2002 COGNIZANT FINANCIAL REVIEW Management’s Discussion and Analysis of Financial Condition and Results of Operations RESULTS BY BUSINESS SEGMENT North American Segment European Segment Asian Segment 18 Income from Operations. Income from operations increased 50.5%, or approximately $0.1 million, from approximately $0.2 million during 2000 to approximately $0.3 million during 2001. The increase in operating income was attributable primarily to increased revenues. Revenue. Revenue increased by 42.5%, or approximately $0.5 million, from approximately $1.1 million during 2000 to approximately $1.6 million in 2001. The increase in revenue was attributable primarily to the Company’s success in India providing software services to domestic Indian companies as well as to Indian divisions of the Company’s multi-national clients. Income from Operations. Income from operations increased 21.7%, or approximately $0.9 million, from approximately $4.0 million during 2000 to approximately $4.9 million during 2001. The increase in operating income was attributable primarily to increased revenues and achieving leverage on prior sales and marketing investments. Revenue. Revenue increased by 15.6%, or approximately $3.3 million, from approximately $21.0 million during 2000 to approximately $24.2 mil- lion in 2001. The increase in revenue was attributable to the Company’s sales and marketing activities in the United Kingdom, partially offset by weak demand for the Company’s services elsewhere in Europe. Income from Operations. Income from operations increased 38.9%, or approximately $8.5 million, from approximately $21.9 million during 2000 to approximately $30.4 million during 2001. The increase in operating income was attributable primarily to increased revenues and achieving leverage on prior sales and marketing investments. Revenue. Revenue increased by 32.2%, or approximately $37.0 million, from approximately $114.9 million during 2000 to approximately $151.9 million in 2001. The increase in revenue was attributable primarily to increased market awareness and acceptance of the onsite/offshore soft- ware delivery model, as well as sales and marketing activities directed at the U.S. market for the Company’s services. Net Income.  Net income increased from approximately $17.7 million in 2000 to approximately $22.2 million in 2001, representing approximately 12.9% and 12.5% as a percentage of revenues, respectively. The lower percentage in 2001 reflects the one-time write-off of the Company’s investment in Questra, discussed previously. from approximately $10.6 million in 2000 to approximately $13.2 million in 2001, with an effective tax rate of 37.4% in both years. The provision for income taxes reflects the Company’s intent to repatriate earnings from its Indian subsidiary. from 48.6% of revenues during 2000 to 48.9% of revenues in 2001. The increase in such gross profit margin was primarily attributable to a contin- ued shift toward higher margin fixed-bid contracts and a lower incentive compensation accrual in 2001 as compared to 2000. Selling, general and administrative expenses.  Selling, general and administrative expenses consist primarily of salaries, employee benefits, travel, promotion, communications, management, finance, administrative and occupancy costs. Selling, general and administrative expenses, includ- ing depreciation and amortization, increased by 26.8%, or approximately $10.8 million, from approximately $40.5 million during 2000 to approxi- mately $51.3 million during 2001, and decreased as a percentage of revenue from approximately 29.5% to 28.9%, respectively. The increase in such expenses in absolute dollars was due primarily to expenses incurred to expand the Company’s sales and marketing activities and increased infrastructure expenses to support the Company’s growth. The decrease in such expenses as a percentage of revenue was primarily due to the increased revenues that have resulted from the Company’s expanded sales and marketing activities in the current and prior years. Income from Operations. Income from operations increased 36.3%, or approximately $9.5 million, from approximately $26.1 million during 2000 to approximately $35.6 million during 2001, representing approximately 19.1% and 20.0% of revenues, respectively. The increase in operating mar- gin was primarily due to a continued shift toward higher margin fixed-bid contracts and a lower incentive compensation accrual in 2001 as compared to 2000. Other Income/Expense.  Other income/expense consists primarily of inter- est income offset, by foreign currency exchange losses and, in 2001, an impairment loss on an investment. Interest income decreased by approximately 5.6%, from approximately $2.6 million during 2000 to approximately $2.5 million during 2001. The decrease in such interest income was attributable primarily to lower interest rates, offset, in part, by higher operating cash balances. The Company recognized a net foreign currency exchange loss of approximately $767,000 during 2001, as a result of the effect of changing exchange rates on the Company's transactions. The Company recognized an impairment loss on its investment in Questra of approximately $2.0 million during the fourth quarter of 2001 in recog- nition of an other than temporary decline in value. The impairment loss was based upon an implied valuation of Questra as a result of a recent new round of venture capital funding in which the Company’s equity interest in Questra was substantially diluted and investors, other than the Company, received preferential liquidation rights. The impairment loss, net of tax benefit, was approximately $1.2 million or $0.02 per diluted share. (See Note 4 to the Consolidated Financial Statements.) Provision for Income Taxes. Historically, through the date of the IPO, the Company had been included in the consolidated federal income tax returns of The Dun & Bradstreet Corporation and Cognizant Corporation. The Company’s provision for income taxes in the consolidated statements of income reflects the federal and state income taxes calculated on the Company’s stand-alone basis. The provision for income taxes increased