Contents. Financial Highlights. Board and Management. Letter from the Chairman and the Managing Director

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2 Contents Financial Highlights Board and Management Letter from the Chairman and the Managing Director Letter from the President and Executive Director Management Discussion and Analysis Directors Report Report on Corporate Governance Auditors Certificate on Corporate Governance Shareholder Information Auditors Report Balance Sheet Profit and Loss Account Cash Flow Statement Schedules forming part of Accounts (I to XV) Notes to Accounts (XVI) Consolidated Financial Statements Section 212 Statement Subsidiary Financial Statements Financial Information as per US GAAP

3 MANAGEMENT DISCUSSION AND ANALYSIS A. About the Indian IT Industry a. Size In FY06, Indian software industry is estimated to have generated $29.5 Billion in revenue, directly employing approximately 1.3 Million people and generating indirect employment for approximately 3 Million people. Indian IT software and services industry recorded a growth of over 30% in FY06. According to estimates of NASSCOM (National Association of Software and Service Companies), total revenues from software and services during FY06 were $29.5 Billion, an increase of 31% over total revenues of $22.6 Billion in FY05. IT services, which constitute nearly 60% of the software and services revenues recorded a growth of 30% over the previous year. Growth in the ITES-BPO segment is estimated to be higher at 38% over FY05. Nearly 80% of the revenues come from export of software and services. The industry expects to generate export revenues of $60 Billion by This would imply a compounded annual growth rate of 26.5% over the estimated export revenues of $23.4 Billion for the current fiscal. By 2010, the direct employment in the industry is expected to be over 2 Million people Growth in Indian IT Software Industry Revenues ($ Billion) FY04 FY05 FY06E IT Services ITES-BPO Engineering Services and R&D, Software Products Source: NASSCOM b. Structure In terms of the services offered, the software and services industry is broadly classified into three segments i. IT services: This segment constitutes approximately 60% of the software industry and has grown by 30% over the previous year.

4 ii. ITES-BPO services: This segment constitutes 24% of the software industry and has recorded a 38% growth over the previous year highest growth rate among the three segments. iii. Engineering Services and R&D, Software products: This segment forms 16% of the software industry and has grown by 23% in FY06 over the previous year. In terms of providers of IT-ITES services, NASSCOM has categorised the industry into six categories: i. Tier I players: Comprising primarily the top 3-4 companies with revenues of over $1 Billion each, this category constitutes 45% of the Indian IT services and about 4%-5% of the BPO revenues. Companies in this category typically have employee strengths of over 30,000 and offer a wide range of services. ii. Tier II Players: With revenues ranging from $100 Million to $1 Billion each, approximately 7-10 companies which fall under this category constitute 24% of the IT services revenues and 4% - 5% of BPO revenues. iii. Offshore operations of Global IT majors: There are about companies in this category with revenues ranging from $10 Million to $500 Million. Revenues from this category aggregate approximately 10%- 15% of IT services revenues and 10%-15% of BPO revenues. iv. Pure Play BPO providers: This category includes companies who operate only in the BPO space and constitute 20% of the BPO revenues. Revenues of each company range between $10 Million and $200 Million. v. Captive BPO units: About 150 companies in this category, each with revenues ranging between $25 Million and $150 Million, constitute 50% of the total BPO revenues. vi. Emerging Players: Most of the companies, exceeding 3,000 in number, with revenues lower than $100 Million in IT services and $10 Million in BPO services, comprise 10%-15% of IT services revenues and 5% of BPO revenues. (Source: NASSCOM) c. Opportunities and Threats As mentioned earlier, NASSCOM estimates that the Indian IT industry will generate $60 Billion in export revenue by the year This implies that the IT exports will grow at a compounded annual growth rate (CAGR) of 26.5% from the present level of an estimated $23.4billion in FY06. This growth expectation is based on several factors all of which will widen the opportunity set for Indian IT players. IT-spend has been growing. Although it is predominantly in the traditional markets of US and Western Europe, other geographies also are showing a strong growth in IT-spend. As the IT-spend continue to show a healthy growth, it bears well for India and Indian IT players. India is the most favoured destination for outsourcing on account of some critical factors such as availability of a large pool of quality manpower, prevalence of English language skills, project management skills and overall quality output. As the IT-spend increases, the volume of IT-ITES services exports will increase, as probably captured in the expected growth rate of export revenues. Outsourcing to India started off as a labour cost arbitrage strategy. At present, focus on labour cost arbitrage has faded away and what has emerged is a more sustainable strategy focused on creating a sustainable value such as increase in efficiency and productivity. This strategic shift from lower end cost arbitrage based

