## OVERVIEW 

We are a leading provider of custom IT services related to IT design, development, integration and maintenance services primarily for Fortune 1000 companies located in North America and Europe. Our core competencies include web-centric applications, data warehous- ing, component-based development and legacy and client-server systems. We provide IT services using an integrated on-site/offshore business model. This seamless on-site/offshore business model combines technical and account management teams located on-site at the customer location and offshore at dedicated development centers located primarily in India. 

In 2004, our revenue increased to $586.7 million compared to $368.2 million in 2003. Net income increased to $100.2 million or $0.70 per diluted share in 2004 compared to $57.4 million or $0.42 per diluted share in 2003. Our revenue growth was driven by continued strong demand for our application management and application development and integration services. We finished 2004 with 233 active clients compared to 153 in 2003. We anticipate that a significant portion of our revenue growth in 2005 will come from increased penetration of existing clients. During 2004, 87% of our revenue came from clients in North America. In 2005, we will look to expand our presence in Northern Europe as we are starting to see an increased level of interest for offshore services in that region. In 2004, our operating margin increased to approximately 20.0% compared to 19.6% in 2003. This was consistent with our targeted operating margin range of 19 to 20% of total revenues. 

At December 31, 2004, we had cash and cash equivalents and short-term bank deposits of $314.8 million, an increase of approximately $121.0 million compared to December 31, 2003. Our most recent building plans provide for construction of over 900,000 square feet of space in new fully-owned development and training centers located in Chennai, Pune, Calcutta and Bangalore, India. This supersedes our previous plans, announced in December 2003, which included 600,000 square feet of new space. Total construction costs related to this program are currently estimated to be approximately $76.0 million, which we expect to fund primarily from current operations. We believe our financial condition will remain strong. In addition, we will continue to consider acquisitions of companies that can improve our capabilities in certain market niches or geographic areas. 

On June 29, 2004, we announced our plans to wind-down operations at our development center located in Limerick, Ireland and close the facility by March 31, 2005. We decided to close this facility due to the increased cost structure resulting from the significant appreciation in the value of the Euro against the U.S. dollar since the facility was acquired in 2002. The work performed in this facility is being transferred to Cognizant’s operations in North America and India. Currently, we expect to incur through 2005 aggregate incremental costs of approxi- mately $1.6 million associated with the closure of this facility. In 2004, we have recorded expenses of approximately $1.5 million primarily for severance, retention bonuses and an obligation to repay funds previously received through local job grant programs and made payments of approximately $1.0 million through December 31, 2004. Approximately 50 employees are affected by the closure. 

On April 12, 2004, our Board of Directors declared a conditional two-for-one stock split to be effected by a 100% stock dividend payable on June 17, 2004 to stockholders of record as of May 27, 2004. The stock split was subject to stockholder approval which was obtained on May 26, 2004 and, as a result, the stock dividend was paid on June 17, 2004 to stockholders of record as of May 27, 2004. The stock split has been reflected in the accompanying consolidated financial statements, and all applicable references as to the number of outstanding common shares and per share information have been restated to reflect the stock split as if it occurred at the beginning of the earliest period presented. Stockholders’ equity accounts have been restated to reflect a reclassification of an amount equal to the par value of the increase in issued shares of Class A common stock from the additional paid-in-capital account to the Class A common stock account. 

## Critical Accounting Estimates and Risks 

Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial state- ments that have been prepared in accordance with accounting principles generally accepted in the United States of America. The prepara- tion of these financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an on-going basis, we evaluate our estimates. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting, for certain fixed-bid contracts, the allowance for doubtful accounts, income taxes, valuation of goodwill and other long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual amounts will differ from the estimates used in the prepara- 

