##### Table of Contents






UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

|                                                     |  |                                                                                           
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|x                                                    |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                    
|                                                     |  | For the Fiscal Year Ended December 31,
	2001                                              
|                                                    
|o                                                    |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                    
|For the Transition Period
	From                   to

Commission File Number 0-22141

COVANSYS CORPORATION

(Exact name of registrant as specified in its
charter)


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

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

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

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

Indicate by check
mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90
days.  Yes x  No o

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

The aggregate
market value of common stock held by non-affiliates of the
registrant as of March 1, 2002 was $157,335,425.

The number of
shares outstanding of the registrants common stock as of
March 1, 2002 was 28,017,080.

Documents Incorporated by Reference

Portions of the
Proxy Statement of the Registrant for its 2002 Annual Meeting of
Shareholders to the extent expressly so stated, are incorporated
by reference into Part III of this Report.



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TABLE OF CONTENTS



|                                                   |  |  |  |  |  |  |  | 
|-------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                            
|PART II                                           
|PART III                                          
|PART IV                                           
|SIGNATURES                                        
|Letter Agreement with Michael S. Duffey           
|Loanout Agreement with Clayton, Dublier & Rice Inc
|Employement Agreement with Martin C. Clague       
|Subsidiaries of Registrant                        
|Consent of Arthur Andersen LLP                    



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COVANSYS CORPORATION AND
SUBSIDIARIES

FORM 10-K

For the Fiscal Year Ended December 31,
2001

INDEX

|           |  |                                                                                        |  |   
|---------- |  | -------------------------------------------------------------------------------------- |  | --
|Part I     |  |                                                                                        |  |   
|Item 1.    |  | Business                                                                               |  | 1 
|Item 2.    |  | Properties                                                                             |  | 6 
|Item 3.    |  | Legal Proceedings                                                                      |  | 6 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |  | 7 
|Part II    |  |                                                                                        |  |   
|Item 5.    |  | Market for the Registrants Common Equity
	and Related Stockholder Matters             |  | 8 
|Item 6.    |  | Selected Financial Data                                                                |  | 9 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  | 11
|Item 8.    |  | Financial Statement and Supplementary Data                                             |  | 19
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  | 37
|Part III   |  |                                                                                        |  |   
|Item 10.   |  | Directors and Executive Officers of the Company                                        |  | 38
|Item 11.   |  | Executive Compensation                                                                 |  | 38
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  | 38
|Item 13.   |  | Certain Relationships and Related Transactions                                         |  | 38
|Part IV    |  |                                                                                        |  |   
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  | 39
|Signatures |  | 40                                                                                    





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PART I


Item 1. Business

Summary

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

Covansys Corporation is a global information
technology (IT) services company that brings a competitive
advantage to our clients by delivering innovative,
results-oriented information management solutions with a
scalable delivery model. We offer clients a focused range of IT
services specializing in systems integration services and
strategic outsourcing. Our range of experience runs from
advising clients on IT business strategy and strategic
technology plans to developing and implementing appropriate IT
applications solutions. We are a single source provider of IT
services including: (1) client server development;
(2) IT consulting; (3) large systems applications
development and maintenance; and (4) packaged software
implementation, such as ERP. We sold our contract programming
division during 2000.

We apply industry-specific IT consulting services
to a wide range of leading technology platforms and perform
these services in a variety of emerging computing environments.
Our technology service offerings include: (1) electronic
commerce solutions, including Web-to-Enterprise Integration
(WEIsm) services; (2) data warehousing
solutions; and (3) services to support enterprise-wide
applications such as Internet/intranet development. We have
established a growing capability to deliver e-commerce
solutions. We believe that our range of services minimizes our
dependence on any single technology, enabling us to serve as a
single-source provider for our clients IT applications
needs. This also enables us to cross-sell our services to
existing clients.

We offer flexible, cost-effective project
delivery capabilities by providing our clients a choice among
any combination of the following options: (1) onsite at the
client facility; (2) offsite at one of our development
facilities in North America; or (3) offshore at one of our
development facilities in India. We have been developing our
extensive offshore infrastructure since 1992 and believe that it
is one of the largest and best in the industry. Our ability to
deliver services globally is enhanced by our local account
management and recruiting infrastructure, consisting of a
geographically dispersed network of 23 offices worldwide and 100
sales and client executives. Our infrastructure allows us to act
as a local partner, becoming an integral member of a
clients technology team. This demonstrates our commitment
to each market and enhances our ability to attract locally based
clients and consultants.

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

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



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Create awareness of our extensive capabilities in
	systems integration services and strategic outsourcing;                                                                          
|
| |  | Capitalize on the marketing and development
	efforts of vertically focused industry solutions groups;                                                                               
|
| |  | Expand the breadth and depth of our technical
	capabilities through a continued evaluation of emerging
	technologies and development of industry solutions;                         
|
| |  | Focus our infrastructure, both domestically and
	internationally, to serve local clients and capitalize on our
	significant investment in offsite and offshore development
	centers;

1



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| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Create virtual partnerships with our clients to
	provide them with a broad range of IT solutions and establish
	cross-selling opportunities; and                 
|
| |  | Seek mergers, acquisitions and investments that
	complement our core skills or expand our geographic reach and
	have the potential to increase our overall value.

The Covansys Advantage

The Covansys advantage enables our clients to use
IT as a more effective business tool consistent with their
evolving business needs. The key attributes of our advantage are
that we:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Offer clients a single-source provider of a
	broad range of IT services,from
	advising them on IT business strategy and strategic technology
	plans to developing and implementing appropriate IT applications
	solutions. This range includes emerging technology services such
	as data warehousing solutions, electronic commerce solutions and
	network services.                                                      
|
| |  | Assure clients of the highest quality software
	servicesby achieving a Level 5
	quality rating at our offshore development centers in India. We
	achieved this designation as set by the Software Engineering
	Institutes Capability Maturity Model. Our proven software
	engineering and management processes are extremely efficient in
	managing project costs and delivery for customers.                             
|
| |  | Provide flexible project deliveryby offering our clients any
	combination of the following options: (1) onsite at the
	client facility; (2) offsite at one of our development
	facilities in North America; or (3) offshore at one of our
	development facilities in India. This flexibility enables our
	clients to determine their degree of project involvement and to
	control the costs and speed of project delivery.
|
| |  | Offer a local presenceby delivering our services to clients
	through a geographically dispersed network of 23 offices
	worldwide and 100 sales and client executives. Our presence
	allows us to demonstrate our commitment to the local market and
	enhances our ability to attract locally based clients and
	consultants.                                                                                               
|
| |  | Recruit and train our consultants globallythrough our established domestic and
	international network. Consultants receive technical training in
	software engineering techniques and key technologies at one of
	our U.S. training centers or one of our overseas training
	centers in India. These centers are equipped with a variety of
	hardware, software and development tools.                                     

Growth Strategy

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Create awareness of our extensive capabilitiesin systems integration and strategic
	outsourcing. We launched a branding campaign in early 2000 to
	better understand how we are perceived by our clients and
	clarify our unique strengths and capabilities. We defined a new
	company name to characterize our true potential. The new name
	was launched on February 5, 2001.                                                                                                                                                                                
|
| |  | Capitalize on the marketing and development
	efforts of vertically focused industry solutions
	groups.These groups develop solutions
	based on in-depth knowledge of particular industries and a
	detailed understanding of the clients business. They sell
	and market a broad range of ERP and other solutions to existing
	clients and also obtain new clients within our targeted
	industries. We provide proprietary knowledge and customized
	templates to support these targeted industries. Targeted
	industries include Public Sector and HealthCare.
|
| |  | Expand the breadth and depth of our technical
	capabilitiesthrough training existing
	personnel, recruiting experienced talent and acquiring or
	merging with complementary businesses. Our                                                                                                                                                                                                                                                                                                                                                                    

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

Systems Integration Services

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

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

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

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

Strategic Outsourcing

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

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

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Industry Specific Solutions

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

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

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



| |   |                                                 
| | - | ------------------------------------------------
| |  | HIPAA Compliance Programs                       
|
| |  | Clarety Public Retirement Administration Package
|
| |  | CCMS/2000 Child Care Management System          

Clients

Using our strategic approach, we are quickly
becoming an important supplier to these middle market clients.
In 2001, we provided services to over 500 clients in North
America, Europe and Asia. Our strategy is to maximize our client
retention rate and to secure additional engagements by providing
quality services and by being responsive to our client needs.
For each of the past five years, existing clients from the
previous fiscal year generated more than 80% of our revenues.

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

Banking and Financial Services

American Century

Amerisure


Bank One Services Corporation


Chase Manhattan Corporation


Fleet Services Corporation


UNUMProvident Corporation


Healthcare


CHA Health

Henry Ford Health System


The Regence Group


Medcor, Inc.






Manufacturing


DaimlerChrysler AG

Ford Motor Company


General Motors Corporation


Johnson Controls, Inc.


Visteon Automotive Services


Public Sector


State of California

State of Indiana


State of Michigan


State of Ohio


State of Rhode Island


State of South Carolina


State of Tennessee


U.S. Virgin Islands


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Retail and Distribution


The GAP, Inc.

The Kroger Company


Lands End, Inc.


Spartan Stores, Inc.


Utilities and Telecommunications


Lucent Technologies, Inc.

South Carolina Electric and Gas Company


Southern California Edison


Sprint Corporation


Sales and Marketing

Traditionally, we have generated the majority of
our new sales through our account management structure.

In late 2000, we determined that a focused sales
and marketing organization to target new business opportunities
would help us grow and identify new clients more effectively. We
recruited an executive to perform this function and assemble the
needed sales executives in our organization. This strategy was
accomplished in early 2001. By mid-year, the sales team was well
established and the sales reporting relationships moved back
into their respective geographic regions in late 2001.

Cross-selling our industry solutions and other
services to existing clients has been a successful way to expand
our business. This accounts for much of the extensive recurring
revenue volume we have enjoyed over the years. Our past
acquisitions have expanded our range of industry solutions and
services, enabling us to be even more successful in this
activity.

Our sales strategy has always focused on making
us an extension of the client organization and making the client
a member of our service delivery team.

In addition to our sales group, we have a
dedicated marketing department responsible for branding,
advertising and the coordination of all corporate
communications. The successful efforts of the marketing team
effectively promote our services and delivery methodologies. The
marketing group provides information and acts as a liaison to
industry analysts including Gartner, Giga, Meta Groups and
Forrester.

Human Resources

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



| |   |                            
| | - | ---------------------------
| |  | Human resource management; 
|
| |  | Competitive salaries;      
|
| |  | Comprehensive benefits; and
|
| |  | Employee stock options     

We use aggressive recruitment strategies to
source well-qualified and well-credentialed consultants
throughout the United States. Our most successful candidate
sources include: Employee Referrals, Management Referrals,
Internet Searching and Postings, On-line Career Fairs,
Traditional Career Fairs, Professional Organizations, Trade
Shows, Seminars, advertisements and articles in leading
newspapers, business

5



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periodicals, trade magazines, networking,
out-placement firms and search firms. In addition, our
recruiting activities seek to draw on an international pool of
IT talent. We actively recruit in a variety of countries
including India, England, Belgium, France, Germany, the
Netherlands and Singapore.


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

Our consultants typically have Bachelors or
Masters degrees in Computer Science, Engineering or other
technical disciplines. As of December 31, 2001, we had
4,206 employees comprised of 3,633 IT professionals, 169 sales
and marketing personnel and 404 general and administrative
personnel. As of December 31, 2001, we also had 211
independent contractors working on client engagements.

We have employee training centers in a variety of
locations in the United States and in India. These training
centers employ full-time instructors and are equipped with
hardware, software and development tools. Along with technical
training, we provide business skills to enhance team building,
diversity awareness and key consulting skills such as
presentations and communications training. We also provide
training to prepare for specific future technical assignments
followed by one month of self-study.

Between projects and after business hours, all IT
professionals receive ongoing training on a variety of
technology platforms. Our education and training department
helps employees make the transition from legacy and
client/server skills to e-commerce skills by providing
cross-platform training in new technologies. In addition to
comprehensive technical training, we provide extensive training
in quality processes and cross-cultural communications skills.
In addition, we offer training courses to non-employees for a
fee and may hire graduates of these training programs.

