UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2006

For the transition period fromto

Commission File Number 0-24429

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code (201) 801-0233

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No:  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No:No  x

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of August 1, 2006:May 3, 2007:

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

TABLE OF CONTENTS

i

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

(Unaudited)

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(in thousands, except par values)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands)

Note 1 — Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Cognizant Technology Solutions Corporation (“Cognizant” or the “Company”) in accordance with generally accepted accounting principles in the United States of America and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s consolidated financial statements (and notes thereto) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.2006. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire year. Certain reclassifications have been made to prior year numbers to conform to the current year presentation.

Note 2 — Revenue Recognition

The Company’s services are entered into on either a time-and-materials or fixed-price basis. Revenues related to time-and-material contracts are recognized as the service is performed. Revenues related to fixed-price contracts that provide for highly complex information technology application development services are recognized as the service is performed using the percentage of completion method of accounting, under which the total value of revenue is recognized on the basis of the percentage that each contract’s cost to date bears to the total estimated cost (cost to cost method). Revenues related to fixed-priced contracts that provide solely for application maintenance services are recognized on a straight-line basis or as services are rendered or transactions processed in accordance with contractual terms. Expenses are recorded as incurred over the contract period. Volume discounts, if any, are recorded as a reduction of revenue over the contract period as services are provided.

For contracts with multiple deliverables, the Company evaluates at the inception of each new contract all deliverables in an arrangement to determine whether they represent separate units of accounting. For arrangements with multiple units of accounting, primarily fixed-price contracts that provide both application maintenance and application development services and certain application maintenance contracts, arrangement consideration is allocated among the units of accounting, where separable, based on their relative fair values and revenue is recognized for each unit of accounting based on the Company’s revenue recognition policy described above.

Fixed-price contracts are cancelable subject to a specified notice period. All services provided by the Company through the date of cancellation are due and payable under the contract terms. The Company issues invoices related to fixed-price contracts based upon achievement of milestones during a project or other contractual terms. Differences between the timing of billings, based upon contract milestones or other contractual terms, and the recognition of revenue, based upon the percentage-of-completion method of accounting, are recognized as either unbilled or deferred revenue. Estimates of certain fixed-price contracts are subject to adjustment as a project progresses to reflect changes in expected completion costs. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately. Warranty provisions generally exist under such contracts for a period of ninety days past contract completion and costs related to such provisions are accrued at the time the related revenues are recorded.

Revenues related to services performed without a signed agreement or work order are not recognized until there is evidence of an arrangement, such as when agreements or work orders are signed or payment is received; however, the cost related to the performance of such work is recognized in the period the services are rendered.

For all services, revenue is recognized when, and if, evidence of an arrangement is obtained and the other criteria to support revenue recognition are met, including the price is fixed or determinable, services have been rendered and collectibility is assured.

The Company accounts for reimbursement of out-of-pocket expenses as revenues.

Note 3 — Capital Stock

On June 13, 2006, the Company’s stockholders approved amendments to: (1) the Restated Certificate of Incorporation to increase the maximum number of authorized shares of the Company’s capital stock, all classes, from 340,000,000 shares,

consisting of (i) 325,000,000 shares of Class A common stock, and (ii) 15,000,000 shares of preferred stock, to 515,000,000 shares, consisting of (x) 500,000,000 shares of Class A common stock, and (y) 15,000,000 shares of preferred stock and (2) the 1999 Incentive Compensation Plan, as amended (the “Incentive Plan”) and the Key Employees’ Stock Option Plan, as amended (the “Key Employees Plan”) to (i) increase the maximum number of shares of Class A common stock reserved for issuance under the Incentive Plan from 37,500,000 to 38,261,580 shares and thereby reserve an additional 761,580 shares of Class A common stock for issuance and (ii) decrease the maximum number of shares of Class A common stock reserved for issuance under the Key Employees Plan by 761,580 from 8,385,000 to 7,623,420 shares.

As a result of the aforementioned amendments to the Incentive Plan and Key Employees Plan, the total number of shares available for issuance under the Company’s stock-based compensation plans remains unchanged and there are no more shares available for future grants under the Key Employees Plan.

Note 4 — Stock-Based Compensation Plans

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment,” utilizing the modified prospective method. SFAS No. 123R requires the recognition of stock-based compensation expense in the consolidated financial statements for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards. Under the modified prospective method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), shall be recognized in net income in the periods after the date of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flow and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under the prior accounting rules.

Prior to the adoption of SFAS No. 123R, the Company followed the intrinsic value method to account for its employee stock option plans and employee stock purchase plan in accordance with the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees and Related Interpretations” (“APB No. 25”), as allowed by SFAS No. 123 and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. Accordingly, no stock-based employee compensation cost was recognized, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant and, with respect to the employee stock purchase plan, the discount did not exceed fifteen percent. In accordance with the transitional provisions of SFAS 123R, operating results for 2005 have not been restated. The Company historically reported pro forma results under the disclosure-only provisions of SFAS No. 123.

The Company has three stock option plans (“Option Plans”):

In addition to the Option Plans, the Company maintains the 2004 Employee Stock Purchase Plan (the “Purchase Plan”) that provides for the issuance of up to 3,000,000 shares of Class A common stock to eligible employees. The Purchase Plan provides for eligible employees to purchase whole shares of Class A common stock at a price of 90% of the lesser of: (a) the

fair market value of a share of Class A common stock on the first date of the purchase period or (b) the fair market value of a share of Class A common stock on the last date of the purchase period. Stock-based compensation expense for the Purchase Plan is recognized over the vesting period of three months on a straight-line basis.

