MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements
including, but not limited to, projections about revenue,
operating income levels, margins, synergies, industry rankings,
capital spending, and market conditions and their anticipated
impact on Intergraph Corporation ("the Company" or "Intergraph");
expectations regarding future results and cash flows; information
regarding the development, timing of introduction, and
performance of new products; any statements of the plans,
strategies, and objectives of management for future operations;
and expectations regarding the Company's various ongoing
litigation proceedings. These forward-looking statements are
subject to known or unknown risks and uncertainties, some of
which are beyond the Company's control, that could cause actual
results to differ materially from those anticipated in the
forward-looking statements.  Factors that could cause or
contribute to such differences include, but are not limited to,
worldwide political and economic conditions and changes, the
ability to attract or retain key personnel, increased
competition, rapid technological change, unanticipated changes in
customer requirements, the ability to protect the Company's
intellectual property rights, the ability to access the
technology necessary to compete in the markets served, the
ability to complete certain sales and lease transactions as
planned, risks associated with doing business internationally
(including foreign currency fluctuations), risks associated with
various ongoing litigation proceedings, including the timing and
ultimate resolution of the appeal by Intel Corporation ("Intel"),
and other risks detailed in our annual and quarterly filings with
the Securities and Exchange Commission ("SEC").

RESULTS OF OPERATIONS

The following financial data sets forth the results of operations
of the Company for each year in the three-year period ended
December 31, 2002.

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                                  2002        2001       2000
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(In thousands)

Revenues                         $501,177    $532,061   $690,454
Cost of revenues                  267,237     298,735    438,177
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Gross profit                      233,940     233,326    252,277
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Operating expenses                223,555     225,623    267,420
Restructuring charges (credits)     2,106        (384)     8,498
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Income (loss) from operations       8,279       8,087    (23,641)

Patent litigation gain, net       440,623         ---        ---
Gains on sales of assets           17,214      11,243     49,546
Interest income                     6,886       7,427      4,809
Interest expense                     (219)     (1,793)    (4,031)
Other income (expense), net        (3,611)      3,954     (7,457)
------------------------------------------------------------------
Income before income taxes and
 minority interest                469,172      28,918     19,226
Income tax expense                (91,135)     (8,500)    (6,600)
------------------------------------------------------------------
Income before minority interest   378,037      20,418     12,626
Minority interest                    (285)       (476)    (2,531)
------------------------------------------------------------------
Net income                       $377,752    $ 19,942   $ 10,095
==================================================================

The general return to profitability resulted from the Company's
restructuring in 2000 into core business segments and its exit
from the hardware business. The improvement in operating income
resulted primarily from the continuing decline in the Company's
operating expenses and higher gross margins due to the increasing
software content in its product mix and better margins in its
services business.

Since 2000, the Company has focused on four business segments
aligned according to markets in which Intergraph believes it is a
leader.  The Company substantially completed the U.S. portion of
this process in third quarter 2000, and in fourth quarter 2000
began to reorganize its European and Asia Pacific operations to
align them with the new business structure.  The international
portion of the Company's reorganization was completed in 2001,
with the last subsidiary sale being completed in 2002 (but
effective October 2001).  In 2002, the Company purchased the
remaining 40% minority interest in its Z/I Imaging Corporation
("Z/I Imaging") segment and combined it and the Utilities and
Communications division with the Intergraph Mapping and
Geospatial Solutions ("IMGS") segment to maximize their synergies
(see "Restructuring Charges" and "Results by Business Segment").
The Company's 2002 business segments are Intergraph Process,
Power & Offshore ("PPO"); IMGS; Intergraph Solutions Group
("ISG"); and Intergraph Public Safety, Inc. ("IPS").

Orders

Systems and services orders for 2002 were $342.4 million, down 7%
from 2001 after declining 36% from 2000 to 2001.  The decline in
orders in 2002 was primarily due to the completion of a large IPS
outsourcing contract and the reduction of services orders in
Europe.  This decrease was partially offset by several large
services orders in the government sector.  The decline in orders
from 2000 to 2001 was primarily due to the Company's exit from
the hardware business and the sale of its civil, plotting, and
raster business to Bentley Systems, Inc. ("BSI") in 2000 and the
sale of its Middle East operations during 2001.

Revenues

In 2002, the Company completed the reorganization of its
operations into four business segments that provide software,
systems integration, and services.  Revenues in 2002, 2001, and
2000 for each of these segments are presented in Note 15 of Notes
to Consolidated Financial Statements.

Total revenue for 2002 was $501.2 million, down 6% from 2001
after declining 23% from 2000 to 2001.  The 2002 decline is
attributable primarily to weak economic conditions worldwide and
the 2001 sale of the Company's Middle East operations.  The
revenue decline from 2000 to 2001 is attributable to the
Company's exit from the hardware business and the sale of its
civil, plotting, and raster business in 2000.

Systems  Systems revenue was $288 million in 2002, down 4% from
2001 after declining 29% from 2000 to 2001.  The 2002 decrease is
primarily due to weak economic conditions worldwide and
continuing order weakness in the Company's Z/I Imaging and
Utilities and Communications businesses.  The decline from 2000
to 2001 is attributable to the Company's exit from the hardware
business, the sale of its Middle East operations in 2001, and the
sale of its civil, plotting, and raster business in 2000.

Systems revenue in 2002 declined in most geographic markets
served by the Company primarily due to the factors noted above.
U.S. systems sales, including sales to the federal government,
totaled $183.8 million in 2002, almost flat with the 2001 level
after decreasing 19% from 2000 to 2001.  International systems
sales totaled $104.2 million in 2002, down 12% from the 2001
level after declining 41% from 2000 to 2001.  European sales were
down 16% in 2002, after declining 28% from 2000 to 2001.  Asia
Pacific's 2002 systems sales were up 21% from 2001, after
declining 62% from 2000 to 2001.  Systems revenue in 2002 for
other international subsidiaries declined 22% primarily as a
result of the sale of the Company's Middle East subsidiaries.

