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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

Commission File Number 000-50849

KANBAY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)

6400 Shafer Court, Suite 100
Rosemont, Illinois 60018
Phone: (847) 384-6100
(Address, including zip code, and telephone number
(including area code) of registrant's principal executive office)

Securities registered pursuant to Section 12 (b) of the Act:

None.

Securities registered pursuant to Section 12 (g) of the Act:

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý.

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: o    No: ý

        The aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant on July 27, 2004, which was the day the Registrant completed an initial public offering of shares of its common stock, based on the closing sale price of $14.90 per share on such date on the Nasdaq National Market, was $245,683,120. Shares of common stock beneficially owned by each director and executive officer and by each person who beneficially owned 5% or more of the outstanding common stock have been excluded because such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of March 23, 2005, the Registrant had 33,881,482 shares of common stock, $0.001 par value per share, outstanding.

Documents Incorporated By Reference

        Certain sections of the Registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders for the year ended December 31, 2004 (the "2005 Proxy Statement") are to be filed with the Securities and Exchange Commission within 120 days after the Registrant's fiscal year ended December 31, 2004 are incorporated by reference into Part III of this Report.

KANBAY INTERNATIONAL, INC.

TABLE OF CONTENTS

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PART I.

Item 1. Business

General

        We are a global provider of information technology, or IT, services and solutions focused on the financial services industry. We combine technical expertise with deep industry knowledge to offer a broad suite of services, including business process and technology advice, software package selection and integration, application development, maintenance and support, network and system security and specialized services through our global delivery model. Our three tier global delivery model combines onsite client relationship teams, senior technical and industry experts at our offsite regional service centers and cost-effective global delivery centers in India. The three tiers of our global delivery model help us to provide our clients with value-enhancing solutions using a seamless, consistent and cost-effective client service approach.

        We focus on the financial services industry and provide our services primarily to credit service companies, banking institutions, capital markets firms and insurance companies. In providing our services, we utilize a wide array of technologies to develop customized solutions that address our clients' specific needs. As of December 31, 2004, Household International (and its affiliates within the HSBC Group), Morgan Stanley, and CitiFinancial (an affiliate of Citigroup), were among our top clients.

        Our engagements with our top clients typically involve numerous projects and multiple business units within each client and vary in complexity, scope and duration. We seek to expand our client relationships and migrate each client over time from discrete initial engagements to longer-term, recurring projects. For example, over the past several years we have successfully deepened our relationship with our largest client, Household International. For the year ended December 31, 2004, Household International, which is also our largest stockholder with approximately 14.2% of our common stock, and its affiliates within the HSBC Group, accounted for 55.6% of our total revenues. Similarly, we have successfully developed our relationship with our second largest client, Morgan Stanley, which owns approximately 4.7% of our common stock and accounted for 10.3% of our total revenues in the year ended December 31, 2004. Our five largest clients together accounted for 80.4% of our total revenues in the year ended December 31, 2004. For each of 2004 and 2003, we received at least 90% of our total revenues from clients that we worked with during the prior year.

        We have operated our business since 1989 and converted from a limited liability company to a corporation in August 2000. Our corporate headquarters are located in Rosemont, Illinois. We have regional offices located in eight countries and delivery centers in Pune and Hyderabad, India, where 2,619 technical professionals were based as of December 31, 2004. We own a 49.0% interest in SSS Holdings Corporation Limited ("SSS"), which is based in Liverpool, England and focuses on providing IT services to the securities industry.

Initial Public Offering

        On July 27, 2004, we completed the initial public offering of shares of our common stock. In connection with our initial public offering, we issued and sold 5,362,500 shares of common stock and Household Investment Funding, Inc. ("HIFI"), which is our largest stockholder and an affiliate of our largest client, Household International, sold 1,787,500 shares of common stock at an offering price of $13.00 per share. On August 4, 2004, certain other selling stockholders sold an aggregate of 1,072,500 shares of common stock at the initial public offering price of $13.00 per share upon the exercise of the underwriters' over-allotment option. We did not receive any proceeds from the sale of the 1,787,500 shares sold by HIFI or the 1,072,500 shares sold by the other selling stockholders pursuant to the underwriters' over-allotment option. After deducting underwriting discounts, commissions and offering-related expenses, the initial public offering resulted in net proceeds to us of approximately $60 million.

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Secondary Public Offering

        On December 13, 2004, we completed a secondary public offering of shares of our common stock. In connection with this offering, certain of our stockholders, including HIFI and certain members of our management team, sold 5,000,000 shares 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 shares of common stock at the public offering price of $26.50 per share upon the exercise of the underwriters' over-allotment option. We did not receive any proceeds from this offering.

Accurum Acquisition

        On March 3, 2005, we acquired Accurum, Inc., an IT services provider to the capital markets industry. Accurum provides application development, enterprise application integration, web services, data warehousing and quality assurance and testing within the front and middle office of capital markets firms, including sales and trading, risk management and research. We expect that this acquisition will complement the solutions that we offer to our capital markets clients in the areas of asset management, investment banking and securities trading. Accurum has 169 employees worldwide, located in offices in New York and New Jersey and a solution center in Chennai, India. The purchase price consisted of a $5 million closing payment, subject to certain adjustments, plus contingent payments of up to $7 million payable upon the achievement of certain performance targets. Accurum will continue to operate under its own name as a wholly-owned subsidiary of ours.

Industry Background

        The role of IT has evolved from simply supporting business enterprises to enabling their expansion and transformation. To succeed in today's marketplace, companies must respond rapidly to market trends, create new business models and improve productivity. Multiple technology platforms and an enhanced emphasis on security and back-up facilities have increased the complexity and cost of IT systems, resulting in greater IT-related risks. The increased complexity, cost and risk have created a growing need for specialists with experience in leveraging technology to support business strategy and expansion.

        Many companies have been forced to reduce their IT budgets as well as place a greater emphasis on closely managing IT spending and improving their return on investments. To accomplish these objectives, many IT departments have shifted all or a portion of their IT development, integration and maintenance requirements to outside IT service providers. In the current market environment, the global financial services industry is faced with a number of challenges, including increased regulatory scrutiny, growing competition and ongoing domestic and international consolidation. Consequently, companies within the financial services industry are looking externally for solutions that allow them to reduce costs and improve performance. Total global IT services spending within the financial services industry is expected to increase from $138.6 billion in 2004 to $177.7 billion in 2008, representing a compound annual growth rate of 6.4%. The financial services industry is expected to account for approximately 23% of total global IT services spending from 2004 to 2008.

Competitive Strengths

        We believe our competitive strengths include:

        Deep industry expertise.    We have developed expertise in the financial services industry, with a specific focus on credit services companies, banking institutions, capital markets and insurance. Our industry focus has enabled us to acquire a thorough understanding of our clients' business issues and applicable technologies, which allows us to deliver services and solutions tailored to each client's needs. We combine our deep knowledge of industry practices and challenges with an understanding of our clients' requirements to provide high quality, timely services. Because of our specific industry focus, a significant economic downturn in the financial services industry could negatively affect our business.

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        Three-tier global delivery model.    Our global delivery model allows us to provide each of our clients with a responsive and accessible relationship management team at the client's location, a readily available offsite team of technology and industry experts at one of our regional delivery centers and a cost-effective application development, maintenance and support team at one of our global delivery centers in India. We believe the processes and technology infrastructure comprising our three-tier global delivery model enable us to effectively integrate our onsite and offsite execution capabilities to deliver seamless, consistent services on a global basis. Although our global delivery model allows us to provide these benefits to our clients, demand for our services could decline as a result of negative public perception regarding, or new legislation restricting, the use of offshore IT service providers.

        Commitment to attracting, developing and retaining the highest quality employees.    We believe we have established a business culture throughout Kanbay that enables us to attract and retain the best available industry talent. From 2002 to 2004, we retained an average of 88% of our employees even though the number of our employees grew significantly. We believe that our high employee retention rate provides tangible benefits to our clients, such as low turnover on long-term engagements, retention of knowledge which can be applied to new projects, consistent quality and competent and responsive personnel. We expect that we will continue to grow and our anticipated growth could place a significant strain on our ability to maintain our culture and provide these tangible benefits to our clients.

        Long-term client relationships.    We have long-standing relationships with many large, international companies within the financial services industry. We focus on building enduring relationships with both existing and new clients and strive to achieve close interaction at every level of their organizations. Our ability to successfully deliver consistent, seamless solutions on a global basis combined with our deep knowledge of the financial services industry helps us expand the breadth and scope of our engagements with existing clients. We manage client relationships with our relationship development methodology, which helps us to migrate our clients over time from discrete initial engagements to longer-term, recurring projects. Because of our long-standing relationships, we have historically earned, and believe that in the future we will continue to earn, a significant portion of our revenues from a limited number of clients.

