i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 2002, SEPTEMBER 30, 2001 AND MARCH 31, 2002

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1 i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 2002, SEPTEMBER 30, 2001 AND MARCH 31, 2002 ASSETS Current assets US dollars (Translated) Indian rupees Cash and cash equivalents 43,532 2,104,337 1,518,743 1,122,346 Trade receivable from related parties, net 14, , , ,980 Trade receivables - others, net 20,946 1,012, , ,106 Bank deposits 59,475 2,875,000-1,150,000 Employee receivables 151 7,291 10,540 8,219 Prepaid expenses 1,976 95, ,816 98,999 Deferred income taxes, net ,533 Marketable securities, available for sale ,205 27,152 20,861 Other assets 3, ,183 53,687 67,624 Total current assets 144,635 6,991,608 3,092,670 4,361,668 Property and equipment, net 7, , , ,283 Other investments 1,552 75, ,875 74,875 Investment in equity investee 200 9,660 33,529 23,834 Rental deposits 5, , , ,541 Employee receivables ,949 26,813 23,984 Deferred income taxes, net , ,624 Other assets ,798 11,441 11,949 TOTAL ASSETS 160,925 7,779,119 3,822,143 5,120,758 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Deferred revenue 4, , , ,781 Accrued employee costs 3, ,792 35,231 64,248 Accrued referral fees 1,550 74,907 54,907 70,935 Accrued rates and taxes ,744 45,959 48,284 Accounts payable ,592 15,948 55,180 Taxes payable 2, ,808 51,403 68,333 Other current liabilities 4, , , ,585 Current portion of capital lease obligations 118 5,694 4,527 6,035 Total current liabilities 18, , , ,381 Deferred revenue ,225 56,788 99,420 Accrued employee costs 2, ,844 58,142 72,714 Capital lease obligations 187 9,133 7,477 10,018 Total liabilities 21,608 1,044, , ,533 Stockholders' equity Common stock, Rs 5/- par value; 100,000,000 equity shares authorised 37,315,400 shares outstanding as of September 30, , , , ,777 Additional paid-in capital 46,911 2,267, , ,760 Accumulated other comprehensive income (887) (42,885) (13,204) (12,341) Loan to Employees Stock Purchase Scheme (ESPS) Trust (5,582) (269,844) (299,715) (291,649) Retained earnings 95,015 4,593,023 3,193,179 3,787,678 Total stockholders' equity 139,317 6,734,558 3,215,447 4,260,225 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 160,925 7,779,119 3,822,143 5,120,758 The accompanying notes are an integral part of these financial statements

2 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF PROFIT AND LOSS FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 AND YEAR ENDED MARCH 31, 2002 (Translated) Indian rupees REVENUES 61,783 2,986,593 1,931,346 4,357,175 Cost of Revenues (26,248) (1,268,817) (799,723) (1,909,411) (excluding depreciation and amortisation) Gross profit 35,535 1,717,776 1,131,623 2,447,764 Selling and marketing expenses (7,975) (385,497) (259,040) (603,159) General and administrative expenses (7,577) (366,257) (306,850) (564,045) Depreciation and amortisation (1,353) (65,400) (54,985) (140,468) INCOME FROM OPERATIONS 18, , ,748 1,140,092 Other than temporary dimunition in value of securities available for sale - - (16,887) (16,887) Share of associate companies' loss (290) (14,024) (20,148) (40,044) Interest income 1,903 91,995 31,427 66,244 Other income, net 26 1,240 27,708 34,607 INCOME BEFORE PROVISION FOR INCOME TAXES 20, , ,848 1,184,012 Provision for income taxes (2,645) (127,844) (91,337) (148,002) NET INCOME 17, , ,511 1,036,010 Basic earnings per share (in US $, Rs) Diluted earnings per share (in US $, Rs) The accompanying notes are an integral part of these financial statements.

