**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2005**

**CommissionFile Number 000-50849**

**KANBAY INTERNATIONAL, INC.**

(Exact Name of Registrantas Specified in its Charter)

| **Delaware**                     |   | **36-4387594**                        |
|----------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| Incorporation of  Organization)  |   | ** **                            |

 

**6400 Shafer Court, Suite 100Rosemont, Illinois 60018Phone: (847) 384-6100**

(Address, including zipcode, and telephone number(including area code) of registrant’s principal executive office)

Securities registered pursuant to Section 12 (b) ofthe Act:

**None.**

Securities registeredpursuant to Section 12 (g) of the Act:

| Title of each class                 | ** ** | **Name of each exchange on which  registered** |
|-------------------------------------|------------|------------------------------------------------|
| **Common  Stock, $0.001 par value** | ** ** | **Nasdaq  National Market**                    |

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act   Yes: o No: x.

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or15(d) of the Act   Yes: oNo: x.

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   Yes: x No: o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K   o.

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes: o No: x

The aggregate market valueof the Registrant’s common stock held by non-affiliates of the Registrant on June 30,2005, based on the closing sale price of $23.11 per share on such date on theNasdaq National Market, was $574,738,096.81. Shares of common stockbeneficially owned by each director and executive officer and by each personwho beneficially owned 5% or more of the outstanding common stock have beenexcluded because such persons may be deemed to be affiliates of the Registrant.This determination of affiliate status is not necessarily a conclusivedetermination for other purposes.

As of March 10, 2006,the Registrant had 39,132,340 shares of common stock, $0.001 par value pershare, outstanding.

**DocumentsIncorporated By Reference**

Certainsections of the Registrant’s Notice of Annual Meeting of Stockholders and ProxyStatement for its Annual Meeting of Stockholders for the year ended December 31,2005 (the “2006 Proxy Statement”) are to be filed with the Securities andExchange Commission within 120 days after the Registrant’s fiscal yearended December 31, 2005 are incorporated by reference into Part IIIof this Report.

 

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**KANBAYINTERNATIONAL, INC.**

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                                     | ** ** | **Page**   | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **        | ** ** | **PART I.**                                                                                                               |       |       |       | ** ** |   |
| **Item 1.**  | ** ** | **Business**                                                                                                                   |       |       | 3          | ** ** |   |
| **Item 2.**  | ** ** | **Properties**                                                                                                                 |       |       | 15         | ** ** |   |
| **Item 3.**  | ** ** | **Legal  Proceedings**                                                                                                         |       |       | 15         | ** ** |   |
| **Item 4.**  | ** ** | **Submission of Matters to a Vote of Security Holders**                                                                        |       |       | 15         | ** ** |   |
| ** **        | ** ** | **PART II.**                                                                                                              |       |       |       | ** ** |   |
| **Item 5.**  | ** ** | **Market for Registrant’s Common Equity and Related  Stockholder Matters and Issuer Purchases of Equity Securities** |       |       | 16         | ** ** |   |
| **Item 6.**  | ** ** | **Selected  Financial Data**                                                                                                   |       |       | 18         | ** ** |   |
| **Item 7.**  | ** ** | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations**                                |       |       | 19         | ** ** |   |
| **Item 7A.** | ** ** | **Quantitative and Qualitative Disclosures About Market  Risk**                                                                |       |       | 36         | ** ** |   |
| **Item 8.**  | ** ** | **Financial Statements and Supplementary Data**                                                                                |       |       | 37         | ** ** |   |
| **Item 9.**  | ** ** | **Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure**                                      |       |       | 83         | ** ** |   |
| **Item 9A.** | ** ** | **Controls and  Procedures**                                                                                                   |       |       | 83         | ** ** |   |
| **Item 9B.** | ** ** | **Other Information**                                                                                                          |       |       | 84         | ** ** |   |
| ** **        | ** ** | **PART III.**                                                                                                             |       |       |       | ** ** |   |
| **Item 10.** | ** ** | **Directors and  Executive Officers of the Registrant**                                                                        |       |       | 85         | ** ** |   |
| **Item 11.** | ** ** | **Executive Compensation**                                                                                                     |       |       | 85         | ** ** |   |
| **Item 12.** | ** ** | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                           |       |       | 85         | ** ** |   |
| **Item 13.** | ** ** | **Certain  Relationships and Related Transactions**                                                                            |       |       | 85         | ** ** |   |
| **Item 14.** | ** ** | **Principal  Accountant Fees and Services**                                                                                    |       |       | 85         | ** ** |   |
| ** **        | ** ** | **PART IV.**                                                                                                              |       |       |       | ** ** |   |
| **Item 15.** | ** ** | **Exhibits and  Financial Statement Schedule**                                                                                 |       |       | 85         | ** ** |   |
| **SIGNATURES**    |       |                                                                                                                           | 90         | ** ** |       |

 

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**PART I.**

**Item 1.   Business**

**General**

We are a global provider of information technology, orIT, services and solutions focused on the financial services industry. Wecombine technical expertise with deep industry knowledge to offer a broad suiteof services, including application development, maintenance and support,software package selection and integration, business process and technologyadvisory services and other specialized services through our global deliverymodel. Our three tier global delivery model combines global client relationshipteams, senior technical and industry experts at our offsite regional servicecenters and equally strong technical and industry knowledge in our globaldelivery centers in India. As a result, we are able to deliver high value solutionsusing a seamless, consistent and cost-effective client service approach.

We focus on the financial services industry and provideour services primarily to companies in the banking, securities and investmentsand insurance industries. In providing our services, we utilize a wide array oftechnologies to develop customized solutions that address our clients’ specificneeds, coupled with our industry-specific and company-specific knowledge of howbest to deploy those technologies. Our clients include many of the world’sleading banks, insurance companies and securities firms.

Our engagements with our top clients typically involvenumerous projects and multiple business units within each client and vary incomplexity, scope and duration. We seek to expand our client relationships andmigrate each client over time from discrete initial engagements to longer-term,recurring projects. For example, over the past several years we havesuccessfully deepened our relationship with our largest client, HSBC (formerlyHousehold International). For the year ended December 31, 2005, HSBC,which is also our largest stockholder with approximately 13.0% of our commonstock, accounted for 53.1% of our total revenues. Similarly, we havesuccessfully developed our relationship with our second largest client, MorganStanley, which is a stockholder of ours and accounted for 11.6% of our totalrevenues in the year ended December 31, 2005. Our five largest clientstogether accounted for 75.6% of our total revenues in the year ended December 31,2005. For each of 2005 and 2004, we received at least 87.0% of our totalrevenues from clients that we worked with during the prior year.

We have operated ourbusiness since 1989 and converted from a limited liability company to acorporation in August 2000. Our corporate headquarters are located inRosemont, Illinois. We have regional offices located in eight countries anddelivery centers in Pune, Hyderabad, and Chennai, India, where 4,645 technicalprofessionals were based as of December 31, 2005. In 2005, we acquiredland in Chennai, India, where we intend to build a new development center. Weown a 48.9% interest in SSS Holdings Corporation Limited (“SSS”), which isbased in Liverpool, England and focuses primarily on providing IT services tothe securities industry.

**Industry Background**

The role of IT has evolved from simply supportingbusiness enterprises to enabling their expansion and transformation. To succeedin today’s marketplace, companies must respond rapidly to market trends, createnew business models and improve productivity. Multiple technology platforms andan enhanced emphasis on security and back-up facilities have increased thecomplexity and cost of IT systems, resulting in greater IT-related risks. Theincreased complexity, cost and risk have created a growing need for specialistswith experience in leveraging technology to support business strategy andexpansion.

Many companies have beenforced to reduce their IT budgets as well as place a greater emphasis onclosely managing IT spending and improving their return on investments. Toaccomplish these objectives, many IT departments have shifted all or a portionof their IT development, integration and maintenance requirements to outside ITservice providers. In the current market environment, the global financialservices industry is faced with a number of challenges, including increasedregulatory scrutiny, growing competition and ongoing domestic and internationalconsolidation. Consequently, companies within the 

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financialservices industry are looking externally for solutions that allow them toreduce costs and improve performance. Total global IT services spending withinthe financial services industry is expected to increase from$140.5 billion in 2005 to $177.8 billion in 2009, representing acompound annual growth rate of 6.0 %. The financial services industry isexpected to account for approximately 23% of total global IT services spendingfrom 2006 to 2009.

**Competitive Strengths**

We believe ourcompetitive strengths include:

**Deepindustry expertise.****  **Wehave developed expertise in the financial services industry, with a specificfocus on banking, insurance and securities and investment institutions. Ourindustry focus has enabled us to acquire a thorough understanding of ourclients’ business issues and applicable technologies, which allows us todeliver services and solutions tailored to each client’s needs. We combine ourdeep knowledge of industry practices and challenges with an understanding ofour clients’ requirements to provide high quality, timely services. Because ofour specific industry focus, a significant economic downturn in the financialservices industry could negatively affect our business.

**Three-tierglobal delivery model.****  **Our global delivery model allows us to provide each ofour clients with a responsive and accessible relationship management team both atthe client’s location and at our delivery centers, a readily available offsiteteam of technology and industry experts at our regional service centers and acost-effective design, application development, maintenance and support team atour global delivery centers in India. We believe the processes and technologyinfrastructure comprising our three-tier global delivery model enable us toeffectively integrate our onsite and offsite execution capabilities to deliverseamless, consistent services on a global basis. The level of industryknowledge in combination with strong technical skills at our centers in Indiaenables us to provide quality services at an attractive price point for ourclients. Because we depend on third party communication service providers andvarious satellite and optical links to link our global delivery centers to ourclients, any disruption in these communication links could hinder ourperformance and our ability to complete client projects on time.

**Commitmentto attracting, developing and retaining the highest quality employees.****  **We believe we have established abusiness culture throughout Kanbay that enables us to attract and retain thebest available industry talent. From 2003 to 2005, we retained an average of86% of our employees even though the number of our employees grew significantly.We believe that our high employee retention rate provides tangible benefits toour clients, such as low turnover on long-term engagements, retention ofknowledge which can be applied to new projects, consistent quality andcompetent and responsive personnel. We expect that we will continue to grow andour anticipated growth could place a significant strain on our ability tomaintain our culture and provide these tangible benefits to our clients.

**Long-termclient relationships.****  **Wehave long-standing relationships with several large, international companieswithin the financial services industry. We focus on building enduringrelationships with both existing and new clients and strive to achieve close interactionat every level of their organizations. Our ability to successfully deliverconsistent, seamless solutions on a global basis combined with our deepknowledge of the financial services industry helps us expand the breadth andscope of our engagements with existing clients. We manage client relationshipswith our relationship development methodology, which helps us to migrate ourclients over time from discrete initial engagements to longer-term, recurringprojects. We have historically earned, and believe that in the future we willcontinue to earn, a significant commitment to Kanbay by key clients through ourcombination of global engagement management, company and industry know-how, andconsistently cost effective delivery.

**Scalableglobal business model.****  **We believe that the combination of our three-tierglobal delivery model and our industry focus allows us to quickly deployproject teams to engage new projects and rapidly meet client needs. Our abilityto rapidly deploy our project teams on new engagements and to provide ourservices to our clients is dependent on many factors, including continuedcompliance with various immigration restrictions and the maintenance of ourglobal communications infrastructure.

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**Technologies and tools.**   Throughits development centers in India and elsewhere in the organization, Kanbay hasdeveloped a significant body of know-how regarding industry-specific processand technology. In addition, Kanbay has developed a number of staff andengagement management, development and delivery tools that contributesignificantly to our delivery of high value, cost-effective solutions to ourclients.

**Our Services**

We offer a broadsuite of services to companies in the financial services industry that combinesour industry expertise and technology capabilities. Our service offerings arefully integrated and include the following:

**Businessprocess and technology advisory services.****  **We assist our clients byrecommending the solution that is most appropriate to accomplish theirobjective in a cost-effective and timely manner. Through our business processand technology advisory services, we deploy our senior consultants and industryand technical experts to advise clients about how to best address businesschallenges and achieve objectives through the appropriate use of technology.Our consultants and experts offer industry perspectives and best practices inorder to assist our clients with defining, optimizing and aligning theirbusiness objectives.

**Softwarepackage selection and integration.****  **We assist our clients in theselection and integration of software packages developed by third partyvendors. Our employees have expertise in various software packages spanning ourtarget sectors within the financial services industry, including electronicnotification software for the banking industry, real-time credit cardtransaction processing applications, application and payment processingsolutions for insurance companies and portfolio accounting applications forinvestment management firms.

**Applicationdevelopment, maintenance and support.****  **We provide application development,maintenance and support services for our clients’ technology platforms, fromweb servers to legacy mainframes. Our application development capabilities spanthe software development life cycle, including defining software requirements,writing software programs and designing, prototyping, building, integrating,producing and implementing custom applications.

**Specializedservices.****  **Someof the specialized services we offer our clients include business intelligence,testing and application management outsourcing. Our business intelligenceservices utilize our tools and third party software to enable our clients todiscover trends in their internal business or customer data and compare thosetrends to market data. Our testing services provide our clients with anobjective assessment of their test processes and recommendations on tools,technologies and methodologies, including functional and regression testing,user acceptance testing, application security testing and test solution design.Our application management outsourcing services can include employing clients’existing application support employees, transitioning to new applications,transforming legacy applications and executing longer-term service levelagreements.

**Our Clients**

We provide our services to companies in the financialservices industry with a particular focus on banking institutions, insurancecompanies and securities and investment firms.

We have long-standingrelationships with many large, international companies within the financialservices industry. We focus on building enduring relationships with bothexisting and new clients through our relationship development methodology,which helps us migrate our clients from discrete initial engagements to longer-term,recurring projects. As a result, we have historically earned, and believe thatwe will continue to earn, a significant portion of our revenues from a limitednumber of clients. HSBC, which is our largest client and our largeststockholder, accounted for 53.1%, 55.6% and 53.2% of our total revenues in theyears ended December 31, 2005, 2004 and 2003. Morgan Stanley, which is oursecond largest client, accounted for 11.6%, 10.3% and 13.0% of our totalrevenues in the years ended 

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December 31,2005, 2004 and 2003. Our five largest clients together accounted for 75.6%,80.4% and 80.7% of our total revenues in the years ended December 31,2005, 2004 and 2003.

**Banking Institutions**

The banking institutions we serve include multi-nationalcommercial and retail banks and consumer finance companies around the world.

Our solutions helpthese institutions:

·       improvetheir ability to process new and existing accounts;

·       streamlinetheir processes for credit approval and financial authorization and provideeasier access to product information;

·       collectdelinquent accounts;

·       organizedemographic information and customer purchasing history for marketing to newaccounts;

·       add  new functions to existing systems to meetgovernmental regulatory and compliance requirements;

·       lowercosts by decreasing system processing times and creating more efficientprocesses; and

·       increase customersatisfaction by providing easy access to account information.

**Insurance Companies**

We serve insurance companies that provide life,pension, health, property and casualty, commercial and supplemental lifeinsurance.

We design, developand implement solutions for our insurance clients that:

·       enablerapid entry into new geographic markets through insurance architecturalsolutions and tools;

·       provideinsurance agents and policyholders access to policy information via the web;

·       reducethe cost of legacy transformation, application development, and maintenance byleveraging our global delivery model;

·       simplifyand automate policyholder billing and payment processes, reducing customerinquiries and needed support staff; and

·       reduce testing costs bycreating a comprehensive testing environment for both initial deployment andongoing system testing.

**Security and Investment Firms**

We serve various types of securities and investmentfirms, including asset management institutions, securities brokerage firms,private wealth management firms, investment banking institutions, securitiesexchanges and hedge funds.

Our services tothese security and investment firms enhance their ability to:

·       matchclients with relevant market research and trading opportunities;

·       trackemployee performance against sales targets;

·       enabletheir customers to utilize extranet sites to view reports generated frommultiple internal systems;

·       increasefund accountant productivity; and

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·       improve access to portfolioaccounting data.

**Our Global Delivery Model**

We believe that ourthree-tier global delivery model is a significant competitive strength for usbecause it provides the following benefits to our clients:

·       strongleadership and industry knowledge in our centers in India enables the deliveryof high value services at a low cost;

·       responsivenessand accessibility of a relationship team both at the client’s location andoffshore in India;

·       readilyavailable offsite senior technical and industry experts;

·       economicleverage of a technical global delivery center;

·       theability to accelerate delivery timetables by simultaneously processing projectcomponents at different locations;

·       round-the-clockexecution capability spanning multiple time zones;

·       accessto a large pool of highly skilled and experienced IT professionals;

·       physicaland operational separation of client projects to provide enhanced security; and

·       aknowledge management solution that enables us to leverage our global financialservices industry expertise.

The objective of our three-tier global delivery modelis to effectively integrate our onsite and offsite execution capabilities todeliver seamless, consistent services on a global basis. For most engagements,a multi-site team of our employees is assembled that includes a relationshipmanagement team at the client’s location with participation from India, offsitesenior technical and industry experts at our regional service centers and atour development centers in India, and a design, application development,maintenance and support team at our delivery centers in India. The client’ssystem is then connected to our system to enable simultaneous processing ofproject components by our onsite and offsite personnel. Our onsite and offsiteproject managers have joint accountability for each project.

Our regional service centers are typically located inthe client’s region to offer technical and industry expertise and timelyresponses. Our existing delivery centers located in Pune, Hyderabad, andChennai, India offer the same level of technology and industry expertise inaddition to cost-effective delivery. We expect to continue our facilitiesexpansion program in India in 2006 including the construction of our newdelivery center in Hyderabad, India, and the expansion of our delivery centersin Pune and Chennai, India.

Our quality control programs and processes aredesigned to proactively identify and effectively resolve potential problems. Ourprograms and processes are CMM Level 5-assessed on a global basis. Inaddition, we have been ISO 9001-certified each year since 2001. Ourquality control employees track relevant metrics to ensure adherence to ourprocesses, conduct periodic internal quality audits of our projects tofacilitate project level defect prevention and perform various processimprovement activities.

Our significant investmentin our communications infrastructure is designed to provide uninterruptedservice to our clients. Our communications infrastructure is composed ofredundant high-speed optical fiber, backup satellite links and multiple pathrouting between our delivery centers in India and our clients’ facilities. Ourdelivery centers in India rely on high-speed fiber optic intra-companyconnectivity and an on-premises satellite earth station for redundancy. Inaddition, our proprietary software tools provide our clients real-time accessto global project status reports and a searchable central repository forproject documents. These tools also enable us to monitor and synchronizedifferent versions of software development projects being worked on in multiplecenters and minimize management overhead costs.

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**Global Business Development**

We market ourservices through our global business development group, which is divided intothe following groups:

·       marketingand sales support;

·       newclient business development;

·       industrypractice group and alliance management leaders; and

·       clientaccount managers supported by our relationship practices group.

Our sales approachemphasizes our combination of deep knowledge of the financial servicesindustry, technical expertise and reliable delivery of cost-effectivesolutions. The goals of our sales approach include increasing the average orderamount, decreasing the length of the sales cycle, developing new and innovativebusiness solutions and expanding our relationships with existing clients toachieve close interaction at every level of their organizations.

**SSS Holdings Corporation Limited**

As of December 31,2005, we held 48.9% of the ownership interest in SSS Holdings CorporationLimited (“SSS”), which we originally acquired in November 2000 in exchangefor 2,086,697 shares of our common stock valued at approximately$15.9 million. SSS is a Liverpool, England based IT services firm focusedprimarily on providing software maintenance and development and businessprocess outsourcing services to U.K. securities firms. We do not control the business,operations or dividend policy of SSS. For the year ended December 31,2005, SSS had revenues of £32.0 million, or approximately$58.1 million, and our share of the earnings of SSS provided us with$1.5 million of equity in earnings of affiliate.

**Intellectual Property**

We do not rely on patents and do not believe thatpatents are important to our business. However, we have developed a significantbody of know-how regarding industry and client-specific software applicationsand technologies. We rely upon a combination of trade secrets and nondisclosureand other contractual arrangements to protect our intellectual property rightsand proprietary methodologies. It is our policy to enter into confidentialityagreements with our employees and consultants, and we generally control accessto and distribution of our proprietary information. We will continue to pursuethe registration of certain of our trademarks and service marks in the UnitedStates and other countries.

We generallyimplement safeguards designed to protect our clients’ intellectual property inaccordance with our clients’ needs and specifications. Compliance with thesesafeguards is the responsibility of our management and is generally monitoredby our clients through inspections or audits. The safeguards we implement mayinclude some or all of the following:

·       segregationof the work area at our global delivery centers dedicated to a particularclient from the work areas dedicated to other clients;

·       limited,secure-access to a client’s server room, with regular monitoring ofentries and exits;

·       separate,encrypted communication links between our global developers and the client’snetwork;

·       customconfiguration of computers used for the client’s project to include only thehardware and software specified by the client; and

·       training programs to ensurethat our employees are aware of, and sensitive to, the client’s confidentialityneeds.

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**Competition**

We believe that theprincipal competitive factors in our business include the ability to:

·       globallydeploy client focused engagement management;

·       strategicallyexecute engagements to deliver value-added and reliable solutions to ourclients;

·       utilizeindustry and technical expertise to enable our clients to achieve theirbusiness objectives;

·       attract,train and retain high quality IT and industry professionals;

·       maintainfinancial strength to support investment in personnel and global infrastructure;

·       completeprojects on time and within budget; and

·       offercost-effective pricing of services.

We believe that we compete effectively on all of thesefactors.

The global IT service providers with whom we competefall into two broad categories: offshore IT service providers and largeconsulting and other professional service firms. Some of our competitors havesignificant resources and financial capabilities combined with much largernumbers of IT professionals. As a result, these competitors may be betterpositioned to use significant economic incentives to secure contracts with ourexisting and prospective clients. These competitors may also be better able tocompete for skilled professionals by offering them more attractive compensationor other incentives.

Offshore IT service providers generally have somesales presence and software consultants working in North America or Europe, butexecute most of their work offshore. In India alone, there are many offshore ITservice providers, with a few top companies firmly established in the globalmarket. The offshore IT service providers with whom we primarily competeinclude Cognizant Technology Solutions, Infosys Technologies, Tata Consultancy Servicesand Wipro.

We also compete with large multinational IT serviceproviders such as Accenture, BearingPoint, Cap Gemini and Deloitte &Touche, many of which have established global delivery centers in suchcountries as India and China to leverage the cost benefits of global delivery.

We believe that we arewell positioned against competition because of our unique blend of industry andtechnical knowledge. Through our global delivery model, we combine our onsiteand offsite capabilities to balance cost and customer proximity. Many offshoreservice providers have business operations primarily in India, which allowsthem to offer lower-cost services, but their lack of onsite and offsiteregional capabilities causes them to sacrifice customer intimacy. On the otherhand, most multi-national service providers have extensive onsite clientmanagement capabilities, but these capabilities generally include largeoverhead costs which increase the cost of their services. We have a strongpresence in the U.S., supported by other regional centers which we believeenables us to couple proximity to customers with a strong and cost-effectiveglobal delivery and support functions.

**OperatingSegment and Geographic Information**

We provide IT managementconsulting services and operate our business as a single operating segment. Themajority of our services continue to be provided to clients in North America. In2005, approximately 89.0% of our revenues came from work performed in NorthAmerica, 8.0% from India and Asia Pacific and 3.0% from Europe. Informationregarding our revenues and total assets by geographic area for the three-yearperiod ended December 31, 2005 is presented in note 15 of the auditedconsolidated financial statements included in this report.

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**Employees**

As of December 31,2005, we had 5,242 full-time employees. In North America, we had a total of 842employees, including 608 IT professionals and 234 sales, marketing andadministrative personnel. We have one office in the United Kingdom, with atotal of 22 employees. In the Asia-Pacific region, we operate from one officein Australia and one each in Hong Kong, Singapore and Japan, with a total of 86employees. Our India staff works from our delivery centers in Pune, Hyderabadand Chennai with a total of 4,292 employees, including 3,958 IT professionalsand 334 marketing, finance, recruiting, staffing, facility management andadministrative personnel.

**Item 1A.   Risk Factors**

*Our business, financial condition or operating resultsmay suffer if any of the following risks is realized. Additional risks anduncertainties not currently known to us may also adversely affect our business,financial condition or operating results.*

**RISKS RELATED TO OUR BUSINESS**

**Ourrevenues are highly dependent on a small number of clients, including a singleclient from whom we receive more than 50% of our revenues and which is also ourlargest stockholder, and the loss of any one of our major clients couldsignificantly impact our business.**

HSBC, which is our largestclient and our largest stockholder, accounted for 53.1%, 55.6% and 53.2% of ourtotal revenues in the years ended December 31, 2005, 2004 and 2003. MorganStanley, which is our second largest client, accounted for 11.6%, 10.3% and13.0% of our total revenues in the years ended December 31, 2005, 2004 and2003. Our five largest clients together accounted for 75.6%, 80.4% and 80.7% ofour total revenues in the years ended December 31, 2005, 2004 and 2003.

**Asignificant or prolonged economic downturn in, increased regulation of andrestrictions imposed on the financial services industry may result in ourclients reducing or postponing spending on the services we offer.**

A significant portion ofour revenues is derived from North American clients in the financial servicesindustry, who have historically operated in a cyclical business environment. Forthe years ended December 31, 2005, 2004 and 2003, approximately 89%, 86%and 82% of our revenues were derived from North America. If economic conditionsweaken, particularly in the U.S. financial services industry, our clients mayreduce or postpone their IT spending significantly, which may in turn lower thedemand for our services and negatively affect our revenues and profitability.

**Ourfailure to anticipate rapid changes in technology may negatively impact demandfor our services in the marketplace.**

Our success will depend,in part, on our ability to develop and implement business and technologysolutions that anticipate rapid and continuing changes in technology, industrystandards and client preferences. Also, products and technologies developed byour competitors may make our solutions noncompetitive or obsolete.

**TheIT services market is highly competitive, and our competitors may haveadvantages that could allow them to better use economic incentives to securecontracts with our existing and prospective clients and attract skilled ITprofessionals.**

Our primarycompetitors include:

·       largeconsulting and other professional service firms, including Accenture,BearingPoint, Cap Gemini and Deloitte & Touche; and

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·       offshoreIT service providers, including Cognizant Technology Solutions, InfosysTechnologies, Tata Consultancy Services and Wipro.

Some of our competitors are large consulting firms oroffshore IT service providers which have significant resources and financialcapabilities combined with much larger numbers of IT professionals. Ourcompetitors may be better positioned to use significant economic incentives tosecure contracts with our existing and prospective clients. These competitorsmay also be better able to compete for skilled professionals by offering themmore attractive compensation or other incentives. In addition, one or more ofour competitors may develop and implement methodologies that yield pricereductions, superior productivity or enhanced quality that we are not able tomatch.

We also expect additionalcompetition from offshore IT service providers with current operations in othercountries, such as China and the Philippines, where we do not have operationsother than our regional service center in Hong Kong.

**Our executiveofficers and directors and their respective affiliates, including HSBC, whichown a large percentage of our common stock, have substantial voting controlover Kanbay and their interests may differ from other stockholders.**

Our executive officers anddirectors and their affiliates, including HSBC, beneficially own, in theaggregate, a large percentage of our outstanding common stock. As a result,these stockholders exercise significant control over all matters requiringstockholder approval, including the election of directors, any amendments toour certificate of incorporation and approval of significant corporatetransactions. These stockholders may exercise this control even if they areopposed by our other stockholders.

**If wedo not effectively manage our anticipated rapid growth, we may not be able todevelop or implement new systems, procedures and controls that are required tosupport our operations, market our services and manage our relationships withour clients.**

In recent years, thenumber of our employees has grown rapidly. To manage this anticipated rapid growth,we must implement and maintain proper operational and financial controls andsystems in order to expand our services and employee base. Further, we willneed to manage our relationships with various clients, vendors and other thirdparties. If we are unable to manage our growth, our business, operating resultsand financial condition would be adversely affected.

**Ourservices may infringe on the intellectual property rights of others, which maysubject us to legal liability, harm our reputation, prevent us from offeringsome services to our clients or distract management.**

We cannot be sure that theservices that we offer to our clients do not infringe on the intellectualproperty rights of third parties, and we may have infringement claims assertedagainst us or our clients. Historically, we have generally agreed to indemnifyour clients for all expenses and liabilities resulting from claimedinfringements of the intellectual property rights of third parties based on theservices that we have performed. Any claims or litigation in this area, whetherwe ultimately win or lose, could be time-consuming and costly and/or injure ourreputation.

**Wehave a limited ability to protect our intellectual property rights, andunauthorized use of our intellectual property could result in the loss ofclients.**

Our success depends, inpart, upon our ability to protect our proprietary methodologies and otherintellectual property. We rely upon a combination of trade secrets,confidentiality policies, nondisclosure and other contractual arrangements andcopyright and trademark laws to protect our intellectual property rights. Thesteps we take to protect our intellectual property may not be adequate to preventor deter infringement or other unauthorized use of our intellectual property,and we may not be able to detect unauthorized use or take appropriate andtimely steps to enforce our intellectual property rights.

11

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**Ourengagements with clients may not be profitable.**

*Unexpectedcosts or delays could make our contracts unprofitable.**  *The profitability of ourengagements, and in particular our fixed-price contracts, is affected byincreased or unexpected costs or unanticipated delays in connection with theperformance of these engagements, including delays caused by factors outsideour control, which could make these contracts less profitable or unprofitable.

*Ourclients may terminate our contracts on short notice.**  *Our clients typically retain us ona non-exclusive, engagement-by-engagement basis, rather than under exclusivelong-term contracts. Many of our consulting engagements are less than12 months in duration, and our clients may terminate most of ourengagements on short notice. If contracts are terminated, we lose theassociated revenues, and we may not be able to eliminate associated costs in atimely manner or transition employees to new engagements in an efficientmanner.

*Our clients unexpectedfinancial insolvency.*   Although a due diligencereview is performed by us prior to taking on a new customer and periodicallythroughout the customer’s life cycle, we have no assurance that our customerswill be able to pay for our services if they experience a significant, unfavorablefuture event which affects their future paying ability.

**Ourprofitability is dependent on our billing and utilization rates, and ourability to control these factors is only partially within our control.**

The rates we areable to charge for our services are affected by a number of factors, including:

·       ourclients’ perception of our ability to add value through our services;

·       ourability to control our costs and improve our efficiency;

·       introductionof new services by us or our competitors;

·       pricingpolicies of our competitors; and

·       generaleconomic conditions.

Our utilizationrates are affected by a number of factors, including:

·       seasonaltrends, primarily our hiring cycle and holiday and summer vacations;

·       ourability to transition employees from completed and/or terminated projects tonew engagements;

·       theamount of time spent by our employees on non-billable training activities;

·       ourability to forecast demand for our services and thereby maintain an appropriateheadcount; and

·       our ability to manageemployee attrition.

**Weare investing substantial cash assets in new facilities, and our profitabilitycould be reduced if our business does not grow proportionately.**

We spent approximately$32.7 million in 2004 and 2005 and have plans to spend an additional $38.0 in2006 on the facility expansion program in India. Our facility expansion programis based on the assumption that our business will continue to grow at levelsconsistent with our business plan. If our business does not growproportionately with our facility expansion program, or if we face costoverruns or project delays in connection with these facilities, our capitalinvestment may affect the future profitability of our business.

**Ourability to raise capital in the future may be limited and our failure to raisecapital when needed could prevent us from growing.**

We expect that our cashflow from operations and the amounts we are able to borrow under our creditfacility will be adequate to meet our anticipated needs for at least the nexttwo years. We may in the future 

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berequired to raise additional funds through public or private financing,strategic relationships or other arrangements. Such financing may not beavailable on acceptable terms, or at all, and our failure to raise capital whenneeded could seriously harm our business.

**RISKSRELATED TO OUR INDIAN AND INTERNATIONAL OPERATIONS**

**Wagepressures in India may reduce our profit margins.**

Wages in India areincreasing at a faster rate than in the North America, which will result inincreased costs for IT professionals, particularly project managers and othermid-level professionals. We may need to increase the levels of our employeecompensation more rapidly than in the past to remain competitive.

**Terroristattacks or a war or regional conflicts could adversely affect the Indianeconomy, disrupt our operations and cause our business to suffer.**

Terrorist attacks, such asthe attacks of September 11, 2001 in the United States, and other acts ofviolence or war, such as a conflict between India and Pakistan, have thepotential to directly impact our clients and the Indian economy by makingtravel more difficult, interrupting lines of communication and effectivelycurtailing our ability to deliver our services to our clients.

