



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


comprehensive loss by $723 as of
December 31, 2003. The correction had no impact on income
from continuing operations or net income.

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

|                                                                               |                                       |                       |       |      |      |   |       |      |  
|------------------------------------------------------------------------------ | ------------------------------------- | --------------------- | ----- | ---- | ---- | - | ----- | ---- | -
|                                                                               |                                       |                      
|                                                                               |                                       | Year Ended            |      
|                                                                               |                                       | December 31,          |      
|                                                                               |                                       |                       |      
|                                                                               |                                       | 2003                  |       |      | 2002 |  
|                                                                               |                                       |                       |       |      |      |  
|                                                                               |                                       |                      
|                                                                               |                                       | (In thousands, except |      
|                                                                               |                                       | per share data)       |      
|Net income (loss) available for common
    shareholders as previously reported |                                       | $                     | 4,096 |      |      | $ | (331  | )   
|                                                                               | Rent expense (pre-tax) restatement    |                       |       | (132 | )    |   |       | (124 | )
|                                                                               | Tax effect of restatement adjustments |                       |       | 53   |      |   |       | 50   |  
|                                                                               | Tax restatement                       |                       |       | 349  |      |   |       |     |  
|                                                                               |                                       |                       |       |      |      |  
|Total net adjustments                                                          |                                       |                       | 270   |      |      |   | (74   | )   
|                                                                               |                                       |                       |       |      |      |  
|Adjusted net income (loss) available for
    shareholders                      |                                       |                       | 4,366 |      |      |   | (405  | )   
|Additional amount allocated to participating
    preferred shareholders        |                                       |                       | (65   | )    |      |   |      |     
|                                                                               |                                       |                       |       |      |      |  
|Net income (loss) available for common
    shareholders as restated            |                                       | $                     | 4,301 |      |      | $ | (405  | )   
|                                                                               |                                       |                       |       |      |      |  
|Earnings (loss) per share                                                      |                                       |                       |       |      |      |   |       |     
|Basic earnings (loss) per share as previously
    reported                     |                                       | $                     | 0.15  |      |      | $ | (0.01 | )   
|Effect of adjustments                                                          |                                       |                       | 0.01  |      |      |   |      |     
|                                                                               |                                       |                       |       |      |      |  
|Basic earnings (loss) per share as restated                                    |                                       | $                     | 0.16  |      |      | $ | (0.01 | )   
|                                                                               |                                       |                       |       |      |      |  
|Diluted earnings (loss) per share as previously
    reported                   |                                       | $                     | 0.15  |      |      | $ | (0.01 | )   
|Effect of adjustments                                                          |                                       |                       | 0.01  |      |      |   |      |     
|                                                                               |                                       |                       |       |      |      |  
|Diluted earnings (loss) per share as restated                                  |                                       | $                     | 0.16  |      |      | $ | (0.01 | )   
|                                                                               |                                       |                       |       |      |      |  

The following schedule reconciles Comprehensive
Income for 2003, as previously reported, to the corresponding
amounts on a restated basis, after giving effect to the
adjustments described above.

|                                            |                                       |              |        |      |      |   |       |      |  
|------------------------------------------- | ------------------------------------- | ------------ | ------ | ---- | ---- | - | ----- | ---- | -
|                                            |                                       |             
|                                            |                                       | Year Ended   |       
|                                            |                                       |             
|                                            |                                       | December 31, |       
|                                            |                                       |              |       
|                                            |                                       | 2003         |        |      | 2002 |  
|                                            |                                       |              |        |      |      |  
|Comprehensive Income as previously reported |                                       | $            | 13,206 |      |      |   | 4,618 |     
|                                            | Rent expense (pretax) restatement     |              |        | (132 | )    |   |       | (124 | )
|                                            | Tax effect of restatement adjustments |              |        | 53   |      |   |       | 50   |  
|                                            | Tax restatement                       |              |        | 349  |      |   |       |     |  
|                                            | Fixed asset restatement               |              |        | 723  |      |   |       |     |  
|                                            |                                       |              |        |      |      |  
|Comprehensive Income as restated            |                                       | $            | 14,199 |      |      | $ | 4,544 |     
|                                            |                                       |              |        |      |      |  

41



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


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

|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |        |   |   |         |        |  
|------------------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ------- | ------ | ----------------- | - | ---------- | -------- |  | - | -------- | ------ | - | - | ------- | ------ | -
|                                                              |                                          |                                       |         |       
|                                                              |                                          | Year Ended                            |         |        | Year Ended        |  
|                                                              |                                          | December 31, 2003                     |         |        | December 31, 2002 |  
|                                                              |                                          |                                       |         |        |                   |  
|                                                              |                                          | As                                    |         |        |                   |   | As         |          |  |  
|                                                              |                                          | Previously                            |         |        |                   |   | Previously |          |  |  
|                                                              |                                          | Reported                              |         |        | Restated          |   |            | Reported |  |   | Restated |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              |                                          |                                      
|                                                              |                                          | (In thousands, except per share data) |        
|Revenues                                                      |                                          | $                                     | 378,630 |        |                   | $ | 378,630    |          |  | $ | 383,053  |        |   | $ | 383,053 |       
|Cost of revenues                                              |                                          |                                       | 286,183 |        |                   |   | 286,183    |          |  |   | 284,427  |        |   |   | 284,427 |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              | Gross profit                             |                                       |         | 92,447 |                   |   |            | 92,447   |  |   |          | 98,626 |   |   |         | 98,626 |  
|Selling, general and administrative expenses                  |                                          |                                       | 82,599  |        |                   |   | 82,731     |          |  |   | 97,833   |        |   |   | 97,957  |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              | Income from operations                   |                                       |         | 9,848  |                   |   |            | 9,716    |  |   |          | 793    |   |   |         | 669    |  
|Other income, net                                             |                                          |                                       | (1,781  | )      |                   |   | (1,781     | )        |  |   | (4,110   | )      |   |   | (4,110  | )     
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              | Income before provision for income taxes |                                       |         | 11,629 |                   |   |            | 11,497   |  |   |          | 4,903  |   |   |         | 4,779  |  
|Provision for income taxes                                    |                                          |                                       | 1,780   |        |                   |   | 1,378      |          |  |   | 936      |        |   |   | 886     |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              | Net income                               |                                       |         | 9,849  |                   |   |            | 10,119   |  |   |          | 3,967  |   |   |         | 3,893  |  
|Convertible redeemable preferred stock dividends              |                                          |                                       | (4,433  | )      |                   |   | (4,433     | )        |  |   | (4,298   | )      |   |   | (4,298  | )     
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|Net income (loss) available for shareholders                  |                                          |                                       | 5,416   |        |                   |   | 5,686      |          |  |   | (331     | )      |   |   | (405    | )     
|Amounts allocated to participating preferred
    shareholders |                                          |                                       | (1,320  | )      |                   |   | (1,385     | )        |  |   |         |        |   |   |        |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|Net income (loss) available for common
    shareholders       |                                          | $                                     | 4,096   |        |                   | $ | 4,301      |          |  | $ | (331     | )      |   | $ | (405    | )     
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|Earnings (loss) per share:                                    |                                          |                                       |         |        |                   |   |            |          |  |   |          |        |   |   |         |       
|                                                              | Basic earnings (loss) per share          |                                       | $       | 0.15   |                   |   | $          | 0.16     |  |   | $        | (0.01  | ) |   | $       | (0.01  | )
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|                                                              | Diluted earnings (loss) per share        |                                       | $       | 0.15   |                   |   | $          | 0.16     |  |   | $        | (0.01  | ) |   | $       | (0.01  | )
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|Basic weighted average shares outstanding                     |                                          |                                       | 26,975  |        |                   |   | 26,975     |          |  |   | 27,734   |        |   |   | 27,734  |       
|Dilutive effect of options                                    |                                          |                                       | 229     |        |                   |   | 229        |          |  |   |         |        |   |   |        |       
|Convertible redeemable preferred stock                        |                                          |                                       | (A      | )      |                   |   | (A         | )        |  |   | (A       | )      |   |   | (A      | )     
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       
|Diluted weighted average shares outstanding                   |                                          |                                       | 27,204  |        |                   |   | 27,204     |          |  |   | 27,734   |        |   |   | 27,734  |       
|                                                              |                                          |                                       |         |        |                   |   |            |          |  |   |          |       

See Note 23 for the effects of the
adjustments discussed above on the unaudited supplemental
quarterly financial information for the quarters ended
March 31, June 30 and September 30, 2004 and
2003, respectively, as well as the quarter ended
December 31, 2003.