        Scalable global business model.    We believe that the combination of our three-tier global delivery model and our financial services industry focus allows us to quickly deploy project teams to engage new projects and rapidly meet client needs. Our ability to rapidly deploy our project teams on new engagements and to provide our services to our clients is dependent on many factors, including continued compliance with various immigration restrictions and the maintenance of our global communications infrastructure.

Risk Factors

        Our business, financial condition and operating results may suffer if any of the following risks are realized:

•

we lose any of our significant clients;



•

the financial services industry experiences a significant economic downturn;



•

we are unable to compete effectively against our larger competitors;



•

negative perception or new legislation regarding offshore IT service providers reduces demand for our services; or



•

we experience cost increases or disruptions of our operations in India.

        For a more detailed discussion of the risk factors that may affect our business, financial condition and operating results, please see Exhibit 99.1 to this report, which is incorporated by reference herein.

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Our Services

        We offer a broad suite of services to companies in the financial services industry that combines our industry expertise and technology capabilities. Our service offerings are fully integrated and include the following:

        Business process and technology advisory services.    We assist our clients by recommending the solution that is most appropriate to accomplish their objective in a cost-effective and timely manner. Through our business process and technology advisory services, we deploy our senior consultants and industry and technical experts to advise clients about how to best address business challenges and achieve objectives through the appropriate use of technology. Our consultants and experts offer industry perspectives and best practices in order to assist our clients with defining, optimizing and aligning their business objectives.

        Software package selection and integration.    We assist our clients in the selection and integration of software packages developed by third party vendors. Our employees have expertise in various software packages spanning our target sectors within the financial services industry, including electronic notification software for the banking industry, real-time credit card transaction processing applications, application and payment processing solutions for insurance companies and portfolio accounting applications for investment management firms.

        Application development, maintenance and support.    We provide application development, maintenance and support services for our clients' technology platforms, from web servers to legacy mainframes. Our application development capabilities span the software development life cycle, including defining software requirements, writing software programs and designing, prototyping, building, integrating, producing and implementing custom applications.

        Network and system security.    Our network and system security services include consulting on internet security assessment and strategy, developing internet security solutions and reviewing and monitoring internet security on an ongoing basis. In addition, we implement network and system security solutions such as identity authentication, encryption, firewalls, intrusion detection, anti-virus shields, virtual private networks, content management, application traffic management and biometrics. We have entered into reseller agreements with certain network and system security software vendors to license and support their software products.

        Specialized services.    Some of the specialized services we offer our clients include business intelligence, application management outsourcing and application testing and validation. Our business intelligence services utilize our tools and third party software to enable our clients to discover trends in their internal business or customer data and compare those trends to market data. 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 level agreements. Our application testing and validation services offer a unique pay-per-use model that enables clients to minimize costs by paying for these services as needed.

Our Clients

        We provide our services to companies in the financial services industry with a particular focus on credit service companies, banking institutions, capital markets firms and insurance companies.

        We have long-standing relationships with many large, international companies within the financial services industry. We focus on building enduring relationships with both existing 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 that we will continue to earn, a significant portion of our revenues from a limited number of clients. Household International, which is our largest client and our largest stockholder, accounted for 55.6%, 53.2% and 47.4% of our total revenues in the years ended December 31, 2004, 2003 and 2002,

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which in 2004 and 2003, included revenues from its affiliates within the HSBC Group. Morgan Stanley, which is our second largest client, accounted for 10.3%, 13.0% and 13.5% of our total revenues in the years ended December 31, 2004, 2003 and 2002. Our five largest clients together accounted for 80.4%, 80.7% and 74.7% of our total revenues in the years ended December 31, 2004, 2003 and 2002.

Credit Services

        We service various credit services companies, including, bank card and retail (private label) card issuers, payment processors and technology vendors. We have long-standing relationships with credit services companies around the world, such as Household International, CitiFinancial, Development Bank of Singapore and HDFC Bank.

        We provide our services to these credit services companies to help them accomplish various objectives, including:

•

improving their ability to process new and existing accounts;



•

collecting delinquent accounts;



•

organizing demographic information and customer purchasing history for marketing to new accounts;



•

enhancing their customer service capabilities; and



•

streamlining their processes for credit approval and financial authorization.

Banking Institutions

        The banking institutions we serve include multi-national commercial and retail banks and consumer finance companies around the world. These institutions include Household International (and its affiliates within the HSBC Group), CitiFinancial, and American General Finance (an affiliate of AIG).

        Our solutions help these institutions:

•

enhance their product offerings by decreasing loan approval times and providing easier access to product information;



•

add new functions to existing systems to meet governmental regulatory and compliance requirements;



•

lower costs by decreasing system processing times and creating more efficient processes; and



•

increase customer satisfaction by providing easy access to account information.

Capital Markets Firms

        We serve various types of capital markets firms, including asset management institutions, securities brokerage firms, private wealth management firms, investment banking institutions, securities exchanges and hedge funds. Our largest client in this industry is Morgan Stanley.

        Our services to these capital markets firms enhance their ability to:

•

match clients with relevant market research and trading opportunities;



•

track employee performance against sales targets;



•

enable their customers to utilize extranet sites to view reports generated from multiple internal systems;



•

increase fund accountant productivity; and



•

improve access to portfolio accounting data.

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Insurance Companies

        We serve insurance companies that provide life, property and casualty, health, commercial and supplemental life insurance. These clients include such companies as Sun Life Financial, Winterthur Life, Advocate Health and The Regence Group (an affiliate of Blue Cross and Blue Shield).

        We design, develop and implement solutions for our insurance clients that:

•

enable rapid entry into new geographic markets by reducing programming hours;



•

provide insurance agents and policyholders access to policy information via the web;



•

reduce the cost of ensuring state-by-state regulatory compliance by leveraging our global delivery model;



•

simplify and automate policyholder billing and payment processes, reducing customer inquiries and needed support staff; and



•

reduce testing costs by creating a comprehensive testing environment for both initial deployment and ongoing system testing.

Our Global Delivery Model

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

•

responsiveness and accessibility of a relationship team at the client's location;



•

readily available offsite senior technical and industry experts;



•

economic leverage of a technical global delivery center;



•

the ability to accelerate delivery timetables by simultaneously processing project components at different locations;



•

round-the-clock execution capability spanning multiple time zones;



•

access to a large pool of highly skilled and experienced IT professionals;



•

physical and operational separation of client projects to provide enhanced security; and



•

a knowledge management solution that enables us to leverage our global financial services industry expertise.

        The objective of our three-tier global delivery model is to effectively integrate our onsite and offsite execution capabilities to deliver seamless, consistent services on a global basis. For most engagements, a multi-site team of our employees is assembled that includes a relationship management team at the client's location, offsite senior technical and industry experts at one of our regional service centers and an application development, maintenance and support team at one of our delivery centers in India. The client's system is then connected to our system to enable simultaneous processing of project components by our onsite and offsite personnel. Our onsite and offsite project managers have joint accountability for each project.

        Our regional service centers are typically located in the client's region to offer technical and industry expertise and timely responses. Our delivery centers in Pune and Hyderabad, India offer technology and industry expertise in addition to cost-effective delivery. We intend to expand our facilities in Pune, India and to commence construction of a new facility in Hyderabad, India to replace the delivery center that we currently lease.

        Our quality control programs and processes are designed to proactively identify and effectively resolve potential problems. Our programs and processes are CMM Level 5-assessed on a global basis. In addition, we have been ISO 9001-certified each year since 2001. Our quality control employees track

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relevant metrics to ensure adherence to our processes, conduct periodic internal quality audits of our projects to facilitate project level defect prevention and perform various process improvement activities.

        Our significant investment in our communications infrastructure is designed to provide uninterrupted service to our clients. Our communications infrastructure is composed of redundant high-speed optical fiber, backup satellite links and multiple path routing between our delivery centers in India and our clients' facilities. Our delivery centers in India rely on high-speed fiber optic intra-company connectivity and an on-premises satellite earth station for redundancy. In addition, our proprietary software tools provide our clients real-time access to global project status reports and a searchable central repository for project documents. These tools also enable us to monitor and synchronize different versions of software development projects being worked on in multiple centers and minimize management overhead costs.

Global Business Development

        We market our services through our global business development group, which is divided into the following groups:

•

marketing and sales support;



•

new client business development;



•

industry practice group and alliance management leaders; and



•

client account managers supported by our relationship practices group.