**Disruptionsin telecommunications or severe weather conditions could harm our globaldelivery model, which could result in client dissatisfaction and a reduction ofour revenues.**

A significant element ofour business strategy is to continue to leverage and expand our deliverycenters in Hyderabad, Pune, and Chennai, India. In particular, our deliverycenters in India accounted for approximately 52.0% and 51.7% of our revenuesfor the years ended December 31, 2005 and 2004. Any significant loss inour ability to communicate, or in our employees’ ability to travel to ourdelivery centers as a result of floods or other severe weather conditions,could result in a disruption in business, which could hinder our performance orour ability to complete client projects on time.

**Ournet income would decrease if the Government of India reduces or withdraws taxbenefits and other incentives it provides to us or adjusts the amount of ourincome taxable in India or if we repatriate our earnings from India.**

Currently, we benefit from the tax holidays theGovernment of India gives to the export of IT services from speciallydesignated software technology parks in India. During 2005, a portion of ourtax holiday expired which resulted in an increase in our effective tax rate. Theremainder of the tax holidays will stay in place until March 31, 2009. Recently,the Government of India has discontinued these tax exemptions for certainsoftware companies and required the companies to pay additional taxes. As aresult, we cannot be certain that the Government of India will not attempt todisallow our tax holidays or taxable income deduction or require us to payadditional taxes.

The Government of India recently enacted new transferpricing rules and began audits of companies, including us, that aresubject to these new rules. We cannot be certain that the audits will notresult in adjustments to our Indian taxable income given the limited precedentsin applying the new requirements. Under Indian law if we repatriated our Indianearnings in the future or such earnings were no longer deemed to beindefinitely reinvested, we would accrue the applicable amount of taxesassociated with such earnings.

In addition to India, weare subject to transfer pricing rules in the United States and a number ofother jurisdictions around the world. While we believe our transfer pricingpolicies are reasonable, the Internal Revenue Service or other taxingjurisdiction may challenge our transfer pricing. We do not believe that anypotential adjustment would have a material effect on our financial statements.

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**Restrictionson immigration may affect our ability to compete for and provide services toclients in the United States, which could adversely affect our ability to meetgrowth and revenue projections.**

The majority of our ITprofessionals are Indian nationals. The ability of our IT professionals to workin North America, Europe and in other countries depends on our ability toobtain the necessary work visas and work permits. Existing and proposedlimitations on and eligibility restrictions for these visas could have asignificant impact on our ability to transfer IT professionals to NorthAmerica, Europe and other countries. Further, in response to recent globalpolitical events, the level of scrutiny in granting visas has increased. Newsecurity procedures may delay the issuance of visas and affect our ability tostaff projects in a timely way.

**Currencyexchange rate fluctuations will affect our operating results.**

The exchange rate betweenthe Indian rupee and the U.S. dollar has changed substantially in recent yearsand may fluctuate substantially in the future. An appreciation of the Indianrupee against the U.S. dollar may have a material adverse effect on our cost ofrevenues, gross profit margin and net income, which may in turn have a negativeimpact on our business, operating results and financial condition. Specifically,based on our current cost structure, a 1% appreciation of the Indian rupeeagainst the U.S. dollar would cause our gross profit margin to decrease by 32basis points and our operating profit margin to decline by 1.4%.

**Available Information**

Our Internet website is http://www.kanbay.com. We makeavailable free of charge on or through our Internet website this annual reporton Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and all amendments to those reports as soon asreasonable practicable after such material is electronically filed with orfurnished to the Securities and Exchange Commission (“SEC”).

Information contained onour website is not part of this report and shall not be deemed to beincorporated by reference into this report or any other public filing made byus with the SEC.

**Item 1B.   Unresolved Staff Comments**

None.

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**Item 2.   Properties**

Our principal executive offices are located inRosemont, Illinois. Our delivery center in Pune, India consists of two buildingclusters and two stand alone buildings and houses an onsite satellite earthstation, dedicated communication links to clients and a technology learningtraining center. We own the two building clusters  and lease the other two buildings in Pune. Wecurrently lease our delivery centers in Hyderabad, India and Chennai, India. Wehave multiple leases for our facilities in Pune and Hyderabad. The terms ofthese leases vary and have expiration dates ranging from March 2006 to September 2007.

As of December 31,2005, we conducted our business from the following properties:

| **Location**               | ** ** | ** **                     | ** ** | **Use** | ** ** | **Leased  or Owned** |
|----------------------------|------------|--------------------------------|------------|---------|------------|----------------------|
| **North America**          |       |                           |       |    |
| Rosemont, Illinois         |       | Corporate Headquarters         |       | Leased  |
| New York, New York         |       | Business Development           |       | Leased  |
| Jersey City, New Jersey    |       | Business/Software  Development |       | Leased  |
| Charlotte, North  Carolina |       | Business/Software  Development |       | Leased  |
| Toronto, Ontario, Canada   |       | Business Development           |       | Leased  |
| St. Louis, Missouri        |       | Business/Software  Development |       | Leased  |
| **International**          |       |                           |       |    |
| Pune, India                |       | Software Development           |       | Owned   |
| Pune, India                |       | Software Development           |       | Owned   |
| Pune, India                |       | Software Development           |       | Leased  |
| Pune, India                |       | Software Development           |       | Leased  |
| Hyderabad, India           |       | Software Development           |       | Leased  |
| Chennai, India             |       | Software Development           |       | Leased  |
| Brisbane, Australia        |       | Sub-Lessor of Office  Space    |       | Leased  |
| Melbourne, Australia       |       | Business Development           |       | Leased  |
| Hong Kong                  |       | Business/Software  Development |       | Leased  |
| Tokyo, Japan               |       | Business Development           |       | Leased  |
| Singapore                  |       | Business Development           |       | Leased  |
| Cambridge, United Kingdom  |       | Business Development           |       | Leased  |

 

**Item 3.   Legal Proceedings**

We are not a party to anylitigation or other legal proceedings that we believe would have a materialadverse effect on our business, financial condition or operating results.

**Item 4.   Submission of Matters to a Vote ofSecurity Holders**

None.

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**PART II.**

**Item5.   Market for the Company’s Common Equity and Related StockholdersMatters and Issuer Purchases of Equity Securities**

**Market Information**

Ourcommon stock has been trading on the Nasdaq National Market under the symbol “KBAY”since July 22, 2004. Prior to that time, there was no public market forour common stock. The following table sets forth, the high and low sales priceper share for our common stock as reported on the Nasdaq National Market duringeach quarter of our fiscal years ended December 31, 2005 and 2004.

| ** **                                 | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|
| **Quarters**                               | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First                                      |       | $          | 30.92      |     | $          | 18.75 |   | — |   | — |   |
| Second                                     |       | $          | 24.85      |     | $          | 15.45 |   | — |   | — |   |
| Third (for 2004,  from July 22, 2004) |       | $          | 24.50      |     | $          | 17.98 |   | $ | 24.13 |   | $ | 12.70 |   |
| Fourth                                     |       | $          | 20.82      |     | $          | 12.85 |   | $ | 31.87 |   | $ | 20.15 |   |
|                                            |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

 

**Holders**

As of March 10, 2006,there were 33 holders of record of our common stock.

**Dividends**

We have never declared orpaid cash dividends on our common stock. We currently intend to retain allavailable funds and any future earnings for use in the operation and expansionof our business and do not anticipate paying any cash dividends in theforeseeable future. In addition, our ability to pay dividends is restricted bycertain provisions contained in our revolving credit facility with LaSalle BankN.A. and in our foreign exchange facility with HSBC Bank in India each of whichrequire that we obtain written consent prior to the payment of dividends toKanbay common stockholders.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

Thefollowing table provides information as of December 31, 2005 with respectto the shares of our common stock that may be issued under our existing equitycompensation plans.

| **Plan Category**                                  | ** ** | ** ** | ** ** | **Number of  securities  to be issued upon  exercise of  outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of  securities  remaining available  for future issuance  under equity  compensation plans** | ** ** |
|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       |       | 6,431,155  |                                                                                                         |       |                                                                        | $          | 9.49                                                                                                                                |       |   |   | 1,615,017 |   |   |
|                                                         |            |            |            |                                                                                                              |            |                                                                             |            |                                                                                                                                     |            |  |  |  |  |  |  |  |

 

In addition, as of December 31,2005, there were 482,627 shares available for issuance under our Employee StockPurchase Plan, which is an equity compensation plan approved by securityholders. There are no equity compensation plans that have not been approved bysecurity holders.

**RecentSales of Unregistered Securities**

None.

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**Use of Proceeds**

In connection withour initial public offering, we offered and sold 5,362,500 shares of our commonstock and Household Investment Funding, Inc. (“HIFI”) offered and sold1,787,500 shares of our common stock at a price of $13.00 per share. The offerand sale of the shares in the initial public offering were registered under theSecurities Act of 1933, as amended, pursuant to a registration statement on Form S-1,as amended (File No. 333-113495), which was declared effective bythe SEC on July 21, 2004. The managing underwriters in this offering wereUBS Securities LLC, Robert W. Baird & Co. Incorporated and JanneyMontgomery Scott LLC. On August 4, 2004, certain selling stockholders offeredand sold 1,072,500 additional shares of our common stock at a price of $13.00per share upon the exercise of the underwriters’ over-allotment option.

The aggregate price of theshares sold in our initial public offering, including the shares sold pursuantto the underwriters’ over-allotment option, was $106.9 million. Ourportion of the net proceeds from the initial public offering was$60.4 million. In connection with the initial public offering, we paidunderwriting discounts and commissions of $4.9 million and offeringexpenses of $4.5 million. We did not receive any proceeds from the sale ofthe 1,787,500 shares sold by HIFI or the 1,072,500 shares sold by other sellingstockholders pursuant to the underwriters’ over-allotment option. The net proceedswere invested in interest bearing short-term and long-term marketablesecurities. At the time of the offering in 2004, we intended to spendapproximately $45 million of the net proceeds for the construction of anew delivery center in Hyderabad, India, the expansion of our delivery centerin Pune, India, and the purchase of land in Chennai, India. The balance of theproceeds is intended to be used for working capital and other general corporatepurposes, including additional infrastructure expansion or acquisitions of orstrategic investments in complementary businesses, technologies or services. Wespent approximately $24.7 million and $8.0 million in 2005 and 2004,respectively, of the net proceeds for the renovation of our facilities in Puneand Hyderabad, India and the purchase of land in Chennai, India. During thefirst quarter of 2005, we spent $5.0 million of the net proceeds in connectionwith the acquisition of 100% of the outstanding shares of Accurum, Inc. onMarch 2, 2005. We spent an additional $3.0 million during 2005 forcontingency payments relating to this acquisition based on the achievement ofcertain sales targets as defined in the purchase agreement. During the fourthquarter of 2005, the Company’s Indian subsidiary, Kanbay Software (India)Private Limited (“KSIL”) spent $3.8 million (170 million rupees) in connectionwith the acquisition of 100% of the outstanding shares of Pune Software ParkPrivate Limited (“PSP Corporation”), which owned two of the buildings we leasedin Pune.

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**Item 6.   Selected Financial Data**

Thefollowing table presents selected historical consolidated financial data as of,and for the years ended, December 31, 2001, 2002, 2003, 2004, and 2005,which has been derived from our audited consolidated financial statements. Youshould read this information together with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and our auditedconsolidated financial statements and related notes for the years ended December 31,2005, 2004 and 2003, which are included in the audited consolidated financialstatements.

| ** **                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Consolidated  statements of operations data:**                      |       |     |       |     |       |     |       |     |       |     |       |
| Net revenues—related parties                                     |       | $        | 149,030    |     | $          | 120,377  |       | $        | 70,942     |     | $          | 50,253 |   | $ | 38,001 |   |
| Net revenues—third parties                                       |       | 81,447   |       | 62,229   |       | 36,211   |       | 32,336   |       | 31,653   |       |
| Total revenues                                                        |       | 230,477  |       | 182,606  |       | 107,153  |       | 82,589   |       | 69,654   |       |
| Cost of revenues                                                      |       | 121,198  |       | 96,139   |       | 58,675   |       | 46,977   |       | 39,786   |       |
| Gross profit                                                          |       | 109,279  |       | 86,467   |       | 48,478   |       | 35,612   |       | 29,868   |       |
| Selling, general  and administrative expenses:                        |       |     |       |     |       |     |       |     |       |     |       |
| Sales and marketing expenses                                          |       | 18,791   |       | 17,501   |       | 11,420   |       | 6,129    |       | 7,176    |       |
| General and administrative expenses                                   |       | 39,231   |       | 30,958   |       | 24,072   |       | 22,056   |       | 21,368   |       |
| Stock compensation expense                                            |       | 337      |       | 1,179    |       | 1,354    |       | 1,571    |       | 2,521    |       |
| Total selling, general and administrative expenses                    |       | 58,359   |       | 49,638   |       | 36,846   |       | 29,756   |       | 31,065   |       |
| Depreciation and amortization                                         |       | 9,353    |       | 5,712    |       | 3,308    |       | 2,682    |       | 2,437    |       |
| Loss on sale of fixed assets                                          |       | 234      |       | 32       |       | 36       |       | 38       |       | 57       |       |
| Income (loss) from operations                                         |       | 41,333   |       | 31,085   |       | 8,288    |       | 3,136    |       | (3,691   | )          |
| Other income  (expense):                                              |       |     |       |     |       |     |       |     |       |     |       |
| Interest income and other, net                                        |       | 1,527    |       | 431      |       | (347     | )          | (332     | )          | (296     | )          |
| Equity in earnings of affiliate(1)                                    |       | 1,485    |       | 2,517    |       | 2,046    |       | 2,241    |       | 861      |       |
| Gain on sale of net assets(2)                                         |       | 270      |       | —   |       | —   |       | —   |       | —   |       |
| Loss on investment                                                    |       | —   |       | —   |       | —   |       | —   |       | (644     | )          |
| Income (loss) before income taxes                                     |       | 44,615   |       | 34,033   |       | 9,987    |       | 5,045    |       | (3,770   | )          |
| Income tax expense (benefit)                                          |       | 11,475   |       | 6,679    |       | (1,452   | )          | 226      |       | 18       |       |
| Income (loss) before cumulative effect of accounting  change          |       | 33,140   |       | 27,354   |       | 11,439   |       | 4,819    |       | (3,788   | )          |
| Cumulative effect of accounting change(3)                             |       | —   |       | —   |       | —   |       | (2,043   | )          | —   |       |
| Net income (loss)                                                     |       | 33,140   |       | 27,354   |       | 11,439   |       | 2,776    |       | (3,788   | )          |
| Dividends on preferred stock                                          |       | —   |       | (277     | )          | (608     | )          | (608     | )          | (608     | )          |
| (Increase) decrease in carrying value of stock  subject to repurchase |       | —   |       | —   |       | 3,063    |       | 4,077    |       | (676     | )          |
| Income (loss) available to common stockholders                        |       | $        | 33,140     |     | $          | 27,077   |       | $        | 13,894     |     | $          | 6,245 |   | $ | (5,072 | ) |
| Income (loss) per  share of common stock:                             |       |     |       |     |       |     |       |     |       |     |       |
| Basic                                                                 |       | $        | 0.97       |     | $          | 1.02     |       | $        | 0.68       |     | $          | 0.30 |   | $ | (0.25 | ) |
| Diluted                                                               |       | 0.88     |       | 0.83     |       | 0.50     |       | 0.23     |       | (0.25    | )          |
| The composition of  stock compensation expense is as follows:         |       |     |       |     |       |     |       |     |       |     |       |
| Cost of revenues                                                      |       | $        | 46         |     | $          | 488      |       | $        | 573        |     | $          | 772 |   | $ | 728 |   |
| Sales and marketing expenses                                          |       | 15       |       | 201      |       | 256      |       | 260      |       | 261      |       |
| General and administrative expenses                                   |       | 276      |       | 490      |       | 525      |       | 539      |       | 1,532    |       |
|                                                                  |       | $        | 337        |     | $          | 1,179    |       | $        | 1,354      |     | $          | 1,571 |   | $ | 2,521 |   |
| **Consolidated balance sheet data:**                                  |       |     |       |     |       |     |       |     |       |     |       |
| Cash and cash equivalents                                             |       | $        | 19,520     |     | $          | 29,126   |       | $        | 17,419     |     | $          | 10,127 |   | $ | 5,340 |   |
| Working capital                                                       |       | 111,631  |       | 72,011   |       | 12,618   |       | 7,117    |       | 2,891    |       |
| Total assets                                                          |       | 217,476  |       | 180,166  |       | 68,359   |       | 51,129   |       | 41,974   |       |
| Long-term debt                                                        |       | —   |       | —   |       | —   |       | 1,761    |       | 2,668    |       |
| Preferred stock                                                       |       | —   |       | —   |       | 3        |       | 3        |       | 3        |       |
| Total  stockholders’ equity                                      |       | 188,116  |       | 143,080  |       | 47,508   |       | 24,809   |       | 14,593   |       |

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(1)              On November 30, 2000, we acquired a49.4% interest in SSS Holdings Corporation Limited (SSS) in exchange for2,086,697 shares of our common stock valued at approximately$15.9 million. As of December 31, 2005, we owned approximately 48.9%of SSS. We account for SSS under the equity method of accounting.

(2)              On May 31, 2005, we sold our securityand connectivity business in Australia to Loop Technology Pty Limited for a netsales price of $351. We recognized a gain of $270 on the sale of this businessin 2005.

(3)              Effective January 1, 2002, we adoptedStatement of Financial Accounting Standards (SFAS) No. 142, “Goodwill andOther Intangible Assets.” SFAS No. 142 does not permit goodwill andindefinite-lived intangible assets to be amortized. Upon adoption of SFASNo. 142, we recorded a non-cash charge of $2.0 million to reduce thecarrying value of goodwill. This non-cash charge was recorded as a cumulativeeffect of an accounting change. If we had applied SFAS No. 142retroactively as of January 1, 2001, our net loss would have been$(2.4) million.

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**Item 7.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

*The following discussion should be read in conjunctionwith the consolidated financial statements and accompanying notes, which appearelsewhere in this report. It contains forward-looking statements thatinvolve risks and uncertainties. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors, including those discussed below and elsewhere in this report.*

**Overview**

We are a global provider of information technologyservices and solutions focused on the financial services industry. We combinetechnical expertise with deep industry knowledge to offer a broad suite ofservices, including application development, maintenance and support, softwarepackage selection and integration, business process and technology advisoryservices, and other specialized services through our global delivery model. Wefocus on the financial service industry and provide our services primarily tocompanies in the banking, securities and investments and insurance industries.

Revenues increased to $230.5 million in 2005,from $182.6 million in 2004 and $107.2 million in 2003. Net incomeincreased to $33.1 million, or $0.88 diluted earnings per share in 2005,from $27.4 million and $11.4 million, or $0.83 and $0.50 dilutedearnings per share, in 2004 and 2003, respectively. Revenues increased in eachindustry group we serve. Revenue growth continued in 2005 from both relatedparties and third parties over 2004 and 2003 levels. One of our on-going keyinitiatives is to grow our third party revenues, which grew 30.9% in 2005 over2004 and is expected to grow by approximately 40.0% in 2006 over 2005 levels. Themajority of our services continue to be provided to clients in North America. Approximately89.0% of our revenues came from work performed in North America, 8.0% fromIndia and Asia Pacific and 3.0% from Europe in 2005.

Our income from operationsincreased to $41.3 million in 2005 compared to $31.1 in 2004 and $8.3 in2003. As a percentage of revenues, income from operations increased to 17.9% in2005, from 17.0% and 7.8% in 2004 and 2003, respectively. Income fromoperations increased in 2005 over 2004 levels primarily due to revenue growthand decreased selling, general and administrative expenses as a percentage ofrevenue. Gross margin of 47.4% was consistent with the prior year. Operatingmargin growth in 2004 over 2003 resulted from higher gross margins and a decreasein selling, general and administrative expenses as a percentage of revenue.  Gross margins increased primarily due toincreased services delivered from our offshore delivery centers in India, whichyield higher gross margins than services performed at our onsite and offsitelocations. Our selling, general and administrative expenses have decreased as apercentage of revenue as our basic support infrastructure, including finance,human resources and IT support functions, enabled us to increase our volume ofactivity with limited increases in expenditures.

**Acquisitions in 2005**

We completed two acquisitions during 2005. On March 3,2005, we acquired Accurum, Inc. (“Accurum”), an IT services provider tothe capital markets industry. Accurum provides application development,enterprise application integration, web services, data warehousing and qualityassurance and testing within the front and middle office of capital marketsfirms, including sales and trading, risk management and research. Thisacquisition complements the solutions that we offer to our clients in the areasof asset management, investment banking and securities trading. As of theacquisition date, Accurum had 169 employees worldwide, located in offices inNew York and New Jersey and a solution center in Chennai, India. The purchaseprice was approximately $5 million subject to certain adjustments, pluscontingent payments of up to $7 million payable upon the achievement ofcertain performance targets.

On October 19, 2005,our Indian subsidiary, Kanbay Software (India) Private Limited (“KSIL”)acquired 100% of the outstanding shares of Pune Software Park Private Limited (“PSPCorporation”) for $3.8 million (170 million rupees). PSP Corporation owned atechnology park and development center in Pune, India which was occupied andleased primarily to KSIL. We believe our strategic decision to 

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purchaserather than lease this facility will result in future cost savings and increasecapacity for future growth. Approximately $283,000 of the closing payment isheld in an escrow account to satisfy certain indemnification obligations of thesellers that may arise under the purchase agreement. The Company has accountedfor this acquisition as a purchase transaction in the fourth quarter of 2005.

**Saleof Security and Connectivity Business in 2005**

On May 31, 2005, wesold our security and connectivity business in Australia to Loop Technology PtyLimited (Loop) for approximately $351,000. Our security and connectivitybusiness sold third party software licenses and provided support for thoselicenses. The sale of this business will allow us to focus on growing our coreservices business. We have entered into a transitional services agreement withLoop to provide certain administrative services through the first quarter of2006. In addition, we have entered into a sublease agreement with Loop foroffice space it uses in Melbourne and Brisbane for the remainder of the leaseperiod. We recognized a gain of $270,000 on the sale of this business duringthe second quarter of 2005.

**Recent Developments**

On March 9, 2006, we completed the acquisition ofAdjoined Consulting, Inc., a privately held IT consulting firm based in Miami,Florida. The aggregate purchase price was approximately $165 million,subject to certain adjustments, which consisted of cash in the amount ofapproximately $95 million and 4,254,839 shares of our common stock. Webelieve the acquisition will enhance our competitive position in the ITservices industry and expand our service offerings. We will account for theacquisition as a purchase transaction in the first quarter of 2006.

On March 9, 2006, weentered into a credit agreement with LaSalle Bank National Association(“LaSalle”), as administrative agent, and certain financial institutions thatare or may from time to time become parties thereto as lenders. The creditagreement provides for a $50 million term loan, and a revolving creditfacility of up to $75 million (with a provision that allows for anincrease of the revolving facility up to $100 million). The revolvingfacility includes subfacilities for swing-line loans and letters of credit. Ourobligations under the credit agreement are guaranteed by our material United Statessubsidiaries. Our obligations under the credit facility, and our subsidiaries’guaranty obligations, are secured by substantially all of our assets, and suchsubsidiaries’ assets. Loans outstanding under the credit agreement bearinterest at the LIBOR rate or, at our option, an alternate base rate, in eachcase, plus an applicable margin based on our total leverage ratio. Our creditagreement includes various covenants, including covenants that require us tomaintain minimum fixed charge and asset coverage ratios and a maximum totalleverage ratio. In addition, the credit agreement contains limitations on ourability to dispose of assets, incur indebtedness, create liens, make certaininvestments, pay dividends and merge or consolidate. The credit agreement willreplace our existing line of credit with Silicon Valley Bank, which we intendto terminate by the second quarter of 2006.

**Sources of Revenues**

Our revenues are generated principally from ITservices provided on either a time-and-materials or a fixed-price basis.Revenues from services provided on a time-and-materials basis are recognized asthe related services are performed. Revenues from services provided on a fixed-pricebasis are recognized pursuant to the proportionate performance method. Inaddition, our service level agreements call for us to provide a fixed number ofhours of service per year, but do not have defined deliverables. Revenues fromthese agreements are also recognized in accordance with the proportionateperformance method. Most of our client contracts, including those that are on afixed-price basis, can be terminated with or without cause on 30 to90 days notice. All services provided by us through the date ofcancellation are due and payable under the contract terms. Because we bear therisk of cost overruns and inflation with respect to fixed-price projects,our operating results could be adversely affected by inaccurate estimates ofcontract completion costs. Losses on contracts, if any, are provided for infull in the period when determined. In 

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order to manage theserisks, we have a strictly enforced process for approval of project estimatesduring the preparation of engagement proposals. We then closely monitor theprogress on all projects and account relationships.

Our decision to focus on the financial servicesindustry has allowed us to develop a high level of expertise in the markets weserve, which has played an important role in our growth in recent years. Wehave been particularly successful in enhancing our ability to serve the bankingindustry through the development of our knowledge of the systems, processes andbusiness issues specific to this market. We continue to focus on furtherdeveloping our capabilities in the other financial services markets we serve,through training programs and the hiring of industry experts. Because of thesize of the financial services industry and the projected compound annualgrowth rate of approximately 6.0% in global IT services spending within thefinancial services industry, we believe there is significant opportunity toexpand our business. However, we also believe we will be facing increasedcompetition. Many IT services firms have obtained or are obtaining an offshoredelivery capability to be more competitive on price and many clients andpotential clients are developing an internal offshore capability. While this isa challenge, we believe we can limit the impact by continuing the developmentof our technical and business knowledge in the markets we serve. This isevidenced by the fact that some of our largest clients have had an internaloffshore capability in place for many years but continue to use our services becauseof our coupling of technical capability and industry expertise withcost-effective delivery.

Revenues from services provided on atime-and-materials basis are derived from the rates at which we bill ourclients and the number of billable hours in a period. The number of billablehours in a period is impacted by the number of technical professionals on staffand employee utilization. We define employee utilization as the total billablehours divided by the total available hours of our professionals.

Our revenues from the sale of third party softwarelicenses and related maintenance contracts declined in 2005 over 2004 and 2003levels due to the sale of our security and connectivity business in Australiato Loop Technology Pty Limited in May 2005. The sale of our productbusiness has allowed us to focus on growing our core services business.Revenues from our product business were $4.2 million, $9.2 million and $7.2million in 2005, 2004 and 2003, respectively.

We have successfully retained and grown many of ourlong term client relationships by employing our relationship developmentmethodology and continuing to grow our offshore technical and deliverycapabilities, which have enabled us to effectively grow our business. Forexample, revenues from our largest client, HSBC, have grown significantly,increasing from $31.3 million in 2001 to $122.2 million in 2005. Thisgrowth has been driven, in part, by rapid expansion at HSBC over the pastseveral years. Revenues from our second largest client, Morgan Stanley, havegrown from $6.2 million in 2001 to $26.8 million in 2005. We continue to focuson growing our third party revenues by winning new accounts and growingexisting relationships. Through the expansion of third party revenue, bothorganic and through selective strategic acquisitions, we expect to reduce ourhigh customer concentration. We believe our continued commitment to invest inour business development operation has increased our visibility as a marketleader for IT development project engagements, and has allowed us to add newclients and facilitate future growth of our company. Our spending on businessdevelopment grew from $11.4 million in 2003 to $18.8 million in 2005,a 64.9% increase.

Our gross margins in 2005, 2004 and 2003 were 47.4%,47.4% and 45.2%, respectively. Our gross margins improved in 2004 over 2003levels and 2005 gross margins remained consistent with 2004 levels as a resultof improving our employee utilization and performing more of our services atour delivery centers in India, which yield significantly higher gross marginsthan services performed at client sites or at our offices located outside ofIndia. While the market conditions that impact our pricing are difficult topredict, we do not expect a material impact, either positive or negative, onour pricing in 2006.

Our actual billing ratesare impacted by the type and size of our engagements. For example, we typicallycharge higher rates on complex development projects than we do on maintenanceprojects. Also, we may discount larger engagements as compared to comparableengagements of a smaller size. Our 

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marketingefforts are not concentrated on a particular type or size of engagement. Therefore,it is difficult to predict the impact that new engagements will have on ouraverage billing rates.

**Cost of Revenues and Gross Profit**

Our cost of revenues consists primarily of the cost ofsalaries, payroll taxes and employee benefits for our technical professionals,including quality assurance personnel and certain client relationshipmanagement personnel. Also included in the cost of revenues are the travelcosts of these employees, fees for subcontractors working on client engagements,the communications costs associated with connectivity to our clients and thepurchase of products for resale.

The proportion of work performed at our facilities andat client sites varies from quarter to quarter. We charge higher rates and incurhigher compensation and other expenses for work performed at client sites andour offices located outside of India. Services performed at client sites or ouroffices located outside of India typically generate higher revenues per-capitaat lower gross margins than the same services performed at our delivery centersin India. As a result, our total revenues, cost of revenues and gross profitsin absolute terms and as a percentage of revenues can fluctuate from quarter toquarter based on the proportion of work performed in India. We hiresubcontractors on a limited basis from time to time to supplement our technicalstaff. In 2005, approximately 6.7% of our cost of revenues was attributable tosubcontracting costs. We do not anticipate that our subcontracting needs willincrease significantly as we expand our business.

We charge our related parties, HSBC and MorganStanley, rates that are consistent with those charged to other clients, with anappropriate level of discount for volume. The ratio of offshore to onsiteemployees staffed on our engagements with HSBC varies for each engagement. Consequently,some of those engagements result in gross margins that are at or above ouraverage gross margins, while others result in gross margins that are at orbelow our average gross margins. In 2005, our average gross margins on ourengagements with HSBC were slightly above our average gross margins. Ourengagements with Morgan Stanley are not staffed with a high ratio of offshoreto onsite employees. As a result, our average gross margins on our engagementswith Morgan Stanley are usually below our average gross margins.

Under the consulting agreement with HSBC, we perform abroad range of information systems services for various business units withinthe HSBC Group. Under the consulting agreement with Morgan Stanley, we performsystems analysis and design, computer programming and other consulting services.The services provided, economic terms and the other provisions of theseagreements are similar to those prevailing with unrelated parties.

According to Hewitt Associates, salary levels ofsoftware development professionals in India rose 13.7% in 2003, 14.5% in 2004and 16.5% in 2005. This is the result of the strong demand for theseprofessionals in India. Salary increases in the other regions in which weoperate have been more reflective of increases in the cost of living. Weanticipate that salaries for software development professionals in India willcontinue to rise at those levels in the foreseeable future. We believe we willbe able to command higher billing rates and maintain our gross margins in thefuture if we continue to strengthen our industry and technical knowledge andadd complimentary service offerings.

Our revenues and grossprofits are also impacted by our ability to efficiently manage and utilize ouremployees. As of December 31, 2005, we had 5,242 employees, of which 4,645were technical professionals. We manage employee utilization by continuouslymonitoring project requirements and timetables to ensure that we haveeffectively staffed our projects to meet our clients needs. The number ofemployees assigned to a project will vary according to the size, complexity,duration and demands of the project. An unanticipated termination of asignificant project could cause us to experience a higher than expected numberof unassigned IT professionals, thereby lowering IT professional employeeutilization. In addition, we do not fully utilize our IT professionals whenthey are enrolled in training and educational programs. In 2005 our utilizationrates for our Indian employees was 70.0 % compared to 74.0% in both 2004 and2003, 

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andutilization rates for our onsite employees were 87.0%,  89.3%, and 85.8% in 2005, 2004 and 2003,respectively.

**Selling,General and Administrative Expenses**

Selling, general andadministrative expenses consist primarily of salaries, employee benefits,professional service fees, travel, promotion, communications, management,finance, administrative and occupancy costs as well as stock compensationexpense. Selling, general and administrative expenses as a percentage ofrevenue were 25.3%, 27.2% and 34.3% in 2005, 2004 and 2003, respectively. Selling,general and administrative expenses have decreased as a percentage of revenueas our basic support infrastructure, including finance, human resources and ITsupport functions, enabled us to increase our volume of activity with limitedincreases in expenditures.