42



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


The following table sets forth the effects of the
restatement adjustments discussed above on the consolidated
balance sheet at December 31, 2003:

|                                                                                                                            |                                                                                                                                     |                                            |         |        |          |  |         |        |         | 
|--------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | -------- |  | ------- | ------ | ------- | 
|                                                                                                                            |                                                                                                                                     |                                           
|                                                                                                                            |                                                                                                                                     | December 31, 2003                          |        
|                                                                                                                            |                                                                                                                                     |                                            |        
|                                                                                                                            |                                                                                                                                     | As                                         |         |        |         
|                                                                                                                            |                                                                                                                                     | Previously                                 |         |        |         
|                                                                                                                            |                                                                                                                                     | Reported                                   |         |        | Restated | 
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     |                                           
|                                                                                                                            |                                                                                                                                     | (Dollars in thousands)                     |        
|ASSETS                                                                                                                     
|Current assets:                                                                                                             |                                                                                                                                     |                                            |         |        |          |  |         |       
|                                                                                                                            | Cash and cash equivalents                                                                                                           |                                            | $       | 89,671 |          |  | $       | 89,671 |        
|                                                                                                                            | Short term investments                                                                                                              |                                            |         | 37,804 |          |  |         | 37,804 |        
|                                                                                                                            | Accounts receivable, net                                                                                                            |                                            |         | 67,245 |          |  |         | 67,245 |        
|                                                                                                                            | Revenue earned in excess of billings                                                                                                |                                            |         | 32,127 |          |  |         | 32,127 |        
|                                                                                                                            | Deferred taxes                                                                                                                      |                                            |         | 9,396  |          |  |         | 9,396  |        
|                                                                                                                            | Prepaid expenses and other                                                                                                          |                                            |         | 5,668  |          |  |         | 5,668  |        
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     | Total current assets                       |         |        | 241,911  |  |         |        | 241,911 | 
|Property and equipment, net                                                                                                 |                                                                                                                                     |                                            | 31,253  |        |          |  | 31,976  |       
|Computer software, net                                                                                                      |                                                                                                                                     |                                            | 5,430   |        |          |  | 5,430   |       
|Goodwill                                                                                                                    |                                                                                                                                     |                                            | 18,441  |        |          |  | 18,441  |       
|Deferred taxes                                                                                                              |                                                                                                                                     |                                            | 4,231   |        |          |  | 3,020   |       
|Other assets                                                                                                                |                                                                                                                                     |                                            | 14,093  |        |          |  | 14,093  |       
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     | Total assets                               |         | $      | 315,359  |  |         | $      | 314,871 | 
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                   
|Current liabilities:                                                                                                        |                                                                                                                                     |                                            |         |        |          |  |         |       
|                                                                                                                            | Accounts payable                                                                                                                    |                                            | $       | 11,290 |          |  | $       | 11,290 |        
|                                                                                                                            | Accrued payroll and related costs                                                                                                   |                                            |         | 21,462 |          |  |         | 21,462 |        
|                                                                                                                            | Other accrued liabilities                                                                                                           |                                            |         | 14,281 |          |  |         | 13,861 |        
|                                                                                                                            | Taxes payable                                                                                                                       |                                            |         | 7,573  |          |  |         | 6,531  |        
|                                                                                                                            | Deferred revenue                                                                                                                    |                                            |         | 1,239  |          |  |         | 1,239  |        
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     | Total current liabilities                  |         |        | 55,845   |  |         |        | 54,383  | 
|Other liabilities                                                                                                           |                                                                                                                                     |                                            | 889     |        |          |  | 4,107   |       
|Commitments and contingencies                                                                                               |                                                                                                                                     |                                            |         |        |          |  |         |       
|Convertible redeemable preferred stock, no par
    value, 200,000 shares issued and outstanding as of
    December 31, 2003 |                                                                                                                                     |                                            | 168,655 |        |          |  | 168,655 |       
|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 shares issued and outstanding as of
    December 31, 2003 |                                            |         |       |          |  |         |       |        
|                                                                                                                            | Additional paid-in capital                                                                                                          |                                            |         | 93,165 |          |  |         | 93,165 |        
|                                                                                                                            | Retained earnings (deficit)                                                                                                         |                                            |         | 1,136  |          |  |         | (1,831 | )      
|                                                                                                                            | Stock subscriptions receivable                                                                                                      |                                            |         | (1,790 | )        |  |         | (1,790 | )      
|                                                                                                                            | Accumulated other comprehensive loss                                                                                                |                                            |         | (2,541 | )        |  |         | (1,818 | )      
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     | Total shareholders equity                 |         |        | 89,970   |  |         |        | 87,726  | 
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 
|                                                                                                                            |                                                                                                                                     | Total liabilities and shareholders equity |         | $      | 315,359  |  |         | $      | 314,871 | 
|                                                                                                                            |                                                                                                                                     |                                            |         |        |          | 

The restatement adjustments had no impact on net
cash flows provided by (used in) operating, investing or
financing activities for the years ended December 31, 2003
or 2002.

43



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




|   |                 
|-- | ----------------
|3. | Recapitalization

On April 27, 2004, the Company announced
that it had entered into a long-term Master Services Agreement
and a Stock Purchase Agreement with Fidelity Information
Services (FIS), Inc., a subsidiary of Fidelity
National Financial, Inc. The Master Services Agreement is
expected to generate an anticipated $150,000 in revenues to the
Company over the next five years.

Under the Stock Purchase Agreement, as amended,
with FIS and approved by shareholders on September 15,
2004, the Company issued to FIS 8,700,000 shares of the
Companys common stock and warrants for $95,700. The four
tranches of warrants, each for 1,000,000 shares of the
Companys common stock, have a strike price between $15 and
$24 per share. FIS also acquired 2,300,000 shares of the
Companys common stock from Rajendra Vattikuti, founder and
Chief Executive Officer of the Company.

In order to facilitate the transactions with FIS,
the Company also entered into a Recapitalization Agreement, as
amended, with a wholly-owned subsidiary of a private equity
investment fund managed by Clayton, Dubilier & Rice, Inc.
(the CDR Stockholder) to restructure the CDR
Stockholders ownership interest in the Company and certain
corresponding governance rights, in exchange for a combination
of cash, stock, notes and warrants. The CDR Stockholder owned
200,000 shares of the Companys Series A Voting
Convertible Preferred Stock, or approximately
8,695,000 shares of common stock on an as converted basis,
and 5,300,000 common stock warrants with a strike price
ranging from $25 to $31 per share.

Under the terms of the Recapitalization Agreement
approved by shareholders on September 15, 2004 the CDR
Stockholder exchanged all of its existing holdings in the
Company for consideration valued at $227,700 consisting of
$177,500 of cash, 2,000,000 shares of common stock of
the Company, subordinated notes in the total amount of $17,500
due December 31, 2005, which bears interest at LIBOR plus
2.20%, and five-year warrants for 5,000,000 shares of
common stock with a strike price of $18 per share. In
accordance with EITF D-42, as amended by EITF 00-27, the Company
recorded a reduction to income available to common shareholders
of $28,674. The Company financed the transaction with the CDR
Stockholder with cash on hand as well as proceeds from the FIS
investment.



|   |                        
|-- | -----------------------
|4. | Shareholder Rights Plan

In October 2004, the Companys board of
directors adopted a shareholder rights plan which provided for
the declaration of a dividend of one preferred share purchase
right for each share of the Companys common stock
outstanding and any common shares issued thereafter. The rights
are not exercisable until ten days following either:

(1) a public announcement that



| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) a person or group of affiliated persons
    (other than Rajendra B. Vattikuti and his affiliates and
    associates or Fidelity Information Services, Inc. and its
    affiliates and associates) has acquired beneficial ownership of
    15% or more of the outstanding Common Shares,            
|
| | (B) Rajendra B. Vattikuti and his affiliates
    have acquired beneficial ownership of 25% or more of the
    outstanding Common Shares or                                                                                                                                                              
|
| | (C) Fidelity Information Services, Inc. and
    its affiliates have acquired beneficial ownership of 40% or more
    of the outstanding Common Shares (each of the persons specified
    in clauses (A), (B) or (C), upon acquiring that level of
    beneficial ownership, is an Acquiring Person) or

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


(2) the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the
consummation of which results in the beneficial ownership



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) by a person or group (other than
    Rajendra B. Vattikuti and his affiliates and associates or
    Fidelity Information Services, Inc. and its affiliates) of 15%
    or more of the outstanding Common Shares, or
|
| | (B) by Rajendra B. Vattikuti and his
    affiliates of 25% or more of the outstanding Common Shares or                                                                                                                 
|
| | (C) by Fidelity Information Services, Inc.
    and its affiliates of 40% or more of the outstanding Common
    Shares.                                                                                                 

Each right, if exercisable, will entitle its
holder to purchase one one-thousandth of a share of the
Companys Series B Junior Participating Preferred
Stock at an exercise price of $11.00, subject to adjustment.

If a person or group becomes an Acquiring Person,
each holder of a Right will thereafter have the right to
receive, upon exercise, Common Shares (or, in certain
circumstances, Preferred Shares or other similar securities of
the Company) having a value equal to two times the exercise
price of the Right. Notwithstanding any of the foregoing,
following the existence of a Acquiring Person, all Rights that
are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will
be null and void.

In the event that the Company is acquired in a
merger or other business combination transaction or 50% or more
of its consolidated assets or earning power are sold after a
person or group has become an Acquiring Person, proper provision
will be made so that each holder of a Right will thereafter have
the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of
common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise
price of the Right. In the event that any person or group
becomes an Acquiring Person, proper provision shall be made so
that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void),
will thereafter have the right to receive upon exercise that
number of Common Shares having a market value of two times the
exercise price of the Right.

At any time after any person or group becomes an
Acquiring Person and prior to the acquisition by such person or
group of 50% or more of the outstanding Common Shares, the Board
of Directors of the Company may exchange the Rights (other than
Rights owned by such person or group which will have become
void), in whole or in part, at an exchange ratio of one Common
Share, or one one-thousandth of a Preferred Share (or of a share
of a class or series of the Companys preferred stock
having equivalent rights, preferences and privileges), per Right
(subject to adjustment).

The board of directors may redeem the Rights at
any time before they become exercisable for $.01 per Right
and, if not exercised or redeemed, the Rights will expire on
November 1, 2014.



|   |                      
|-- | ---------------------
|5. | Fixed Price Contracts

The Company realized approximately 40.5% of its
revenue during the year ended December 31, 2004, from fixed
price contracts (percentage of completion as well as fixed price
IT outsourcing and maintenance). Approximately 12.8% of our
revenue during the year ended December 31, 2004 was
realized from fixed price contracts with respect to which we
recognize revenue on a percentage of completion basis. These
contracts expose the Company to collection risk on both billed
and unbilled receivables in the event that contract milestones
are not met or the client does not accept the product as
delivered. In addition, the Company could incur unanticipated
losses if it is necessary to increase its estimated cost to
complete.

45



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


The Companys 2004 financial results were
negatively impacted by approximately $11,192 due to four
significant fixed price contracts which it considers to be
challenged.