3 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF CASH FLOW FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30,2001 AND YEAR ENDED MARCH 31, 2002 (Translated) Indian rupees CASH FLOWS FROM OPERATING ACTIVITIES Net Income 17, , ,511 1,036,010 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,353 65,400 54, ,468 (Profit)/loss on retirement/sale of property and equipment, net (9) (506) Loss on sale of investment ,500 Other than temporary dimunition in value of securities available for sale ,887 16,887 Share of associate companies loss ,024 20,148 40,044 Provision for doubtful debt, net (372) (17,987) - 54,284 Deferred tax benefit, net (82) (3,986) 11,947 (12,667) 18, , ,802 1,276,860 Change in assets and liabilities Trade receivables 3, ,098 (186,969) (761,296) Other assets (1,161) (56,124) (84,856) (73,848) Current liabilities and other liabilities 3, ,272 (11,112) 251,298 Net cash provided by operating activities 24,580 1,188, , ,014 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment including capital advances (3,020) (145,970) (72,539) (240,952) Sale of property and equipment Investment in bank deposits (35,685) (1,725,000) - (1,150,000) Purchase of investments (3) (131) (89,016) (69,598) Share capital advance for investment in joint ventures (152) (7,350) - (29,620) Share capital refund from joint ventures 155 7, Sale of investment ,500 Net cash (used in) investing activities (38,694) (1,870,406) (161,348) (1,441,463) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Initial Public Offering ('IPO') 36,839 1,780, IPO expenses (1,343) (64,906) - - Proceeds from private placement of shares ,350 Repayment of loan from Employee Stock Purchase Scheme (ESPS) Trust , ,549 Capital lease payment (52) (2,524) (1,391) (5,106) Dividend paid (965) (46,644) (41,596) (41,596) Net cash (used in)/provided by financing activities 34,930 1,688,531 (42,504) 403,197 Net (decrease)/increase in cash and cash equivalents during the period/year 20,817 1,006,305 59,013 (345,252) Effect of exchange gain/(loss) on cash and cash equivalents (503) (24,314) (14,660) (6,792) Cash and cash equivalents at the beginning of the period/year 23,218 1,122,346 1,474,390 1,474,390 Cash and cash equivalents at the end of the period/year 43,532 2,104,337 1,518,743 1,122,346 Supplementary information Cash Taxes paid Domestic taxes 1,373 66,356 23,003 47,932 Foreign taxes ,399 94,808 Dividend taxes - - 4,243 4,243 1,373 66,356 83, ,983 Non Cash Assets acquired under capital leases 51 2,447 1,670 9,193 The accompanying notes are an integral part of these financial statements

4 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 AND YEAR ENDED MARCH 31, 2002 Common Stock ( Indian rupees) No. of Shares Par Value Additional paid-in capital Comprehensive income Accumulated other comprehensive income Loan to Trust Retained earnings Total stockholders' equity Balance as of March 31, 2001 (As restated ) 33,276, , ,805 (3,283) (300,198) 2,793,264 2,824,970 Cash Dividend declared (41,596) (41,596) Repayment of loan by ESPS Trust Net income for the period , , ,511 Translation loss (7,272) (7,272) - - (7,272) Unrealised loss on securities available for sale (2,649) (2,649) - - (2,649) Comprehensive income 431,590 Balance as of September 30, ,276, , ,805 (13,204) (299,715) 3,193,179 3,215,447 Cash dividend declared Common stock issued upon Preferential allotment 679,000 3, , ,350 Repayment of loan by ESPS Trust ,066-8,066 Net income for the period , , ,499 Translation gain ,655 4, ,655 Unrealised loss on securities available for sale (3,792) (3,792) - - (3,792) Comprehensive income 595,362 Balance as of March 31, ,955, , ,760 (12,341) (291,649) 3,787,678 4,260,225 Cash dividend declared (46,644) (46,644) IPO of stock during the period 3,360,000 16,800 1,764, ,780,800 IPO related expenses - - (103,073) (103,073) Repayment of loan by ESPS Trust ,805-21,805 Net income for the period , , ,989 Translation loss (26,389) (26,389) - - (26,389) Unrealised loss on securities available for sale (4,155) (4,155) - - (4,155) Comprehensive income 821,445 Balance as of September 30, ,315, ,577 2,267,687 (42,885) (269,844) 4,593,023 6,734,558 ( ) (Translated) Balance as of September 30, ,315,400 3,860 46,911 (887) (5,582) 95, ,317 The accompanying notes are an integral part of the financial statements