5 strategy to higher end value based strategy is creating further opportunities for the Indian IT players. Non-traditional markets such as Eastern Europe, Asia Pacific are also opening up creating further opportunities. It is expected that Japan, with an estimated market size of $80 Billion, is likely to emerge as the next largest market after US. Countries with traditionally strong labour unions are also gradually opening up. So far most of the tier-i companies have been able to benefit from outsourcing and indeed from the IT industry in general. Success of such tier-i companies in outsourcing have encouraged tier II companies, who are now entering the outsourcing arena. These emerging geographies and new customers are adding to the opportunity set. To exploit the growing opportunity and to maintain a healthy growth rate, it is imperative for the Indian IT industry to continue to invest in people and processes so that India continues to be the most favoured destination for outsourcing. Other countries, specially in Latin America, Eastern Europe and some parts of Asia Pacific are fast emerging as alternative destinations. d. Major trends Some major trends in the IT industry in the recent past have been the following:- There is a trend of increasing spending on IT-ITES services across the world. While most of the spending has been in the traditional geographies such as US and Western Europe, other geographies are also showing a strong growth in IT-spend. Outsourcing initiatives are being supported by global delivery platforms. Traditionally Indian IT players had their offshore development centres in India, which together with onsite locations at customer premises used to serve as the delivery platform. Recently, near-shore development centres have also become a norm. Near-shore centres are being set up by Indian IT players in countries in Eastern Europe, Latin America etc. This initiative has been supported as much by IT players as much as by their customers. Indian IT players are going global. Many Indian companies have already set up not only marketing offices but also delivery centres in other countries. Indian companies are also acquiring companies abroad to grow inorganically. In the recent past, there have been several cross border M&A transactions announced by Indian IT companies, including 2 by KPIT Cummins. Indian companies are also expanding in non-english speaking markets by hiring local professionals. MNC have been steadily ramping up their offshore delivery centres in India. Over the next year, NASSCOM estimates that these MNCs will be adding 30% more employees to their captive units. Encouraged by the success of these MNCs, others are also keen on setting up a captive unit in India to cater to their global requirements. As the outsourcing model shifts towards more value-added services, the complexity in the services rendered by IT-ITES service providers is increasing. This is reflective of the confidence of the outsourcers in the

6 Indian IT players as well as the confidence of the Indian IT players on their ability to deliver. e. Critical success factors in the industry The following are the critical success factors for our industry: People: We are in the service industry and our people are a key resource. It is imperative for us to continue to empower our employees with the skills and knowledge to deliver the best service to our customers. Given the level of attrition prevalent in the industry, it is critical to manage employee attrition to be able to retain knowledge and expertise. Customer focus: For companies of our size, it is important not to lose customer focus. Customer focus requires creating the right organization structure whereby we are able to provide adequate executive-mindshare to our customers and account management systems to help understand customers present and future IT needs. This understanding helps us in developing skills and offerings in the relevant domains to serve our customers better. Technology: Keeping abreast of technological trends is obviously a key success factor. Also, using technology to improve the effectiveness of our employees and the delivery of service will remain a key to sustainable competitive advantage. Delivery: Building a scalable, sustainable delivery capability includes providing for ready physical, communication and desktop infrastructure to meet our clients needs on demand. It also involves using our CMMI level 5 processes to continuously improve our delivery process capabilities. B. About KPIT Cummins Infosystems a. Overview of KPIT Cummins KPIT Cummins Infosystems Limited, headquartered in Pune, India provides IT and IT enabled services to clients across the world. KPIT Cummins services include development, maintenance and support of software applications; implementation of software packages; supply chain management solutions; development of PCbased tools; embedded software and networking solutions for automotive companies; development of business intelligence tools; chip design, verification and testing for semiconductor companies; SAP consulting, risk management and compliance services; transaction processing; technology based and knowledge based services. These services are delivered from KPIT Cummins offshore delivery centres in Pune and Bangalore in India and from onsite locations at the customers premises across the world. b. Our Shareholders Our shareholders include strategic investors, portfolio investors and retail investors in addition to partners and promoters. Current shareholding structure has 27% shareholding by the original promoters, 14% by Cummins, about 8% by Lehman Bros, 16% by Foreign Institutional Investors, 16% by Indian Financial Institutions and Mutual Funds, and the balance 19% by retail investors. We will be allotting equity

7 worth $2.5 Million to International Finance Corporation, Washington on a preferential basis in May Public 19% Promoters 27% Indian FIs 16% Cummins 14% FIIs 16% Lehman 8% We are proud of our shareholder and value their trust in our Company. To keep our shareholders updated about the performance of the Company we frequently issue press releases and investor updates on our quarterly performance and any material development in our Company. In addition we follow a practice of having regular interaction with our investors, analysts and fund managers. We continue to review and enhance the level and quality of shareholder communication. c. Goals Our vision is to become a global IT Consulting Organization of FIRST CHOICE to our Customers, Employees and Shareholders. In FY02, we had set ourselves a medium-term mission to become a $100 Million Company with profitability in the top 20 percentile by FY07. Consistent with that mission, we have issued revenue and profit guidance for FY07 revenues between $98Million to US$102Million and net profit of between $11.25 Milllion and $12 Million. Our expected revenue for FY07 implies that we have to grow by 34% to 40% in revenues and 51% to 61% in profits higher than the average growth rate in the industry. Once we have achieved our $100 Million target, we will work on more ambitious medium term goals for the future. d. Our Strategy Our strategy is based on Focus focus at three levels. At the first level, we have chosen to focus on two verticals Manufacturing and Diversified Financial Services (DFS). At the second level, we focus on a select group of customers in these two verticals. At the third level, we focus on some niche offering in which we strive to build a position of leadership. We believe that our strategy of focus will help develop a good understanding of our clients which we can use to create service offerings to address their IT needs and