The Company currently utilizes authorized, available shares to satisfy stock option exercises under its Option Plans and issuances under its Purchase Plan. During the three and six months ended June 30, 2006, stock-based compensation expense and related income tax benefits reflected in the Company’s operating results were $6,769 and $14,371, respectively, and $1,380 and $2,689, respectively. The allocation of stock-based compensation expense between cost of revenues and selling, general and administrative expenses was as follows:

The effect of adopting SFAS No. 123R on selected reported items as compared to amounts that would have been reported under APB No. 25, including changes to the geographic mix of taxable income attributed to the adoption of SFAS No. 123R resulting in decreased tax benefits of $538 and $714 as compared to our reported results for the three and six months ended June 30, 2006, is presented in the following table:

A summary of changes in the Option Plans for the six months ended June 30, 2006 is as follows:

As of June 30, 2006, the total remaining unrecognized stock-based compensation cost related to non-vested stock options expected to vest amounted to $47,219, which will be amortized over the weighted-average remaining requisite service period of 1.91 years. At June 30, 2006, the Company has 2,334,698 and 2,198,495 shares available for future stock option grants and issuances under the Option Plans and Purchase Plan, respectively.

Other information pertaining to option activity during the three and six months ended June 30, 2006 and 2005 was as follows:

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for periods ended June 30, 2005:

The fair value of each stock option was estimated on the date of grant using a Black-Scholes option-pricing model. For the three and six months ended June 30, 2006, expected volatility was calculated using implied market volatilities. In addition, the expected term, which represents the period of time, measured from the grant date, that vested options are expected to be outstanding, was derived by incorporating exercise and post-vest termination assumptions, based on historical data, in a Monte Carlo simulation model. For the three and six months ended June 30, 2005, expected volatility was based on historical volatility of the Company’s Class A common stock and the expected term was based on historical employee exercise behavior. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The Black-Scholes model also incorporates forfeiture assumptions based on an analysis of historical data. The Company does not pay dividends.

The fair values of option grants, including the Purchase Plan, were estimated at the date of grant with the following assumptions:

During the three and six months ended June 30, 2006, the Company issued 92,340 and 197,370 shares of Class A common stock, respectively, under the Purchase Plan with a total vested fair value of approximately $926 and $1,841, respectively.

Note 5 – Short-term Investments

The following is a summary of short-term investments:

The carrying value of ourthe short-term investments approximated fair value as of June 30, 2006March 31, 2007 and December 31, 2005.2006. Realized gains or losses, if any, on these investments were insignificant for the periods presented.

Note 63 — Income Taxes

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of adopting FIN 48 of $850 was recorded as a reduction of retained earnings and an increase to noncurrent liabilities. The total amount of unrecognized tax benefits as of the date of adoption was $7,700 of which $7,500 would impact the effective income tax rate if recognized. There have been no material changes to the unrecognized tax benefit balance during the quarter ended March 31, 2007. Included in the balance of unrecognized tax benefits as of January 1, 2007, is $2,921 related to certain U.S. Federal and state unrecognized tax benefits that could reasonably be recognized during the next 12 months due to expiration of statutes of limitations.

The Company continues to classify accrued interest and penalties related to unrecognized tax benefits in income tax expense. At January 1, 2007, the Company had $614 accrued for interest relating to certain tax matters in India. The Company has not accrued interest on U.S. unrecognized tax benefits as the Company currently has net operating loss carry forwards that would mitigate any current interest cost.

As of January 1, 2007, the Company is subject to U.S. Federal income tax examinations for the years 2003 through 2006 and various state and local income tax examinations for the tax years 2000 through 2006. The Company is also subject to examination in India and other foreign jurisdictions for the tax years 2001 through 2006. Currently, the Company is under income tax examination in India and is a party to a California state income tax audit with a prior owner. The Company does not believe that the outcome of any examination will have a material effect on its financial statements.

Our Indian subsidiary, Cognizant India, is an export-oriented company, which, under the Indian Income Tax Act of 1961, is entitled to claim tax holidays for a period of ten consecutive years for each Software Technology Park (“STP”) with respect to export profits for each STP. Substantially all of the earnings of Cognizant India are attributable to export profits.

The majority of the Company’s STPs in India are currently entitled to a 100% exemption from Indian income tax. Under current law, these tax holidays will be completely phased out by March of 2009. On March 31, 2006, the tax holiday expired for a second STP. The incremental Indian taxes related to the taxable STPs have been incorporated into the Company’s effective income tax rate for 2006.2007. The effective tax rate of 17.8%16.4% for the three and six months ended June 30, 2005March 31, 2007 decreased tofrom 16.6% for the three and six months ended June 30,March 31, 2006 primarily due to the Company’s overall growth, which resulted in a greater percentage of Cognizant India’s revenue falling under the income tax holiday. The principal difference between the effective income tax rates for the 2006 and 2005 periods and the United States federal statutory rate is the effect of the tax holiday in India.

Note 74 — Commitments and Contingencies

In February 2006,As of March 31, 2007, the Company expanded its plans to construct additional fully-owned development centers to now include over 1,700,000 square feet as compared to previous plans, announced in October 2004, to add 900,000 square feet of space. The 1,700,000 square feet of facilities will be located in Chennai, Pune, Kolkata, Hyderabad and Bangalore, India. The total construction expenditure related to this expanded program is estimated to be approximately $140,000, an increase of approximately $64,000 when compared to the expansion program announced in October 2004. As of June 30, 2006, the Company has entered intohad outstanding fixed capital commitments of approximately $87,000$98,000 related to thisits India development center expansion program,program.

In connection with the acquisition of which approximately $77,000 has been spentsubstantially all the assets of Fathom Solutions, LLC (“Fathom”) in April 2005, additional purchase price, not to date.exceed $16,000, payable in 2007, is contingent on Fathom achieving certain financial and operating targets over the two years ended April 30, 2007. The Company estimates that it will make an additional purchase price payment of at least $11,000 to the sellers of Fathom in 2007.

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the outcome of such claims and legal actions, if decided adversely, is not expected to have a material adverse effect on the Company’s quarterly or annual results of operations, cash flows, or consolidated financial position. Additionally, many of the Company’s engagements involve projects that are critical to the operations of its customers’ businesses and provide benefits that are difficult to quantify. Any failure in a customer’s computer system could result in a claim for substantial damages against the Company, regardless of the Company’s responsibility for such failure. Although the Company attempts to contractually limit its liability for damages arising from negligent acts, errors, mistakes, or omissions in rendering its software development and maintenance services, there can be no assurance that the limitations of liability set forth in its contracts will be enforceable in all instances or will otherwise protect the Company from liability for damages. Although the Company has general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceed available insurance coverage or changes in the Company’s insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on the Company’s business, results of operations, cash flows and financial condition.