5 i-flex Solutions Limited and subsidiaries NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2002, SEPTEMBER 30, 2001 AND YEAR ENDED MARCH 31, BACKGROUND (All amounts in thousands of Indian rupees, unless otherwise stated) i-flex Solutions Limited ('i-flex' or 'the Company'), a public limited company, was incorporated in India with limited liability on September 27, The Company s principal shareholder is OrbiTech Limited ( OrbiTech ) formerly Citicorp Overseas Software Limited with shareholding of per cent. OrbiTech is a 100 per cent subsidiary of Citicorp Technology Holdings Inc, USA. In June 2002, the Company completed an IPO of 3,961,700 equity shares of Rs 5/- each at a price of Rs 530/- per share, comprising a fresh issue of 3,360,000 equity shares and offer for sale of 601,700 equity shares held by existing shareholders. On June 28, 2002, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. The Company had a controlling/significant interest in the following: i-flex solutions b.v. ( i-flex b.v. ), a 100 per cent owned subsidiary company incorporated in May 2000 under the laws of The Netherlands; DotEx International Limited ( DotEx ), a 49 per cent owned investee company incorporated in June 2000 under the Indian laws; Flexcel International Private Limited ( Flexcel ), a per cent owned investee company incorporated in March 2001 under the Indian laws; i-flex solutions Pte. Ltd., ( i-flex Pte. ), a 100 per cent owned subsidiary company incorporated in November 2001 under the laws of Singapore; and i-flex solutions inc., ( i-flex inc ), a 100 per cent owned subsidiary company incorporated in December 2001 under the laws of the United States of America. The Company along with i-flex b.v., i-flex Pte. and i-flex inc. (hereinafter collectively referred to as the Group ) is principally engaged in the business of providing information technology solutions to the financial services industry worldwide. i-flex has a suite of banking products, which caters to the needs of corporate, retail and investment banking as well as treasury operations and data warehousing. The Group also provides software development services and develops bespoke software for its customers from the financial services industry. The Group derives a substantial portion of its revenues from the overseas markets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Principles of consolidation The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America ( US GAAP ) to reflect the financial position and the results of operations of the Group. 1

6 The consolidated financial statements present the accounts of the Group, as described above. DotEx and Flexcel are accounted for using the equity method since the Group exerts significant influence on the operations of DotEx and Flexcel. All material transactions and balances between the entities included in the consolidated financial statements have been eliminated. The group provides for losses above its value of investment in DotEx since it is committed to provide further financial support to DotEx. 2.2 Basis of presentation (a) These financial statements are prepared under the historical cost convention on the accrual basis of accounting in accordance with the accounting and reporting requirements of US GAAP. The significant accounting policies adopted by the Group, in respect of the financial statements are set out below. (b) These financial statements are stated in thousands of Indian rupees ( Rs ). For the convenience of readers, the financial statements for the period ended September 30, 2002 have been translated into thousands of United States Dollars ( US$ ) using the telex transfer average rate as prescribed by Citibank NA as at September 28, 2002 which was 1 US$ = Rs The convenience translation should not be construed as a representation that the Rs amounts or the US$ amounts referred to in these financial statements have been, could have been, or could in the future be, converted into US$ or Rs, as the case may be, at this or at any other rate of exchange, or at all. (c) On October 9, 1999, the Board of Directors authorised a one-for-one stock split of the Company s equity shares effected in form of a stock dividend. Further on October 31, 2000, there was one-forone stock split of the Group s shares in form of a stock dividend. Also, in accordance with the resolution passed in the shareholders and Board of Directors meetings held on August 14, 2001 and January 7, 2002 respectively, the equity share of par value Rs 10/- each has been split into two equity shares of par value of Rs 5/- each. Subsequent to the sub-division, the authorised Common Stock is 100,000,000 equity shares and issued and outstanding common stock is 37,315,400 equity shares. The stockholders equity accounts reflect the equity capitalisation of the Group after giving retrospective effect to these stock dividends and sub-division of shares for all the periods/years presented. 2.3 Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting year. Although these estimates are based upon management s best knowledge of current events and actions, actual results could differ from those estimates. 2.4 Foreign currency The functional currency of each entity in the Group is its respective local currency. Monetary assets and liabilities in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the date of the transaction. All foreign exchange gains and losses are recorded in the accompanying consolidated income statements. The results of each entity in the Group are translated into Indian rupees, the reporting currency, at the average rates of exchange during the year and the balance sheet is translated at the rate in effect at the balance sheet date. Translation adjustments are included as a separate component of stockholders equity in the accompanying consolidated statements. 2

