To improve comparability with competitors' results, we included the following table indicating certain operational data after excluding special charges for purchased research and development and amortization of intangible assets acquired as a result of acquisitions (dollars in thousands):

		INCOME BEFORE SPECIAL CHARGES								PERIOD-TO-PERIOD CHANGE
RECONCILIATION OF INCOME		FISCAL YEAR ENDED MARCH 31,							2000 TO				1999 TO
BEFORE SPECIAL CHARGES		2001			2000		1999		2001				2000
Income before income taxes		$ 192,069			$ 561,776		$ 530,041		(65.8	%)		6.0	%
(See Consolidated Statements of Income)  Purchased research and development					17,900		4,350		(100.0	)		311.5
Amortization of goodwill		41,302			25,252		4,857		63.6			419.9
Amortization of purchased software		16,089			7,605		750		111.6			914.0
Income before income taxes and    special charges		249,460			612,533		539,998		(59.3	)		13.4
Income tax provision		85,649			220,317		182,714		(61.1	)		20.6
Net income before special charges		$ 163,811			$ 392,216		$ 357,284		(58.2	%)		9.8	%

The Company operates in two business segments in the software industry: products and professional services.

Products Revenue

The Company's products are designed to support four key activities within the application development process: development and integration, quality assurance, production readiness and performance management of the application to optimize performance in production. Products revenue consists of software license fees and maintenance fees and comprised 47.4%, 56.1% and 62.1% of total Company revenue during fiscal years 2001, 2000 and 1999, respectively, S/390 product revenue (mainframe revenue) decreased $268.5 million, or 26.0%, during fiscal 2001 and increased $201.0 million, or 24.2%, during fiscal 2000. Revenue from distributed software products decreased $31.4 million, or 14,2%, during fiscal 2001 and increased $33.2 million, or 17.7%, during fiscal 2000. The overall decline in product revenue from fiscal year 2000 to fiscal year 2001 is primarily attributable to a decrease in demand for large enterprise license agreements and fluctuations in foreign currencies. If foreign exchange rates remained consistent with fiscal 2000, product revenue would have been $984 million in fiscal 2001 compared to $1.252 billion in fiscal 2000. This represents an overall decline in constant U.S. dollars of $268 million, or 21.4%, compared to the actual decline of $300 million, or 24.0%. Product revenue in fiscal year 2001 was negatively impacted by a decrease in customer demand for large enterprise license agreements ("ELAs") which are multiyear, and often multipayment contracts. We believe that the decrease in large multiyear contracts is due, in part, to the capacity purchased by our customers in fiscal year 2000 during their preparations for Y2K. The increase in product revenue from fiscal year 1999 to fiscal year 2000 was primarily attributable to increased demand for ELAs to meet customer needs at that time. For fiscal years 2001 and 2000, multiyear contracts greater than $5 million represented approximately 12.8% and 26.5%, respectively, of license revenue. The products organization is focused on completing a larger number of transactions each quarter rather than relying on ELAs.

For more than five years, the Company has supported clients with product agreements covering multiple years and allowing deferred payment terms. The contract price is allocated between maintenance for the term of the deal and license revenue. All license revenue associated with these perpetual license agreements is recognized when the customer commits unconditionally to the transaction, the software products and quantities are fixed and the software has been shipped to the customer. License revenue associated with certain transactions that include an option to exchange or select products in the future has been deferred and will be recognized over the term of the deal. When the license portion is paid over a number of years, the license portion of the payment stream is discounted to its net present value. Interest income is recognized over the payment term. The maintenance associated with all sales is deferred and recognized over the applicable maintenance period.

Professional Services Revenue

The Company offers a broad range of information technology professional services, including business systems analysis, design and programming, software conversion and system planning and consulting. Revenue from professional services increased $79.3 million or 8.1% during fiscal 2001 compared to fiscal 2000 and $358.0 million or 57.7% during fiscal 2000 compared to fiscal 1999. These increases are primarily associated wilh increased market share associated with the August 1999 acquisition of Data Processing Resources Corporation.

Operating Profit and Expenses

The Company evaluates the performance of its segments based primarily on operating profit before corporate expenses and purchased research and development expense.