        Our sales approach emphasizes our combination of deep knowledge of the financial services industry, technical expertise and reliable delivery of cost-effective solutions. The goals of our sales approach include increasing the average order amount, decreasing the length of the sales cycle, developing new and innovative business solutions and expanding our relationships with existing clients to achieve close interaction at every level of their organizations.

SSS Holdings Corporation Limited

        As of December 31, 2004, we held 49.0% of the ownership interest in SSS Holdings Corporation Limited ("SSS"), which we originally acquired in November 2000 in exchange for 2,086,697 shares of our common stock valued at approximately $15.9 million. SSS is a Liverpool, England based IT services firm focused primarily on providing software maintenance and development and business process 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, 2004, SSS had revenues of £34.9 million, or approximately $63.9 million, and our share of the earnings of SSS provided us with $2.5 million of equity in earnings of affiliate.

Intellectual Property

        We do not rely on patents and do not believe that patents are important to our business. We rely upon a combination of trade secrets and nondisclosure and other contractual arrangements to protect our intellectual property rights and proprietary methodologies. It is our policy to enter into confidentiality agreements with our employees and consultants, and we generally control access to and distribution of our proprietary information. We pursue the registration of certain of our trademarks and service marks in the United States and other countries. We have registered "Kanbay" and our logo in the United States, New Zealand, Japan, the European Community, China and Australia.

        We generally implement safeguards designed to protect our clients' intellectual property in accordance with our clients' needs and specifications. Compliance with these safeguards is the

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responsibility of our management and is generally monitored by our clients through inspections or audits. The safeguards we implement may include some or all of the following:

•

segregation of the work area at our global delivery centers dedicated to a particular client from the work areas dedicated to other clients;



•

limited, secure-access to a client's server room, with regular monitoring of entries and exits;



•

separate, encrypted communication links between our global developers and the client's network;



•

custom configuration of computers used for the client's project to include only the hardware and software specified by the client; and



•

training programs to ensure that our employees are aware of, and sensitive to, the client's confidentiality needs.

Competition

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

•

strategically execute engagements to deliver value-added and reliable solutions to our clients;



•

utilize industry and technical expertise to enable our clients to achieve their business objectives;



•

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



•

maintain financial strength to support investment in personnel and global infrastructure;



•

complete projects on time and within budget; and



•

other cost-effective pricing of services.

        We believe that we compete effectively on all of these factors.

        The global IT service providers with whom we compete fall into three broad categories: offshore IT service providers, large consulting and other professional service firms and in-house IT departments of large corporations. Some of our competitors have significant resources and financial capabilities combined with much larger numbers of IT professionals. As a result, these competitors may be better positioned to use significant economic incentives to secure contracts with our existing and prospective clients. These competitors may also be better able to compete for skilled professionals by offering them more attractive compensation or other incentives.

        Offshore IT service providers generally have some sales presence and software consultants working in North America or Europe, but execute most of their work offshore. In India alone, there are many offshore IT service providers, with a few top companies firmly established in the global market. The offshore IT service providers with whom we primarily compete include Cognizant Technology Solutions, Infosys Technologies and Wipro.

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

        We believe that we are well positioned against competition because we are one of the few companies that cater primarily to the financial services industry. Through our global delivery model, we combine our onsite and offsite capabilities to balance cost and customer proximity. Many offshore service providers have business operations primarily in India, which allows them to offer lower-cost services, but their lack of onsite and offsite regional capabilities causes them to sacrifice customer intimacy. On the other hand, most multi-national service providers have extensive onsite client management capabilities, but these capabilities generally include large overhead costs which increase the cost of their services. We have a strong presence in the U.S., which we believe enables us to couple proximity to customers with a strong and cost-effective global delivery and support function.

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Operating Segment and Geographic Information

        We provide IT management consulting services and operate our business as a single operating segment. The majority of our services continue to be provided to clients in North America. In 2004, approximately 86% of our revenues came from work performed in North America, 10% from Asia/Pacific and 4% from Europe. Information regarding our revenues and total assets by geographic area for the three-year period ended December 31, 2004 is presented in note 14 of the audited consolidated financial statements included in this report.

Employees

        As of December 31, 2004, we had 3,708 full-time employees. In North America, we had a total of 670 employees, including 538 IT professionals and 132 sales, marketing and administrative personnel. We have one office in the United Kingdom, with a total of 24 employees. In the Asia-Pacific region, we operate from three offices in Australia and one each in Hong Kong, Singapore and Japan, with a total of 106 employees. Our India staff works from our delivery centers in Pune and Hyderabad with a total of 2,908 employees, including 2,619 IT professionals and 289 finance, recruiting, staffing, facility management and administrative personnel.

Available Information

        Our Internet website is http://www.kanbay.com. We make available free of charge on or through our Internet website this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonable practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

        Information contained on our website is not part of this report and shall not be deemed to be incorporated by reference into this report or any other public filing made by us with the SEC.

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Item 2. Properties

        Our principal executive offices are located in Rosemont, Illinois. Our delivery center in Pune, India consists of four buildings and houses an onsite satellite earth station, dedicated communication links to clients and a technology learning training center. We own one of the buildings in Pune and lease the other three. We currently lease our delivery center in Hyderabad, India. We have multiple leases for our facilities in Pune and Hyderabad. The terms of these leases vary and have expiration dates ranging from March 2006 to September 2007.

        As of December 31, 2004, we conducted our business from the following properties:

(1)

On March 3, 2005, we acquired Accurum, Inc. Accurum leases its offices located in New York and New Jersey and its solution center in Chennai, India. The terms of these leases vary and have expiration dates ranging from April 2007 to November 2011.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

        None.

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Item 5. Market for the Company's Common Equity and Related Stockholders Matters

Market Information

        Our common stock has been traded on the Nasdaq National Market under the symbol "KBAY" since July 22, 2004. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated in the fiscal year ended December 31, 2004, the high and low sales price per share for our common stock as reported on the Nasdaq National Market.

Holders

        As of March 28, 2005, there were 48 holders of record of our common stock.

Dividends

        We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, our ability to pay dividends is restricted by certain provisions contained in our revolving credit facility which provides that we may not pay any dividends without written consent from Silicon Valley Bank.

Securities Authorized for Issuance under Equity Compensation Plans

        In addition, as of December 31, 2004, there were 500,000 shares available for issuance under our Employee Stock Purchase Plan, which is an equity compensation plan approved by security holders. There are no equity compensation plans that have not been approved by security holders.

Recent Sales of Unregistered Securities

        On December 19, 2003, we issued and sold 440,062 shares of common stock in connection with the exercise of options for an aggregate exercise price of $558,570. The options were exercised by six former employees and one estate of a former employee. The options were granted in 1999 pursuant to the Kanbay International, Inc. 1998 Non-Qualified Option Plan. At the time the options were granted, each former employee was employed by or providing services to us. The sale of these shares was exempt from registration under the Securities Act pursuant to Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to a written compensatory benefits plan.

        On May 21, 2004, we issued and sold 62,596 shares of common stock upon the exercise of a warrant for an aggregate exercise price of $294,043. The warrant was exercised by The Co-Investment 2000 Fund, L.P. The sale of these shares was exempt from registration under the Securities Act pursuant to Section 4(2) as a transaction not involving a public offering.

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        On November 19, 2004, we issued 40,963 shares of common stock upon the conversion of a warrant by Silicon Valley Bancshares. The sale of these shares was exempt from registration under the Securities Act pursuant to Section 4(2) as a transaction not involving a public offering.

Use of Proceeds

        On July 27, 2004, we completed our initial public offering of shares of our common stock. In connection with our initial public offering, we offered and sold 5,362,500 shares of our common stock and HIFI offered and sold 1,787,500 shares of our common stock at a price of $13.00 per share. The offer and sale of the shares in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1, as amended (File No. 333-113495), which was declared effective by the Securities and Exchange Commission on July 21, 2004. The managing underwriters in this offering were UBS Securities LLC, Robert W. Baird & Co. Incorporated and Janney Montgomery Scott LLC. On August 4, 2004, certain selling stockholders offered and sold 1,072,500 additional shares of our common stock at a price of $13.00 per share upon the exercise of the underwriters' over-allotment option.

        The aggregate price of the shares sold in our initial public offering, including the shares sold pursuant to the underwriters over-allotment option, was $106.9 million. Our portion of the net proceeds from the initial public offering was $60.4 million. In connection with the initial public offering, we paid underwriting discounts and commissions of $4.9 million and offering expenses of $4.5 million. We did not receive any proceeds from the sale of the 1,787,500 shares sold by HIFI or the 1,072,500 shares sold by other selling stockholders pursuant to the underwriters' over-allotment option. The net proceeds were invested in interest bearing short term and long term marketable securities. We currently plan to spend approximately $45 million of the net proceeds for the construction of a new delivery center in Hyderabad, India and the expansion of our delivery center in Pune, India. Since June 30, 2004, we spent approximately $8 million for the renovation of our facilities in India. We plan to spend approximately $28 million in 2005 and $9 million in 2006 on facility expansion activities.