**Other Income and Expense**

Other income and expense primarily consists ofinterest income, interest expense, foreign currency exchange gains and losses,equity in earnings of affiliate, gain on sale of net assets, and othermiscellaneous income or expenses. Interest income consists of interest earnedon our short-term and long-term investments. Foreign currency gains and lossesare generated primarily by fluctuations of the Indian rupee against theU.S. dollar. As explained in note 1 to our audited consolidatedfinancial statements, our Indian subsidiary’s functional currency is theU.S. dollar, which results in non-monetary assets and liabilities beingtranslated at historical exchange rates, while monetary assets and liabilitiesare translated at current exchange rates. This may result in gains or losseswhich are reflected in income. Included in foreign currency gains and lossesare the unrealized gains and losses from our forward foreign currency contractswhich we have entered into beginning in 2005 to hedge foreign currency exchangeexposure between the Indian rupee and the U.S. dollar. Gain on sale of netassets represents the recorded gain as a result of selling our Australiansecurity and connectivity service line to Loop Technology Pty Limited in thesecond quarter of 2005.

We own 48.9% of SSSHoldings Corporation Limited (“SSS”), which is a Liverpool, England based ITservices firm that focuses primarily on the securities industry with revenuesearned predominantly in the United Kingdom. Because we own less than 50% ofSSS, its results of operations are not consolidated into our financial results.Our share of the earnings of SSS is accounted for under the equity method ofaccounting for investments in common stock, which is described in more detailin note 3 to our audited consolidated financial statements. Our earningsfrom this affiliate were lower in 2005 compared to 2004 as SSS had technicalstaff in training in order to fill future demand from a client who had selectedSSS as its strategic partner.

**Income Tax Expense**

Our net income earned fromproviding services is subject to tax in the country in which we perform thework. We have benefited from net operating loss carry forwards in the UnitedStates, the remaining balance of which was used in 2003. Currently, we benefitfrom the tax holidays in India, which are available to export-oriented ITservices firms. A portion of our tax holidays in India ended on March 31,2005 with the remainder to be phased out completely by March 31, 2009. Historically,as a result of these net operating loss carry forwards and tax holidays, ouroperations have been subject to minimal tax liabilities. Our effective taxrates were 25.7% and 19.6% in 2005 and 2004, respectively. We recorded a taxbenefit of $1.5 million in 2003 as a result of recording the remaining netoperating loss carry forwards in the United States in 2003. Our exact effectivetax rate in future periods will be affected by the geographic distribution ofour earnings, as well as expiring tax holidays in India.

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**CRITICALACCOUNTING POLICIES, ESTIMATES AND RISKS**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with generally accepted accountingprinciples. The preparation of financial statements in accordance withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, including the recoverability of tangible andintangible assets, disclosure of contingent assets and liabilities as of thedate of the financial statements and the reported amounts of revenues andexpenses during the reported period.

On an ongoing basis, we review and if required reviseour estimates. The most significant estimates relate to the allowance fordoubtful accounts, recognition of revenue and profits based on theproportionate performance method of accounting for fixed-bid contracts, incometaxes, recoverability of tangible and intangible assets, and reserves foremployee benefits. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results could vary from the estimates andassumptions used in the preparation of the accompanying financial statements.

We market our services internationally and most of ourtechnical professionals are located in India. As a result, we may be subject tocertain risks associated with international operations, including risksassociated with foreign currency exchange rate fluctuations and risksassociated with the application and imposition of protective legislation andregulations relating to import and export or otherwise resulting from foreignpolicy or the variability of foreign economic conditions. Additional risksassociated with international operations include difficulties in the burdens ofcomplying with a wide variety of foreign laws, potentially adverse taxconsequences, tariffs, quotas and other barriers.

We believe the followingcritical accounting policies affect the significant judgments and estimatesused in the preparation of our consolidated financial statements:

**Allowance for Doubtful Accounts**

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourclients to make required payments. Our allowance for doubtful accounts isdetermined by evaluating the credit-worthiness of each client and thesize and aging of our receivables. A significant portion of our receivables aredue from a few clients with very strong credit ratings and a good paymenthistory. As we attempt to diversify our client base, we will continue toevaluate our method of determining our allowance for doubtful accounts toensure that we are maintaining appropriate balances. Our allowance for doubtfulaccounts at December 31, 2005 was $796,000 or 1.5% of gross receivables.If actual defaults are higher than our historical experience, our allowance fordoubtful accounts may be insufficient to cover the uncollectible receivables,which would have an adverse impact on our operating results in the period ofoccurrence.

**Revenue Recognition**

Our service contracts are entered into on either atime-and-materials or fixed-price basis. Our fixed-price contractsprimarily relate to application development and enhancement projects. Revenuesrelated to time-and-materials contracts are recognized as the service isperformed. Revenues related to fixed-price contracts are recognized asthe service is performed using the proportionate performance method ofaccounting, under which the sales value of performance, including estimatedearnings thereon, is recognized on the basis of the percentage that eachcontract’s cost to date bears to the total estimated cost.

In general, fixed-price contracts are cancelablesubject to a specified notice period. All services provided by us through thedate of cancellation are due and payable under the contract terms. We issue 

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invoices related to fixed-pricecontracts based upon achievement of milestones during a project or othercontractual terms. Differences between the timing of billings, based uponcontract milestones or other contractual terms, and the recognition of revenue,based upon the proportionate performance method of accounting, are recognizedas either unbilled or deferred revenue. We do not incur significant up-frontcosts associated with these fixed-price contracts, and all costs relatedto the services provided are expensed as incurred. Estimates are subject toadjustment as a project progresses to reflect changes in expected completioncosts or dates. The cumulative impact of any revision in estimates of thepercentage of work completed is reflected in the financial reporting period inwhich the change in estimate becomes known, and any anticipated losses oncontracts are recognized immediately. Warranty provisions exist under somecontracts, which generally exist for a period ranging from 30 to 90 dayspast contract completion. If warranty provisions exist, they are included inthe total estimated cost when we calculate proportionate performance. However,a reserve is not maintained as the amounts of such potential warrantyobligations are not material. Our failure to estimate accurately the resourcesand time required for a fixed-price project, or our failure to completeour contractual obligations within the time frame committed, could have amaterial adverse effect on our business, operating results and financialcondition. We carefully monitor fixed-price projects. Project managersperiodically submit percentage of completion data to our accounting department,which then makes any necessary adjustments. Our fixed-price contractestimates have been accurate in the past, properly reflecting revenue as it wasearned.

In addition, certain contracts, which we refer to asservice level agreements, call for us to provide a fixed number of hours ofservice per year, but do not contain defined deliverables. Revenues from theseagreements are also recognized in accordance with the proportionate performancebasis.

On May 31, 2005, wesold our security and connectivity business, which sold third party softwarelicenses and maintenance agreements for the support of those licenses.  Revenues from the sale of third party licenseswere recognized in the financial reporting period in which the licenses weredelivered. Maintenance agreements generally cover a period of 12 monthsfrom the date of sale. Revenues from maintenance contracts were amortized overthe term of the agreement. The unrecognized portion of the revenue at the endof each period was recorded as deferred revenue.

**Income Taxes**

We record a valuation allowance to reduce our deferredtax assets to the amount that we expect to realize. Our allowance was $3.4million and $2.3 million as of December 31, 2005 and 2004,respectively. While we have considered future taxable income and on-goingprudent and feasible tax planning strategies in assessing the need for thevaluation allowance, in the event we were to determine that we would be able torealize our deferred tax assets in the future in excess of our net recordedamount, an adjustment to the deferred tax asset would increase income in theperiod such determination was made. Similarly, if we determine that we wouldnot be able to realize all or part of our net deferred tax asset in the future,an adjustment to the deferred tax asset would be charged to income in theperiod such determination was made.

Our Indian subsidiary,Kanbay Software (India) Limited (“KSIL”), is an export-oriented company,which, under the Indian Income Tax Act of 1961, is entitled to claim varioustax holidays for a period of 10 years with respect to its export profits.Substantially all of the earnings of KSIL are attributable to export profitsand, therefore, are entitled to a 100% exemption from Indian income tax subjectto the 10 year limitation. This exemption resulted in decreases in our incometax expense of $6.8 million, $5.1 million, and $1.7 million in 2005,2004, and 2003, respectively, when compared to the effective tax rates that weestimate would have applied if these incentives had not been available, withoutaccounting for double taxation treaty set-offs, if any. The tax holidays werepartially phased out on March 31, 2005. The remainder of the holidays willremain in place until March 31, 2009, at which time our effective tax ratewould increase to approximately 37.0%. Recently, the Government of India hasdiscontinued these tax exemptions for certain software companies and requiredthe companies to pay additional taxes. Although we believe that we have compliedwith and are eligible for our tax holidays and taxable income deduction, 

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wecannot be certain that the Government of India will not attempt to disallow ourtax holidays or taxable income deduction or require us to pay additional taxes.

The exact impact of thephase out of the tax holidays will vary based on our growth in India and wouldbe negatively affected if the Government of India disallows our tax holidays orrequires us to pay additional taxes. We have and will continue to use theearnings of KSIL for expansion outside of the United States instead ofrepatriating these earnings to the United States. Accordingly, pursuant toAccounting Principles Board Opinion No. 23, “Accounting for Income Taxes—SpecialAreas,” we do not accrue taxes on the repatriation of earnings from KSIL. Ifsuch earnings are repatriated in the future, or are no longer deemed to beindefinitely reinvested, we will accrue the applicable amount of taxesassociated with such earnings.

**Recoverabilityof Tangible and Intangible Long-Lived Assets**

We review our goodwill andother intangible assets for impairment at least annually as required underFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets”. Property and equipment are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable. If the sum of the expected undiscounted cash flows is less thanthe carrying value of the related asset or group of assets, a loss isrecognized for the difference between the fair value and carrying value of theasset or group of assets.

**Employee Benefits**

Our U.S. subsidiarymaintains a self-funded medical plan with stop loss insurance coverage to limitour exposure under the plan. We maintain an accrual for unpaid claims that isestimated based on recent claims activity.

**Foreign Currency Translation**

The assets and liabilitiesof our Asian, European and Canadian subsidiaries are translated intoU.S. dollars from local currencies at current exchange rates and revenuesand expenses are translated from local currencies at average monthly exchangerates. The resulting translation adjustments are recorded in a separatecomponent of stockholders’ equity. For our Indian subsidiary, the functionalcurrency is the U.S. dollar. Because our sales are made primarily in theUnited States, the sales price is predominantly in U.S. dollars and thereis a high volume of intercompany transactions denominated in U.S. dollarsbetween our Indian and U.S. entities. Non-monetary assets and liabilitiesare translated at historical exchange rates, while monetary assets andliabilities are translated at current exchange rates. The resulting gain orloss is included in other income (expense). As of December 31, 2005, basedon our current cost structure, a 10% appreciation in the Indian rupee againstthe U.S. dollar would result in a reduction in other income of approximately$1.4 million based on our current operations.

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**RESULTS OF OPERATIONS**

Thefollowing table sets forth the items in our consolidated income statements as apercentage of revenues for the periods presented.

| ** **                                         | ** ** | **Years ended  December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated statements of  operations data:**   |       |                                    |       |   |   |   |   |
| Net revenues                                       |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                   |       | 52.6                                    |       | 52.6 |   | 54.8 |   |
| Gross profit                                       |       | 47.4                                    |       | 47.4 |   | 45.2 |   |
| Selling, general and  administrative expenses:     |       |                                    |       |   |   |   |   |
| Selling and marketing expenses                     |       | 8.2                                     |       | 9.6 |   | 10.6 |   |
| General and administrative expenses                |       | 17.0                                    |       | 17.0 |   | 22.5 |   |
| Stock compensation expense                         |       | 0.1                                     |       | 0.6 |   | 1.3 |   |
| Total selling, general and administrative expenses |       | 25.3                                    |       | 27.2 |   | 34.4 |   |
| Depreciation and  amortization                     |       | 4.1                                     |       | 3.1 |   | 3.1 |   |
| Loss on sale of  fixed assets                      |       | 0.1                                     |       | — |   | — |   |
| Income from operations                             |       | 17.9                                    |       | 17.0 |   | 7.7 |   |
| Other income (expense):                            |       |                                    |       |   |   |   |   |
| Interest expense                                   |       | —                                  |       | — |   | (0.2 | ) |
| Interest income                                    |       | 1.0                                     |       | 0.4 |   | — |   |
| Foreign exchange  loss                             |       | (0.5                                    | )          | (0.1 | ) | (0.1 | ) |
| Equity in  earnings of affiliate                   |       | 0.7                                     |       | 1.4 |   | 1.9 |   |
| Gain on sale of  net assets                        |       | 0.1                                     |       | — |   | — |   |
| Other net                                          |       | 0.2                                     |       | — |   | — |   |
|                                               |       | 1.5                                     |       | 1.7 |   | 1.6 |   |
| Income before  income taxes                        |       | 19.4                                    |       | 18.7 |   | 9.3 |   |
| Income tax  expense (benefit)                      |       | 5.0                                     |       | 3.7 |   | (1.4 | ) |
| Net income                                         |       | 14.4                                    | %          | 15.0 | % | 10.7 | % |

 

**Yearended December 31, 2005 compared to year ended December 31, 2004**

**Revenues**

Our revenues increased by$47.9 million, or 26.2%, from $182.6 million in 2004 to$230.5 million in 2005. Of the $47.9 million increase,$28.6 million resulted from increased sales to related parties, whilethird party sales increased by $19.3 million during 2005. Revenuesincreased in 2005 over the prior year due to a $52.9 million increase inservice revenues, offset by a $5.0 million decrease in product revenues. Ofthe $52.9 million increase in service revenues, $59.5 millionresulted from increased billable hours as a result of hiring additionaltechnical professionals, including those hired in connection with the Accurum acquisition during the first quarter of2005, $1.6 million resulted from increased average bill rates, offset in partby a $8.2 million decrease in utilization. Our actual bill rates are impactedby the type, size and duration of our engagements. For instance, we typicallycharge higher rates on complex development projects and lower rates onmaintenance projects. Our product revenue decreased by $5.0 million in 2005compared to 2004 due to the sale of our Australian security and connectivitybusiness during the second quarter of 2005.

**Cost of Revenues**

Our cost of revenuesincreased by $25.1 million, or 26.1%, from $96.1 million in 2004 to$121.2 million in 2005. Cost of revenues increased by $29.2 million as aresult of increased service revenues and decreased by $4.1 million as a resultof decreased product sales in 2005 compared to 2004. Of the $29.2 million 

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increasein cost of service revenues, $28.5 million was due to an increase in totalsalary and wages for our delivery organization which includes the addition ofAccurum technical professionals hired during the first quarter of 2005. The$4.1 million decrease in product sales was due to the sale of the security andconnectivity business in Australia during the second quarter of 2005.  The size of our delivery organizationincreased from 3,243 technical professionals as of December 31, 2004 to4,645 as of December 31, 2005. A decrease in the average exchange rate ofthe Indian rupee increased the cost of sales by $711,000 in 2005 compared to2004.

**Gross Profit**

Our gross profit increasedby $22.8 million, or 26.4%, from $86.5 million in 2004 to$109.3 million in 2005. Our gross margin of 47.4% was the same in 2005 and2004. Gross margins were consistent with the prior year as annual salaryincreases  and lower utilization in 2005compared to 2004 were offset by additional services delivered from India wherewe earn a higher gross margin, additional services delivered by more juniorstaff members which results in higher gross margins and higher bill rates. Weexpect a reduction in gross margin levels in 2006 by as much as two percentagepoints as we do not expect bill rate increases to compensate fully forincreases in salaries and we do not expect an increase in the percentage ofwork delivered from India or from junior level staff. However, we do anticipategaining additional economies of scale on our selling, general andadministrative expenses which should allow us to maintain operating marginsconsistent with 2005 levels.

**Selling,General and Administrative Expenses**

Sales and marketing expenses increased by$1.3 million, or 7.4%, from $17.5 million in 2004 to$18.8 million in 2005. This increase is attributable to annual salaryincreases, which took effect on April 1, 2005 and July 1, 2005, andcontinued investment in selling and marketing programs. We believe ourcommitment to invest in our business development operations has increased ourvisibility as a market leader for IT development project engagements, andallowed us to add new clients and facilitate future growth of our company. As apercentage of revenue, sales and marketing expenses decreased from 9.6% in 2004to 8.2% in 2005. Selling and marketing expenses have decreased as a percentageof revenue as our basic support infrastructure enabled us to increase ourvolume of activity with limited increases in expenditures.

General and administrativeexpenses increased by $8.2 million, or 26.5%, from $31.0 million in2004 to $39.2 million in 2005. The increase is attributable to a $2.0million increase in accounting, legal and professional services, a $1.8 millionincrease in rent and facility costs, a $1.9 million increase due to the Accurumacquisition during the first quarter of 2005, a $1.9 million increase in salaryand benefit costs, $800,000 in additional visa costs, offset partially by a$237,000 decrease in bad debt expense. Our accounting, legal and professionalservice fees increased in 2005 over the prior year period primarily due to anincreased reliance on outside experts for accounting, legal and tax mattersrelating to increased complexities in public reporting,  compliance and our first year efforts tosatisfy the requirements of the Sarbanes-Oxley Act. The facility expansion inHyderabad and Pune, India resulted in increases to our rental and facilitycosts in 2005. We are expanding our capacity in India to meet future demand forour service offerings to our clients. Salary and benefit costs increased due toannual salary increases which took effect on April 1, 2005 and July 1,2005, and the addition of general and administrative staff to support thegrowth of our business. As a percentage of revenue, general and administrativeexpenses were 17.0% in both 2005 and 2004.

**Depreciation and Amortization**

Depreciation andamortization increased by $3.6 million, or 63.2%, from $5.7 millionin 2004 to $9.3 million in 2005. Of the $3.6 million increase, $2.3million was attributable to computer equipment, leasehold improvements and furnitureand fixtures at our Hyderabad and Pune, India facilities, $792,000 wasattributable to computer equipment, furniture and leasehold improvements at ourRosemont, Illinois 

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facilityand $506,000 was attributable to the Accurum acquisition. As a percentage ofrevenue, depreciation and amortization expenses were 4.0% in 2005 and 3.1% in2004.

**Income from Operations**

Income from operationsincreased by $10.2 million, or 32.8%, from $31.1 million in 2004 to$41.3 million in 2005. As a percentage of revenue, income from operationsincreased from 17.0% in 2004 to 17.9% in 2005. This was the result of increasedrevenue growth, the elimination of our low margin product business line inAustralia during the second quarter of 2005, and reduced selling, general andadministrative expenses as a percentage of revenue, offset in part by a secondquarter 2005 nonrecurring charge for severance costs relating to the downsizingof the St. Louis, Missouri facility, the annual salary increases effective on April 1,2005 and July 1, 2005, higher visa costs paid and lower utilization in2005 compared to 2004.

**Other Income and Expense**

Interest income increased $1.5 million, from $659,000in 2004 to $2.2 million in 2005, due to interest earned on our short-term andlong-term investments, as proceeds from our initial public offeringsignificantly increased our short-term and long-term investment balances. Interestexpense decreased by $5,000, or 29.4%, from $17,000 in 2004 to $12,000 in 2005as a result of decreased short-term bank borrowings. Equity in earnings ofaffiliate decreased $1.0 million, from $2.5 million in 2004 to$1.5 million in 2005, due to a decline in operating earnings of SSS in2005 from the prior year. Operating earnings for SSS declined as a result ofhiring additional technical professionals during the first quarter of 2005 forupcoming opportunities at one of its largest clients. These technicalprofessionals were hired before full utilization on the client projects inorder to fulfill contractual training requirements before deployment at theclient site. Gain on sale of net assets increased by $270,000, or 100%, in 2005compared to 2004 as a result of selling our Australian security andconnectivity service line to Loop Technology Pty Limited in the second quarterof 2005. Foreign currency exchange loss increased by $1.1 million, from$240,000 in 2004 to $1.3 million in 2005, as a result of exchange ratefluctuations in the currencies of the countries in which we operate. Otherincome, net increased by $542,000 in 2005 compared to 2004 as a result ofcontract settlements with two customers.

**Provision for Income Taxes**

Our provision for incometaxes increased $4.8 million, or 71.6%, from $6.7 million in 2004 to $11.5 millionin 2005. Our effective tax rate was 25.8% in 2005 and 19.7% in 2004. Oureffective tax rate increased in 2005 due to the expiration of a portion of ourtax holiday in India on March 31, 2005 and due to a change in the regionaldistribution of our earnings.

**Net Income**

Net income increased by$5.7 million, or 20.8%, from $27.4 million in 2004 to$33.1 million in 2005. As a percentage of revenue, net income decreasedfrom 15.0% in 2004 to 14.4% in 2005. While operating margins increased, theincrease in our effective tax rate has reduced net income as a percentage ofrevenue.

**Yearended December 31, 2004 compared to year ended December 31, 2003**

**Revenues**

Our revenues increased by$75.4 million, or 70.3%, from $107.2 million in 2003 to$182.6 million in 2004. Of the $75.4 million increase,$49.4 million resulted from increased sales to related parties, whilethird party sales increased by $26.0 million during 2004. Revenuesincreased in 2004 over the prior year due to a $73.5 million increase inservice revenues and a $1.9 million increase in product revenues. Of the$73.5 million increase in service revenues, $75.4 million resultedfrom increased billable hours as a result of 

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hiringadditional technical professionals and $922,000 resulted from increased utilizationin 2004 over the prior year; however, these increases were offset in part by$2.8 million due to a decline in our average bill rates in 2004 ascompared to the prior year. Our actual bill rates are impacted by the type,size and duration of our engagements. For instance, we typically charge higherrates on complex development projects and lower rates on maintenance projects.

**Cost of Revenues**

Our cost of revenuesincreased by $37.4 million, or 63.7%, from $58.7 million in 2003 to$96.1 million in 2004. Of the $37.4 million increase,$35.4 million resulted from increased services sold during the currentyear and $2.0 million resulted from increased product sales. The increasedservice cost was primarily due to an increase in the number of technical professionals,which increased from 2,001 as of December 31, 2003 to 3,243 as ofDecember 31, 2004, resulting in a $33.8 million increase in cost ofrevenues. Salary and benefit increases in 2004 over the prior year contributedan additional $985,000. Also, an increase in the average exchange rate of theIndian rupee resulted in an additional $631,000 to cost of revenues in 2004compared to 2003.

**Gross Profit**

Our gross profit increasedby $38.0 million, or 78.4%, from $48.5 million in 2003 to$86.5 million in 2004. As a percentage of revenue, our gross marginincreased from 45.2% in 2003 to 47.4% in 2004. Gross margins increasedprimarily due to an increase in the amount of our services delivered from ouroffshore delivery centers in India, which yield higher gross margins, and causeincreased utilization of our technical staff.

**Selling,General and Administrative Expenses**

Sales and marketing expenses increased by$6.1 million, or 53.5%, from $11.4 million in 2003 to$17.5 million in 2004. This increase is the result of our significantinvestment in our business development operation since 2003, which is designedto facilitate future growth and add new clients. As part of this investment, wehired additional sales and marketing staff, which added approximately $5.3 millionin salary and benefit costs in 2004 over the prior year. As a percentage ofrevenue, sales and marketing expenses decreased from 10.6% in 2003 to 9.6% in2004.

General and administrativeexpenses increased by $6.9 million, or 28.6%, from $24.1 million in2003 to $31.0 million in 2004. The increase is attributable to a$2.2 million increase in rent and facility costs, a $2.0 millionincrease in recruiting, utilities and other general administrative costs, a$1.4 million increase in salary, benefit and employee related expenses, a$560,000 increase in professional services and a $700,000 increase in bad debtexpense. We are expanding our capacity in India to meet future demand for ourservice offerings. During 2004, our facility expansions in Hyderabad and Pune,India resulted in increases to our rental, general office and utility costsover the prior year. Our professional service fees increased in 2004 comparedto 2003, primarily due to an increased use of outside experts on legal,accounting and tax related matters relating to our initial public offering. Ourbad debt expense increased in 2004 as a result of a slow down in the paymentcycle for one of our largest clients. As a percentage of revenue, general andadministrative expenses decreased from 22.5% in 2003 to 17.0% in 2004. Generaland administrative expenses have decreased as a percentage of revenue as ourbasic support infrastructure, including finance, human resources and IT supportfunctions, enabled us to increase our volume of activity with limited increasesin expenditures.

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**Depreciation and Amortization**

Depreciation andamortization increased by $2.4 million, or 72.7%, from $3.3 millionin 2003 to $5.7 million in 2004. The increase was primarily attributableto additions to computer equipment and software, leasehold improvements andfurniture and fixtures at our Hyderabad and Pune facilities, which accountedfor $2.2 million of the increase.

**Income from Operations**

Income from operationsincreased by $22.8 million, or 274.7%, from $8.3 million in 2003 to$31.1 million in 2004. As a percentage of revenue, income from operationsincreased from 7.7% in 2003 to 17.0% in 2004. This was the result of animprovement in gross margin and a reduction in selling, general andadministrative expenses and depreciation and amortization as a percentage ofrevenue.

**Other Income and Expense**

Interest income increased$620,000, from $39,000 in 2003 to $659,000 in 2004, due to the purchase ofmarketable security investments in July 2004 with the proceeds receivedfrom the initial public offering of shares of our common stock. Interestexpense decreased by $270,000, or 94.1%, in 2004 compared to 2003, as a resultof the repayment of our outstanding long term debt in 2003. Equity in earningsof affiliate increased $471,000, from $2.0 million in 2003 to $2.5 millionin 2004, due to improved operating performance of SSS Holdings Limited in 2004.Foreign currency exchange loss increased by $120,000, from a loss of $120,000in 2003 to $240,000 in 2004, as a result of exchange rate fluctuations in the currenciesof the countries in which we operate.

**Provision for Income Taxes**

We recorded an income tax provision of$6.7 million in 2004, which represented an effective tax rate of 19.6%. In2003, we recorded an income tax benefit of $1.5 million, which was attributableto the deferred tax benefit that we recognized when we used the remaining netoperating loss carry forwards in the United States in the third quarter of2003.

State income taxes werepaid in 2003 to states with minimum tax amounts not offset by net operatingloss carry forwards in those states.

**Net Income**

Net income increased by$15.9 million, or 139.5%, from $11.4 million in 2003 to$27.3 million in 2004. As a percentage of revenue, net income increasedfrom 10.7% in 2003 to 15.0% in 2004.

**Liquidity and Capital Resources**

As of December 31, 2005, we had $74.4 million incash and investments compared to $91.7 million as of December 31,2004. Of the $74.4 million, we had $19.5 million in non-restricted cash,and $54.9 million in short-term investments. Of the $19.5 millionnon-restricted cash balance as of December 31, 2005, $11.3 million washeld in accounts in North America, $4.5 million was held in accounts in AsiaPacific, $2.5 million was held in accounts in India, and $1.2 million was heldin accounts in Europe. At December 31, 2004, we had $29.1 million innon-restricted cash, $2.5 million in restricted cash, $35.7 million inshort-term investments and $24.4 million in long-term investments. Of the$29.1 million non-restricted cash balance as of December 31, 2004,$22.2 million was held in accounts in North America, $2.6 million washeld in accounts in India and $2.3 million was held in accounts in Europewith the balance of $2.0 million held in Asia Pacific. At  December 31, 2004, we had restrictedcash in the form of certificates of deposit for $2.5 million which securedletters of credit issued by our U.S. lender in lieu of security deposits forleases of our offices in Rosemont, Illinois and New York, New York. As a resultof negotiations with our U.S. lender, on October 28, 2005 our $2.5 millionrestricted cash balance was no longer restricted. The funds held at locationsoutside of the United States are for future operating expenses, and we have nointention of 

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repatriating those funds.We are not, however, restricted from repatriating those funds back to theUnited States, if necessary. While we expect that cash generated by our Indiansubsidiary will be reinvested in India to support expansion of our business, tothe extent that funds were remitted to the United States in the form ofdividend payments, those payments would be subject to an Indian dividenddistribution tax of approximately 14.0%.

Operating activities resulted in a source of funds of$17.1 million during 2005 as compared to $26.6 million during 2004. Netcash provided by operating activities in 2005 was primarily attributable to netincome net of non-cash adjustments of $49.0 million, reduced by a $24.8million increase in accounts receivable, and a $12.5 million decrease in othercurrent liabilities. Accounts receivable increased by $24.8 million due toincreased revenues in 2005 over 2004, and the timing of customer cash receipts.Other current liabilities decreased by $12.5 million primarily due to thepayment of the 2004 annual bonuses of $8.6 million during 2005 and a $4.1million decrease in customer advances.

The non-cash items consisted primarily of depreciationand amortization, tax benefit on stock compensation expense, loss on the saleof fixed assets, and non-cash stock compensation expense offset by equityin earnings of affiliate, deferred income taxes and the gain on sale of oursecurity and connectivity business in Australia during 2005. Earnings from ouraffiliate, SSS, are reflected in non-cash items as a use of cash in theoperating activities section of the statement of cash flows. Dividends receivedfrom SSS are reflected as an investing activity.

Operating activities resulted in a source of funds of$26.6 million during 2004 as compared to $14.8 million during 2003. Net cashprovided by operating activities in 2004 was attributable to net income net ofnon-cash adjustments of $35.8 million, a $14.3 million increase in otherliabilities, and a $1.6 million increase in accounts payable offset by a $13.9million increase in accounts receivable and a $11.2 million increase in otherassets. Other liabilities increased in 2004 as a result of receiving an $8.0million customer advance from one of our clients, a related party, in September 2004in addition to increases to our salary and benefit related accruals as a resultof increased staffing levels in 2004 over 2003 levels. Accounts payableincreased by $1.6 million primarily due to the deferral in payment of certain2004 invoices to January 2005 relating to subcontracting, legal andaccounting services. Accounts receivable increased by $13.9 million primarilydue to increased revenues in 2004, and a larger prepayment of services bycertain clients in December 2003. Other assets increased by $11.2 millionin 2004 due to additional deposits of $1.5 million made in 2004 relating to theoccupancy of additional facilities in Hyderabad and Pune, India and theconstruction of our office in Rosemont, Illinois, together with a $7.8 millionincrease in our U.S. federal tax receivable as a result of an overpayment madein 2004.

Net cash used in investing activities was$32.0 million in 2005 and $76.5 million in 2004. On March 2, 2005, weacquired Accurum, Inc. for approximately $5.0 million, subject to certainadjustments, plus contingent payments of up to $7.0 million payable upon theachievement of certain performance targets. The net purchase price of $7.6million at December 31, 2005 is comprised of the $5.0 million closingpayment plus $312,000 in acquisition costs paid, plus a contingent payment of$3.0 million paid over the second, third and fourth quarters of 2005, less$294,000 of cash received as a result of the acquisition, less a $383,000working capital adjustment in accordance with the terms of the stock purchaseagreement.  On October 19, 2005, ourIndian subsidiary, Kanbay Software (India) Private Limited (“KSIL’’) acquired100% of the outstanding shares of Pune Software Park Limited (“PSP Corporation”)for approximately $3.8 million (170 million rupees). PSP Corporation owns atechnology park and development center in Pune, India which is occupiedprimarily by KSIL. We believe our strategic decision to purchase rather thanlease this facility will result in future cost savings and increase capacityfor future growth. Approximately $283,000 will be held in an escrow account tosatisfy indemnification obligations of the sellers that may arise under thepurchase agreement.  We sold our securityand connectivity business in Australia to Loop Technology Pty Limited forapproximately $351,000 on May 31, 2005. We sold short term investments for$5.2 million during 2005 to fund our current operations and facility expansionprograms in India. As a result of negotiations with our U.S. lender, on October 28,2005 our $2.5 million restricted cash balance was no longer restricted.

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Net cash used in investing activities in 2004consisted of a $60.2 million purchase of short and long term marketablesecurity investments with the proceeds received from the initial publicoffering of shares of our common stock in July 2004. We used $2.5 millionto secure a letter of credit issued by our bank in lieu of a security depositfor additional office space in Rosemont, Illinois and New York, New York tosupport future growth. We used $30.0 million of cash in 2005 and $15.3 millionof cash in 2004 to purchase property and equipment primarily for the Hyderabadand Pune, India facilities. These cash expenditures were partially offset by$1.4 million in dividends received from SSS in both 2005 and 2004.

Net cash provided by financing activities was $5.3million in 2005 compared to $61.4 million in 2004. Net cash provided byfinancing activities during 2005 was attributable to $4.9 million in stockoption exercises and employee contributions of $361,000 to the employee stockpurchase plan. Financing activities generated cash of $61.4 million in 2004 asa result of receiving net proceeds of $60.4 million from the initial publicoffering of shares of our common stock in July 2004, $794,000 as a resultof stock option exercises and $294,000 as a result of warrant exercises.