Communications with contracting parties during
2004 caused management to re-assess the collectibility of billed
and unbilled receivables for two troubled projects. In both
cases, the Company has been informed that its services would no
longer be required to complete the project prior to its
implementation. As of December 31, 2004, the Company is not
performing work on either of these contracts. As a result, the
Company reduced the related receivables by $5,500 and $350 to
their net realizable value in the first quarter and third
quarter of 2004, respectively. In accordance with the
application of percentage of completion accounting, the Company
reflected the changes as a contract price adjustment, and
accordingly, as a reduction in revenue. In the fourth quarter of
2004, the Company reached a settlement with one of these
customers, resulting in the recovery of $350 of the previously
written-off receivable. This recovery was reflected as revenue
in the fourth quarter.

The Company also determined it was necessary to
increase its estimated cost to complete for three of these
projects due to changes in 2004 in both scope and resource
requirements. The revision in estimates had the effect of
reducing gross margin by $5,700 in 2004.

At December 31, 2004, the Company has $4,000
in billed and unbilled receivables related to a challenged
contract for which the Company is still performing services and
which management believes are collectible.



|   |                                
|-- | -------------------------------
|6. | 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, 2004, 2003 and 2002, the Company repurchased
253,100 shares, 557,200 shares and
1,124,376 shares for cash, at a total cost of $2,408,
$1,485 and $6,583, respectively. Through December 31, 2004,
the Company has repurchased 11,434,976 shares of its common
stock for cash, at a total cost of $141,980. As of
December 31, 2004, 2,565,024 shares remain available
for repurchase under the board of directors authorization at
prices not to exceed $12 per share. The Company has entered
into a Credit Agreement which restricts the Companys
ability to repurchase shares of its common stock without
obtaining prior approval from the Lender.



|   |             
|-- | ------------
|7. | 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

46



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


cash acquired. The aggregate purchase price,
which was funded through available working capital, was
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 | 



|   |         
|-- | --------
|8. | 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.

The following table summarizes the change in the
carrying amount of goodwill for the two years ended
December 31, 2004:

|                                        |  |   |        | 
|--------------------------------------- |  | - | ------ | 
|Goodwill balance at January 1, 2003     |  | $ | 17,053 | 
|Foreign currency translation adjustment |  |   | 1,388  | 
|                                        |  |   |       
|Goodwill balance at December 31, 2003   |  | $ | 18,441 | 
|Foreign currency translation adjustment |  |   | 707    | 
|                                        |  |   |       
|Goodwill balance at December 31, 2004   |  | $ | 19,148 | 
|                                        |  |   |       

The following table summarizes the Companys
goodwill by reportable segment:

|              |  |              |        |  |      |   |        | 
|------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|              |  |             
|              |  | December 31, |       
|              |  |              |       
|              |  | 2004         |        |  | 2003 |  
|              |  |              |        |  |      |  
|Commercial    |  | $            | 3,006  |  |      | $ | 2,807  | 
|Public Sector |  |              | 6,361  |  |      |   | 6,361  | 
|India         |  |              | 2,467  |  |      |   | 2,467  | 
|Europe        |  |              | 7,314  |  |      |   | 6,806  | 
|              |  |              |        |  |      |  
|              |  | $            | 19,148 |  |      | $ | 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, 2004 and 2003. These
evaluations indicated that goodwill was not impaired.



|   |                                    
|-- | -----------------------------------
|9. | Accounts Receivable and Credit Risk

Accounts receivable, which includes both billed
and unbilled receivables, are recorded at the invoiced or
estimated amount and do not bear interest. The allowance for
doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review our
allowance for doubtful

47



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


accounts quarterly. Past due balances over
90 days are reviewed individually for collectibility.
Account balances are charged off against the allowance when we
feel it is probable the receivable will not be recovered.

The activity in the allowance for doubtful
accounts is as follows:

|                              |  |      |        |   |      |   |       |      |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                              |  | 2004 |        |   | 2003 |   |       | 2002 | 
|                              |  |      |        |   |      |   |       |      | 
|Balance  beginning of period |  | $    | 1,789  |   |      | $ | 1,353 |      |  | $ | 1,771  |  
|Provision                     |  |      | 892    |   |      |   | 875   |      |  |   | 815    |  
|Charge-offs                   |  |      | (1,149 | ) |      |   | (439  | )    |  |   | (1,233 | )
|                              |  |      |        |   |      |   |       |      | 
|Balance  end of period       |  | $    | 1,532  |   |      | $ | 1,789 |      |  | $ | 1,353  |  
|                              |  |      |        |   |      |   |       |      | 

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



|    |                       
|--- | ----------------------
|10. | Property and Equipment

As of December 31, 2004 and 2003, property
and equipment consisted of the following:

|                                                             |  |              |         |          |           |   |         |       |  |  |           | 
|------------------------------------------------------------ |  | ------------ | ------- | -------- | --------- | - | ------- | ----- |  |  | --------- | 
|                                                             |  |              |         |         
|                                                             |  | December 31, |         |          |          
|                                                             |  |              |         |          | Estimated |  
|                                                             |  |              |         | Restated |           |   | Useful  |      
|                                                             |  | 2004         |         |          | 2003      |   |         | Lives | 
|                                                             |  |              |         |          |           |   |         |       | 
|Equipment and purchased software                             |  | $            | 52,862  |          |           | $ | 69,653  |       |  |  | 3-5 years | 
|Internally developed computer software and
    related costs |  |              | 10,480  |          |           |   | 10,480  |       |  |  | 5-9 years | 
|Furniture and fixtures                                       |  |              | 7,520   |          |           |   | 7,465   |       |  |  | 5-7 years | 
|Leasehold Improvements                                       |  |              | 8,519   |          |           |   | 8,468   |       |  |  | 5-7 years | 
|Automobiles                                                  |  |              |        |          |           |   | 1,475   |       |  |  | 5 years   | 
|Buildings                                                    |  |              | 1,461   |          |           |   | 1,033   |       |  |  | 31 years  | 
|                                                             |  |              |         |          |           |   |         |       | 
|                                                             |  |              | 80,842  |          |           |   | 98,574  |       |  |  |           | 
|Accumulated depreciation                                     |  |              | (51,080 | )        |           |   | (66,598 | )     |  |  |           | 
|                                                             |  |              |         |          |           |   |         |       | 
|Property and equipment, net                                  |  | $            | 29,762  |          |           | $ | 31,976  |       |  |  |           | 
|                                                             |  |              |         |          |           |   |         |       | 

Depreciation expense totaled $12,702, $12,761,
and $13,147, for the years ended December 31, 2004, 2003
and 2002, respectively.

Subsequent to the original issuance of its
financial statements for the year ended December 31, 2003,
the Company identified $2,561 of adjustments related to property
and equipment, $1,495 of which related to prior periods
requiring the Company to restate its previously filed financial
statements for all periods affected by the charge. The remaining
$1,066 was recorded in the first quarter of 2004, $742 of which
relates to equipment that the Company has been unable to
determine the period or periods during which the equipment left
its possession and $324 of which relates to equipment that
became obsolete in the first quarter of 2004. Of the $1,066, $39
was recorded in cost of revenue and $1,027 was recorded in
selling, general and administrative expense.



|    |                           
|--- | --------------------------
|11. | Related Party Transactions

On September 15, 2004 the Company issued
8,700,000 shares of common stock and
4,000,000 warrants to FIS for $95,700 (See Note 3). In
the second quarter of 2004, the Company entered into a Master
Services Agreement with FIS to provide services over a five year
period. Services provided by the Company to FIS

48



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


during 2004 totaled approximately $5,070. The
balance owed to the Company by FIS at December 31, 2004 was
$2,259. In connection with the acquisition of
2,300,000 shares of the Companys common stock from
the Chief Executive Officer of the Company by FIS (Note 3),
the Company reimbursed the Chief Executive Officer $100 for
certain out-of-pocket fees and expenses. In addition, the
Company reimbursed FIS $1,000 for certain out-of-pocket fees and
expenses related to the recapitalization.

Synova, Inc. and subsidiaries (Synova) are an IT
professional services organization owned by the Companys
Chief Executive Officer. For the year ended December 31,
2004, 2003 and 2002, the Company provided services to Synova
totaling approximately $2,520, $3,175 and $4,643, respectively.
In addition, Synova provided services to the Company, for the
year ended December 31, 2004, 2003 and 2002, totaling
approximately $2,051, $1,609 and $4,126, respectively. The net
balance owed to (from)the Company with Synova at
December 31, 2004 and 2003 was ($206) and $471,
respectively. In addition, under the terms of a note payable
originated in 2000 (originally $8,000), Synova owes the Company
$3,000. The note is due in September 2005, and interest, at a
variable rate (6.5% in the fourth quarter 2004) is paid
quarterly in accordance with its terms.

The Company paid approximately $604, $779 and
$1,111 to Clayton, Dubilier and Rice, Inc. (CDR), a shareholder,
for financial, management advisory, and executive management
services for the years ended December 31, 2004, 2003 and
2002, respectively. During 2004, the Company entered into a
recapitalization transaction (Note 3) in which CDRs
ownership interest in Covansys, including $168,655 of
Convertible Redeemable Preferred Stock, was redeemed and
exchanged for consideration valued at $227,700 including
$177,500 of cash, 2,000,000 shares of Covansys common stock,
$17,500 of subordinated notes and five-year warrants for
5,000,000 shares of common stock at a strike price of $18 per
share. In connection with the recapitalization, the company
reimbursed CDR $500 for certain out-of-pocket fees and expenses.

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, 2004, 2003 and 2002, services
provided by the Company to SIRVA, Inc. totaled approximately
$9,974, $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. No services were provided by SIRVA to the Company
during the year ended December 31, 2004. In December 2004,
the Company signed an agreement with SIRVA under which SIRVA
agreed to pay the Company an additional $1,200 for services
previously provided through December 31, 2004. This
agreement was reflected in 2004 revenue.

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

The Company paid approximately $903 during the
year ended December 31, 2004 for consultation and advisory
services in connection with the recapitalization transaction and
$237 during the year ended December 31, 2002 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 the
Companys Chief Executive Officer. During the years ended
December 31, 2004 and 2003, the Company did not provide any
services to Praja. In addition, Praja did not provide any
services or software to Covansys for the years ended
December 31, 2004 and 2003. During the year ended
December 31, 2002, the Company provided 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 loans to its employees in India
of $1,192 and $1,223 at December 31, 2004 and 2003,
respectively, to assist them with the purchase of automobiles
and houses. The loans, which bear interest at below market
rates, are collateralized by the property and repaid through
payroll deductions.

