##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-Q












COVANSYS CORPORATION




|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Michigan(State or Other Jurisdiction of
    Incorporation or Organization) |  | 38-2606945(IRS Employer
    Identification No.)

32605 West Twelve Mile Road


Suite 250


Farmington Hills, Michigan 48334




(248) 488-2088


x o






|                           |                      |                         
|-------------------------- | -------------------- | ------------------------
|Large accelerated filer  o | Accelerated filer  þ | Non-accelerated filer  o

o þ




|                                    |  |                                             
|----------------------------------- |  | --------------------------------------------
|No Par Value(Class of Common Stock) |  | 37,558,828(Outstanding as of April 28, 2006)









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##### 



COVANSYS CORPORATION


INDEX







|                                                                           |  |                                                                                           |    |          |    | 
|-------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                                                                           |  |                                                                                           |    | Page No. |   
|                                                                           |  |                                                                                           |    |          |   
|PART I.                                                                    |  | FINANCIAL INFORMATION                                                                     |    |          |    | 
|Item 1.                                                                    |  | Financial Statements                                                                      |    |          | 3  | 
|                                                                           |  | Condensed Consolidated Balance Sheets                                                     |    |          | 3  | 
|                                                                           |  | Condensed Consolidated Statements of
    Income                                           |    |          | 4  | 
|                                                                           |  | Condensed Consolidated Statements of Cash
    Flows                                       |    |          | 5  | 
|                                                                           |  | Notes to Condensed Consolidated Financial
    Statements                                  |    |          | 6  | 
|Item 2.                                                                    |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |          | 14 | 
|Item 3.                                                                    |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |          | 19 | 
|Item 4.                                                                    |  | Controls and Procedures                                                                   |    |          | 19 | 
|                                                                          
|PART II.                                                                   |  | OTHER INFORMATION                                                                         |    |          |    | 
|Item 1.                                                                    |  | Legal Proceedings                                                                         |    |          | 20 | 
|Item 1A.                                                                   |  | Risk Factors                                                                              |    |          | 20 | 
|Item 2.                                                                    |  | Unregistered Sales of Securities and Use of
    Proceeds                                  |    |          | 20 | 
|Item 6.                                                                    |  | Exhibits                                                                                  |    |          | 21 | 
|                                                                          
|SIGNATURES                                                                 |  |                                                                                           | 22 |         
|Certification Pursuant to Section 302                                     
|Certification Pursuant to Section 302                                     
|Certification of Rajendra B. Vattlikuti pursuant to 18 U.S.C. Section 1350
|Certification of James S. Trouba pursuant to 18 U.S.C. Section 1350       