We provide over 200 courses on our computer-based
training system, which is available 24 hours a day, 7 days a
week. We have license to 250 titles with access to over 1200
titles of technical coursework. In addition to technical skills
in a variety of programming languages, we offer courses in
business and administration skills.

Item 2. Properties

We lease approximately 70,000 square feet of
office space in Farmington Hills, Michigan for our headquarters
office. In addition to our headquarters, we lease office space
throughout the world. Currently, our facilities are adequate for
our needs; however, additional space may be required as our
business expands. We believe we will be able to obtain suitable
space as needed.

We have principal offices in the following
locations:

|                                                                                                                              |  |                                                                                                                          |  |                                                                                                             
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------
|                                                                                                                              |  |                                                                                                                         
|North America                                                                                                                 |  | International                                                                                                           
|Atlanta, GA
	Basking Ridge, NJ
	Chicago, IL
	Cleveland, OH
	Columbus, OH
	Farmington Hills, MI
	Lansing, MI
	Indianapolis, IN |  | Los Angeles, CA
	Middletown, CT
	Milpitas, CA
	Montreal, Canada
	Portland, OR
	Providence, RI
	Sacramento, CA
	Tampa, FL |  | Bangalore, India
	Brussels, Belgium
	Chennai, India
	London, U.K.
	Mumbai, India
	Munich, Germany
	Singapore

Item 3. Legal Proceedings

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

In addition, many of our engagements involve
projects that are critical to the operations of our
clients businesses and provide benefits that may be
difficult to quantify. We attempt to contractually limit our
liability for damages arising from errors, mistakes, omissions
or negligent acts in rendering our services.

6



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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, 2001.

7



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PART II


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

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

|                              |                |                |   |       |  |  |   |       | 
|----------------------------- | -------------- | -------------- | - | ----- |  |  | - | ----- | 
|                              |                |               
|                              |                | Price Range of
|                              |                | Common Stock  
|                              |                |               
|                              |                | High           |   | Low  
|Year Ended December 31, 2000: |                |                |   |       |  |  |   |      
|                              | First Quarter  |                | $ | 28.00 |  |  | $ | 16.63 | 
|                              | Second Quarter |                | $ | 24.88 |  |  | $ | 15.94 | 
|                              | Third Quarter  |                | $ | 20.75 |  |  | $ | 11.25 | 
|                              | Fourth Quarter |                | $ | 13.75 |  |  | $ | 6.25  | 
|Year Ended December 31, 2001: |                |                |   |       |  |  |   |      
|                              | First Quarter  |                | $ | 13.19 |  |  | $ | 9.13  | 
|                              | Second Quarter |                | $ | 13.65 |  |  | $ | 8.61  | 
|                              | Third Quarter  |                | $ | 13.32 |  |  | $ | 7.45  | 
|                              | Fourth Quarter |                | $ | 9.98  |  |  | $ | 6.38  | 

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

As of March 1, 2002, there were
approximately 710 shareholders of record of our common
stock.

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

8



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Item 6. Selected Financial Data

The selected financial data presented below for
the five years ended December 31, 2001, are derived from
our Consolidated Financial Statements and related Notes thereto.
The selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related Notes thereto included in
Item 8 of this Form 10-K.

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

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

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

Complete Business Solutions, Inc. (CBSI) and
Costello had fiscal years ending December 31 and Claremont
had a fiscal year ending June 30. The statement of
operations data presented below for the year ended
December 31, 1997, combine CBSIs and Costellos
results for the year ended December 31, 1997, with
Claremonts results for the year ended June 30, 1997.
The statement of operations data for the year ended
December 31, 1998, combine all three companies
results for the year ended December 31, 1998. The balance
sheet data as of December 31, 1997 combine CBSIs and
Costellos balance sheets as of December 31, 1997,
with Claremonts balance sheet as of June 30, 1997.
The balance sheet data as of December 31, 1998, combine all
three companies balance sheets as of that date.

9



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##### Table of Contents



|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |         |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | - | ---- | - | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                                                      |                                                                                                             |                                      
|                                                                      |                                                                                                             | Years Ended December 31,             
|                                                                      |                                                                                                             |                                      
|                                                                      |                                                                                                             | 1997                                  |   | 1998    |   | 1999 |   | 2000    |   | 2001
|                                                                      |                                                                                                             |                                      
|                                                                      |                                                                                                             | (In thousands, except per share data)
|Statement of Operations
	Data:                                        |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Revenues                                                                                                    |                                       | $ | 249,532 |   |      | $ | 361,667 |   |      | $      | 443,541 |   |   | $      | 419,641 |   |   | $      | 404,734 |  
|                                                                      | Cost of revenues                                                                                            |                                       |   | 168,880 |   |      |   | 236,499 |   |      |        | 297,171 |   |   |        | 308,299 |   |   |        | 290,651 |  
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Gross profit                                                                                                |                                       |   | 80,652  |   |      |   | 125,168 |   |      |        | 146,370 |   |   |        | 111,342 |   |   |        | 114,083 |  
|                                                                      | Selling, general and administrative expenses                                                                |                                       |   | 62,855  |   |      |   | 83,233  |   |      |        | 98,645  |   |   |        | 143,467 |   |   |        | 115,011 |  
|                                                                      | Restructuring, merger costs and other(a)                                                                    |                                       |   | 1,559   |   |      |   | 28,250  |   |      |        | 5,367   |   |   |        | 21,507  |   |   |        | 23,665  |  
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Income (loss) from continuing operations                                                                    |                                       |   | 16,238  |   |      |   | 13,685  |   |      |        | 42,358  |   |   |        | (53,632 | ) |   |        | (24,593 | )
|                                                                      | Other expense (income)                                                                                      |                                       |   | (842    | ) |      |   | (2,927  | ) |      |        | (3,737  | ) |   |        | (6,060  | ) |   |        | (5,531  | )
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Income (loss) from continuing operations before
	provision (benefit) for income taxes and minority interest |                                       |   | 17,080  |   |      |   | 16,612  |   |      |        | 46,095  |   |   |        | (47,572 | ) |   |        | (19,062 | )
|                                                                      | Provision (benefit) for income taxes                                                                        |                                       |   | 7,246   |   |      |   | 9,962   |   |      |        | 16,283  |   |   |        | (11,255 | ) |   |        | (8,544  | )
|                                                                      | Minority interest                                                                                           |                                       |   | 82      |   |      |   |        |   |      |        |        |   |   |        |        |   |   |        |        |  
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Net income (loss) from continuing operations                                                                |                                       | $ | 9,752   |   |      | $ | 6,650   |   |      | $      | 29,812  |   |   | $      | (36,317 | ) |   | $      | (10,518 | )
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Income (loss) from discontinued operations, net
	of income taxes                                            |                                       |   | 55      |   |      |   | 41      |   |      |        | (15     | ) |   |        | (1,692  | ) |   |        |        |  
|                                                                      | Gain on sale of discontinued operations, net of
	income taxes                                               |                                       |   |        |   |      |   |        |   |      |        |        |   |   |        | 6,072   |   |   |        |        |  
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Net income (loss)                                                                                           |                                       |   | 9,807   |   |      |   | 6,691   |   |      |        | 29,797  |   |   |        | (31,937 | ) |   |        | (10,518 | )
|                                                                      | Beneficial conversion feature                                                                               |                                       |   |        |   |      |   |        |   |      |        |        |   |   |        | (23,651 | ) |   |        |        |  
|                                                                      | Convertible redeemable preferred stock dividends                                                            |                                       |   |        |   |      |   |        |   |      |        |        |   |   |        | (2,569  | ) |   |        | (4,265  | )
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                                                      | Net income (loss) available for common
	shareholders                                                        |                                       | $ | 9,807   |   |      | $ | 6,691   |   |      | $      | 29,797  |   |   | $      | (58,157 | ) |   | $      | (14,783 | )
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|Diluted (basic where applicable) earnings (loss)
	per share           |                                                                                                             |                                       |   |         |   |      |   |         |   | $    | 0.78   |         |   | $ | (1.77  | )       |   | $ | (0.51  | )      
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        
|Diluted (basic where applicable) weighted average
	shares outstanding |                                                                                                             |                                       |   |         |   |      |   |         |   |      | 38,212 |         |   |   | 32,892 |         |   |   | 28,704 |        
|                                                                      |                                                                                                             |                                       |   |         |   |      |   |         |   |      |        |         |   |   |        |         |   |   |        |        

|                    |                                              |                    |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         | 
|------------------- | -------------------------------------------- | ------------------ | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                    |                                              |                   
|                    |                                              | As of December 31,
|                    |                                              |                   
|                    |                                              | 1997               |   | 1998    |  | 1999 |   | 2000    |  | 2001
|                    |                                              |                   
|                    |                                              | (In thousands)    
|Balance Sheet Data: |                                              |                    |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                    | Cash and cash equivalents                    |                    | $ | 72,698  |  |      | $ | 60,732  |  |      | $ | 91,236  |  |  | $ | 140,123 |  |  | $ | 123,755 | 
|                    | Working capital                              |                    |   | 101,106 |  |      |   | 108,857 |  |      |   | 166,051 |  |  |   | 206,900 |  |  |   | 187,157 | 
|                    | Total assets                                 |                    |   | 168,240 |  |      |   | 191,045 |  |      |   | 277,388 |  |  |   | 330,901 |  |  |   | 297,623 | 
|                    | Revolving credit facility and long-term debt |                    |   | 4,958   |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|                    | Total shareholders equity                   |                    |   | 125,326 |  |      |   | 141,155 |  |      |   | 236,417 |  |  |   | 117,106 |  |  |   | 87,805  | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Fiscal year 2001 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 consists
	of approximately $18.6 million of costs associated with our
	organizational restructuring, including severance and lease
	terminations, and approximately $2.9 million related primarily
	to the write-down of certain assets which we determined were no
	longer realizable. Fiscal year 1999 consists of approximately
	$5.4 million of certain non-capitalizable merger and other
	costs, including lease termination and severance, related to the
	acquisition of EBS. Fiscal year 1998 consists of approximately
	$12.7 million in transaction costs related to the mergers
	with Costello and Claremont and approximately $15.6 million
	related primarily to the write-down of certain assets which
	Claremont determined, prior to June 30, 1998, were no
	longer realizable. Fiscal year 1997 consists of approximately
	$1.6 million in transaction costs related to the merger with
	Synergy Software, Inc.

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

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

Overview

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

We offer our clients a focused range of IT
services specializing in systems integration services and
strategic outsourcing. Our range of experience runs from
advising clients on IT business strategy and strategic plans to
developing and implementing appropriate IT applications
solutions.

We generally assume responsibility for project
management and may bill the client on either a
time-and-materials or fixed-price basis, although such projects
are generally billed on a time-and-materials basis. We recognize
revenues on time-and-materials engagements as the services are
performed. On fixed-price engagements, we recognize revenues
under the percentage of completion method. For the years ended
December 31, 2001 and 2000, approximately 32% and 20%,
respectively, of our total revenues were generated from
fixed-price engagements. Fixed-price engagements generally
experience higher gross margins than time-and-materials
engagements due to our project management experience and ability
to control project variables.

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 offsetting increases in
salaries and benefits with increases in billing rates. We use a
human resource management team to ensure that IT professionals
are quickly placed on assignments to minimize nonbillable time
and are placed on assignments that use their technical skills
and allow for maximum billing rates. We have realized higher
gross profit margins from our shift away from contract
programming services and from our shift to offshore projects in
India, where the personnel cost of IT professionals is lower as
a percentage of professional service fees. This benefit is
partially offset due to additional coordination efforts and
costs for offshore projects.

In an effort to sustain our growth and
profitability, we have made and continue to make substantial
investments in our infrastructure, including:
(1) development centers in the United States and India;
(2) system methodologies; (3) sales and marketing
teams; (4) a geographically dispersed branch management
structure; and (5) internal systems.