49



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




|    |                 
|--- | ----------------
|12. | Credit Agreement

On September 7, 2004, the Company entered
into a new Credit Agreement which provides for borrowings or
standby and commercial letters of credit up to $30,000. The
Credit Agreement expires on December 28, 2005 but may be
extended in one-year increments at the request of the Company
and the consent of the lenders. With the prior consent of the
Agent, the Company may request to increase the availability
under the Credit Agreement by up to $10,000 (not to exceed an
aggregate availability of $40,000). Borrowings under the Credit
Agreement are collateralized by all domestic assets of the
Company.

Borrowings under the Credit Agreement bear
interest at LIBOR plus 1.20% to 1.55% or prime minus .50%. The
interest rate matrix is based on the Companys level of
outstanding credit exposure as defined in the Credit Agreement.
Under the Credit Agreement, the Company pays a commitment fee of
..125% per annum on the unused portion of the commitment and a
facility letter of credit fee of .90% to 1.55% per annum based
on the level of outstanding credit exposure as defined in the
Credit Agreement.

The Credit Agreement contains covenants which
include financial covenants which require the Company to
maintain a certain interest coverage ratio, leverage ratio and a
minimum total capitalization. At December 31, 2004, the
Company had no borrowings and $7,808 in outstanding letters of
credit under this Credit Agreement. The Credit Agreement also
includes a covenant which restricts the Companys ability
to repurchase shares of its common stock without the prior
approval of the Lender.



|    |               
|--- | --------------
|13. | 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 $8,305, $12,678, and
$11,993 for the years ended December 31, 2004, 2003 and
2002, respectively. Estimated claims incurred but not reported
were $1,529 and $1,989 as of December 31, 2004 and 2003,
respectively, and are included in other accrued liabilities in
the accompanying consolidated balance sheets.



|    |       
|--- | ------
|14. | Leases

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

Rent expense for the years ended
December 31, 2004, 2003 and 2002 amounted to approximately
$9,284, $8,885, and $9,301, respectively. The future minimum
lease payments required under these operating leases, net of
sublease commitments of $1,799, for the years ending
December 31, are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 8,667  | 
|2006       |  |   | 6,418  | 
|2007       |  |   | 4,836  | 
|2008       |  |   | 3,563  | 
|2009       |  |   | 3,433  | 
|Thereafter |  |   | 17,601 | 
|           |  |   |       
|           |  | $ | 44,518 | 
|           |  |   |       

50



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)




|    |              
|--- | -------------
|15. | 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, 2004
there are 13,247,454 shares of Common Stock authorized for grant
under the Plan. Options under the Plan are granted with exercise
prices equal to the fair value of common stock on the date of
grant. The options vest over periods determined by the
Compensation Committee of the Board of Directors.

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.

During 2004, the Company made amendments to the
stock option grants of two employees upon their termination. In
connection with the amendments, the Company recorded a charge of
$243.

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, 2002        |  |                     | 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           |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options granted                 |  |                     | 1,179  |                  |                |   | 12.07            |             |  |               |                 |  |  | $ | 5.71 | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Options exercised               |  |                     | (171   | )                |                |   | 8.35             |             |  |               |                 |  |  |   |      | 
|Options cancelled and forfeited |  |                     | (725   | )                |                |   | 12.81            |             |  |               |                 |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 
|Balance, December 31, 2004      |  |                     | 3,198  |                  |                | $ | 11.88            |             |  |               | 1,547           |  |  |   |      | 
|                                |  |                     |        |                  |                |   |                  |             |  |               |                 | 

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 2004, 2003 and
2002 grants: risk-free rate of interest of 3.4%, 3.3% and 4.2%
in 2004, 2003 and 2002, respectively, dividend yield of 0%, and
expected lives of 4 to 5 years. A volatility factor of 58%,
86%, and 92% was used in 2004, 2003 and 2002, respectively.

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


A summary of options outstanding at
December 31, 2004, is as follows:

|                        |  |                     |           |  |                     |  |      |          |  |   |                |  |  |          |           |  |  |   |       | 
|----------------------- |  | ------------------- | --------- |  | ------------------- |  | ---- | -------- |  | - | -------------- |  |  | -------- | --------- |  |  | - | ----- | 
|                        |  |                     |           | 
|                        |  | 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 |  | 2004                |           |  | Contractual Life    |  |      | Price    |  |   | 2004           |  |  | Price    |          
|                        |  |                     |           |  |                     |  |      |          |  |   |                |  |  |          |          
|$ 0.01 - 6.00           |  |                     | 598,689   |  |                     |  | 7.95 |          |  | $ | 3.22           |  |  |          | 245,158   |  |  | $ | 3.10  | 
|$ 6.01 - 11.89          |  |                     | 1,362,050 |  |                     |  | 8.67 |          |  |   | 11.04          |  |  |          | 351,326   |  |  |   | 9.95  | 
|$11.90 - 14.99          |  |                     | 665,731   |  |                     |  | 6.52 |          |  |   | 13.42          |  |  |          | 379,231   |  |  |   | 13.68 | 
|$15.00 - 19.34          |  |                     | 137,194   |  |                     |  | 4.13 |          |  |   | 17.01          |  |  |          | 137,194   |  |  |   | 17.01 | 
|$19.35 - 22.75          |  |                     | 377,539   |  |                     |  | 5.04 |          |  |   | 21.27          |  |  |          | 377,539   |  |  |   | 21.27 | 
|$22.76 - 34.58          |  |                     | 56,668    |  |                     |  | 3.18 |          |  |   | 30.55          |  |  |          | 56,668    |  |  |   | 30.55 | 
|                        |  |                     |           |  |                     |  |      |          |  |   |                |  |  |          |          
|                        |  |                     | 3,197,871 |  |                     |  |      |          |  |   |                |  |  |          | 1,547,116 |  |  |   |       | 
|                        |  |                     |           |  |                     |  |      |          |  |   |                |  |  |          |          

16.     Benefit
Plans

Defined Contribution Plan

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 and provides for eligible employees to
contribute up to 50% of their compensation. For the years ended
December 31, 2004, 2003 and 2002, the Company matched 40%
of the employees contribution up to a maximum of 2.4% of
the employees compensation.

Matching contributions made by the Company
amounted to approximately $2,371, $2,541 and $2,880 for the
years ended December 31, 2004, 2003 and 2002, respectively.
The Company may also make an additional contribution, at its
discretion, to the 401(k) plan. No such additional
contributions have been made to date.

Defined Benefit Plan

The Company has a defined benefit plan for its
employees in India. Under the plan, employees who have completed
five years of service are entitled to a lump sum payment upon
retirement equal to one-half month of salary for each year of
service. As of December 31, 2004, the projected benefit
obligation and accumulated benefit obligation totaled $1,350 and
$819, respectively. For purposes of computing its obligations,
the Company assumed a weighted average discount rate, return on
plan assets and increase in compensation of 7%, 7% and 10%,
respectively.

Plan assets, which are invested with the Life
Insurance Corporation of India, totaled $1,031 at
December 31, 2004. Benefits expected to be paid by the plan
in each of the next five years are $84, $101, $121, $146 and
$175, respectively. The aggregate benefits expected to be paid
by the plan during the five years thereafter is $753. The
Companys best estimate of its contribution to the plan in
fiscal 2005 is approximately $450.

Net periodic benefit expense totaled $427, $464
and $304 for the years ended December 31, 2004, 2003 and
2002, respectively.

Other

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

52



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


17.     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, which the Company estimates could
be as much as $60,000, to be permanently invested. Therefore, no
United States income taxes have been provided on these earnings.

The provision for income taxes consists of:

|           |                 |                         |                 |          |       |       |          |        |        |       |   |        |        |     | 
|---------- | --------------- | ----------------------- | --------------- | -------- | ----- | ----- | -------- | ------ | ------ | ----- | - | ------ | ------ | --- | 
|           |                 |                        
|           |                 | Year Ended December 31, |                
|           |                 |                         |                
|           |                 |                         |                 | Restated |       |       | Restated |       
|           |                 | 2004                    |                 |          | 2003  |       |          | 2002   |       
|           |                 |                         |                 |          |       |       |          |        |       
|Current   |                 |                         |                 |          |       |       |          |        |        |       |   |       
|           | Federal         |                         | $               | 1,173    |       |       | $        | (4,452 | )      |       | $ |       |       
|           | State and local |                         |                 | 531      |       |       |          | 1,143  |        |       |   |       |       
|           | Foreign         |                         |                 | 2,011    |       |       |          | 2,225  |        |       |   | 2,043  |       
|           |                 |                         |                 |          |       |       |          |        |       
|           |                 | Total current           |                 |          | 3,715 |       |          |        | (1,084 | )     |   |        | 2,043  |    
|Deferred  |                 |                         |                 |          |       |       |          |        |        |       |   |       
|           | Federal         |                         |                 | 238      |       |       |          | 2,018  |        |       |   | (1,117 | )     
|           | State and local |                         |                 | 414      |       |       |          | 568    |        |       |   | (40    | )     
|           | Foreign         |                         |                 | 118      |       |       |          | (124   | )      |       |   |       |       
|           |                 |                         |                 |          |       |       |          |        |       
|           |                 | Total deferred          |                 |          | 770   |       |          |        | 2,462  |       |   |        | (1,157 | )  
|           |                 |                         |                 |          |       |       |          |        |       
|           |                 |                         | Total provision |          | $     | 4,485 |          |        | $      | 1,378 |   |        | $      | 886 | 
|           |                 |                         |                 |          |       |       |          |        |       