2



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##### Table of Contents






PART I. FINANCIAL INFORMATION





Item 1. Financial Statements


COVANSYS CORPORATION AND SUBSIDIARIES





condensed consolidated
balance sheets


|                                     |                                                                                                                                                                                     |                                            |        |         |              |  |        |         |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                     |                                                                                                                                                                                     | March 31,                                  |        |         | December 31, | 
|                                     |                                                                                                                                                                                     | 2006                                       |        |         | 2005         | 
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | (Dollars in thousands)                     |       
|                                     |                                                                                                                                                                                     | (Unaudited)                                |       
|ASSETS                               |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|Current assets:                      |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|                                     | Cash and cash equivalents                                                                                                                                                           |                                            | $      | 61,492  |              |  | $      | 58,030  |        
|                                     | Short-term investments                                                                                                                                                              |                                            |        | 20,414  |              |  |        | 23,332  |        
|                                     | Accounts receivable, net of allowance for doubtful accounts of
    $1,377 and $1,357 at March 31, 2006 and December 31,
    2005, respectively                                      |                                            |        | 78,906  |              |  |        | 82,526  |        
|                                     | Revenue earned in excess of billings                                                                                                                                                |                                            |        | 3,679   |              |  |        | 25,632  |        
|                                     | Deferred taxes                                                                                                                                                                      |                                            |        | 6,729   |              |  |        | 6,275   |        
|                                     | Prepaid expenses and other                                                                                                                                                          |                                            |        | 6,952   |              |  |        | 8,842   |        
|                                     | Assets held for sale                                                                                                                                                                |                                            |        | 32,005  |              |  |        |        |        
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | Total current assets                       |        |         | 210,177      |  |        |         | 204,637 | 
|Property and equipment, net          |                                                                                                                                                                                     |                                            | 33,954 |         |              |  | 34,506 |        
|Computer software, net               |                                                                                                                                                                                     |                                            | 1,298  |         |              |  | 2,150  |        
|Goodwill                             |                                                                                                                                                                                     |                                            | 22,056 |         |              |  | 21,893 |        
|Deferred taxes                       |                                                                                                                                                                                     |                                            | 3,075  |         |              |  | 3,086  |        
|Other assets                         |                                                                                                                                                                                     |                                            | 5,540  |         |              |  | 4,989  |        
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | Total assets                               |        | $       | 276,100      |  |        | $       | 271,261 | 
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|Current liabilities:                 |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|                                     | Accounts payable                                                                                                                                                                    |                                            | $      | 13,527  |              |  | $      | 14,346  |        
|                                     | Accrued payroll and related costs                                                                                                                                                   |                                            |        | 19,619  |              |  |        | 21,542  |        
|                                     | Taxes payable                                                                                                                                                                       |                                            |        | 2,129   |              |  |        | 1,438   |        
|                                     | Other accrued liabilities                                                                                                                                                           |                                            |        | 16,271  |              |  |        | 19,618  |        
|                                     | Deferred revenue                                                                                                                                                                    |                                            |        | 361     |              |  |        | 2,783   |        
|                                     | Liabilities held for sale                                                                                                                                                           |                                            |        | 5,036   |              |  |        |        |        
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | Total current liabilities                  |        |         | 56,943       |  |        |         | 59,727  | 
|Other liabilities                    |                                                                                                                                                                                     |                                            | 3,388  |         |              |  | 3,674  |        
|Commitments and contingencies        |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|Shareholders equity:                |                                                                                                                                                                                     |                                            |        |         |              |  |        |        
|                                     | Preferred stock, no par value, 1,000,000 shares authorized, none
    issued                                                                                                         |                                            |        |        |              |  |        |        |        
|                                     | Common stock, no par value, 200,000,000 shares authorized,
    37,524,311 and 37,398,342 shares issued and outstanding as
    of March 31, 2006 and December 31, 2005, respectively |                                            |        |        |              |  |        |        |        
|                                     | Additional paid-in capital                                                                                                                                                          |                                            |        | 167,384 |              |  |        | 165,496 |        
|                                     | Retained earnings                                                                                                                                                                   |                                            |        | 48,928  |              |  |        | 43,971  |        
|                                     | Accumulated other comprehensive loss                                                                                                                                                |                                            |        | (543    | )            |  |        | (1,607  | )      
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | Total shareholders equity                 |        |         | 215,769      |  |        |         | 207,860 | 
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 
|                                     |                                                                                                                                                                                     | Total liabilities and shareholders equity |        | $       | 276,100      |  |        | $       | 271,261 | 
|                                     |                                                                                                                                                                                     |                                            |        |         |              | 



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COVANSYS CORPORATION AND SUBSIDIARIES