In connection with the split-off of the Company from IMS Health Incorporated (“IMS Health”) on February 13, 2003, the Company entered into a Distribution Agreement, dated January 7, 2003, with IMS Health (the “Distribution Agreement”), that provides, among other things, that IMS Health and the Company will comply with, and not take any action during the relevant time period that is inconsistent with, the representations made to and relied upon by McDermott, Will & Emery in

connection with rendering its opinion regarding the U.S. federal income tax consequences of the exchange offer. In addition, pursuant to the Distribution Agreement, the Company indemnified IMS Health for any tax liability to which they may be subject as a result of the exchange offer but only to the extent that such tax liability resulted solely from a breach in the representations the Company made to and were relied upon by McDermott, Will & Emery in connection with rendering its opinion regarding the U.S. federal income tax consequences of the exchange offer. If the Company breaches any of its representations in connection with the Distribution Agreement, the related indemnification liability could be material to the Company’s results of operations, financial position and cash flows.

Note 85 — Segment Information

The Company’s reportable segments are: Financial Services, which includes customers providing banking / banking/transaction processing, capital markets and insurance services; Healthcare, which includes healthcare providers and payers as well as life sciences customers; Manufacturing / Retail / Manufacturing/Retail/Logistics, which includes manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and Other, which is an aggregation of industry segments which, individually, are less than 10% of consolidated revenues and segment operating profit. The Other reportable segment includes media, information services, telecommunications and high technology operating segments. The Company’s sales managers, account executives, account managers and project teams are aligned in accordance with the specific industries they serve.

The Company’s chief operating decision maker evaluates the Company’s performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. 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 Company’s IT 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.

Further, stock-based compensation expense is not allocated to individual segments in internal management reports used by the chief operating decision maker. Accordingly, these expenses are separately disclosed as “unallocated” and adjusted only against the total income from operations of the Company. Additionally, management has determined that it is not practical to allocate identifiable assets, by segment, since such assets are used interchangeably among the segments.

Revenues from external customers and segment operating profit, before unallocated expenses, for the Financial Services, Healthcare, Manufacturing / Retail / Manufacturing/Retail/Logistics, and Other reportable segments for the three and six months ended June 30,March 31, 2007 and 2006 and 2005 are as follows:

Geographic Area Information

Revenue and long-lived assets, by geographic area, are as follows

(4)	Long-lived assets include property and equipment and intangible assets, net of accumulated depreciation and amortization, respectively, and goodwill.

(5)	Substantially all of these long-lived assets relate to the Company’s operations in India.

No customer accounted for revenues in excess of 10% of total revenues for the three and six monthsquarter ended June 30,March 31, 2007 or 2006. One customer, JPMorgan Chase, accounted for more than 10% of revenues during the three and six months ended June 30, 2005.

Note – 96 — Recent Accounting PronouncementPronouncements

On July 13, 2006,In February 2007, the FASB issued Statement of Financial Accounting Standards Board issued Interpretation(“SFAS”) No. 48, “Accounting159, “The Fair Value Option for Uncertainty in Income Taxes —Financial Assets and Financial Liabilities, Including an interpretationAmendment of FASB Statement No. 109”115” (“FIN 48”SFAS No. 159”), which clarifies the accountingis effective for uncertainty in tax positions. FIN 48 requires recognition in the financial statements of the impact of a tax position, ifissued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that positionare otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions are effective for the Company beginningirrevocable and subsequent changes in the first quarter of 2007 with the cumulative effect, if any, of the changefair value must be recorded in accounting principle recorded as an adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of adopting FIN 48that SFAS No. 159 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact that SFAS No. 157 will have on its consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary

During the three and six months ended June 30, 2006,March 31, 2007, our revenue increased to $336.8 million and $622.3$460.3 million compared to $211.7 million and $393.4$285.5 million during the three and six months ended June 30, 2005.March 31, 2006. Net income increased to $55.1$75.4 million and $102.2 million, respectively, or $0.37 and $0.68$0.50 per diluted share, including stock-based compensation expense, net of tax, equal to $0.04 and $0.08 per diluted share, during the three and six months ended June 30, 2006March 31, 2007. This is compared to $36.0 million and $68.0net income of $47.2 million or $0.25 and $0.47$0.32 per diluted share, including stock-based compensation expense, net of tax, equal to $0.04 per diluted share, during the three and six months ended June 30, 2005, which excludes stock-based compensation expense.March 31, 2006. The key drivers of our revenue growth during the quarter ended June 30, 2006March 31, 2007 were as follows:

During 20052006 and in the first halfquarter of 2006,2007, we saw increasing demand from our customers for a broad range of IT solutions, particularly high performance web development initiatives and complex systems development engagements, testing, customer relationship management (CRM) and enterprise resource planning, (ERP), and data warehousingor ERP, infrastructure management, business process outsourcing and business intelligence. We finished the quarter with approximately 270420 active clients compared to 246260 as of June 30, 2005. DuringMarch 31, 2006 and increased the number of strategic clients by five during the quarter we added 5 strategic clients to bringbringing the total number of our strategic clients to 77.92. We define a strategic client as one offering the potential to generate between $5.0$5 million and $40.0$40 million or more in annual revenues at maturity. Our top five and top ten customers accounted for approximately 30%26% and 41%36%, respectively, of our total revenues in 2006during the quarter ended March 31, 2007 as compared to approximately 34%30% and 46%42%, respectively, for the quarter ended June 30, 2005.March 31, 2006. As we continue to add new customers and increase our penetration at existing customers, we expect the percentage of revenues from our top five and top ten customers to continue to trend downdecline over time.