7 2.5 Revenue recognition The Group derives revenues from: The licensing of banking software products, along with the provision of related implementation services and post contract support; and Providing software development and other consulting services to certain customers, which comprise primarily large financial services companies. License Fees The Group's standard end user license agreement for the Group's products provides for a license fee to use the product in perpetuity upto a specified limit or on an enterprise-wide basis. This license fee is usually payable by the customer based on a pre-determined payment schedule wherein, realisability of the license fees is in no way dependant on any other element of the arrangement. In accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition" ( SOP 97-2 ), where an arrangement does not provide for significant modification or customisation of the software, license fee revenues are recognised when persuasive evidence of an arrangement exists, delivery has occurred, the license fee is fixed and determinable and the collection of the fee is probable. Fees from licenses sold are recognised only when the above criteria have been met. License fees from arrangements which contain extended payment terms is not considered to be fixed and determinable at the outset of the arrangement and revenue is therefore recognized as payments from customers become due (assuming all other conditions for revenue recognition set out in SOP 97-2 have been satisfied). The Group allocates a portion of its software revenues to post-contract support activities provided free of charge to the customer for a specified period as included under the licensing arrangement. Amounts allocated are based upon Vendor Specific Objective Evidence ( VSOE ) of the fair value of those services or products. If a licensing arrangement provides a customer a right to a significant incremental discount (with reference to VSOE of the fair value of that element) on a future purchase of any other software product or a service, a proportionate amount of that discount is applied to each element covered by that arrangement based on each element s fair value. Licensing arrangements, which allow a customer to purchase additional copies of products already licensed and delivered to the customer, do not result in the provision of a significant discount to the customer. Revenues are recognised as each additional copy is purchased by the customer based on the price per copy stated in the agreement. If software product components are used in software development and consulting services agreement where the services are determined to be essential to the functionality of the licensed software both the license and consulting fees are recognised under the proportional efforts method of contract accounting. Implementation/Enhancement Services These services essentially comprise, inter alia, functional enhancements, interface building, implementation planning, data conversion, training and product walkthrough and are provided to customers who enter into licensing arrangements with the Group. Such services are not essential to the functionality of the software and do not affect the realisability of the license fees. Revenue for implementation/enhancement services is recognised upon the proportionate efforts method to the extent certified by the customer for fixed price contracts and as the services are provided for time and material contracts. Post-Contract Support/Annual Maintenance Contracts Support agreements, which are generally for a period of 12 months, require the Group to provide technical support, maintenance, query solving and upgrades to the customers. Revenues from postcontract support are recognised rateably over the term of the contract on a straight-line basis. 3

8 Software Development and Consulting Services The Group provides software development services, which comprise resource augmentation support and onsite and/or offshore development activities. Revenue for time and material contracts is recognised as the services are provided. Fixed price contract revenue is recognised using the proportionate effort method to the extent certified by the customers. Reimbursement for out-of-pocket expenses The Group receives reimbursement for out-of-expenses incurred, from the customers. These expenses primarily include travel expenses, accommodation and travel allowances given to the employees. The Group is the primary obligor and has the credit risk for the expenses incurred. Pursuant to the guidance set out in Emerging Issues Task Force issue No the Company has reported these reimbursements of out-of-pocket expenses as revenues. Deferred revenue represents amounts billed in excess of revenue earned. Referral fees are accrued for corresponding to the extent of the recognition of revenue to which they relate. 2.6 Cost of revenues Cost of revenues comprises of salaries and employee benefits, project related travel costs, application software costs and professional fees. 2.7 Research and development expenses for products Research and development costs are expensed as incurred. Software product development costs are expensed as incurred until technological feasibility is established. Software product development costs incurred subsequent to the achievement of technological feasibility are not material and are expensed as incurred. 2.8 Cash and cash equivalents Cash and cash equivalents include all highly liquid investments with an original maturity of ninety-one days or less. 2.9 Property and equipment Property and equipment including assets under capital lease agreements are stated at cost, less accumulated depreciation and amortisation. Depreciation is computed using the written-down value method and is charged to income over the estimated useful life of the assets. Assets under capital leases are amortised over the shorter of the useful life or lease term. The Group purchases certain application software for internal use. It is estimated that such software has a relatively short useful life, usually less than one year. The Group, therefore, charges to income the cost of acquiring such software. The amount charged to expense for purchase of such software is Rs 46,078, Rs 16,883 and Rs 60,496 for the six month periods ended September 30, 2002, and September 30, 2001 and year ended March 31, 2002 respectively. Costs of normal repairs and maintenance are charged to income as incurred. Major replacements or betterment of property and equipment are capitalised. When assets are sold or otherwise disposed off, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. Advances paid towards the acquisition of property and equipment outstanding at each balance sheet date and the cost of property and equipment not put to use before such date are disclosed under Capital advances. 4