condensed consolidated
statements of income


|                                             |         |                                          |         |     |        |   |         |     |        | 
|-------------------------------------------- | ------- | ---------------------------------------- | ------- | --- | ------ | - | ------- | --- | ------ | 
|                                             |         | Three Months Ended                       |        
|                                             |         | March 31,                                |        
|                                             |         |                                          |        
|                                             |         | 2006                                     |         |     | 2005   |  
|                                             |         |                                          |         |     |        |  
|                                             |         | (In thousands, except                    |        
|                                             |         | per share data)                          |        
|                                             |         | (Unaudited)                              |        
|Revenue                                      |         | $                                        | 109,776 |     |        | $ | 104,273 |    
|Cost of revenue                              |         |                                          | 85,586  |     |        |   | 73,950  |    
|                                             |         |                                          |         |     |        |  
|                                             |         | Gross profit                             |         |     | 24,190 |   |         |     | 30,323 | 
|Selling, general and administrative expenses |         |                                          | 18,674  |     |        |   | 18,861  |    
|                                             |         |                                          |         |     |        |  
|                                             |         | Income from operations                   |         |     | 5,516  |   |         |     | 11,462 | 
|Interest expense                             |         |                                          | 17      |     |        |   | 203     |    
|Other income, net                            |         |                                          | (563    | )   |        |   | (589    | )  
|                                             |         |                                          |         |     |        |  
|                                             |         | Income before provision for income taxes |         |     | 6,062  |   |         |     | 11,848 | 
|Provision for income taxes                   |         |                                          | 1,105   |     |        |   | 3,791   |    
|                                             |         |                                          |         |     |        |  
|                                             |         | Net income                               |         | $   | 4,957  |   |         | $   | 8,057  | 
|                                             |         |                                          |         |     |        |  
|Income per share                             |         |                                          |         |     |        |   |         |    
|                                             | Basic   |                                          | $       | .13 |        |   | $       | .22 |       
|                                             |         |                                          |         |     |        |  
|                                             | Diluted |                                          | $       | .13 |        |   | $       | .21 |       
|                                             |         |                                          |         |     |        |  
|Basic weighted average shares                |         |                                          | 37,444  |     |        |   | 37,429  |    
|Dilutive effect of options and warrants      |         |                                          | 459     |     |        |   | 604     |    
|                                             |         |                                          |         |     |        |  
|Diluted weighted average shares              |         |                                          | 37,903  |     |        |   | 38,033  |    
|                                             |         |                                          |         |     |        |  

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


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COVANSYS CORPORATION AND SUBSIDIARIES