In Europe, we continue to seeexperience strong growth. During the quarter ended June 30, 2006,March 31, 2007, our revenue from European customers increased by approximately 70%84.1% to approximately $42.4$64.6 million compared to approximately $25.0$35.1 million in the quarter ended June 30, 2005.March 31, 2006. For the quarter ended June 30, 2006,March 31, 2007, revenue from Europe, excluding the UK, increased by approximately $5.1$14.4 million or approximately 99%183.6% from approximately $5.2$7.9 million in the quarter ended June 30, 2005March 31, 2006 to approximately $10.3$22.3 million. Europe will continue to be an area of heavy investment for us in 20062007 as we see this arearegion as a growth opportunity for the long-term.long term.

Our revenue growth is also attributed to increasing market acceptance of, and strong demand for, offshore IT services. Recent NASSCOM (India’s National Association of Software and Services Companies) reports state that India’s IT services export industry is expected to grow by 33% during the twelve month period ended March 31, 2007.

Our operating margin decreased to approximately 18.0%18.2% for the quarter ended June 30, 2006March 31, 2007 compared to 20.0%18.6% for the quarter ended June 30, 2005.March 31, 2006. Excluding stock-based compensation costs of approximately $6.8$7.4 million, operating margin for the quarter ended June 30, 2006March 31, 2007 was approximately 20.0%19.8%. This was in line with our historic targeted operating margin range, excluding stock-based compensation costs, of 19% to 20% of total revenues. Historically, we have invested the profitability above the 19% to 20% operating margin level, which excludes stock-based compensation, back into our business, which we believe is a significant contributing factor to our strong revenue growth. This investment is primarily focused in the areas of: (i) hiring client partners and relationship personnel with specific industry experience or domain expertise,expertise; (ii) training our technical staff in a broader range of IT service offerings,offerings; (iii) strengthening our business analytic capabilities,capabilities; (iv) strengthening and expanding our portfolio of services,services; (v) continuing to expand our geographic presence for both sales and delivery,delivery; and (vi) recognizing and rewarding exceptional performance by our employees. In addition, we maintain a deep bench of resources, trained in a broad range of service offerings, in order to be well positioned to respond to our customer requests to take on additional projects. This also has an effect of reducing our operating margins and lowering our utilization levels. For the year ending December 31, 2006,2007, we expect to continue to invest amounts in excess of our historical targeted operating margin levels back into the business.

During the quarter, we experienced pressure on our cost structure due to the appreciation of the India rupee versus the U.S. dollar. This is in addition to the continuing wage inflation, primarily in India, that we have experienced over the last several years. Approximately 27% of our global costs are denominated in the Indian rupee and the appreciation of the Indian rupee versus the U.S. dollar during the first quarter of 2007 as compared to the quarter ended December 31, 2006 had the effect of decreasing our operating margin by approximately 40 basis points or 0.4 percentage points. Each additional 1% appreciation of the Indian rupee will have the effect of decreasing our operating margin by 20 basis points or 0.2 percentage points. In addition, the current proposed budget by the government of India includes, among other items that may result in additional costs to the Company, a provision to tax the rental payments on commercial real estate. If approved, this additional tax will be effective for our quarter ended June 30, 2007. We have already begun to implement actions to mitigate these negative costs trends, including increasing our global utilization rates of our technical staff and reducing discretionary spending. Accordingly, we believe this balanced response will permit us to continue to maintain operating margins in our historic targeted operating margin range, which excludes stock compensation costs, of 19% to 20% of total revenues and permit us to continue to make the necessary investments to continue to grow the Company.

We finished the quarter with total headcount of approximately 29,675,43,400, an increase of approximately 10,40016,650 over the total headcount at June 30, 2005.March 31, 2006. The increase in the number of our technical personnel and related infrastructure costs, to meet the demand for our services, are the primary drivers of the increase in our operating expenses in 2006.2007. Annualized

turnover, including both voluntary and involuntary, was approximately 15% during the quarterthree months ended June 30, 2006.March 31, 2007. The majority of our turnover occurs in India, resulting in on-siteIndia. As a result, annualized attrition rates on-site at clients are below theour global attrition rate. In addition, attrition is weighted towardtowards the more junior members of our staff. We have experienced wage inflation in India, which may continue in the future; however, this has not had a material impact on our results of operations as Indian wages represent less than 20% of our total operating expenses.

We are continuing with our strategy of moving from leased facilities to owned facilities as a way of reducing overall operating costs. We recently expandedIn November 2006, we announced the expansion of our plansexisting India real estate development program to construct additional fully-owned development centers to now include over 1.7three million square feet as compared to previous plans, announced in October 2004, to addof new space, which is inclusive of the 900,000 square feet of space.space that we added to our planned construction program in February 2006. The 1.7expanded program, which commenced during the quarter ended March 31, 2007, includes the expenditure of approximately $200 million square feetthrough the end of 2008 on land acquisition, facilities will beconstruction and furnishings to build new state-of-the-art IT development centers in regions primarily designated as Special Economic Zones located in Chennai, Pune, Kolkata, Hyderabad and Bangalore,Coimbatore, India. The total construction expenditure related to this expanded program is estimated to be approximately $140 million, an increase of approximately $64 million when compared to the expansion program announced in October 2004, whichAdditionally, we expect to fund primarily from current operations.continue to expand our capacity and capabilities in Bangalore, Kochi and Mumbai, India.

At June 30, 2006,March 31, 2007, we had cash and cash equivalents and short-term investments of $468.2 million. Further, we had no third party debt$673.1 million and working capital of approximately $642.3$898.3 million. Accordingly, we do not anticipate any near-term liquidity issues.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment”, utilizing the modified prospective method. SFAS No. 123R requires the recognition of stock-based compensation expense in the consolidated financial statements for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards. Under the modified prospective method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), are recognized in net income in the periods after the date of adoption. Pre-tax stock-based compensation costs of $6.8 million and $14.4 million have been recorded for the three and six months ended June 30, 2006. In accordance with the modified prospective method of adoption under SFAS No. 123R, prior period financial statements have not been restated to reflect stock-based compensation costs. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flow and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under the prior accounting rules.