8 thus create a deeper and value creating relationship with our clients. This strategy has been successful in many of our clients. e. Our Customer Strategy PYRAMID model Our customer strategy focuses on customer acquisition, retention and growth. We have been following what we call the STAR customer model. Customers who demonstrate a good growth potential are called STAR customers account management and delivery processes are then aligned to create a deeper relationship with the STAR customer. We believe that the STAR customer model has been critical in aligning our growth with our $100 Million mission. As we prepare for growth beyond the $100 Million after FY07, we have enhanced our Star model to a Customer PYRAMID model. While continuing with our focus strategy, this model is expected to create a differentiated level of focus based on revenue generating potential. We will focus on growing clients to the next higher level of the Pyramid. $20-40M $10-20Mn Existing STAR customers $5-10Mn $1-5Mn $0-1Mn Potential STAR Customers Our PYRAMID model comprises a Pyramid structure with five levels. The main objective of this model is to create a set of customer relationships which stack up like a Pyramid a small number of customer each accounting for $20-40Million revenues at the highest level of the Pyramid and a large number of customers each accounting for $0-1 Million revenues at the bottom level of the Pyramid. The three layers in between comprise an increasing number of clients (moving top to bottom) each generating a small volume of revenues. Our Pyramid model focuses on establishing initial business relationship with customers with revenues between $1-10 Billion at the bottom level of the Pyramid. At the initial stage of engagement, the expected business volumes from the customer may be under $1million, but our preliminary research on the customer should demonstrate a greater potential. Depending on the potential of each relationship, a differentiated level of focus and correspondingly a suitable account management and delivery structure are set up to help grow the customer relationship. The objective is to grow the relationship to the next higher level in the Pyramid until it reaches its full potential. This approach balances our Focus

9 strategy of working with a few customers with the need to have an increased customer base. Under this model, we expect to have strong customer relationships with about customers to be able to reach our next medium term goal. This model will help us work with our existing set of customers Star customers as well as potential Star customers. This implies that on the one hand, we work with a slightly larger base of customers and therefore derisk our growth from any changes in strategy by any customer, while continuing to focus on establishing a deeper relationship with the customers. f. Our Customers During FY06, we have added 15 customers to our list of 24 customers at the beginning of FY06. Most of these customers have revenues between $ 1 Billion and $ 10 Billion. With the inorganic growth initiatives executed in the previous fiscal, we have added another 33 customers. As we entered the current fiscal, we had a customer base of 72 more than half of which feature among the Forbes Global We have 10 Star customers. Our customers mainly belong to the discrete Manufacturing and DFS sectors. Our customers in the discrete manufacturing sector include the largest independent diesel engine manufacturer based in the USA, original equipment manufacturers (OEMs) in the automobile industry, industrial automation companies based in Europe, leading European company in the fast moving consumer goods (FMCG) industry, a leading US-based technology company, one of the best known business intelligence software product company based in US and leading vendors to the automobile OEMs etc. Our customers in the DFS vertical include leading European banks and US based credit card processing company. Cummins Inc. Cummins Inc. is our partner, lead Star customer and an investor. Our relationship with Cummins started about five years ago with the merger of Cummins Infotech with KPIT Infosystems. Since then, our relationship has grown to over $32 Million in FY06. As per the terms of the merger, Cummins was issued options convertible into equity shares at par. In June 2004, 294,300 options from the Series A were converted into equity shares of Rs.10/- each. At present, Cummins holds 13.71% of KPIT Cummins equity shares. In June 2007, the options under Series B will either expire or become eligible for conversion according to the following table: Option series Cummins relative business No of Options of Rs.5 each Approximate dilution on present equity base B % 321,600 2% B % 1,507,000 10% B % 1,448,800 10% g. Our Marketing and Delivery Network Our marketing offices are spread throughout most of the relevant geographies. We currently have six offices in the USA Iselin, New Jersey; Glen Allen, Virginia; Santa Clara, California; Columbus, Indiana; Detroit, Michigan; and Stafford, Texas. In Europe, we have created a stronger market presence through our offices in UK, France and Germany. Besides, we also have offices in Japan and UAE.