Total revenue from the United States government was approximately
$136.9 million in 2002, $143 million in 2001, and $132.4 million
in 2000, representing 27%, 27%, and 19% of total revenue in 2002,
2001, and 2000, respectively.  The Company sells to the U.S.
government under long-term contractual arrangements, primarily
indefinite delivery, indefinite quantity, and cost-based
contracts, and through sales of commercial products not covered
by long-term contracts.  Approximately 80% of the Company's 2002
federal government revenue was earned under long-term contracts.
The Company believes its relationship with the federal government
to be good.  While it is anticipated that these contracts will
remain in effect through their stated expiration, the contracts
are subject to termination at the election of the government.
Any loss of a significant government contract would have an
adverse impact on the results of operations of the Company.

Maintenance  Maintenance revenue declined 3% in 2002, after
declining 22% from 2000 to 2001.  The Company's hardware
maintenance business has declined as a result of the trend in the
industry toward lower priced products and longer warranty periods
and the Company's exit from the hardware business.

Services  Services revenue, consisting primarily of revenues from
implementation and consulting services, decreased 13% in 2002,
after increasing 2% from 2000 to 2001.  The 2002 decline is
attributable primarily to weak economic conditions worldwide,
especially in the Utilities and Communications business, and the
completion of a large outsourcing project in Australia.

Gross Margin

The Company's total gross margin percentage on revenue was 47% in
2002, compared to 44% in 2001 and 37% in 2000.

Margin on systems revenue was 49% in 2002, flat with 49% in 2001
and increasing from 38% in 2000.  The margin improvement since
2000 is due primarily to increasing software content in the
product mix as the Company's hardware revenues continued to
decline.  Also, systems margins in 2000 declined due to inventory
write-downs resulting from the exit of the Company's hardware
business that year.

In general, the Company believes its systems margins may be
improved by higher software content in the product mix, a weaker
U.S. dollar in international markets, and less discounting.
Systems margins may be lowered by price competition, a higher
services content in the product mix, a stronger U.S. dollar in
international markets, and a higher mix of federal government
sales, which generally produce lower margins than commercial
sales.

Margin on maintenance revenue was 55% in 2002, 47% in 2001, and
45% in 2000.  Although maintenance revenues have declined over
the past three years, the Company has been able to increase
maintenance margins because of the higher software content of
maintenance revenue and lower associated cost of revenues because
of headcount reductions.

Margin on services revenue was 29% in 2002, improving from 25%
and 18% in 2001 and 2000, respectively.  Margins in 2002 were
positively impacted by more effective cost controls and better
overall utilization of resources.  Margins in 2001 were
positively impacted by a slight increase in revenue, coupled with
a larger decrease in costs, primarily in the Utilities and
Communications business.  Margins in 2000 were positively
affected by several large high-margin ISG consulting contracts.
For contracts other than those accounted for under the percentage-
of-completion method, costs are expensed as incurred, with
revenues recognized either at the end of the performance period
or based on milestones specified in the contract.

In third quarter 2000, the Company exited the hardware business
but continues to service its installed hardware base under
warranty and contractual maintenance obligations.  Most hardware
currently sold by the Company is purchased from third-party
vendors.

Operating Expenses (exclusive of restructuring charges)

Operating expenses in 2002 were flat with the 2001 level after
declining 16% from 2000 to 2001.  In response to the level of its
previous operating losses, the Company took various actions,
including employee terminations and the closure and sale of
certain unprofitable non-core businesses, which reduced the total
number of its employees by approximately 33% during the three-
year period ended December 31, 2002.

Product development expense declined by 6% in 2002 after
declining 4% from 2000 to 2001.  The 2002 decrease is primarily
due to more capitalization of development costs offset by some
increased expenses from new product development initiatives.  The
2001 decrease is the result of the exit from the hardware
business.

The Company capitalizes certain development costs incurred after
the technological feasibility of new software products has been
established and amortizes those costs against the revenues
generated by those products.  Though the Company regularly
reviews its capitalized development costs to ensure recognition
of any decline in value, it is possible that, for any given
product, revenues will not materialize in amounts anticipated due
to industry conditions that include price and performance
competition, or that product lives will be reduced due to shorter
product cycles.  Should these events occur, the carrying amount
of capitalized development costs would be reduced, producing
adverse effects on the Company's systems margin and results of
operations (see Note 1 of Notes to Consolidated Financial
Statements).

The Company currently has many ongoing projects relating to
development of new products and enhancement of existing
products.  Projects for the development of new products include
software for engineering information management, intelligent
piping and instrumentation diagrams, 3D visualization,
enterprise information access and reports, and 2D CAD; and new
technology for the earth-imaging industry which includes new
digital products for photogrammetry, airborne reconnaissance,
aerial mapping, and image distribution.  For these ongoing
projects (some of which are expected to be completed during
2003), the Company has incurred total costs of $51.9 million
over the last five years.  The ultimate timing and impact of
certain of these projects on our operations and financial
results cannot be accurately predicted.

Sales and marketing expense in 2002 was slightly higher than the
2001 level, after decreasing 19% from 2000 to 2001.  The 2002
increase was due to the weakening of the U.S. dollar against
international currencies and increased sales and marketing
activity, primarily in PPO.  These increases were partially
offset by reduced spending in the Utilities and Communications
division as a result of headcount reductions.  Expenses in 2001
and 2000 were lower because of the strengthening of the U.S.
dollar against international currencies and headcount reductions
throughout 2001 and 2000.

General and administrative expense for 2002 was flat with the
2001 level, after decreasing 19% from 2000 to 2001.  Legal fees
from second quarter 2002 forward related to the Intel litigation
were offset against the settlement proceeds in "Patent litigation
gain, net" in the 2002 consolidated statement of income.
Expenses in 2001 decreased primarily due to reductions in
headcount and bad debt expenses.  Expenses in 2000 included a
decline in legal fees as the result of reduced activity related
to the Intel litigation and a decline in headcount.