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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,
|                                             |  |             
|                                             |  | 1999         |       | 2000 |  | 2001
|Revenues                                     |  |              | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Cost of revenues                             |  |              | 67.0  |      |  |      | 73.5  |    |  |  | 71.8  |   
|                                             |  |              |       |      |  |      |       |    |  |  |       |   
|Gross profit                                 |  |              | 33.0  |      |  |      | 26.5  |    |  |  | 28.2  |   
|Selling, general and administrative expenses |  |              | 22.3  |      |  |      | 34.2  |    |  |  | 28.4  |   
|Restructuring, merger costs and other        |  |              | 1.2   |      |  |      | 5.1   |    |  |  | 5.8   |   
|                                             |  |              |       |      |  |      |       |    |  |  |       |   
|Income (loss) from continuing operations     |  |              | 9.5   | %    |  |      | (12.8 | )% |  |  | (6.0  | )%

2001 Compared to 2000

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

Gross
Profit.Gross profit consists of
revenues less cost of revenues. Cost of revenues consists
primarily of salaries (including nonbillable and training time),
benefits, travel and relocation for IT professionals. In
addition, cost of revenues includes depreciation and
amortization, direct facility costs and contractual services.
Gross profit increased 2.5% to $114.1 million in fiscal
2001 from $111.3 million in fiscal 2000. Gross profit as a
percentage of revenues increased to 28.2% for fiscal 2001 from
26.5% in fiscal 2000. The increase in gross profit and gross
profit as a percentage of revenues are due to increased
utilization rates in both the U.S. and India, an increased
proportion of our professional services being performed in
India, and an increase in the percentage of revenue from
fixed-price engagements.

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

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

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

2000 Compared to 1999

Revenues.Our
revenues decreased 5.4% to $419.6 million for fiscal 2000
from $443.5 million in fiscal 1999. This decline in
revenues is primarily due to longer customer sales cycles
brought on by the IT industry

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##### Table of Contents



slowdown. For the year ended December 31,
2000, approximately 85% of our revenues were generated from
existing clients.


Gross
Profit.Gross profit decreased
23.9% to $111.3 million in fiscal 2000 from
$146.4 million in fiscal 1999. Gross profit as a percentage
of revenues decreased to 26.5% for fiscal 2000 from 33.0% in
fiscal 1999. The decrease in gross profit and gross profit as a
percentage of revenues are due to the decrease in revenues
between periods, decreased utilization rates, and our continuing
investment in training and development of our IT professional
workforce.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased 45.5% to $143.5 million
in fiscal 2000 from $98.6 million in fiscal 1999. As a
percentage of revenues, selling, general and administrative
expenses increased in fiscal 2000 to 34.2% from 22.3% in fiscal
1999. These increases result from the recording of a
$23.0 million charge significantly due to the write-down of
certain accounts receivable from dot.com companies which had
become uncollectible and to recognize lower valuations of
investments in certain dot.com companies. In addition, we
recorded a $15.3 million charge to write-down goodwill,
primarily from our acquisition of EBS, that we determined was no
longer realizable. We continued to make increasing
infrastructure investments, including the enhancement of our
selling and marketing capabilities, as we pursued our
transformation and repositioning strategy.

Other Expense
(Income).Other expense (income)
for fiscal 2000 was $6.1 million compared to
$3.7 million in fiscal 1999. This increase is primarily due
to interest earned from the investment of funds received in
connection with the issuance of Convertible Redeemable Preferred
Stock to Clayton, Dubilier & Rice, Inc. in April and July of
2000.

1999 Compared to 1998

Revenues.Our
revenues increased 22.6% to $443.5 million for fiscal 1999 from
$361.7 million in fiscal 1998. This growth is primarily
attributable to increases in our IT professional workforce,
increases in average billing rates, and additional services
provided to existing clients. For the year ended
December 31, 1999, approximately 86% of our revenues were
generated from existing clients.

Gross
Profit.Gross profit increased
16.9% to $146.4 million in fiscal 1999 from $125.2 million
in fiscal 1998. This increase is primarily attributable to
increases in our IT professional workforce and average U.S.
billing rates. Gross profit as a percentage of revenues
decreased to 33.0% for fiscal 1999 from 34.6% in fiscal 1998.
This decrease in gross profit as a percentage of revenues is
primarily attributable to a decrease in offshore utilization
resulting from the continuing transition from Year 2000 related
services to emerging technology services, including e-business
services.

Selling, General and Administrative
Expenses.Selling and
administrative expenses increased 18.5% to $98.6 million in
fiscal 1999 from $83.2 million in fiscal 1998. This increase
resulted from the continued expansion of our direct selling and
marketing effort, further investments in infrastructure, and
other general overhead cost increases necessary to support our
continued revenue growth. As a percentage of revenues, selling,
general and administrative expenses decreased in fiscal 1999 to
22.3% from 23.0% in fiscal 1998 as we continued to leverage our
existing infrastructure.

Other Expense
(Income).Other expense (income)
for fiscal 1999 was $3.7 million compared to $2.9 million
in fiscal 1998. This change is primarily due to interest earned
from the investment of net proceeds from our public offering of
stock in 1999.

Discontinued Operations and Gain on Sale of
Discontinued Operations

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

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in cash used in discontinued operations and
effect of exchange rate changes in cash in the
accompanying consolidated statements of cash flows for all years
presented.


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

As a result of this exchange, we recorded a gain
on the sale of a discontinued operation of $6,072, net of income
taxes, in the accompanying consolidated statements of operations.

Restructuring, Merger and Other Related
Charges

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

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

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

|                                                                              |  |  |       | 
|----------------------------------------------------------------------------- |  |  | ----- | 
|Severance and costs associated with building a
	new executive management team |  |  | 8,800 | 
|Termination of lease obligations associated with
	consolidation of facilities |  |  | 5,800 | 
|Write-off of assets due to change in strategic
	direction                     |  |  | 2,900 | 
|Other                                                                         |  |  | 4,007 | 

In fiscal 1999, we recorded merger and other
costs of $5,367, principally for lease termination and employee
severance related to the acquisition of EBS. These costs did not
meet the requirements of Emerging Issues Task Force (EITF) 95-03
and therefore were not accrued at the time of acquisition and
capitalized in goodwill.

Related Party Transactions

During the year ended December 31, 2000, we
sold Synova, Inc. (Synova), our contract programming services
subsidiary, to a related party. We paid approximately $1,538 to
Synova for contract services for the year ending
December 31, 2001. As of December 31, 2000, we owed
Synova $652 for services rendered between the companies. As of
December 31, 2001, Synova owed us $6 for services rendered
between the companies.

We paid approximately $333 and $949 to Clayton,
Dubilier & Rice, Inc. for financial and management advisory
services for the years ended December 31, 2000 and 2001,
respectively.

We paid approximately $506, $717, and $1,118 for
the years ended December 31, 1999, 2000, and 2001,
respectively, for consulting services provided by an affiliate
owned by an outside director.

New Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) which addresses the
financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supercedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of

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Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the
disposal of a segment of a business (as previously defined in
that Opinion). SFAS 144 is effective for the Companys
fiscal year beginning January 1, 2002 and its not expected
to have a material impact upon adoption.


On June 30, 2001, the FASB issued
Statement 141, Business Combinations, and
Statement 142, Goodwill and Other Intangible Assets.
Statement 141 requires all business combinations initiated
after June 30, 2001 to be accounted for under the purchase
method of accounting. Under Statement 142, goodwill and
intangible assets that have indefinite useful lives will no
longer be subject to amortization. Rather, goodwill and
intangible assets will be subject to at least an annual
assessment for impairment. Under Statement 142, this is
achieved by applying a fair-value based test. In addition, other
intangible assets with finite useful lives will continue to be
amortized over their estimated useful lives. The Company is
required to adopt Statement 142 in the first quarter of
2002. Although management has not fully assessed the impact of
these pronouncements, the Company will cease recognizing
approximately $136 of quarterly goodwill amortization beginning
in the first quarter of 2002.

Liquidity and Capital Resources

We generally fund our operations and working
capital needs through internally generated funds, periodically
supplemented by borrowings under our revolving credit facilities
with a commercial bank. Cash provided by (used in) operating
activities was $12.5 million, $(3.3) million and
$18.3 million for the years ended December 31, 1999,
2000 and 2001, respectively. The increase in cash provided by
operations in 2001 is primarily due to increased gross profit
margins, a decrease in the accounts receivable days sales
outstanding and receipt of approximately $17.3 million in tax
refunds.

The principal use of cash for investing
activities during the three years ended December 31, 2001
was for the purchase of property and equipment, primarily as
part of the development and enhancement of our offshore software
development centers, the investment in internally developed
computer software, other strategic investments and the affiliate
loan guarantee.

To facilitate future cash flow needs, we have an
arrangement with a commercial bank, where we may borrow an
amount not to exceed $30.0 million with interest at the
banks prime interest rate, or the LIBOR rate plus
1 1/4%. Borrowings under this facility are short-term,
payable on demand and are secured by our trade accounts
receivable and equipment. During the three year period ended
December 31, 2001, we have not had any significant average
balances outstanding under this arrangement.

Net cash provided by (used in) financing
activities was $63.2 million, $81.3 million and
$(12.8) million for years ended December 31, 1999,
2000 and 2001, respectively. The change in cash provided by
financing activities in 2001 was primarily due to the funds
received in connection with the issuance of Convertible
Redeemable Preferred Stock in 2000 of $185.7 million and
realizing net proceeds from the issuance of common stock of
$61.2 million in fiscal 1999 in a follow-on offering.
Significant use of cash in financing activities was for the
repurchase of our Common Stock. During the years ended
December 31, 1999, 2000 and 2001, we repurchased 354,000,
7,663,600 and 1,482,700 shares, respectively, of our Common
Stock, for cash, at a total of $5.2 million,
$111.8 million and $14.5 million, respectively.

Most of our revenues are billed in U.S. dollars.
We recognize transaction gains and losses in the period of
occurrence. Foreign currency fluctuations in 1999, 2000 and 2001
did not have a material impact on income (loss) from operations
as currency fluctuations on revenue denominated in a foreign
currency were offset by currency fluctuations on expenses
denominated in a foreign currency. There were no material
operating trends or effects on liquidity as a result of
fluctuations in the functional currency. We do not generally use
any types of derivatives to hedge against foreign currency
fluctuations, nor do we speculate in foreign currency.

Revenues generated by our India and Asia
operations, including development centers, from both direct
services provided to clients in India and Asia as well as
services provided to customers in the United States, accounted
for 12.2% of our total 2001 revenues. In addition, services
provided by our other international operations, primarily in
Europe, accounted for 4.2% of our total revenues.

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Inflation did not have a material impact on our
revenues or income (loss) from operations in fiscal years 1999,
2000 and 2001.

Factors That May Affect Future
Results

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

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

Failure to Properly Manage Mergers,
Acquisitions and Strategic Investments

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

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

Variability of Operating Results

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

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

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

 Progress on fixed-price projects
during a quarter;

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

Impact of Government Regulation of Immigration
Could Limit Growth

We recruit IT professionals globally. We must
comply with the immigration laws in the countries in which we
operate, particularly the United States. As of December 31,
2001, approximately 21% of our worldwide workforce was working
under H-1B temporary work permits in the United States.
Government regulation limits the number of new H-1B permits that
may be approved in a fiscal year. If the limit is reached in any
year, we may not be able to recruit enough IT professionals to
meet our personnel requirements. This could adversely affect our
business.

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Our Fixed-Price Projects Expose us to Cost
Overrun Risks

We realized approximately 32% and 20% of our
revenues from fixed-price projects during the years ended
December 31, 2001 and 2000, respectively. Significant cost
overruns can occur if we fail to:

 Adequately estimate the resources
required to complete a project;

 Properly determine the scope of an
engagement; or

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

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

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

Our off-shore operations in India and Asia
accounted for approximately 12.2% of our total revenues for the
year ended December 31, 2001 and approximately 24% of our
workforce was located in India and Asia. We benefit directly
from certain incentives provided by the Indian government to
encourage foreign investment, including tax holidays (temporary
exemptions from taxation on operating income) and liberalized
import and export duties. If the Indian government changes any
of these incentives, it could negatively impact the
profitability of our Indian operations.

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

We Operate in Highly Competitive
Markets

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

Our Contracts are Short-Term and Contain
Termination Provisions

A typical contract with our clients has a term of
one to three years. A client may choose not to renew its
contract when it terminates. Under our contracts, clients may
unilaterally reduce the use of our services with little or no
notice and without penalty. If we are unable to retain our
existing clients, our business could be adversely affected. An
unanticipated termination of a major project could result in a
loss of revenues and could require us to pay a number of
unassigned IT professionals until new engagements can be
obtained.

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

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



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

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

Limited Protection of Intellectual Property
Rights

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

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##### Table of Contents



Item 8. Financial Statement and
Supplementary Data

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To Covansys Corporation:

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

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

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

ARTHUR ANDERSEN LLP

Detroit, Michigan,

January 31, 2002.