10 Our offshore delivery centres are primarily located in India in Pune and Bangalore. At Pune, our global head office, we are currently expanding our facility. Our second building, which will house another 2,500 people within the same campus, is under construction and is expected to be completed in August With that we will have a larger infrastructure to support our customers. Our earlier set up at Bangalore is further enhanced with the addition of the facilities of CG-Smith which we acquired. Our board has approved setting up of a near shore delivery centre in Poland. Poland was selected after an extensive evaluation of a short list of countries offering an attractive venue for near-shoring. Work on the delivery centre in Poland has already commenced and we expect that over a period of three years we would have a 400+ strong team at Poland. In addition to investing in creating physical infrastructure, we continue to invest in technological development. We have instituted Centres of Excellence and other programmes such as p-invent which continually scan the relevant technology space to adopt and adapt technologies which are likely to create value for our clients and shareholders. This is a continuous process and is constantly monitored at the senior management level. h. Our Employees Our employees are our key strength and critical resource. At the end of FY06 we had an employee base of 2,122 having added 641 employees during the year. We also had new employees join us from SolvCentral.com, Pivolis and CG-Smith, taking our total employee strength to approximately 2,400 at present. We extend a warm welcome all the new employees those who have joined us directly and also those who have joined us from our partner companies. Around 90% of the employees are engaged in software development and the rest are involved as marketing personnel, management and support staff. Our employees come from several different countries and bring various different skills to our company. Our employees include engineers, computer science graduates, commerce graduates, chartered accountants, MBAs, CFAs, CISA certified professionals etc. We continue to invest in the development of our employees. We continue to hire fresh graduates and experienced professionals to our employee base to strengthen our team. For recruitment of fresh graduates we have initiated University Relations programme. With the interest of employees in mind, we have initiated several employee centric programmes which are discussed in more detail in the letter to our shareholders from our President and Executive Director. i. Our Lines of business From the current fiscal, we have reorganized our business into six lines of business (LOB), each set up as an independent profit centre. i. Auto electronics: Originally a part of our Advanced Technology Solutions (ATS) practice, this LOB is one of our key strengths. Services in this LOB are mostly high-end specialized services for the automobile industry. Customers for this LOB include some of the top OEMs in the automobile industry and their Tier I and Tier II vendors which are also large corporations.

11 ii. Semiconductor solutions group: This group, also part of the Advanced Technology Solutions practice, is also one of the unique differentiators for us. Under this LOB we work with some of the top semiconductor companies of the world in their chip design, verification and testing. Chips are increasing becoming embedded in all day to day equipment and the market for chips and their applications is increasing. Our expertise is in the chips for the automobile industry and we work with chip manufacturers in that segment. iii. Business Intelligence: Set up as a new LOB, especially after the acquisition of SolvCentral.com, this LOB is one of the future growth areas. Services offered in this area help our customers make more sense of the huge volume of data they have and to customize their data analysis process. We work with leading business intelligence software vendors as well as end customers in areas such as customization of portal and dashboards, data modelling, data mart creation and deployment. iv. Global Business Solutions: This is the BPO arm of our company, constituted as a wholly owned subsidiary which took legal form in the middle of last fiscal. We look at GBS as one of the growth areas for the future, more so with the expected convergence of BPO and IT services in the industry. We offer (i) skills and rule based services e.g. transaction processing, finance & accounting, HR processing etc. (ii) technology based services e.g. technical help desk solutions, and (iii) knowledge based solutions such as Sarbanes Oxley solutions, data analytics etc. v. Manufacturing: One of our focus verticals constituting a major portion of our revenue, services under this LOB include IT strategy consulting, product life cycle management services, supply chain solutions, ERP implementation in addition to application development and maintenance services. This LOB continues to generate bulk of the revenues for our company. vi. Diversified Financial Services: The second of our focus verticals, revenues from this area have so far remained a small percentage of total revenues. However, we have some good relationships with some of the leading global banks to whom we provide application development and support solutions, migration solutions etc. Auto electronics, Semiconductor solutions, Business Intelligence and GBS are our areas of strength and future growth drivers. With the reorganization as independent profit centres, we have further empowered the respective LOB heads to independently drive growth and profitability of their respective LOBs. j. Our M&A Strategy Our M&A strategy is another element of our growth strategy. During the last fiscal, we have announced three such transactions SolvCentral.com, Pivolis and CG- Smith Software. In addition we have also set up a joint venture in Germany. Earlier we have successfully completed two acquisitions - of Cummins Infotech and Panex Consulting. Our M&A strategy is focussed on strengthening our geographical presence in the relevant markets and on consolidating and expanding our domain expertise. Through M&As we have sought to lay the foundation for our growth in the future years. Our inorganic growth initiatives begin with a thorough analysis and evaluation of our competitive positions and our offering for our customers on the one hand and on the other hand a detailed evaluation of potential target companies. We evaluate target companies on the basis of their strategic fit, cultural fit and