The effects of exchange rates on cash was an increaseof $10,000 in 2005 and $172,000 in 2004.

On March 9, 2006, we entered into a credit agreementwith LaSalle and certain financial institutions that are or may from time totime become parties thereto as lenders. The credit agreement provides for a $50 millionterm loan, and a revolving credit facility of up to $75 million (with aprovision that allows for an increase of the revolving facility up to $100 million).The revolving facility includes subfacilities for swing-line loans and lettersof credit. Our obligations under the credit agreement are guaranteed by ourmaterial United States subsidiaries. Our obligations under the creditfacility, and our subsidiaries’ guaranty obligations, are secured bysubstantially all of our assets, and such subsidiaries’ assets. Loansoutstanding under the credit agreement bear interest at the LIBOR rate or, atour option, an alternate base rate, in each case, plus an applicable marginbased on our total leverage ratio. Our credit agreement contains limitations onour ability to dispose of assets, incur indebtedness, create liens, makecertain investments, pay dividends and merge or consolidate. The creditagreement also contains financial statement reporting obligations and requiresus to maintain certain financial covenants, including (i) a maximum totalleverage ratio of 2.25 to 1, (ii) a minimum fixed charge coverage ratio of1.25 to 1 for any fiscal quarter ending June 30, 2006 through December 31,2006, and 1.50 to 1 for any fiscal quarter thereafter and (iii) a minimum assetcoverage ratio of 1 to 1 from March 31, 2006 through December 31, 2006and 1.25 to 1 thereafter. The credit agreement will replace our line of creditwith Silicon Valley Bank in effect as of December 31, 2005, which weintend to terminate by the second quarter of 2006. We believe that our creditfacility provides sufficient flexibility so that we will be able to remain incompliance with its terms.

As of December 31, 2005, we had a$7.5 million revolving line of credit with Silicon Valley Bank, of which$5.0 million was available on December 31, 2005. This credit facilityprovided for letters of credit up to $3.5 million. At December 31, 2005 wehad $2.5 million of letters of credit outstanding in this facility in lieu ofsecurity deposits for leases of our offices in Rosemont, Illinois and New York,New York. Our credit facility with Silicon Valley Bank, was secured by thegrant of a security interest in all of our assets in favor of the bank andcontained limitations on our ability to dispose of assets, incur indebtedness,create liens, make certain investments, pay dividends and merge or consolidate.Our credit facility also contained certain financial statement reportingobligations and required us to maintain certain financial covenants, includinga quick ratio of at least 1.25 to 1 and an EBITDA ratio not to exceed 2 to 1. Advancesmade under our credit facility accrued interest at a per annum rate equal tothe prime rate. As of December 31, 2005, we were in compliance with thecovenants contained in the Silicon Valley Bank credit facility.

Our Indian subsidiary, KSIL, has a credit facilitywith Citibank India for approximately $2.9 million which matures in December 2006,and with HSBC Bank in India for approximately $885,000 (40 million rupees)which matures in September 2006. Both credit facilities provide for bankguarantees and letters of credit in foreign currency. As of December 31,2005, KSIL had a bank guarantee of approximately $962,000 outstanding and$644,000 in open letters of credit with Citibank India. As of December 31,2005, KSIL had a bank guarantee of approximately $50,000 outstanding and$279,000 in open letters of credit 

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with HSBC Bank in India. InJune 2005, KSIL signed an International Foreign Exchange Master Agreement(IFEMA) with HSBC Bank in India to provide a foreign exchange facility ofapproximately $11.1 million (500 million rupees) to hedge trade related foreignexchange exposure. As of December 31, 2005, KSIL had approximately $8.3million in foreign exchange contracts covered by this facility. Our foreignexchange facility is unsecured and contains provisions which require priorapproval by HSBC Bank in India prior to changes to our capital structure,making certain investments, and incurring additional debt. In addition, theHSBC Bank facility imposes restrictions on dividend payments and net workingcapital.

We expect to continue ourfacilities expansion program in India and expect our capital spending for thefull year 2006 to be approximately $50.0 million, relating primarily to theconstruction of our new delivery center in Hyderabad, India, the expansion ofour delivery centers in Pune, and Chennai, India.

We currently lease spacefor our employees in Hyderabad, India. These leases expire near the timeconstruction of our new facility in Hyderabad is scheduled to be completed.Construction of the Hyderabad facility started in April 2005 and we areexpecting to complete phase one by March 2006 and phase two in the firstquarter of 2007. Completion of phase one will provide seating capacity for anadditional 2,000 associates. Under our current lease agreement, we have optionsfor short term lease extensions if we experience construction delays, whichwill allow us to move our Hyderabad employees from leased space to our newfacility upon its completion. The completion of this project in phases, basedon the need to meet increased client demand, will allow us to minimize the impacton future financial performance if we experience an unexpected hiring reduction.As a result, the projected impact on our operating profit due to unoccupiedspace in the initial occupancy periods of our new facility is projected to be amaximum of $28,000 per month. We believe that the transfer of employees fromleased space to our new facility in Hyderabad will result in a net reduction inexpenses of approximately $770,000 per year. This net reduction will resultfrom reduced general and administrative expenses of approximately$1.1 million per year partially offset by an increase in depreciation ofapproximately $357,000 per year.

In August 2004, weentered into an agreement to acquire the real estate for our new deliverycenter in Hyderabad, India from an Indian government entity. At this time, weare not required to make payment for the real estate. Under the terms of theagreement, we must invest approximately $11 million in our Hyderabad deliverycenter and employ at least 3,000 persons at the center in order to acquiretitle to the real estate. We are only required to make payment to the seller tothe extent we employ fewer than 3,000 persons at the delivery center by August 2011.The amount we will be required to pay, if any, will be in direct proportion to$962,000 based on the number of employees at August 2011, if less than3,000. For example, if we only employ 2,000 persons at the new delivery centerin August 2011, we will be required to pay the seller $321,000. In November 2004,we provided a bank guarantee of $962,000 toward the purchase price for the realestate. The bank guarantee will be revised in 2006, and each year thereafter,based upon the number of employees actually employed at the new delivery centerin proportion to our commitment to hire at least 3,000 employees at the newdelivery center.

In February 2004, weestablished a regional off-site development center in St. Louis, Missouri,using 89 former employees of one of our clients as the initial staff. At thetime we established this development center, the U.S. presidential andcongressional campaigns caused a considerable political debate regardingoutsourcing and the use of offshore resources. In addition, a change ingovernment in India created additional anxiety about the use of offshoreoutsourcing. This, in turn, created an interest in the marketplace for regionaloff-site development centers in the United States. However, interest inregional off-site development centers has significantly diminished. As aresult, we were unable to redeploy the majority of the St. Louis staff on newbillable assignments. In early May 2005, we terminated 56 of the St. Louisemployees. Our net income was negatively impacted by approximately $800,000 inthe second quarter of 2005 as a result of the employee termination costsresulting from this workforce reduction. The Company paid all termination costsprior to June 30, 2005.

In June 2005, we signed an agreement withMahindra Industrial Park Ltd (MIPL) to lease 30 acres of real estate inChennai, India. This real estate has been granted Special Economic Zone status,which 

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provides certain corporateand sales tax exemptions upon the fulfillment of certain export obligations. Wepaid lease charges of $1.4 million in the second quarter of 2005, which represents85% of the total lease charges. We will pay the remaining $248,000 leasecharges upon the contractual performance of certain conditions by MIPL. Thepayment date for the remaining lease charges has been extended to the firstquarter of 2006.

On October 19, 2005, KSIL acquired 100% of theoutstanding shares of Pune Software Park Private Limited (“PSP Corporation”)for a closing payment of $3.8 million (170 million rupees). PSP Corporationowns a technology park and development center in Pune, India which is occupiedand leased primarily to KSIL. We believe our strategic decision to purchaserather than lease this facility will result in future cost savings and increasecapacity for future growth. Approximately $283,000 of the closing payment isheld in an escrow account to satisfy certain indemnification obligations of thesellers that may arise under the purchase agreement. The Company has accountedfor this acquisition as a purchase transaction in the fourth quarter 2005.

On March 9, 2006, we completed the acquisition ofAdjoined Consulting, Inc., a privately held IT consulting firm based in Miami,Florida. The aggregate purchase price was approximately $165 million,subject to certain adjustments, which consisted of cash in the amount ofapproximately $95 million and 4,254,839 shares of our common stock. Webelieve the acquisition will enhance our competitive position in the ITservices industry and expand our service offerings. We will account for theacquisition as a purchase transaction in the first quarter of 2006.

Based upon our currentlevel of operations together with our current cash and investment balances, weexpect that our cash flow will be adequate to meet our anticipated needs in2006.

**Off-Balance Sheet Arrangements**

We do not have anyoff-balance sheet arrangements, investments in special purpose entities orundisclosed borrowings or debt. In addition, we have not entered into anyderivative contracts (other than those described below in “Qualitative andQuantitative Disclosures about Market Risk”) or any synthetic leases.

**Contractual Obligations**

Wehave no long term debt, and, as of December 31, 2005, we had the followingcontractual obligations:

| ** **              | ** ** | **Payments due by period** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **              | ** ** | **(in thousands)**                   | ** ** |
| Operating  leases(1)    |       | 11,743                                    |       |   | 3,412 |   |   | 2,176 |   | 1,532 |   |   | 4,623 |   |   |
| Purchase obligations(2) |       | 23,640                                    |       |   | 23,640 |   |   | — |   | — |   |   | — |   |   |

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(1)          Our obligations underour operating leases consist of payments related to our real estate leases.

(2)          Ourpurchase obligations consist of payments related to our facility expansions inPune and Hyderabad, India.

**Recent Accounting Pronouncements**

In December 2004 theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard No. 123 (revised 2004)—Share-Based Payment (SFAS 123R).This statement establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services. Thestatement focuses primarily on accounting for transactions when an entityobtains employee services in share-based payment transactions. The statementprovides for a prospective application of the new standard under whichcompensation cost will be recognized on or after the required 

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effectivedate for all future share based award grants and the portion of outstandingawards for which the requisite service has not been rendered, based on thegrant-date fair value of those awards calculated under SFAS 123 for pro formadisclosures. We are required to implement SFAS 123R beginning January 1,2006. The effect of adoption of SFAS 123R is currently estimated to result inadditional pre-tax expense of approximately $6.0 million in 2006.

In May 2005, the FASBissued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154),a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3,Reporting Accounting Changes in Interim Financial Statements (SFAS 3). SFAS 154replaces the provisions of SFAS 3 with respect to reporting accounting changesin interim financial statements. SFAS 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after June 1, 2005. Issuers thatapply SFAS 154 in an interim period should provide the applicable disclosuresspecified in SFAS 154. The Company does not expect SFAS 154 willsignificantly impact its financial statements upon its adoption on January 1,2006.

**Forward-LookingStatements and Risk Factors**

This annual report on Form 10-K,including “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements often are proceeded by words such as “believes,” “expects,” “may,” “anticipates,”“plans,” “intends,” “assumes,” “will” or similar expressions. Forward-lookingstatements reflect management’s current expectations, as of the date of thisreport, and involve certain risks and uncertainties. Our actual results coulddiffer materially from those anticipated in these forward-lookingstatements as a result of various factors. Some of the factors that could causefuture results to materially differ from the recent results or those projectedin forward-looking statements are described in Part I, Item IA inthis annual report on Form 10-K.

**Item 7A.   Qualitativeand Quantitative Disclosures About Market Risk**

We transact businessprimarily in U.S. dollars. We are subject, however, to adverse movements inforeign currency exchange rates in those countries where we conduct business.We have historically entered into, and we may enter into in the future, forwardforeign currency exchange contracts to hedge non-U.S. dollar currency exchangeexposures. The purpose of this foreign currency hedging activity is to protectus from the risk that the eventual cash flows from sale of our services mightbe adversely affected by changes in the exchange rate.

Our most significant foreign currency exchange rateexposure relates to fluctuations in the Indian rupee. In December 2004, weadopted a foreign currency exchange management policy. This policy authorizesus to hedge our exposure to the Indian rupee to offset the effects of changesin the exchange rate.  Pursuant to thispolicy, we entered into several forward contracts during 2005 to hedge foreigncurrency exchange exposure between the Indian rupee and the U.S. dollar. As of December 31,2005, we had foreign currency contracts representing an aggregate amount of$8.3 million with maturity rates ranging from March 2006 through July 2006.In June 2005, KSIL signed an International Foreign Exchange MasterAgreement (IFEMA) with HSBC bank in India to provide a foreign exchangefacility of approximately $11.1 million to hedge trade related foreign exchangeexposure. Foreign exchange contracts covered by this facility may only beentered into to cover trade related exchange exposure incurred in the normalcourse of business. Our foreign exchange facility is unsecured and containsprovisions which require prior approval by HSBC bank in India on changes to ourcapital structure, making certain investments and incurring additional debt. Inaddition, the HSBC bank facility imposes restrictions on dividend payments andnet working capital. We have performed a quantitative analysis of our currencyrate exposure to the Indian rupee as of December 31, 2005. Based on ourcurrent cost structure, a 10% appreciation in the Indian rupee against the U.S.dollar would result in a reduction in other income of approximately $1.4million based on our current operations. We do not enter into derivativeinstruments for trading purposes.

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**Item8.   Financial Statements and Supplementary Data**

**INDEXTO HISTORICALCONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                            | ** ** | Page   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
| **Consolidated Financial  Statements of Kanbay International, Inc.**                                                  |       |   |       |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                            |       | 38     |       |
| Consolidated Statements of Income for the years ended  December 31, 2005, 2004 and 2003                               |       | 39     |       |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2005, 2004 and 2003 |       | 40     |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 and 2003                           |       | 41     |       |
| Notes to Consolidated Financial Statements                                                                                 |       | 42     |       |
| Report of Independent Registered Public Accounting Firm                                                                    |       | 61     |       |
| Report of Independent Registered Public Accounting  Firm on Internal Control Over Financial Reporting                      |       | 62     |       |

 

|                                                                                                                         | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Consolidated Financial  Statements of SSS Holdings Corporation Limited**                                              |       |     |       |
| Report of Independent  Auditors                                                                                         |       | 64       |       |
| Consolidated  Profit and Loss Accounts for the years ended December 31, 2005, 2004 and  2003                       |       | 65       |       |
| Consolidated  Statement of Total Recognised Gains and Losses for the years ended December 31,  2005, 2004 and 2003 |       | 66       |       |
| Consolidated Balance  Sheets at December 31, 2005 and 2004                                                         |       | 67       |       |
| Consolidated Cash  Flow Statements for the Years Ended December 31, 2005, 2004 and 2003                            |       | 68       |       |
| Notes to the  Consolidated Financial Statements                                                                         |       | 69       |       |

 

37

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**Kanbay International, Inc.CONSOLIDATED BALANCE SHEETS(dollars in thousands)**

| ** **                                                                                                                                                                                                 | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                                            |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                  |       |                        | $          | 19,520                      |       |   |   | $ | 29,126 |   |   |
| Restricted cash                                                                                                                                                                                            |       |                        | —     |                        |       |   | 2,478 |   |   |
| Short term investments, held to maturity at amortized  cost                                                                                                                                                |       |                        | 54,918     |                        |       |   | 35,730 |   |   |
| Accounts receivable—related parties                                                                                                                                                                   |       |                        | 34,063     |                        |       |   | 10,007 |   |   |
| Accounts receivable—third parties                                                                                                                                                                     |       |                        | 17,708     |                        |       |   | 14,657 |   |   |
| Employee and other receivables                                                                                                                                                                             |       |                        | 1,571      |                        |       |   | 1,599 |   |   |
| Deferred income taxes                                                                                                                                                                                      |       |                        | 1,781      |                        |       |   | 1,084 |   |   |
| Prepaid expenses and other                                                                                                                                                                                 |       |                        | 10,308     |                        |       |   | 14,416 |   |   |
| Total current assets                                                                                                                                                                                       |       |                        | 139,869    |                        |       |   | 109,097 |   |   |
| Property and equipment:                                                                                                                                                                                    |       |                        |       |                        |       |   |   |   |   |
| Land and buildings                                                                                                                                                                                         |       |                        | 23,213     |                        |       |   | 6,291 |   |   |
| Computer equipment                                                                                                                                                                                         |       |                        | 20,312     |                        |       |   | 17,538 |   |   |
| Computer software                                                                                                                                                                                          |       |                        | 7,586      |                        |       |   | 5,407 |   |   |
| Furniture and fixtures                                                                                                                                                                                     |       |                        | 9,749      |                        |       |   | 5,691 |   |   |
| Leasehold improvements                                                                                                                                                                                     |       |                        | 4,872      |                        |       |   | 3,105 |   |   |
|                                                                                                                                                                                                       |       |                        | 65,732     |                        |       |   | 38,032 |   |   |
| Less accumulated depreciation                                                                                                                                                                              |       |                        | 19,987     |                        |       |   | 17,141 |   |   |
|                                                                                                                                                                                                       |       |                        | 45,745     |                        |       |   | 20,891 |   |   |
| Investment in affiliate                                                                                                                                                                                    |       |                        | 22,567     |                        |       |   | 25,094 |   |   |
| Long term investments, held to maturity at amortized  cost                                                                                                                                                 |       |                        | —     |                        |       |   | 24,424 |   |   |
| Goodwill                                                                                                                                                                                                   |       |                        | 6,269      |                        |       |   | — |   |   |
| Other intangibles, net                                                                                                                                                                                     |       |                        | 3,026      |                        |       |   | — |   |   |
| Deferred income taxes                                                                                                                                                                                      |       |                        | —     |                        |       |   | 660 |   |   |
| Total assets                                                                                                                                                                                               |       |                        | $          | 217,476                     |       |   |   | $ | 180,166 |   |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                       |       |                        |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                           |       |                        | $          | 3,878                       |       |   |   | $ | 3,973 |   |   |
| Amounts due to subcontractors                                                                                                                                                                              |       |                        | 1,176      |                        |       |   | 565 |   |   |
| Deferred revenue                                                                                                                                                                                           |       |                        | 1,448      |                        |       |   | 4,017 |   |   |
| Customer deposit                                                                                                                                                                                           |       |                        | 7          |                        |       |   | 4,106 |   |   |
| Accrued liabilities                                                                                                                                                                                        |       |                        | 21,729     |                        |       |   | 24,425 |   |   |
| Total current liabilities                                                                                                                                                                                  |       |                        | 28,238     |                        |       |   | 37,086 |   |   |
| Deferred income taxes.                                                                                                                                                                                     |       |                        | 1,122      |                        |       |   | — |   |   |
| Total liabilities                                                                                                                                                                                          |       |                        | 29,360     |                        |       |   | 37,086 |   |   |
| Stockholders’ equity:                                                                                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Preferred Stock, par value $0.001 per share,  5,000,000 shares authorized, no shares issued and outstanding at  December 31, 2005 and December 31, 2004, respectively                            |       |                        | —     |                        |       |   | — |   |   |
| Common Stock, par value $0.001 per share,  200,000,000 shares authorized, 34,794,163 and 32,989,935 shares issued and  outstanding at December 31, 2005 and December 31, 2004, respectively |       |                        | 35         |                        |       |   | 33 |   |   |
| Additional paid-in capital                                                                                                                                                                                 |       |                        | 135,843    |                        |       |   | 120,641 |   |   |
| Retained earnings                                                                                                                                                                                          |       |                        | 49,694     |                        |       |   | 16,554 |   |   |
| Unearned restricted stock compensation                                                                                                                                                                     |       |                        | (635       | )                           |       |   | — |   |   |
| Cumulative foreign currency translation adjustments                                                                                                                                                        |       |                        | 3,179      |                        |       |   | 5,852 |   |   |
| Total stockholders’ equity                                                                                                                                                                            |       |                        | 188,116    |                        |       |   | 143,080 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                           |       |                        | $          | 217,476                     |       |   |   | $ | 180,166 |   |   |

 

See accompanying notes to consolidated financial statements.

38

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**Kanbay International, Inc.CONSOLIDATED STATEMENTS OFINCOME(dollars in thousands except per share amounts)**

| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  revenues—related parties                            |       | $                                          | 149,030    |   | $ | 120,377 |   | $ | 70,942 |   |
| Net  revenues—third parties                              |       | 81,447                                     |       | 62,229 |   | 36,211 |   |
| Total revenues                                                |       | 230,477                                    |       | 182,606 |   | 107,153 |   |
| Cost of revenues                                              |       | 121,198                                    |       | 96,139 |   | 58,675 |   |
| Gross profit                                                  |       | 109,279                                    |       | 86,467 |   | 48,478 |   |
| Sales and  marketing expenses                                 |       | 18,791                                     |       | 17,501 |   | 11,420 |   |
| General and  administrative expenses                          |       | 39,231                                     |       | 30,958 |   | 24,072 |   |
| Stock  compensation expense                                   |       | 337                                        |       | 1,179 |   | 1,354 |   |
| Total selling,  general and administrative expenses           |       | 58,359                                     |       | 49,638 |   | 36,846 |   |
| Depreciation and  amortization                                |       | 9,353                                      |       | 5,712 |   | 3,308 |   |
| Loss on sale of  fixed assets                                 |       | 234                                        |       | 32 |   | 36 |   |
| Income from operations                                        |       | 41,333                                     |       | 31,085 |   | 8,288 |   |
| Other income (expense):                                       |       |                                       |       |   |   |   |   |
| Interest expense                                              |       | (12                                        | )          | (17 | ) | (287 | ) |
| Interest income                                               |       | 2,235                                      |       | 659 |   | 39 |   |
| Foreign exchange  loss                                        |       | (1,267                                     | )          | (240 | ) | (120 | ) |
| Equity in  earnings of affiliate                              |       | 1,485                                      |       | 2,517 |   | 2,046 |   |
| Gain on sale of  net assets                                   |       | 270                                        |       | — |   | — |   |
| Other, net                                                    |       | 571                                        |       | 29 |   | 21 |   |
|                                                          |       | 3,282                                      |       | 2,948 |   | 1,699 |   |
| Income before  income taxes                                   |       | 44,615                                     |       | 34,033 |   | 9,987 |   |
| Income tax  expense (benefit)                                 |       | 11,475                                     |       | 6,679 |   | (1,452 | ) |
| Net income                                                    |       | 33,140                                     |       | 27,354 |   | 11,439 |   |
| Dividends on  preferred stock                                 |       | —                                     |       | (277 | ) | (608 | ) |
| Increase in  carrying value of stock subject to repurchase    |       | —                                     |       | — |   | 3,063 |   |
| Income available  to common stockholders                      |       | $                                          | 33,140     |   | $ | 27,077 |   | $ | 13,894 |   |
| Income per share of  common stock                             |       |                                       |       |   |   |   |   |
| Basic                                                         |       | $                                          | 0.97       |   | $ | 1.02 |   | $ | 0.68 |   |
| Diluted                                                       |       | $                                          | 0.88       |   | $ | 0.83 |   | $ | 0.50 |   |
| The composition of stock  compensation expense is as follows: |       |                                       |       |   |   |   |   |
| Cost of revenues                                              |       | $                                          | 46         |   | $ | 488 |   | $ | 573 |   |
| Sales and marketing expenses                                  |       | 15                                         |       | 201 |   | 256 |   |
| General and administrative expenses                           |       | 276                                        |       | 490 |   | 525 |   |
|                                                          |       | $                                          | 337        |   | $ | 1,179 |   | $ | 1,354 |   |

 

See accompanying notes to consolidated financial statements.

39

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**Kanbay International, Inc.CONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY(dollars in thousands)**

| ** **                                                               | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in** | ** ** | **Unearned  Restricted  Stock** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Cumulative  Foreign  Currency  Translation** | ** ** | **Stockholders’** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**              | ** ** | **Amount**                      | ** ** | **Capital**                          | ** ** | **Compensation**                               | ** ** | **Deficit)**           | ** ** | **Adjustments** | ** ** | **Equity** | ** ** |
| Balance at December 31, 2002                                        |       | 2,906,004            |       |              | $          | 3                       |       |                            | 19,688,724 |                                 |       | $                                              | 20         |                   |       |   | $ | 53,876 |   |   |   | $ | — |   |   |   | $ | (30,759 | ) |   |   | $ | 1,669 |   |   |   | $ | 24,809 |   |   |
| Repurchase and retirement of stock subject to  repurchase                |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | (1,118     | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,118 | ) |   |
| Expiration of repurchase rights on stock subject to  repurchase          |       | 427,329              |       |              | —     |                    |       | 596,990                         |       |                                 | 1          |                                           |       |                   | (1         | ) |   |   | — |   |   |   | 8,520 |   |   |   | — |   |   |   | 8,520 |   |   |
| Stock compensation expense                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 1,354      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,354 |   |   |
| Change in ownership of investment in affiliate and  other                |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | (90        | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (90 | ) |   |
| Exercise of stock options                                                |       | —               |       |              | —     |                    |       | 440,062                         |       |                                 | —     |                                           |       |                   | 559        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 559 |   |   |
| Impact of tax deduction less than stock compensation  expense, net  |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | (10        | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (10 | ) |   |
| Comprehensive income:                                                    |       |                 |       |              |       |                    |       |                            |       |                                 |       |                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | 11,439 |   |   |   | — |   |   |   | 11,439 |   |   |
| Foreign exchange currency adjustments                                    |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   | 2,045 |   |   |   | 2,045 |   |   |
| Total comprehensive income                                               |       |                 |       |              |       |                    |       |                            |       |                                 |       |                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 13,484 |   |   |
| Balance at December 31, 2003                                        |       | 3,333,333            |       |              | 3          |                    |       | 20,725,776                      |       |                                 | 21         |                                           |       |                   | 54,570     |   |   |   | — |   |   |   | (10,800 | ) |   |   | 3,714 |   |   |   | 47,508 |   |   |
| Change in ownership of investment in affiliate and  other                |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | (91        | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (91 | ) |   |
| Stock compensation expense                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 1,179      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,179 |   |   |
| Exercise of stock options                                                |       | —               |       |              | —     |                    |       | 589,102                         |       |                                 | 1          |                                           |       |                   | 793        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 794 |   |   |
| Tax benefit related to stock option plan                                 |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 3,548      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,548 |   |   |
| Exercise of warrants.                                                    |       | 33,605               |       |              | —     |                    |       | 40,963                          |       |                                 | —     |                                           |       |                   | 294        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 294 |   |   |
| Recapitalization                                                         |       | (3,366,938           | )          |              | (3         | )                       |       | 6,271,594                       |       |                                 | 6          |                                           |       |                   | (3         | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| IPO proceeds, net of costs                                               |       | —               |       |              | —     |                    |       | 5,362,500                       |       |                                 | 5          |                                           |       |                   | 60,351     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 60,356 |   |   |
| Comprehensive income:                                                    |       |                 |       |              |       |                    |       |                            |       |                                 |       |                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | 27,354 |   |   |   | — |   |   |   | 27,354 |   |   |
| Foreign exchange currency adjustments                                    |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   | 2,138 |   |   |   | 2,138 |   |   |
| Total comprehensive income                                               |       |                 |       |              |       |                    |       |                            |       |                                 |       |                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 29,492 |   |   |
| Balance at December 31, 2004                                        |       | —               |       |              | —     |                    |       | 32,989,935                      |       |                                 | 33         |                                           |       |                   | 120,641    |   |   |   | — |   |   |   | 16,554 |   |   |   | 5,852 |   |   |   | 143,080 |   |   |
| Change in ownership of investment in affiliate and  other                |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 30         |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 30 |   |   |
| Stock compensation expense                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 314        |   |   |   | 23 |   |   |   | — |   |   |   | — |   |   |   | 337 |   |   |
| Exercise of stock options                                                |       | —               |       |              | —     |                    |       | 1,746,855                       |       |                                 | 2          |                                           |       |                   | 4,902      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 4,904 |   |   |
| Tax benefit related to stock option plan                                 |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | 8,937      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 8,937 |   |   |
| Restricted stock grant.                                                  |       | —               |       |              | —     |                    |       | 40,000                          |       |                                 | —     |                                           |       |                   | 658        |   |   |   | (658 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Proceeds from employee stock purchase plan                               |       | —               |       |              | —     |                    |       | 17,373                          |       |                                 | —     |                                           |       |                   | 361        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 361 |   |   |
| Comprehensive  income:                                                   |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income                                                               |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | 33,140 |   |   |   | — |   |   |   | 33,140 |   |   |
| Foreign exchange currency adjustments                                    |       | —               |       |              | —     |                    |       | —                          |       |                                 | —     |                                           |       |                   | —     |   |   |   | — |   |   |   | — |   |   |   | (2,673 | ) |   |   | (2,673 | ) |   |
| Total comprehensive income                                               |       |                 |       |              |       |                    |       |                            |       |                                 |       |                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 30,467 |   |   |
| Balance at  December 31, 2005                                       |       | —               |       |              | —     |                    |       | 34,794,163                      |       |                                 | $          | 35                                             |       |                   |       | $ | 135,843 |   |   |   | $ | (635 | ) |   |   | $ | 49,694 |   |   |   | $ | 3,179 |   |   |   | $ | 118.116 |   |   |

 

See accompanying notes to consolidated financial statements

40

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**Kanbay International, Inc.CONSOLIDATED STATEMENTSOF CASH FLOWS(dollars in thousands)**

| ** **                                                                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 33,140     |   | $ | 27,354 |   | $ | 11,439 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 9,353                                      |       | 5,712 |   | 3,308 |   |
| Loss on sale of fixed assets                                                       |       | 234                                        |       | 32 |   | 39 |   |
| Gain on sale of net assets                                                         |       | (270                                       | )          | — |   | — |   |
| Stock compensation expense                                                         |       | 337                                        |       | 1,179 |   | 1,354 |   |
| Equity in earnings of affiliate                                                    |       | (1,485                                     | )          | (2,517 | ) | (2,046 | ) |
| Deferred income taxes                                                              |       | (1,216                                     | )          | 450 |   | (2,194 | ) |
| Tax benefit due  to (deduction less than) stock compensation expense, net          |       | 8,937                                      |       | 3,548 |   | (10 | ) |
| Changes in operating  assets and liabilities:                                      |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                |       | (24,833                                    | )          | (13,924 | ) | 652 |   |
| Other current assets                                                               |       | 5,945                                      |       | (11,146 | ) | (1,289 | ) |
| Accounts payable                                                                   |       | (529                                       | )          | 1,622 |   | (529 | ) |
| Other current liabilities                                                          |       | (12,509                                    | )          | 14,309 |   | 4,041 |   |
| Net cash provided  by operating activities                                         |       | 17,104                                     |       | 26,619 |   | 14,765 |   |
| INVESTING ACTIVITIES                                                               |       |                                       |       |   |   |   |   |
| Additions to  property and equipment                                               |       | (30,008                                    | )          | (15,329 | ) | (5,997 | ) |
| Proceeds from  sale of fixed assets                                                |       | 6                                          |       | 27 |   | 14 |   |
| Proceeds from  sale of net assets, net of costs                                    |       | 351                                        |       | — |   | — |   |
| Purchase of  businesses, net of cash acquired                                      |       | (11,406                                    | )          | — |   | — |   |
| Purchases of  short and long term investments                                      |       | (110,291                                   | )          | (60,154 | ) | — |   |
| Maturity of short  term investments                                                |       | 115,527                                    |       | — |   | — |   |
| Decrease  (increase) in restricted cash                                            |       | 2,478                                      |       | (2,478 | ) | — |   |
| Dividends  received from affiliate                                                 |       | 1,358                                      |       | 1,406 |   | 763 |   |
| Net cash used in  investing activities                                             |       | (31,985                                    | )          | (76,528 | ) | (5,220 | ) |
| FINANCING ACTIVITIES                                                               |       |                                       |       |   |   |   |   |
| Payments on line  of credit, net                                                   |       | —                                     |       | — |   | (406 | ) |
| Payments on long-term  debt                                                        |       | —                                     |       | — |   | (1,773 | ) |
| Payments on  amounts due related parties                                           |       | —                                     |       | — |   | (653 | ) |
| Proceeds from  IPO, net of costs                                                   |       | —                                     |       | 60,356 |   | — |   |
| Proceeds from  exercise of stock options                                           |       | 4,904                                      |       | 794 |   | 559 |   |
| Proceeds from  employee stock purchase plan                                        |       | 361                                        |       | — |   | — |   |
| Proceeds from  exercise of warrants                                                |       | —                                     |       | 294 |   | — |   |
| Net cash provided  by (used in) financing activities                               |       | 5,265                                      |       | 61,444 |   | (2,273 | ) |
| Effect of  exchange rates on cash                                                  |       | 10                                         |       | 172 |   | 20 |   |
| (Decrease)  increase in cash and cash equivalents                                  |       | (9,606                                     | )          | 11,707 |   | 7,292 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 29,126                                     |       | 17,419 |   | 10,127 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                          | 19,520     |   | $ | 29,126 |   | $ | 17,419 |   |
| NONCASH INVESTING AND  FINANCING ACTIVITIES                                        |       |                                       |       |   |   |   |   |
| Accrued liability  for repurchase of common stock                                  |       | $                                          | —     |   | $ | — |   | $ | 1,118 |   |
| SUPPLEMENTAL  INFORMATION:                                                         |       |                                       |       |   |   |   |   |
| Cash paid for interest                                                             |       | $                                          | 12         |   | $ | 17 |   | $ | 292 |   |

 

See accompanying notes to consolidated financial statements.

