Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 The Company’s chief operating decision maker evaluates Cognizant’s performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on industries served by our operating groups may affect revenue and operating expenses to differing degrees. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as a per seat charge for use of the development centers. Certain expenses, such as general and administrative, and a portion of depreciation and amortization, are not specifically allocated to specific segments as management does not believe it is practical to allocate such costs to individual segments because they are not directly attributable to any specific segment. Accordingly, these expenses are separately disclosed as “unallocated” and adjusted only against the total income from operations. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” prior periods segment disclosure has been restated to reflect industry segments for all periods presented. Revenues from external customers and segment operating profit, before unallocated expenses, for the Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other reportable segments for the years ended December 31, 2004, 2003 and 2002 are as follows: Revenue. Revenue increased by 70.5%, or approximately $120.1 million, from approximately $170.4 million during 2003 to approximately $290.4 million in 2004. The increase in revenue was attributable primarily to greater acceptance of the on-site/offshore IT services delivery model as a means of reducing a customer’s internal IT costs, as well as increased sales and marketing activities directed at both the U.S. and European markets for our services. Segment Operating Profit. Segment operating profit increased 98.6%, or approximately $51.7 million, from approximately $52.4 million during 2003 to approximately $104.1 million during 2004. The increase in segment operating profit was attributable primarily to increased revenues and achieving continued leverage on prior sales and marketing investments. Revenue. Revenue increased by 48.4%, or approximately $38.0 million, from approximately $78.4 million during 2003 to approximately $116.4 million in 2004. The increase in revenue was primarily attributable to the continued expansion of services within our existing North American customers. Segment Operating Profit. Segment operating profit increased 48.2%, or approximately $15.4 million, from approximately $31.9 million during 2003 to approximately $47.3 million during 2004. The increase in segment operating profit was attributable primarily to increased revenues and achieving continued leverage on prior sales and marketing investments. Revenue. Revenue increased by 64.4%, or approximately $41.3 million, from approximately $64.1 million during 2003 to approximately Manufacturing/Retail/Logistics Segment Healthcare Segment Financial Services Segment Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Y COGNIZANT ANNUAL REPORT 2004 Revenues: Financial services $ 290,432 $ 170,370 $ 81,404 $ 120,062 70.5 $ 88,966 109.3 Healthcare 116,370 78,420 55,434 37,950 48.4 22,986 41.5 Manufacturing/retail/logistics 105,328 64,064 48,788 41,264 64.4 15,276 31.3 Other 74,543 55,377 43,460 19,166 34.6 11,917 27.4 Total revenues $ 586,673 $ 368,231 $ 229,086 $ 218,442 59.3 $ 139,145 60.7 Segment Operating Profit: Financial services $ 104,074 $ 52,412 $ 27,473 $ 51,662 98.6 $ 24,939 90.8 Healthcare 47,294 31,912 22,582 15,382 48.2 9,330 41.3 Manufacturing/retail/logistics 38,842 24,569 21,522 14,273 58.1 3,047 14.2 Other 30,820 20,964 16,363 9,856 47.0 4,601 28.1 Total segment operating profit $ 221,030 $ 129,857 $ 87,940 $ 91,173 70.2 $ 41,917 47.7 2004 2003 (Dollars in thousands) 2004 2003 2002 Increase % Increase %