12 their financial fit with our company. In addition to a range of valuation parameters such as Net Present Value, Return on Investment, impact on EPS, etc. we try to see that the payback period of each transaction is less than 3 years. Our M&As are typically in the nature of mergers. We don t acquire companies we add partners. We have usually adopted a mix of cash & stock based payment partly upfront and the balance earnout based. Our payment structure creates adequate incentives for the leaders of the partner companies to continue with our company and to grow the business to a much greater level. Many mergers do not work and fail to generate value as post-transaction companies do not focus on integration. We have therefore created a 100-days post-merger integration framework, which involves people from both sides of the company to integrate the sales function, the human resources, the finance and account functions and all the policies and procedures. We believe our M&A initiatives from evaluation of target companies to postmerger integration are geared towards creating value for our shareholders. Cummins Infotech and Panex are quite well integrated and can become casestudies in successful mergers. SolvCentral.com has also been integrated with our Company and currently we are working on the integration of Pivolis and CG-Smith. k. Our Competitors We face competition in almost all our business areas. We consider competition as a healthy stimulant for streamlining our strategies and to be better in our niche areas. Our competitors include leading software service providers from India and abroad. We differentiate ourselves from our competitors primarily on the basis of leadership in certain niche areas such as auto electronics and embedded software, business intelligence. We also differential ourselves on the basis of our size, which allows us to provide executive mindshare and attention to our customers, and on the basis of our proven ability in managing multi-million dollar accounts. C. Financial performance Financial year for our company is from April 1 to March 31 of the following calendar year. Financial Year 2006 (FY06) means fiscal Year beginning April 1, 2005 and ending on March 31, The discussions and analyses hereunder are based on our Company s consolidated financials for FY06. a. Balance sheet Share Capital The Board of Directors approved an increase in our Company s authorised capital from Rs.120 Million to Rs.300 Million. Therefore the authorised capital will constitute 60 Million shares of Rs.5 each after the balance sheet date. As of March 31, 2006, our share capital was Rs Million, comprising 14,559,686 issued and subscribed shares. During the year, we have allotted 306,352 shares as the final issue of stock to Mr. Nitin Tarte, the promoter of Panex Consulting, under the terms and condition of the merger agreement between our Company and Panex Consulting. Panex Consulting is a wholly owned subsidiary of our company. We have also allotted 14,868 shares under the Employee Stock Options Plan.

13 During the year, we have allotted 148,830 equity shares to the promoters of Pivolis, France, as part of the total consideration for our acquisition of Pivolis. The preferential allotment was made consequent to our shareholders and Board of Directors approval. As per Securities and Exchange Board of India (SEBI) guidelines for preferential allotment, the issue price for this allotment was Rs per share (including a premium of Rs per share) of face value of Rs. 5. Details No of Shares Rs. Million Share Capital as on March 31, ,089, Shares issued to promoter of Panex 306, Shares issued to promoters of Pivolis 148, Shares issued under ESOP 14, Share capital as on March 31, ,559, During the year, our Board of Directors also approved a preferential allotment of 311,166 equity shares of face value of Rs. 5 each, to International Finance Corporation, Washington, an affiliate of the World Bank. These shares would be allotted at an issue price of Rs. 356 per share (at a premium of Rs. 351/- per share), calculated in accordance with SEBI guidelines. With this, International Finance Corporation would hold approx 2% stake in our Company at the beginning of FY07. The actual allotment will be made in the month of May Reserves & Surplus Our Company s reserves & surplus as on March 31, 2006 stood at Rs. 1, Million as against Rs Million in the previous year. The net increase of Rs Million is on account of the following: a. Increase in the Share premium account by Rs Million. Of this, i. Rs Million is on account of the preferential allotment to the promoters of Pivolis, France. ii. Rs Million is on account of the issue of shares to Mr. Nitin Tarte. As per the terms of the merger agreement with Panex Consulting, shares were to be issued to Mr. Tarte at a premium of Rs per share of Rs. 10 face value or Rs per share of Rs. 5 face value. iii. Rs Million is on account of the issue of shares under ESOP. b. Transfer of Rs Million from the Profit and Loss account. c. Increase in Cumulative translation adjustment of Rs Million. Secured Loans At the end of March 31, 2006, we had total secured loans of Rs Million against Rs Million as on March 31, Secured loans include the following:- A. Term loans: Total term loans stood at Rs Million as on March 31, 2006 as compared with Rs Million on March 31, Increase of Rs Million is on account of the following: i. Loans from IFC, Washington: Our company has been sanctioned a total of $ 11 Million debt by IFC to finance the construction of the $13.5 Million Software Development Centre II (SDC-II) at the