Restructuring Charges

During the three years ended December 31, 2002, the Company
implemented various restructuring actions in an effort to
eliminate unprofitable businesses and better align costs with the
remaining level of revenues generated.

In 2002, the Company recorded $2.1 million in restructuring
charges as a result of combining the Utilities and Communications
business with the IMGS business segment.  Severance costs
associated with the business reorganization totaled almost $1.6
million.  Approximately 45 positions were eliminated worldwide,
primarily in the sales and marketing area, with the majority of
the expense incurred in Europe.  The remaining restructuring
costs consisted of accruals for idle building space.  These
expenses are reflected in "Restructuring charges (credits)" in
the 2002 consolidated statement of income.  Cash outlays and
accrued liability in 2002 for this restructuring approximated
$38,000 and $2.1 million, respectively.  The Company estimates
that the reorganization of these business units will result in
annual savings of approximately $2.7 million.

In 2001, severance liabilities of $384,000 were reversed in
response to unanticipated attrition.  This expense reversal is
reflected in "Restructuring charges (credits)" in the 2001
consolidated statement of income.  Cash outlays in 2001 for
severance that related to the 2000 and prior restructuring plans
approximated $3.6 million.  At December 31, 2001, the Company had
no accrued liability related to the prior years' restructuring
efforts.

In 2000, the Company incurred restructuring charges of
approximately $13.2 million due to its exit from the hardware
business and efforts to better align its international operations
with its new business segments.  Approximately $8.5 million is
recorded in "Restructuring charges (credits)" and $4.7 million in
"Cost of revenues" in the 2000 consolidated statement of income.
The Company's exit from the hardware manufacturing business was
completed with the sales of its Intense3D graphics accelerator
division and its high-end workstation and server business (see
Note 17 of Notes to Consolidated Financial Statements).  The $4.7
million reflected in cost of revenues represented the costs of
inventory write-offs.  The $8.5 million recorded in
"Restructuring charges (credits)" is composed of approximately
$3.2 million related to the exit from the hardware business and
$5.3 million related to the Company's alignment of its
international operations with its new business segments.  The
$3.2 million includes severance costs of approximately $1.7
million (related to the elimination of approximately 50 positions
worldwide, primarily in the sales and marketing area, with the
majority of the related expense incurred in Europe).   The
remaining exit costs were for related fixed asset write-offs of
approximately $1.5 million and accruals for lease cancellations
and idle building space.  The $5.3 million was primarily for
employee severance pay and related expenses.  The Company
eliminated approximately 145 positions worldwide in its sales and
marketing, general and administrative, and customer service and
support areas, with the majority of the related expense incurred
in Europe and Asia.  Cash outlays in 2000 for severance that
related to the Company's restructuring efforts were $7.3 million.
At December 31, 2000, the total remaining accrued liability for
severance relating to the reductions in force during the year was
$384,000.

Non-operating Income and Expense

Patent Litigation Gain, Net  In April 2002, Intergraph and Intel
settled a patent infringement lawsuit filed in Alabama Federal
Court in 1997 for $300 million, which the Company received in
May.  In October 2002, the U.S. District Court for the Eastern
District of Texas ruled in favor of the Company in a related
patent infringement case, resulting in an additional $150 million
payment from Intel, which was received in November.  The Company
recognized a gain of $440.6 million (net of applicable legal fees
and other associated litigation costs) on these transactions
which is included in "Patent litigation gain, net" in the 2002
consolidated statement of income.  See "Litigation and Other
Risks and Uncertainties" for further discussion on patent
litigation.

Gains on Sales of Assets  "Gains on sales of assets" in the
consolidated statements of income and cash flows consists of the
net gains and losses recognized by the Company on sales of
various non-core subsidiaries, divisions, and product lines, and
gains recorded on real estate sales.  See Notes 16 and 17 of
Notes to Consolidated Financial Statements for details of the
Company's acquisitions and divestitures during the three-year
period ended December 31, 2002.

In 2002, the Company reported an additional gain of $2 million
from the Intense3D transaction as the shares originally placed in
escrow were released in March 2002.  In May 2002, Creative
Technology Ltd. ("Creative") purchased all of the outstanding
shares of 3Dlabs Inc., Ltd. ("3Dlabs") for $3.60 per share,
paying one-third in cash and two-thirds in Creative common stock.
The Company recognized a gain of $17 million on the sale of its
3Dlabs stock to Creative.  In July 2002, Intergraph sold
approximately 789,000 shares of Creative stock for a net loss of
$1.3 million.  These transactions are included in "Gains on sales
of assets" in the 2002 consolidated statement of income.  At
December 31, 2002, the Company owned approximately 1.5 million
shares of Creative common stock with a market value of $10.6
million.

In 2001, the Company reported an additional gain from the BSI
transaction of approximately $10.1 million as part of the initial
consideration for the sale, as well as consideration for
transferred maintenance revenues for the products sold to BSI, as
provided for in the original sale agreement.  Also in 2001, the
Company reported an additional gain of $581,000 as a result of
the final calculation and settlement of the earn-out provisions
with 3Dlabs.  In 2001, the Company sold its Middle East
operation, reporting a net gain of $530,000.  See "Litigation and
Other Risks and Uncertainties" for a discussion of pending
litigation with BSI.

In 2000, the Company recorded a gain of $23 million on the sale
of its civil, plotting, and raster product lines to BSI and a
gain of $15.7 million on the sale of its Intense3D graphics
accelerator division to 3Dlabs.  Also in 2000, the Company sold
several real estate holdings including some of the buildings on
its Huntsville, Alabama, campus for an aggregate gain of $1.9
million, and land and a building in The Netherlands for an
aggregate gain of $5.2 million.  Other significant transactions
for 2000 include a $2 million gain recognized on the sale of a
non-core software product line, a $1.5 million gain on the sale
of an investment in an affiliate, a $1.5 million gain on the
termination of a long-term capital lease, and a loss of $1.3
million on the sale of the Company's Singapore subsidiary.