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COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


|                            |                                           |                        |              |         |         |         |        |         |         |         | 
|--------------------------- | ----------------------------------------- | ---------------------- | ------------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                            |                                           |                       
|                            |                                           | December 31,          
|                            |                                           |                       
|                            |                                           | 2000                   |              | 2001   
|                            |                                           |                       
|                            |                                           | (Dollars in thousands)
|ASSETS                      |                                           |                       
|Current assets:             |                                           |                        |              |         |         |         |        |        
|                            | Cash and cash equivalents                 |                        | $            | 140,123 |         |         | $      | 123,755 |        
|                            | Accounts receivable, net                  |                        |              | 82,203  |         |         |        | 69,391  |        
|                            | Revenue earned in excess of billings, net |                        |              | 22,347  |         |         |        | 30,755  |        
|                            | Deferred taxes                            |                        |              | 13,158  |         |         |        | 7,824   |        
|                            | Prepaid expenses and other                |                        |              | 4,143   |         |         |        | 5,101   |        
|                            |                                           |                        |              |         |         |         |        |        
|                            |                                           | Total current assets   |              |         | 261,974 |         |        |         | 236,826 |        
|                            |                                           |                        |              |         |         |         |        |        
|Property and equipment, net |                                           |                        | 34,169       |         |         |         | 32,560 |        
|Computer software, net      |                                           |                        | 3,409        |         |         |         | 1,981  |        
|Goodwill, net               |                                           |                        | 11,398       |         |         |         | 10,691 |        
|Deferred taxes              |                                           |                        |             |         |         |         | 2,891  |        
|Other assets, net           |                                           |                        | 19,951       |         |         |         | 12,674 |        
|                            |                                           |                        |              |         |         |         |        |        
|                            |                                           |                        | Total assets |         | $       | 330,901 |        |         | $       | 297,623 | 
|                            |                                           |                        |              |         |         |         |        |        

|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |         |        |         | 
|------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                           |                                                                                                                                                                     |                           |                                            |        
|Current liabilities:                                                                                                           |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|                                                                                                                               | Accounts payable                                                                                                                                                    |                           | $                                          | 13,715  |        |         | $       | 10,127  |       
|                                                                                                                               | Accrued payroll and related costs                                                                                                                                   |                           |                                            | 27,581  |        |         |         | 29,650  |       
|                                                                                                                               | Other accrued liabilities                                                                                                                                           |                           |                                            | 11,991  |        |         |         | 9,495   |       
|                                                                                                                               | Deferred revenue                                                                                                                                                    |                           |                                            | 1,787   |        |         |         | 397     |       
|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|                                                                                                                               |                                                                                                                                                                     | Total current liabilities |                                            |         | 55,074 |         |         |         | 49,669 |        
|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|Deferred taxes                                                                                                                 |                                                                                                                                                                     |                           | 2,969                                      |         |        |         |        |        
|Other liabilities                                                                                                              |                                                                                                                                                                     |                           | 92                                         |         |        |         | 225     |        
|Commitments and contingencies                                                                                                  |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|Convertible redeemable preferred stock, no par
	value, 200,000 shares issued and outstanding as of
	December 31, 2000 and 2001 |                                                                                                                                                                     |                           | 155,660                                    |         |        |         | 159,924 |        
|Shareholders equity:                                                                                                          |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|                                                                                                                               | Preferred stock, no par value, 1,000,000 shares
	authorized, 200,000 issued as convertible redeemable preferred
	stock                                              |                           |                                            |        |        |         |         |        |       
|                                                                                                                               | Common stock, no par value, 200,000,000 shares
	authorized, 29,577,428 and 28,254,850 shares issued and
	outstanding as of December 31, 2000 and 2001, respectively |                           |                                            |        |        |         |         |        |       
|                                                                                                                               | Additional paid-in capital                                                                                                                                          |                           |                                            | 122,139 |        |         |         | 108,946 |       
|                                                                                                                               | Retained earnings (deficit)                                                                                                                                         |                           |                                            | 2,553   |        |         |         | (12,230 | )     
|                                                                                                                               | Stock subscriptions receivable                                                                                                                                      |                           |                                            | (3,176  | )      |         |         | (2,362  | )     
|                                                                                                                               | Accumulated other comprehensive loss                                                                                                                                |                           |                                            | (4,410  | )      |         |         | (6,549  | )     
|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|                                                                                                                               |                                                                                                                                                                     |                           | Total shareholders equity                 |         |        | 117,106 |         |         |        | 87,805  | 
|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |        
|                                                                                                                               |                                                                                                                                                                     |                           | Total liabilities and shareholders equity |         | $      | 330,901 |         |         | $      | 297,623 | 
|                                                                                                                               |                                                                                                                                                                     |                           |                                            |         |        |         |         |        

The accompanying notes are an integral part of
these consolidated balance sheets.

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |        |         |  
|------------------------------------------------------------------------ | ----------------------------------- | -------------------------------------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                         |                                     |                                                                                       
|                                                                         |                                     | Year Ended December 31,                                                               
|                                                                         |                                     |                                                                                       
|                                                                         |                                     | 1999                                                                                   |         | 2000   |         | 2001
|                                                                         |                                     |                                                                                       
|                                                                         |                                     | (In thousands, except per share data)                                                 
|Revenues                                                                 |                                     | $                                                                                      | 443,541 |        |         | $    | 419,641 |        |         | $ | 404,734 |       
|Cost of revenues                                                         |                                     |                                                                                        | 297,171 |        |         |      | 308,299 |        |         |   | 290,651 |       
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Gross profit                                                                           |         |        | 146,370 |      |         |        | 111,342 |   |         |        | 114,083 |  
|Selling, general and administrative expenses                             |                                     |                                                                                        | 98,645  |        |         |      | 143,467 |        |         |   | 115,011 |       
|Restructuring, merger costs and other                                    |                                     |                                                                                        | 5,367   |        |         |      | 21,507  |        |         |   | 23,665  |       
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Income (loss) from continuing operations                                               |         |        | 42,358  |      |         |        | (53,632 | ) |         |        | (24,593 | )
|Other expense (income)                                                   |                                     |                                                                                        | (3,737  | )      |         |      | (6,060  | )      |         |   | (5,531  | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Income (loss) from continuing operations before
	provision
	(benefit) for income taxes |         |        | 46,095  |      |         |        | (47,572 | ) |         |        | (19,062 | )
|Provision (benefit) for income taxes                                     |                                     |                                                                                        | 16,283  |        |         |      | (11,255 | )      |         |   | (8,544  | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Net income (loss) from continuing operations                                           |         |        | 29,812  |      |         |        | (36,317 | ) |         |        | (10,518 | )
|Loss from discontinued operations, net of income
	taxes                  |                                     |                                                                                        | (15     | )      |         |      | (1,692  | )      |         |   |        |       
|Gain on sale of discontinued operations, net of
	income taxes            |                                     |                                                                                        |        |        |         |      | 6,072   |        |         |   |        |       
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Net income (loss)                                                                      |         |        | 29,797  |      |         |        | (31,937 | ) |         |        | (10,518 | )
|Beneficial conversion feature                                            |                                     |                                                                                        |        |        |         |      | (23,651 | )      |         |   |        |       
|Convertible redeemable preferred stock dividends                         |                                     |                                                                                        |        |        |         |      | (2,569  | )      |         |   | (4,265  | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         |                                     | Net income (loss) available for common
	shareholders                                   |         | $      | 29,797  |      |         | $      | (58,157 | ) |         | $      | (14,783 | )
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Basic earnings (loss) per share                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         | Weighted average shares outstanding |                                                                                        |         | 37,267 |         |      |         | 32,892 |         |   |         | 28,704 |        
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Basic earnings (loss) per share from continuing
	operations              |                                     | $                                                                                      | 0.80    |        |         | $    | (1.10   | )      |         | $ | (0.37   | )     
|Basic loss per share from discontinued operations                        |                                     |                                                                                        |        |        |         |      | (0.05   | )      |         |   |        |       
|Basic earnings per share from gain on sale of
	discontinued operations   |                                     |                                                                                        |        |        |         |      | 0.18    |        |         |   |        |       
|Basic loss per share from beneficial conversion
	feature and dividends   |                                     |                                                                                        |        |        |         |      | (0.80   | )      |         |   | (0.14   | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Basic earnings (loss) per share                                          |                                     | $                                                                                      | 0.80    |        |         | $    | (1.77   | )      |         | $ | (0.51   | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Diluted earnings (loss) per share                                       |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|                                                                         | Weighted average shares outstanding |                                                                                        |         | 37,267 |         |      |         | 32,892 |         |   |         | 28,704 |        
|                                                                         | Dilutive effect of stock options    |                                                                                        |         | 945    |         |      |         |       |         |   |         |       |        
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Diluted weighted average shares outstanding                              |                                     |                                                                                        | 38,212  |        |         |      | 32,892  |        |         |   | 28,704  |       
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Diluted earnings (loss) per share from continuing
	operations            |                                     | $                                                                                      | 0.78    |        |         | $    | (1.10   | )      |         | $ | (0.37   | )     
|Diluted loss per share from discontinued
	operations                     |                                     |                                                                                        |        |        |         |      | (0.05   | )      |         |   |        |       
|Diluted earnings per share from gain on sale of
	discontinued operations |                                     |                                                                                        |        |        |         |      | 0.18    |        |         |   |        |       
|Diluted loss per share from beneficial conversion
	feature and dividends |                                     |                                                                                        |        |        |         |      | (0.80   | )      |         |   | (0.14   | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       
|Diluted earnings (loss) per share                                        |                                     | $                                                                                      | 0.78    |        |         | $    | (1.77   | )      |         | $ | (0.51   | )     
|                                                                         |                                     |                                                                                        |         |        |         |      |         |        |         |   |         |       