        On December 13, 2004, we completed a secondary public offering of shares of our common stock. In connection with this offering, certain of our stockholders, including HIFI and certain members of our management team, sold 5,000,000 shares 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 shares of common stock at the public offering price of $26.50 per share upon the exercise of the underwriters' over-allotment option. We did not receive any proceeds from this offering.

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Item 6. Selected Financial Data

        The following table presents selected historical consolidated financial data as of, and for the years ended, December 31, 2000, 2001, 2002, 2003, and 2004, which has been derived from our audited consolidated financial statements. You should read this information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes for the years ended December 31, 2002, 2003 and 2004, which are included in the audited consolidated financial statements.

(1)

On November 30, 2000, we acquired a 49.4% interest in SSS Holdings Corporation Limited (SSS) in exchange for 2,086,697 shares of our common stock valued at approximately $15.9 million. As of December 31, 2004, we owned approximately 49.0% of SSS. We account for SSS under the equity method of accounting.

(2)

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 does not permit goodwill and indefinite-lived intangible assets to be amortized. Upon adoption of SFAS No. 142, we recorded a non-cash charge of $2.0 million to reduce the carrying value of goodwill. This non-cash charge was recorded as a cumulative effect of an accounting change. If we had applied SFAS No. 142 retroactively as of January 1, 2000, our net income (loss) would have been $(12.0 million) in 2000 and $(2.4 million) in 2001.

(3)

For the period from January 1, 1999 through August 23, 2000, we operated as a Delaware limited liability company (LLC). On August 24, 2000, we converted from a LLC into a Delaware C corporation when all members exchanged their common and preferred units in the LLC for an equivalent number of shares of our common and preferred stock. Income (loss) per share of common stock and average shares outstanding is presented for the years during which we operated as a C corporation.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report.

Overview

        We are a global provider of information technology services and solutions focused on the financial services industry. We combine technical expertise with deep industry knowledge to offer a broad suite of services, including business process and technology advice, software package selection and integration, application development, maintenance and support, network and system security and specialized services, through our global delivery model. We focus on the financial services industry and provide our services primarily to four industry groups with whom we work—credit services, banking, capital markets and insurance.

        Revenues increased to $182.6 million in 2004, from $107.2 million in 2003 and $82.6 million in 2002. Net income increased to $27.4 million, or $0.83 diluted earnings per share in 2004, from $11.4 million and $2.8 million, or $0.50 and $0.23 diluted earnings per share, in 2003 and 2002, respectively. Revenues increased in each industry group we serve and the increases were particularly strong in the insurance and capital markets industries. Revenues from both related parties and third parties have increased in 2004 over the prior year. The majority of our services continue to be provided to clients in North America. Approximately 86% of our revenues came from work performed in North America, 10% from Asia/Pacific and 4% from Europe in 2004.

        Our income from operations increased to $31.1 million in 2004, compared to $8.3 in 2003 and $3.1 in 2002. As a percentage of revenues, income from operations increased to 17.0% in 2004, from 7.7% and 3.8% in 2003 and 2002, respectively. The growth was primarily due to higher gross margins and a decrease in selling, general and administrative expenses as a percentage of revenue. Gross margins increased primarily due to an increase in the amount of our services delivered from our offshore delivery centers in India, which yield higher gross margins than services performed at our onsite and offsite locations. Our selling, general and administrative expenses have decreased as a percentage of revenue as our basic support infrastructure, including finance, human resources and IT support functions, enabled us to increase our volume of activity with limited increases in expenditures.

Initial Public Offering

        On July 27, 2004, we completed the initial public offering of shares of our common stock. In connection with our initial public offering, we issued and sold 5,362,500 shares of common stock and Household Investment Funding, Inc. ("HIFI"), which is our largest stockholder and an affiliate of our largest client, Household International, sold 1,787,500 shares of common stock at an offering price of $13.00 per share. On August 4, 2004, certain other stockholders sold 1,072,500 shares of common stock at the initial public offering price of $13.00 per share upon the exercise of the underwriters' over-allotment option. We did not receive any proceeds from the sale of the 1,787,500 shares sold by HIFI or the 1,072,500 shares sold by other selling stockholders pursuant to the underwriters' over-allotment option. After deducting underwriting discounts, commissions and offering-related expenses, the initial public offering resulted in net proceeds to us of approximately $60 million.

Secondary Public Offering

        On December 13, 2004, we completed a secondary public offering of shares of our common stock. In connection with this offering, certain of our stockholders, including HIFI and certain members of our management team, sold 5,000,000 shares 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 shares of

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common stock at the public offering price of $26.50 per share upon the exercise of the underwriters' over-allotment option. We did not receive any proceeds from this secondary public offering.

Accurum Acquisition

        On March 3, 2005, we acquired Accurum, Inc., an IT services provider to the capital markets industry. Accurum provides application development, enterprise application integration, web services, data warehousing and quality assurance and testing within the front and middle office of capital markets firms, including sales and trading, risk management and research. We expect that this acquisition will complement the solutions that we offer to our capital markets clients in the areas of asset management, investment banking and securities trading. Accurum has 169 employees worldwide, located in offices in New York and New Jersey and a solution center in Chennai, India. The purchase price consisted of a $5 million closing payment, subject to certain adjustments, plus contingent payments of up to $7 million payable upon the achievement of certain performance targets. Accurum will continue to operate under its own name as a wholly-owned subsidiary of ours.

Sources of Revenues

        Our revenues are generated principally from IT services provided on either a time-and-materials or a fixed-price basis. Revenues from services provided on a time-and-materials basis are recognized as the related services are performed. Revenues from services provided on a fixed-price basis are recognized pursuant to the proportionate performance method. In addition, our service level agreements call for us to provide a fixed number of hours of service per year, but do not have defined deliverables. Revenues from these agreements are also recognized in accordance with the proportionate performance method. Most of our client contracts, including those that are on a fixed-price basis, can be terminated with or without cause on 30 to 90 days notice. All services provided by us through the date of cancellation are due and payable under the contract terms. Because we bear the risk of cost overruns and inflation with respect to fixed-price projects, our operating results could be adversely affected by inaccurate estimates of contract completion costs. Losses on contracts, if any, are provided for in full in the period when determined. In order to manage these risks, we have a strictly enforced process for approval of project estimates during the preparation of engagement proposals. We then closely monitor the progress on all projects and account relationships.

        Our decision to focus on the financial services industry has allowed us to develop a high level of expertise in the markets we serve, which has played an important role in our growth in recent years. We have been particularly successful in enhancing our ability to serve the credit services market through the development of our knowledge of the systems, processes and business issues specific to this market. We continue to focus on further developing our capabilities in the other financial services markets we serve, through training programs and the hiring of industry experts. Because of the size of the financial services industry and the projected compound annual growth rate of approximately 6.4% in global IT services spending within the financial services industry, we believe there is significant opportunity to expand our business. However, we also believe we will be facing increased competition. Many IT services firms have obtained or are obtaining an offshore delivery capability to be more competitive on price and many clients and potential clients are developing an internal offshore capability. While this is a challenge, we believe we can limit the impact by continuing the development of our technical and business knowledge in the markets we serve. This is evidenced by the fact that some of our largest clients have had an internal offshore capability in place for many years but continue to use our services because of our technical capability and industry expertise.

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

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        We also generate revenues through the sale of third party software licenses and related maintenance contracts. Revenues from these sources accounted for $9.2 million of our revenues in 2004. These revenue levels have remained relatively constant in recent years, while services revenues have grown. Consequently, revenues from the sale of third party software licenses and related maintenance contracts have gradually declined as a percentage of total revenues, decreasing from 11.9% in 2000 to 5.0% in 2004. We provide software development services to our clients, but we do not develop software for sale or license to our clients or other third parties. The software development services we provide involve software that is owned by our clients and we provide our services in exchange for a fee.

        Revenues from our largest client, Household International, have grown significantly, increasing from $31.3 million in 2001 to $101.6 million in 2004. This growth has been driven by rapid expansion at Household International and the acquisition of Household International by HSBC Holdings plc in March 2003.