For 2004 and 2003, $9,595 and $3,395,
respectively, of income from operations before income taxes was
from U.S. sources, and $12,394 and $8,102, 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 |     
|                       |                                                            | 2004                    |    |          | 2003 |  |          | 2002 |  
|                       |                                                            |                         |    |          |      |  |          |      |  
|Federal statutory rate |                                                            |                         | 35 | %        |      |  | 35       | %    |   |  | 35 | %  
|Effect of             |                                                            |                         |    |          |      |  |          |      |   |  |    |    
|                       | Tax effect on foreign earnings not subject to
    U.S. tax |                         |    | (10      | )    |  |          | (6   | ) |  |    | (30 | )
|                       | Reversal of valuation allowance                            |                         |    | (10      | )    |  |          |     |   |  |    |    |  
|                       | Foreign tax credits                                        |                         |    |         |      |  |          | (1   | ) |  |    | (9  | )
|                       | Nondeductible expenses                                     |                         |    | 1        |      |  |          | 2    |   |  |    | 8   |  
|                       | State taxes, net of federal tax effect                     |                         |    | 2        |      |  |          | 10   |   |  |    | 1   |  
|                       | Taxes on distributions from foreign subsidiaries           |                         |    | 2        |      |  |          | 5    |   |  |    | 22  |  
|                       | Adjustment of tax contingency reserves                     |                         |    |         |      |  |          | (35  | ) |  |    |    |  
|                       | Other, net                                                 |                         |    |         |      |  |          | 2    |   |  |    | (8  | )
|                       |                                                            |                         |    |          |      |  |          |      |  
|                       |                                                            |                         | 20 | %        |      |  | 12       | %    |   |  | 19 | %  
|                       |                                                            |                         |    |          |      |  |          |      |  

53



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


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 |       
|                           |                                                                       | 2004                            |        |          | 2003   | 
|                           |                                                                       |                                 |        |          |        | 
|Deferred tax assets       |                                                                       |                                 |        |          |        |  |        |       
|                           | Accrued expenses                                                      |                                 | $      | 3,165    |        |  | $      | 4,081  |       
|                           | Allowance for doubtful accounts                                       |                                 |        | 612      |        |  |        | 714    |       
|                           | Net operating loss carryforwards                                      |                                 |        | 7,195    |        |  |        | 10,954 |       
|                           | Restructuring reserves                                                |                                 |        | 870      |        |  |        | 609    |       
|                           | Other                                                                 |                                 |        | 3,411    |        |  |        | 2,894  |       
|                           |                                                                       |                                 |        |          |        | 
|                           |                                                                       | Total gross deferred tax assets |        |          | 15,253 |  |        |        | 19,252 | 
|Deferred tax liabilities  |                                                                       |                                 |        |          |        |  |        |       
|                           | Property and equipment and capitalized software
    development costs |                                 |        | (2,375   | )      |  |        | (2,581 | )     
|                           |                                                                       |                                 |        |          |        | 
|                           | Net deferred tax assets before valuation allowance                    |                                 |        | 12,878   |        |  |        | 16,671 |       
|Valuation allowance        |                                                                       |                                 | (1,965 | )        |        |  | (4,255 | )     
|                           | Net deferred tax assets                                               |                                 | $      | 10,913   |        |  | $      | 12,416 |       
|                           |                                                                       |                                 |        |          |        | 

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 net
deferred tax assets will be realized through future taxable
income. The Company utilized domestic net operating loss
carryforwards during 2004 and 2003. The effective tax rate was
20.4% for the full year 2004. On a quarterly basis, management
assesses whether it remains more likely than not that the net
deferred tax assets will be realized. The valuation allowance
recorded relates to state net operating losses that begin to
expire in 2005. During 2004, the Company reversed $2,236 of
valuation reserves related to federal net operating losses that
were deemed to be no longer required based on managements
estimates of future profitability of the Company.

The Company has six business units (four in 2003)
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 was 30% and expired during the
Indian tax year ended March 31, 2004.

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 tax benefit for this tax
holiday was approximately $3,384 for the year ended
December 31, 2004.

The Company had available U.S. Federal net
operating loss carryforwards of approximately $9,118 as of
December 31, 2004. The majority of the net operating loss
carryforward was acquired in an acquisition and its utilization
is limited to $688 per year. This net operating loss
carryforward will expire in 2017.

18.     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

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


performance based primarily on its revenue 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 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. See realignment discussion below.                                                                                                                                                      

The accounting policies of the operating segments
are the same as those described in the summary of significant
accounting policies in Note 1.

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 profit accruing to North
America or Europe where the end customer is located.

55



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


Segment information is presented below. Revenue
and income (loss) from operations by segment is as follows:

|                              |                                          |                         |         |          |         |   |          |         |         |   |         |         |         |  
|----------------------------- | ---------------------------------------- | ----------------------- | ------- | -------- | ------- | - | -------- | ------- | ------- | - | ------- | ------- | ------- | -
|                              |                                          |                        
|                              |                                          | Year Ended December 31, |        
|                              |                                          |                         |        
|                              |                                          |                         |         | Restated |         |   | Restated |        
|                              |                                          | 2004                    |         |          | 2003    |   |          | 2002    |        
|                              |                                          |                         |         |          |         |   |          |         |        
|Revenue                      |                                          |                         |         |          |         |   |          |         |         |   |         |        
|                              | Commercial                               |                         | $       | 242,941  |         |   | $        | 241,202 |         |   | $       | 223,272 |        
|                              |                                          | Less intersegment       |         |          | (651    | ) |          |         | (557    | ) |         |         |        |  
|                              |                                          |                         |         |          |         |   |          |         |        
|                              |                                          |                         | 242,290 |          |         |   | 240,645  |         |         |   | 223,272 |        
|                              | Public Sector                            |                         |         | 91,199   |         |   |          | 112,913 |         |   |         | 130,591 |        
|                             
|                              | India/Asia                               |                         |         | 106,140  |         |   |          | 75,050  |         |   |         | 60,613  |        
|                              |                                          | Less intersegment       |         |          | (77,765 | ) |          |         | (61,601 | ) |         |         | (47,949 | )
|                              |                                          |                         |         |          |         |   |          |         |        
|                              |                                          |                         | 28,375  |          |         |   | 13,449   |         |         |   | 12,664  |        
|                             
|                              | Europe                                   |                         |         | 14,434   |         |   |          | 15,586  |         |   |         | 18,260  |        
|                              |                                          | Less intersegment       |         |          | (2,577  | ) |          |         | (3,686  | ) |         |         | (2,068  | )
|                              |                                          |                         |         |          |         |   |          |         |        
|                              |                                          |                         | 11,857  |          |         |   | 11,900   |         |         |   | 16,192  |        
|                              | Other                                    |                         |         | 652      |         |   |          | (277    | )       |   |         | 334     |        
|                              |                                          |                         |         |          |         |   |          |         |        
|                              |                                          | $                       | 374,373 |          |         | $ | 378,630  |         |         | $ | 383,053 |        
|                              |                                          |                         |         |          |         |   |          |         |        
|Income (Loss) from Operations |                                          |                         |         |          |         |   |          |         |         |   |         |        
|                              | Commercial                               |                         | $       | 51,809   |         |   | $        | 38,409  |         |   | $       | 6,146   |        
|                              | Public Sector                            |                         |         | (2,090   | )       |   |          | 4,372   |         |   |         | 19,245  |        
|                              | India/Asia                               |                         |         | 10,445   |         |   |          | 4,902   |         |   |         | 7,596   |        
|                              | Europe                                   |                         |         | 482      |         |   |          | 742     |         |   |         | (665    | )      
|                              | Other                                    |                         |         | (39,729  | )       |   |          | (38,709 | )       |   |         | (31,653 | )      
|                              |                                          |                         |         |          |         |   |          |         |        
|                              |                                          |                         | 20,917  |          |         |   | 9,716    |         |         |   | 669     |        
|Interest Expense              |                                          |                         | (245    | )        |         |   |         |         |         |   |        |        
|Other Income, net             |                                          |                         | 1,317   |          |         |   | 1,781    |         |         |   | 4,110   |        
|                              |                                          |                         |         |          |         |   |          |         |        
|                              | Income Before Provision For Income Taxes |                         | $       | 21,989   |         |   | $        | 11,497  |         |   | $       | 4,779   |        
|                              |                                          |                         |         |          |         |   |          |         |        

56



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


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, |        
|          |               |                         |        
|          |               | 2004                    |         |         | 2003    |   |         | 2002    |        
|          |               |                         |         |         |         |   |         |         |        
|Revenue  |               |                         |         |         |         |   |         |         |         |   |         |        
|          | North America |                         | $       | 326,296 |         |   | $       | 348,005 |         |   | $       | 351,273 |        
|         
|          | India/Asia    |                         |         | 106,140 |         |   |         | 51,431  |         |   |         | 45,250  |        
|          |               | Less intersegment       |         |         | (77,765 | ) |         |         | (37,982 | ) |         |         | (32,586 | )
|          |               |                         |         |         |         |   |         |         |        
|          |               |                         | 28,375  |         |         |   | 13,449  |         |         |   | 12,664  |        
|          | Europe        |                         |         | 22,929  |         |   |         | 21,418  |         |   |         | 21,184  |        
|          |               | Less intersegment       |         |         | (3,227  | ) |         |         | (4,242  | ) |         |         | (2,068  | )
|          |               |                         |         |         |         |   |         |         |        
|          |               |                         | 19,702  |         |         |   | 17,176  |         |         |   | 19,116  |        
|          |               |                         |         |         |         |   |         |         |        
|          |               | $                       | 374,373 |         |         | $ | 378,630 |         |         | $ | 383,053 |        
|          |               |                         |         |         |         |   |         |         |        

|                             |                     |              |        |          |      |   |        |        |  |  |  |  | 
|---------------------------- | ------------------- | ------------ | ------ | -------- | ---- | - | ------ | ------ |  |  |  |  | 
|                             |                     |              |        |         
|                             |                     | December 31, |        |          |     
|                             |                     |              |        |          |     
|                             |                     |              |        | Restated |      |   |       
|                             |                     | 2004         |        |          | 2003 |   |        |       
|                             |                     |              |        |          |      |   |        |       
|Tangible Long-Lived Assets  |                     |              |        |          |      |   |        |        |  |  |  | 
|                             | North America       |              | $      | 21,522   |      |   | $      | 28,741 |  |  |  |  | 
|                             | India/Asia          |              |        | 16,167   |      |   |        | 11,398 |  |  |  |  | 
|                             | Other international |              |        | 173      |      |   |        | 191    |  |  |  |  | 
|                             |                     |              |        |          |      |   |        |        | 
|                             |                     | $            | 37,862 |          |      | $ | 40,330 |        |  |  |  | 
|                             |                     |              |        |          |      |   |        |        | 

19.     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, 2004, we had
12 performance bonds outstanding and posted with clients, with
an aggregate total value of approximately $37,604 to secure
performance of contractual obligations with our clients. Eleven
of these performance bonds are secured by letters of credit
totaling $7,808. 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.