condensed consolidated
statements of cash flows


|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |        |        |         |       |        |        |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | -
|                                                 |                                                                                       | Three Months Ended                               |                                                                              
|                                                 |                                                                                       | March 31,                                        |                                                                              
|                                                 |                                                                                       |                                                  |                                                                              
|                                                 |                                                                                       | 2006                                             |                                                                               |                                           | 2005  |       
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|                                                 |                                                                                       | (Dollars in thousands)                           |                                                                              
|                                                 |                                                                                       | (Unaudited)                                      |                                                                              
|Cash flows from operating activities:            |                                                                                       |                                                  |                                                                               |                                           |       |        |        |        
|                                                 | Net income                                                                            |                                                  | $                                                                             | 4,957                                     |       |        | $      | 8,057   |      
|                                                 | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                  |                                                                               |                                           |       |        |        |         |      
|                                                 |                                                                                       | Depreciation and amortization                    |                                                                               |                                           | 3,380 |        |        |         | 3,218 |       
|                                                 |                                                                                       | Loss on disposal of property and equipment       |                                                                               |                                           | 177   |        |        |         | 158   |       
|                                                 |                                                                                       | Stock-based compensation cost                    |                                                                               |                                           | 397   |        |        |         |      |       
|                                                 |                                                                                       | Provision for and write-off of doubtful accounts |                                                                               |                                           | 3     |        |        |         | 150   |       
|                                                 |                                                                                       | Provision for deferred income taxes              |                                                                               |                                           | (450  | )      |        |         | (381  | )     
|                                                 |                                                                                       | Gain from sale of short-term investments         |                                                                               |                                           | (13   | )      |        |         | (43   | )     
|                                                 |                                                                                       | Change in assets and liabilities:                |                                                                               |                                           |       |        |        |         |       |       
|                                                 |                                                                                       |                                                  | Accounts receivable and revenue earned in excess of billings                  |                                           |       | (3,590 | )      |         |       | (6,466 | )     
|                                                 |                                                                                       |                                                  | Prepaid expenses and other                                                    |                                           |       | 639    |        |         |       | (432   | )     
|                                                 |                                                                                       |                                                  | Accounts payable, accrued payroll and related costs and other
    liabilities |                                           |       | (2,462 | )      |         |       | 5,117  |       
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|                                                 |                                                                                       |                                                  |                                                                               | Net cash provided by operating activities |       |        | 3,038  |         |       |        | 9,378  |  
|Cash flows from investing activities:            |                                                                                       |                                                  |                                                                               |                                           |       |        |        |        
|                                                 | Investment in property, equipment and other                                           |                                                  |                                                                               | (4,366                                    | )     |        |        | (2,608  | )    
|                                                 | Investment in computer software                                                       |                                                  |                                                                               | (15                                       | )     |        |        | (43     | )    
|                                                 | Proceeds from sale of available for sale securities                                   |                                                  |                                                                               | 33,107                                    |       |        |        | 29,972  |      
|                                                 | Purchases of available for sale securities                                            |                                                  |                                                                               | (29,997                                   | )     |        |        | (30,047 | )    
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|                                                 |                                                                                       |                                                  |                                                                               | Net cash used in investing activities     |       |        | (1,271 | )       |       |        | (2,726 | )
|Cash flows from financing activities:            |                                                                                       |                                                  |                                                                               |                                           |       |        |        |        
|                                                 | Net proceeds from exercise of stock options                                           |                                                  |                                                                               | 1,305                                     |       |        |        | 876     |      
|                                                 | Tax benefit from stock options exercised                                              |                                                  |                                                                               | 187                                       |       |        |        |        |      
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|                                                 |                                                                                       |                                                  |                                                                               | Net cash provided by financing activities |       |        | 1,492  |         |       |        | 876    |  
|                                                 |                                                                                       |                                                  |                                                                               | Effect of exchange rate changes on cash   |       |        | 203    |         |       |        | (128   | )
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|Increase in cash and cash equivalents            |                                                                                       |                                                  | 3,462                                                                         |                                           |       |        | 7,400  |        
|Cash and cash equivalents at beginning of period |                                                                                       |                                                  | 58,030                                                                        |                                           |       |        | 71,250 |        
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       
|Cash and cash equivalents at end of period       |                                                                                       | $                                                | 61,492                                                                        |                                           |       | $      | 78,650 |        
|                                                 |                                                                                       |                                                  |                                                                               |                                           |       |       



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COVANSYS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(Unaudited)