        By employing our relationship development methodology, we have successfully retained and grown many of our long term client relationships. This has enabled us to effectively grow our business and expand our industry knowledge. However, it has also resulted in a high customer concentration. In order to drive additional growth and reduce our dependence on a small number of clients, we have made significant investments in business development, including the creation of a dedicated business development team focused exclusively on generating engagements with new clients. Our spending on business development grew from $6.1 million in 2002 to $17.5 million in 2004, a 186.9% increase.

        Many companies have been forced to reduce their IT project spending, resulting in pricing pressures within the IT service market. As a result, we have experienced pricing pressure which has had an adverse effect on our revenues, gross margins and net income. However, we believe that our in-depth knowledge of the processes and applications in the areas of the financial services industry that we serve has partially shielded us from pricing pressure. Despite some pricing pressure, we increased our gross margins and net income in each of 2002, 2003 and 2004 by improving our employee utilization and performing more of our services at our delivery centers in India, which yield significantly higher gross margins than services performed at client sites or at our offices located outside of India. Our gross margins in 2002, 2003 and 2004 were 43.1%, 45.2% and 47.4%, respectively. While the market conditions that impact our pricing are difficult to predict, we do not expect a material impact, either positive or negative, on our pricing in 2005.

        Our actual billing rates are impacted by the type and size of our engagements. For example, we typically charge higher rates on complex development projects than we do on maintenance projects. Also, we may discount larger engagements as compared to comparable engagements of a smaller size. Our marketing efforts 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 our average billing rates.

Cost of Revenues and Gross Profit

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

        The proportion of work performed at our facilities and at client sites varies from quarter to quarter. We charge higher rates and incur higher compensation and other expenses for work performed at client sites and our offices located outside of India. Services performed at client sites or our offices located outside of India typically generate higher revenues per-capita at lower gross margins than the same services performed at our delivery centers in India. As a result, our total revenues, cost of revenues and gross profits in absolute terms and as a percentage of revenues fluctuate from quarter to quarter based on the proportion of work performed in India. We hire subcontractors on a limited basis

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from time to time to supplement our technical staff. In 2004, approximately 6.3% of our cost of revenues was attributable to subcontracting costs. We do not anticipate that our subcontracting needs will increase significantly as we expand our business.

        We charge our related parties, Household International and Morgan Stanley, rates that are consistent with those charged to other clients, with an appropriate level of discount for volume. The ratio of offshore to onsite employees staffed on our engagements with Household International varies for each engagement. Consequently, some of those engagements result in gross margins that are at or above our average gross margins, while others result in gross margins that are at or below our average gross margins. In 2004, our average gross margins on our engagements with Household International were slightly above our average gross margins. Our engagements with Morgan Stanley are not staffed with a high ratio of offshore to onsite employees. As a result, our average gross margins on our engagements with Morgan Stanley are usually below our average gross margins.

        Under the consulting agreement with Household International, we perform a broad range of information systems services for various business units within the HSBC Group. Under the consulting agreement with Morgan Stanley, we perform systems analysis and design, computer programming and other consulting services. The services provided, economic terms and the other provisions of these agreements are similar to those prevailing with unrelated parties.

        According to Hewitt Associates, salary levels of software development professionals in India rose 11.2% in 2002, 13.7% in 2003 and 14.5% in 2004. This is the result of the strong demand for these professionals in India. Salary increases in the other regions in which we operate have been more reflective of increases in the costs of living. We anticipate that salaries for software development professionals in India will continue to rise at those levels in the foreseeable future. In 2002, 2003 and 2004, our gross margins increased despite these salary increases because of increases in the amount of services performed at our delivery centers in India and increased utilization of our IT professionals. However, we believe we are now operating at near optimal levels in these areas of efficiencies. We believe we will be able to command higher billing rates and maintain our gross margins in the future if we continue to strengthen our financial services industry expertise.

        Our revenues and gross profits are also impacted by our ability to efficiently manage and utilize our employees. As of December 31, 2004, we had 3,708 employees, of which 3,243 were technical professionals. We manage employee utilization by continuously monitoring project requirements and timetables to ensure that we have effectively staffed our projects to meet our clients' needs. The number of employees assigned to a project will vary according to the size, complexity, duration and demands of the project. An unanticipated termination of a significant project could cause us to experience a higher than expected number of unassigned IT professionals, thereby lowering IT professional employee utilization. In addition, we do not fully utilize our IT professionals when they are enrolled in training and educational programs. In 2004, 2003 and 2002, utilization rates for our Indian employees were 74.0%, 74.0% and 70.0%, respectively, and utilization rates for our onsite employees were 89.3%, 85.8% and 81.5%, respectively.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses consist primarily of salaries, employee benefits, travel, promotion, communications, management, finance, administrative and occupancy costs as well as stock compensation expense. Selling, general and administrative expenses as a percentage of revenue were 36.0%, 34.4% and 27.2% in 2002, 2003 and 2004, respectively.

Other Income and Expense

        Other income and expense includes interest income, interest expense, foreign currency exchange gains and losses, equity in earnings of affiliate and provisions for losses on investments. Foreign currency gains and losses are generated primarily by fluctuations of the Indian rupee against the U.S. dollar. As explained in note 1 to our audited consolidated financial statements, our Indian

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subsidiary's functional currency is the U.S. dollar, which results in non-monetary assets and liabilities being translated at historical exchange rates, while monetary assets and liabilities are translated at current exchange rates. This may result in gains or losses which are reflected in other income.

        We own 49.0% of SSS Holdings Corporation Limited ("SSS"), which is a Liverpool, England based IT services firm that focuses primarily on the securities industry with revenues earned predominantly in the United Kingdom. Because we own less than 50% of SSS, 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 of accounting for investments in common stock, which is described in more detail in note 4 to our audited consolidated financial statements.

Income Tax Expense

        Our net income earned from providing services is subject to tax in the country in which we perform the work. We have benefited from net operating loss carry forwards in the United States, the remaining balance of which was used in 2003. Currently, we benefit from the tax holidays in India, which are available to export-oriented IT services firms. As a result of these net operating loss carry forwards and tax holidays, our operations have been subject to minimal tax liabilities. With the net operating loss carry forwards in the United States no longer available, our effective tax rate increased to approximately 20% in the fourth quarter of 2003. Our exact effective tax rate in future periods will vary based on our geographic earnings. Our tax holidays in India will phase out partially on March 31, 2005 and will phase out completely on March 31, 2009. Once these holidays begin to phase out, our effective tax rate will materially increase.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

        On an ongoing basis, we evaluate our estimates. The most significant estimates relate to the allowance for doubtful accounts, reserves for employee benefits, income taxes, depreciation of fixed assets and long-lived assets and the recognition of revenue and profits based on the proportionate performance method of accounting for fixed-bid contracts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from the estimates and assumptions used in the preparation of the accompanying financial statements.

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

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        We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

        Our service contracts are entered into on either a time-and-materials or fixed-price basis. Our fixed-price contracts primarily relate to application development and enhancement projects. Revenues related to time-and-materials contracts are recognized as the service is performed. Revenues related to fixed-price contracts are recognized as the service is performed using the proportionate performance method of accounting, under which the sales value of performance, including estimated earnings thereon, is recognized on the basis of the percentage that each contract's cost to date bears to the total estimated cost.

        In general, fixed-price contracts are cancelable subject to a specified notice period. All services provided by us through the date of cancellation are due and payable under the contract terms. We issue invoices related to fixed-price contracts based upon achievement of milestones during a project or other contractual terms. Differences between the timing of billings, based upon contract milestones or other contractual terms, and the recognition of revenue, based upon the proportionate performance method of accounting, are recognized as either unbilled or deferred revenue. We do not incur significant up-front costs associated with these fixed-price contracts, and all costs related to the services provided are expensed as incurred. Estimates are subject to adjustment as a project progresses to reflect changes in expected completion costs or dates. The cumulative impact of any revision in estimates of the percentage of work completed is reflected in the financial reporting period in which the change in estimate becomes known, and any anticipated losses on contracts are recognized immediately. Warranty provisions exist under some contracts, which generally exist for a period ranging from 30 to 90 days past contract completion. If warranty provisions exist, they are included in the total estimated cost when we calculate proportionate performance. However, a reserve is not maintained as the amounts of such potential warranty obligations are not material. Our failure to estimate accurately the resources and time required for a fixed-price project, or our failure to complete our contractual obligations within the time frame committed, could have a material adverse effect on our business, operating results and financial condition. We carefully monitor fixed-price projects. Project managers periodically submit percentage of completion data to our accounting department, which then makes any necessary adjustments. Our fixed-price contract estimates have been accurate in the past, properly reflecting revenue as it was earned.