20.     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

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


delivery employees) coming from costs of revenue
with the remaining coming from selling, general and
administrative.

During 2004, the Company recorded $1,696 of lease
termination costs and $1,252 related to severance. Amounts
related to lease terminations will be paid out through 2011.
Amounts related to severance will be paid through 2005.

During 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.

During 2002, the Company recorded restructuring
and other costs of $1,354 related to the termination of 30
employees, including employees from executive management and
certain business units.

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

|                             |  |           |        |       |              |   |        |       |  |   |       |   |  |   |        |  
|---------------------------- |  | --------- | ------ | ----- | ------------ | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                             |  |           |        | Lease |              |   |        |       | 
|                             |  | Severance |        |       | Terminations |   |        | Other |  |   | Total |  
|                             |  |           |        |       |              |   |        |       |  |   |       |  
|Balance January 1, 2002      |  | $         | 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  |  
|Expense                      |  |           | 1,252  |       |              |   | 1,696  |       |  |   |      |   |  |   | 2,948  |  
|Payments and other           |  |           | (1,556 | )     |              |   | (1,190 | )     |  |   |      |   |  |   | (2,746 | )
|                             |  |           |        |       |              |   |        |       |  |   |       |  
|Balance at December 31, 2004 |  | $         | 67     |       |              | $ | 2,174  |       |  | $ |      |   |  | $ | 2,241  |  
|                             |  |           |        |       |              |   |        |       |  |   |       |  

Included in the balance at December 31, 2004
is $924 of lease termination costs related to terminations in
years prior to 2004. Such amounts will be paid through June,
2011.

21.     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.

22.     Subsequent
Event

During the fourth quarter of 2004, the Company
continued to perform services for one of its significant
customers after it had reached the authorized spending limit on
a time and material contract. While the Company believed it
would be paid for these services, management concluded that it
did not have a legally enforceable contractual right to the
revenue as of December 31, 2004. As a result, in accordance
with the Companys revenue recognition policies, and Staff
Accounting Bulletin 104, the Company recognized the costs
of providing the services, but did not recognize any revenue for
these services in 2004. Gross profit in the Commercial segment
was negatively impacted in the fourth quarter by approximately
$3,500. In 2005, the

58



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


Company received a contract which covered these
services and will recognize the revenue in the first quarter of
2005, with a corresponding increase in gross profit.

23.     Supplemental
Quarterly Information (Unaudited)

|                                                              |  |               |        |   |          |   |        |              |  |   |             |   |  |   |        | 
|------------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | 
|                                                              |  |              
|                                                              |  | Quarter Ended |       
|                                                              |  |               |       
|                                                              |  | Restated      |        |   | Restated |   |        | Restated     |  |   |            
|2004                                                          |  | March 31      |        |   | June 30  |   |        | September 30 |  |   | December 31 |  
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Revenue(c)                                                    |  | $             | 84,892 |   |          | $ | 94,109 |              |  | $ | 96,201      |   |  | $ | 99,171 | 
|Gross profit(c)                                               |  |               | 14,891 |   |          |   | 25,263 |              |  |   | 26,116      |   |  |   | 26,989 | 
|Income (loss) from operations                                 |  |               | (4,373 | ) |          |   | 5,678  |              |  |   | 9,185       |   |  |   | 10,427 | 
|Net income (loss)                                             |  |               | (2,890 | ) |          |   | 4,603  |              |  |   | 6,567       |   |  |   | 9,224  | 
|Convertible redeemable preferred dividends                    |  |               | 1,130  |   |          |   | 1,139  |              |  |   | 952         |   |  |   |       | 
|Redemption of convertible redeemable preferred
    stock      |  |               |       |   |          |   |       |              |  |   | 28,674      |   |  |   |       | 
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Net income (loss) available for shareholders                  |  |               | (4,020 | ) |          |   | 3,464  |              |  |   | (23,059     | ) |  |   | 9,224  | 
|Amounts allocated to participating preferred
    shareholders |  |               |       |   |          |   | (847   | )            |  |   |            |   |  |   |       | 
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Net income (loss) available to common shareholders            |  | $             | (4,020 | ) |          | $ | 2,617  |              |  | $ | (23,059     | ) |  | $ | 9,224  | 
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Basic net income (loss) per share                             |  | $             | (0.15  | ) |          | $ | 0.10   |              |  | $ | (0.81       | ) |  | $ | 0.25   | 
|Diluted net income (loss) per share                           |  | $             | (0.15  | ) |          | $ | 0.10   |              |  | $ | (0.81       | ) |  | $ | 0.24   | 

|                                                              |  |               |        |   |               |   |        |               |  |   |         |  
|------------------------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------- | -
|                                                              |  |              
|                                                              |  | Quarter Ended |       
|                                                              |  |               |       
|                                                              |  | As Previously |        |   | As Previously |   |        | As Previously | 
|                                                              |  | Reported      |        |   | Reported      |   |        | Reported      | 
|2004                                                          |  | March 31      |        |   | June 30       |   |        | September 30  | 
|                                                              |  |               |        |   |               |   |        |               | 
|Revenue(c)                                                    |  | $             | 84,892 |   |               | $ | 94,109 |               |  | $ | 96,201  |  
|Gross Profit(c)                                               |  |               | 14,891 |   |               |   | 25,263 |               |  |   | 26,116  |  
|Income (loss) from operations                                 |  |               | (4,471 | ) |               |   | 5,578  |               |  |   | 9,081   |  
|Net income (loss)                                             |  |               | (2,948 | ) |               |   | 4,542  |               |  |   | 6,508   |  
|Convertible redeemable preferred dividends                    |  |               | 1,130  |   |               |   | 1,139  |               |  |   | 952     |  
|Redemption of convertible redeemable preferred
    stock      |  |               |       |   |               |   |       |               |  |   | 28,674  |  
|                                                              |  |               |        |   |               |   |        |               | 
|Net income (loss) available for shareholders                  |  |               | (4,078 | ) |               |   | 3,403  |               |  |   | (23,118 | )
|Amounts allocated to participating preferred
    shareholders |  |               |       |   |               |   | (832   | )             |  |   |        |  
|                                                              |  |               |        |   |               |   |        |               | 
|Net income (loss) available to common shareholders            |  | $             | (4,078 | ) |               | $ | 2,571  |               |  | $ | (23,118 | )
|                                                              |  |               |        |   |               |   |        |               | 
|Basic net income (loss) per share                             |  | $             | (0.15  | ) |               | $ | 0.10   |               |  | $ | (0.81   | )
|Diluted net income (loss) per share                           |  | $             | (0.15  | ) |               | $ | 0.09   |               |  | $ | (0.81   | )

59



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
data)


|                                                              |  |               |        |   |          |   |        |              |  |   |             |   |  |   |        |  
|------------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                              |  |              
|                                                              |  | Quarter Ended |       
|                                                              |  |               |       
|                                                              |  | Restated      |        |   | Restated |   |        | Restated     |  |   | Restated    |  
|2003                                                          |  | March 31      |        |   | June 30  |   |        | September 30 |  |   | December 31 |  
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Revenue(c)                                                    |  | $             | 96,559 |   |          | $ | 96,240 |              |  | $ | 94,355      |   |  | $ | 91,476 |  
|Gross Profit(c)                                               |  |               | 21,782 |   |          |   | 22,629 |              |  |   | 25,837      |   |  |   | 22,199 |  
|Income (loss) from operations                                 |  |               | (239   | ) |          |   | (219   | )            |  |   | 6,547       |   |  |   | 3,627  |  
|Net income (loss)                                             |  |               | 159    |   |          |   | (36    | )            |  |   | 4,080       |   |  |   | 5,916  |  
|Convertible redeemable preferred dividends                    |  |               | 1,095  |   |          |   | 1,104  |              |  |   | 1,113       |   |  |   | 1,121  |  
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Net income (loss)available for shareholders                   |  |               | (936   | ) |          |   | (1,140 | )            |  |   | 2,967       |   |  |   | 4,795  |  
|Amounts allocated to participating preferred
    shareholders |  |               |       |   |          |   |       |              |  |   | (721        | ) |  |   | (1,157 | )
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Net income (loss) available to common shareholders            |  | $             | (936   | ) |          | $ | (1,140 | )            |  | $ | 2,246       |   |  | $ | 3,638  |  
|                                                              |  |               |        |   |          |   |        |              |  |   |             |  
|Basic net income (loss) per share                             |  | $             | (0.03  | ) |          | $ | (0.04  | )            |  | $ | 0.08        |   |  | $ | 0.14   |  
|Diluted net income (loss) per share                           |  | $             | (0.03  | ) |          | $ | (0.04  | )            |  | $ | 0.08        |   |  | $ | 0.13   |  