9 2.10 Impairment of long-lived assets The Group reviews long-lived assets for impairment, whenever an event or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The carrying values of longlived assets are assessed for recoverability by reference to the estimated future undiscounted cash flows associated with them. Where this assessment indicates a deficit, the assets are written down to market value. For assets, which do not have a readily determinable market value, the assets are written down to their estimated market value, calculated by reference to the estimated future discounted cash flows. Assets to be disposed are reported at the lower of the written down value or the fair value, less the cost to sell. As at September 30, 2002 management believes that no such impairment exists Marketable securities Investments in marketable securities are classified as available for sale and are accounted for at fair value, which is determined by reference to prevailing market prices. Changes in fair value are excluded from net income and reported, net of taxes as a separate component of stockholders' equity. Declines in fair value below original cost are recorded in the income statement when they are considered to be other than temporary Other investments Investments where the Group controls between 20 percent and 50 percent of the voting interest are accounted for using the equity method. Investments in unquoted equity and debt securities, where the Group controls less than 20 percent voting interest are accounted for at cost. Decline in fair value below original cost is recorded in the income statement when they are considered to be other than temporary Income taxes The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Group. Deferred income taxes are recognised for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income statement in the year that includes the enactment date. Deferred tax assets are recognised in full, subject to a valuation allowance to reduce the amount recognised to that, which is more likely than not to be realised Retirement benefits Contributions to defined contribution plans are charged to income in the year in which they accrue. Current service costs for defined benefit plans are also accrued in the year to which they relate. Prior service costs, if any, resulting from amendments to the plans are recognised and amortised over the remaining period of service of such employees Operating leases Leases of assets under which the lessor effectively retains all the risks and rewards of ownership are classified as operating leases. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term Earnings per share Basic earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding during the period/year. Diluted earnings per share is computed using the weighted average of common and dilutive common equivalent shares outstanding during the period/year, using the treasury stock method for shares which have been granted to employees pursuant to the Employees Stock Purchase Scheme ( the Scheme ) adopted by the Group, except where the result would be anti-dilutive. 5

10 The weighted average of common and dilutive common equivalent shares outstanding at the period-end reflects the retrospective effect to the stock dividends and sub-division of shares for all the periods/year presented. Please refer note 2.2 (c) Stock-based compensation The Group accounts for stock-based compensation using the intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options is measured as the excess of the fair value of the Company s stock on the measurement date over the amount an employee must pay to acquire the stock and is recognised over the vesting period. The intrinsic value of the options is measured on the basis of the fair value of the Company s stock at the end of each period. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No Derivative instruments and hedging activities The Group does not use derivative financial instruments and does not engage in any hedging activities. However, some of the license arrangements entered into by the Group with its customers are denominated in a currency which is neither the functional currency of the Group nor the local currency of the customer, and thus qualify as embedded derivative instruments as per SFAS No Accordingly, gains or losses on such embedded derivative instruments are recognised in the Group s consolidated income statements based on the market value of the embedded derivative contracts at each period end and corresponding asset/liability is recorded in the balance sheet Vacation pay Accrual for vacation pay is determined at the actuarial estimate for the entire unavailed leave balance standing to the credit of the employees at the period/year-end. 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of physical cash, cheques on hand and balances available in current accounts and time deposits with banks. Time deposits are interest-bearing deposits for periods ranging from 30 to 91 days. The details of cash and cash equivalents are as follows: Indian rupees Cash on hand Bank balances Current accounts 35,356 1,709, , ,651 Time deposits 8, , , ,189 43,532 2,104,337 1,518,743 1,122,346 Cash and cash equivalents of the Company are subject to local exchange control restrictions and can be remitted overseas only with prior approval from the relevant regulatory authorities. 6