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

        Our Australian subsidiary sells third party software licenses and maintenance agreements for the support of those products. Revenues from the sale of third party licenses are recognized in the financial reporting period in which the licenses are delivered. Maintenance agreements generally cover a period of 12 months from the date of sale. Revenues from maintenance contracts are amortized over the term of the agreement. The unrecognized portion of the revenue at the end of each period is recorded as deferred revenue.

Foreign Currency Translation

        The assets and liabilities of our Canadian, Asian and European subsidiaries are translated into U.S. dollars from local currencies at current exchange rates and revenues and expenses are translated from local currencies at average monthly exchange rates. The resulting translation adjustments are recorded in a separate component of stockholders' equity. For our Indian subsidiary, the functional currency is the U.S. dollar. Because our sales are made primarily in the United States, the sales price is predominantly in U.S. dollars and there is a high volume of intercompany transactions denominated in U.S. dollars between the Indian and U.S. entities. Non-monetary assets and liabilities are translated at

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historical exchange rates, while monetary assets and liabilities are translated at current exchange rates. The resulting gain or loss is included in other income. A 5.0% decrease in the value of the U.S. dollar against the Indian rupee would result in a reduction in other income of approximately $2.9 million based on our current operations.

Allowance for Doubtful Accounts

        We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. Our allowance for doubtful accounts is determined by evaluating the credit-worthiness of each client and the size and aging of our receivables. A significant portion of our receivables are due from a few clients with very strong credit ratings and with whom we have a good payment history. As we attempt to diversify our client base, we will continue to evaluate our method of determining our allowance for doubtful accounts to ensure that we are maintaining appropriate balances. Our allowance for doubtful accounts as of December 31, 2004 was $1.1 million, which represented 4.4% of our gross receivables. If actual defaults are higher than our historical experience, our allowance for doubtful accounts may be insufficient to cover the uncollectible receivables, which would have an adverse impact on our operating results in the period of occurrence.

Income Taxes

        We record a valuation allowance to reduce our deferred tax assets to the amount that we expect to realize. Our allowance as of December 31, 2004 was $2.3 million. While we have considered future taxable income and on-going prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Similarly, if we determine that we would not 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 the period 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 various tax holidays for a period of 10 years with respect to its export profits. Substantially all of the earnings of KSIL are attributable to export profits and, therefore, are currently entitled to a 100% exemption from Indian income tax. This exemption resulted in decreases in our income tax expense of $5.1 million, $1.7 million and $655,000 in 2004, 2003 and 2002, respectively, when compared to the effective tax rates that we estimate would have applied if these incentives had not been available, without accounting for double taxation treaty set-offs, if any. The tax holidays will phase out partially on March 31, 2005. We expect our effective tax rate to increase by approximately 2.8% as a result. The remainder of the holidays will remain in place until March 31, 2009, at which time our effective tax rate would increase by approximately 14.0%. Recently, the Government of India has disallowed these tax exemptions for certain software companies and required the companies to pay additional taxes. Although we believe that we have complied with and are eligible for our tax holidays and taxable income deduction, we cannot be certain that the Government of India will not attempt to disallow our tax holidays or taxable income deduction or require us to pay additional taxes. The exact impact of the phase out of the tax holidays will vary based on our growth in India and would be negatively affected if the Government of India disallows our tax holidays or requires us to pay additional taxes. We have and will continue to use the earnings of KSIL for expansion outside of the United States instead of repatriating these earnings to the United States. Accordingly, pursuant to Accounting Principles Board Opinion No. 23, "Accounting for Income Taxes—Special Areas," we do not accrue taxes on the repatriation of earnings from KSIL. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxes associated with such earnings.

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Employee Benefits

        Our U.S. subsidiary maintains a self-funded medical plan with stop loss insurance coverage to limit our exposure under the plan. We maintain an accrual for unpaid claims that is estimated based on the weighted average of recent claims.

RESULTS OF OPERATIONS

        The following table sets forth the items in our consolidated income statements as a percentage of revenues for the periods presented.

Year ended 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, while third party sales increased by $26.0 million during 2004. Revenues increased in 2004 over the prior year due to a $73.5 million increase in service revenues and a $1.9 million increase in product revenues. Of the $73.5 million increase in service revenues, $75.4 million resulted from increased billable hours as a result of hiring additional technical professionals and $922,000 resulted from increased utilization in 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 as compared to the prior year. Our actual bill rates are impacted by the type, size and duration of our engagements. For instance, we typically charge higher rates on complex development projects and lower rates on maintenance projects.

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Cost of Revenues

        Our cost of revenues increased 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 current year and $2.0 million resulted from increased product sales. The increased service 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 of December 31, 2004, resulting in a $33.8 million increase in cost of revenues. Salary and benefit increases in 2004 over the prior year contributed an additional $985,000. Also, an increase in the average exchange rate of the Indian rupee resulted in an additional $631,000 to cost of revenues in 2004 compared to 2003.

Gross Profit

        Our gross profit increased by $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 margin increased from 45.2% in 2003 to 47.4% in 2004. Gross margins increased primarily due to an increase in the amount of our services delivered from our offshore delivery centers in India, which yield higher gross margins, and cause increased 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 significant investment in our business development operation since 2003, which is designed to facilitate future growth and add new clients. As part of this investment, we hired additional sales and marketing staff, which added approximately $5.3 million in salary and benefit costs in 2004 over the prior year. As a percentage of revenue, sales and marketing expenses decreased from 10.6% in 2003 to 9.6% in 2004.

        General and administrative expenses increased by $6.9 million, or 28.6%, from $24.1 million in 2003 to $31.0 million in 2004. The increase is attributable to a $2.2 million increase in rent and facility costs, a $2.0 million increase 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 debt expense. We are expanding our capacity in India to meet future demand for our service offerings. During 2004, our facility expansions in Hyderabad and Pune, India resulted in increases to our rental, general office and utility costs over the prior year. Our professional service fees increased in 2004 compared to 2003, primarily due to an increased use of outside experts on legal, accounting and tax related matters relating to our initial public offering. Our bad debt expense increased in 2004 as a result of a slow down in the payment cycle for one of our largest clients. As a percentage of revenue, general and administrative expenses decreased from 22.5% in 2003 to 17.0% in 2004. General and administrative expenses have decreased as a percentage of revenue as our basic support infrastructure, including finance, human resources and IT support functions, enabled us to increase our volume of activity with limited increases in expenditures.

Depreciation and Amortization

        Depreciation and amortization increased by $2.4 million, or 72.7%, from $3.3 million in 2003 to $5.7 million in 2004. The increase was primarily attributable to additions to computer equipment and software, leasehold improvements and furniture and fixtures at our Hyderabad and Pune facilities, which accounted for $2.2 million of the increase.

Income from Operations

        Income from operations increased 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 operations increased from 7.7% in 2003 to 17.0% in 2004. This was the result of an improvement in gross margin and a reduction in

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selling, general and administrative expenses and depreciation and amortization as a percentage of revenue.

Other Income and Expense

        Interest income increased $620,000, from $39,000 in 2003 to $659,000 in 2004, due to the purchase of marketable security investments in July 2004 with the proceeds received from the initial public offering of shares of our common stock. Interest expense decreased by $270,000, or 94.1%, in 2004 compared to 2003, as a result of the repayment of our outstanding long term debt in 2003. Equity in earnings of affiliate increased $471,000, from $2.0 million in 2003 to $2.5 million in 2004, due to improved operating performance of SSS Holdings Limited in 2004. Foreign currency exchange loss increased by $120,000, from a loss of $120,000 in 2003 to $240,000 in 2004, as a result of exchange rate fluctuations in the currencies of 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%. In 2003, we recorded an income tax benefit of $1.5 million, which was attributable to the deferred tax benefit that we recognized when we used the remaining net operating loss carry forwards in the United States in the third quarter of 2003.

        State income taxes were paid in 2003 to states with minimum tax amounts not offset by net operating loss 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 increased from 10.7% in 2003 to 15.0% in 2004.

Year ended December 31, 2003 compared to Year ended December 31, 2002

Revenues

        Our revenues increased by $24.6 million, or 29.8%, from $82.6 million in 2002 to $107.2 million in 2003. The increase was primarily attributable to an increase in billable hours, which resulted in an increase in revenue of $26.4 million, offset by a decrease in average billing rates of approximately 2.1%, which resulted in a decrease in revenue of $2.3 million. The increase in billable hours was primarily due to the addition of technical professionals, particularly at our delivery centers in India, to meet increased demand, principally from existing clients. Increased utilization of existing technical professionals also contributed to the increase in billable hours. Of the $26.4 million increase in revenue attributable to the increase in billable hours, $4.1 million was due to an increase in utilization and $22.3 million was due to an increase in technical staff. The decrease in average billing rates was due to pricing pressure.