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  December 31, 1998 |                                                               |                        | 34,862,642 |            |   | $         | 117,590 |               |   | $             | 30,912  |               |   | $ | (6,079 | )      |   | $ | (1,268 | )      |   | $ | 141,155 |         
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|                            | Net income                                                    |                        |            |           |   |           |         |              |   |               |         | 29,797        |   |   |        |       |   |   |        |       |   |   |         | 29,797   |  
|                            | Currency translation adjustment (loss)                        |                        |            |           |   |           |         |              |   |               |         |              |   |   |        |       |   |   |        | (241   | ) |   |         | (241     | )
|                            | Stock options exercised                                       |                        |            | 683,741    |   |           |         | 6,753         |   |               |         |              |   |   |        | (3,702 | ) |   |        |       |   |   |         | 3,051    |  
|                            | Repayment of stock subscriptions receivable                   |                        |            |           |   |           |         |              |   |               |         |              |   |   |        | 4,182  |   |   |        |       |   |   |         | 4,182    |  
|                            | Issuances of common stock                                     |                        |            | 2,302,063  |   |           |         | 63,686        |   |               |         |              |   |   |        |       |   |   |        |       |   |   |         | 63,686   |  
|                            | Repurchases of common
	stock                                  |                        |            | (354,000   | ) |           |         | (5,213        | ) |               |         |              |   |   |        |       |   |   |        |       |   |   |         | (5,213   | )
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|Balance  December 31, 1999 |                                                               |                        | 37,494,446 |            |   |           | 182,816 |               |   |               | 60,709  |               |   |   | (5,599 | )      |   |   | (1,509 | )      |   |   | 236,417 |         
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|                            | Net loss                                                      |                        |            |           |   |           |         |              |   |               |         | (31,937       | ) |   |        |       |   |   |        |       |   |   |         | (31,937  | )
|                            | Currency translation adjustment (loss)                        |                        |            |           |   |           |         |              |   |               |         |              |   |   |        |       |   |   |        | (2,901 | ) |   |         | (2,901   | )
|                            | Stock options exercised                                       |                        |            | 420,103    |   |           |         | 4,193         |   |               |         |              |   |   |        | (1,005 | ) |   |        |       |   |   |         | 3,188    |  
|                            | Repayment of stock subscriptions receivable                   |                        |            |           |   |           |         |              |   |               |         |              |   |   |        | 3,428  |   |   |        |       |   |   |         | 3,428    |  
|                            | Issuances of common stock                                     |                        |            | 76,479     |   |           |         | 724           |   |               |         |              |   |   |        |       |   |   |        |       |   |   |         | 724      |  
|                            | Beneficial conversion feature                                 |                        |            |           |   |           |         |              |   |               |         | (23,651       | ) |   |        |       |   |   |        |       |   |   |         | (23,651  | )
|                            | Issuance of warrants                                          |                        |            |           |   |           |         | 56,306        |   |               |         |              |   |   |        |       |   |   |        |       |   |   |         | 56,306   |  
|                            | Convertible redeemable preferred stock dividend               |                        |            |           |   |           |         |              |   |               |         | (2,568        | ) |   |        |       |   |   |        |       |   |   |         | (2,568   | )
|                            | Receipt of common stock for
	sale of discontinued
	operations |                        |            | (750,000   | ) |           |         | (10,080       | ) |               |         |              |   |   |        |       |   |   |        |       |   |   |         | (10,080  | )
|                            | Repurchases of common
	stock                                  |                        |            | (7,663,600 | ) |           |         | (111,820      | ) |               |         |              |   |   |        |       |   |   |        |       |   |   |         | (111,820 | )
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|Balance  December 31, 2000 |                                                               |                        | 29,577,428 |            |   |           | 122,139 |               |   |               | 2,553   |               |   |   | (3,176 | )      |   |   | (4,410 | )      |   |   | 117,106 |         
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|                            | Net loss                                                      |                        |            |           |   |           |         |              |   |               |         | (10,518       | ) |   |        |       |   |   |        |       |   |   |         | (10,518  | )
|                            | Currency translation adjustment (loss)                        |                        |            |           |   |           |         |              |   |               |         |              |   |   |        |       |   |   |        | (2,139 | ) |   |         | (2,139   | )
|                            | Stock options exercised                                       |                        |            | 28,878     |   |           |         | 159           |   |               |         |              |   |   |        |       |   |   |        |       |   |   |         | 159      |  
|                            | Repayment of stock subscriptions receivable                   |                        |            |           |   |           |         |              |   |               |         |              |   |   |        | 814    |   |   |        |       |   |   |         | 814      |  
|                            | Issuances of common stock and other                           |                        |            | 131,244    |   |           |         | 1,118         |   |               |         |              |   |   |        |       |   |   |        |       |   |   |         | 1,118    |  
|                            | Convertible redeemable preferred stock dividend               |                        |            |           |   |           |         |              |   |               |         | (4,265        | ) |   |        |       |   |   |        |       |   |   |         | (4,265   | )
|                            | Repurchases of common
	stock                                  |                        |            | (1,482,700 | ) |           |         | (14,470       | ) |               |         |              |   |   |        |       |   |   |        |       |   |   |         | (14,470  | )
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         
|Balance  December 31, 2001 |                                                               |                        | 28,254,850 |            |   | $         | 108,946 |               |   | $             | (12,230 | )             |   | $ | (2,362 | )      |   | $ | (6,549 | )      |   | $ | 87,805  |         
|                            |                                                               |                        |            |            |   |           |         |               |   |               |         |               |   |   |        |        |   |   |        |        |   |   |         |         

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 CASH
FLOWS


|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |         |        |        |         |  
|------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------ | ------- | ------- | -------- | ------- | ------- | ------- | ------- | ------ | ------ | ------- | -
|                                                                                                                                |                                                                                    |                                                               
|                                                                                                                                |                                                                                    | Year Ended December 31,                                       
|                                                                                                                                |                                                                                    |                                                               
|                                                                                                                                |                                                                                    | 1999                                                           |                                                                | 2000                                                                          |        | 2001   
|                                                                                                                                |                                                                                    |                                                               
|                                                                                                                                |                                                                                    | (Dollars in thousands)                                        
|Cash flows provided by (used in) operating
	activities                                                                         |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Net income (loss)                                                                                                               |                                                                                    | $                                                              | 29,797                                                         |                                                                               |        | $       | (31,937 | )        |         | $       | (10,518 | )      
|Adjustments to reconcile net income (loss) to net
	cash provided by (used in) operating activities from
	continuing operations: |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                |                                                                                    | Depreciation and amortization                                  |                                                                |                                                                               | 10,323 |         |         |          | 11,967  |         |         |         | 11,516 |       
|                                                                                                                                |                                                                                    | Provision for doubtful accounts                                |                                                                |                                                                               | 1,144  |         |         |          | 19,849  |         |         |         | 1,626  |       
|                                                                                                                                |                                                                                    | Write-down of goodwill, computer software and
	other assets    |                                                                |                                                                               |       |         |         |          | 23,481  |         |         |         |       |       
|                                                                                                                                |                                                                                    | Write-down of equity investment and receivable
	from affiliate |                                                                |                                                                               |       |         |         |          |        |         |         |         | 19,384 |       
|                                                                                                                                |                                                                                    | Provision (benefit) for deferred taxes                         |                                                                |                                                                               | 6,319  |         |         |          | (7,031  | )       |         |         | (526   | )     
|                                                                                                                                |                                                                                    | Loss from discontinued operations                              |                                                                |                                                                               | 15     |         |         |          | 1,692   |         |         |         |       |       
|                                                                                                                                |                                                                                    | Non-cash gain on sale of discontinued operations               |                                                                |                                                                               |       |         |         |          | (10,106 | )       |         |         |       |       
|                                                                                                                                |                                                                                    | Change in assets and liabilities:                              |                                                                |                                                                               |        |         |         |          |         |         |         |         |        |       
|                                                                                                                                |                                                                                    |                                                                | Accounts receivable and revenue earned in excess
	of billings  |                                                                               |        | (20,735 | )       |          |         | (20,741 | )       |         |        | 2,778  |        
|                                                                                                                                |                                                                                    |                                                                | Prepaid expenses and other assets                              |                                                                               |        | 1,771   |         |          |         | (804    | )       |         |        | (644   | )      
|                                                                                                                                |                                                                                    |                                                                | Accounts payable, accrued payroll and related
	costs and other |                                                                               |        | (13,994 | )       |          |         | 9,675   |         |         |        | (4,015 | )      
|                                                                                                                                |                                                                                    |                                                                | Deferred revenue                                               |                                                                               |        | (2,169  | )       |          |         | 637     |         |         |        | (1,257 | )      
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                |                                                                                    |                                                                |                                                                | Net cash provided by (used in) operating
	activities of continuing operations |        |         | 12,471  |          |         |         | (3,318  | )       |        |        | 18,344  |  
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Cash flows used in investing
	activities                                                                                       |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                | Investment in property, equipment and other                                        |                                                                |                                                                | (15,702                                                                       | )      |         |         | (11,895  | )       |         |         | (8,174  | )     
|                                                                                                                                | Payment of loan guarantee for affiliate                                            |                                                                |                                                                |                                                                              |        |         |         |         |         |         |         | (13,608 | )     
|                                                                                                                                | Investment in computer software                                                    |                                                                |                                                                | (8,395                                                                        | )      |         |         | (3,580   | )       |         |         | (124    | )     
|                                                                                                                                | Business acquisitions and investments, net of
	cash acquired                       |                                                                |                                                                | (21,048                                                                       | )      |         |         | (11,653  | )       |         |         |        |       
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                |                                                                                    |                                                                |                                                                | Net cash used in investing activities of
	continuing operations               |        |         | (45,145 | )        |         |         | (27,128 | )       |        |        | (21,906 | )
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Cash flows provided by (used in) financing
	activities                                                                         |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                | Net proceeds from issuances of common stock and
	other                             |                                                                |                                                                | 61,186                                                                        |        |         |         | 724      |         |         |         | 969     |       
|                                                                                                                                | Net proceeds from issuance of convertible
	redeemable preferred stock and warrants |                                                                |                                                                |                                                                              |        |         |         | 185,747  |         |         |         |        |       
|                                                                                                                                | Net proceeds from exercise of stock options, net
	of tax benefit                   |                                                                |                                                                | 7,233                                                                         |        |         |         | 6,616    |         |         |         | 695     |       
|                                                                                                                                | Repurchases of common stock                                                        |                                                                |                                                                | (5,213                                                                        | )      |         |         | (111,820 | )       |         |         | (14,470 | )     
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                |                                                                                    |                                                                |                                                                | Net cash provided by (used in) financing
	activities of continuing operations |        |         | 63,206  |          |         |         | 81,267  |         |        |        | (12,806 | )
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Cash used in discontinued operations                                                                                            |                                                                                    |                                                                | (28                                                            | )                                                                             |        |         | (1,934  | )        |         |         |        |        
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Increase (decrease) in cash and cash equivalents                                                                                |                                                                                    |                                                                | 30,504                                                         |                                                                               |        |         | 48,887  |          |         |         | (16,368 | )      
|Cash and cash equivalents at beginning of period                                                                                |                                                                                    |                                                                | 60,732                                                         |                                                                               |        |         | 91,236  |          |         |         | 140,123 |        
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Cash and cash equivalents at end of period                                                                                      |                                                                                    | $                                                              | 91,236                                                         |                                                                               |        | $       | 140,123 |          |         | $       | 123,755 |        
|                                                                                                                                |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|Supplemental disclosures of cash flow information:                                                                              |                                                                                    |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |        
|                                                                                                                                | Cash paid during the period for:                                                   |                                                                |                                                                |                                                                               |        |         |         |          |         |         |         |         |       
|                                                                                                                                |                                                                                    | Income taxes                                                   |                                                                | $                                                                             | 17,594 |         |         | $        | 4,224   |         |         | $       | 662    |       

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

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Dollars in thousands, except per share
data)

1. Organization and Summary of
Significant Accounting Policies

Operations

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

Principles
of Consolidation and Organization

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

In April 1999, the Company closed a Stock
Purchase Agreement for the purchase of all of the outstanding
common stock of E-Business Solutions.com, Inc.
(EBS), formerly Impact Innovations Group, Inc. from
Medaphis Corporation. The acquisition of EBS was accounted for
by the purchase method of accounting, and accordingly, the
operating results of EBS have been included in the consolidated
statements of operations, shareholders equity, and cash
flows since the date of the acquisition.

Foreign
Currency and Comprehensive Income (Loss)

For significant foreign operations, the local
currencies have been designated as the functional currencies.
The financial statements of these subsidiaries are translated
into U.S. dollars using exchange rates in effect at year end for
assets and liabilities and at the average exchange rate during
the year for revenues and expenses. The resulting foreign
currency translation adjustment is reflected as a separate
component of shareholders equity as of December 31,
2000 and 2001 and represents the only component of accumulated
other comprehensive loss.

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

Comprehensive income (loss) was $29,556,
$(34,838) and $(12,657) for the years ended December 31,
1999, 2000 and 2001, respectively.

Cash
and Cash Equivalents

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

Financial
Instruments

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

Investments

The Company accounts for investments in common
stock on the cost method. The Company continually evaluates
whether events and circumstances have occurred that indicate a
decline in the market value of the

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


common stock is judged to be other than
temporary. When factors indicate that the decline in market
value is other than temporary, the cost basis is written down to
fair market value.

The Company had an equity investment in a
management consulting firm and also provided a guarantee of the
consulting firms bank debt. In the second quarter of 2001,
the Company determined that the equity investment did not fit
the strategic direction of the Company. In connection with that
determination, the Company also decided to terminate its
guarantee of the consulting firms bank debt. This decision
resulted in the Company being required to pay the bank debt in
the approximate amount of $13,600. In return, the Company
received a note receivable from the consulting firm in such
amount. On July 31, 2001, the Company entered into an
agreement with the consulting firm to terminate its ownership
interest, eliminate any future equity investments and reduce the
$13,600 note receivable to $1,400. The Company also agreed to
continue to guarantee a property lease of approximately $2,513
for office space of the consulting firm and assumed $250 of
liabilities of the consulting firm. Simultaneously with the
closing of this agreement the consulting firm paid $500 of the
$1,400 note receivable. Accordingly, during the second quarter
of 2001, the Company recorded a charge of $14,700 related
primarily to the impairment of the equity investment and note
receivable and related transaction fees recorded in
restructuring, merger costs and other in the accompanying
statement of operations.

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

Goodwill

Goodwill represents the excess of cost over the
net tangible and identifiable intangible assets related to
businesses acquired and the acquisition of shares of a
subsidiary. Goodwill is carried at cost, less accumulated
amortization, and through December 31, 2001, was amortized
on a straight-line basis over periods ranging from 20 to 30
years (see New Accounting Pronouncements). 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. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an
estimate of the related businesss undiscounted cash flow
over the remaining life of the goodwill in measuring whether the
goodwill is recoverable.