Critical Accounting Estimates and Risks

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation 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, assumptions used in valuing stock-based compensation arrangements, 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 may differ from the estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Our significant accounting policies are described in Note 21 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.2006.

We believe the following critical accounting policies require a higher level of management judgments and estimates than others in preparing the consolidated financial statements:

Revenue Recognition. Revenues related to our fixed-pricehighly complex information technology application development contracts, which are predominantly fixed-priced contracts, are recognized as the service is performed using the percentage of completion method of accounting, under which theaccounting. Under this method, total contract revenue during the term of an agreement is recognized on the basis of the percentage that each contract’s cost to date bears to the total estimated cost (cost to cost method). EstimatesThis method is followed where reasonably dependable estimates of total contract revenues and costs are continuously monitored duringcan be made. Management reviews estimated future labor costs, the termdriver of thetotal expected contract and recorded revenues and costs, are subjecton an ongoing basis. Revisions to revision as the contract progresses. Such revisionsour estimates may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified. If our estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated costs of the contract exceed the estimated total revenues that will be generated by the contract and are included in cost of revenues in our unaudited condensed consolidated statement of operations. Contract losses for the 2007 and 2006 periods presented were immaterial.

Stock-Based Compensation. Effective January 1, 2006, we were required to account for stock-based awards in accordance with the fair value recognition provisions of SFAS No. 123R. Under the fair value recognition provisions of SFASStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (SFAS No. 123R), stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options and the expected volatility of our stock. In addition, judgment is also required in estimating the income tax benefits related to the stock-based awards and the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.

Income Taxes. Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and related valuation allowance, if any, involves judgment. As a global company, we are required to calculate and provide for income taxes in each of the jurisdictions where we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. In the period of resolution, adjustments may need to be recorded that result in increases or decreases to income. Changes in the geographic mix or estimated level of annual pre-tax income can also affect the overall effective income tax rate.

On an on-going basis, we evaluate whether a valuation allowance is needed to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and on-going prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we determine that we will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we will not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Our Indian subsidiary, Cognizant India, is an export-oriented company, which, under the Indian Income Tax Act of 1961, is entitled to claim tax holidays for a period of ten consecutive years for each Software Technology Park (STP) with respect to export profits for each STP. Substantially all of the earnings of Cognizant India are attributable to export profits. The majority of the Company’sour STPs in India are currently entitled to a 100% exemption from Indian income tax. Under current law, these tax holidays will be completely phased out by March of 2009. On March 31, 2006, the tax holiday expired for a second STP; however, we do not expect theThe incremental Indian taxes due onrelated to the operating profits of this STP totaxable STPs have a significant effect onbeen incorporated into our 2006 effective income tax rate as we anticipatefor 2007. The effective tax rate of 16.6% for the three months ended March 31, 2006 decreased to 16.4% for the three months ended March 31, 2007 primarily due to our overall growth, which resulted in a greater percentage of Indian earnings subject toCognizant India’s revenue falling under the income tax holiday in India will increase as a percentage of total Indian earnings in 2006.holiday. In anticipation of the complete phase out of the tax holidays in March 2009, we expect to locate a portion of our new development centers in areas designated as Special Economic Zones (SEZ). Development centers operating in SEZ will be entitled to certain income tax incentives for periods up to 15 years. Under current Indian tax law, export profits after March 31, 2009 from our existing STPs will be fully taxable at the Indian statutory rate (currently 33.66%)(33.66% as of March 31, 2007) in effect at such time.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is determined by evaluating the relative credit-worthiness of each customer, historical collections experience and other information, including the aging of the

receivables. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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 June 30, 2006,March 31, 2007, our goodwill balance was approximately $18.4$27.3 million.

Long-lived Assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment 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 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-political 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 management and our independent auditor to provide us with an unqualified report as to the adequacy and effectiveness, respectively, 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. See Part II, Item 1A. “Risk Factors”.

Results of Operations

Three Months Ended June 30, 2006March 31, 2007 Compared to Three Months Ended June 30, 2005March 31, 2006

The following table sets forth, for the periods indicated, certain financial data expressed for the three months ended June 30:March 31:

(Dollars in thousands)

The following table below includes non-GAAP income from operations, excluding stock-based compensation, a measure defined by the Securities and Exchange Commission as a non-GAAP financial measure. This non-GAAP financial measure is not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, this non-GAAP measure, the financial statements prepared in accordance with GAAP and reconciliations of our GAAP financial statements to such non-GAAP measure should be carefully evaluated.

We manage the company to targeted operating margin, excluding stock-based compensation costs, of 19% to 20% of revenues. Accordingly, we believe that non-GAAP income from operations, excluding stock-based compensation costs, is a meaningful measure for investors to evaluate our financial performance. For our internal management reporting and budgeting purposes, we use financial statements that do not include stock-based compensation expense related to employee stock options and employee stock purchases for financial and operational decision making, to evaluate period-to-period comparisons and for making comparisons of our operating results to that of our competitors. Moreover, because of varying available valuation methodologies and the variety of award types that companies can use under SFAS No. 123R, we believe that providing a non-GAAP financial measure namelythat

excludes stock-based compensation allows investors to make additional comparisons between our operating results to those of other companies. Accordingly, we believe that the presentation of non-GAAP income from operations on a non-GAAP basis, excluding the impact of stock-based compensation resulting from the adoption of SFAS No. 123R. The table also includes reconciliations ofwhen read in conjunction with our reported GAAP income from operations presentedcan provide useful supplemental information to our management and to investors regarding financial and business trends relating to our financial condition and results of operations.