Financial information for the Company's products segment is as follows (in thousands):

		YEAR ENDED MARCH 31,
		2001		2000		1999
Revenue	$ 952,106	$ 1,251,954		$ 1,017,725
Operating expenses	646,963	624,299		548,359
Products operating profit	$ 305,143	$    627,655		$    469,366

Products revenue by geographic location is presented in the table below (in thousands):

		YEAR ENDED MARCH 31,
		2001		2000		1999
United States	$ 597,290	$ 833,365		$ 654,011
European subsidiaries	235,841	285,158		252,964
Other international operations	118,975	133,431		110,750
Total products revenue	$ 952,106	$1,251,954		$1,017,725

The products segment generated operating margins of 32.0%, 50.1% and 46.1% during fiscal years 2001, 2000 and 1999, respectively. Products expenses include cost of software license fees, cost of maintenance, software product development costs and sales and marketing expenses. The decrease in operating margin in fiscal 2001 is primarily a result of a decrease in software license revenue while total products costs have remained fairly constant. The increase in operating margin in fiscal 2000 is primarily the result of economies associated with larger transactions, more sales representatives in the field with increased sales productivity, additional product offerings and increased market penetration of our distributed software products.

Cost of software license fees includes amortization of capitalized software, the cost of preparing and disseminating products to customers and the cost of author royalties. The increase in these costs is due primarily to an increase in amortization of capitalized software products, related to the Programart, CACI and Optimal acquisitions and, in fiscal 2001, to increased amortization of internally capitalized projects associated with EcoSYSTEMS, QALoad, UNIFACE, AbenD-AID, File-AID and XPEDITER, which were released for general availability during fiscal year 2001. In fiscal 2000, increases in author royalties were offset, in part, by decreased packaging and distribution costs. As a percentage of software license fees, cost of software license fees were 8.0%, 3.8% and 4.1% in fiscal 2001, 2000 and 1999, respectively.

Cost of maintenance consists of the cost of maintenance programmers and product support personnel and the computing, facilities and benefits costs allocated to such personnel. The increase in cost of maintenance was due to a higher average head count during fiscal 2001 and fiscal 2000 compared to the prior fiscal years. The average head count increase was primarily the result of the Programart acquisition, which occurred in September 1999. As a percentage of maintenance fees, these costs were 11.6%, 10.5% and 11.2% for fiscal years 2001, 2000 and 1999, respectively.

Software product development costs consist of the cost of programming personnel, the facilities, computing and benefits costs allocated to such personnel and the costs of preparing user and installation guides for the Company's software products, less the amount of software development costs capitalized during the fiscal year. The increase in these costs was primarily due to an increase in salaries and benefits, including severance costs, associated with a relocation of the software development lab for the EcoSYSTEMS product line during fiscal 2001 and an increase in software development staff related to the Programart and CACI acquisitions during fiscal 2000. Before the capitalization of internally developed software products, total research and development expenditures for fiscal 2001 increased $20.5 million, or 21.5%, to $116.1 million from $95.6 million in fiscal year 2000. In fiscal 2000, total research and development costs increased $18.8 million, or 24.5%, to $95.6 million from $76.8 million in fiscal 1999. The major development projects that achieved technological feasibility during fiscal 2001 included five new interactive analysis and debugging products, three new fault management products, eight new file and data management products, 16 new automated testing products, eight new systems management products, four new application development products, two new application performance management products and 16 new Windows development tools.

Sales and marketing costs consist of the sales and marketing expenses associated with the Company's products business, which include costs of direct sales, sales support and marketing staff, the facilities and benefits costs allocated to such personnel and the costs of marketing and sales incentive programs. The decrease in sales and marketing costs from fiscal 2000 to fiscal 2001 was largely attributable to lower sales commissions associated with decreased product sales and to reduced advertising expenditures, offset, in part, by increased salary and benefits costs due, primarily, to a higher average head count during fiscal year 2001 compared to the prior year. The increase in sales and marketing expenses from fiscal 1999 to fiscal 2000 was largely attributable to the expansion of the worldwide sales force, higher sales commissions associated with increased product sales and increased allocations of costs of corporate systems, offset, in part, by decreased advertising expenditures. The direct sales and sales support staff decreased by 221 to 2,459 people at the end of fiscal 2001, as compared to 2,680 at the end of fiscal 2000 and 2,061 at the end of fiscal 1999.