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**Kanbay International, Inc.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003(dollars in thousands, except share and per share amounts)**

**1.**                 Description ofBusiness

Kanbay International, Inc.(the “Company”) is a global provider of information technology, or IT, servicesand solutions focused on the financial services industry. The Company combinestechnical expertise with deep industry knowledge to offer a broad suite ofservices, including application development, maintenance and support, softwarepackage selection and integration, business process and technology advisoryservices, and other specialized services, through its global delivery model.The Company provides services primarily to banking institutions, securities andinvestment firms and insurance companies located in North America, India,Asia-Pacific and Europe.

**Basis of Presentation**

The consolidated financial statements include theaccounts of the Company and its wholly and majority owned subsidiaries, afterelimination of significant intercompany accounts and transactions. Theconsolidated financial statements for the period ending December 31, 2005include the results of the two acquisitions which were completed in 2005 as ofthe purchase dates (refer to Note 4). The results of the Company’s security andconnectivity business in Australia are included through the date of sale (referto Note 5).

The Company accounts forits interest (48.92% at December 31, 2005 and 48.98% at December 31,2004) in SSS Holdings Corporation Limited (“SSS”), a company based in theUnited Kingdom, under the equity method of accounting. Under the equity methodof accounting, the Company’s share of income or loss of SSS is recorded as “equityin earnings of affiliate” in the consolidated statements of income. The Companyaccounts for any gains or losses arising from the issuance by SSS of its ownstock, principally related to the exercise of stock options, as a direct chargeor credit to additional paid-in-capital.

**Stock Split**

On June 15, 2004, theCompany effectuated a 1.8627 for 1 stock split of the Company’s common stock inthe form of a stock dividend to stockholders (see Note 13). All referencesin the accompanying financial statements and notes to common stock, includingnumber of shares authorized and outstanding, price per share, per shareamounts, and stock option data, have been restated to reflect the split.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

**Cash,Cash Equivalents and Restricted Cash**

The Company considers allhighly liquid investments with maturities of three months or less whenpurchased to be cash equivalents. On December 31, 2004, the Company hadcertificates of deposit for $2,478 that secured letters of credit issued by ourbank in lieu of security deposits on two office leases which are classified asrestricted cash. As a result of negotiations with our U.S. lender, on October 28,2005 our $2,478 restricted cash balance was no longer restricted.

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**Investments**

At December 31, 2005and 2004 the Company has investments in current and non-current maturities ofcorporate and government bonds, commercial paper and mortgage backed securitiestotaling $54,918 and $60,154, respectively. Maturities greater than one yearare classified as non-current and all non-current investments mature within twoyears. It is management’s intent and ability to hold the securities to maturity.Securities held to maturity are stated at amortized cost, which approximatesthe market value of those securities.

**Accounts Receivable**

The collectibility of the Company’s accountsreceivable is based upon a combination of factors. In circumstances where aspecific customer is unable to meet its financial obligations (e.g., bankruptcyfilings), a specific reserve for bad debts is recorded against amounts due toreduce the net recognized receivable to the amount reasonably expected to becollected. For all other customers, reserves for bad debts are based onhistorical collection experience.

The allowance for doubtfulaccounts at December 31, 2005 and 2004 totaled $796 and $1,143,respectively. Unbilled accounts receivable was $18,977 and $8,798 at December 31,2005 and 2004, respectively. Unbilled accounts receivable increased by $10,179primarily due to the prepayment of the December 2004 invoice by our largestcustomer to facilitate their year end closing.

**Fair Value of Financial Instruments**

The carrying amounts of cash and cash equivalents,accounts receivable and accounts payable approximated fair value as of December 31,2005 and 2004, due to the short maturities of these instruments. The aggregatefair value of current and non-current investments was $54,745 and $60,032 at December 31,2005 and 2004, respectively. The fair value of our current and non-currentinvestments included an unrealized loss of $173 and $122 as of December 31,2005 and 2004, respectively.

Thefair value of financial instruments by investment type is as follows: 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| State and local  government bonds |       | $                     | 20,350     |   | $ | 12,750 |   |
| Corporate bonds.                  |       | 8,618                 |       | 18,368 |   |
| Mortgage-backed  securities       |       | 13,503                |       | 22,080 |   |
| Commercial paper                  |       | 12,274                |       | 6,834 |   |
|                              |       | $                     | 54,745     |   | $ | 60,032 |   |

 

Theunrealized gain (losses) of financial instruments by investment type is asfollows:

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| State and local  government bonds |       | $                     | —     |   | $ | — |   |
| Corporate bonds.                  |       | (36                   | )          | (41 | ) |
| Mortgage-backed  securities       |       | (136                  | )          | (44 | ) |
| Commercial paper                  |       | (1                    | )          | (37 | ) |
|                              |       | $                     | (173       | ) | $ | (122 | ) |

 

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**Property and Equipment**

Propertyand equipment, including software acquired for internal use, are stated atcost. Depreciation is calculated using the straight-line method over thefollowing estimated useful lives:

| Buildings              |   | 30  years    |
|------------------------|--------|--------------|
| Computer equipment     |   | 3  years     |
| Computer software      |   | 3  years     |
| Furniture and fixtures |   | 7  years     |
| Leasehold improvements |   | 2 - 13 years |

 

**Goodwilland Other Intangible Assets**

The Company accounts for goodwill and other intangibleassets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” Goodwill represents the excess of thepurchase price and related costs over the value assigned to net tangible assetsand identifiable intangible assets of businesses acquired and accounted forunder the purchase method.

Intangibleassets were acquired by the Company in conjunction with the Accurum, Inc. (“Accurum”) and Pune Software ParkPrivate Limited (“PSP Corporation”) acquisitions during 2005. Intangible assetsare carried at cost and are amortized on a straight-line basis over the assetsestimated useful life. Intangible assets for the year ended December 31,2005 include the following:

| ** **                  | ** ** | **Gross Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** | **Weighted-  average  Amortization  Period** | ** ** |
|-----------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| Customer list               |       |                           | $          | 2,438                         |       |                         |       | $                                            | (148       | ) |   |   | $ | 2,290 |   |   |   | 15 years |   |   |
| Non-solicitation  agreement |       |                           | 500        |                          |       |                         | (139       | )                                            |       |   | 361 |   |   |   | 3 years |   |   |
| Trade name                  |       |                           | 450        |                          |       |                         | (75        | )                                            |       |   | 375 |   |   |   | 5 years |   |   |
| Total                       |       |                           | $          | 3,388                         |       |                         |       | $                                            | (362       | ) |   |   | $ | 3,026 |   |   |   | 12 years |   |   |

 

Theestimated aggregate amortization expense over the next five years is asfollows:

| ** **            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Amortization  Expense |       | $        | 453        |     | $          | 438      |       | $        | 286        |     | $          | 248 |   | $ | 171 |   |
|                       |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

Goodwill consists of$5,282 from the Accurum acquisition and $987 from the PSP Corporationacquisition in 2005. These amounts are preliminary pending the finalization ofremaining contingent payment obligations. Goodwill is subject to an annualimpairment evaluation.

**Impairmentof Intangible and Long-Lived Assets**

Intangible and long livedassets with finite lives are reviewed for impairment annually or whenever eventsor changes in circumstances indicate that the carrying amount may not berecoverable. If an indicator of impairment exists, an estimate of undiscountedfuture cash flows is compared to the carrying amount of an asset or group ofassets. If an asset or group of assets is determined to be impaired, the lossis measured by the excess of the carrying amount of the assets or group ofassets over its fair value as determined by an estimate of discounted futurecash flows. Such analysis involves significant judgment.

**Income Taxes**

The Company recognizesdeferred tax assets and liabilities for the future tax consequences oftemporary differences between the tax basis of assets and liabilities and theirreported amounts in the financial statements. Deferred tax assets are reducedby a valuation allowance if, based upon 

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management’sestimates, it is more likely than not that a portion of the deferred tax assetswill not be realized in a future period. The estimates utilized in therecognition of deferred tax assets are subject to revision in future periodsbased on new facts or circumstances.

**Foreign Currency Translation**

The financial statements of Kanbay Software (India)Private Limited (“KSIL”), which has the U.S. dollar as its functional currency,are remeasured into U.S. dollars using current rates of exchange for monetaryassets and liabilities and historical rates of exchange for nonmonetary assets.Adjustments from remeasurement are included in operations.

All of the Company’s otherinternational subsidiaries use the local currency as their functional currency.Accordingly, assets and liabilities are translated into U.S. dollars atexchange rates as of the balance sheet date, and revenues and expenses aretranslated at weighted average exchange rates. The adjustments resulting fromtranslation are included as a component of stockholders’ equity.

**Revenue Recognition**

The Company provides business process and technologyservices, software package selection and integration services, applicationdevelopment, maintenance and support services, and specialized services. Priorto the sale of the Company’s security and connectivity business on May 31,2005, the Company sold third party software licenses and provided support forthose licenses. The Company does not track revenues or sell its services basedon these categories. The Company’s engagements often involve aspects of morethan one service. However, each engagement consists of a single deliverable. Eachof these services are described below followed by a description of the Company’smethods of recognizing revenues from these services.

Business Process and Technology Services—The Companyassists its clients by deploying senior consultants and industry technicalexperts to advise clients on how to best address business challenges andachieve objectives through the appropriate use of technology. These servicesare provided either on a time-and-materials or a fixed-price basis asdescribed below.

Software Package Selection and Integration Services—TheCompany assists clients in the selection and/or integration of large softwarepackages developed by third party vendors. The Company does not sell licensesfor these third party software vendors nor does the Company receive any form ofcompensation from the third party software vendors in delivering these services.All selection and integration services are provided either on atime-and-materials or a fixed-price basis as described below.

Application Development, Maintenance and SupportServices—The Company provides services associated with the custom development,maintenance and support of software for its clients. The Company does notdevelop software for resale. All development is specific to a client’s needsand the client retains the intellectual property rights to the software. Maintenanceand support may be provided on the software the Company has developed for theclient or on software otherwise acquired by the client. Separate contractualagreements are entered into for maintenance provided on custom softwaredeveloped by the Company for its clients, and these maintenance agreements aregenerally not entered into contemporaneously with software developmentagreements. These services are provided either on a time-and-materials or afixed-price basis as described below.

Specialized Services—These services include businessintelligence, application management outsourcing and application testing andvalidation. In the performance of these services, the Company may use certainsoftware tools. These tools are not sold to the client, but rather are usedinternally to facilitate the work. These services are provided either on atime-and-materials or a fixed-price basis as described below. Applicationmanagement outsourcing is a new service offering for the Company and may resultin more complex types of contractual arrangements than the Company hashistorically undertaken. It is possible that some of the future engagements mayinvolve multiple deliverables, in which case the 

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Company will recordrevenues in accordance with Emerging Issues Task Force (“EITF”) 00-21 “RevenueArrangements with Multiple Deliverables.”

Network and Systems Security Services—Prior to thesale of the Company’s security and connectivity business on May 31, 2005,the Company consulted with its clients on internet security assessment andstrategy, development of internet security solutions and reviewed and monitoredinternet security. In addition, the Company sold third party software productsand maintenance contracts on that software. The consulting and implementationservices were provided either on a time-and-materials or a fixed-pricebasis as described below.

Revenues from the sale of third party softwarelicenses are recognized in the period in which the licenses are delivered. Therevenues from third party software sales and third party maintenance agreementsales are recorded on a gross basis in accordance with EITF 99-19 “ReportingRevenue Gross as a Principal versus Net as an Agent.” The Company recognizesthe revenue allocable to software licenses upon delivery of the softwareproduct to the end-user, unless the fee is not fixed or determinable,collectibility is not probable or a signed agreement is not in effect. Revenuesfrom maintenance agreements are amortized over the term of the agreement. Theunrecognized portion of the revenue at the end of each accounting period isrecorded as deferred revenue.

As referenced above, the Company’s services areprovided on either a time-and-materials or a fixed-price basis. Revenuesrelated to time-and-materials contracts are recognized as the service isperformed. Revenues related to fixed-price contracts, which primarilyrelate to application development and enhancement projects, are recognized asthe service is performed using the proportionate performance method ofaccounting, under which the sales value of performance, including estimatedearnings thereon, is recognized on the basis of the percentage that eachcontract’s cost to date bears to the total estimated cost. In general, fixed-pricecontracts are cancelable subject to a specified notice period. All servicesprovided through the date of cancellation are due and payable under thecontract terms. The Company invoices fixed-price contracts based upon theterms of the contract or upon achievement of milestones during the project. Differencesbetween the timing of billings and the recognition of revenue are recorded aseither unbilled or deferred revenue. The Company does not incur significantup-front costs associated with fixed-price contracts and all costsrelated to the services provided are expensed as incurred. Estimates aresubject to adjustment as a project progresses to reflect changes in expectedcompletion costs or dates. The cumulative impact of any revision in estimatesis reflected in the financial reporting period in which the change in estimatebecomes known and any anticipated losses on contracts are recognizedimmediately. The Company accounts for each client contract as a stand-alonecontract rather than combining all single counterparty contracts. Warrantyprovisions exist under some contracts, which generally exist for a periodranging from 30 to 90 days past contract completion. If warrantyprovisions exist, they are included in the total estimated cost whencalculating proportionate performance, however, a reserve is not maintained asthe amounts of such potential warranty obligations are not material. Failure toaccurately estimate the resources and time required for a fixed-priceproject, or failure to complete contractual obligations within the time framecommitted, could have a material adverse effect on the Company’s results ofoperations and financial condition. In addition, certain contracts require theCompany to provide a fixed number of hours of service per year, but do notcontain defined deliverables. Revenues from these contracts are also recognizedon the same proportionate performance basis.

Revenues related to services performed without asigned agreement or work order are not recognized until there is evidence of anagreement, such as when agreements or work orders are signed, or if collectionis uncertain, when payment is received; however, the cost related to theperformance of these services is recognized in the period the services arerendered. Services provided without a signed agreement or work order have beentime and material engagements with existing clients under a master servicesagreement. Billings to these clients are based on established terms with theclients and processes are in place to ensure that the client has ordered andaccepted the services provided before revenue is recognized. For all services,revenue is recognized when, and if, evidence of an arrangement is obtained 

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and the other criteria tosupport revenue recognition are met, including the price is fixed anddeterminable, services have been rendered and collectibility is reasonablyassured.

Reimbursements receivedfor out of pocket expenses incurred are included in revenues and cost ofrevenues and totaled $1,874, $905 and $524 during 2005, 2004 and 2003,respectively.

**Advertising Costs**

Advertising costs arecharged to operations as incurred and totaled $81, $317 and $188 during 2005,2004 and 2003, respectively.

**Derivatives**

The Company accounts forderivative instruments in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” The Statement requires theCompany to recognize all derivatives in the balance sheet at fair value. Derivativesthat are not hedges are adjusted to fair value through operations. If theCompany elects to account for a derivative as a hedge, depending on the natureof the hedge, changes in the fair value of such derivatives are either offsetagainst the change in the fair value of the respective assets or liabilitiesthrough operations, or recognized in other comprehensive income until thehedged item is recognized in operations.

**Stock Options**

The Company has stock-based employeecompensation plans (see Note 11). SFAS No. 123, “Accounting for Stock-BasedCompensation,” encourages, but does not require companies to recordcompensation cost for stock-based employee compensation plans at fairvalue. The Company has chosen to apply Accounting Principles Board Opinion (“APB”)No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for its stock option plans. For options grantedwhere the number of shares is fixed and the exercise price of the stock optionsequals the market price of the underlying stock on the date of grant, nocompensation expense has been recognized. For options granted where the numberof shares is fixed and the exercise price is less than the market price of theunderlying stock on the date of grant, the Company has recognized stockcompensation expense for the difference between the market price and theexercise price over the vesting period using the straight line method.

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Hadcompensation cost been determined based upon the fair value at the grant datefor awards under the plans based on the provisions of SFAS No. 123, theCompany’s pro forma earnings and earnings per share would have been as follows:

| ** **                                                          | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as  reported                                            |       | $                                          | 33,140     |   | $ | 27,354 |   | $ | 11,439 |   |
| Compensation  expense, as reported, net of tax                      |       | 245                                        |       | 948 |   | 1,209 |   |
| Compensation  expense, under the fair value method, net of tax      |       | (4,820                                     | )          | (2,939 | ) | (550 | ) |
| Pro forma net income                                                |       | $                                          | 28,565     |   | $ | 25,363 |   | $ | 12,098 |   |
| Pro forma net  income available to common stockholders—basic   |       | $                                          | 28,565     |   | $ | 25,086 |   | $ | 14,553 |   |
| Pro forma net income  available to common stockholders—diluted |       | $                                          | 28,565     |   | $ | 25,363 |   | $ | 15,161 |   |

 

| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Income Per Share:** |       |                                       |       |   |   |   |   |
| **As reported:**      |       |                                       |       |   |   |   |   |
| Basic                 |       | $                                          | 0.97       |   | $ | 1.02 |   | $ | 0.68 |   |
| Diluted               |       | 0.88                                       |       | 0.83 |   | 0.50 |   |
| **Pro forma:**        |       |                                       |       |   |   |   |   |
| Basic                 |       | $                                          | 0.84       |   | $ | 0.94 |   | $ | 0.71 |   |
| Diluted               |       | 0.76                                       |       | 0.77 |   | 0.52 |   |

 

Thefair value of each stock option grant is estimated on the date of grant usingthe Black-Scholes option pricing model with the following assumptions:

| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield                |       | 0%                                         |       | 0% |   | 0% |   |
| Average expected  option life |       | 5 years                               |       | 5 years |   | 5 years |   |
| Risk-free interest  rate      |       | 4.24%                                      |       | 3.71% |   | 4.96% |   |
| Expected volatility           |       | 50%                                        |       | 50% |   | 70% |   |

 

Based on these assumptions, the weighted-averagefair value of the options granted was $9.23 in 2005, $6.22 in 2004 and $1.47 in2003.

Because of the use ofhighly subjective assumptions, the pro forma disclosures are not likely to berepresentative of the effects on reported net income or loss in future years.

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**Income per Share of Common Stock**

Thefollowing table sets forth the computation of basic and diluted income pershare of common stock:

| ** **                                                                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Basic:**                                                                                                       |       |                                       |       |   |   |   |   |
| Net income, as  reported                                                                                         |       | $                                          | 33,140     |   | $ | 27,354 |   | $ | 11,439 |   |
| Dividends on  preferred stock                                                                                    |       | —                                     |       | (277 | ) | (608 | ) |
| Decrease in  carrying value of stock subject to repurchase                                                       |       | —                                     |       | — |   | 3,063 |   |
| Income available  to common stockholders                                                                    |       | $                                          | 33,140     |   | $ | 27,077 |   | $ | 13,894 |   |
| Weighted-average  number of shares of common stock outstanding                                                   |       | 34,120,045                                 |       | 26,573,373 |   | 20,493,852 |   |
| Basic income per  share                                                                                          |       | $                                          | 0.97       |   | $ | 1.02 |   | $ | 0.68 |   |
| **Diluted:**                                                                                                     |       |                                       |       |   |   |   |   |
| Net income                                                                                                       |       | $                                          | 33,140     |   | $ | 27,354 |   | $ | 11,439 |   |
| Decrease in  carrying value of stock subject to repurchase                                                       |       | —                                     |       | — |   | 3,063 |   |
|                                                                                                             |       | $                                          | 33,140     |   | $ | 27,354 |   | $ | 14,502 |   |
| Weighted-average  number of shares of common stock outstanding                                                   |       | 34,120,045                                 |       | 26,573,373 |   | 20,493,852 |   |
| Effect of  conversion of preferred stock                                                                         |       | —                                     |       | 2,835,875 |   | 6,208,998 |   |
| Effect of  dilutive stock options and warrants                                                                   |       | 3,368,122                                  |       | 3,678,306 |   | 2,262,061 |   |
| Denominator for  diluted income per share calculation                                                            |       | 37,488,167                                 |       | 33,087,554 |   | 28,964,911 |   |
| Diluted income  per share                                                                                        |       | $                                          | 0.88       |   | $ | 0.83 |   | $ | 0.50 |   |
| **Securities that are not  included in the computation of diluted per share as their impact is  anti-dilutive:** |       |                                       |       |   |   |   |   |
| Stock options and  warrants                                                                                      |       | 139,870                                    |       | — |   | 435,136 |   |

 

**New Accounting Standards**

In December 2004 the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 123 (revised 2004)—Share-Based Payment (SFAS123R). This statement establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services. Thestatement focuses primarily on accounting for transactions when an entityobtains employee services in share-based payment transactions. The statementprovides for a prospective application of the new standard under whichcompensation cost will be recognized on or after the required effective datefor all future share based award grants and the portion of outstanding awardsfor which the requisite service has not been rendered, based on the grant-datefair value of those awards calculated under SFAS 123 for pro forma disclosures.We are required to implement SFAS 123R beginning January 1, 2006. Theeffect of adoption of SFAS 123R is currently estimated to result in additionalpre-tax expense of approximately $6.0 million in 2006.

In May 2005, the FASBissued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154),a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements (SFAS 3). SFAS 154replaces the provisions of SFAS 3 with respect to reporting accounting changesin interim financial statements. SFAS 154 is effective for 

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accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after June 1, 2005. Issuers thatapply SFAS 154 in an interim period should provide the applicable disclosuresspecified in SFAS 154. The Company does not expect that SFAS 154 willsignificantly impact its financial statements upon its adoption on January 1,2006.

**2.**                 Prepaid Expensesand Other

Prepaidexpenses and other consist of the following:

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Income taxes  receivable |       | $                     | 5,393      |   | $ | 7,781 |   |
| Other prepaid  expenses  |       | 4,915                 |       | 6,635 |   |
|                     |       | $                     | 10,308     |   | $ | 14,416 |   |

 

**3.**                 Investment inAffiliate

TheCompany accounts for its 48.92% interest in SSS Holdings Limited (“SSS”), A UKcompany, under the equity method of accounting. Under the equity method ofaccounting, the Company’s share of income or loss of SSS is recorded as “equityin earnings of affiliate” in the consolidated statements of income. Changes inthe carrying value of SSS consists of the following:

| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Carrying value in  SSS at beginning of year |       | $        | 25,094     |     | $          | 22,185 |   |
| Equity in earnings  of SSS                  |       | 1,485    |       | 2,517    |       |
| Cash dividend  received from SSS            |       | (1,358   | )          | (1,406   | )          |
| Foreign currency  translation adjustments   |       | (2,684   | )          | 1,889    |       |
| Change in  ownership percentage and other   |       | 30       |       | (91      | )          |
| Carrying value in SSS at  end of year       |       | $        | 22,567     |     | $          | 25,094 |   |

 

Condensedstatement of operations and balance sheet information of SSS are presentedbelow. All amounts are presented in accordance with accounting principlesgenerally accepted in the United States. In addition, the assets andliabilities of SSS have been translated at exchange rates as of the balancesheet date and revenues and expenses of SSS have been translated at the annualweighted-average exchange rate for each respective reporting period .

| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Condensed statement of  operations information** |       |                                       |       |   |   |   |   |
| Net revenues                                       |       | $                                          | 58,149     |   | $ | 63,858 |   | $ | 54,684 |   |
| Net income                                         |       | 3,043                                      |       | 5,143 |   | 4,053 |   |
|                                                    |            |                                            |            |  |  |  |  |  |  |  |

 

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Condensed balance sheet  information**         |       |                  |       |   |   |   |   |
| Current assets                                   |       |                  | $          | 12,903 |   |   | $ | 16,096 |   |
| Non-current  assets                              |       |                  | 7,158      |   |   | 8,994 |   |
| Total assets                                     |       |                  | $          | 20,061 |   |   | $ | 25,090 |   |
| Current  liabilities                             |       |                  | $          | 5,549 |   |   | $ | 9,110 |   |
| Long-term  liabilities                           |       |                  | 33         |   |   | 191 |   |
| Stockholders’  equity                       |       |                  | 14,479     |   |   | 15,789 |   |
| Total liabilities and  stockholders’ equity |       |                  | $          | 20,061 |   |   | $ | 25,090 |   |

 

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**4.**                 Acquisitions

OnMarch 2, 2005, the Company acquired 100% of the outstanding shares ofAccurum, Inc. (“Accurum”) for approximately $5,000, subject to certainadjustments. Accurum is an IT services provider to the security and investmentindustry. The acquisition was accounted for as a purchase and the results ofAccurum have been included in the Company’s consolidated results since the dateof acquisition. The purchase price, including acquisition costs paid and net of$294 cash acquired, was allocated to assets acquired and liabilities assumed asfollows:

| Current assets          |   | $      | 2,961  |   |
|-------------------------|--------|--------|--------|--------|
| Property and  equipment |   | 424    |   |
| Other assets            |   | 336    |   |
| Goodwill                |   | 5,282  |   |
| Other intangibles       |   | 3,340  |   |
| Liabilities  assumed    |   | (4,708 | )      |
| Net purchase price      |   | $      | 7,635  |   |

 

The net purchase price is preliminary and is subjectto change based on certain future contingent payments. The purchase price hasbeen adjusted from $4,938 as of March 31, 2005 to $7,635 as ofDecember 31, 2005 due to an additional contingent payment of $3,000 formeeting certain sales targets, a $(383) working capital adjustment inaccordance with the terms of the stock purchase agreement, and an additional$80 in legal and other professional service fees relating to the acquisition.The purchase agreement provides for additional contingent future payments of upto $4,000 for achievement of certain sales and profitability targets during thefifteen-month post acquisition period. These contingent future payments mayaffect the final net purchase price. A valuation of the intangible assets wasperformed by a third party during 2005 which resulted in an adjustment togoodwill to recognize the fair value of the other intangible assets acquired,which includes the tradename, a customer list and non-compete agreements.

On October 19,2005, the Company’s Indian subsidiary, Kanbay Software (India) Private Limited(“KSIL”) acquired 100% of the outstanding shares of Pune Software Park PrivateLimited (“PSP Corporation”) for approximately $3,761 (170,000 rupees). PSPCorporation owned a technology park and development center in Pune, India whichwas occupied and leased primarily to KSIL. Approximately $283 of the closingpayment is held in an escrow account to satisfy indemnification obligations ofthe sellers that may arise under the purchase agreement. The acquisition wasaccounted for as a purchase and the results of PSP Corporation have beenincluded in the Company’s consolidated results since the date of acquisition. Thepurchase price, including acquisition costs paid and net of $7 cash acquired, was allocated to assets acquired andliabilities assumed as follows:

| Current assets          |   | $      | 1,202  |   |
|-------------------------|--------|--------|--------|--------|
| Property and  equipment |   | 3,750  |   |
| Goodwill                |   | 987    |   |
| Other intangibles       |   | 48     |   |
| Liabilities  assumed    |   | (2,216 | )      |
| Net purchase price      |   | $      | 3,771  |   |

 

The net purchase price is preliminary and is subjectto change based on the outcome of certain indemnification obligations. Thepurchase price as of December 31, 2005 includes the closing payment $3,754(170,000 rupees) plus $17 (776 rupees) in legal and other professional servicefees relating to the acquisition.

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TheCompany’s consolidated financial statements include the results of operationsfor Accurum and PSP Corporation since the dates of acquisitions. Unaudited proforma results of operations data as if these acquisitions had occurred as of January 1,2005 and January 1, 2004 are as follows:

| ** **                            | ** ** | **December 31** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Proforma revenues                     |       | $                    | 233,138    |   | $ | 194,953 |   |
| Proforma income  from operations      |       | 41,438               |       | 31,970 |   |
| Proforma net income                   |       | $                    | 32,821     |   | $ | 28,045 |   |
| Proforma basic  earnings per share    |       | $                    | 0.96       |   | $ | 1.06 |   |
| Proforma dilutive  earnings per share |       | $                    | 0.88       |   | $ | 0.85 |   |

 

**5.**                 Saleof Net Assets and Reduction in Workforce

On May 31, 2005, we sold our security andconnectivity business in Australia to Loop Technology Pty Limited (“Loop”) forapproximately $351. Our security and connectivity business sold third partysoftware licenses and provided support for those licenses. The sale of thisbusiness will allow us to focus on growing our core services business. We haveentered into a transitional services agreement with Loop to provide certainadministrative services through the first quarter of 2006. In addition, we haveentered into a sublease agreement with Loop for office space it uses inMelbourne and Brisbane for the remainder of the lease period. We recognized again of $270 on the sale of this business during the second quarter of 2005.

In February 2004, theCompany established a regional off-site development center in St. Louis,Missouri, using 89 former employees of one of its clients as the initial staff.At the time the Company established this development center, the U.S.presidential and congressional campaigns caused a considerable political debateregarding outsourcing and the use of offshore resources. In addition, a changein government in India created additional anxiety about the use of offshoreoutsourcing. This, in turn, created an interest in the marketplace for regionaloff-site development centers in the United States. However, interest inregional off-site development centers has significantly diminished. As aresult, the Company was unable to redeploy the majority of the St. Louis staffon new billable assignments. In early May 2005, the Company terminated 56of the St. Louis employees. The Company recognized a charge of approximately$800 in the second quarter of 2005 as a result of the employee terminationcosts resulting from this workforce reduction. The Company paid all terminationcosts prior to June 30, 2005. The employee termination costs are reflectedin 2005 in the “Cost of revenues” in the consolidated statements of income.

**6.**                 FinancialDerivatives

For the foreseeable futurethe Company expects that a significant portion of its personnel and operatingcosts will continue to be denominated in Indian rupees, while the majority ofrevenues will continue to be generated in U.S. dollars. Accordingly, theCompany has entered into several forward foreign currency contracts in 2005 tohedge foreign currency exchange exposure between the Indian rupee and the U.S.dollar. As of December 31, 2005, the aggregate fair market value ofoutstanding forward foreign currency contracts was $8,276, with maturity datesranging from March 2006 through July 2006. The Company accounts forderivative instruments in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” The forward foreign currencycontracts do not qualify for hedge accounting under SFAS No. 133 and,accordingly, are marked-to-market and recorded at fair value in “Accruedliabilities” in the consolidated balance sheet. Unrealized gains and losses arereported in “Foreign exchange loss” in the consolidated statements of income.An unrealized loss of $183 was recognized in 2005.

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**7.**                 Lines of Credit

As of December 31, 2005, the Company had a creditfacility with Silicon Valley Bank, which provided for a $7,500 revolving lineof credit. The Company had $5,022 and $7,500 available under this facility at December 31,2005 and 2004, respectively. Borrowings under the revolving line of credit werelimited to the borrowing base, as defined in the credit facility, which bearinterest at prime. The credit facility also provided for a $3,500 sub limit forletters of credit. At December 31, 2005 the Company had $2,478 letters ofcredit outstanding in this facility in lieu of security deposits for officeleases in Rosemont, Illinois and New York, New York. The credit facility alsorequired the Company to maintain certain financial covenants, including aminimum quick ratio.

KSIL has a credit facilitywith Citibank India which provides for a line of credit of approximately $2,912and matures in December 2006 and with HSBC Bank in India for approximately$885 (40,000 rupees) which matures in September 2006. Both credit facilityprovides for bank guarantees and letters of credit in foreign currency. As of December 31,2005, KSIL had a bank guarantee of approximately $962 outstanding and $644 inopen letters of credit with Citibank India. As of December 31, 2005, KSILhad a bank guarantee of approximately $50 outstanding and $279 in open lettersof credit with HSBC Bank in India. There were no outstanding letters of creditat December 31, 2004. In June 2005, KSIL signed an InternationalForeign Exchange Master Agreement (IFEMA) with HSBC Bank in India to provide aforeign exchange facility of approximately $11.1 million to hedge trade relatedforeign exchange exposure. As of December 31, 2005, KSIL had approximately$8.3 million in foreign exchange contracts covered by this facility. Ourforeign exchange facility is unsecured and contains provisions which requireprior approval by HSBC Bank in India on changes to our capital structure,making certain investments, and incurring additional debt. In addition, theHSBC bank facility imposes restrictions on dividend payments and net workingcapital.