Interest Income  Interest income was $6.9 million in 2002, $7.4
million in 2001, and $4.8 million in 2000.  Although interest
income from short-term investments increased during 2002 due to
proceeds from patent litigation, interest income declined
compared to 2001 due primarily to a decrease in the amount of
interest received on notes receivable.  Also, the 2001 amount
included past due interest received due to settlement of the
Micrografx, Inc. ("Micrografx") convertible subordinated
debenture.

Interest Expense  Interest expense was $219,000 in 2002, $1.8
million in 2001, and $4 million in 2000.  The Company's average
outstanding debt has declined due to repayment of borrowings
utilizing existing cash balances and the proceeds from patent
litigation.  See Note 7 of Notes to Consolidated Financial
Statements for details of the Company's financing arrangements.

Other Income (Expense), Net  "Other income (expense), net" in the
consolidated statements of income consists primarily of foreign
exchange gains and losses and other miscellaneous items of non-
operating income and expense.  In 2002, this amount included a $7
million write-down of the other-than-temporary loss on Creative
stock, a $277,000 net foreign exchange gain, an additional gain
of approximately $1.1 million on the prior sale and leaseback of
a European office building, a dividend of $376,000 from Creative,
and $691,000 in gains on the sales of various assets.  In 2001,
this amount included a $3.8 million payment received from
Micrografx for a convertible debenture held by the Company, $1.7
million for a Mentor Graphics warrant, and a net foreign exchange
loss of $1.5 million.  In 2000, this amount included a $5 million
write-down of the value of the Micrografx convertible debenture
and a net foreign exchange loss of $3.9 million.  See "Impact of
Currency Fluctuations and Currency Risk Management" and Notes 6
and 17 of Notes to Consolidated Financial Statements.

Income Taxes

The Company earned pretax income before minority interest of
$469.2 million in 2002, compared to $28.9 million in 2001 and
$19.2 million in 2000.  Income tax expense in 2002 was
attributable both to income from patent litigation and from taxes
on individually profitable subsidiaries.  Income tax expense in
2001 and 2000 resulted primarily from taxes on individually
profitable subsidiaries, including the Company's 60% ownership
interest in Z/I Imaging in 2001 and 2000.

Note 11 of Notes to Consolidated Financial Statements contains a
reconciliation of statutory income tax expense to actual income
tax expense for each year in the three-year period ended December
31, 2002, and includes further details of the Company's tax
position, including net income and tax credit carryforwards.

Results by Business Segment

Over the past three years, the Company has focused on organizing
the Company into four business segments, along with an
Intellectual Property division ("IP") and a corporate oversight
function ("Corporate").  The following discussion provides a
comparative analysis of results of operations before
restructuring charges (credits) based on the Company's business
structure for 2002.  See Note 15 of Notes to Consolidated
Financial Statements for further explanation and details of the
Company's segment reporting.

PPO  PPO earned operating income of $19 million, $6.8 million,
and $9.9 million on revenues of $124.1 million, $116.5 million,
and $123.7 million, in 2002, 2001, and 2000, respectively.  The
7% increase in revenue in 2002 is due to nonrecurring revenue in
the shipbuilding business and growth in new products covering
instrumentation design, materials/procurement management, and
information management software.  The 6% decline in revenue from
2000 to 2001 is due to a reduction in hardware sales and
associated maintenance revenue due to the Company's exit from the
hardware business in 2000 and the reduction of maintenance
revenue resulting from the sale of certain non-core products to
BSI.  PPO's total gross margin improved from 61% in 2001 to 68%
in 2002 as a result of growth in higher margin products,
improvements in services margins, and less sales of low-margin
products like hardware and hardware maintenance.  The 2001 margin
improvement from 52% in 2000 is the result of a reduction in
sales of lower-margin products.  Operating expenses were flat
with the 2001 level and increased 20% from 2000 to 2001, mainly
in product development.

IMGS  In 2002, IMGS reported an operating loss of $1 million on
revenue of $195.1 million, compared to 2001 operating income of
$6.1 million on revenue of $222.7 million and 2000 operating
income of $13.2 million on revenue of $272 million.  IMGS'
declines in revenue and operating income are the result of less
capital spending in the utilities; communications; local, state,
and federal government; and earth imaging markets.  The 2001
results also included nonrecurring transactions causing 2002
revenue to appear low in comparison.  Compared to 2000, 2001
systems revenue was adversely impacted by weakened demand for the
Company's hardware product offerings due to the exit from the
hardware business and maintenance revenue declined due to the
sale of certain non-core products to BSI.   Services revenue
increased 6% to partially offset these declines.  IMGS' total
gross margin was approximately 48% in 2002, slightly higher than
47% in 2001 after improving from 41% in 2000 due primarily to an
improved overall business mix between hardware, software, and
services revenue.  Operating expenses decreased 3% from the 2001
level as the result of a decrease in headcount and an increase in
development costs that qualified for capitalization.  Operating
expenses were flat between 2001 and 2000.

ISG  In 2002, ISG earned operating income of $5.9 million on
revenue of $127 million, compared to 2001 operating income of $10
million on revenue of $134.1 million and 2000 operating income of
$13.8 million on revenue of $159.5 million.  ISG's maintenance
revenues in 2002 and 2001 were adversely impacted by the
Company's exit from the hardware business in 2000.  This decline
will continue as more hardware maintenance contracts reach
conclusion in 2003.  Systems revenue in 2001 was adversely
impacted by weakened demand for the Company's hardware product
offerings due to the exit from the hardware business.  ISG's
total gross margin was 24% in 2002, a slight decrease compared to
25% in 2001 which decreased from 28% in 2000.  The 2002 decrease
was due to a significant, nonrecurring government purchase of
third-party software with very low margin.  The 2001 margin
decrease was due to declines in the hardware sales and hardware
maintenance businesses as noted above.  Operating expenses
increased 3% from the 2001 level due to higher sales and
marketing expenses associated with expanding into the commercial
services market and decreased 22% from 2000 to 2001 due to
reductions in headcount and bad debt expenses.

