2002 COGNIZANT FINANCIAL REVIEW Notes to Consolidated Financial Statements (in thousands, except share and per share data) Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of 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. The most significant estimates relate to the allowance for doubtful accounts, reserve for warranties, reserves for employee benefits, depreciation of fixed assets and long-lived assets, con- tingencies and litigation and the recognition of revenue and profits based on the percentage of completion method of accounting for applicable fixed-bid contracts, income tax expense and related deferred assets and liabilities, and purchase price allocation related to intangible and tangible assets acquired. Results could vary from the estimates and assumptions used in the prepara- tion of the accompanying financial statements.  Company’s Indian subsidiary are attributable to export profits and are there- fore currently entitled to a 90% exemption from Indian income tax. These tax holidays will begin to expire in 2004 and under current law will be com- pletely phased out by 2009. In prior periods, it was management’s intent to repatriate all accumulated earnings from India to the United States; accord- ingly, the Company has provided deferred income taxes in the amount of approximately $24,935 on all such undistributed earnings through December 31, 2001. During the first quarter of 2002, the Company made a strategic decision to pursue an international strategy that includes expanded infrastructure investments in India and geographic expansion in Europe and Asia. As a component of this strategy, the Company intends to use 2002 and future Indian earnings to expand operations outside of the United States instead of repatriating these earnings to the United States. Accordingly, effective January 1, 2002, pursuant to Accounting Principles Bulletin 23, the Company has not accrued taxes on the repatriation of earnings recognized in 2002 as these earnings are considered to be indefinitely reinvested outside of the United States. As of December 31, 2002, the amount of unrepatriated earn- ings upon which no provision for taxation has been recorded is approximate- ly $30,059. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, the Company would accrue the applica- ble amount of taxes associated with such earnings. This change in intent, as well as a change in the second quarter in the manner in which repatriated earnings are taxed in India, resulted in an estimated effective tax rate for the year ended December 31, 2002 of 23.4%. This rate compares to an effec- tive tax rate for the years ended December 31, 2001 and 2000 of 37.4%. Risks and Uncertainties. All of the Company’s software development cen- ters, including a substantial majority of its employees are located in India. As a result, the Company may be subject to certain risks associated with international operations, including risks associated with foreign currency exchange rate fluctuations and risks associated with the application and imposition of protective legislation and regulations relating to import and export or otherwise resulting from foreign policy or the variability of foreign economic conditions. To date, the Company has not engaged in any signifi- cant hedging transactions to mitigate its risks relating to exchange rate fluc- tuations. Additional risks associated with international operations include difficulties in enforcing intellectual property rights, the burdens of comply- ing with a wide variety of foreign laws, potential geo-political and other risks associated with terrorist activities and local or cross border conflicts, poten- tially adverse tax consequences, tariffs, quotas and other barriers.  Deferred U.S. income taxes on unremitted earnings from other foreign enti- ties have not been provided for as it is the Company’s intent to reinvest such earnings. Such income taxes are immaterial.  Net Income Per Share. Basic earnings per share (“EPS”) excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes all potential dilutive common stock in the weighted average shares outstanding (See note 14). Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company main- tains its cash investments with high credit quality financial institutions in investment-grade, short-term debt securities and limits the amount of credit exposure to any one commercial issuer. Reclassifications. Certain prior-year amounts have been reclassified to con- form with the 2002 presentation. Statements of Financial Accounting Standards Adopted: Income Taxes. The Company provides for income taxes utilizing the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.  Recently Issued Accounting Standards. In June 2001, Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”) and Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”) were issued. FAS 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. FAS 141 also speci- fies criteria that intangible assets acquired must meet to be recognized and reported separately from goodwill. FAS 142 requires that goodwill and intan- gible assets with indefinite lives no longer be amortized but instead be measured for impairment at least annually, or when events indicate that there may be an impairment. At December 31, 2002, the Company evaluated CTS India is an export-oriented company, which under the Indian Income Tax Act of 1961, is entitled to claim a tax holiday for a period of ten years with respect to its export profits. Substantially all of the earnings of the 30