Financial information for the Company's professional services segment is as follows (in thousands):

		YEAR ENDED MARCH 31,
		2001		2000		1999
Revenue	$ 1,057,944	$ 978,674		$ 620,720
Operating expenses	1,039,237	946,710		506,765
Professional services operating profit	$      18,707	$   31,964		$ 113,955

Professional services revenue by geographic location is presented in the table below (in thousands):

		YEAR ENDED MARCH 31,
		2001		2000		1999
United States	$   963,508	$ 903,146		$ 548,255
European subsidiaries	88,041	66,269		63,429
Other international operations	6,395	9,259		9,036
Total professional services revenue	$ 1,057,944	$ 978,674		$ 620,720

The professional services segment generated operating margins of 1.8%, 3.3% and 18.4% during fiscal years 2001, 2000 and 1999, respectively. The decrease in professional services operating margin is primarily due to lower utilization and billing rates during the first two quarters of fiscal year 2001 and increased costs, primarily associated with the Data Processing Resources Corporation acquisition. During each quarter of fiscal year 2001, the professional services operating margin was a negative 2.5% and positive 0.4%, 4.6% and 4.7%, for the first, second, third and fourth quarters, respectively. The increase in the professional services operating margin during fiscal 2001 is attributable to increased utilization of professional billable staff coupled with significant decreases in cost of professional services due to reductions in staff, commissions and advertising, offset, in part, by increased use of subcontractors for special services. The decrease in professional services operating margin in fiscal 2000 is primarily attributable to billable staff off assignment, increased use of subcontractors for special services and increased allocations of costs of corporate systems. All reported professional services revenue and expenses include operating revenue and operating expenses associated with Data Processing Resources Corporation since the - acquisition in August 1999.

Cost of professional services includes all costs of the Company's professional services business, including the personnel costs of the professional, management and administrative staff of the Company's services business and the facilities and benefits costs allocated to such personnel. The increase in these costs is due, primarily, to a higher average professional staff head count during fiscal years 2001 and 2000, compared to the prior fiscal years, and to increased use of subcontractors for special services. The professional billable staff decreased 1,565 people to 8,041 people as of March 31, 2001 from 9,606 people at the end of fiscal 2000. This compares to an increase of 3,328 professional billable staff, primarily associated with the DPRC acquisition, to 9,606 in fiscal 2000 from 6,278 people at the end of fiscal 1999.

Administrative and general expenses increased 45.2% during fiscal 2001 compared to fiscal 2000. The increase in administrative and general expenses is primarily attributable to charges against investments in joint ventures and increased goodwill amortization expense, offset, in part, by decreases in legal costs, associated with fewer acquisitions, and decreases in outside consulting services. The increase in administrative and general expenses in fiscal 2000 of 15.4% relates primarily to increased goodwill amortization expense associated with the DPRC acquisition.

During fiscal year 2000, the Company recognized $17.9 million of expense for purchased research and development costs associated with the acquisition of in-process research and development from Programart Corporation. During fiscal year 1999, the Company recognized $4.4 million of expense for purchased research and development costs associated with the acquisition of in-process research and development from Centerline Software, Inc., Vireo Software, Inc. and Cardume Software Limited. Since the research and development in process had not reached technological feasibility, these amounts were expensed in accordance with Statement of Financial Accounting Standards No. 2.

Interest and investment income for fiscal 2001 was $30.7 million as compared to $34.9 million in fiscal 2000 and $30.2 million in fiscal 1999. Interest and investment income in fiscal 2000 includes a gain of approximately $10.9 million resulting from the sale of securities, interest expense for fiscal 2001 was $31.3 million as compared to $24.5 million in fiscal 2000 and $0.8 million in fiscal 1999. This increase in interest expense is primarily attributable to interest expense associated with debt outstanding under the $900 million Senior Credit Facility discussed in the Liquidity and Capital Resources section below.

The Company's provision for income taxes was $73.0 million in fiscal 2001, which represents an effective tax rate of 38.0%. This compares to a tax provision of $209.8 million in fiscal 2000, which represents an effective tax rate of 37.3%, and an income tax provision of $180.2 million in fiscal 1999, which represents an effective tax rate of 34.0%. The fiscal 2001 and fiscal 2000 increases in the effective tax rate were due to nondeductible goodwill amortization associated witn certain acquisitions and a shift of our state apportionment to states with higher corporate income tax rates.

Liquidity and Capital Resources

As of March 31, 2001, the Company had approximately $255.0 million in cash and investments, which is consistent with the level the Company has committed to maintain while utilizing the $900 million Senior Credit Facilily. During fiscal 2001 and 2000, the Company generated $336.6 million and $165.4 million, respectively, in operating cash flow. The increased operating cash flow is generated, in part, from the collection of the current portion ot prior years' installment sales as reflected in the decrease in total accounts receivable. During these periods, the Company had capital expenditures that included property and equipment, capitalized research and software development and purchased software of $53.7 million and $50.6 million, respectively.