14 ii. Company s premises at Hinjawadi, Pune. During the last fiscal we have drawn down $ 4 Million and we expect to draw down the balance in the current fiscal. Loans from banks: The other component of the term loans include loans from domestic banks availed for the purpose of financing the construction of SDC-I. The term loans are secured by first charge by way of mortgage of immovable fixed assets. B. Working capital loans: Working capital loans increased from Rs Million to Rs Million. These loans are secured by the hypothecation of current assets, book debts and equitable mortgage over some of the immovable fixed assets of our Company. Increase in working capital is on account of increase in our Company s business during the year. Unsecured Loans During the year, we raised short term loan for the purpose of financing our investment in software. This loan is in the form of a short term loan repayable within a year. As on March 31, 2006 the balance outstanding was Rs Million. Finance lease obligations, which are obligations towards lease rentals of vehicles, declined during the year to Rs Million from Rs Million in the previous year. Minority interest During the year, we have consolidated the accounts of SolvCentral.com. According to the terms of the transaction with SolvCentral.com, we own 90% of SolvCentral.com, the balance 10% to be acquired over a period of 3 years. As a result we have provided for the minority interest of the 10% ownership. During the year we have also established a 60:40 joint venture in Germany. Fixed Assets During the year ended March 31, 2006, our Company added tangible assets worth Rs Million. Gross Block as on March 31, 2006 stood at Rs Million compared with previous year Rs Million, while the net block was Rs Million compared to Rs Million as on March 31, Capital work in progress increased from Rs Million as on March 31, 2005 to Rs Million as on March 31, 2006 on account of the construction of SDC II. During the year, our intangible assets also grew by Rs Million Rs Million on account of increase in goodwill from the acquisition of SolvCentral.com. Rs Million of project expenditure, which meet the criteria laid down in AS 26 (Intangible Assets), have been classified as intangible assets and are being amortized, in accordance with the accounting policy adopted by KPIT Cummins GBS over the period of economic benefit derived from the project expenditure or 36 months, whichever is shorter.

15 (Rs. Million) Particulars Intangible Assets As On April 1, 2005 Gross Block Deductions/ Additions Adjustments As on March 31, 2006 Goodwill (1.06) Project Development Expenses Tangible Assets Land (Leasehold) Building Plant and Machinery (53.90) Computers Software Package Furniture and Fittings (0.08) Vehicles - Owned Vehicles - Lease / HP (4.45) TOTAL (6.29) Investments There is no change in the investments made by the Company. Total amount of investments therefore remain unchanged at Rs Million. Current Assets Current assets of our Company include sundry debtors, cash and bank balance and loans and advances. Sundry Debtors The amount classified under sundry debtors is the amount receivable by our Company from our customers. Customers usually follow a billing cycle - invoices received by a certain date are cleared on a predetermined day of the month and those received after the date are cleared in the next cycle. Considering the billing cycle, which is unique to each customer, it is considered normal for a company to have about 60 days outstanding. For any doubtful debt or a very old debt, companies make provisions. Sundry Debtors increased from Rs Million as on March 31, 2005 to Rs Million as on March 31, In terms of days of sales, receivables have gone up to 86 days as compared to 70 days as on March 31, However, 93% of the total receivables are less than 60 days old. In effect 7% of receivables are more than 61 days and less than 180 days. Cash & Bank Balance Cash & Bank Balance stood at Rs Million as on March 31, 2006 compared to Rs Million as on March 31, Rs Million, comprising 69% of the total cash balance, is kept under deposit accounts with banks. The balance is maintained under current accounts with banks.

16 Loans and advances Amount classified under this are the loans and advances extended by our company to others, usually as part of the business process. In our case, it includes primarily advances given by our Company for various reasons. If there are doubts about the recovery of the advances or of the value to be received in lieu of the advances, provisions are created. As on March 31, 2006 total loans and advances stood at Rs Million, an increase of Rs Million over the corresponding figure as on March 31, A large component of loans and advances, amounting to Rs Million, was advances for investment - towards upfront payment for the acquisition of shares from the promoters of Pivolis and CG-Smith respectively. Other components of loans and advances include advances made for the construction of SDC-II, deposits and interest accrued but not due. All loans and advances are considered good and accordingly no provision has been created. Current Liabilities and Provisions Current liabilities and provisions include current liabilities of the Company assumed in the normal course of business and provisions required to be maintained for taxes and other benefits payable. As on March 31, 2006 current liabilities and provisions stood at Rs Million as compared to Rs Million as on March 31, Sundry creditors constitute Rs Million, of which Rs Million was towards accrued salaries and benefits and the balance towards goods and services received. Other liabilities and unclaimed dividends constituted Rs Million. Provisions created for tax, for fringe benefit tax, for dividend and dividend tax and for other staff benefits aggregated Rs Million. b. Income statement Revenues and Classifications Type of Projects In our business, revenues generation process is broadly classified under Time & Material (T&M) and / or Turnkey / Fixed Price basis. In T&M type of services, billing is done on the basis of time number of hours spent by software professional for providing services. In a Turnkey or Fixed Price contract, billing is done based on achievement of predefined milestones for a particular project. Specification, deadlines, and total cost for such projects, are determined in advance. During FY06 our Company derived 88% of its revenue from T&M projects and balance 12% from Fixed Price contracts. This ratio was the same during FY05 too. Onsite / Offshore Revenues are also classified on the basis of the location from where services are provided. A company may provide software services through software