Cost of Revenues

        Our cost of revenues increased by $11.7 million, or 24.9%, from $47.0 million in 2002 to $58.7 million in 2003. The increase was due primarily to costs resulting from an increase in the number of technical professionals from 1,253 as of December 31, 2002 to 2,001 as of December 31, 2003, adding approximately $8.2 million in costs in 2003. Most of this increase occurred at our delivery centers in India, where 81.7% of our technical staff was located as of December 31, 2003 as compared to 72.9% as of December 31, 2002. In addition, salary level increases added approximately $2.9 million to cost of revenues in 2003 as a result of strong demand for technical professionals in India.

        Approximately 23.6% of our cost of revenues in 2003 was incurred in India. A decrease in the value of the U.S. dollar against the Indian rupee in 2003 increased our cost of revenues by

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approximately $372,000, or approximately 0.3% of our revenues. We have not historically used hedging tools to mitigate this currency exposure.

Gross Profit

        Our gross profit increased by $12.9 million, or 36.2%, from $35.6 million in 2002 to $48.5 million in 2003. Our gross margin increased to 45.2% from 43.1%. Gross margin on our services performed in India is significantly higher than the gross margin on our services performed elsewhere. Most of the additional revenue realized in 2003 as compared to 2002 was attributable to increased services performed at our delivery centers in India, thereby increasing the average gross margin. In addition, improved utilization of our technical staff contributed to increased gross margin.

Selling, General and Administrative Expenses

        Sales and marketing expenses increased by $5.3 million, or 86.9%, from $6.1 million in 2002 to $11.4 million in 2003. As a percentage of revenue, sales and marketing expenses increased from 7.4% in 2002 to 10.6% in 2003. We made a significant investment in our business development operation in 2003 in order to facilitate future growth and add new clients. The largest contributors to the increase over 2002 were $2.4 million in additions to the sales and marketing staff based in the United States, $1.4 million in costs of staffing and other costs associated with establishing business development support for our new application management outsourcing services and approximately $1.0 million in additional travel related expenses.

        General and administrative expenses increased by $2.0 million, or 9.0%, from $22.1 million in 2002 to $24.1 million in 2003. Salary increases constituted $700,000 of the increase in 2003. Approximately $200,000 of the increase was due to the decrease in the value of the U.S. dollar against the Indian rupee. The remainder of the increase was the result of cost escalation in many areas, such as rent, utilities and insurance premiums. We had the support infrastructure in place prior to 2003 that enabled us to realize growth in 2003 without incurring significant additional expenditures. As a result, general and administrative expenses decreased as a percentage of revenue from 26.7% in 2002 to 22.5% in 2003.

Depreciation and Amortization

        Depreciation and amortization increased by $600,000, or 22.2%, from $2.7 million in 2002 to $3.3 million in 2003. The increase was attributable primarily to additional hardware and software associated with the increase in technical personnel and improvements to additional leased facilities in India.

Income from Operations

        Income from operations increased by $5.2 million, or 167.7%, from $3.1 million in 2002 to $8.3 million in 2003. As a percentage of revenue, income from operations increased from 3.8% in 2002 to 7.7% in 2003. This was the result of an improvement in gross margin and a reduction in selling and marketing expenses and depreciation and amortization as a percentage of revenue.

Other Income and Expense

        Interest expense decreased by $137,000, or 32.3%, from $424,000 in 2002 to $287,000 in 2003. The decrease was attributable to the repayment of bank loans and the continued repayment of long-term debt. Our remaining long-term debt was repaid in October 2003. Equity in earnings of affiliate decreased $200,000, from $2.2 million in 2002 to $2.0 million in 2003, due to a decline in operating performance of SSS Holdings Limited in the current year. In 2003, we recorded a foreign currency exchange loss of $120,000, while in 2002 we recorded a foreign currency exchange gain of $69,000, as a result of exchange rate fluctuations in the currencies of the countries in which we operate.

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Provision for Income Taxes

        We recorded an income tax provision of $226,000 in 2002, which represented an effective tax rate of 4.5%. In 2003, we recorded an income tax benefit of $1.5 million, which was attributable to the deferred tax benefit that we recognized when we used the remaining net operating loss carry forwards in the United States in the third quarter of 2003.

        The Government of India imposed a one time tax on 10.0% of the profits generated by export-oriented IT services firms in India during the Indian tax year of April 1, 2002 through March 31, 2003. As a result, our earnings in India for the three-month period ended March 31, 2003 and the nine-month period ended December 31, 2002 were subject to this tax. Income taxes paid in India in 2003 totaled $26,000 as compared to $105,000 in 2002.

Income Before Cumulative Effect of Accounting Change

        Income before cumulative effect of accounting change increased by $6.6 million, or 137.5%, from $4.8 million in 2002 to $11.4 million in 2003. As a percentage of revenue, income before cumulative effect of accounting change increased from 5.8% in 2002 to 10.6% in 2003.

Cumulative Effect of Accounting Change

        In 2002, we recorded a non-cash charge of $2.0 million to reduce the carrying value of goodwill related to our 1999 acquisition of Megatec Pty Limited in Australia. This non-cash charge was recorded as a cumulative effect of an accounting change.

Net Income

        Net income increased by $8.6 million, or 307.1%, from $2.8 million in 2002 to $11.4 million in 2003. As a percentage of revenue, net income increased from 3.4% in 2002 to 10.7% in 2003.

Liquidity and Capital Resources

        As of December 31, 2004, we had $91.7 million in cash and investments compared to $17.4 million as of December 31, 2003. Of the $91.7 million, we had $29.1 million in non-restricted cash, $2.5 million in restricted cash, $35.7 million in short-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 the United States, $2.6 million was held in accounts in India, and $2.3 million was held in Europe with the balance of $2.0 million held in Asia Pacific. As of December 31, 2004, we had restricted cash in the form of certificates of deposit for $2.5 million which secure letters of credit issued by our U.S. lender in lieu of security deposits for the leases of our offices in Rosemont, Illinois and New York, New York. Of the $17.4 million cash balance as of December 31, 2003, $13.4 million was held in accounts in the United States, $2.0 million was held in accounts in India and $2.0 million was held in accounts in our other regions. The funds held at locations outside of the United States are for future operating expenses, and we have no intention of repatriating those funds. We are not, however, restricted from repatriating those funds back to the United States, if necessary. While we expect that cash generated by our Indian subsidiary will be reinvested in India to support expansion of our business, to the extent that funds were remitted to the United States in the form of dividend payments, those payments would be subject to a withholding tax of 12.8%.

        Operating activities resulted in a source of funds of $26.6 million during 2004 as compared to $14.8 million during 2003. Net cash provided by operations in 2004 was attributable to $35.8 million in net income net of non-cash adjustments, a $14.3 million increase in other liabilities, and a $1.6 million increase in accounts payable offset by a $13.9 million increase in accounts receivable and a $11.2 million increase in other assets. Other liabilities increased in 2004 as a result of receiving an $8.0 million customer advance from one of our clients, a related party, in September 2004 in addition to increases to our salary and benefit related accruals as a result of increased staffing levels in 2004

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over 2003 levels. Accounts payable increased by $1.6 million primarily due to the deferral in payment of certain 2004 invoices to January 2005 relating to subcontracting, legal and accounting services. Accounts receivable increased by $13.9 million primarily due to increased revenues in 2004, and a larger prepayment of services by certain clients in December of 2003. Other assets increased by $11.2 million in 2004 due to additional deposits of $1.5 million made in 2004 relating to the occupancy of additional facilities in Hyderabad and Pune, India and the construction of our new office in Rosemont, Illinois, together with a $7.8 million increase in our U.S. federal tax receivable as a result of an overpayment made in 2004.

        Net cash provided by operating activities in 2003 was due primarily to $11.9 million in net income, net of non-cash adjustments, a net change in working capital of $2.9 million and a tax benefit of $300,000 related to our stock option plan. The non-cash items consisted primarily of depreciation and amortization, deferred income taxes, non-cash stock compensation expense and equity in earnings of affiliate. Earnings from our affiliate, SSS, are reflected in non-cash items as a use of cash in the operating activities section of the statement of cash flows. Dividends received from SSS are reflected as an investing activity.

        Net cash used in investing activities was $76.5 million in 2004 and $5.2 million in 2003. We purchased $60.2 million of marketable security investments with short and long-term durations with the proceeds received from the initial public offering of shares of our common stock in July 2004. We used $2.5 million to secure a letter of credit issued by our bank in lieu of a security deposit for additional office space in Rosemont, Illinois and New York, New York to support future growth. We used $15.3 million of cash in 2004 and $6.0 million of cash in 2003 to purchase property and equipment primarily for the Hyderabad and Pune, India facilities. These cash expenditures were partially offset by $1.4 million in dividends received from SSS during 2004 and $763,000 during the prior year.