As of March 31, 2001 and 2000, the Company had $140.0 million and $450.0 million, respectively, in long-term debt representing borrowings under the $900 million Senior Credit Facility entered into in August 1999. Initial borrowings during fiscal year 2000 were used primarily to fund the acquisition of Data Processing Resources Corporation. In August 2001, the Senior Credit Facility will be reduced to a total of $800 million available. The Company does not anticipate any negative impact on its liquidity from this decrease. See Note 5 of Notes to Consolidated Financial Statements for a description of the terms of the Senior Credit Facility.

The Company acquired Nomex, Inc., a privately held provider of web design and development services located in Montreal, Canada, for $8.9 million on May 10, 2000. During July 2000, the Company acquired substantially all the assets and certain liabilities of Optimal Networks Corporation for $5,0 million. The Company continues to evaluate business acquisition opportunities that fit the Company's strategic plans.

The Company has begun construction on an office tower with a current estimated cost of $350 million within the city of Detroit. These cash outlays will have no impact on operating expenses until the building is occupied in the fall of 2002, at which point, the depreciation will result in an annual expense of approximately $11.7 million. This will be partially offset by the savings realized by the consolidation of offices. As of March 2001 and 2000, funds expended were approximately $25.2 million and $2.2 million, respectively (see Note 4 of Notes to Consolidated Financial Statements). Cash outlays over the next 12 months are expected to be approximately $150.0 million, with the funds coming from the Senior Credit Facility and cash flow from operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition ot a derivative. The Company has adopted SFAS 133 effective April 1, 2001. The adoption of SFAS 133 will not have a significant impact on the financial position, results of operations or cash flows of the Company.

FORWARD-LOOKING STATEMENTS

The Company makes forward-looking statements in this report within the meaning of the federal securities laws and may make forward-looking statements on future filings with the Securities and Exchange Commission and in press releases and other communications. Forward-looking statements are identified by the use of the words "believes," "expects," "anticipates," "will," "contemplates," "would" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect the Company's operating results, including without limitation those discussed below. These factors, risks and uncertainties could cause the Company's actual results to differ materially from the results implied by these or any other forward-looking statements made by, or on behalf of, the Company. There can be no assurance that future results will meet expectations.

• Our quarterly financial results vary and may be adversely affected by certain relatively fixed costs. Our product revenues vary from quarter to quarter. Net income may be disproportionately affected by a fluctuation in revenues because only a small portion of our expenses varies with revenues.
• Our success depends in part on our ability to develop product enhancements and new products which keep pace with continuing changes in technology and customer preferences.
• Approximately 22% of our revenue is derived from foreign sources. This exposes us to exchange rate risks on foreign currencies and to other international risks such as the need to comply with foreign and U.S. export laws and the uncertainty of certain foreign economies.
• While we are expanding our focus on distributed software products, a majority of our revenue from software products is dependent on our customers' continued use of IBM and IBM-compatible mainframe products and on the acceptance of our pricing structure for software licenses, upgrades and maintenance. The pricing of our software licenses and maintenance is under constant pressure from customers and competitive vendors.
• We regard our software as proprietary and attempt to protect it with copyrights, trademarks, trade secret laws and restrictions on disclosure, copying and transferring title. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States.
• Although we have not received any material claims that our products infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against us in the future with respect to current and future products or that any such assertion may not require us to enter into royalty arrangements or result in costly litigation.
• We depend on key employees and technical personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could have a material adverse effect on our business.
• Our operating margins may continue to decline. We do not compile margin analysis other than on a segment basis. However, we are aware that operating expenses associated with our distributed systems products are higher than those associated with our traditional mainframe products. Since we believe the best opportunities for revenue growth are in the distributed systems market, products operating margins could experience more pressure. In addition, operating margins in the professional services business are significantly impacted by small fluctuations in revenue since most costs are fixed during any short-term period.
• A general or regional slowdown in the world economy could cause customers to delay or forego decisions to license new products or upgrades to their existing environments, and this could adversely affect our operating results.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed primarily to market risks associated with movements in interest rates and foreign currency exchange rates. The Company believes that it takes the necessary steps to appropriately reduce the potential impact of interest rate and foreign exchange exposures on the Company's financial position and operating performance. The Company does not use derivative financial instruments or forward foreign exchange contracts for investment, speculative or trading purposes. Immediate changes in interest rates and foreign currency rates discussed in the following paragraphs are hypothetical rate scenarios used to calibrate risk and do not currently represent management's view of future market developments. A discussion of the Company's accounting policies for derivative instruments is included in the Notes to Consolidated Financial Statements.