17 professionals stationed at customers sites. Revenues from such services are termed Onsite revenues. On the other hand, a company may provide services through software professionals stationed at Software Development Centres located away from the customer s site e.g. in India. Revenues from such services are termed Offshore revenues. Billing rates for Onsite services are usually higher, as the software professional is based in the client s site, usually in countries such as USA, Europe etc. where the cost of living is higher. However, for the company too the cost of providing onsite services is higher. Thus, while the percentage of revenues coming from onsite revenues may be higher, margins on these projects is lower as compared to that on offshore projects. For offshore projects, employees are stationed in the home country and while the billing rates are considerably lower than onsite billing rates, on account of lower costs, margins are higher. For FY06, our onsite / offshore revenue ratio was 61%:39%. This ratio has changed towards higher offshore component from 68%:32% during FY05. During FY06, every quarter we have witnessed a gradual shift towards more offshore revenues. Two factors which have led to this are (i) increase in overall offshore revenue and (ii) decrease in onsite revenues in a couple of accounts. Consolidated FY06 FY05 FY04 Revenues % % % - Onsite 61% 68% 54% - Offshore 39% 32% 46% Total 100% 100% 100% Geographies Almost all the revenues of our Company are from overseas markets. Our Company operates not only in the traditional markets e.g. USA and Western Europe, but also in the emerging markets e.g. Eastern Europe, Japan and Asia- Pacific. Revenues from USA and Europe however continue to form majority of the revenues. During FY06, our Company generated 65.87% of consolidated revenues from the US geography, slightly higher than 62% of revenues in the previous year. Higher share of revenues from the US geography is a result of the following factors. Cummins, our anchor customer and partner, increased its IT-spend and its business relationship with our Company. During the year, revenue from Cummins itself grew by over 66% to reach $32.93 Million. Moreover, SolvCentral.com, which we acquired in the third quarter of FY06 was consolidated in the fourth quarter. A large portion of the revenues of SolvCentral.com also come from the US, thus increasing the share of revenues from the US geography. Revenues from Europe constituted 28.69% of total revenues as compared to 35.24% in FY05. This decline is a result of the slow or negative growth in some of the existing customers in Europe. However, for the future, Europe offers great potential. Some of our recent initiatives e.g. acquisition of Pivolis in France, establishment of joint venture in Germany and setting up a nearshore centre in Poland, reflect our optimism about Europe. Moreover, CG-Smith,

18 which we acquired at the beginning of the current fiscal, has a strong presence in Europe. Rest of the world, including Japan, Asia Pacific and others, constituted the balance 5.44% of revenues. Most of the revenues in this segment came from Japan. We are optimistic about Japan also as a geography. Geographical Spread of Revenue Percentage 100% 80% 60% 40% 20% 0% Year US Europe Rest of the World Consolidated Revenues Consolidated revenue grew by 26% from Rs. 2, Million in FY05 to Rs. 3, Million. Of this, export revenues comprised 98.5% and the balance 1.5% from domestic sales. Export revenues included foreign exchange gains of Rs Million. Software Development Expenses Software development expenses comprise the direct cost of software professionals salaries and bonuses, consultancy charges, travel and overseas expenses. Total software development expenses increased by 23.8% from Rs. 1, Million to Rs. 2, Million. Employee Cost, which include salaries and bonuses increased by 44% over the previous year, primarily on account of two factors average salary increase of 17% for the last year and increase in the employee base by 641. Consultancy charges represent fees paid to for professional consultants, onsite allowance and sub contractors costs. Travel and overseas expense consists of the overseas airfare, and other direct travel related expenditure. These have gone up on account of increase efforts in Europe and US geographies. As a percentage of sales, software development expenses marginally declined from 65.93% in FY05 to 64.77% in FY06 - resulting in increase in gross margin by 1.16%. Increase in gross margins from 35.23% in FY05 to 34.07% in FY06 was also a result of higher offshore revenues.