|                                                              |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |  
|------------------------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                              |  |              
|                                                              |  | Quarter Ended |       
|                                                              |  |               |       
|                                                              |  | As Previously |        |   | As Previously |   |        | As Previously |  |   | As Previously |  
|                                                              |  | Reported      |        |   | Reported      |   |        | Reported      |  |   | Reported      |  
|2003                                                          |  | March 31      |        |   | June 30       |   |        | September 30  |  |   | December 31   |  
|                                                              |  |               |        |   |               |   |        |               |  |   |               |  
|Revenue(c)                                                    |  | $             | 96,559 |   |               | $ | 96,240 |               |  | $ | 94,355        |   |  | $ | 91,476 |  
|Gross Profit(c)                                               |  |               | 21,782 |   |               |   | 22,629 |               |  |   | 25,837        |   |  |   | 22,199 |  
|Income (loss) from operations                                 |  |               | (206   | ) |               |   | (186   | )             |  |   | 6,580         |   |  |   | 3,660  |  
|Net income (loss)                                             |  |               | 179    |   |               |   | (16    | )             |  |   | 4,100         |   |  |   | 5,586  |  
|Convertible redeemable preferred dividends                    |  |               | 1,095  |   |               |   | 1,104  |               |  |   | 1,113         |   |  |   | 1,121  |  
|                                                              |  |               |        |   |               |   |        |               |  |   |               |  
|Net income (loss) available for shareholders                  |  |               | (916   | ) |               |   | (1,120 | )             |  |   | 2,987         |   |  |   | 4,465  |  
|Amounts allocated to participating preferred
    shareholders |  |               |       |   |               |   |       |               |  |   | (726          | ) |  |   | (1,078 | )
|                                                              |  |               |        |   |               |   |        |               |  |   |               |  
|Net income (loss) available to common shareholders            |  |               | (916   | ) |               |   | (1,120 | )             |  | $ | 2,261         |   |  | $ | 3,387  |  
|                                                              |  |               |        |   |               |   |        |               |  |   |               |  
|Basic net income (loss) per share                             |  | $             | (0.03  | ) |               | $ | (0.04  | )             |  | $ | 0.08          |   |  | $ | 0.13   |  
|Diluted net income (loss) per share                           |  | $             | (0.03  | ) |               | $ | (0.04  | )             |  | $ | 0.08          |   |  | $ | 0.12   |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The tax provision for the quarter and year ended
    December 31, 2003 included a $4,300 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) | Revenue for the quarter ended December 31,
    2004, includes $1,200 in connection with an agreement signed
    with SIRVA related to services previously provided. Gross profit
    for the quarter ended December 31, 2004, includes the cost
    associated with services performed for one of the Companys
    significant customers after it had reached the authorized
    spending limit on a time and material contract. In accordance
    with Staff Accounting Bulletin 104, the Company did not
    recognize the revenue for these services in 2004 and gross
    profit was negatively impacted by approximately $3,500. In 2005,
    the Company received a contract which covered these services and
    will recognize the revenue in the first quarter of 2005, with a
    corresponding increase in gross profit.
|   
|(d) | The tax provision for the quarter and year ended
    December 31, 2004 included a reversal of $2,236 of
    valuation allowances related to federal net operating losses
    that were deemed to be no longer required based on
    managements estimates of future profitability of the
    Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

60



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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, 2004 the Companys Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were not
effective for the reasons discussed below.

MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

The management of Covansys Corporation (the
Company) is responsible for establishing and
maintaining adequate internal control over financial reporting.
Our Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. Internal control
over financial reporting includes policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company,
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.

The Companys management assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004. In making this
assessment, the Companys management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.

Managements assessment included an
evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process
documentation, accounting policies and our overall control
environment. This assessment is supported by testing and
monitoring performed by our Internal Audit organization.

A material weakness is a control deficiency, or
combination of control deficiencies, that results in a more than
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
We identified the following material weaknesses in our
assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004:



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The Company did not maintain effective controls
    over the validity and accuracy of contract revenue and the
    related billed and unbilled accounts receivable. Specifically,
    the Company did not maintain effective controls over obtaining a
    signed contract or determining that a contract amendment was
    authorized at the time revenue is recognized; and that all
    original or amended contract terms (primarily customer
    acceptance conditions and fee limitation clauses) are accurately
    reflected within the consolidated financial statements. This
    control deficiency resulted in the Company recording a material
    adjustment to the fourth quarter 2004 financial statements.
    Additionally, this control deficiency could result in a
    misstatement to the revenue accounts that would result in a
    material misstatement to annual or interim financial statements
    that would not be prevented or detected.
|
| | 2. | The Company did not maintain effective controls
    over the completeness and accuracy of revenue accounted for
    under the percentage-of-completion method and the associated
    revenue in excess of billings balance sheet account. The Company
    accounts for a portion of its fixed price contracts using the
    percentage-of-completion method. Under this accounting method,
    revenue to be recognized is                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dependent upon, among other things,
    managements ability to reasonably estimate the costs to
    complete the contract. The Companys
    percentage-of-completion accounting control procedures were not
    designed to require the use of a consistent risk-adjusted method
    to estimate the costs to complete. Additionally, the
    Companys controls over cost to complete estimates were not
    operating effectively because project management and accounting
    personnel did not consistently document manual adjustments to
    cost estimates and percentage-of-completion accounting records
    and they did not in limited instances provide written
    certifications attesting to the accuracy of their cost to
    complete estimates. The control deficiency did not result in any
    adjustments to the 2004 annual or interim consolidated financial
    statements. However, this control deficiency could result in a
    misstatement to the revenue and revenue in excess of billings
    accounts that would result in a material misstatement to annual
    or interim financial statements that would not be prevented or
    detected.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | The Company did not maintain effective controls
    over the completeness and accuracy of the Companys net
    property and equipment balance and the related depreciation
    expense. Specifically, substantially all of the Companys
    property and equipment records are maintained using databases
    and spreadsheets, which are not integrated with the
    Companys underlying information technology system and do
    not have adequate controls to ensure that assets, asset values,
    capitalization dates and useful lives are complete, accurate and
    recorded on a timely basis. Additionally, reconciliation
    controls over inter-company fixed asset transactions were not
    operating effectively. This control deficiency resulted in the
    restatement of the Companys consolidated financial
    statements for 2003, 2002, and 2001 and for each of the quarters
    for the two years in the period ended December 31, 2003,
    and in the Company recording an adjustment to the fourth quarter
    2004 financial statements. Additionally, this control deficiency
    could result in a misstatement to the property and equipment and
    related depreciation expense accounts that would result in a
    material misstatement to annual or interim financial statements
    that would not be prevented or detected.
|
| | 4. | The Company did not maintain effective controls
    over the accuracy of the Companys current tax payable
    account, the deferred tax asset and liability balances,
    valuation allowance and income tax expense. Specifically, the
    Company did not have controls in place to ensure that the
    Company had sufficient supporting documentation for these income
    tax balances and that its income tax accounts were periodically
    reconciled to supporting documentation. This control deficiency
    resulted in the restatement of the Companys consolidated
    financial statements for 2003, 2002, and 2001, for each of the
    quarters for the two years in the period ended December 31,
    2003 and for the first, second and third quarters for 2004, and
    in the Company recording an audit adjustment to the fourth
    quarter 2004 financial statements. Additionally, this control
    deficiency could result in a misstatement to the current tax
    payable account, the deferred tax asset and liability balances,
    valuation allowance and to income tax expense that would result
    in a material misstatement to the annual or interim financial
    statements that would not be prevented or detected.                                                                                                           
|
| | 5. | The Company did not maintain effective controls
    over the completeness and accuracy of its accrued lease
    liability and related lease expense. Specifically, the Company
    did not have controls in place to ensure the accounting
    implications for new or amended leases were consistently
    evaluated and reviewed by management. Additionally, the
    Companys controls over its selection and monitoring of its
    accounting policy for lease accounting were ineffective. The
    Company incorrectly applied generally accepted accounting
    principles to lease agreements with step increases in rental
    payments resulting in an error in the accrued lease liability
    and related lease expense. This control deficiency resulted in
    the restatement of the Companys consolidated financial
    statement for 2003, 2002 and 2001, for each of the quarters for
    the two years in the period ended December 31, 2003 and for
    the first, second and third quarters for 2004. Additionally,
    this control deficiency could result in a misstatement to the
    accrued lease liability and lease expense that would result in a
    material misstatement to annual or interim financial statements
    that would not be prevented or detected.                                                                      

Because of these material weaknesses, the
Companys management have concluded that the Company did
not maintain effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework.

62



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##### Table of Contents



Managements assessment of the effectiveness
of the Companys internal control over financial reporting
as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears under
Item 8.

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING

AND MANAGEMENTS REMEDIATION
INITIATIVES


The Companys internal control over
financial reporting is the responsibility of the Chief Executive
Officer and the Chief Financial Officer. To fulfill this
responsibility, management has continued to enhance internal
controls and increase the oversight over those affected
controls. Management has also taken corrective action with
regard to identified significant deficiencies and material
weaknesses.

As a result of managements evaluation of
internal control over financial reporting, certain material
weaknesses were identified as set forth in Managements
Report on Internal Control Over Financial Reporting. Management
is currently addressing these material weaknesses through a
number of initiatives including those specifically set forth
below.