Interest Rate Risk

The Company's exposure to market risk for changes in interest rates relates primarily to the Company's cash investments, revolving credit facility and installment receivables. Derivative financial instruments are not a part of the Company's investment strategy. The Company places its investments with high quality issuers and preserves its invested funds by limiting default and market risk. In addition, the Company has classified all its marketable debt securities and long-term debt investments as "held to maturity" which does not expose the consolidated statement of income or balance sheet to fluctuations in interest rates.

The table below provides information about the Company's investment portfolio. For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates (in thousands, except interest rates):

		YEAR ENDED MARCH 31,						TOTAL			FAIR VALUE AT MARCH 31, 2001
		2002			2003
Cash Equivalents		$ 53,340						$ 53,340			$ 53,340
Average Interest Rate		4.51	%					4.51	%
Average Interest Rate (tax equivalent)		4.53	%					4.53	%
Investments		185,176			$  16,488			201,664			202,497
Average Interest Rate		4.17	%		4.30	%		4.18	%
Average Interest Rate (tax equivalent)		6.35	%		6.62	%		6.37	%

At March 31, 2001, the Company's outstanding variable rate debt was $140,0 million. Each 25 basis point increase or decrease in the level of interest rates would have $0.4 million effect on variable rate debt interest based on the balance of such debt at March 31, 2001. Information about the Company's long-term debt is set forth in Note 5 of Notes to Consolidated Financial Statements.

The Company offers financing arrangements with installment payment terms in connection with its multiyear software sales (see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Product Revenue"). Installment accounts are generally receivable over a three-to five-year period. As of March 31, 2001, non-current receivables amount to $356.4 million and are due approximately $199.4 million, $114.4 million, $32.8 million, $5.5 million and $4.3 million in each of the years ended March 31, 2003 through 2006 and thereafter, respectively. The fair value of non-current accounts receivable is estimated by discounting the future cash flows using the current rate at which the Company would finance a similar transaction. At March 31, 2001, the fair value of such receivables is approximately $349.2 million. Each 25 basis point increase in interest rates would have an associated $1.4 million negative impact on the fair value of non-current accounts receivable based on the balance of such receivables at March 31, 2001. A change in interest rates will have no impact on cash flows or net income associated with non-current accounts receivable.

Foreign Currency Risk

The Company has entered into forward foreign exchange contracts primarily to hedge amounts due from select subsidiaries denominated in foreign currencies (mainly in Europe and Asia/Pacific) against fluctuations in exchange rates. The Company's accounting policies for these contracts are based on the Company's designation of the contracts as hedging transactions. The criteria the Company uses for designating a contract as a hedge include the contract's effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on forward foreign exchange contracts are recognized in income in the same period as gains and losses on the underlying transactions. If the underlying hedged transaction is terminated earlier than initially anticipated, the offsetting gain or loss on the related forward foreign exchange contract would be recognized in income in the same period. In addition, since the Company enters into forward contracts only as a hedge, any change in currency rates would not result in any material net gain or loss, as any gain or loss on the underlying foreign currency denominated balance would be offset by the gain or loss on the forward contract. The Company operates in certain countries in Latin America and Asia/Pacific where there are limited forward currency exchange markets and thus the Company has unhedged transaction exposures in these currencies.

The table below provides information about the Company's foreign exchange forward contracts at March 31, 2001. The table presents the value of the contracts in U.S. dollars at the contract maturity date and the fair value of the contracts at March 31, 2001 (in thousands, except contract rates):

		CONTRACT DATE IN 2001		MATURITY DATE IN 2001		CONTRACT RATE		FORWARD POSITION IN U.S. DOLLARS		FAIR VALUE AT MARCH 31, 2001
Australian Dollar		March 31		April 30		2.03798		$ 5,103		$5,048
Canadian Dollar		March 31		April 30		1.574502		5,399		5,380
Danish Krone		March 31		April 30		8.48825		766		764
Hong Kong Dollar		March 31		April 30		7.999		1,154		1,154
Japanese Yen		March 31		April 30		124.395		121		119
Singapore Dollar		March 31		April 30		1.8026		3,606		3,591
Swiss Franc		March 31		April 30		1.73063		5,778		5,747
British Pound		March 31		April 30		0.702647		7,685		7,668
Euro Dollar		March 31		April 30		1.13603		13,503		13,499

Approximately 22% of our revenue is derived from foreign sources. This exposes us to exchange rate risks on foreign currencies related to the fair value of foreign assets and liabilities, net income and cash flows.