1.     Organization and Basis of
Presentation


e-business


10-K




2.     Sale of State and Local
Consulting Practice




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COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |   |        |  |  |   |        |     | 
|--------------------------------------------------------- | ------- | ---------------------------- | ------- | --------------- | ------------------- | - | ------ | -------- |  | - | --------------- | --- |  | ------------------- | ------- | --- | -------- | - | ------ |  |  | - | ------ | --- | 
|                                                          |         | Three Months Ended March 31, |        
|                                                          |         |                              |        
|                                                          |         | 2006                         |         |                 | 2005                |  
|                                                          |         |                              |         |                 |                     |  
|                                                          |         |                              |         | State and Local |                     |   |        |          |  |   | State and Local |     |  |                    
|                                                          |         | As Reported                  |         |                 | Consulting Practice |   |        | Proforma |  |   | As Reported     |     |  | Consulting Practice |         |     | Proforma |  
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Revenue                                                   |         | $                            | 109,776 |                 |                     | $ | 12,436 |          |  | $ | 97,340          |     |  | $                   | 104,273 |     |          | $ | 18,597 |  |  | $ | 85,676 |    
|Cost of revenue                                           |         |                              | 85,586  |                 |                     |   | 13,210 |          |  |   | 72,376          |     |  |                     | 73,950  |     |          |   | 15,634 |  |  |   | 58,316 |    
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Gross profit (loss)                                       |         |                              | 24,190  |                 |                     |   | (774   | )        |  |   | 24,964          |     |  |                     | 30,323  |     |          |   | 2,963  |  |  |   | 27,360 |    
|                                                         
|Selling, general and administrative expenses              |         |                              | 18,674  |                 |                     |   | 1,548  |          |  |   | 17,126          |     |  |                     | 18,861  |     |          |   | 1,993  |  |  |   | 16,868 |    
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Income (loss) from operations                             |         |                              | 5,516   |                 |                     |   | (2,322 | )        |  |   | 7,838           |     |  |                     | 11,462  |     |          |   | 970    |  |  |   | 10,492 |    
|                                                         
|Interest income and other                                 |         |                              | (546    | )               |                     |   |       |          |  |   | (546            | )   |  |                     | (386    | )   |          |   |       |  |  |   | (386   | )  
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Income (loss) before provision (benefit) for income taxes |         |                              | 6,062   |                 |                     |   | (2,322 | )        |  |   | 8,384           |     |  |                     | 11,848  |     |          |   | 970    |  |  |   | 10,878 |    
|Provision (benefit) for income taxes                      |         |                              | 1,105   |                 |                     |   | (929   | )        |  |   | 2,034           |     |  |                     | 3,791   |     |          |   | 388    |  |  |   | 3,403  |    
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Net income (loss)                                         |         | $                            | 4,957   |                 |                     | $ | (1,393 | )        |  | $ | 6,350           |     |  | $                   | 8,057   |     |          | $ | 582    |  |  | $ | 7,475  |    
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|Earnings per share                                        |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |   |        |  |  |   |        |    
|                                                          | Basic   |                              | $       | .13             |                     |   |        |          |  |   | $               | .17 |  |                     | $       | .22 |          |   |        |  |  |   | $      | .20 | 
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  
|                                                          | Diluted |                              | $       | .13             |                     |   |        |          |  |   | $               | .17 |  |                     | $       | .21 |          |   |        |  |  |   | $      | .20 | 
|                                                          |         |                              |         |                 |                     |   |        |          |  |   |                 |     |  |                     |         |     |          |  







3.     Income Taxes




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COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








4.     Fixed Price Contracts








5.     Segment Information






| |   |                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commercial includes all global services provided to non public
    sector customers. Commercial includes application services for
    maintenance and development outsourcing (AMD/O), retail,
    healthcare, distribution, manufacturing, financial services,
    telecommunications, utilities, e-business, packaged software
    implementation and other services.

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COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Public Sector includes all services provided to domestic state
    and local municipalities.                                                                                            
|
| |  | Other consists primarily of the labor and supporting expenses
    for the Corporate functions, depreciation and amortization
    expenses and lease expenses for corporate headquarters.

10-K.




|                              |                                          |                    |         |        |        |   |         |        |        |  
|----------------------------- | ---------------------------------------- | ------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                              |                                          | Three Months Ended |        
|                              |                                          | March 31,          |        
|                              |                                          |                    |        
|                              |                                          | 2006               |         |        | 2005   |  
|                              |                                          |                    |         |        |        |  
|Revenue                       |                                          |                    |         |        |        |   |         |       
|                              | Commercial                               |                    | $       | 89,659 |        |   | $       | 80,257 |       
|                              |                                          | Less intersegment  |         |        | (1,242 | ) |         |        | (1,882 | )
|                              |                                          |                    |         |        |        |  
|                              |                                          |                    | 88,417  |        |        |   | 78,375  |       
|                              | Public Sector                            |                    |         | 21,359 |        |   |         | 25,898 |       
|                              |                                          |                    |         |        |        |  
|                              |                                          | $                  | 109,776 |        |        | $ | 104,273 |       
|                              |                                          |                    |         |        |        |  
|Income (Loss) From Operations |                                          |                    |         |        |        |   |         |       
|                              | Commercial                               |                    | $       | 15,414 |        |   | $       | 18,484 |       
|                              | Public Sector                            |                    |         | (628   | )      |   |         | 2,636  |       
|                              | Corporate and Other                      |                    |         | (9,270 | )      |   |         | (9,658 | )     
|                              |                                          |                    |         |        |        |  
|                              |                                          |                    | 5,516   |        |        |   | 11,462  |       
|Interest expense              |                                          |                    | 17      |        |        |   | 203     |       
|Other income, net             |                                          |                    | (563    | )      |        |   | (589    | )     
|                              |                                          |                    |         |        |        |  
|                              | Income Before Provision For Income Taxes |                    | $       | 6,062  |        |   | $       | 11,848 |       
|                              |                                          |                    |         |        |        |  