Revenue Contract Accounting:In the first quarter of 2005, the
Company engaged in a thorough process to organize and catalogue
its customer contracts in preparation of the integration of its
contract information into a module of its ERP system. This
process confirmed that measures implemented by the Company at
the end of the second quarter of 2004 had strengthened the
Companys revenue recognition processes by requiring that
contract documentation for new engagements be presented to
and/or confirmed by the Legal Department prior to recognition of
revenue for that contract. There are still improvements
required, however, to strengthen the design of the
Companys process to capture and validate the contractual
terms which impact the Companys recognition of revenue. In
conjunction with the contract organization process and in
preparation of the year-end consolidated financial statements,
management reviewed substantially all of its contracts that
contain a fee limitation cap to confirm that revenue recognized
did not exceed the fee limitation cap. It was through this
process that the revenue adjustment associated with the contract
disclosed in Note 22 of the consolidated financial
statements, was identified and recorded during the fourth
quarter closing process. The Company is continuing to develop
procedures to improve the flow of information between its legal,
finance and field operations, which procedures will include:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Quarterly verification that contractual
    documentation exists to support revenue recognized in the
    applicable reporting period;                                    
|
| |  | Integration of the Companys contract
    repository into a module of the Companys ERP system
    (anticipated to occur no later than the third quarter of 2005);
    and
|
| |  | Enhancement of the Companys ERP system to
    track fee limitation caps.                                                                                                 

Percentage of Completion Accounting:In November 2003, the Company
disclosed a material weakness in its internal controls related
to 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 controls of fixed price contracts and to enhance
the processes supporting application of the
percentage-of-completion method of accounting for its fixed
price contracts. As of December 31, 2004, however,
management concluded that the material weakness had not been
adequately remediated. Specifically, management determined that
the initiatives encompassed in that plan had not been fully
implemented and were not yet operating effectively. Since the
material weakness was identified in 2003, management has
implemented the following:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Standardization and continuous improvement of the
    use of three primary estimating tools;

63



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##### Table of Contents





| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and
|
| |  | Monthly certification by individual project
    managers attesting to the appropriateness of their monthly
    estimate-to-complete submissions.                                                       

The Company believes the foregoing measures
strengthened its accounting policies with regard to
percentage-of-completion accounting, but that such measures did
not include a consistent risk-adjusted methodology for project
managers to use in their estimates of costs to complete on
percentage of completion projects. The Company will continue to
strengthen its processes in this area in 2005 through:



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Creation and consistent application of a
    risk-adjusted methodology to identify the appropriate level of
    contingency for percentage of completion projects and a
    framework for project managers to use in calculating their
    estimates of costs to complete;
|
| |  | Continued executive oversight of significant
    projects including weekly reviews by executive management of
    projects that include new or high risk technology
    implementations or that have significantly deviated from the
    project plan;                    
|
| |  | Increased monitoring of projects by the Project
    Management Office and Internal Audit Department;                                                                                                                                                                      
|
| |  | Creation of more detailed procedural
    documentation and additional training to assist the
    Companys employees in their reporting responsibilities; and                                                                                                             
|
| |  | Automation and integration of the Companys
    various systems and spreadsheets to provide greater transparency
    and real time information about the various projects and
    contracts under which the Company operates.                                             

Net Property and Equipment:At the conclusion of a physical
inventory process undertaken by the Company 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. This process
resulted in a restatement of previously issued financial
statements for 2003, 2002, and 2001 and in the Company reporting
a material weakness related to the Companys recording and
tracking of fixed assets in its Form 10-Q for the quarter
ended March 31, 2004. Additionally, as discussed in
Note 2 of the consolidated financial statements, as part of
the year-end closing process, management discovered that a
consolidating entry to properly record inter-company property
and equipment transactions on the balance sheet at
December 31, 2003, and at quarterly balance sheets through
September 30, 2004, was classified within accumulated
comprehensive income in error. This balance sheet
misclassification has been corrected in the financial statements
in Item 8 for the current and prior period. Since June
2004, the Company has successfully accomplished the following
items of its plan to strengthen accounting for its fixed assets:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Development of a policy and procedure manual
    regarding the recording, tracking and depreciation of fixed
    assets;                                                                                                          
|
| |  | Addition of a new resource in the information
    technology staff who is responsible for equipment tracking; and                                                                                                                 
|
| |  | Periodic physical inventories of fixed assets
    including one completed at year-end 2004 which resulted in no
    material subsequent adjustments. Management will continue the
    periodic physical inventory process in 2005.

The Company anticipates implementing a
transaction level fixed asset module within the Companys
ERP system to integrate the tracking of its fixed assets no
later than the second quarter 2005.

Income Taxes:As
part of its 2004 year-end closing process, the Company
identified errors (disclosed in Note 2 of the consolidated
financial statements) when reconciling its cumulative temporary
difference and

64



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##### Table of Contents



contingent tax liabilities to recorded amounts.
Management will strengthen controls over this area in 2005 by
enlisting additional tax expertise either within the Company or
through more effective use and oversight of third party tax
service providers.


Leases (Step-Rents):As part of its 2004 year-end
closing process, it was concluded that straight-line rent
expense for the Companys headquarters had been incorrectly
accrued and that the related lease expense for prior periods was
incorrect. This error was determined to be a material weakness
in internal controls and resulted in a restatement of prior
period financial statements. The Company has recently
implemented controls to reduce the risk of such an error in the
future through implementation of a comprehensive lease review
checklist, review of each significant lease for proper
accounting treatment by the Companys controller, and
limiting execution of all property leases by the Companys
Chief Financial Officer or authorized designee.

65



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##### Table of Contents






PART III





|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information required by this item is included
in our Proxy Statement for our 2005 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 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), David H. Wasserman 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 2005 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 Chief Financial Officer.

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 2005 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 2005 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 2005 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 2005 Annual Meeting of
Shareholders under the caption Principal Accountants Fees and
Services and is incorporated herein by reference.

66



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##### Table of Contents






PART IV





|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits, Financial Statement
    Schedules

(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                                                                                |  |      | 27 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003 (restated)                                                                |  |      | 30 | 
|Consolidated Statements of Operations for each of
    the years ended December 31, 2004, 2003 (restated) and 2002
    (restated)           |  |      | 31 | 
|Consolidated Statements of Shareholders
    Equity for each of the years ended December 31, 2004, 2003
    (restated) and 2002 (restated) |  |      | 32 | 
|Consolidated Statements of Cash Flows for each of
    the years ended December 31, 2004, 2003 (restated) and 2002
    (restated)           |  |      | 33 | 
|Notes to Consolidated Financial Statements                                                                                                 |  |      | 34 | 

2.     Financial
Statement Schedules

None

3.(a) Exhibits

|        |    |       |             |                                                                                                                                                                                                    
|------- | -- | ----- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|No.     |    |       | Description
|        |    |       |            
|        | 3  | .1*   |             | Restated Articles of Incorporation of the
    Company, as amended.                                                                                                                                 
|        | 3  | .2**  |             | Restated Bylaws.                                                                                                                                                                                   
|        | 4  | .1    |             | See Exhibits 3.1 and 3.2 for provisions of the
    Restated Articles of Incorporation and Restated Bylaws of the
    Company defining the rights of the holders of Common Stock of
    the Company.
|        | 4  | .2*** |             | Specimen Stock Certificate.                                                                                                                                                                        
|        | 10 | .1**  |             | Credit Agreement with Bank One NA.                                                                                                                                                                 
|        | 10 | .2**  |             | Amendment 1 to Credit Agreement with Bank One NA.                                                                                                                                                  
|        | 10 | .3**  |             | Shareholder Rights Plan.                                                                                                                                                                           
|        | 10 | .4**  |             | Master Service Provider Agreement with Fidelity
    Information Services.                                                                                                                          
|        | 10 | .5**  |             | Exhibits to Master Service Provider Agreement
    with Fidelity Information Services.                                                                                                              
|        | 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 and filed with
    the Companys Form 10-Q for the period ended March 31,
    2004.



|   |                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------
|** | Incorporated herein by reference and filed with
    the Companys Form 10-Q for the period ended
    September 30, 2004.



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

67



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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/ RAJENDRA B. VATTIKUTI

| |                                                   
| | --------------------------------------------------
| |                                                   
| | Rajendra B. Vattikuti                             
| | Chairman, Chief Executive Officer and
    Director

March 14, 2005

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/ RAJENDRA B. VATTIKUTIRajendra B. Vattikuti |  | Chairman, Chief Executive Officer
    and Director                                             |  | March 14, 2005
|                                              
|/s/ JAMES S. TROUBAJames S. Trouba             |  | Vice President and
    Chief Financial Officer
    (Principal Financial Officer)               |  | March 14, 2005
|                                              
|/s/ THOMAS E. LINDSEYThomas E. Lindsey         |  | Vice President, Controller and
    Chief Accounting Officer
    (Principal Accounting Officer) |  | March 14, 2005
|                                              
|*William C. Brooks                             |  | Director                                                                                       |  | March 14, 2005
|                                              
|*William P. Foley                              |  | Director                                                                                       |  | March 14, 2005
|                                              
|*Douglas S. Land                               |  | Director                                                                                       |  | March 14, 2005
|                                              
|*Ronald K. Machtley                            |  | Director                                                                                       |  | March 14, 2005
|                                              
|*John A. Stanley                               |  | Director                                                                                       |  | March 14, 2005
|                                              
|*Frank R. Sanchez                              |  | Director                                                                                       |  | March 14, 2005
|                                              
|*Frank D. Stella                               |  | Director                                                                                       |  | March 14, 2005

68



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##### Table of Contents



|                                                          |  |          |  |                |  | 
|--------------------------------------------------------- |  | -------- |  | -------------- |  | 
|                                                         
|*David H. Wasserman                                       |  | Director |  | March 14, 2005
|                                                         
|*Gary C. Wendt                                            |  | Director |  | March 14, 2005
|                                                         
|* /s/ JAMES S. TROUBAJames S. Trouba
    Attorney-in-fact |  |          |  |               

69



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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**  |             | Restated Bylaws.                                                                                                                                                                                   
|        | 4  | .1    |             | See Exhibits 3.1 and 3.2 for provisions of the
    Restated Articles of Incorporation and Restated Bylaws of the
    Company defining the rights of the holders of Common Stock of
    the Company.
|        | 4  | .2*** |             | Specimen Stock Certificate.                                                                                                                                                                        
|        | 10 | .1**  |             | Credit Agreement with Bank One NA.                                                                                                                                                                 
|        | 10 | .2**  |             | Amendment 1 to Credit Agreement with Bank One NA.                                                                                                                                                  
|        | 10 | .3**  |             | Shareholder Rights Plan.                                                                                                                                                                           
|        | 10 | .4**  |             | Master Service Provider Agreement with Fidelity
    Information Services.                                                                                                                          
|        | 10 | .5**  |             | Exhibits to Master Service Provider Agreement
    with Fidelity Information Services.                                                                                                              
|        | 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 and filed with
    the Companys Form 10-Q for the period ended March 31,
    2004.



|   |                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------
|** | Incorporated herein by reference and filed with
    the Companys Form 10-Q for the period ended
    September 30, 2004.



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