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

Goodwill amortization was $951, $858 and $561 for
the years ended December 31, 1999, 2000 and 2001,
respectively. Accumulated amortization at December 31, 2000
and 2001 was $3,240 and $3,801, respectively.

Property
and Equipment

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

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

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


Revenue
Recognition

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

Revenues on fixed-priced contracts are recognized
using the percentage of completion method. The percentage of
completion is determined by relating the actual cost of work
performed to date to the estimated total cost for each contract.
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. Retainages, which are
not material for any of the years presented, are included in
revenue earned in excess of billings in the accompanying
consolidated balance sheets. Revenue earned in excess of
billings is primarily comprised of revenue recognized on certain
contracts in excess of contractual billings on such contracts.
Billings in excess of revenue earned are classified as deferred
revenue.

Computer
Software

The Company performs research to develop software
for various business applications. The costs of such research
are charged to expense when incurred. When the technological
feasibility of the product is established, subsequent costs are
capitalized. Capitalized software costs are amortized on a
product-by-product basis. Amortization is recorded on the
straight-line method over the estimated economic life of the
product, generally three years to five years, commencing when
such product is available. The establishment of technological
feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic
product lives and changes in software and hardware technology.
These assumptions are reevaluated and adjusted as necessary at
the end of each accounting period. On an ongoing basis,
management reviews the valuation and amortization of capitalized
development costs. As part of this review, the Company considers
the value of future cash flows attributable to the capitalized
development costs in evaluating potential impairment of the
asset. The amortization of software development costs was
$1,076, $1,245 and $1,026 for the years ended December 31,
1999, 2000 and 2001, respectively.

Accumulated amortization on computer software
amounted to $1,774 and $2,682 as of December 31, 2000 and
2001, respectively.

Amounts capitalized were $2,387, $748 and $124
for the years ended December 31, 1999, 2000 and 2001,
respectively.

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

Use
of Estimates in the Preparation of Financial
Statements

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

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.

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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


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.

Net
Loss Per Share

Basic and diluted net loss per share is computed
in accordance with SFAS No. 128, Earnings Per
Share, by dividing the net loss allocable to common
shareholders by the weighted average number of shares of common
stock outstanding. For the years 2000 and 2001, the effect of
convertible redeemable preferred stock, stock options and
warrants outstanding for the purchase of shares of common stock
has not been used in the calculation of diluted net loss per
share because to do so would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic and
diluted net loss per share allocable to common stockholders are
equal. The total number of shares excluded from the calculations
of diluted net loss per share, prior to application of the
treasury stock method, was 5,473,763 and 8,779,045, for the
years 2000 and 2001, respectively.

New
Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) which addresses the
financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supercedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the
disposal of a segment of a business (as previously defined in
that Opinion). SFAS 144 is effective for the Companys
fiscal year beginning January 1, 2002 and it is not
expected to have a material impact upon adoption.

On June 30, 2001, the FASB issued
Statement 141, Business Combinations, and
Statement 142, Goodwill and Other Intangible
Assets. Statement 141 requires all business
combinations initiated after June 30, 2001 to be accounted
for under the purchase method of accounting. Under
Statement 142, goodwill and intangible assets that have
indefinite useful lives will no longer be subject to
amortization. Rather, goodwill and intangible assets will be
subject to at least an annual assessment for impairment. Under
Statement 142, this is achieved by applying a fair-value
based test. In addition, other intangible assets with finite
useful lives will be amortized over their estimated useful
lives. The Company is required to adopt Statement 142 in
the first quarter of 2002. Although management has not fully
assessed the impact of these pronouncements, the Company will
cease recognizing approximately $136 of quarterly goodwill
amortization beginning in the first quarter of 2002.

Reclassifications

Certain reclassifications have been made to the
2000 and 1999 consolidated financial statements to conform with
the 2001 presentation.

2. Common Stock Offerings

In February 1999, the Company completed an
offering of 5,400,000 shares of its Common Stock at a price of
$31 per share. This offering consisted of 2,135,000 shares of
newly issued Common Stock and 3,265,000 shares sold by selling
shareholders. After underwriting discounts, commissions and
other issuance costs, net proceeds to the Company from the sale
of the newly issued shares in this offering were approximately
$60,000.

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


3. Common Stock Repurchase
Program

In fiscal 1999, 2000 and 2001, the Companys
board of directors has authorized the repurchase of up to
12,000,000 shares of the Companys Common Stock. During the
years ended December 31, 1999, 2000 and 2001, the Company
repurchased 354,000, 7,663,600 and 1,482,700 shares, for cash,
at a total cost of $5,213, $111,820 and $14,470, respectively.

4. Mergers and Acquisitions

On April 20, 1999, the Company acquired all of
the outstanding capital stock of EBS for approximately $15,000.
The aggregate purchase price, which was funded through available
working capital, has been allocated to the assets based upon
their respective fair values.

5. Accounts Receivable and Credit
Risk

The allowance for doubtful accounts is as follows:

|                                     |  |      |       |      |  |      |        |   |  |   |         |  
|------------------------------------ |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                     |  | 1999 |       | 2000 |  | 2001
|Balance  beginning of period        |  | $    | 2,245 |      |  | $    | 4,204  |   |  | $ | 17,653  |  
|Provision                            |  |      | 1,144 |      |  |      | 19,849 |   |  |   | 1,626   |  
|Charge-offs                          |  |      | (592  | )    |  |      | (6,400 | ) |  |   | (17,508 | )
|Allowance related to EBS acquisition |  |      | 1,407 |      |  |      |       |   |  |   |        |  
|                                     |  |      |       |      |  |      |        |   |  |   |         |  
|Balance  end of period              |  | $    | 4,204 |      |  | $    | 17,653 |   |  | $ | 1,771   |  
|                                     |  |      |       |      |  |      |        |   |  |   |         |  

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

During the year ended December 31, 2000, the
Company recorded a $18,730 provision to write-down certain
accounts receivable, significantly due to dot.com companies
which had become uncollectible. The Company believes that its
accounts receivable from dot.com companies at December 31,
2001 are not material and are reflected on the consolidated
balance sheet at their net realizable value.

6. Property and Equipment

As of December 31, 2000 and 2001, property and
equipment consisted of the following:

|                                                          |  |              |         |           |  |       |         |   |  |  |           | 
|--------------------------------------------------------- |  | ------------ | ------- | --------- |  | ----- | ------- | - |  |  | --------- | 
|                                                          |  |              |         |          
|                                                          |  | December 31, |         | Estimated
|                                                          |  |              |         | Useful   
|                                                          |  | 2000         |         | 2001      |  | Lives
|Equipment and purchased software                          |  | $            | 45,333  |           |  | $     | 51,610  |   |  |  | 3-5 years | 
|Internally developed computer software and
	related costs |  |              | 8,639   |           |  |       | 8,639   |   |  |  | 10 years  | 
|Furniture and fixtures                                    |  |              | 6,509   |           |  |       | 6,914   |   |  |  | 5-7 years | 
|Leasehold improvements                                    |  |              | 5,550   |           |  |       | 6,285   |   |  |  | 5-7 years | 
|Automobiles                                               |  |              | 902     |           |  |       | 1,197   |   |  |  | 5 years   | 
|Buildings                                                 |  |              | 641     |           |  |       | 981     |   |  |  | 31 years  | 
|                                                          |  |              |         |           |  |       |         |   |  |  |           | 
|                                                          |  |              | 67,574  |           |  |       | 75,626  |   |  |  |           | 
|Accumulated depreciation                                  |  |              | (33,405 | )         |  |       | (43,066 | ) |  |  |           | 
|                                                          |  |              |         |           |  |       |         |   |  |  |           | 
|Property and equipment, net                               |  | $            | 34,169  |           |  | $     | 32,560  |   |  |  |           | 
|                                                          |  |              |         |           |  |       |         |   |  |  |           | 

Total depreciation and amortization expense was
$10,323, $11,967 and $11,516 for the years ended
December 31, 1999, 2000 and 2001, respectively.

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


7. Related Party Transactions

During the year ended December 31, 2000, the
Company sold Synova, Inc. (Synova), its contract programming
services subsidiary, to a related party. See Note 17. The
Company paid approximately $1,538 to Synova for contract
services for the year ending December 31, 2001. As of
December 31, 2000, the Company owed Synova $652 for
services rendered between the companies. As of December 31,
2001, Synova owed the Company $6 for services rendered between
the companies.

The Company paid approximately $333 and $949 to
Clayton, Dubilier & Rice, Inc. for financial and management
advisory services for the years ended December 31, 2000 and
2001, respectively.

The Company paid approximately $506, $717, and
$1,118 for the years ended December 31, 1999, 2000, and
2001, respectively, for consulting services provided by an
affiliate owned by an outside director.

8. Revolving Credit Facility

Under a credit arrangement with a commercial
bank, the Company may borrow an amount not to exceed $30,000 at
the banks prime interest rate, or LIBOR plus 1 1/4%.
Borrowings under the facility are short-term, payable on demand
and are secured by trade accounts receivable and equipment of
the Company. There were no amounts outstanding under this
agreement at December 31, 2000 and 2001. The credit
agreement contains various restrictive covenants which, among
other items, require the Company to maintain certain levels of
tangible net worth, a debt to earnings ratio, and a funded debt
to capitalization ratio.

9. Self-Insurance

The Company is self-insured 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 of approximately
$10,478, $10,805, and $12,612 for the years ended
December 31, 1999, 2000 and 2001, respectively. Estimated
claims incurred but not reported were $3,100 and $2,000 as of
December 31, 2000 and 2001, respectively, and are included
in other accrued liabilities in the accompanying consolidated
balance sheets.

10. Leases

The Company leases its headquarters, regional
offices, equipment and certain automobiles under noncancelable,
long-term operating leases.

Rent expense for the years ended
December 31, 1999, 2000 and 2001 amounted to approximately
$7,845, $10,120, and $7,764, respectively. The future minimum
lease payments required under these operating leases for the
years ending December 31, are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2002       |  | $ | 7,523  | 
|2003       |  |   | 6,064  | 
|2004       |  |   | 4,979  | 
|2005       |  |   | 4,336  | 
|2006       |  |   | 3,665  | 
|Thereafter |  |   | 4,160  | 
|           |  |   |        | 
|           |  | $ | 30,727 | 
|           |  |   |        | 

During the years ended December 31, 1999,
2000 and 2001, the Company made decisions to close certain
offices. See Note 18.

11. Stock Options

The Company maintains a Stock Option Plan (the
Plan). Under the Plan, eligible employees and directors may be
granted either Incentive Stock Options (ISOs) or Non-Incentive
Stock Options (NISOs) at

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


the discretion of the Compensation Committee of
the Board of Directors. At December 31, 2001 there are
13,247,454 shares of Common Stock authorized for grant under the
Plan. Options under the Plan are granted at fair value on the
date of grant. The options vest over periods determined by the
Compensation Committee of the Board of Directors.

The Plan agreements provide for the option holder
to exercise the options in exchange for cash, or a promissory
note payable to the Company over a period of up to five years
for NISOs and up to two years for ISOs. These notes are full
recourse and bear interest at the prime rate of interest
determined at the date of exercise. Interest on the loans is
payable every six months.