IPS  IPS earned operating income of $14.7 million, $8.2 million,
and $1.9 million on revenues of $63.6 million, $60.9 million, and
$51.9 million in 2002, 2001, and 2000 respectively.  A 2002
decline in revenue from Asia and Canada was offset by higher
revenue recognized on several major projects in the United States
and Europe.  The 2002 increase in operating income was due to
higher revenue with better gross margins, flat operating
expenses, and a one-time sale of software and systems associated
with the completion of a large outsourcing contract in Australia.
The 2001 margin of 41% was an improvement over 37% in 2000,
largely due to higher software content in revenues and better
control of project costs.

IP  In 2002, the IP division reported an operating loss of $6.6
million compared to an operating loss of $4 million in 2001 and
$4.3 million in 2000.   Costs are primarily legal fees (related
to patent litigation) that were formerly included in the
Corporate segment.  From second quarter 2002 forward, the legal
expenses related to the Intel patent litigation were offset
against the settlement proceeds recorded in "Patent litigation
gain, net" in the 2002 consolidated statement of income.

Corporate  Corporate incurred operating losses of $22 million in
2002, $19.4 million in 2001, and $49.6 million in 2000, on
revenues of $13.1 million, $33.8 million, and $185 million,
respectively.  The decline in revenue is a direct result of the
exit from the hardware business.  The operating losses are mainly
due to continuing costs of exiting the hardware business,
including management of warranty reserves, inventory write-downs,
and management of a repair depot.  Operating expenses for 2002
decreased 11% from 2001 after decreasing 64% from 2000 to 2001 as
a result of the Company's ongoing efforts to reduce its corporate
overhead, primarily through reductions in headcount.

Outlook for 2003

The Company expects that the markets in which it competes will
continue to be characterized by intense competition, rapidly
changing technologies, and shorter product cycles.  Further
improvement in the Company's operating results will depend on
further market penetration by accurately anticipating customer
requirements and technological trends, and rapidly and
continuously developing and delivering new products and services
that are competitively priced, offer enhanced performance, and
meet customers' requirements.  Better operating results will also
depend on worldwide economic improvement in the markets served.
To increase operating profitability, the Company must achieve
revenue growth and continue to align operating expenses with the
projected level of revenue.  In addition, the Company continues
to face legal expenses of unknown duration and amount as it
licenses its intellectual property and otherwise asserts its
intellectual property rights.  The ultimate impact of these
initiatives is subject to known and unknown risks and
uncertainties.  See "Cautionary Note Regarding Forward-Looking
Statements."

Litigation and Other Risks and Uncertainties

Intel Litigation  As further described in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, the
Company has had ongoing litigation with Intel since 1997.  In
April 2002, the Company and Intel reached an agreement during
the course of court-ordered mediation that settled the
litigation involving the Company's system-level Clipper cache
memory management patents ("Clipper patents").  Under the terms
of this settlement agreement, Intel paid $300 million to the
Company in May 2002, the lawsuit pending in Alabama was
dismissed, the companies signed a highly restricted cross-
license agreement, and the Company assigned certain unrelated
patents to Intel.  The settlement does not require the Company
to take any future actions or make any future payments, and
specifically reserves the Company's right to enforce its Clipper
patents against computer system companies, including customers
of Intel.  Any patents issued in the future will automatically
be licensed to Intel.  Any costs associated with any future
obligations of the Company are inconsequential.  The settlement
also established a range of damages for the then pending patent
infringement suit in Texas.

The Texas trial was held in July 2002 with final closing
arguments in August 2002.  On October 10, 2002, the Court ruled
that Intergraph's parallel instruction computing ("PIC") patents
were valid, enforceable, and infringed by Intel's Itanium and
Itanium 2 products.  The Court also ruled that the Company was
entitled to an injunction on the sale, manufacture, and use of
Intel's Itanium and Itanium 2 processors.  On October 18, 2002,
Intel filed a combined Motion to Reconsider and Motion for a New
Trial, which was denied.  On October 30, 2002, the Court entered
a "Final Judgment and Permanent Injunction" against Intel.
Based on this Final Judgment and pursuant to the terms of the
parties' settlement agreement, Intel paid $150 million to the
Company in November 2002.  Although Intel appealed this ruling
in December 2002, the $150 million payment is non-refundable,
regardless of the outcome on appeal.  Intel will be required to
pay an additional $100 million in damages to the Company if the
trial court's decision is affirmed on appeal.  The appeal
process is expected to take between ten to twelve months.

The Company recorded the $300 million settlement and the $150
million award (net of applicable legal fees and other associated
litigation costs) as a separate line item in the other income
(expense) section of the 2002 consolidated statement of income.

In 1997, the Company placed a number of computer system vendors
on notice that it believed their products infringed the Clipper
patents.  The Company continued to offer to negotiate a patent
license with these system vendors, but such discussions were
suspended as a result of the Company's litigation against Intel.
The Company's lawsuit against Intel was filed in 1997 and
settled in April 2002; however, the Intel settlement agreement
did not include licenses for Intel's customers (the system
vendors who combined an Intel processor with certain other non-
Intel components).  Rather, the Intel settlement agreement
expressly excludes any license regarding the system vendors'
sale of infringing computer systems and specifically records the
Company's intention to seek payment for patent licenses from the
system vendors.

Original Equipment Manufacturers ("OEM") Litigation  On December
16, 2002, the Company filed a patent infringement action against
Dell Computer Corporation(TM), Gateway Inc.(TM), and Hewlett-Packard
Co.(TM) (including the former Compaq Computer Corporation(TM)) in the
U.S. District Court for the Eastern District of Texas ("OEM
case") claiming that products from these computer vendors
infringe three Clipper patents owned by the Company (U.S. Patent
Numbers 4,899,275, 4,933,835, and 5,091,846).  These patents
relate to memory management technology.