19 Selling, General and Administrative Expenses SG&A expenses have increased from Rs Million in FY05 to Rs Million in FY06. The increase of 25% was in line with the growth in business. As a result, as a percentage of sales, SG&A expenses have remained at steady level at 20.79% in FY06 as compared to 20.82% in FY05. We will continue to invest in sales & marketing initiatives and hence we may see an increase in SG&A expenses in absolute terms, but as percentage of sales we may see a decline. Operating Profits Operating profit before depreciation, interest and tax were 14.44% for FY06 as compared to 13.43% in the previous year. Improvement of 1.01% at the operating profit level is also as a result of higher gross margins and stable SG&A expenses. Interest Expense Our interest expense has increased from Rs Million in FY05 to Rs Million primarily on account of additional debt for the SDC-II and higher working capital loans. As a percentage of sales, interest burden has increased from 0.37% in FY05 to 0.60% in FY06. For the current fiscal too, we can expect higher interest expense, as we will be drawing down the rest of the IFC loan to fund SDC-II. Depreciation For FY06, total depreciation increased to Rs Million as compared to Rs Million in FY05. For FY05, the impact of depreciation from SDC-I, was minimal. During FY06, the full impact of depreciation of SDC-II has been recorded. As a result, depreciation has increased from 1.27% of revenues in FY05 to 2.65% of revenues in FY06. As the SDC-II gets completed around August this year, we can expect an additional impact on depreciation from the SDC-II for part of the year. The full impact of depreciation of SDC-II may come later. Taxes Tax liability for our Company arises on account of overseas business through subsidiaries such as Panex and SolvCentral.com and domestic business. Our Company has tax exemption under Section 10A of the Income Tax Act, 1961 for the units covered under the tax holiday period. As a percentage of the Profit Before Tax (PBT), tax for FY06 comprised 9.20% as compared to 4.39% of the PBT in FY05. Our tax liability went up on account of tax provision required for overseas business through our subsidiaries including the new subsidiary SolvCentral.com. Profit after Taxes. Our company made a Net Profit after tax of Rs Million, 15.96% higher than the net profit after tax of Rs Million in the previous year, before

20 D. Our Profitability Drivers extraordinary items. Net profit margins have shown a decline from 11.12% of revenues in previous year to 10.23% in FY06. Net profit margins have been affected, as discussed earlier, on account of higher depreciation, interest and taxes. For the current fiscal, our focus is on improving profitability. We have issued revenue guidance of between $ 98 Million and $ 102 Million and net profit guidance of between $ Million and $ 12 Million. It is imperative for us therefore to improve our profitability by 150 to 200 basis points. We are therefore focusing on the following key drivers which will help us improve profitability: a. Billing Rates: Our billing rates are in line with that of the industry. However, for certain niche services e.g. Auto electronics and embedded, Business intelligence etc in which we have a strong competitive expertise, and in some new relationships we are able to command better rates. This is based on our experience with our customers in the recent past. Increase in billing rates will definitely help us improve our margins. b. Onsite-offshore mix: As discussed earlier, margins on offshore projects are higher than that on onsite projects. Scalability of offshore teams is simpler and faster. Thus, a favourable offshore percentage in our services translates to better profitability. Our offshore percentage has still considerable scope of improvement and we expect the percentage to increase going forward leading to improvement in profitability. c. Human Resource Utilization: Better utilization of our employees, especially the freshers who are yet to join the billable team, will enable better revenue growth and hence improvement in margins. In the last fiscal, our utilization levels declined by 3% on onsite projects and 4% on offshore projects. We are focusing on getting back to our earlier levels and bettering our utilization. d. Scale of Operations: We also expect to benefit from the higher scale of operations. As discussed earlier, with the increase in the scale of business, our SG&A expenses are not expected to grow at similar rate. Therefore, as we scale up our operations to better utilize our infrastructure, our profitability is expected to improve. e. Productivity Improvements: This would require higher revenues per person, lower attrition, high utilization and more productivity. We have embarked on many initiatives internally and we are hopeful that these will enable us to manage our costs on the one hand and to deliver better value to our customers on the other hand. E. Our Controls, Systems and Compliance

21 Our company has well established and well defined internal control systems and procedures both in financial and operational areas that are commensurate with the size and nature of the business of our Company. These internal control systems and procedures are multileveled and the roles and responsibilities of people are well defined. a. Internal Control Systems in the Financial Areas: Audit Committee The Audit Committee of our Company, consisting of independent non-executive directors, is responsible for ensuring the following: o o o o Overseeing our Company s financial reporting process and disclosures of financial information and in ensuring that the financial statement is correct, sufficient and credible. Reviewing with the management, annual financial statements before submission to the Board of Directors, focusing primarily on any changes in the accounting policies, significant adjustments arising out of audit, compliance with accounting standards, qualifications in draft audit report, going concern assumption etc. Reviewing with the management, external and internal auditors, adequacy of internal control function. Discussion with the auditors about the internal audit function, its structure, and adequacy. Our senior management consisting of professionals from finance and operations also ensure adherence to the internal control systems and processes. We have appointed P.G. Bhagwat & Associates, Chartered Accountants as our Internal Auditors for auditing the financial records maintained by our Company in India. The Audit Committee reviews the Internal Audit Report on a regular basis. b. Internal Control Systems in operational area Our company has been successfully assessed at CMMI Level 5, which is an indicator of the effectiveness and adequacy of the matured internal software processes. Our company s software processes also conform to ISO 9001:2000 requirements. This reflects effectiveness of processes and in turn ensures appropriate controls across throughout the organization. We have recently obtained BS7799 certification, a globally recognized standard for information security management systems.