The Company has elected to account for stock
options using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As supplemental information, the
Company has elected to provide the pro forma disclosures, as
permitted under the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123). Accordingly, no
additional compensation expense has been recognized for the Plan
within the accompanying consolidated statements of operations.
Had compensation expense for the Plan been determined based on
the fair value at the grant date for awards in 1999, 2000 and
2001 consistent with the provisions of SFAS No. 123, the
Companys pro forma net income (loss) from continuing
operations and pro forma diluted earnings (loss) per common
share would have been reduced to the amounts indicated below:

|                                                               |                        |      |   |        |  |      |   |         |   |  |   |         |  
|-------------------------------------------------------------- | ---------------------- | ---- | - | ------ |  | ---- | - | ------- | - |  | - | ------- | -
|                                                               |                        | 1999 |   | 2000   |  | 2001
|Net income (loss) from continuing operations:                  |                        |      |   |        |  |      |   |         |   |  |   |        
|                                                               | As reported            |      | $ | 29,812 |  |      | $ | (36,317 | ) |  | $ | (10,518 | )
|                                                               | SFAS No. 123 pro forma |      | $ | 23,586 |  |      | $ | (48,514 | ) |  | $ | (24,997 | )
|Diluted earnings (loss) per share from continuing
	operations: |                        |      |   |        |  |      |   |         |   |  |   |        
|                                                               | As reported            |      | $ | 0.78   |  |      | $ | (1.10   | ) |  | $ | (0.37   | )
|                                                               | SFAS No. 123 pro forma |      | $ | 0.62   |  |      | $ | (1.47   | ) |  | $ | (0.87   | )

A summary of option activity is as follows:

|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|-------------------------- |  | ------------------- | ------ | ---------------- |  | ----------- | ----- | ---------------- |  |  | ----- |  |  | - | ----- | 
|                           |  |                     |        |                  |  |            
|                           |  | Options Outstanding |        |                  |  |            
|                           |  |                     |        |                  |  |            
|                           |  |                     |        | Weighted Average |  | Options     |       | Weighted Average
|                           |  | Shares              |        | Exercise Price   |  | Exercisable |       | Fair Value of   
|                           |  | (in thousands)      |        |                  |  |             |       | Options Granted 
|Balance, December 31, 1998 |  |                     | 4,027  |                  |  | $           | 16.53 |                  |  |  | 880   |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options granted            |  |                     | 2,393  |                  |  |             | 15.22 |                  |  |  |       |  |  | $ | 10.08 | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options exercised          |  |                     | (684   | )                |  |             | 7.59  |                  |  |  |       |  |  |   |       | 
|Options cancelled          |  |                     | (1,085 | )                |  |             | 19.97 |                  |  |  |       |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Balance, December 31, 1999 |  |                     | 4,651  |                  |  | $           | 16.37 |                  |  |  | 975   |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options granted            |  |                     | 4,382  |                  |  |             | 22.02 |                  |  |  |       |  |  | $ | 11.97 | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options exercised          |  |                     | (349   | )                |  |             | 9.14  |                  |  |  |       |  |  |   |       | 
|Options cancelled          |  |                     | (1,521 | )                |  |             | 18.27 |                  |  |  |       |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Balance, December 31, 2000 |  |                     | 7,163  |                  |  | $           | 18.33 |                  |  |  | 1,608 |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options granted            |  |                     | 1,152  |                  |  |             | 10.95 |                  |  |  |       |  |  | $ | 9.26  | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Options exercised          |  |                     | (29    | )                |  |             | 4.03  |                  |  |  |       |  |  |   |       | 
|Options cancelled          |  |                     | (1,518 | )                |  |             | 16.78 |                  |  |  |       |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 
|Balance, December 31, 2001 |  |                     | 6,768  |                  |  | $           | 19.01 |                  |  |  | 2,552 |  |  |   |       | 
|                           |  |                     |        |                  |  |             |       |                  |  |  |       |  |  |   |       | 

30



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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


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 1999, 2000 and
2001 grants: risk-free rate of interest of 5.6%, 6.2% and 4.9%
in 1999, 2000 and 2001, respectively, dividend yield of 0%, and
expected lives of 4 to 5 years. A volatility factor of 87%,
87% and 147% was used in 1999, 2000 and 2001, respectively.

A summary of options outstanding at
December 31, 2001, is as follows:

|               |  |                     |       |                     |  |          |      |                |  |          |       |  |  |  |       |  |  |   |       | 
|-------------- |  | ------------------- | ----- | ------------------- |  | -------- | ---- | -------------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|               |  |                     |       |                    
|               |  | Options Outstanding |       | Options Exercisable
|               |  |                     |       |                    
|               |  |                     |       | Weighted            |  |          |      |               
|               |  | Number              |       | Average             |  | Weighted |      | Number         |  | Weighted
|               |  | Outstanding at      |       | Remaining           |  | Average  |      | Exercisable at |  | Average 
|Range of       |  | December 31,        |       | Contractual         |  | Exercise |      | December 31,   |  | Exercise
|Exercise Price |  | 2001                |       | Life                |  | Price    |      | 2001           |  | Price   
|$ 0.01 -  6.00 |  |                     | 95    |                     |  |          | 4.21 |                |  | $        | 4.41  |  |  |  | 95    |  |  | $ | 4.41  | 
|$ 6.01 - 14.99 |  |                     | 2,572 |                     |  |          | 8.15 |                |  | $        | 12.10 |  |  |  | 1,197 |  |  | $ | 13.27 | 
|$15.00 - 19.34 |  |                     | 656   |                     |  |          | 6.82 |                |  | $        | 17.33 |  |  |  | 365   |  |  | $ | 17.47 | 
|$19.35 - 22.89 |  |                     | 2,683 |                     |  |          | 8.15 |                |  | $        | 21.32 |  |  |  | 696   |  |  | $ | 21.58 | 
|$22.90 - 34.58 |  |                     | 762   |                     |  |          | 7.63 |                |  | $        | 37.50 |  |  |  | 199   |  |  | $ | 27.94 | 

12. Benefit Plans

The Company maintains the Covansys Corporation
Incentive Savings Plan and Trust (the 401(k) plan). All
employees of the Company are eligible to participate in the
401(k) plan on their first day of service and have attained
age 21. The 401(k) plan is a defined contribution plan,
qualified as a profit sharing plan under Section 401(k) of
the Internal Revenue Code. Through December 31, 2001, the
401(k) plan allows eligible employees to contribute up to 18% of
their compensation with the Company matching a percentage of the
contributions. Effective January 1, 2002, the 401(k) plan
was amended to allow eligible employees to contribute up to 50%
of their compensation. For the years ended December 31,
1999, 2000 and 2001, the Company matched 40% of the
employees contribution up to a maximum of 2.4% of the
employees compensation.

Matching contributions made by the Company
amounted to approximately $2,184, $1,914 and $2,850 for the
years ended December 31, 1999, 2000 and 2001, respectively.
The Company may also make an additional contribution, at its
discretion, to the 401(k) plan. No such additional contributions
have been made to date.

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

13. Income Taxes

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

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


The provision (benefit) for income taxes consists
of:

|           |                 |                         |        |       |   |      |         |        |   |   |        |        |  
|---------- | --------------- | ----------------------- | ------ | ----- | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|           |                 |                        
|           |                 | Year Ended December 31,
|           |                 |                        
|           |                 | 1999                    |        | 2000  |   | 2001
|Current   |                 |                         |        |       |   |      |         |        |   |   |        |       
|           | Federal         |                         | $      | 8,731 |   |      | $       | (4,258 | ) |   | $      | (8,365 | )
|           | State and local |                         |        | 1,115 |   |      |         | (547   | ) |   |        | (882   | )
|           | Foreign         |                         |        | 118   |   |      |         | 581    |   |   |        | 1,228  |  
|           |                 |                         |        |       |   |      |         |        |   |   |        |       
|           |                 |                         | 9,964  |       |   |      | (4,224  | )      |   |   | (8,019 | )     
|Deferred  |                 |                         |        |       |   |      |         |        |   |   |        |       
|           | Federal         |                         |        | 6,598 |   |      |         | (6,733 | ) |   |        | (255   | )
|           | State and local |                         |        | (108  | ) |      |         | (866   | ) |   |        | (270   | )
|           | Foreign         |                         |        | (171  | ) |      |         | 568    |   |   |        |       |  
|           |                 |                         |        |       |   |      |         |        |   |   |        |       
|           |                 |                         | 6,319  |       |   |      | (7,031  | )      |   |   | (525   | )     
|           |                 |                         |        |       |   |      |         |        |   |   |        |       
|           |                 | $                       | 16,283 |       |   | $    | (11,255 | )      |   | $ | (8,544 | )     
|           |                 |                         |        |       |   |      |         |        |   |   |        |       

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,
|                       |                                                                   |                        
|                       |                                                                   | 1999                    |    | 2000 |   | 2001
|Federal statutory rate |                                                                   |                         | 35 | %    |   |      | 35 | %   |   |  | 35 | % 
|Effect of             |                                                                   |                         |    |      |   |      |    |     |   |  |    |   
|                       | Tax rate differences on foreign earnings not
	subject to U.S. tax |                         |    | (5   | ) |      |    | 1   |   |  |    | 22 |  
|                       | Goodwill write down                                               |                         |    |     |   |      |    | (6  | ) |  |    |   |  
|                       | State income taxes, net of federal tax effect                     |                         |    | 4    |   |      |    | 4   |   |  |    | 3  |  
|                       | Taxes on distributions from foreign subsidiaries                  |                         |    |     |   |      |    |    |   |  |    | (8 | )
|                       | Other, net                                                        |                         |    | 1    |   |      |    | (10 | ) |  |    | (7 | )
|                       |                                                                   |                         |    |      |   |      |    |     |   |  |    |   
|                       |                                                                   |                         | 35 | %    |   |      | 24 | %   |   |  | 45 | % 
|                       |                                                                   |                         |    |      |   |      |    |     |   |  |    |   

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,                        
|                           |                                        |                                     
|                           |                                        | 2000                                 |                         | 2001  
|Deferred tax assets       |                                        |                                      |                         |        |        |        |   |       
|                           | Accrued expenses                       |                                      | $                       | 4,463  |        |        | $ | 4,338  |       
|                           | Allowance for doubtful accounts        |                                      |                         | 7,134  |        |        |   | 655    |       
|                           | Net operating loss carryforward        |                                      |                         | 2,311  |        |        |   | 5,909  |       
|                           | Restructuring charge                   |                                      |                         | 1,561  |        |        |   | 2,639  |       
|                           | Investment write-down                  |                                      |                         | 1,490  |        |        |   |       |       
|                           | Property                               |                                      |                         |       |        |        |   | 919    |       
|                           | Other                                  |                                      |                         | 359    |        |        |   | 209    |       
|                           |                                        |                                      |                         |        |        |        |   |       
|                           |                                        | Total gross deferred tax assets      |                         |        | 17,318 |        |   |        | 14,669 |       
|Deferred tax liabilities  |                                        |                                      |                         |        |        |        |   |       
|                           | Capitalized software development costs |                                      |                         | (3,937 | )      |        |   | (3,732 | )     
|                           | Loss on equity investment              |                                      |                         | (2,340 | )      |        |   |       |       
|                           | Property                               |                                      |                         | (585   | )      |        |   |       |       
|                           | Other                                  |                                      |                         | (267   | )      |        |   | (222   | )     
|                           |                                        |                                      |                         |        |        |        |   |       
|                           |                                        | Total gross deferred tax liabilities |                         |        | (7,129 | )      |   |        | (3,954 | )     
|                           |                                        |                                      |                         |        |        |        |   |       
|                           |                                        |                                      | Net deferred tax assets |        | $      | 10,189 |   |        | $      | 10,715 | 
|                           |                                        |                                      |                         |        |        |        |   |       

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COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


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

At December 31, 2001, for income tax
purposes, the Company had available Federal net operating loss
carryforwards of approximately $10,000, which expire between
2011 and 2021.

14. Segment Information

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

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

|                    |                     |                         |       |         |         |      |        |         |         |   |        |         |         |  
|------------------- | ------------------- | ----------------------- | ----- | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                    |                     |                        
|                    |                     | Year Ended December 31,
|                    |                     |                        
|                    |                     | 1999                    |       | 2000    |         | 2001
|Revenues           |                     |                         |       |         |         |      |        |         |         |   |        |        
|                    | North America       |                         | $     | 424,132 |         |      | $      | 396,726 |         |   | $      | 373,298 |        
|                    | India and Asia      |                         |       | 27,497  |         |      |        | 36,577  |         |   |        | 44,755  |        
|                    |                     | Less intersegment       |       |         | (22,587 | )    |        |         | (25,037 | ) |        |         | (30,293 | )
|                    |                     |                         |       |         |         |      |        |         |         |   |        |        
|                    |                     |                         | 4,910 |         |         |      | 11,540 |         |         |   | 14,462 |        
|                    | Other International |                         |       | 14,499  |         |      |        | 11,375  |         |   |        | 16,974  |        
|                    |                     |                         |       |         |         |      |        |         |         |   |        |        
|                    |                     |                         |       | $       | 443,541 |      |        | $       | 419,641 |   |        | $       | 404,734 |  
|                    |                     |                         |       |         |         |      |        |         |         |   |        |        
|Long-Lived Assets  |                     |                         |       |         |         |      |        |         |         |   |        |        
|                    | North America       |                         | $     | 41,275  |         |      | $      | 49,162  |         |   | $      | 42,559  |        
|                    | India and Asia      |                         |       | 5,872   |         |      |        | 6,994   |         |   |        | 7,352   |        
|                    | Other international |                         |       | 273     |         |      |        | 1,373   |         |   |        | 195     |        
|                    |                     |                         |       |         |         |      |        |         |         |   |        |        
|                    |                     | Total                   |       | $       | 47,420  |      |        | $       | 57,529  |   |        | $       | 50,106  |  
|                    |                     |                         |       |         |         |      |        |         |         |   |        |        

In 2001, the Company began evaluating performance
based on the location where services were performed and not
based on the location which invoices for services performed, as
the table above presents. Under this methodology, revenues in
2001 for North America, India and Asia, and Other International
were $338,545, $49,215, and $16,974, respectively.