A limitation of using non-GAAP income from operations versus income from operations reported in accordance with U.S. generally accepted accounting principlesGAAP is that non-GAAP income from operations, excludes a cost, namely, stock-based compensation that is recurring. Stock-based compensation has been and will continue to thisbe for the foreseeable future a significant recurring expense in our business. In addition, other companies may calculate non-GAAP measure. Management believes thatfinancial measures differently than us, thereby limiting the presentationusefulness of this non-GAAP financial measure provides usefulas a comparative tool. We compensate for this limitation by providing specific information to investors because our unaudited condensed consolidated statement ofregarding the GAAP amounts excluded from non-GAAP income from operations for the three months ended June 30, 2005 did not reflect the impact of the adoption of SFAS No. 123R and therefore, the presentation of theevaluating such non-GAAP financial measure enhances investors’ ability to make period to period comparisons of our operating results. with financial measures calculated in accordance with GAAP.

A reconciliation of income from operations as reported and non-GAAP income from operations, excluding stock-based compensation expense, is as follows for the three months ended June 30:March 31:

(Dollars in thousands)

Revenue.Revenue increased by 59.1%61.2%, or approximately $125.1$174.8 million, from approximately $211.7$285.5 million during the three months ended June 30, 2005March 31, 2006 to approximately $336.8$460.3 million during the three months ended June 30, 2006.March 31, 2007. This increase is attributed to greater acceptance of the on-site/offshore delivery model among an increasing number of industries, and continued strength in our customers’ discretionary spending.spending and greater penetration in the European market. Revenue from customers existing as of June 30, 2005March 31, 2006 increased by approximately $97.7$136 million and revenue from new customers added since June 30, 2005March 31, 2006 was approximately $27.4$38.8 million or approximately 8.1%8.4% of total revenues for the three months ended June 30, 2005.March 31, 2007. In addition, revenue from European customers increased by $29.5 million during the quarter ended March 31, 2007. We had approximately 270420 active clients as of June 30, 2006March 31, 2007 as compared to 246260 active clients as of June 30, 2005.March 31, 2006. In addition, we experienced strong demand

across all of our business segments for an increasingly broad range of services. Our Financial Services and Healthcare business segments accounted for approximately $58.7$78.3 million and $33.7$47.5 million, respectively, of the $125.1$174.8 million increase. Our IT consulting and technology services and IT outsourcing revenues increased by approximately 61%50.2% and 58%72.6%, respectively, compared to the quarter ended June 30, 2005March 31, 2006 and represented approximately 49%47.2% and 51%52.8%, respectively, of total revenues for the quarter ended June 30, 2006.March 31, 2007. No customer accounted for sales in excess of 10% of revenues during the quarter ended June 30,March 31, 2007 or 2006. JPMorgan Chase accounted for more than 10% of revenues during the quarter ended June 30, 2005.

Cost of Revenues (Exclusive of Depreciation and Amortization Expense).Our costCost of revenues consists primarily of the cost of salaries, stock-based compensation expense, payroll taxes, benefits, immigration and project-related travel for technical personnel, the cost of subcontracting and the cost of sales commissions related to revenues. Our cost of revenues increased by 59.9%60.7%, or approximately $70.6$96.3 million, from approximately $117.8$158.6 million during the three months ended June 30, 2005March 31, 2006 to approximately $188.3$254.9 million during the three months ended June 30, 2006.March 31, 2007. The increase was primarily due to higher compensation and benefits costs of approximately $55.3 million and the inclusion in 2006 of stock-based compensation expense of approximately $3.3$80.4 million.

Selling, General and Administrative Expenses.Selling, general and administrative expenses consist primarily of salaries, stock-based compensation expense, employee benefits, travel, promotion, communications, management, finance, administrative and occupancy costs as well as depreciation and amortization expense.costs. Selling, general and administrative expenses, including depreciation and amortization, increased by 70.3%65.1%, or approximately $36.3$48.0 million, from approximately $51.6$73.7 million during the three months ended June 30, 2005March 31, 2006 to approximately $87.8$121.8 million during the three months ended June 30, 2006,March 31, 2007, and increased as a percentage of revenue from 24.4%25.8% to 26.1%26.5%. The majority of the percentage increase in such expenses in absolute dollars and as a percentage of revenues was due primarily to stock-based compensation expense of approximately $3.4 million or 1% of revenues during the three months ended June 30, 2006.expenses incurred to expand our sales and marketing activities and increased infrastructure expenses to support our growth.

Income from Operations.Income from operations increased 43.2%57.3%, or approximately $18.3$30.4 million, from approximately $42.4$53.2 million during the three months ended June 30, 2005March 31, 2006 to approximately $60.7$83.6 million during the three months ended June 30, 2006,March 31, 2007, representing operating margins of 20.0%18.6% and 18.0%18.2% of revenues, respectively. The decrease in operating margin was primarily due to the increase in selling, general and administrative costs described above, as well as the appreciation of the Indian rupee versus the U.S. dollar, which negatively impacted operating margin by 15 basis points or 0.15 percentage points. Excluding stock-based compensation expense of approximately $6.8$7.4 million or 2.0% of revenues, recorded in the three months ended June 30, 2006. Excluding stock-based compensation expense,2007 and $7.6 million in 2006, operating margin for the three months ended June 30,March 31, 2007 and March 31, 2006 was 20.0%19.8% and 21.3% of revenues, respectively. On an annual basis, we expect stock-based compensation costs to continue to decrease as a percentage of total revenues.

Other Income/Expense, Net.Other income/expense, net consists primarily of interest income and foreign currency gains or losses. The increase in other income/expense, net of $3.9$3.3 million is attributed to an increase in interest income of $1.8$3.2 million from $2.1$3.4 million during the three months March 31, 2006 to approximately $6.6 million during the three months ended June 30, 2005 to approximately $3.9 million during the three months ended June 30, 2006 plus a period-over-period increase of $2.1 million inMarch 31, 2007. Interest income due to the remeasurement of certain balance sheet accounts for movements in foreign currency exchange rates. The increase in interest income isincreased due to higher average invested global cash and short-term investments balances and an increase in short-term interest rates.2007 compared to 2006.