The OEM case seeks unspecified damages for past infringement
(including enhanced damages), a statutory patent injunction,
prejudgment interest, costs, and attorneys' fees.  The
defendants have not yet been served the summons and complaint.
The Company is using the time between filing the lawsuit and
serving the complaint to pursue licensing discussions with the
defendants.  As a result, the Court has not yet set the trial
schedule.  The Company cannot speculate as to the timing or
outcome of its discussions with the defendants or the setting of
a trial schedule.  The Company also has not ruled out the
possibility of adding additional defendants to the pending OEM
case.

Texas Instruments Litigation  On January 30, 2003, the Company
filed a patent infringement action against Texas Instruments(TM)
("TI") in the U.S. District Court for the Eastern District of
Texas ("TI case").  The TI case pertains to the Company's PIC
patents, United States Patent Numbers 5,560,028, 5,794,003, and
6,360,313 B1, and states that such patents are infringed by TI's
family of Digital Signal Processors marketed under the name
TMS320C6000(TM).  These devices are used as high-performance
embedded controllers in consumer products.  Their applications
include audio and video encoders and decoders, broadband
solutions, optical networking, telephony, voice processing, and
wireless communications.  The Company believes that publicly
available documents for the TMS320C6000 product family confirm
that the processors employ the same PIC technology described by
the Company's PIC patents.  These same patents have already been
found to be valid and enforceable by the U.S. District Court for
the Eastern District of Texas and were also licensed from the
Company by Fujitsu in September 2002.  As with the OEM case, the
Company intends to use the time between filing and serving the
complaint to pursue licensing discussions with TI.  As a result,
the Company cannot speculate as to the timing or outcome of its
discussions with TI or the setting of a trial schedule.

BSI Litigation In December 2002, the Company filed a declaratory
judgment action in Madison County, Alabama, against BSI.  The
action requests the Court to interpret the parties' asset
purchase agreement and promissory note, and require BSI to
specifically perform the repayment of the same.  The asset
purchase agreement and note were executed in conjunction with
the sale of the Company's civil, plotting, and raster software
product lines to BSI in 2000.  BSI subsequently filed a summons,
but no complaint, against the Company in Philadelphia,
Pennsylvania, and thereafter, in January 2003, filed a summons
and complaint against the Company in Delaware.  The Delaware
complaint alleges that the Company breached certain terms of the
asset purchase agreement.  BSI did not specify an amount of
damages in its Delaware actions, and the Company does not
believe that such claims are likely to be of a size or nature
that would impact the operations of the Company.  The Company
intends to vigorously pursue its claims against BSI, and defend
the claims asserted by BSI.

Other Litigation The Company has other ongoing litigation, none
of which is considered to represent a material contingency for
the Company at this time; however, any unanticipated unfavorable
ruling in any of these proceedings could have an adverse impact
on the Company's results of operations and cash flows.

Other Risks and Uncertainties  The Company owns and maintains a
number of registered patents and registered and unregistered
copyrights, trademarks, and service marks.  The patents and
copyrights held by the Company are the principal means by which
the Company preserves and protects the intellectual property
rights embodied in the Company's products.  Similarly, trademark
rights held by the Company are used to preserve and protect the
reputation of the Company's registered and unregistered
trademarks.  The ultimate impact of these initiatives is subject
to known and unknown risks and uncertainties.  See "Cautionary
Note Regarding Forward-Looking Statements."

In 2002, the Company established an intellectual property
division that is responsible for protecting and licensing the
Company's intellectual property.  During 2002, this division
retained a consulting firm to help develop a licensing program
and strategies for engaging companies using the Company's
patented technologies.

In January 2003, the Company entered into a cross-licensing
agreement with International Business Machines Corporation
("IBM") that will extend for ten years.  The agreement settled
all patent infringement claims between IBM and the Company.
Under the agreement, IBM will transfer ownership of various IBM
patents to the Company.  IBM will also make a balancing payment
of $10 million during 2003.  The ultimate impact of these
initiatives is subject to known and unknown risks and
uncertainties.  See "Cautionary Note Regarding Forward-Looking
Statements."

As industry standards proliferate, there is a possibility that
the patents of others may become a significant factor in the
Company's business.  Computer software technology is
increasingly being protected by patents, and many companies,
including the Company, are developing patent positions for
software innovations.  It is unknown at the present time whether
various patented software technology will be made generally
available under licenses, or whether specific innovations will
be held by their inventors and not made available to others.  In
many cases, it may be possible to employ software techniques
that avoid the patents of others, but the possibility exists
that some features needed to compete successfully in a
particular segment of the software market may be unavailable or
may require an unacceptably high cost via royalty arrangements.
Patented software techniques that become de facto industry
standards are among those that may raise costs or may prevent
the Company from competing successfully in particular markets.

An inability to protect the Company's copyrights, trademarks,
and patents, or to obtain current technical information or any
required patent rights of others through licensing or purchase,
all of which are important to success in the markets in which
the Company competes, could significantly reduce the Company's
revenues and adversely affect its results of operations.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, cash and short-term investments totaled
$506 million compared to $110.8 million and $119.8 million at
December 31, 2001, and 2000.  The improvement in cash and short-
term investments in 2002 is due primarily to the receipt of $450
million from the Intel litigation, $13.4 million from the sale of
its 3Dlabs stock, and $7.9 million from the sale of Creative
stock.  During 2002, the Company spent approximately $83.6
million to purchase 4,734,000 shares of its common stock under a
stock repurchase program.

In August 2002, the Company terminated its secured credit
agreement.  (See the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, for complete details of this credit
agreement.)  Due to its current cash position, the Company
believes a general line of credit is unnecessary at this time.