6.     Common Stock Repurchase
Program




7.     Net Income (Loss) Per
Share




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COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                        |  |                    |           |  |      |  |           | 
|----------------------------------------------------------------------- |  | ------------------ | --------- |  | ---- |  | --------- | 
|                                                                        |  | Three Months Ended |          
|                                                                        |  | March 31,          |          
|                                                                        |  |                    |          
|                                                                        |  | 2006               |           |  | 2005 | 
|                                                                        |  |                    |           |  |      | 
|Warrants issued to CDR to purchase 5,000,000 shares of common
    stock |  |                    | 5,000,000 |  |      |  | 5,000,000 | 
|Warrants issued to FIS to purchase 4,000,000 shares of common
    stock |  |                    | 3,000,000 |  |      |  | 4,000,000 | 
|Average number of stock options outstanding                             |  |                    | 1,440,772 |  |      |  | 3,126,065 | 

8.     Stock Option Plans










|                                                                                                       |  |                |       |  
|------------------------------------------------------------------------------------------------------ |  | -------------- | ----- | -
|                                                                                                       |  | Three Months   |      
|                                                                                                       |  | Ended          |      
|                                                                                                       |  | March 31, 2005 |      
|                                                                                                       |  |                |      
|Net income as reported                                                                                 |  | $              | 8,057 |  
|Stock-based employee compensation cost included in reported net
    income                             |  |                |      |  
|Stock-based employee compensation cost determined under the fair
    value based method for all awards |  |                | (743  | )
|                                                                                                       |  |                |      
|Pro forma net income                                                                                   |  | $              | 7,314 |  
|                                                                                                       |  |                |      

10



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##### Table of Contents



COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                   |             |                |  |   |     | 
|------------------ | ----------- | -------------- |  | - | --- | 
|                   |             | Three Months   | 
|                   |             | Ended          | 
|                   |             | March 31, 2005 | 
|                   |             |                | 
|Earnings per share |             |                |  |  
|                   | As reported |                |  |   |    
|                   |             | Basic          |  | $ | .22 | 
|                   |             |                | 
|                   |             | Diluted        |  | $ | .21 | 
|                   |             |                | 
|                   | Pro forma   |                |  |   |    
|                   |             | Basic          |  | $ | .20 | 
|                   |             |                | 
|                   |             | Diluted        |  | $ | .19 | 
|                   |             |                | 

9.     Comprehensive Income




|                                                 |                            |                    |       |       |      |   |        |       | 
|------------------------------------------------ | -------------------------- | ------------------ | ----- | ----- | ---- | - | ------ | ----- | 
|                                                 |                            | Three Months Ended |      
|                                                 |                            | March 31,          |      
|                                                 |                            |                    |      
|                                                 |                            | 2006               |       |       | 2005 |  
|                                                 |                            |                    |       |       |      |  
|Net income                                       |                            | $                  | 4,957 |       |      | $ | 8,057  |      
|Currency translation adjustment                  |                            |                    | 1,086 |       |      |   | (1,043 | )    
|Unrealized gain (loss) on short term investments |                            |                    | (22   | )     |      |   | 11     |      
|                                                 |                            |                    |       |       |      |  
|                                                 | Total comprehensive income |                    | $     | 6,021 |      |   | $      | 7,025 | 
|                                                 |                            |                    |       |       |      |  