**8.**                 AccruedLiabilities

Accruedliabilities consist of the following:

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Accrued bonus and  commissions           |       | $                     | 4,096      |   | $ | 9,833 |   |
| Accrued vacation                         |       | 3,272                 |       | 2,694 |   |
| Accrued salaries,  withholding and taxes |       | 3,159                 |       | 3,898 |   |
| Accrued facility  expansion expenses     |       | 3,123                 |       | 425 |   |
| Other                                    |       | 8,079                 |       | 7,575 |   |
|                                     |       | $                     | 21,729     |   | $ | 24,425 |   |

 

**9.**                 Income Taxes

Incomebefore income taxes based on the geographic location to which such income isattributed is as follows:

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States |       | $                                          | 21,507     |   | $ | 14,501 |   | $ | 6,044 |   |
| Foreign       |       | 23,108                                     |       | 19,532 |   | 3,943 |   |
|          |       | $                                          | 44,615     |   | $ | 34,033 |   | $ | 9,987 |   |

 

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Thecomponents of income tax expense (benefit) are as follows:

| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:   |       |                                       |       |   |   |   |   |
| Federal    |       | $                                          | 9,260      |   | $ | 4,782 |   | $ | 729 |   |
| State      |       | 1,995                                      |       | 755 |   | 127 |   |
| Foreign    |       | 1,437                                      |       | 692 |   | 215 |   |
| Deferred   |       | (1,217                                     | )          | 450 |   | (2,523 | ) |
|       |       | $                                          | 11,475     |   | $ | 6,679 |   | $ | (1,452 | ) |

 

Incometax expense (benefit) differs from the U.S. federal statutory rate due to thefollowing items:

| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Provision at U.S.  federal statutory rate  |       | $                                          | 15,649     |   | $ | 11,571 |   | $ | 3,396 |   |
| State taxes, net  of federal effect        |       | 1,200                                      |       | 660 |   | 242 |   |
| Foreign tax  holiday                       |       | (7,037                                     | )          | (5,922 | ) | (1,637 | ) |
| Undistributed  earnings of SSS             |       | 234                                        |       | (212 | ) | (510 | ) |
| Foreign tax  credit                        |       | —                                     |       | (200 | ) | (259 | ) |
| Non-deductible  items                      |       | 273                                        |       | 92 |   | 470 |   |
| Change in  valuation allowance             |       | 241                                        |       | (43 | ) | (2,772 | ) |
| Foreign deferred  taxes out of tax holiday |       | (244                                       | )          | — |   | — |   |
| Tax reserves                               |       | 1,697                                      |       | 521 |   | 100 |   |
| Other                                      |       | (538                                       | )          | 212 |   | (482 | ) |
|                                       |       | $                                          | 11,475     |   | $ | 6,679 |   | $ | (1,452 | ) |

 

In determining tax provisions, the Company alsoprovides for tax contingencies based on the Company’s assessment of futureregulatory reviews of filed tax returns. Tax reserves, which are recorded inincome taxes payable, are based on management’s estimates and are subject torevision as additional information becomes available.

Total taxes paid by the Company were $2,045, $10,851and $743 in 2005, 2004 and 2003, respectively.

The Company’s Indian subsidiary, KSIL, operates threesoftware export units which, under the Indian Income Tax Act of 1961, areentitled to claim various tax holidays for a period of up to ten years withrespect to its export profits. Substantially all of the earnings of KSIL areattributable to export profits and, therefore are currently substantiallyexempt from Indian income tax. These tax holidays on one of the units ended on March 2005.The remainder of the tax holidays will remain in place until March 31,2009, at which time the Company expects its effective tax rate to increase toapproximately 37.0%. The effect of the income tax holiday was to reduce incometax expense in 2005, 2004 and 2003 and increase net income in 2005, 2004 and2003 by approximately $6,845, $5,099 and $1,742 respectively, and increasediluted income per share in 2005, 2004 and 2003 by $0.18, $0.15 and $0.06,respectively.

The Government of India recently enacted new transferpricing rules and began audits of companies, including the Company, which aresubject to the new rules. The Company is uncertain whether the audits willresult in adjustments to its Indian taxable income given the limited precedentsin applying the new rules. To the extent the Company’s income in India isadjusted upon audit, such adjustments would not be exempt from tax under thetax holiday and would increase the Company’s Indian tax liability and decreaseits net income.

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No provision for U.S. income taxes has been made onthe undistributed earnings of consolidated foreign subsidiaries as suchearnings are considered to be permanently reinvested overseas. AtDecember 31, 2005, the undistributed earnings amounted to $42,550.Determination of the amount of unrecognized deferred tax liability on theundistributed earnings is not practicable. In addition, no provision or benefitfor U.S. income taxes has been made on foreign currency translationadjustments.

Undistributed earnings of the Company’s investment inSSS amounted to approximately $5,112 at December 31, 2005. Upondistribution of those earnings in the form of dividends or otherwise, theCompany expects to have foreign tax credits available to offset the majority ofthe resulting federal income tax liability. The Company has recorded a deferredtax liability at December 31, 2005 for the difference in statutory taxrates between the United States and the United Kingdom.

Thetax effects of temporary differences of assets and liabilities between incomeand financial reporting are as follows:

| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax assets:               |       |                  |       |   |   |
| Net operating  loss carry forwards |       | $                     | 2,854      |   | $ | 1,884 |   |
| Capital loss  carry forwards       |       | 256                   |       | 250 |   |
| Accrued vacation                   |       | 731                   |       | 719 |   |
| Allowance for  doubtful accounts   |       | 284                   |       | 406 |   |
| Stock  compensation expense        |       | 935                   |       | 1,187 |   |
| Foreign tax  credits               |       | 154                   |       | — |   |
| Other                              |       | 842                   |       | 97 |   |
|                               |       | 6,056                 |       | 4,543 |   |
| Deferred tax  liabilities:         |       |                  |       |   |   |
| Depreciation                       |       | (809                  | )          | (509 | ) |
| Intangibles                        |       | (1,187                | )          | — |   |
|                               |       | 4,060                 |       | 4,034 |   |
| Valuation  allowance               |       | (3,401                | )          | (2,290 | ) |
| Net deferred tax asset             |       | $                     | 659        |   | $ | 1,744 |   |

 

At December 31, 2005, the Company has foreign netoperating loss carry forwards of approximately $10,673 which may be carriedforward indefinitely. These operating loss carry forwards are subject to auditby the various taxing authorities.

The Company established avaluation allowance at December 31, 2005 and 2004, due to uncertaintyregarding the realization of certain deferred tax assets, principally the netoperating loss carry forwards in certain foreign countries and the capital losscarry forward because the Company does not have an established history ofprofitability in the respective foreign tax jurisdictions and does not have anestablished history of generating capital gains in the United States.

**10.**          LeaseCommitments

The Company leases various facilities and computerequipment under noncancelable operating leases. Total rent expense during theyear ended December 31, 2005, 2004 and 2003, was $3,833, $2,936 and$1,678, respectively.

Future minimum paymentsunder non cancelable operating leases with terms in excess of one year are$3,412 in 2006, $1,450 in 2007, $726 in 2008, $748 in 2009, $784 in 2010 and$4,623 thereafter.

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**11.**          BenefitPlans

Kanbay Incorporated, a wholly-owned subsidiaryof the Company, sponsors a defined-contribution plan that qualifies underSection 401(k) of the Internal Revenue Code. The plan covers alleligible employees of Kanbay Incorporated. Any subsidiary or affiliate, asdefined in the plan document, of Kanbay Incorporated may also adopt the planwith the Company’s consent. Participants in the plan may contribute up to 15%of their before-tax earnings to the plan. In addition, Kanbay Incorporated matches40% of employee contributions up to 6% of the employee’s annual salary. TheCompany’s expense related to the plan was $598, $454 and $296 during the yearended December 31, 2005, 2004 and 2003, respectively.

KSIL has an employee benefit plan that coverssubstantially all India-based employees. The employees’ provident fund,pension and family pension plans are statutory defined contribution retirementbenefit plans. Under the plans, employees contribute up to 12% of their basecompensation, which is matched by an equal contribution by the company anddeposited with the Regional Provident Fund Commissioner. The expense recognizedwas $1,743, $1,173 and $695 for the years ended December 31, 2005, 2004and 2003, respectively.

KSIL has a statutorygratuity plan that is a statutory post-employment benefit plan. The expenserecognized was $448, $165 and $146 for the years ended December 31, 2005,2004, and 2003, respectively, based on the actuarial valuations.

**12.**          Stockholders’Equity

On June 15, 2004, the Company effectuated therecapitalization of its capital structure. The recapitalization consisted of (a) thevoluntary conversion of all outstanding shares of the Company’s Series A-1and A-2 Preferred Stock into shares of the Company’s Class A CommonStock; (b) the reclassification of all of its then outstanding shares of Class ACommon Stock into a newly-reclassified and redesignated class of CommonStock; (c) the authorization of a new class of preferred stock; and (d) a1.8627 for 1 stock split of the Company’s Common Stock.

As indicated in Note 1, all references in thefinancial statements to Common Stock including number of shares authorized andoutstanding, price per share, per share amounts and stock option plan data havebeen restated to reflect the split.

On July 27, 2004, the Company completed theinitial public offering of shares of its common stock. In connection with ourinitial public offering, the Company issued and sold 5,362,500 shares of itscommon stock at an offering price of $13.00 per share. After deductingunderwriting discounts, commissions and estimated offering-relatedexpenses, the initial public offering resulted in net proceeds to the Companyof approximately $60 million.

On December 13, 2004, the Company completed aregistered public offering of shares of its common stock. In connection withthis offering, certain of our stockholders sold an aggregate of 5,000,000shares of common stock at a public offering price of $26.50 per share. On December 28,2004, certain of these selling stockholders sold an additional 750,000 sharesof common stock at the public offering price of $26.50 per share upon theexercise of the underwriters’ over-allotment option. The Company did notreceive any proceeds from this registered public offering.

Holders of Series A-1 and Series A-2Preferred Stock (collectively, the Preferred Stock) were entitled to receive acash dividend of $.0005 per share per day. Each share of Series A-1Preferred Stock was convertible at the option of the holder at any time into 1.8627shares of common stock. Each share of Series A-2 Preferred Stock wasconvertible at the option of the holder at any time into 1.8627 shares ofcommon stock. As described above, on June 15, 2004, all outstanding sharesof Series A-1 and Series A-2 Preferred Stock wereconverted into common stock. Upon liquidation, holders of Preferred Stock wereentitled to receive, prior to any distributions with respect to common stock,an amount equal to the greater of $3.00 per share plus any accrued but unpaid dividendsor the amount to which each share of Preferred Stock would otherwise beentitled if such share were converted into common stock immediately prior to 

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such liquidation. Upon therecapitalization and initial public offering of the Company’s common stock alldividends in arrears were foregone.

Holders of Common Stock are entitled to one vote foreach share held. Holders of Preferred Stock were entitled to the number ofvotes, which the holder would cast if all shares of Preferred Stock wereconverted into common stock.

At December 31, 2005, the Company had thefollowing warrants outstanding: (1) warrants to purchase 223,524 shares ofcommon stock at an exercise price of $3.36 per share which expire in October 2009;and (2) warrants to purchase 372,540 shares of common stock at an exerciseprice of $7.64 per share which expire in September 2010.

An aggregate of 9,124,863shares of common stock are reserved for: (1) the exercise of warrants(596,064 shares); (2) future purchases under the employee stock purchaseplan (482,627); (3) the exercise of outstanding stock options (6,431,155);and (4) future equity grants under the stock incentive plan (1,615,017).

**13.**          StockIncentive and Stock Purchase Plans

Stock options, restricted stock, stock appreciationrights and performance shares may be granted to employees, outside directors,and consultants under a stock incentive plan with varying agreements based onthe provisions of the plan at the time of grant. Generally, outstanding optionsvest over periods not exceeding four years and expire either ten years afterthe date of grant or five years after vesting depending on the agreement. Inthe event of a termination of employment (other than a result of death ordisability), the vested portion of an Employee’s options is forfeited either 60or 90 days after such termination depending on the agreement and theunvested portion is immediately forfeited. In the event of a termination ofemployment as a result of death or disability, the unvested portion of an Employee’soptions vest upon such event and the options are forfeited 1 year aftersuch termination. In any case, the plan administrator may authorize a change tosuch forfeiture provisions. Generally restricted stock vests over periods notexceeding four years. During the restriction period, participants holdingrestricted stock may exercise full voting rights with respect to the underlyingcommon stock.

Asummary of stock incentive plan activity is as follows:

| ** **                    | ** ** | **Shares  Available  for Grant** | ** ** | **Options  Outstanding** | ** ** | **Price per  Share** | ** **    | **Weighted-  average  Exercise  Price** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------|------------|---------------------------|---------------|-----------------------------------------|------------|
| December 31,  2002       |       | 1,660,114                             |       | 5,143,054                |       | $                         | 0.90 - 3.46   |                                    |       | $ | 1.71 |   |   |
| Options granted               |       | (251,464                              | )          | 251,464                  |       | 3.46 - 4.07               |          |                                    | 3.59       |   |   |
| Options exercised             |       |                                  |       | (440,066                 | )          | 0.90 - 1.45               |          |                                    | 1.27       |   |   |
| Options canceled              |       | 332,538                               |       | (332,538                 | )          | 0.90 - 3.46               |          |                                    | 1.45       |   |   |
| December 31,  2003       |       | 1,741,188                             |       | 4,621,914                |       | 0.90 - 4.07               |          |                                    | 1.88       |   |   |
| Additional shares  authorized |       | 4,077,362                             |       |                     |       |                      |          |                                    |       |   |   |
| Options granted               |       | (4,224,498                            | )          | 4,224,498                |       | 13.00 - 27.54             |          |                                    | 13.06      |   |   |
| Options exercised             |       |                                  |       | (589,102                 | )          | 0.90 - 1.61               |          |                                    | 1.25       |   |   |
| Options canceled              |       | 68,927                                |       | (68,927                  | )          | 1.45 - 13.00              |          |                                    | 9.25       |   |   |
| December 31,  2004       |       | 1,662,979                             |       | 8,188,383                |       | 0.90 - 27.54              |          |                                    | 7.65       |   |   |
| Options granted               |       | (469,133                              | )          | 469,133                  |       | 14.44 - 30.23             |          |                                    | 19.09      |   |   |
| Restricted stock  granted     |       | (40,000                               | )          |                     |       | 16.46                     |          |                                    |       |   |   |
| Options exercised             |       |                                  |       | (1,765,190               | )          | 0.90 - 13.00              |          |                                    | 2.85       |   |   |
| Options canceled              |       | 461,171                               |       | (461,171                 | )          | 0.90 - 26.38              |          |                                    | 12.05      |   |   |
| December 31, 2005        |       | 1,615,017                             |       | 6,431,155                |       | $                         | 0.90 - $30.23 |                                    |       | $ | 9.49 |   |   |

 

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Asummary of stock options exercisable is as follows:

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock options  exercisable       |       | 3,007,409             |       | 3,368,494 |   | 3,384,393 |   |
| Weighted-average  exercise price |       | $5.44                 |       | $2.04 |   | $1.54 |   |

 

Thefollowing table summarizes information about options outstanding at December 31,2005:

|        | **Number Outstanding** | ** ** | **    Average Remaining      Contractual Life** | ** ** | **    Weighted-average      Exercise Price** | ** **     | **Options  Exercisable** | ** ** |
|--------|-----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|----------------|--------------------------|------------|
|        |                        | 151,194    |                                                                                              |       |                                                                                      | 3.3 years |                     |       |   | $ | 0.90 |   |   | 151,194 |   |
|   |                        | 777,588    |                                                                                              |       |                                                                                      | 3.7 years |                     |       |   | 1.45 |   |   | 777,588 |   |
|        |                        | 411,050    |                                                                                              |       |                                                                                      | 4.9 years |                     |       |   | 1.69 |   |   | 411,050 |   |
|   |                        | 1,013,899  |                                                                                              |       |                                                                                      | 6.2 years |                     |       |   | 3.46 |   |   | 743,098 |   |
|        |                        | 53,554     |                                                                                              |       |                                                                                      | 7.7 years |                     |       |   | 4.07 |   |   | 25,613 |   |
|   |                        | 3,533,237  |                                                                                              |       |                                                                                      | 6.0 years |                     |       |   | 13.00 |   |   | 892,991 |   |
|        |                        | 23,500     |                                                                                              |       |                                                                                      | 6.2 years      |                     |       |   | 22.51 |   |   | 5,875 |   |
|   |                        | 467,133    |                                                                                              |       |                                                                                      | 7.5 years |                     |       |   | 19.09 |   |   | — |   |
|        |                        | 6,431,155  |                                                                                              |       |                                                                                      |           |                     |       |   |   |   |   | 3,007,409 |   |

 

A grant of 40,000 shares of restricted stock was madeon November 10, 2005 with a fair value of $16.46 per share and 25% vestingper year from date of grant.

The Company has anemployee stock purchase plan which became effective on January 1, 2005. Theplan provides for eligible employees to purchase, by payroll withholding,shares of common stock at a 10% discount from the market price as of the end ofeach semi-annual accumulation period. Accumulation periods end June 30 andDecember 31 each year. In early July 2005, 17,373 shares were issuedafter the end of the June 30 accumulation period.

**14.**          SegmentInformation and Significant Customers

The Company operates in one line of business—providinginformation management consulting services. The Company earns a significantportion of its revenues from a limited number of customers. During the yearsended December 31, 2005, 2004 and 2003, its largest customer accounted for53.1%, 55.6% and 53.2% of net revenues and its second largest customeraccounted for 11.6%, 10.3% and 13.0% of net revenues. Both of these customersare stockholders of the Company. The Company’s five largest customers accountedfor 75.6%, 80.4% and 80.7% of net revenues for the years ended December 31,2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, the twolargest customers collectively accounted for 64.7% and 42.2% of accountsreceivable, respectively.

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**15.**          GeographicInformation

TheCompany operates in various foreign countries. Net revenues and total assets inthese various countries are as follows:

| ** **     | ** ** | **Year ended December 31, 2005** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **Net  Revenues**                                    | ** ** | **Intercompany  Elimination** | ** ** | **Consolidated  Net Revenues** | ** ** |
| Australia      |       | $                                                    | 7,414      |   |   | $ | — |   |   |   | $ | 7,414 |   |   |
| Canada         |       | 114                                                  |       |   | — |   |   |   | 114 |   |   |
| Hong Kong      |       | 2,703                                                |       |   | — |   |   |   | 2,703 |   |   |
| India          |       | 85,317                                               |       |   | (84,000 | ) |   |   | 1,317 |   |   |
| Japan          |       | 913                                                  |       |   | — |   |   |   | 913 |   |   |
| Singapore      |       | 6,143                                                |       |   | — |   |   |   | 6,143 |   |   |
| United Kingdom |       | 7,370                                                |       |   | — |   |   |   | 7,370 |   |   |
| United States  |       | 205,041                                              |       |   | (538 | ) |   |   | 204,503 |   |   |
|           |       | $                                                    | 315,015    |   |   | $ | (84,538 | ) |   |   | $ | 230,477 |   |   |

 

| ** **     | ** ** | **Year ended December 31, 2004** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **Net  Revenues**                                    | ** ** | **Intercompany  Elimination** | ** ** | **Consolidated  Net Revenues** | ** ** |
| Australia      |       | $                                                    | 11,797     |   |   | $ | — |   |   |   | $ | 11,797 |   |   |
| Hong Kong      |       | 1,209                                                |       |   | — |   |   |   | 1,209 |   |   |
| India          |       | 58,674                                               |       |   | (58,657 | ) |   |   | 17 |   |   |
| Japan          |       | 448                                                  |       |   | — |   |   |   | 448 |   |   |
| Singapore      |       | 4,987                                                |       |   | — |   |   |   | 4,987 |   |   |
| United Kingdom |       | 7,897                                                |       |   | — |   |   |   | 7,897 |   |   |
| United States  |       | 156,251                                              |       |   | — |   |   |   | 156,251 |   |   |
|           |       | $                                                    | 241,263    |   |   | $ | (58,657 | ) |   |   | $ | 182,606 |   |   |

 

| ** **     | ** ** | **Year ended December 31, 2003** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **Net  Revenues**                                    | ** ** | **Intercompany  Elimination** | ** ** | **Consolidated  Net Revenues** | ** ** |
| Australia      |       | $                                                    | 10,583     |   |   | $ | — |   |   |   | $ | 10,583 |   |   |
| Hong Kong      |       | 1,267                                                |       |   | — |   |   |   | 1,267 |   |   |
| India          |       | 28,342                                               |       |   | (28,284 | ) |   |   | 58 |   |   |
| Japan          |       | 742                                                  |       |   | — |   |   |   | 742 |   |   |
| Singapore      |       | 1,939                                                |       |   | — |   |   |   | 1,939 |   |   |
| United Kingdom |       | 4,310                                                |       |   | — |   |   |   | 4,310 |   |   |
| United States  |       | 88,254                                               |       |   | — |   |   |   | 88,254 |   |   |
|           |       | $                                                    | 135,437    |   |   | $ | (28,284 | ) |   |   | $ | 107,153 |   |   |

 

| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Total assets:** |       |                  |       |   |   |
| Australia         |       | $                     | 1,308      |   | $ | 4,328 |   |
| Canada            |       | 95                    |       | 91 |   |
| Hong Kong         |       | 2,231                 |       | 305 |   |
| India             |       | 47,229                |       | 22,534 |   |
| Japan             |       | 761                   |       | 269 |   |
| Singapore         |       | 3,809                 |       | 3,622 |   |
| United Kingdom    |       | 3,590                 |       | 4,262 |   |
| United States     |       | 158,453               |       | 144,755 |   |
|              |       | $                     | 217,476    |   | $ | 180,166 |   |

 

59

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| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Net long-lived assets:** |       |                  |       |   |   |
| Australia                  |       | $                     | 128        |   | $ | 328 |   |
| Canada                     |       | 1                     |       | 1 |   |
| Hong Kong                  |       | 104                   |       | 36 |   |
| India                      |       | 40,301                |       | 16,707 |   |
| Japan                      |       | 11                    |       | 22 |   |
| Singapore                  |       | 53                    |       | 53 |   |
| United Kingdom             |       | 4                     |       | 5 |   |
| United States              |       | 37,005                |       | 53,917 |   |
|                       |       | $                     | 77,607     |   | $ | 71,069 |   |

 

**16.**          SubsequentEvents

On March 9, 2006, the Company completed the acquisitionof Adjoined Consulting, Inc., a privately held IT consulting firm based inMiami, Florida. The aggregate purchase price paid to former Adjoinedstockholders was approximately $164.5 million, subject to certain adjustments,which consisted of cash in the amount of approximately $95.4 million andapproximately 4,254,839 shares of our common stock. The Company believes theacquisition will enhance its competitive position in the IT services industryand expand its service offerings. The Company will account for the acquisitionas a purchase transaction in the first quarter of 2006.

On March 9, 2006, theCompany entered into a credit agreement with LaSalle Bank National Association(“LaSalle”). The credit agreement provides for a $50 million term loan, and arevolving credit facility of up to $75 million, which includes subfacilitiesfor swing-line loans and letters of credit. The Company’s obligations under thecredit facility are secured by substantially all of its assets and a firstpriority pledge of the outstanding equity securities of its domesticsubsidiaries, and 65% of the outstanding equity securities of certain of itsforeign subsidiaries. Loans outstanding under the credit agreement bearinterest at the LIBOR rate or, at the Company’s option, an alternate base rate,in each case, plus an applicable margin based on our total leverage ratio. Thecredit agreement includes various covenants, including covenants that requirethe Company to maintain minimum fixed charge and asset coverage ratios and amaximum total leverage ratio. In addition, the credit agreement containslimitations on the Company’s ability to dispose of assets, incur indebtedness,create liens, make certain investments, pay dividends and merge or consolidate.The credit agreement will replace the Company’s existing line of credit withSilicon Valley Bank, which the Company intends to terminate by the secondquarter of 2006.

**17.**          QuarterlyFinancial Information (Unaudited)

Thefollowing table represents unaudited statement of income data for our mostrecent eight fiscal quarters. You should read the following table inconjunction with our consolidated financial statements and related notesappearing elsewhere in this report. The results of operations of any quarterare not necessarily indicative of the results that may be expected for anyfuture period.

| ** **                         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
|------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                         | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** |
| Net revenues                       |       | $                | 61,048     |              | $          | 58,951 |   | $ | 57,018 |   | $ | 53,460 |   | $ | 50,878 |   | $ | 49,973 |   | $ | 44,750 |   | $ | 37,005 |   |
| Gross profit                       |       | $                | 29,745     |              | $          | 27,882 |   | $ | 26,289 |   | $ | 25,363 |   | $ | 24,065 |   | $ | 23,561 |   | $ | 20,601 |   | $ | 18,240 |   |
| Net income                         |       | $                | 8,944      |              | $          | 8,711 |   | $ | 7,278 |   | $ | 8,207 |   | $ | 8,037 |   | $ | 7,558 |   | $ | 6,430 |   | $ | 5,329 |   |
| Income per share of  common stock: |       |             |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                              |       | $                | 0.26       |              | $          | 0.25 |   | $ | 0.21 |   | $ | 0.25 |   | $ | 0.25 |   | $ | 0.24 |   | $ | 0.29 |   | $ | 0.25 |   |
| Diluted                            |       | $                | 0.24       |              | $          | 0.23 |   | $ | 0.19 |   | $ | 0.22 |   | $ | 0.21 |   | $ | 0.22 |   | $ | 0.21 |   | $ | 0.18 |   |

 

60

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and ShareholdersKanbay International, Inc.

We have audited the accompanying consolidated balancesheets of Kanbay International, Inc. as of December 31, 2005 and2004, and the related consolidated statements of income, changes instockholders’ equity and cash flows for each of the three years in the periodended December 31, 2005. Our audits also included the financial statementschedule listed in the index at Item 15(a). These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Kanbay International, Inc. at December 31, 2005 and 2004,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of KanbayInternational, Inc.’s internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 14, 2006 expressed an unqualified opinionthereon. 

/s/ Ernst & YoungLLP

Chicago, IllinoisMarch 14, 2006

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**Report of Independent Registered Public AccountingFirm on Internal Control Over Financial Reporting**

The Board of Directors and ShareholdersKanbay International, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Kanbay International, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2005, based oncriteria established in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (the COSO criteria).Kanbay International, Inc.’s  managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and proceduresthat (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

As indicated in the accompanying Management’s Reporton Internal Control over Financial Reporting, management’s assessment of andconclusion on the effectiveness of internal control over financial reportingdid not include the internal controls of Accurum, Inc. and Pune Software ParkPrivate Limited, which are included in the 2005 consolidated financialstatements of Kanbay International, Inc. Accurum, Inc. constituted $13,019 and$1,193 of total and net assets, respectively, as of December 31, 2005 and$12,692 and $1,193 of revenues and net income, respectively, for the year thenended. Pune Software Park Private Limited constituted $4,831 and $(31) of totaland net assets, respectively, as of December 31, 2005 and $0 and $(31) ofrevenues and net income (loss), respectively, for the year then ended. KanbayInternational, Inc. completed its acquisitions of Accurum, Inc. and PuneSoftware Park Private Limited on March 1, 2005 and October 19, 2005,respectively, and as permitted by the U.S. Securities and Exchange Commission’sguidance, management did not assess the effectiveness of internal control overfinancial reporting of Accurum, Inc. and Pune Software Park Private Limited.Our audit of internal control over financial reporting of Kanbay International,Inc. also did not include an evaluation of the internal control over financialreporting of Accurum, Inc. and Pune Software Park Private Limited.

62

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In our opinion, management’s assessment that KanbayInternational, Inc. maintained effective internal control over financialreporting as of December 31, 2005, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, KanbayInternational, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, basedon the COSO criteria.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Kanbay International, Inc.as of December 31, 2005 and 2004, and the related consolidated statementsof income, changes in stockholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2005 and our report dated March 14,2006 expressed an unqualified opinion thereon. 

/s/ Ernst & Young LLP

Chicago, IllinoisMarch 14, 2006

63

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**SSS HoldingsCorporation Limited**

**REPORTOF INDEPENDENT AUDITORS**

**To: The Board ofDirectors**

**SSS HoldingsCorporation Limited**

We have audited the accompanying consolidated balancesheets of SSS Holdings Corporation Limited as of December 31, 2005 and 2004, andthe related consolidated profit and loss accounts and statements of totalrecognized gains and losses, cash flows and movements in shareholders’ fundsfor each of the three years in the period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit. 

We conducted our audits in accordance with generallyaccepted auditing standards in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion. 

In our opinion, based onour audits, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of SSS HoldingsCorporation Limited at December 31, 2005 and 2004, and the consolidatedresults of its operations and its consolidated cash flows for each of the threeyears in the period ended December 31, 2005 in conformity with accountingprinciples generally accepted in the United Kingdom which differ in certainrespects from United States generally accepted accounting principles (see Note26 of Notes to the consolidated financial statements.

/s/ ERNST & YOUNG LLP

Manchester, EnglandMarch 14, 2006

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**SSS HOLDINGS CORPORATION LIMITEDConsolidated profit andloss accounts**

| ** **                                         | ** ** | **Note**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Turnover—continuing                           |       | 2          |       | 33,482,295 |       | 34,869,258 |       | 31,984,143 |       |
| Cost of sales                                      |       |       |       | 20,109,021 |       | 22,320,286 |       | 21,060,709 |       |
| **Gross profit**                                   |       |       |       | 13,373,274 |       | 12,548,972 |       | 10,923,434 |       |
| Administrative expenses                            |       |       |       | 9,378,640  |       | 8,470,601  |       | 8,823,062  |       |
| **Operating profit**                               |       | 3          |       | 3,994,634  |       | 4,078,371  |       | 2,100,372  |       |
| Interest receivable and similar income             |       |       |       | 46,488     |       | 50,249     |       | 152,076    |       |
| Interest payable and similar charges               |       | 6          |       | 31,644     |       | —     |       | 81,704     |       |
| **Profit on ordinary  activities before taxation** |       |       |       | 4,009,478  |       | 4,128,620  |       | 2,170,744  |       |
| Taxation on profit on ordinary activities          |       | 7          |       | 1,538,114  |       | 1,288,702  |       | 447,619    |       |
| **Profit on ordinary  activities after taxation**  |       |       |       | 2,471,364  |       | 2,839,918  |       | 1,723,125  |       |
| Minority interest                                  |       |       |       | —     |       | —     |       | 11,692     |       |
| **Profit for the financial  year**(1)              |       | 16,17      |       | 2,471,364  |       | 2,839,918  |       | 1,711,433  |       |

----

(1)          A summaryof the significant adjustments to profit for the year that would be required ifUnited States generally accepted accounting principles were applied instead ofthose generally accepted in the United Kingdom is set out in note 26 tothe consolidated accounts.

The notes on pages 69 to 82 form part of these consolidated accounts.

65

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**SSS HOLDINGS CORPORATION LIMITEDConsolidated statementof total recognised gains and losses**

| ** **                                           | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Profit for the financial year                        |       | 2,471,364  |       | 2,839,918  |       | 1,711,433  |       |
| Currency translation differences on foreign currency |       |       |       |       |       |       |       |
| Net investment                                       |       | (18,650    | )          | (82,216    | )          | 48,041     |       |
| **Total recognised gains and losses for the year**   |       | 2,452,714  |       | 2,757,702  |       | 1,759,474  |       |

----

The statement of comprehensiveincome required under United States generally accepted accounting principles isset out in note 26 to the consolidated accounts

The notes on pages 69 to 82 form part of these consolidated accounts.