Provision for Income Taxes. The provision for income taxes increased from approximately $7.8$9.4 million during the three months ended June 30, 2005March 31, 2006 to approximately $11.0$14.8 million during the three months ended June 30, 2006.March 31, 2007. The effective tax rate of 17.8% for the three months ended June 30, 2005 decreased to 16.6% for the three months ended June 30,March 31, 2006 decreased to 16.4% for the three months ended March 31, 2007 primarily due to our overall growth, which resulted in a greater percentage of Cognizant India’s revenuerevenues falling under the income tax holiday.

Net Income.Net income increased from approximately $36.0$47.2 million for the three months ended June 30, 2005March 31, 2006 to approximately $55.1$75.4 million for the three months ended June 30, 2006,March 31, 2007, representing 17.0% and 16.3% of revenues, respectively. The decrease in net income as a percentage of revenues compared to the prior period was due to the stock-based compensation expense recorded for the three months ended June 30, 2006, representing a decrease of 2.0% of revenues, offset, in part, by the decrease in the overall effective income tax rate in 2006 equal to 0.4% of revenues and an increase in other income/expense, net, of equal to 0.9% of revenues.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

The following table sets forth, for the periods indicated, certain financial data for the six months ended June 30:

(Dollars in thousands)

The following table includes a non-GAAP financial measure, namely income from operations on a non-GAAP basis, excluding the impact of stock-based compensation resulting from the adoption of SFAS No. 123R. The table also includes reconciliations of income from operations presented in accordance with U.S. generally accepted accounting principles to this non-GAAP measure. Management believes that the presentation of this non-GAAP financial measure provides useful information to investors because our unaudited condensed consolidated statement of operations for the three months ended June 30, 2005 did not reflect the impact of the adoption of SFAS No. 123R and, therefore, the presentation of the non-GAAP financial measure enhances investors’ ability to make period to period comparisons of our operating results. A reconciliation of income from operations as reported and non-GAAP income from operations excluding stock-based compensation expense is as follows for the six months ended June 30:

Revenue.Revenue increased by 58.2%, or approximately $228.9 million, from approximately $393.4 million during the six months ended June 30, 2005 to approximately $622.3 million during the six months ended June 30, 2006. This increase is primarily attributed to greater acceptance of the on-site/offshore delivery model among an increasing number of industries and continued strength in our customers’ discretionary spending. Revenue from customers existing as of June 30, 2005, increased by $181.5 million and revenue from new customers added since June 30, 2005 was approximately $47.5 million or 7.6% of revenues for the six months ended June 30, 2005. We had approximately 270 active clients as of June 30, 2006 as compared to 246 active clients as of June 30, 2005. In addition, we experienced strong demand across all of our business segments for an increasingly broad range of services. Our Financial Services and Healthcare business segments accounted for approximately $104.8 million and $60.9 million, respectively, of the $228.9 million increase. Our IT consulting and technology services and IT outsourcing revenues increased by approximately 63% and 54%, respectively, compared to the six months ended June 30, 2005 and represented approximately 50% and 50%, respectively, of total revenues for the six months ended June 30, 2006. No customer accounted for sales in excess of 10% of revenues during the six months ended June 30, 2006. JPMorgan Chase accounted for more than 10% of our revenues during the six months ended June 30, 2005.

Cost of Revenues (Exclusive of Depreciation and Amortization Expense).Our cost of revenues consists primarily of the cost of salaries, payroll taxes, benefits, immigration and project-related travel for technical personnel, the cost of subcontracting, and the cost of sales commissions related to revenues. Our cost of revenues increased by 60.8%, or approximately $131.1 million, from approximately $215.8 million during the six months ended June 30, 2005 to approximately $346.9 million during the six months ended June 30, 2006. The increase was due to higher compensation and benefits costs of approximately $102.7 million and the inclusion in 2006 of stock-based compensation expense of approximately $6.5 million.

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 as well as depreciation and amortization expense. Selling, general and administrative expenses, including depreciation and amortization, increased by 64.8%, or approximately $63.5 million, from approximately $98.1 million during the six months ended June 30, 2005 to approximately $161.6 million during the six months ended June 30, 2006, and increased as a percentage of revenue from 24.9% to 26.0%. The majority of the percentage increase in such expenses was due to stock-based compensation expense of approximately $7.9 million or 1.3% of revenues during the six months ended June 30, 2006.

Income from Operations.Income from operations increased 43.1%, or approximately $34.3 million, from approximately $79.6 million during the six months ended June 30, 2005 to approximately $113.8 million during the six months ended June 30, 2006, representing operating margins of 20.2% and 18.3% of revenues, respectively. The decrease in operating margin was due primarily to stock-based compensation expense of approximately $14.4 million, or 2.3% of revenues, recorded in the six months ended June 30, 2006, offset, in part, by the leverage achieved from increased revenues that resulted from our expanded sales and marketing activities in the current and prior years. Excluding stock-based compensation expense, operating margin for the six months ended June 30, 2006 was 20.6% of revenues.

Other Income/Expense, Net. Other income/expense, net consists primarily of interest income and foreign currency gains or losses. The increase in other income/expense, net of $5.6 million is attributed to an increase in interest income of $3.4 million from approximately $3.9 million during the six months ended June 30, 2005 to approximately $7.3 million during the six months ended June 30, 2006 plus a period-over-period increase of approximately $2.2 million in income due to the remeasurement of certain balance sheet accounts for movements in foreign currency exchange rates. The increase in interest income is due to higher invested global cash balances and an increase in short-term interest rates.

Provision for Income Taxes. The provision for income taxes increased from approximately $14.7 million during the six months ended June 30, 2005 to approximately $20.3 million during the six months ended June 30, 2006. The effective tax rate of 17.8% for the six months ended June 30, 2005 decreased to 16.6% for the six months ended June 30, 2006 primarily due to overall growth in our business which resulted in a greater percentage of Cognizant India’s income falling under the income tax holiday.

Net Income.Net income increased from approximately $68.0 million for the six months ended June 30, 2005 to approximately $102.2 million for the six months ended June 30, 2006, representing 17.3%16.5% and 16.4% of revenues, respectively. The decrease in net income as a percentage of revenues compared to the prior period was primarily due to the stock-based compensation expense recorded for the six months ended June 30, 2006, representing a decrease of 2.3% of revenues, offset, in part, by the decrease in the overall effective income tax rate in 2006 equal to 0.5% of revenues and the increase in other income/expense, net, of 0.7% of revenues.