        Financing activities generated cash of $61.4 million in 2004 as a result of receiving net proceeds of $60.4 million from the initial public offering of shares of our common stock in July 2004, $794,000 as a result of stock option exercises and $294,000 as a result of warrant exercises. We used $2.3 million for financing activities during 2003 to repay $406,000 outstanding under our credit facility, $1.7 million of our long term debt and $653,000 of related party debt, offset by $559,000 cash received as a result of stock option exercises. Related-party debt represented funds borrowed from our early stage investors and founders.

        The effect of exchange rates on cash was an increase of $172,000 in 2004 and $20,000 in 2003.

        We have a $7.5 million revolving line of credit with Silicon Valley Bank, all of which was available on December 31, 2004. Our credit facility is secured by the grant of a security interest in all of our assets in favor of the bank and contains covenants and limitations, including 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 contains certain financial statement reporting obligations and requires us to maintain certain financial covenants, including a quick ratio of at least 1.25 to 1 and an EBITDA ratio not to exceed 2 to 1. Under our credit facility, our quick ratio is the ratio of our current assets to our current liabilities minus deferred revenue and any current portion of subordinated debt. Our EBITDA ratio is the ratio of all amounts we owe to Silicon Valley Bank under our credit facility to EBITDA. Advances made under our credit facility accrue interest at a per annum rate equal to the prime rate. Our credit facility expires on April 29, 2005 and we are currently evaluating refinancing alternatives.

        We are currently in compliance with the covenants contained in our credit facility and believe that our credit facility provides sufficient flexibility so that we will remain in compliance with its terms. However, a breach of any of the covenants or our inability to comply with any requirements in the future could result in a default. A default under our credit facility, if not cured or waived, could result in the immediate acceleration of all obligations due and payable or restrict our ability to obtain additional credit. If we are unable to borrow under our credit facility, we may be required to divert money that we could otherwise use to expand our business or to develop an alternative source of

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liquidity, which may include raising additional funds through public or private financing, strategic relationships or other arrangements. There is no assurance that any of these alternatives could, if necessary, be effected on commercially reasonable terms, or at all.

        Our Indian subsidiary, KSIL, has a credit facility with Citibank India which provides for a line of credit of approximately $2.0 million maturing in December 2006. This credit facility provides for bank guarantees and letters of credit in foreign currency. As of December 31, 2004, KSIL had a bank guarantee of $959,000 outstanding.

        We expect to continue our facilities expansion program in India and expect our capital spending for the full year 2005 to be approximately $28 million, relating primarily to the construction of our new delivery center in Hyderabad, India and the expansion of our delivery center in Pune, India. We have spent approximately $8 million in 2004 relating to our facility expansion program.

        We currently lease space for our employees in Hyderabad, India. These leases expire at the time construction of our new facility in Hyderabad is scheduled to be completed. We have options for short term lease extensions if we experience construction delays, which will allow us to move our Hyderabad employees from leased space to our new facility upon its completion. Construction of the remainder of our new facility will be completed in phases, based on the need to meet increased client demand, which will allow us to minimize the impact on future financial performance if we experience an unexpected hiring reduction. As a result, the projected impact on our operating profit due to unoccupied space in the initial occupancy periods of our new facility is projected to be a maximum of $28,000 per month. The transfer of employees from leased space to our new facility in Hyderabad will result in a net reduction in expenses of approximately $770,000 per year. This net reduction will result from reduced general and administrative expenses of approximately $1.1 million per year partially offset by an increase in depreciation of approximately $357,000 per year.

        In August 2004, we entered into an agreement to acquire the real estate for our new delivery center in Hyderabad, India from an Indian government entity. At that time, we were not required to make payment for the real estate. Under the terms of the agreement, we must invest approximately $11 million in our Hyderabad delivery center and employ at least 3,000 persons at the center in order to acquire title to the real estate. We are only required to make payment to the seller to the extent we employ fewer than 3,000 persons by August 2011. The amount we will be required to pay, if any, will be up to $959,000 based on the number of employees at August 2011, if less than 3,000. For example, if we only employ 2,000 persons at the new delivery center in August 2011, we will be required to pay the seller $319,667. In November 2004, we provided a bank guarantee of $959,000 toward the purchase price for the real estate. The bank guarantee will be revised in 2006, and each year thereafter, based upon the number of employees actually employed at the new delivery center in proportion to our commitment to hire at least 3,000 employees at the new delivery center.

        In February 2004, we established a regional off-site development center in the United States, using approximately 80 former employees of one of our clients as the initial staff. In connection with this initiative, we entered into a service agreement with the client. The service agreement expired in February 2005. If we are unable to redeploy the staff of the development center on new or existing projects our financial results could suffer from either the employee termination costs resulting from a reduction in our workforce or the costs of carrying staff at the development center until full utilization is achieved again, or both. At the current time, we estimate that our net income will be negatively impacted by approximately $1 million, primarily in the second quarter of 2005, in connection with the redeployment of the workforce at the development center.

        Based upon our current level of operations together with our current investment balances, we expect that our cash flow will be adequate to meet our anticipated needs for at least the next two years. Although we currently have no specific plans to do so, to the extent we decide to pursue one or more significant strategic acquisitions, we may incur additional debt or sell additional equity to finance those acquisitions.

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Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. In addition, we have not entered into any derivative contracts (other than those described below in "Qualitative and Quantitative Disclosures about Market Risk") or any synthetic leases.

Contractual Obligations

        We have no long-term debt, and, as of December 31, 2004, we had the following contractual obligations:

(1)

Our obligations under our operating leases consist of payments related to our real estate leases.

(2)

Our purchase obligations consist of payments related to our facility expansion in Pune India.

Recent Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123(R) "Share-Based Payment" which replaces SFAS 123 "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R by July 1, 2005. Under SFAS 123R, we must determine the appropriate fair market value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retroactive alternative options. Under the modified retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented; however, expense amounts for grants prior to adoption are based on SFAS 123 not SFAS 123R The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated statements of income and earnings per share. We have not yet determined the method of adoption and have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

        In October 2004, FASB issued Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"). FSP 109-2 provides guidance under FASB Statement No. 109, "Accounting for Income Taxes", with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. Based upon our preliminary evaluation of the effects of the repatriation provision, we do not expect to apply this provision.

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        In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by us in the three months ended September 30, 2005. We are currently evaluating the effect that the adoption of SFAS 153 will have on our consolidated statements of income and financial condition but do not expect it to have a material impact.

Forward-Looking Statements and Risk Factors

        This annual report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often are proceeded by words such as "believes," "expects," "may," "anticipates," "plans," "intends," "assumes," "will" or similar expressions. Forward-looking statements reflect management's current expectations, as of the date of this report, and involve certain risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. Some of the factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements described in Exhibit 99.1 hereto.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

        We transact business primarily in U.S. dollars. We are subject, however, to adverse movements in foreign currency exchange rates in those countries where we conduct business. We have historically entered into, and we may enter into in the future, forward foreign currency exchange contracts to hedge certain commitments in Australian dollars. The purpose of this foreign currency hedging activity is to protect us from the risk that the eventual cash flows from sales of third-party software licenses and maintenance contracts to Australian customers will be adversely affected by changes in the exchange rate. Our most significant foreign currency exchange rate exposure relates to fluctuations in the Indian rupee. A 5.0% decrease in the value of the U.S. dollar against the Indian rupee would result in a reduction in other income of approximately $2.9 million based on our current operations.

        In December 2004, we adopted a foreign currency exchange management policy. This policy authorizes us to hedge our exposure to the Indian rupee to offset the effects of changes in the exchange rate. At December 31, 2004, we did not hedge any foreign currency exposure to offset the effects of changes in exchange rates. We do not use derivative financial instruments for speculative trading purposes.

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Item 8. Financial Statements and Supplementary Data

INDEX TO HISTORICAL
CONSOLIDATED FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Kanbay International, Inc.

        We have audited the accompanying consolidated balance sheets of Kanbay International, Inc. (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15 (b). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, 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 consolidated financial statements and the schedule referred to above present fairly, in all material respects, the financial position of Kanbay International, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As described in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangibles to conform with Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."

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Kanbay International, Inc.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

See accompanying notes to consolidated financial statements.

34

Kanbay International, Inc.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands except per share amounts)

See accompanying notes to consolidated financial statements.

35

Kanbay International, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(dollars in thousands)