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**SSS HOLDINGS CORPORATION LIMITEDConsolidated balance sheets**

| ** **                                         | ** ** | **Note**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **£** | ** ** | **£** | ** ** |
| **Fixed  assets**                                  |       |       |       |       |       |       |       |   |   |
| Intangible assets                                  |       |       | 9          |       |       | 1,385,566  |       | 1,350,755 |   |
| Tangible assets                                    |       |       | 10         |       |       | 3,153,915  |       | 2,662,300 |   |
| Investments                                        |       |       | 11         |       |       | —     |       | — |   |
|                                               |       |       |       |       |       | 4,539,481  |       | 4,013,055 |   |
| **Current  assets**                                |       |       |       |       |       |       |       |   |   |
| Debtors                                            |       |       | 12         |       |       | 6,538,331  |       | 7,153,047 |   |
| Cash at bank and in hand                           |       |       |       |       |       | 1,818,796  |       | 466,412 |   |
|                                               |       |       |       |       |       | 8,357,127  |       | 7,619,459 |   |
| **Creditors: amounts falling due within one year** |       |       | 13         |       |       | 4,682,741  |       | 3,249,185 |   |
| **Net current assets**                             |       |       |       |       |       | 3,674,386  |       | 4,370,274 |   |
| **Total assets less current liabilities**          |       |       |       |       |       | 8,213,867  |       | 8,383,329 |   |
| **Provisions  for liabilities and charges**        |       |       |       |       |       |       |       |   |   |
| Deferred taxation                                  |       |       | 14         |       |       | 99,111     |       | — |   |
|                                               |       |       |       |       |       | 8,114,756  |       | 8,383,329 |   |
| **Capital  and reserves**                          |       |       |       |       |       |       |       |   |   |
| Called up share capital                            |       |       | 15         |       |       | 919        |       | 920 |   |
| Share premium account                              |       |       | 16         |       |       | 67,605     |       | 81,534 |   |
| Capital reserve                                    |       |       | 16         |       |       | 9,962      |       | 9,962 |   |
| Profit and loss account                            |       |       | 16         |       |       | 8,036,270  |       | 8,279,221 |   |
| **Equity shareholders’ funds(1)**             |       |       | 17         |       |       | 8,114,756  |       | 8,371,637 |   |
| **Minority interests**                             |       |       | 11         |       | ** ** | **—** |       | 11,692 |   |
|                                               |       |       |       |       |       | 8,114,756  |       | 8,383,329 |   |

----

(1)          A summary of thesignificant adjustments to equity shareholders’ funds that would be required ifUnited States generally accepted accounting principles were applied instead ofthose generally accepted in the United Kingdom is set out in note 26 tothe consolidated accounts.

The notes on pages 69 to 82 form part of these consolidated accounts.

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**SSS HOLDINGS CORPORATION LIMITEDConsolidated cash flowstatements**

| ** **                                    | ** ** | **Note**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| **Net cash inflow from operating activities** |       |       | 18         |       |       |       | 6,948,523  |       |       |   | 3,090,828 |   |   |   | 1,593,833 |   |   |
| **Returns on investments**                    |       |       | 19         |       |       |       | 14,844     |       |       |   | 50,249 |   |   |   | 70,372 |   |   |
| **Corporation tax paid**                      |       |       |       |       |       |       | 1,307,917  |       |       |   | (1,580,543 | ) |   |   | (651,892 | ) |   |
| **Capital expenditure**                       |       |       | 19         |       |       |       | (1,734,984 | )          |       |   | (554,587 | ) |   |   | (497,513 | ) |   |
| **Acquisitions**                              |       |       | 20         |       |       |       | (587,130   | )          |       |   | (427,036 | ) |   |   | (337,182 | ) |   |
| **Financing**                                 |       |       | 19         |       |       |       | 28,225     |       |       |   | 9,905 |   |   |   | 13,930 |   |   |
| **Equity dividends paid**                     |       |       |       |       |       |       | (961,865   | )          |       |   | (1,560,465 | ) |   |   | (1,516,523 | ) |   |
| **Increase/(decrease)  in cash**              |       |       |       |       |       |       | 2,399,696  |       |       |   | (971,649 | ) |   |   | (1,324,975 | ) |   |

 

**Reconciliation of net cashflow to movement in net funds**(see note 19)

| ** **                                  | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| **Increase/(decrease) in cash in the year** |       |       | 2,399,696  |       |       |       | (971,649   | ) |   |   | (1,324,975 | ) |   |
| **Exchange differences**                    | ** ** | ** ** | **—** |       |       |       | (29,339    | ) |   |   | 11,721 |   |   |
| **Net funds at 1 January**                  |       |       | 377,484    |       |       |       | 2,777,180  |   |   |   | 1,776,192 |   |   |
| **Net funds at 31 December**                |       |       | 2,777,180  |       |       |       | 1,776,192  |   |   |   | 462,938 |   |   |

----

Thesignificant differences between the cash flow statements presented above andthose required under United States generally accepted accounting principles areset out in note 26 to the consolidated accounts.

The notes on pages 69 to 82 form part of these consolidated accounts.

68

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**SSS HOLDINGS CORPORATION LIMITEDNotes to the consolidatedaccounts**

**1       Accounting policies**

Theconsolidated accounts have been prepared under the historical cost conventionand are in accordance with applicable United Kingdom accounting standards. Theprincipal accounting policies are:

***Basis of consolidation***

Theconsolidated accounts incorporate the financial statements of SSS HoldingsCorporation Limited and its subsidiary undertakings (together “the group”) madeup to 31 December each year. The group uses the acquisition method ofaccounting to consolidate the results of subsidiary undertakings. The resultsof a subsidiary undertaking are included from the date of acquisition.

***Goodwill***

Goodwillarising on an acquisition of a subsidiary is the difference between the fairvalue of the consideration paid and the fair value of the assets andliabilities acquired. It is capitalised and amortised through the profit andloss account over the directors’ estimate of its useful economic life, which is15 years.

Negativegoodwill arising on consolidation on acquisitions pre 23 December 1998 iscredited to a capital reserve.

*Turnover*

Turnoverrepresents sales to external customers at invoiced amount less value added tax.Turnover is recognised as services are provided on a time basis in accordancewith the customers agreement.

*Depreciation*

Depreciationis provided to write off the cost, less estimated residual values, of all fixedassets, over their expected useful lives. It is calculated at the followingannual rates on a straight line basis:

| Fixtures and fittings and  office equipment | —   10%–20%                             |
|---------------------------------------------|-------------------------------------------------------------|
| Leasehold improvements                      | —   10% or the life of the lease, if shorter |
| Computer equipment                          | —   331¤3%                              |
| Motor vehicles                              | —   25%                                      |
| Nursery equipment                           | —   10%                                      |

 

*Deferred taxation*

Deferredtax balances are recognised in respect of all timing differences that haveoriginated but not reversed by the balance sheet date except that:

·       deferredtax is not recognised on timing differences arising on revalued propertiesunless the company has entered into a binding sale agreement and is notproposing to take advantage of rollover relief; and

·       the recognition of deferred taxassets is limited to the extent that the company anticipates to makesufficient taxable profits in the future to absorb the reversal of theunderlying timing differences.

Deferred tax balancesarising from underlying timing differences in respect of tax allowances onindustrial buildings are reversed if and when all conditions for retainingthose allowances have been met.

Deferred tax balances arenot discounted.

69

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*Pension costs*

Contributionsto defined contribution pension schemes are charged to the profit and lossaccount in the year in which they become payable.

*Investments*

Investmentsare stated at cost less any provision for a permanent diminution in value.

*Operating leases*

Annualrentals on operating leases are charged to the profit and loss account on astraight line basis over the term of the lease.

*Employee benefit trust*

The group is deemed to havecontrol of the assets, liabilities, income and costs of its Employee BenefitTrust (EBT). It has therefore been included in the financial statements of thecompany in accordance with UITF 32 “Employee benefit trusts and otherintermediate payment arrangements”.

Contributionsmade to the Trust are charged to the profit and loss account to the extent thatthe assets held by the Trust as a result of the contribution have beenunconditionally gifted to the beneficiaries or, if earlier, when a constructiveobligation has arisen and created a liability of the company. The value of anyassets held by the Trust that have not been unconditionally transferred tobeneficiaries is included within cash. In accordance with FRS 12 “Provisions,Contingent Liabilities and Contingent Assets”, constructive obligations toemployees in respect of past services to the business have been charged to theprofit and loss account in the period to which they relate.

*Government grants*

Grants relating to expenditureon tangible fixed assets are credited to the profit and loss account at thesame rate as the depreciation on the assets to which the grant relates. Thedeferred element of grants is included in creditors as deferred income.

Grantsof a revenue nature are credited to the profit and loss account in the year towhich they relate.

*Research anddevelopment*

Expenditure on pure and applied research is charged tothe profit and loss account in the year in which it is incurred.

Development costsare also charged to the profit and loss account in the year of expenditure, unlessindividual projects satisfy all of the following criteria:

·       theproject is clearly defined and related expenditure is separately identifiable;

·       theproject is technically feasible and commercially viable;

·       currentand future costs are expected to be exceeded by future sales; and

·       adequateresources exist for the project to be completed.

In such circumstances thecosts are carried forward and amortised over a period not exceeding      years commencing in the year the group starts tobenefit from the expenditure.

*Foreign Currency*

Transactions in foreigncurrencies are recorded at the rate ruling at the date of the transaction or atthe contracted rate if the transaction is covered by a forward foreign currencycontract. Monetary assets 

70

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andliabilities denominated in foreign currencies are retranslated at the rate ofexchange ruling at the balance sheet date or if appropriate at the forwardcontract rate. All differences are taken to the profit and loss account.

Thefinancial statements of overseas subsidiary undertakings are translated at therate of exchange ruling on the balance sheet date. The Exchange differencearising on the retranslation of opening net assets is taken directly toreserves.

*Dividends*

Inaccordance with FRS 21 “Events after the balance sheet date”, dividendsdeclared after the balance sheet date are not recognised as a liability at thebalance sheet date.

**2       Turnover**

Analysisby geographical area:

| ** **               | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| United Kingdom           |       |       | 30,136,581 |       |       |       | 31,081,389 |   |   |   | 28,334,719 |   |   |
| United States of America |       |       | 3,328,967  |       |       |       | 3,185,325  |   |   |   | 2,618,513 |   |   |
| China                    |       |       | 16,747     |       |       |       | 602,544    |   |   |   | 1,030,911 |   |   |
|                     |       |       | 33,482,295 |       |       |       | 34,869,258 |   |   |   | 31,984,143 |   |   |

 

Turnover by geographicaldestination is not materially different to the analysis provided above.

Analysisby class of business:

| ** **                 | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| IT consultancy services    |       |       | 31,675,545 |       |       |       | 31,428,455 |   |   |   | 27,500,593 |   |   |
| Back-office administration |       |       | 1,575,009  |       |       |       | 2,938,276  |   |   |   | 3,942,007 |   |   |
| Other                      |       |       | 231,741    |       |       |       | 502,527    |   |   |   | 541,543 |   |   |
|                       |       |       | 33,482,295 |       |       |       | 34,869,258 |   |   |   | 31,984,143 |   |   |

 

**3      **Operatingprofit

| ** **                                       | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| This is arrived at after charging/(crediting):   |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Depreciation/impairment of tangible fixed assets |       |       | 1,148,231  |       |       |       | 1,099,810  |   |   |   | 1,036,130 |   |   |
| Amortisation of intangible fixed assets          |       |       | 102,471    |       |       |       | 105,903    |   |   |   | 111,787 |   |   |
| Hire of other assets—operating leases       |       |       | 874,701    |       |       |       | 1,133,067  |   |   |   | 1,577,801 |   |   |
| Research and development                         |       |       | 135,000    |       |       |       | 165,000    |   |   |   | 40,000 |   |   |
| Auditors’ remuneration—audit services  |       |       | 16,500     |       |       |       | 26,350     |   |   |   | 35,000 |   |   |
| Government  grants                               |       |       | (66,250    | )          |       |       | (28,500    | ) |   |   | (106,667 | ) |   |

 

71

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**4       Employees**

The average monthly number of employees of the groupduring the year, including executive directors, was as follows:

| ** **      | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| ** **      | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Client delivery |       |       | 437        |       |       |       | 454        |   |   |   | 462 |   |   |
| Other           |       |       | 108        |       |       |       | 119        |   |   |   | 122 |   |   |
|            |       |       | 545        |       |       |       | 573        |   |   |   | 584 |   |   |

 

Staff costs for all employees, including executivedirectors, consist of:

| ** **            | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Wages and salaries    |       | 18,884,232 |       | 20,178,207 |       | 19,534,623 |       |
| Social security costs |       | 2,133,114  |       | 2,227,523  |       | 2,148,809  |       |
| Other pension costs   |       | 935,356    |       | 833,666    |       | 829,148    |       |
|                  |       | 21,952,702 |       | 23,239,396 |       | 22,512,580 |       |

 

**5       Directors**

| ** **                                                  | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Directors’  emoluments consist of:                     |       |       |       |       |       |       |       |
| Emoluments                                                  |       | 507,144    |       | 850,000    |       | 975,000    |       |
| Contributions to defined  contribution pension schemes |       | 72,000     |       | 72,000     |       | 72,000     |       |
|                                                        |       | 579,144    |       | 922,000    |       | 1,047,000  |       |
| Emoluments  of the highest paid director are as follows:    |       |       |       |       |       |       |       |
| Emoluments (excluding pension  contributions)               |       | 257,144    |       | 425,000    |       | 487,500    |       |
| Contributions to defined  contribution pension scheme  |       | 36,000     |       | 36,000     |       | 36,000     |       |
|                                                        |       | 293,144    |       | 461,000    |       | 523,500    |       |

 

Twodirectors (2003 and 2004—two) were members of defined contribution pensionschemes.

**6       Interest payable and similar income**

| ** **     | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------|------------|------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Other interest |       | 31,644     |       |       | —     |       |       | 81,704 |   |
|                |            |            |            |            |            |            |            |  |  |

 

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**7       Taxationon profit on ordinary activities**

| ** **                                                | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Corporation tax                                           |       | 1,007,069  |       | 1,653,649  |       | 933,209    |       |
| Adjustments in  respect of prior years                    |       | 1,648      |       | (150,734   | )          | (84,690    | )          |
| Foreign tax                                               |       | 306,950    |       | 58,956     |       | (182,887   | )          |
|                                                      |       | 1,315,667  |       | 1,561,871  |       | 665,632    |       |
| *Deferred tax*                                            |       |       |       |       |       |       |       |
| Origination and  reversal of timing differences (note 14) |       | 222,447    |       | (273,169   | )          | (218,013   | )          |
| Taxation on profit on  ordinary activities                |       | 1,538,114  |       | 1,288,702  |       | 447,619    |       |

 

Thetax assessed for the year differs from the standard rate of corporation tax inthe UK. The differences are explained below:

| ** **                                          | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Profit on  ordinary activities before tax           |       | 4,009,478  |       | 4,128,620  |       | 2,170,744  |       |
| Profit on ordinary  activities at the standard rate |       |       |       |       |       |       |       |
| of corporation tax in the UK of 30%                 |       | 1,202,843  |       | 1,238,586  |       | 651,223    |       |
| *Effects of:*                                       |       |       |       |       |       |       |       |
| Expenses not  deductible for tax purposes           |       | 62,290     |       | 15,521     |       | 2,431      |       |
| Adjustment to tax  in respect of previous years     |       | 1,648      |       | (150,734   | )          | (88,905    | )          |
| Overseas tax rate  differences                      |       | 52,873     |       | 71,651     |       | —     |       |
| Depreciation in  excess of capital allowances       |       | (3,987     | )          | 278,122    |       | (93,882    | )          |
| Non-qualifying  depreciation                        |       | —     |       | —     |       | 90,079     |       |
| Rate differences                                    |       | —     |       | —     |       | 4,215      |       |
| Losses carried  forward                             |       | —     |       | 108,725    |       | 121,705    |       |
| Short term timing  differences                      |       | —     |       | —     |       | (1,937     | )          |
| Deductions                                          |       | —     |       | —     |       | (19,297    | )          |
| Current tax charge                                  |       | 1,315,667  |       | 1,561,871  |       | 665,632    |       |

 

Factors that mayaffect future tax charges:

The group has tax losses of£405,683 that are available for offset against future taxable profits of thosecompanies in which the losses arose.

Nodeferred tax is recognised on the unremitted earnings of overseas subsidiariesas the group has no liability to additional taxation should such amounts beremitted due to the availability of double taxation relief.

**8       Dividends**

| ** **              | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Ordinary dividend  paid |       | 961,865    |       | 1,560,465  |       | 1,516,523  |       |

 

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**9       Intangible fixed assets**

| **Group**                | ** ** | ** ** | ** ** | **Goodwill** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
| ** **               | ** ** | **£** | ** ** |
| ***Cost***               |       |       |       |
| At 1 January 2004   |       | 1,676,799  |       |
| Exchange differences     |       | (88,253    | )          |
| At 1 January 2005   |       | 1,588,546  |       |
| Exchange differences     |       | 88,253     |       |
| At 31 December 2005 |       | 1,676,799  |       |
| ***Amortisation***       |       |       |       |
| At 1 January 2005   |       | 102,471    |       |
| Charge for the year      |       | 105,903    |       |
| Exchange differences     |       | (5,394     | )          |
| At 1 January 2005   |       | 202,980    |       |
| Charge for the year      |       | 111,787    |       |
| Exchange differences     |       | 11,277     |       |
| At 31 December 2005 |       | 326,044    |       |
| ***Net book value***     |       |       |       |
| At 31 December 2004 |       | 1,385,566  |       |
| At 31 December 2005 |       | 1,350,755  |       |

 

**10    Tangible assets**

| **Group**                | ** ** | ** ** | ** ** | **Fixtures,  fittings and  office  equipment** | ** ** | **Leasehold  improvement** | ** ** | **Computer  equipment** | ** ** | **Childcare  nursery** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------|------------|-----------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|------------------------|------------|-----------|------------|
| ** **               | ** ** | **£** | ** ** | **£**                                          | ** ** | **£**                 | ** ** | **£**              | ** ** | **£**             | ** ** |
| ***Cost***               |       |       |       |                                                |       |                       |       |                    |       |                   |       |      |       |   |   |
| At 1 January 2004   |       | 2,485,245  |       |                                                | 1,094,375  |                       |       | 3,684,449               |       |                   | 734,403    |      |       | 7,998,472 |   |
| Additions                |       | 139,763    |       |                                                | 107,575    |                       |       | 244,249                 |       |                   | 63,000     |      |       | 554,587 |   |
| Exchange differences     |       | (24,396    | )          |                                                | (9,683     | )                          |       | (21,417                 | )          |                   | —     |      |       | (55,496 | ) |
| At 31 December 2004 |       | 2,600,612  |       |                                                | 1,192,267  |                       |       | 3,907,281               |       |                   | 797,403    |      |       | 8,497,563 |   |
| Additions                |       | 135,569    |       |                                                | 159,677    |                       |       | 198,378                 |       |                   | 3,889      |      |       | 497,513 |   |
| Exchange differences     |       | 28,149     |       |                                                | 14,224     |                       |       | 19,269                  |       |                   | —     |      |       | 61,642 |   |
| At 31 December 2005 |       | 2,764,330  |       |                                                | 1,366,168  |                       |       | 4,124,928               |       |                   | 801,292    |      |       | 9,056,718 |   |
| ***Depreciation***       |       |       |       |                                                |       |                       |       |                    |       |                   |       |      |       |   |   |
| At 1 January 2004   |       | 624,235    |       |                                                | 547,729    |                       |       | 2,998,778               |       |                   | 77,658     |      |       | 4,248,400 |   |
| Charge for the year      |       | 269,561    |       |                                                | 160,336    |                       |       | 594,052                 |       |                   | 75,861     |      |       | 1,099,810 |   |
| Exchange differences     |       | (1,388     | )          |                                                | (1,053     | )                          |       | (2,121                  | )          |                   | —     |      |       | (4,562 | ) |
| At 31 December 2004 |       | 892,408    |       |                                                | 707,012    |                       |       | 3,590,709               |       |                   | 153,519    |      |       | 5,343,648 |   |
| Charge for the year      |       | 301,899    |       |                                                | 158,513    |                       |       | 327,945                 |       |                   | 247,773    |      |       | 1,036,130 |   |
| Exchange differences     |       | 4,769      |       |                                                | 2,165      |                       |       | 7,706                   |       |                   | —     |      |       | 14,640 |   |
| At 31 December 2005 |       | 1,199,076  |       |                                                | 867,690    |                       |       | 3,926,360               |       |                   | 401,292    |      |       | 6,394,418 |   |
| ***Net book value***     |       |       |       |                                                |       |                       |       |                    |       |                   |       |      |       |   |   |
| At 31 December 2004 |       | 1,708,204  |       |                                                | 485,255    |                       |       | 316,572                 |       |                   | 643,884    |      |       | 3,153,915 |   |
| At 31 December 2005 |       | 1,565,254  |       |                                                | 498,478    |                       |       | 198,568                 |       |                   | 400,000    |      |       | 2,662,300 |   |

 

The depreciation chargefor the year ended 31 December 2005 includes an impairment charge of£165,471, in respect of childcare nursery assets, in order to reduce thecarrying value of such assets to net realisable value.

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**11**             Fixed asset investments

| ** **                                          | ** ** | **Other unlisted** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **investments**         | ** ** |
| ** **                                          | ** ** | **£**              | ** ** |
| *Cost*                                              |       |                    |       |   |   |
| At 1 January 2004 and 31 December 2004    |       |                    | 230,000    |   |   |
| Disposal                                            |       |                    | (230,000   | ) |   |
| At 31 December 2005                            |       |                    | —     |   |   |
| *Provision for impairment*                          |       |                    |       |   |   |
| At 1 January 2004                              |       |                    | 157,000    |   |   |
| Impairment                                          |       |                    | 73,000     |   |   |
| At 31 December 2004                            |       |                    | 230,000    |   |   |
| Disposal                                            |       |                    | (230,000   | ) |   |
| At 31 December 2005                            |       |                    | —     |   |   |
| *Net book value*                                    |       |                    |       |   |   |
| At 31  December 2004 and 31 December 2005 |       |                    | —     |   |   |

 

Other unlisted investments represented the cost of a23% shareholding in The Monocle Holdings Corporation Limited which wasdissolved in October 2005.

The followingunlisted companies were subsidiary undertakings at the end of the year and havebeen included in the consolidated accounts.

| ** **                           | ** ** | **Country**       | ** ** | **Proportion of voting** | ** ** | ** **                                               |
|--------------------------------------|------------|-------------------|------------|--------------------------|------------|----------------------------------------------------------|
| ** **                           | ** ** | **of**            | ** ** | **rights and ordinary**  | ** ** | ** **                                               |
| ** **                           | ** ** | **incorporation** | ** ** | **share capital**        | ** ** | ** **                                               |
| **Name**                             | ** ** | ** **        | ** ** | **or registration**      | ** ** | **held**                                                 | ** ** | ** ** | **Nature of business** | ** ** |
| Strategic System  Solutions Ltd      |       | England           |       | 100%                     |       | Computer software  development                           |
| Strategic System  Solutions Inc.     |       | USA               |       | 100%                     |       | Computer software  development                           |
| Strategic Training  Solutions Ltd    |       | England           |       | 100%                     |       | Computer training  provider                              |
| Strategic Back-Office  Solutions Ltd |       | England           |       | 75%                      |       | Back office services                                     |
| SSS Hangzhou Co. Limited  (*)        |       | China             |       | 100%                     |       | Computer software  development                           |
| BizzKidz Limited                     |       | England           |       | 100%                     |       | Provision of executive day care for pre-school  children |
|                                      |            |                   |            |                          |            |                                                          |  |  |  |  |

 

(*)          Sharesheld by Strategic Systems Solutions Limited

The minority interest at31 December 2005 relates to a 25% interest in the ordinary shares ofStrategic Back-Office Solutions Limited.

**12**             Debtors

| ** **                     | ** ** | **2004**   | ** ** | **2005**   | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **£** | ** ** | **£** | ** ** | ** ** |
| Due  within one year           |       |       |       |       |       |       |
| Trade debtors                  |       | 3,379,098  |       | 3,667,242  |       |       |
| Prepayments and accrued income |       | 3,159,233  |       | 3,156,765  |       |       |
| Corporation tax recoverable    |       | —     |       | 210,138    |       |       |
| Deferred tax asset (note 14)   |       | —     |       | 118,902    |       |       |
|                           |       | 6,538,331  |       | 7,153,047  |       |       |

 

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**13**             Creditors: amounts falling due within one year

| ** **                        | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
|                              |       | **£** |       | **£** |       |
| Bank overdraft                    |       | 42,604     |       | 3,474      |       |
| Trade creditors                   |       | 817,819    |       | 164,339    |       |
| Deferred consideration (note  21) |       | 685,420    |       | 348,238    |       |
| Taxation and social security      |       | 1,141,252  |       | 1,354,904  |       |
| Corporation tax                   |       | 535,389    |       | 762,108    |       |
| Accruals and deferred income      |       | 1,460,257  |       | 616,122    |       |
|                              |       | 4,682,741  |       | 3,249,185  |       |

 

Includedwith accruals and deferred income is an amount of £135,000 (2004 - £225,000) inrelation to government grants not yet released to the profit and loss account. Thegrants may become liable to be repaid if the group breaches certain criteriaduring the period of the grants.

**14**             Deferred taxation

*Deferredtaxation*

| ** **                                       | ** ** | **£** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| Deferred  tax provision at 1 January 2004   |       | 372,280    |       |
| Charge  to profit and loss account               |       | (273,169   | )          |
| Deferred  tax provision at 31 December 2004 |       | 99,111     |       |
| Charge  to profit and loss account               |       | (218,013   | )          |
| Deferred  tax asset at 31 December 2005     |       | (118,902   | )          |

 

*Deferred taxation analysis*

| ** **                     | ** ** | **2004**   | ** ** | **2005**   | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **£** | ** ** | **£** | ** ** | ** ** |
| Accelerated capital allowances |       | 111,216    |       | 36,017     |       |       |
| Short term timing differences  |       | (12,105    | )          | (32,914    | )          |       |
| Tax losses                     |       | —     |       | (121,705   | )          |       |
|                           |       | 99,111     |       | (118,902   | )          |       |

 

Therewas an unprovided deferred tax asset at 31 December 2004 of £108,775. Thisrelated to unutilised trading losses. This asset was not recognised in theaccounts as the group did not anticipate making sufficient taxable profits inthe near future to absorb the underlying timing differences.

**15**             Share capital

| *** ***                              | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| ***Authorised***                          |       |       |       |       |       |       | ** ** |
| 10,000,000 ordinary shares of  0.01p each |       | 1,000      |       | 1,000      |       | 1,000      |       |

 

| ** **                                | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| ***Allotted,  called up and fully paid*** |       |       |       |       |       |       |       |
| Ordinary shares of 0.01p each             |       | 918        |       | 919        |       | 920        |       |

 

During the year to 31 December2003, 40,000 ordinary shares of 0.01p each with a total nominal value of £4were allotted for a total consideration of £28,225. The premium on the sharesof £28,221 has been credited to the share premium account (note 16).

76

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During the year to 31 December2004, 10,000 ordinary shares of 0.01p each with a total nominal value of £1were allotted for a total consideration of £9,905. The premium on the shares of£9,904 has been credited to the share premium account (note 16).

Duringthe year to 31 December 2005, 12,600 ordinary shares of 0.01p each with atotal nominal value of £1 were allotted for a total consideration of £13,930. Thepremium on the shares of £13,929 has been credited to the share premium account(note 16).

**16**             Reserves

| ** **                                             | ** ** | **Share**   | ** ** | ** **  | ** ** | **Profit**        | ** ** |
|--------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------------|------------|
| ** **                                             | ** ** | **premium** | ** ** | **Capital** | ** ** | **and loss** | ** ** |
| ** **                                             | ** ** | **account** | ** ** | **reserve** | ** ** | **account**       | ** ** |
| ** **                                             | ** ** | **£**  | ** ** | **£**  | ** ** | **£**        | ** ** |
| At 1 January 2003                                 |       |        | 29,480     |        |       |              | 9,962      |   |   | 5,348,184 |   |
| Profit for year                                        |       |        | —     |        |       |              | —     |   |   | 2,471,364 |   |
| Dividends                                              |       |        | —     |        |       |              | —     |   |   | (961,865 | ) |
| Premium on new shares issued                           |       |        | 28,221     |        |       |              | —     |   |   | — |   |
| Translation differences on foreign currency investment |       |        | —     |        |       |              | —     |   |   | (18,650 | ) |
| At 31 December 2003 (restated see note 17)        |       |        | 57,701     |        |       |              | 9,962      |   |   | 6,839,033 |   |
| Profit for year                                        |       |        | —     |        |       |              | —     |   |   | 2,839,918 |   |
| Dividends                                              |       |        | —     |        |       |              | —     |   |   | (1,560,465 | ) |
| Premium on new shares issued                           |       |        | 9,904      |        |       |              | —     |   |   | — |   |
| Translation differences on foreign currency investment |       |        | —     |        |       |              | —     |   |   | (82,216 | ) |
| At 31 December 2004                               |       |        | 67,605     |        |       |              | 9,962      |   |   | 8,036,270 |   |
| Profit for year                                        |       |        | —     |        |       |              | —     |   |   | 1,711,433 |   |
| Dividends                                              |       |        | —     |        |       |              | —     |   |   | (1,516,523 | ) |
| Premium on new shares issued                           |       |        | 13,929     |        |       |              | —     |   |   | — |   |
| Translation differences on foreign currency investment |       |        | —     |        |       |              | —     |   |   | 48,041 |   |
| At  31 December 2005                              |       |        | 81,534     |        |       |              | 9,962      |   |   | 8,279,221 |   |

 

**17**             Reconciliation of movement in shareholders’ funds

| ** **                                             | ** ** | **2003**       | ** ** | **2004**       | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                             | ** ** | **£**     | ** ** | **£**     | ** ** | **£** | ** ** |
| ** **                                             | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | ** ** | ** ** |
| Profit for the financial year                          |       | 2,471,364      |       | 2,839,918      |       | 1,711,433  |       |
| Dividends                                              |       | (961,865       | )          | (1,560,465     | )          | (1,516,523 | )          |
|                                                   |       | 1,509,499      |       | 1,279,453      |       | 194,910    |       |
| Issue of shares, including premium                     |       | 28,225         |       | 9,905          |       | 13,930     |       |
| Translation differences on foreign currency investment |       | (18,650        | )          | (82,216        | )          | 48,041     |       |
| Net addition to shareholders’ funds               |       | 1,519,074      |       | 1,207,142      |       | 256,881    |       |
| Opening shareholders’ funds                       |       | 5,388,540      |       | 6,907,614      |       | 8,114,756  |       |
| Closing  shareholders’ funds                      |       | 6,907,614      |       | 8,114,756      |       | 8,371,637  |       |

 

The company has implemented FRS 21 “Events after thebalance sheet date” during the year ended 31 December 2005. Accordingly,dividends declared after the balance sheet date are no longer recognised as aliability at the balance sheet date. As a consequence, the profit and lossaccount and shareholders funds at 31 December 2003 were increased by£138,379.