In September 2002, in order to reduce the cost of issuing letters
of credit, the Company established a credit line with Wells Fargo
Bank to cover its outstanding letters of credit.  This credit
line is secured by $15 million of interest-bearing securities.
Under this arrangement, the Company earns interest on the
securities and withdrawal of securities is allowed, but the
Company is required to maintain a level of securities sufficient
to cover total outstanding letters of credit (which totaled $9.7
million at January 31, 2003).

The Company's average collection period for accounts receivable
in 2002 was approximately 87 days, representing a slight decrease
from the prior year.  Approximately 70% of the Company's 2002
revenues were derived from international customers and the U.S.
government, both of which traditionally have longer collection
periods.  Total U.S. government accounts receivable were $26.7
million at December 31, 2002 (compared with $27.7 million at
December 31, 2001).  The Company endeavors to enforce its payment
terms with these and other customers, and grants extended payment
terms only in very limited circumstances.

During 2002, the Company reduced its debt under various floating
rate arrangements to approximately $169,000 (see Note 7 of Notes
to Consolidated Financial Statements).  Due to the immaterial
amount of debt at December 31, 2002, market risk of future
increases in interest rates is not currently considered material.

The Company expects that capital expenditures will require $10
million to $12 million in 2003, primarily for the purchase of
computer equipment.  The Company does not anticipate significant
non-operating events that will require the use of cash, with the
exception of its stock repurchase program.  In 2002, the stock
repurchase program was extended to December 31, 2004, and funding
was increased to $175 million.  See the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, for further
discussion.

The Company's general financial condition improved in 2002, and
it generated positive operating cash flow for the third
consecutive year.  The Company believes that the combination of
existing cash balances and improved cash flow from operations
will substantially exceed cash requirements for operations for
2003.

FOURTH QUARTER 2002

Revenue in fourth quarter was $122 million, down 8% from fourth
quarter 2001.  The Company earned net income of $90.1 million
($1.85 per share diluted) for the quarter, compared to net
income of $11.9 million ($.23 per share diluted) in fourth
quarter 2001.  The revenue decline from the prior-year period
was primarily due to a large one-time sale of third-party
hardware in fourth quarter 2001.  Despite the decline in
revenue, the Company reported income from operations of $.01 per
share diluted, compared to income from operations of $.03 per
share diluted for fourth quarter 2001.  The impact of the
revenue decline was partially offset by a 13% decrease in cost
of revenues.  Gross margin improved from 46% of total revenues
in 2001 to 49% in 2002, primarily from increased software
content in the product mix.  Operating expenses decreased 4%
from the fourth quarter 2001 level.  Fourth quarter 2002
operating results were impacted by the Intel patent litigation
gain of $148.2 million and by other net expense of $4.5 million,
including the $7 million write-down of a long-term investment.
Fourth quarter 2001 operating results included gains on sales of
assets of $5.9 million, primarily related to additional purchase
price consideration on the sale of the Company's civil,
plotting, and raster product lines to BSI, $3.9 million for
settlement of the Micrografx convertible debenture, and $1.7
million for the sale of the Mentor Graphics warrant.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, which
requires gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather
than as extraordinary items (as previously required under
Statement 4) and requires certain modifications to capital
leases.  The provisions related to the rescission of Statement 4
become effective for the Company in 2003, the provisions related
to Statement 13 became effective for the Company for
transactions occurring after May 15, 2002, and all other
provisions of this statement became effective for financial
statements issued after May 15, 2002.  The Company does not
expect the adoption of SFAS No. 145 to have a significant impact
on its consolidated results of operations or financial position.

In July 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses
financial accounting and reporting for costs associated with
exit or disposal activities.  The provisions of this Statement
are effective for exit or disposal activities that are initiated
after December 31, 2002.  The Company does not expect the
adoption of SFAS No. 146 to have a significant impact on its
consolidated results of operations or financial position.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which
amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation and to require prominent disclosure about
the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee
compensation.  The provisions of this Statement became effective
for the Company for the year ended December 31, 2002.  The
Company does not expect the adoption of SFAS No. 148 to have a
significant impact on its consolidated results of operations or
financial position.  See Note 12 of Notes to Consolidated
Financial Statements for information regarding the Company's
stock-based compensation plans.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are disclosed in
Note 1 of Notes to Consolidated Financial Statements.  The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that
management use judgments to make estimates and assumptions that
affect the amounts reported in the financial statements.  As a
result, there is some risk that reported financial results could
have been different had other methods, assumptions, and estimates
been used.

The Company believes that of its significant accounting policies,
the following may involve a higher degree of judgment and
complexity in preparing its consolidated financial statements.

Revenue Recognition

IMGS, ISG, and IPS derive a significant portion of revenue from
contracts accounted for by the percentage-of-completion method
with contractual terms generally fixed.  The Company regularly
reviews its progress on these contracts and reviews the estimated
costs of fulfilling its obligations.  If the Company does not
accurately estimate the resources required or the scope of the
work to be performed, or does not manage these contracts properly
within the planned periods of time or satisfy its obligations
under the contracts, then future revenue and margins may be
significantly and negatively affected, or losses on existing
contracts may need to be recognized.  Any resulting reductions in
revenues, margins, or contract losses could be material to the
Company's results of operations.

Capitalized Software

The Company capitalizes certain costs incurred after the
technological feasibility of new software products has been
established and amortizes these costs on a straight-line basis
once revenues begin to be generated by these products.  Though
the Company regularly reviews its capitalized development costs
to ensure recognition of any decline in value, it is possible
that, for any given product, revenues will not materialize in
amounts anticipated due to industry conditions that include price
and performance competition, or that products will have shorter
lives.  Should these events occur, the carrying amount of
capitalized development costs would be reduced, producing adverse
effects on the Company's systems margin and results of
operations.  During 2002, 2001, and 2000, the Company assessed
projects in process and associated costs capitalized for any net
realizable value concerns.  Based on this assessment, the Company
decided to cease further capitalization for certain projects and
increase product development expense by $10.5 million, $8.6
million, and $3.9 million in 2002, 2001, and 2000, respectively.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be
realized.  While the Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made.  Likewise,
should the Company determine that it would not be able to realize
all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income
in the period such determination was made.