10.     Related Party
Transactions








11



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##### Table of Contents



COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


11.     Restructuring, Merger and
Other Related Charges




|                        |  |           |     |       |              |   |       |       |  |   |       |  
|----------------------- |  | --------- | --- | ----- | ------------ | - | ----- | ----- |  | - | ----- | -
|                        |  |           |     | Lease |              |   |      
|                        |  | Severance |     |       | Terminations |   |       | Total | 
|                        |  |           |     |       |              |   |       |       | 
|Balance January 1, 2006 |  | $         |    |       |              | $ | 1,194 |       |  | $ | 1,194 |  
|Expense                 |  |           |    |       |              |   |      |       |  |   |      |  
|Payments and other      |  |           |    |       |              |   | (251  | )     |  |   | (251  | )
|                        |  |           |     |       |              |   |       |       | 
|Balance March 31, 2006  |  | $         |    |       |              | $ | 943   |       |  | $ | 943   |  
|                        |  |           |     |       |              |   |       |       | 
|Balance January 1, 2005 |  | $         | 67  |       |              | $ | 2,174 |       |  | $ | 2,241 |  
|Expense                 |  |           |    |       |              |   |      |       |  |   |      |  
|Payments and other      |  |           | (67 | )     |              |   | (487  | )     |  |   | (554  | )
|                        |  |           |     |       |              |   |       |       | 
|Balance March 31, 2005  |  | $         |    |       |              | $ | 1,687 |       |  | $ | 1,687 |  
|                        |  |           |     |       |              |   |       |       | 



12.     Cost of Computer Software to
be Sold, Leased or Marketed




13.     Goodwill




|                        |  |   |        | 
|----------------------- |  | - | ------ | 
|Balance January 1, 2006 |  | $ | 21,893 | 
|Currency translation    |  |   | 163    | 
|                        |  |   |       
|Balance March 31, 2006  |  | $ | 22,056 | 
|                        |  |   |       

14.     Credit Agreement






12



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##### Table of Contents



COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




15.     Other Income, Net




16.     Subsequent Event




13



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##### Table of Contents



COVANSYS CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following section should be read in conjunction with our
Condensed Consolidated Financial Statements and related Notes
appearing in this
Form 10-Q. 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 impact of changes in estimates on fixed
price projects, internal control weaknesses, variability of
operating results, failure to recruit, train and retain skilled
IT professionals, our agreement to sell the state and local
practice of our Public Sector business may not close, exposure
to regulatory, political and general economic conditions, short
term nature and termination provisions of contracts, competition
in the IT services industry, economic conditions unique to
clients in specific industries, the success of the Company to
negotiate contract renewals at comparable terms, public sector
budget constraints, limited protection of intellectual property
rights, infringement by our services on the property rights of
others, legal liability and damage to our professional
reputation from claims made against our work, and risks related
to merger, acquisition and strategic investment strategy.


Overview












14



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##### Table of Contents





|                              |  |                 |        |   |      |   |        | 
|----------------------------- |  | --------------- | ------ | - | ---- | - | ------ | 
|                              |  | Three Months    |       
|                              |  | Ended March 31, |       
|                              |  |                 |       
|                              |  | 2006            |        |   | 2005 |  
|                              |  |                 |        |   |      |  
|                              |  | (In thousands)  |       
|Revenue                       |  | $               | 12,436 |   |      | $ | 18,597 | 
|Gross profit (loss)           |  |                 | (774   | ) |      |   | 2,963  | 
|Income (loss) from operations |  |                 | (2,322 | ) |      |   | 970    | 







Critical Accounting Policies and Estimates




10-K.




Revenue Recognition.


15



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##### Table of Contents





81-1.


multiple-element re-sale 00-21.






Impairment of Long-Lived Assets.


Computer Software. product-by-product


16



---



##### Table of Contents



Income Taxes.