77

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**18**             Reconciliation of operating profit to net cashinflow from operating activities

| ** **                                 | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Operating profit                           |       | 3,994,634  |       | 4,078,371  |       | 2,100,372  |       |
| Depreciation                               |       | 1,148,231  |       | 1,099,810  |       | 1,036,130  |       |
| Amortisation                               |       | 102,471    |       | 105,903    |       | 111,787    |       |
| Impairment in fixed asset investments      |       | 157,000    |       | 73,000     |       | —     |       |
| Decrease/(increase) in debtors             |       | 51,210     |       | (1,538,890 | )          | (245,012   | )          |
| Increase/(decrease) in creditors           |       | 1,494,977  |       | (727,366   | )          | (1,409,444 | )          |
| Net  cash inflow from operating activities |       | 6,948,523  |       | 3,090,828  |       | 1,593,833  |       |

 

**19**             Notes to the cash flow statement

**i)**                 Gross cash flows

| ** **                                  | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| **Returns  on investments**                 |       |       |       |       |       |       |       |
| Interest received                           |       | 46,488     |       | 50,249     |       | 152,076    |       |
| Interest paid                               |       | (31,644    | )          | —     |       | (81,704    | )          |
|                                        |       | 14,844     |       | 50,249     |       | 70,372     |       |
| **Capital  expenditure**                    |       |       |       |       |       |       |       |
| Payments to acquire tangible assets         |       | (1,742,902 | )          | (554,587   | )          | (497,513   | )          |
| Receipts from sale of tangible fixed assets |       | 7,918      |       | —     |       | —     |       |
|                                        |       | (1,734,984 | )          | (554,587   | )          | (497,513   | )          |
| **Financing**                               |       |       |       |       |       |       |       |
| Issue  of ordinary share capital            |       | 28,225     |       | 9,905      |       | 13,930     |       |

 

**ii)**             Analysis of changes in net funds

| ** **               | ** ** | **At 1 January** | ** ** | **Cash**   | ** ** | **At 31 December** | ** ** |
|--------------------------|------------|----------------------------|------------|------------|------------|------------------------------|------------|
| ** **               | ** ** | **2003**                   | ** ** | **flows**  | ** ** | **2003**                     | ** ** |
| ** **               | ** ** | **£**                 | ** ** | **£** | ** ** | **£**                   | ** ** |
| Cash at bank and in hand |       |                       | 377,484    |       |       | 2,399,696                    |       |   | 2,777,180 |   |   |
|                          |            |                            |            |            |            |                              |            |  |  |  |  |

 

| ** **                | ** ** | **At**             | ** ** | ** ** | ** ** | **Other**    | ** ** | ** **           | ** ** |
|---------------------------|------------|--------------------|------------|------------|------------|--------------|------------|----------------------|------------|
| ** **                | ** ** | **1 January** | ** ** | **Cash**   | ** ** | **non-cash** | ** ** | **31 December** | ** ** |
| ** **                | ** ** | **2004**           | ** ** | **flow**   | ** ** | **changes**  | ** ** | **2004**             | ** ** |
| ** **                | ** ** | **£**         | ** ** | **£** | ** ** | **£**   | ** ** | **£**           | ** ** |
| Cash in hand and  at bank |       | 2,777,180          |       | (929,045   | )          | (29,339      | )          |                 | 1,818,796  |   |   |
| Bank overdraft            |       | —             |       | (42,604    | )          | —       |       |                 | (42,604    | ) |   |
|                      |       | 2,777,180          |       | (971,649   | )          | (29,339      | )          |                 | 1,776,192  |   |   |

 

| ** **                | ** ** | **At**             | ** ** | ** ** | ** ** | **Other**    | ** ** | **At**               | ** ** |
|---------------------------|------------|--------------------|------------|------------|------------|--------------|------------|----------------------|------------|
| ** **                | ** ** | **1 January** | ** ** | **Cash**   | ** ** | **non-cash** | ** ** | **31 December** | ** ** |
| ** **                | ** ** | **2005**           | ** ** | **flow**   | ** ** | **changes**  | ** ** | **2005**             | ** ** |
| ** **                | ** ** | **£**         | ** ** | **£** | ** ** | **£**   | ** ** | **£**           | ** ** |
| Cash in hand and  at bank |       | 1,818,796          |       | (1,364,105 | )          |         | 11,721     |                 |       |   | 466,412 |   |   |
| Bank overdraft            |       | (42,604            | )          | 39,130     |       |         | —     |                 |       |   | (3,474 | ) |   |
|                      |       | 1,776,192          |       | (1,324,975 | )          |         | 11,721     |                 |       |   | 462,938 |   |   |

 

78

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**20**             Acquisitions

The following acquisitions weremade in the year to 31 December 2003:

**Acquisition of assets of the Deutsche Bank AG NewYork Branch Horsham.**

On 3 February 2003, the company purchased theassets of the Deutsche Bank AG New York Branch Horsham, which provided softwaredevelopment services to Deutsche Bank AG New York. The total consideration was €3,000,000 (£1,761,389)and is payable in six instalments ending 3 August 2005.

| ** **                            | ** ** | **Fair value**        | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **to the group** | ** ** |
| ** **                            | ** ** | **£**                 | ** ** |
| **Net assets acquired:**              |       |                       |       |   |   |
| Fixtures and fittings (at book value) |       |                       | 84,590     |   |   |
| Goodwill (note 9)                |       |                       | 1,676,799  |   |   |
|                                  |       |                       | 1,761,389  |   |   |
| **Satisfied  by:**                    |       |                       |       |   |   |
| Cash                                  |       |                       | 587,130    |   |   |
| Deferred consideration                |       |                       | 1,174,259  |   |   |
|                                  |       |                       | 1,761,389  |   |   |

 

**21**             Effect on cash flows of acquisitions anddisposals

| ** **                                                         | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Payments to acquire subsidiary undertakings and goodwill (note 20) |       |       | (587,130   | )          |       |       | (427,036   | ) |   |   | (337,182 | ) |   |
|                                                                    |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

**22**             Commitments and contingencies

At the balance sheet date, the group had annualcommitments under non-cancellable operating leases for land and buildingsas follows:

| ** **                      | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **£** | ** ** | **£** | ** ** |
| Operating  leases which expire: |       |       |       |       |       |   |   |   |   |
| In less than one year           |       |       | —     |       |       |   | 32,007 |   |   |
| In 2-5 years                    |       |       | 538,525    |       |       |   | 604,633 |   |   |
| After five years                |       |       | 831,503    |       |       |   | 928,155 |   |   |
|                            |       |       | 1,370,028  |       |       |   | 1,564,795 |   |   |

 

**23**             Pension costs

Thegroup contributes to defined contribution pension schemes. The assets of theschemes are held separately from those of the group in independentlyadministered funds. The pension cost charge for the year ended 31December 2005 was £829,148 (2004 - £833,666; 2003 - £935,356). The unpaidpension contributions outstanding at the year end were £99,565 (2004 -£113,638, 2003 - £105,482).

**24**             CompaniesAct 1985

These consolidatedaccounts do not comprise the company’s “statutory accounts” within the meaningof section 240 of the Companies Act 1985 of Great Britain. Statutory accountsfor the years ended 30 June 2003 and 2004 and 2005 have been delivered tothe Registrar of Companies for England and Wales. The statutory auditors’reports on such accounts were unqualified.

79

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**25**             Related party transactions

Kanbay Europe Limited, asubsidiary of Kanbay International Inc (which owns 49% of the issued sharecapital of SSS Holdings Corporation Limited) performed work for the groupduring the year ended 31 December 2005 for which £19,693 (2004–£28,180;2003–£42,208) was invoiced. There were no outstanding balances due to KanbayEurope Limited at 31 December 2005 (2004 £nil).

SSS Holdings CorporationLimited, together with Morgan Stanley and Co International Inc. and thedirectors owned 100% of the issued share capital of The Monocle HoldingsCorporation Limited, the ultimate parent company of The Monocle CorporationLimited. The Monocle Holdings Corporation Limited and The Monocle CorporationLimited were dissolved in October 2005.

During the year to 31 December 2003 the groupperformed work for The Monocle Corporation Limited. £26,000 was invoiced duringthe year to 31 December 2003 in respect of this work. There were noamounts due from The Monocle Corporation Limited at 31 December 2004. Duringthe year to 31 December 2004, The Monocle Corporation Limited invoiced thegroup £7,095 (2004–£7,095; 2003–£6,540). The amount due to The MonocleCorporation Limited at 31 December 2004 was £nil.

During the year to 31 December2004 the group received computer equipment for £155,309 and cash of £95,668 infull settlement of the net amounts due from The Monocle Corporation Limited andthe provision of £230,518 recorded in previous years was released to the profitand loss account.

UntilSeptember 2004, SSS Holdings Corporation Limited owned 50% of the sharecapital of Strategic Investment Solutions Limited. During the year to 31 December 2004,the group charged a management fee of £10,575 (2003–£10,575) to StrategicInvestment Solutions Limited. The amount outstanding at 31 December 2004was £nil.

**26**             Differencebetween United Kingdom and United States Generally Accepted AccountingPrinciples

The Company’s consolidatedaccounts are prepared in accordance with accounting principles generallyaccepted in the United Kingdom (“UK GAAP”) which differ from United Statesgenerally accepted accounting principles (“US GAAP”). The significantdifferences applicable to the Company are summarised below:

*Goodwill andintangible assets*

Under UK GAAP goodwill is amortised on a straight-linebasis over its useful life up to a maximum of 20 years. Under US GAAP,goodwill is not amortised, but is reviewed annually for impairment. Goodwillamortisation under UK GAAP is reversed for US GAAP purposes.

Under US GAAP other intangibleassets may be identified when an acquisition occurs before assigning theremaining purchase price to goodwill. An intangible asset for the customerrelationship was identified for US GAAP accounting related to the acquisitiondescribed in Note 21 in the amount of £743,048. This intangible asset willbe amortised over its estimated life of 6 years.

*Accrual forvacation expense*

Under UK GAAP, the groupdid not fully provide for vacation expense. Under US GAAP the group would fullyprovide for this cost.

*Software costs*

Under UK GAAP, costs related to purchased software areexpensed to the profit and loss account as incurred. Under US GAAP such costsare capitalised in the balance sheet and depreciated over their expected usefullives.

80

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The following is a summaryof the significant adjustments to the profit for the years ended 31 December2003, 2004 and 2005 and to shareholders’ funds as of 31 December 2004 and2005 that would be required if US GAAP were to be applied instead of UK GAAPtogether with the statement of comprehensive income that would be requiredunder US GAAP.

*Profit for the year*

| ** **                                                                                 | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                 | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Profit for the year as reported in the consolidated profit and loss  account under UK GAAP |       |       | 2,471,364  |       |       |       | 2,839,918  |   |   |   | 1,711,433 |   |   |
| Amortisation of goodwill                                                                   |       |       | 102,471    |       |       |       | 105,903    |   |   |   | 111,787 |   |   |
| Amortisation of customer contract                                                          |       |       | (113,521   | )          |       |       | (123,840   | ) |   |   | (123,840 | ) |   |
| Vacation expense                                                                           |       |       | 35,000     |       |       |       | 57,000     |   |   |   | (54,000 | ) |   |
| Equity income/(loss) from investments                                                      |       |       | 31,000     |       |       |       | —     |   |   |   | — |   |   |
| Capitalised software costs                                                                 |       |       | 138,055    |       |       |       | 64,397     |   |   |   | 146,985 |   |   |
| Depreciation on capitalised software costs                                                 |       |       | (213,552   | )          |       |       | (176,450   | ) |   |   | (117,153 | ) |   |
| Tax effects of US GAAP adjustments                                                         |       |       | 30,585     |       |       |       | 41,194     |   |   |   | (1,518 | ) |   |
| Net  income for the year under US GAAP                                                     |       |       | 2,481,402  |       |       |       | 2,808,122  |   |   |   | 1,673,694 |   |   |

 

*Statementof comprehensive income*

| ** **                                                          | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **£** | ** ** | **£** | ** ** | **£** | ** ** |
| Net income for the year under US GAAP                               |       |       | 2,481,402  |       |       |       | 2,808,122  |   |   |   | 1,673,694 |   |   |
| Currency translation differences on foreign currency net investment |       |       | (18,650    | )          |       |       | (82,216    | ) |   |   | 48,041 |   |   |
| Comprehensive  income under US GAAP                                 |       |       | 2,462,752  |       |       |       | 2,725,906  |   |   |   | 1,721,735 |   |   |

 

*Shareholders’funds*

| ** **                                                                            | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                            | ** ** | **£** | ** ** | **£** | ** ** |
|                                                                                  |       |       |       |       |       |   |   |   |   |
| Shareholders’ funds as reported in the consolidated balance sheet under  UK GAAP |       |       | 8,114,756  |       |       |   | 8,371,637 |   |   |
| US GAAP adjustments:                                                                  |       |       |       |       |       |   |   |   |   |
| Intangible assets                                                                     |       |       |       |       |       |   |   |   |   |
| Goodwill–cost                                                                    |       |       | (743,048   | )          |       |   | (743,048 | ) |   |
| Customer contract–cost                                                           |       |       | 743,048    |       |       |   | 743,048 |   |   |
| Amortisation                                                                          |       |       | (28,987    | )          |       |   | (41,040 | ) |   |
| Tangible assets: software                                                             |       |       |       |       |       |   |   |   |   |
| Cost                                                                                  |       |       | 887,141    |       |       |   | 1,034,126 |   |   |
| Depreciation                                                                          |       |       | (728,094   | )          |       |   | (845,247 | ) |   |
| Tangible assets: childcare  nursery                                                   |       |       |       |       |       |   |   |   |   |
| Cost                                                                                  |       |       | —     |       |       |   | (165,471 | ) |   |
| Depreciation                                                                          |       |       | —     |       |       |   | 165,471 |   |   |
| Creditors amounts falling due  within one year                                        |       |       |       |       |       |   |   |   |   |
| Vacation accrual                                                                      |       |       | (61,000    | )          |       |   | (115,000 | ) |   |
| Tax effects on US GAAP  adjustments                                                   |       |       | 13,700     |       |       |   | 12,182 |   |   |
| Shareholders’  funds under US GAAP                                               |       |       | 8,197,516  |       |       |   | 8,416,658 |   |   |

 

81

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*Consolidated statement of cashflows*

The consolidated statement ofcash flows prepared under UK GAAP present substantially the same information asthat required under US GAAP. However, the statements differ with regard to theclassification of items within them and as regards to the definition of cashunder UK GAAP and cash and cash equivalents under US GAAP.

Under UK GAAP, cash flows arepresented separately for operating activities, returns on investments andservicing of finance, taxation, capital expenditure and financial investment,acquisitions, equity dividends and management of liquid resources andfinancing. US GAAP requires only three categories of cash flow to be reported;operating, investing and financing. Cash flows from taxation and returns oninvestments and servicing shown under UK GAAP would, with the exception ofdividends paid to minority shareholders, be included within operatingactivities under US GAAP. The payment of dividends would be included as afinancing activity under US GAAP. Capital expenditure and financial investmentand acquisitions are reported within investing activities under US GAAP. UnderUS GAAP, cash and cash equivalents include short-term highly liquid investmentsbut do not include bank overdrafts.

The categories of cash flow activity under US GAAP canbe summarised as follows:

| ** **                                 | ** ** | **Year ended 31 December** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **£**                                | ** ** | **£** | ** ** | **£** | ** ** |
| Cash flow provided by operating activities |       |                                      | 5,655,450  |   |   |   | 1,603,138 |   |   |   | 973,183 |   |   |
| Cash used in investing activities          |       |                                      | (2,322,114 | ) |   |   | (981,623 | ) |   |   | (834,695 | ) |   |
| Cash used in financing activities          |       |                                      | (933,640   | ) |   |   | (1,550,560 | ) |   |   | (1,502,593 | ) |   |
| Exchange differences                       |       |                                      | —     |   |   |   | (29,339 | ) |   |   | 11,721 |   |   |
| Beginning of the period                    |       |                                      | 377,484    |   |   |   | 2,777,180 |   |   |   | 1,818,796 |   |   |
| End  of the period                         |       |                                      | 2,777,180  |   |   |   | 1,818,796 |   |   |   | 466,412 |   |   |

 

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**Item 9.        Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

None.

**Item 9A.     Controls and Procedures.**

**Evaluationof Disclosure Controls and Procedures and Changes in Internal Control overFinancial Reporting**

As of December 31, 2005, our Chief ExecutiveOfficer and Chief Financial Officer evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended). Basedon their evaluation of our disclosure controls and procedures, our ChiefExecutive Officer and Chief Financial Officer, with the participation of ourmanagement, have concluded that our disclosure controls and procedures areeffectively designed to ensure that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner.

There were no changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f)of the Exchange Act) during the fourth quarter of 2005 that materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**Management’sReport on Internal Control Over Financial Reporting**

Management is responsible for the preparation,integrity and fair presentation of the consolidated financial statements andnotes to the consolidated financial statements. The financial statements wereprepared in accordance with the accounting principles generally accepted in theU.S. and include certain amounts based on management’s judgment and bestestimates. Other financial information presented is consistent with thefinancial statements.

Management is alsoresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is designed under the supervision of the Company’sprincipal executive and financial officers in order to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. The Company’s internal control over financialreporting includes those policies and procedures that:

(i)            Pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets of the Company;

(ii)        Provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and

(iii)    Provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

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Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005. Inmaking this assessment, management used the criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

The Company completed its acquisitions of Accurum, Inc.and Pune Software Park Private Limited on March 1, 2005 andOctober 19, 2005, respectively. As permitted by the U.S. Securities andExchange Commission, management’s assessment as of December 31, 2005 didnot include the internal control of Accurum, Inc. and Pune Software ParkPrivate Limited, which are included in the Company’s consolidated financialstatements as of December 31, 2005. Accurum, Inc. constituted $13,019 and$1,193 of total and net assets, respectively, as of December 31, 2005 and$12,692 and $1,193 of revenues and net income, respectively, for the year thenended. Pune Software Park Private Limited constituted $4,831 and ($31) of totaland net assets, respectively, as of December 31, 2005 and $0 and $(31) ofrevenues and net income (loss), respectively, for the year then ended. (Allnumbers referenced above for Accurum, Inc. and Pune Software Park PrivateLimited are stated in thousands.)

Based on management’s assessment, which excluded anassessment of internal control over financial reporting of the acquired operationsof Accurum, Inc. and Pune Software Park Private Limited, management hasconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2005 to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external reporting purposes in accordance with GAAP.

The Company’s independent registered public accountingfirm, Ernst & Young LLP, has issued an attestation report onmanagement’s assessment of the Company’s internal control over financialreporting. That report appears on a preceeding page of this Report andexpresses unqualified opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting.

Kanbay International, Inc.

March 14, 2006

**Item 9B.**               OtherInformation

None.

84

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**PART III.**

**Item 10.**                 Directorsand Executive Officers of the Company.

See the information underthe captions “Executive Officers and Directors,” “Board of Directors” and “Committeesof the Board of Directors” in the 2006 Proxy Statement.

**Item 11.**                 ExecutiveCompensation.

See the information underthe captions “Director Compensation” and “Executive Compensation” in the 2006Proxy Statement.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

See the information underthe captions “Stock Ownership by Certain Beneficial Owners and Ownership byManagement of Equity Securities” in the 2006 Proxy Statement.

**Item 13.**                 CertainRelationships and Related Transactions.

See the information underthe caption “Certain Transactions” in the 2006 Proxy Statement.

**Item 14.**                 PrincipalAccountant Fees and Services.

See the information underthe caption “Proposal to Approve the Selection of Auditors” in the 2006 ProxyStatement.

**PART IV.**

**Item 15.**                 Exhibitsand Financial Statement Schedule.

**(a)**          Documentsfiled as part of this report

1.                 Thefollowing financial statements are included in this Form 10-K:

|                                                                                                                             | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Consolidated Financial  Statements of Kanbay International, Inc.**                                                   |       |     |       |   |   |
| Consolidated Balance  Sheets at December 31, 2005 and 2004                                                             |       |     | 38         |   |   |
| Consolidated  Statements of Income for the years ended December 31, 2005, 2004 and  2003                               |       |     | 39         |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2005, 2004 and 2003 |       |     | 40         |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004 and  2003                           |       |     | 41         |   |   |
| Notes to  Consolidated Financial Statements                                                                                 |       |     | 42         |   |   |
| Report of  Independent Registered Public Accounting Firm                                                                    |       |     | 61         |   |   |
| Report of  Independent Registered Public Accounting Firm on Internal Control Over  Financial Reporting                      |       |     | 62         |   |   |

 

|                                                                                                                         | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Consolidated Financial  Statements of SSS Holdings Corporation Limited**                                              |       |     |       |   |   |
| Report of Independent  Auditors                                                                                         |       |     | 64         |   |   |
| Consolidated  Profit and Loss Accounts for the years ended December 31, 2005, 2004 and  2003                       |       |     | 65         |   |   |
| Consolidated  Statement of Total Recognised Gains and Losses for the years ended  December 31, 2005, 2004 and 2003 |       |     | 66         |   |   |
| Consolidated Balance  Sheets at December 31, 2005 and 2004                                                         |       |     | 67         |   |   |
| Consolidated Cash  Flow Statements for the Years Ended December 31, 2005, 2004 and 2003                            |       |     | 68         |   |   |
| Notes to the  Consolidated Financial Statements                                                                         |       |     | 69         |   |   |

 

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2.                 FinancialStatement Schedule

The following financialstatement schedule is a part of this Form 10-K and should be read inconjunction with our audited consolidated financial statements.

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS(in thousands)Years ended December 31, 2005, 2004 and 2003**

| **Description**                              | ** ** | ** ** | ** ** | **Balance at  Beginning  of year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deduction** | ** ** | **Balance at  End of  Year** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|----------------------------------------|------------|
| 2005:                                        |       |       |       |                                         |       |                                          |       |          |       |                                   |       |   |   |   |   |   |   |
| Valuation allowance for accounts receivable  |       |       | $          | 1,143                                        |       |                                          |       | $             | 485        |                                   |       |   | $ | (832 | )(1) |   |   | $ | 796 |   |   |
| Valuation allowance for deferred tax assets  |       |       | 2,290      |                                         |       |                                          | 1,111      |          |       |                                   | —     | (2) |   |   | 3,401 |   |   |
| 2004:                                        |       |       |       |                                         |       |                                          |       |          |       |                                   |       |   |   |   |   |   |   |
| Valuation allowance for accounts receivable  |       |       | 659        |                                         |       |                                          | 727        |          |       |                                   | (243       | )(1) |   |   | 1,143 |   |   |
| Valuation allowance for deferred tax assets  |       |       | 2,333      |                                         |       |                                          | —     |          |       |                                   | (43        | )(2) |   |   | 2,290 |   |   |
| 2003:                                        |       |       |       |                                         |       |                                          |       |          |       |                                   |       |   |   |   |   |   |   |
| Valuation allowance for accounts receivable  |       |       | 874        |                                         |       |                                          | (169       | )             |       |                                   | (46        | )(1) |   |   | 659 |   |   |
| Valuation  allowance for deferred tax assets |       |       | 5,105      |                                         |       |                                          | —     |          |       |                                   | (2,772     | )(2) |   |   | 2,333 |   |   |
|                                              |            |            |            |                                              |            |                                               |            |               |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Uncollectible accountswritten off, net of recoveries.

(2)          Changes in temporary taxdifferences fully reserved for countries with unused net operating losses.

All other schedules not listed above have been omittedbecause the information required to be set forth therein is not applicable, notrequired or is included in the financial statements or notes thereto.

3.                 The exhibitslisted on the “Exhibit Index.” Certain of the exhibits listed in the Exhibit Indexhave been previously filed with the Securities and Exchange Commission pursuantto the requirements of the Securities Act of 1933, as amended, and theSecurities Exchange Act of 1934, as amended. Such exhibits are identified bythe parenthetical references following the listing of each such exhibit and areincorporated by reference.

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**Exhibit Index**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                 |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Merger Agreement among Kanbay  International, Inc. Kanbay Consulting, LLC, Adjoined  Consulting, Inc. and the Adjoined stockholders named herein, dated  February 13, 2006 (incorporated by reference to Exhibit 2.1 to  Form 8-K filed by the Registrant on February 14, 2006).  |
| 2.2              |       | First Amendment to  Merger Agreement dated as of March 9, 2006 among Kanbay International, Inc.,  Kanbay Consulting, LLC, Adjoined Consulting, Inc. and Matthew Newton  (incorporated by reference to Exhibit 2.1 to the Form 8-K  filed by the Registrant on March 15, 2006).    |
| 3.1              |       | Second Amended and  Restated Certificate of Incorporation (incorporated by reference to  Exhibit 3.3 of Amendment No. 3 to the Form S-1  Registration Statement filed by the Registrant on June 17, 2004).                                                                                  |
| 3.2              |       | Amended and Restated By-laws  (incorporated by reference to Exhibit 3.5 of Amendment No. 3 to the  Form S-1 Registration Statement filed by the Registrant on  June 17, 2004).                                                                                                              |
| 4.1              |       | Specimen Common Stock  Certificate (incorporated by reference to Exhibit 4.1 of Amendment  No. 2 to the Form S-1 Registration Statement filed by the  Registrant on June 10, 2004).                                                                                                         |
| 4.2              |       | Second Amended and  Restated Registration Rights Agreement (incorporated by reference to  Exhibit 4.2 of Amendment No. 3 to the Form S-1  Registration Statement filed by the Registrant on June 17, 2004).                                                                                 |
| 4.3              |       | Class A Common  Stock Purchase Warrant dated September 4, 2003 issued to Household  Investment Funding, Inc. (incorporated by reference to Exhibit 4.4  of the Form S-1 Registration Statement filed by the Registrant on  March 11, 2004).                                       |
| 4.4              |       | Warrant to Purchase  Common Stock No. CA-002 dated September 14, 2000 issued to  Household Investment Funding, Inc. (incorporated by reference to  Exhibit 4.5 of the Form S-1 Registration Statement filed by  the Registrant on March 11, 2004).                                |
| 4.5              |       | Registration Rights  Agreement dated as of March 9, 2006 among Kanbay  International, Inc. and the former stockholders of Adjoined  Consulting, Inc. signatories thereto (incorporated by reference to  Exhibit 10.3 to the Form 8-K filed by the Registrant on  March 15, 2006). |
| 10.1             |       | Kanbay International  1998 Non-Qualified Option Plan (incorporated by reference to  Exhibit 10.1 of the Form S-1 Registration Statement filed by  the Registrant on March 11, 2004).                                                                                                             |
| 10.2             |       | Kanbay  International, Inc. Stock Incentive Plan (incorporated by reference to  Exhibit 10.2 of Amendment No. 4 to the Form S-1  Registration Statement filed by the Registrant on July 2, 2004).                                                                                      |
| 10.3             |       | Kanbay  International, Inc. 2005 Employee Stock Purchase Plan, as amended  (incorporated by reference to Exhibit 10.3 to Form 10-K for the  year ended December 31, 2005 filed by the Registrant on March 30,  2005).                                                                  |
| 10.4             |       | Kanbay  International, Inc. 2004 Global Leadership Bonus Plan (incorporated by  reference to Exhibit 10.3(a) of Amendment No. 4 to the  Form S-1 Registration Statement filed by the Registrant on  July 2, 2004).                                                                |
| 10.5             |       | Kanbay Outside Directors  Compensation Plan (incorporated by reference to Exhibit 10.3(b) of  Amendment No. 4 to the Form S-1 Registration Statement filed  by the Registrant on July 2, 2004).                                                                                        |
| 10.6             |       | Severance Agreement  between the Registrant and Raymond J. Spencer (incorporated by reference to  Exhibit 10.4 of Amendment No. 4 to the Form S-1  Registration Statement filed by the Registrant on July 2, 2004).                                                                         |

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| 10.7  |   | Severance Agreement  between the Registrant and William F. Weissman (incorporated by reference to  Exhibit 10.5 of Amendment No. 4 to the Form S-1  Registration Statement filed by the Registrant on July 2, 2004).                                                                                                                                                                                                                                                                                         |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Severance Agreement  between the Registrant and Jean A. Cholka (incorporated by reference to  Exhibit 10.6 of Amendment No. 4 to the Form S-1  Registration Statement filed by the Registrant on July 2, 2004).                                                                                                                                                                                                                                                                                              |
| 10.9  |   | Severance Agreement between the Registrant and  Cyprian D’Souza (incorporated by reference to Exhibit 10.7 of Amendment  No. 4 to the Form S-1 Registration Statement filed by the  Registrant on July 2, 2004).                                                                                                                                                                                                                                                                                        |
| 10.10 |   | Severance Agreement  between the Registrant and Shrihari Gokhale (incorporated by reference to  Exhibit 10.8 of Amendment No. 4 to the Form S-1  Registration Statement filed by the Registrant on July 2, 2004).                                                                                                                                                                                                                                                                                            |
| 10.11 |   | Form of  Indemnification Agreement (incorporated by reference to Exhibit 10.9 of  the Form S-1 Registration Statement filed by the Registrant on  March 11, 2004).                                                                                                                                                                                                                                                                                                                                           |
| 10.12 |   | Consulting Agreement  dated November 14, 1994 between the Registrant and Household  International, Inc. (incorporated by reference to Exhibit 10.10 of  Amendment No. 2 to the Form S-1 Registration Statement filed  by the Registrant on June 10, 2004).                                                                                                                                                                                                                                         |
| 10.13 |   | Consulting Agreement  dated July 28, 2000 between the Registrant and Morgan Stanley &  Co., Inc. (incorporated by reference to Exhibit 10.11 of Amendment  No. 2 to the Form S-1 Registration Statement filed by the  Registrant on June 10, 2004).                                                                                                                                                                                                                                       |
| 10.14 |   | Consulting Agreement  dated April 19, 2005 between Kanbay Europe Ltd., and HSBC Holdings plc  (Pursuant to an application for confidential treatment in accordance with  Rule 24b-2 of the Securities Exchange Act of 1934, as amended,  portions of this exhibit have been omitted and filed separately with the  Securities and Exchange Commission), (incorporated by reference to  Exhibit 10.1 to Form 10-Q for the quarter ended June 30,  2005 filed by the Registrant on August 12, 2005). |
| 10.15 |   | Rate Schedule dated  April 19, 2005 between Kanbay Europe Ltd. and HSBC Holdings plc  (Pursuant to an application for confidential treatment in accordance with  Rule 24b-2 of the Securities Exchange Act of 1934, as amended,  portions of this exhibit have been omitted and filed separately with the  Securities and Exchange Commission), (incorporated by reference to  Exhibit 10.2 to Form 10-Q for the quarter ended June 30,  2005 filed by the Registrant on August 12, 2005).         |
| 10.16 |   | Kanbay 2005 Global  Leadership Bonus Plan (incorporated by reference to Exhibit 10.1 to  Form 10-Q for the quarter ended March 31, 2005 filed by the  Registrant on May 13, 2005).                                                                                                                                                                                                                                                                                                                           |
| 10.17 |   | Guaranty and Collateral  Agreement dated as of March 9, 2006 between Kanbay International, Inc.,  certain of its subsidiaries and LaSalle Bank National Association  (incorporated by reference to Exhibit 10.2 to the Form 8-K  filed by the Registrant on March 15, 2006).                                                                                                                                                                                                                            |
| 10.18 |   | Credit Agreement dated  as of March 9, 2006 between Kanbay International, Inc., LaSalle  Bank National Association and certain financial institutions that are or may  become parties thereto (incorporated by reference to Exhibit 10.1 to the  Form 8-K filed by the Registrant on March 15, 2006).                                                                                                                                                                                                   |
| 10.19 |   | Form of the Kanbay  International, Inc. 2004 Non-Qualified Stock Option Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.20 |   | Form of the Kanbay  International, Inc. 2004 Director Non-Qualified Stock Option Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21 |   | Form of the Kanbay  International, Inc. 2005 Restricted Stock Award Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1  |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 23.1  |   | Consent of  Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

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| 23.2 |   | Consent of  Ernst & Young LLP.                                                                                                                        |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 31.2 |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 32.1 |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                            |   | KANBAY INTERNATIONAL, INC.                                       |
|----------------------------|--------|-----------------------------------------------------------------------|
| Date: March 16,  2006 | By:    | /s/ RAYMOND J. SPENCER                                                |
|                       |   | Raymond J. Spencer  Chairman of the Board and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                                  | **Signature** | ** **                                   | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** | ** ** |
|----------------------------------|---------------|----------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|------------|
| /s/ RAYMOND J.  SPENCER     |          | Chairman of the  Board and Chief Executive   |       | March 16, 2006 |      |
| Raymond J.  Spencer         |          | Officer (Principal executive officer)        |       |                |      |
| /s/ WILLIAM F.  WEISSMAN    |          | Vice President  and Chief Financial Officer  |       | March 16, 2006 |      |
| William F.  Weissman        |          | (Principal financial and accounting officer) |       |                |      |
| /s/ DONALD R.  CALDWELL     |          | Director                                     |       | March 16, 2006 |      |
| Donald R.  Caldwell         |          |                                         |       |                |      |
| /s/ KENNETH M.  HARVEY      |          | Director                                     |       | March 16, 2006 |      |
| Kenneth M.  Harvey          |          |                                         |       |                |      |
| /s/ B. DOUGLAS  MORRISS     |          | Director                                     |       | March 16, 2006 |      |
| B. Douglas  Morriss         |          |                                         |       |                |      |
| /s/ MICHAEL E.  MIKOLAJCZYK |          | Director                                     |       | March 16, 2006 |      |
| Michael E.  Mikolajczyk     |          |                                         |       |                |      |
| /s/ CYPRIAN  D’SOUZA        |          | Director                                     |       | March 16, 2006 |      |
| Cyprian  D’Souza            |          |                                         |       |                |      |
| /s/ HARRY C.  GAMBILL       |          | Director                                     |       | March 16, 2006 |      |
| Harry C.  Gambill           |          |                                         |       |                |      |

 

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