Results by Business Segment

Our reportable segments are: Financial Services, which includes customers providing banking / banking/transaction processing, capital markets and insurance services; Healthcare, which includes healthcare providers and payers as well as life sciences customers; Manufacturing / Retail / Manufacturing/Retail/Logistics, which includes manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services; and Other, which is an aggregation of industry operating segments which, individually, are less than 10% of consolidated revenues and segment operating profit. The Other reportable segment includes media and information services, telecommunications and high technology operating segments. Our sales managers, account executives, account managers and project teams are aligned in accordance with the specific industries they serve.

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. Further, stock-based compensation expense is not allocated to individual segments in internal management reports used by the chief decision maker. Accordingly, these expenses are separately disclosed as “unallocated” and adjusted only against the total income from operations.

Three Months Ended June 30, 2006March 31, 2007 Compared to Three Months Ended June 30, 2005March 31, 2006

Revenues from external customers and segment operating profit, before unallocated expenses, for the Financial Services, Healthcare, Manufacturing / Retail / Manufacturing/Retail/Logistics, and Other reportable segments for the three months ended June 30,March 31, 2007 and 2006 and 2005 are as follows:

(Dollars in thousands)

Financial Services Segment

Revenue. Revenue increased by 56.5%57.7%, or approximately $58.7$78.3 million, from approximately $103.9$135.8 million during the three months ended June 30, 2005March 31, 2006 to approximately $162.6$214.2 million during the three months ended June 30, 2006.March 31, 2007. The increase

in revenue was driven by continued expansion of existing customer relationships as well as new customers. The increase in revenue from customers existing as of June 30, 2005March 31, 2006 and customers added since such date was approximately $51.6$69.4 million and approximately $7.1$8.9 million, respectively. Within the segment, growth was particularly strong among our insurancebanking customers, where revenue increased approximately $31.6$58.6 million over the secondfirst quarter of last year. The increase can also be attributed to leveraging sales and marketing investments in this business segment as well as greater acceptance of the onsite/offshore IT services delivery model.

Segment Operating Profit. Segment operating profit increased 74.0%49.6%, or approximately $25.0$24.6 million, from approximately $33.8$49.6 million during the three months ended June 30, 2005March 31, 2006 to approximately $58.9$74.3 million during the three months ended June 30, 2006.March 31, 2007. The increase in segment operating profit was attributable primarily to increased revenues and achievingpartially offset by continued leverage on priorinvestment in sales and marketing investments.marketing.

Healthcare Segment

Revenue. Revenue increased by 84.7%76.0%, or approximately $33.7$47.5 million, from approximately $39.7$62.5 million during the three months ended June 30, 2005March 31, 2006 to approximately $73.4$110.0 million during the three months ended June 30, 2006.March 31, 2007. The increase in revenue was driven by continued expansion of existing customer relationships as well as new customers. The increase in revenue from customers existing as of June 30, 2005March 31, 2006 and customers added since such date was approximately $31.3$38.5 million and approximately $2.4$9.0 million, respectively. Within the segment, growth was particularly strong among our life scienceshealthcare customers, where revenue increased by approximately $18.5$29.9 million over the secondfirst quarter of last year. The increase can also be attributed to leveraging sales and marketing investments in this business segment as well as greater acceptance of the onsite/offshore IT services delivery model.

Segment Operating Profit. Segment operating profit increased 84.9%49.6%, or approximately $13.2$13.3 million, from approximately $15.6$26.9 million during the three months ended June 30, 2005March 31, 2006 to approximately $28.9$40.2 million during the three months ended June 30, 2006.March 31, 2007. The increase in segment operating profit was attributable primarily to increased revenues.revenues partially offset by continued investment in sales and marketing.

Manufacturing/Retail/Logistics Segment

Revenue. Revenue increased by 37.5%55.1%, or approximately $14.2$24.8 million, from approximately $38.0$45.0 million during the three months ended June 30, 2005March 31, 2006 to approximately $52.2$69.8 million during the three months ended June 30, 2006.March 31, 2007. The increase in revenue within the manufacturing, logistics and retail groups was driven by continued expansion of existing customer relationships as well as new customers The increase in revenue from customers existing as of June 30, 2005 and customers added since such date was approximately $6.0 million and approximately $8.2 million, respectively. The increase can also be attributed to leveraging sales and marketing investments in this business segment as well as greater acceptance of the onsite/offshore IT services delivery model.

Segment Operating Profit. Segment operating profit increased 68.6%, or approximately $7.3 million, from approximately $10.7 million during the three months ended June 30, 2005 to approximately $18.0 million during the three months ended June 30, 2006. The increase in segment operating profit was attributable primarily to increased revenues and achieving continued leverage on prior sales and marketing investments.

Other Segment

Revenue. Revenue increased by 61.6%, or approximately $18.5 million, from approximately $30.1 million during the three months ended June 30, 2005 to approximately $48.6 million during the three months ended June 30, 2006. The increase in revenue was due to continued expansion of existing customer relationships and a significant number of new customers. The increase in revenue from customers existing as of June 30, 2005March 31, 2006 and customers added since such date was approximately $8.8$11.5 million and approximately $9.7$13.3 million, respectively. The increase can also be attributed to leveraging sales and marketing investments in this business segment as well as greater acceptance of the onsite/offshore IT services delivery model.

Segment Operating Profit. Segment operating profit increased 54.5%49.5%, or approximately $5.6$8.0 million, from approximately $10.2$16.1 million during the three months ended June 30, 2005March 31, 2006 to approximately $15.8$24.0 million during the three months ended June 30, 2006.March 31, 2007. The increase in segment operating profit was attributable primarily to increased revenues partially offset by continuingcontinued investment isin sales and marketing.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

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 six months ended June 30, 2006 and 2005 are as follows:

(Dollars in thousands)