Investment in Debt and Equity Securities

The Company holds minority interests in companies having
operations or technology in areas within its strategic focus,
some of which are publicly traded and can have highly volatile
share prices, and some of which are in non-publicly traded
companies whose value is difficult to determine.  The Company
records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than
temporary.  Future adverse changes in market conditions or poor
operating results of underlying investments could result in
losses or an inability to recover the carrying value of the
investments, thereby possibly requiring an impairment charge in
the future.

Bad Debt Reserves

The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
make required payments.  If the financial condition of the
Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required.

Inventory

The Company regularly estimates the degree of technological
obsolescence in its inventories and provides inventory reserves
on that basis.  Though the Company believes it has adequately
provided for any such declines in inventory value to date, any
unanticipated change in technology could significantly affect the
value of the Company's inventories and thereby adversely affect
gross margins and results of operations.  In addition, an
inability of the Company to accurately forecast its inventory
needs related to its warranty and maintenance obligations could
adversely affect gross margin and results of operations.

Patent Litigation Gain

The Company accounted for the Intel settlement as a one-time
event, net of applicable costs, and has received SEC staff
concurrence with this financial statement presentation.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Currency Fluctuations and Currency Risk Management

International markets, particularly Europe and Asia, continue in
importance to the industry and to the Company.  The Company's
operations are subject to and may be adversely affected by a
variety of risks inherent in doing business internationally, such
as government policy restrictions, worldwide political
conditions, currency exchange fluctuations, and other factors.

Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations.  For 2002, approximately 43% of the Company's revenue
was derived from customers outside the United States, primarily
through subsidiary operations.  Most subsidiaries sell to
customers and incur and pay operating expenses in local
currencies.  These local currency revenues and expenses are
translated into U.S. dollars for reporting purposes.  A stronger
U.S. dollar will decrease the level of reported U.S. dollar
orders and revenues, decrease the U.S. dollar gross margin, and
decrease reported U.S. dollar operating expenses of the
international subsidiaries.  A weaker U.S. dollar will have the
opposite impact.  The Company estimates that the weakening of the
U.S. dollar in its international markets improved its results of
operations by approximately $.04 per share (basic and diluted) in
2002.  For 2001 and 2000, the Company estimated that the
strengthening of the U.S. dollar adversely impacted its results
of operations by approximately $.03 and $.08 per share (basic and
diluted), respectively.

The Company estimates that the result of a uniform 10%
strengthening in the value of the U.S. dollar relative to the
currencies in which the Company's sales are denominated would
result in a decrease in earnings of approximately $3 million for
the year ended December 31, 2002.  Likewise, a uniform 10%
weakening in the value of the U.S. dollar would result in
increased earnings of approximately $3 million.  This calculation
assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.  In addition to the direct
effects of changes in exchange rates, exchange rate fluctuations
may also affect the volume of sales and foreign currency sales
prices.  The Company's estimation of the effects of changes in
foreign currency exchange rates does not consider potential
changes in sales levels or local currency prices.  The Company's
income statement exposure to currency fluctuations has declined
successively over the past three years as the result of declining
hardware sales in its international regions.  See Note 15 of
Notes to Consolidated Financial Statements for a summary of the
Company's revenues by geographic area.

The Company conducts business in all major markets outside the
United States, but the most significant of these operations with
respect to currency risk are located in Europe and Asia.  Local
currencies are the functional currencies for the Company's
European and Canadian subsidiaries.  The U.S. dollar is the
functional currency for all other international subsidiaries.
See Note 1 of Notes to Consolidated Financial Statements for a
description of the Company's policy for managing the currency
risks associated with its international operations.

In 2002, the Company recorded a net foreign exchange gain of
$277,000.  In 2001 and 2000, the Company incurred net foreign
exchange losses of $1.5 million and $3.9 million, respectively.
The Company's exchange losses for 2001 and 2000 resulted
primarily from the strengthening of the U.S. dollar against the
Euro, particularly with respect to Euro-denominated intercompany
receivables.  The 2001 exchange loss also included approximately
$715,000 in loss incurred as the result of subsidiary
recapitalizations.  Effective first quarter 2000, the Company
ceased hedging any of its foreign currency risks.  At December
31, 2002, the Company had no forward exchange contracts
outstanding.

The Company estimates that a uniform 10% strengthening or
weakening in the value of the U.S. dollar relative to the
currencies in which such intercompany receivables and loans are
denominated at December 31, 2002, would not result in a
significant loss or improvement in earnings.  This calculation
assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.  The Company's
intercompany receivables have declined as the result of declining
sales volumes, reducing the Company's currency exposure with
respect to these items.

Euro Conversion  On January 1, 1999, eleven member countries of
the European Monetary Union ("EMU") fixed the conversion rates of
their national currencies to a single common currency, the Euro.
In September 2000, and with effect from January 1, 2001, Greece
became the twelfth member of the EMU to adopt the Euro.  Euro
currency began to circulate on January 1, 2002, and the
individual national currencies of the participating countries
were withdrawn from circulation by February 28, 2002.  All of the
Company's financial systems currently accommodate the Euro, and
since 1999, the Company has conducted business in Euros with its
customers and vendors who chose to do so without encountering
significant administrative problems.  While the Company continues
to evaluate the potential impacts of the common currency, at
present it has not identified significant risks related to the
Euro.  The full Euro conversion in 2002 did not have a material
impact on the Company's results of operations or financial
condition, and to date, the conversion to one common currency has
not impacted the Company's pricing in European markets.

See Notes 1 and 6 of Notes to Consolidated Financial Statements
for further information related to management of currency risk.