Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 On October 22, 2004, the American Jobs Creation Act of 2004 (“Act”) was enacted into law. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations, and as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, we are not yet in a position to decide on whether, and to what extent, we might repatri- ate foreign earnings that have not yet been remitted to the U.S. Under the provisions of the Act and subject to the completion of our analysis of the Act and the operating results of our controlled foreign entities during 2005, we will be eligible to repatriate some amount between $0 and $500 million. Due to the complexities of domestic and foreign tax law and the lack of clarity surrounding the Act, we cannot reasonably estimate the tax liability if we elect to repatriate any accumulated foreign earnings. We expect to finalize our assessment in 2005 after further guidance is published. The funds may only be repatriated in 2005. Goodwill. We evaluate goodwill for impairment at least annually, or as circumstances warrant. When determining the fair value of our reporting units, we utilize various assumptions, including projections of future cash flows. Any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge. As of December 31, 2004, our goodwill balance was approximately $9.7 million. Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impair- ment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset. The measurement for such an impairment loss is then based on the fair value of the asset. If such assets were determined to be impaired, it could have a material adverse effect on our business, results of operations and financial condition. Risks. Most of our IT development centers, including a majority of our employees, are located in India. As a result, we 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 rr from foreign policy or the variability of foreign economic or political conditions. Additional risks associated with international operations include difficulties in enforcing intellectual property rights, the burdens of complying with a wide variety of foreign laws, potential geo-polit- ical and other risks associated with terrorist activities and local and cross border conflicts, potentially adverse tax consequences, tariffs, quotas and other barriers. We are also subject to risks associated with our overall compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The inability of our independent auditor to provide us with an unqualified report as to the adequacy of our internal controls over financial reporting for future year ends could result in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline. The following table sets forth, for the periods indicated, certain financial data expressed for the three years ended December 31, 2004: RESULTS OF OPERATIONS C OGNIZANT ANNUAL REPORT 2004 Revenues $ 586,673 100.0% $ 368,231 100.0% $ 229,086 100.0% $ 218,442 $ 139,145 Cost of revenues 319,810 54.5 199,724 54.2 122,701 53.6 120,086 77,023 Gross profit 266,863 45.5 168,507 45.8 106,385 46.4 98,356 62,122 Selling, general and administrative 132,796 22.7 84,259 22.9 53,345 23.3 48,537 30,914 Depreciation and amortization 16,447 2.8 11,936 3.3 7,842 3.4 4,511 4,094 Income from operations 117,620 20.0 72,312 19.6 45,198 19.7 45,308 27,114 Other income (expense), net 4,475 (81) (107) 4,556 26 Provision for income taxes (21,852) (14,866) (10,529) 6,986 4,337 Net income $ 100,243 17.1 $ 57,365 15.6 $ 34,562 15.1 42,878 22,803 % of % of % of Increase (Dollars in thousands) 2004 Revenues 2003 Revenues 2002 Revenues 2004 2003