Liquidity and Capital Resources














Results of Operations




|        |                     |                     |         |        |        |   |         |        |        |  
|------- | ------------------- | ------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|        |                     | Three Months Ended  |        
|        |                     | March 31,           |        
|        |                     |                     |        
|        |                     | 2006                |         |        | 2005   |  
|        |                     |                     |         |        |        |  
|        |                     | (In thousands)      |        
|Revenue |                     |                     |         |        |        |   |         |       
|        | Commercial          |                     | $       | 89,659 |        |   | $       | 80,257 |       
|        |                     | Less intersegment   |         |        | (1,242 | ) |         |        | (1,882 | )
|        |                     |                     |         |        |        |  
|        |                     |                     | 88,417  |        |        |   | 78,375  |       
|        | Public Sector       |                     |         | 21,359 |        |   |         | 25,898 |       
|        |                     |                     |         |        |        |  
|        |                     | $                   | 109,776 |        |        | $ | 104,273 |       
|        |                     |                     |         |        |        |  
|        | Gross profit (loss) |                     |         |        |        |   |         |        |       
|        |                     | Commercial          |         | $      | 23,514 |   |         | $      | 25,697 |  
|        |                     | Public Sector       |         |        | 1,738  |   |         |        | 5,233  |  
|        |                     | Corporate and Other |         |        | (1,062 | ) |         |        | (607   | )
|        |                     |                     |         |        |        |  
|        |                     | $                   | 24,190  |        |        | $ | 30,323  |       
|        |                     |                     |         |        |        |  

17



---



##### Table of Contents



Revenue:


Gross profit:


Selling, General, and Administrative
Expenses:


Interest expense:


Other Income, Net:


Provision for Income
Taxes:


18



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##### Table of Contents



Commitments, Contingencies and Potential Liability to
Clients






Available Information


10-K, 10-Q, 8-K,





Item 3.     Quantitative and
Qualitative Disclosures About Market Risk




Foreign Exchange Risk




Interest Rate Risk







Item 4.     Controls and
Procedures


Disclosure Controls and Procedures




19



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##### Table of Contents





10-Q





PART II.     OTHER INFORMATION





Item 1.     Legal
Proceedings




(C-03825).







Item 1A.     Risk
Factors


10-K







|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds



20



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##### Table of Contents






Item 6.     Exhibits




|       |      |     |         |                                                                                                                                                          
|------ | ---- | --- | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      |     | Exhibit
|       |      |     |        
|       | 10.1 | (a) |         | Asset Purchase Agreement dated March 8, 2006.                                                                                                            
|       | 31.1 |     |         | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                             
|       | 31.2 |     |         | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                             
|       | 32.1 |     |         | Certification of Rajendra B. Vattlikuti pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|       | 32.2 |     |         | Certification of James S. Trouba pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.       






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(a) | Incorporated herein by reference and filed with the
    Companys Current Report on
    Form 8-K dated
    March 8, 2006.

21



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##### Table of Contents






SIGNATURES






| |                     
| | --------------------
| | Covansys Corporation



| |     |                      
| | --- | ---------------------
| | By: | /s/ Thomas E. Lindsey

| |                                     
| | ------------------------------------
| |                                     
| | Thomas E. Lindsey                   
| | Vice President, Controller and Chief
| | Accounting Officer                  
| | (Principal Accounting Officer)      
|
| | /s/ James S. Trouba                 
| |                                     
| | James S. Trouba                     
| | Chief Financial Officer             
| | (Principal Financial Officer)       



22



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##### Table of Contents



EXHIBIT INDEX


|            |      |     |             |                                                                                                                                                          
|----------- | ---- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      |     | Description
|            |      |     |            
|            | 10.1 | (a) |             | Asset Purchase Agreement dated March 8, 2006.                                                                                                            
|            | 31.1 |     |             | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                             
|            | 31.2 |     |             | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                             
|            | 32.1 |     |             | Certification of Rajendra B. Vattlikuti pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 32.2 |     |             | Certification of James S. Trouba pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.       






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(a) | Incorporated herein by reference and filed with the
    Companys Current Report on
    Form 8-K dated
    March 8, 2006.