15. Commitments, Contingencies and
Potential Liability to Clients

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

In addition, many of the Companys
engagements involve projects that are critical to the operations
of its clients businesses and provide benefits that may be
difficult to quantify. The Company attempts to

33



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


contractually limit its liability for damages
arising from errors, mistakes, omissions or negligent acts in
rendering its services.

16. Convertible Redeemable Preferred
Stock

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

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

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

The Preferred Stock is redeemable at the option
of the holder within ten years of the date of issuance. Due to
the redeemable nature of the Preferred Stock, the difference
between the proceeds allocated to the Preferred Stock and the
amount of the redemption ($200,000) is being accreted to
Preferred Stock over the redemption period as a dividend on
Preferred Stock. The Preferred Stock ranks senior to common
stock in the event of liquidation, has voting rights equal to
the number of common shares into which it is convertible and is
entitled to the same dividend as common stock if a dividend is
declared.

The Company also entered into an agreement with
CDR whereby CDR will provide the Company financial and
management advisory services. During 2000 and 2001, the amount
paid under this agreement was $333 and $949, respectively.

17. Discontinued Operations and Gain on
Sale of Discontinued Operations

In June 2000, the Companys board of
directors adopted a plan to sell the operations of its contract
programming services subsidiary, Synova. Accordingly, the
accompanying consolidated financial statements have been
reclassified to reflect Synova as a discontinued operation. The
net operating results of Synova have been reported, net of
income taxes, as income (loss) from discontinued
operations in the accompanying consolidated statements of
operations for 1999 and 2000. The net cash flows of Synova have
been included in cash used in discontinued operations and
effect of exchange rate changes in cash in the
accompanying consolidated statements of cash flows for 1999 and
2000.

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

|                     |  |              |        |               |  |   |        |  
|-------------------- |  | ------------ | ------ | ------------- |  | - | ------ | -
|                     |  |              |        | Nine Months  
|                     |  | Year Ended   |        | Ended        
|                     |  | December 31, |        | September 30,
|                     |  |              |        |              
|                     |  | 1999         |        | 2000         
|Revenues             |  | $            | 18,529 |               |  | $ | 39,204 |  
|Loss from operations |  |              | (24    | )             |  |   | (2,685 | )

34



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


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

In connection with the sale of Synova, certain
receivables due to the Company were converted into a note
receivable from Synova of $8,000. The note receivable, which
bears interest at approximately 8.5% and is due in
September 2005, is guaranteed by the related party.

18. Restructuring, Merger and Other
Related Charges

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

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

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

|                                                                              |  |  |       | 
|----------------------------------------------------------------------------- |  |  | ----- | 
|Severance and costs associated with building a
	new executive management team |  |  | 8,800 | 
|Termination of lease obligations associated with
	consolidation of facilities |  |  | 5,800 | 
|Write-off of assets due to change in strategic
	direction                     |  |  | 2,900 | 
|Other                                                                         |  |  | 4,007 | 

In fiscal 1999, the Company recorded merger and
other costs of $5,367, principally for lease termination and
employee severance related to the acquisition of EBS. These
costs did not meet the requirements of Emerging Issues Task
Force (EITF) 95-03 and therefore were not accrued at the
time of acquisition and capitalized in goodwill.

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

|                               |  |      |        |      |  |      |         |   |  |   |         |  
|------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                               |  | 1999 |        | 2000 |  | 2001
|Balance, beginning of period   |  | $    | 0      |      |  | $    | 0       |   |  | $ | 7,541   |  
|Provision                      |  |      | 5,367  |      |  |      | 21,507  |   |  |   | 23,665  |  
|Write-down/write-off of assets |  |      |       |      |  |      | (3,100  | ) |  |   | (15,250 | )
|Cash payments                  |  |      | (5,367 | )    |  |      | (10,866 | ) |  |   | (8,525  | )
|                               |  |      |        |      |  |      |         |   |  |   |         |  
|Balance, end of period         |  | $    | 0      |      |  | $    | 7,541   |   |  | $ | 7,431   |  
|                               |  |      |        |      |  |      |         |   |  |   |         |  

19. Supplemental Quarterly Information
(Unaudited)

The following quarterly information is unaudited.

|                                                      |  |               |         |         |  |              |         |             |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------- | ------- | ------- |  | ------------ | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                      |  |              
|2000                                                  |  | Quarter Ended
|                                                      |  |              
|                                                      |  | March 31      |         | June 30 |  | September 30 |         | December 31
|Revenues                                              |  | $             | 101,721 |         |  | $            | 105,831 |             |  | $ | 105,641 |   |  | $ | 106,448 |  
|Gross profit                                          |  |               | 30,918  |         |  |              | 27,499  |             |  |   | 26,771  |   |  |   | 26,154  |  
|Income (loss) from continuing operations              |  |               | 7,593   |         |  |              | (2,798  | )           |  |   | (16,417 | ) |  |   | (42,010 | )
|Net income (loss)                                     |  |               | 5,011   |         |  |              | (2,040  | )           |  |   | (3,900  | ) |  |   | (31,008 | )
|Diluted net income (loss) per weighted-average
	share |  | $             | 0.13    |         |  | $            | (0.06   | )           |  | $ | (0.11   | ) |  | $ | (1.00   | )

35



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##### Table of Contents



COVANSYS CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


|                                                      |  |               |         |         |  |              |         |             |  |   |         |   |  |   |        |  
|----------------------------------------------------- |  | ------------- | ------- | ------- |  | ------------ | ------- | ----------- |  | - | ------- | - |  | - | ------ | -
|                                                      |  |              
|2001                                                  |  | Quarter Ended
|                                                      |  |              
|                                                      |  | March 31      |         | June 30 |  | September 30 |         | December 31
|Revenues                                              |  | $             | 104,671 |         |  | $            | 104,412 |             |  | $ | 100,136 |   |  | $ | 95,515 |  
|Gross profit                                          |  |               | 27,526  |         |  |              | 29,617  |             |  |   | 28,683  |   |  |   | 28,257 |  
|Loss from continuing operations                       |  |               | (4,758  | )       |  |              | (15,838 | )           |  |   | (204    | ) |  |   | (3,793 | )
|Net income (loss)                                     |  |               | (1,950  | )       |  |              | (11,269 | )           |  |   | 1,024   |   |  |   | 1,677  |  
|Diluted net income (loss) per weighted-average
	share |  | $             | (0.07   | )       |  | $            | (0.39   | )           |  | $ | 0.03    |   |  | $ | 0.05   |  

36



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##### Table of Contents



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

None

37



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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 2002 Annual Meeting of
Shareholders under the caption Directors and Executive Officers
and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this item is included
in our Proxy Statement for our 2002 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 2002 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 2002 Annual Meeting of
Shareholders under the caption Certain Relationships and Related
Transactions and is incorporated herein by reference.

38



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##### Table of Contents








PART IV


Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K



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



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



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

|                                                                                                               |  |      |    | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                               |  | Page
|                                                                                                               |  |     
|Report of Independent Public Accountants                                                                       |  |      | 19 | 
|Consolidated Balance Sheets as of
	December 31, 2000 and 2001                                                  |  |      | 20 | 
|Consolidated Statements of Operations for each of
	the years ended December 31, 1999, 2000 and 2001            |  |      | 21 | 
|Consolidated Statements of Shareholders
	Equity for each of the years ended December 31, 1999, 2000
	and 2001 |  |      | 22 | 
|Consolidated Statements of Cash Flows for each of
	the years ended December 31, 1999, 2000 and 2001            |  |      | 23 | 
|Notes to Consolidated Financial Statements                                                                     |  |      | 24 | 

2. Financial Statement Schedules

None

3. Exhibits

|        |      |             |  |                                                                                                                                                                                       
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        | 3.1* |             |  | Restated Articles of Incorporation of the
	Company, as amended.                                                                                                                       
|        | 3.2* |             |  | Bylaws of the Company.                                                                                                                                                                
|        | 4.1* |             |  | See Exhibits 3.1 and 3.2 for provisions of the
	Restated Articles of Incorporation and Restated Bylaws of the
	Company defining rights of the holders of Common Stock of the
	Company.
|        | 4.2* |             |  | Specimen Stock Certificate.                                                                                                                                                           
|        | 10.1 |             |  | Letter Agreement with Michael S. Duffey                                                                                                                                               
|        | 10.2 |             |  | Loanout Agreement between Covansys Corporation
	and Clayton, Dubilier & Rice, Inc.                                                                                                    
|        | 10.3 |             |  | Employment Agreement with Martin C. Clague                                                                                                                                            
|        | 21.1 |             |  | Subsidiaries of Registrant. (Filed Herein)                                                                                                                                            
|        | 23.1 |             |  | Consent of Arthur Andersen LLP. (Filed Herein)                                                                                                                                        
|        | (b)  |             |  | Reports on Form 8-K.                                                                                                                                                                  
|        |      |             |  | Per report on Form 8-K filed
	November 15, 2001.                                                                                                                                      




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

39



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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/ NED C. LAUTENBACH

| |                         
| | ------------------------
| |                         
| | Ned C. Lautenbach       
| | Chief Executive Officer,
| | Co-Chairman and Director
| | March 14, 2002          

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

|                                               |  |                                                                                                                                              |  |               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|/s/ NED C. LAUTENBACHNed C. Lautenbach         |  | Chief Executive Officer, Co-Chairman and Director                                                                                            |  | March 14, 2002
|/s/ RAJENDRA B. VATTIKUTIRajendra B. Vattikuti |  | Co-Chairman, Director                                                                                                                        |  | March 14, 2002
|/s/ MARTIN C. CLAGUEMartin C. Clague           |  | President, Chief Operating Officer and Director                                                                                              |  | March 14, 2002
|/s/ MICHAEL S. DUFFEYMichael S. Duffey         |  | Executive Vice President of Finance and
	Administration and Chief Financial Officer, Treasurer
	(Principal Financial and Accounting Officer) |  | March 14, 2002
|/s/ WILLIAM BROOKSWilliam Brooks               |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ KEVIN CONWAYKevin Conway                   |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ DOUGLAS S. LANDDouglas S. Land             |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ RONALD K. MACHTLEYRonald K. Machtley       |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ JOHN A. STANLEYJohn A. Stanley             |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ FRANK D. STELLAFrank D. Stella             |  | Director                                                                                                                                     |  | March 14, 2002
|/s/ DAVID WASSERMANDavid Wasserman             |  | Director                                                                                                                                     |  | March 14, 2002

40



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##### Table of Contents



EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                       
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 3.1  | *           |  | Restated Articles of Incorporation of the
	Company, as amended.                                                                                                                       
|        | 3.2  | *           |  | Bylaws of the Company.                                                                                                                                                                
|        | 4.1  | *           |  | See Exhibits 3.1 and 3.2 for provisions of the
	Restated Articles of Incorporation and Restated Bylaws of the
	Company defining rights of the holders of Common Stock of the
	Company.
|        | 4.2  | *           |  | Specimen Stock Certificate.                                                                                                                                                           
|        | 10.1 |             |  | Letter Agreement with Michael S. Duffey                                                                                                                                               
|        | 10.2 |             |  | Loanout Agreement between Covansys Corporation
	and Clayton, Dubilier & Rice, Inc.                                                                                                    
|        | 10.3 |             |  | Employment Agreement with Martin C. Clague                                                                                                                                            
|        | 21.1 |             |  | Subsidiaries of Registrant. (Filed Herein)                                                                                                                                            
|        | 23.1 |             |  | Consent of Arthur Andersen LLP. (Filed Herein)                                                                                                                                        




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

41