11 4. TRADE RECEIVABLES, NET Trade receivable from related parties as of September 30, 2002 and 2001 and March 31, 2002, net of provision for doubtful accounts of Rs Nil, Rs Nil and Rs 1,221 respectively amounted to Rs 719,521, Rs 570,638 and Rs 902,980 respectively. Trade receivable - others as of September 30, 2002 and 2001 and March 31, 2002 net of provisions for doubtful accounts of Rs 37,925, Rs 6,715 and Rs 54,691 respectively amounted to Rs 1,012,518, Rs 806,060 and Rs 988,106 respectively. The movement in provision for doubtful accounts is given below: Indian rupees Provision for doubtful debts Trade receivables from related parties Opening balance 25 1,221 Additions 1,221 Reversals (25) (1,221) Closing balance 1,221 Trade receivables others Opening balance 1,131 54,691 4,233 4,233 Additions 43 2,100 4,157 52,198 Reversals (390) (18,866) (1,675) (1,740) Closing balance ,925 6,715 54, PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: Estimated useful life (years) Indian rupees Freehold land ,734 44,734 Improvement to leasehold premises 7 1,733 83,756 68,264 83,479 Building ,116 7,116 7,116 Computer equipments 3 8, , , ,650 Electrical and office equipment 7 3, , , ,349 Furniture and fixtures 7 2, ,136 80, ,228 Vehicles on lease ,702 20,728 26,890 Capital advances 1,943 93,924 30,728 2,412 19, , , ,858 Less: Accumulated depreciation and amortisation (12,081) (583,976) (438,266) (521,575) Property and equipment, net 7, , , ,283 7

12 Property and equipment above include the following assets held under capital leases: September2002 September 2002 September 2001 March 2002 Indian Rupees Vehicles ,702 20,728 26,890 Less: Accumulated amortisation (275) (13,286) (10,122) (12,370) 6. FINANCIAL INSTRUMENTS 6.1 Fair Value of Financial Instruments ,416 10,606 14,520 SFAS 107 requires the Group to disclose the fair value of all financial instruments in the financial statements. However, this does not change any requirements for recognition, measurement, or classification of the financial instruments in the financial statements. The fair values of the Group's current assets and current liabilities approximate their carrying values because of their short maturity. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months. The fair values of equity investment, deferred income taxes and other investments are not disclosed as prescribed by SFAS 107. Long-term rental deposits comprise of interest free deposits maintained for office and residential premises taken on lease. Such deposits are repayable on termination of such lease agreements. The fair value of the long-term rental deposits carried in the financial statements as at September 30, 2002, 2001 and March 31, 2002 at Rs 271,130, Rs 307,080 and Rs 291,541 respectively, determined using market rates of interest as at September 30, 2002 and 2001 and March 31, 2002 is approximately Rs 203,081, Rs 183,007 and Rs 206,814 respectively. Long term deferred revenue comprises of unaccrued amount of the annual maintenance contract, post contract support and the discounts on the undelivered elements of the license arrangements. Such deferred revenue is recognized as revenue ratably over the term/period of the annual maintenance contract, post contract support period and over the period of the undelivered element of the license arrangement. The fair value of the long term deferred revenue carried in the financial statements as at September 30, 2002 and 2001 and March 31, 2002 at Rs 47,225, Rs 56,788 and Rs 99,420 respectively, determined using market rates of interest as at September 30, 2002 and 2001 and March 31, 2002 is approximately Rs 38,600, Rs 42,299 and Rs 72,958 respectively. 6.2 Concentration of credit risk Financial instrument that potentially subject the Group to concentrations of credit risk consist principally of cash equivalents, trade receivables from related parties, trade receivables from others and bank deposits. By their nature, all such financial instruments involve risk including the credit risk of nonperformance by counterparties. The Group s cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. As at September 30, per cent and 54.5 per cent of cash equivalents (primarily denominated in US $) were placed with HDFC Bank and Citibank respectively and 100% of bank deposits were placed with HDFC Bank. Trade receivables (primarily denominated in US $) are typically unsecured and are derived from revenues earned from customers in the financial service industry worldwide. The Group monitors the credit worthiness of its customers to which it grants credit terms in the normal course of the business. As at September 30, % of trade receivable from related parties was recoverable from various Citibank branches, no single customer accounted for more than 10% of trade receivables from others as at September 30,

13 In management s opinion, as of September 30, 2002, there was no significant risk of loss in the event of non-performance of the counterparties to these financial instruments, other than the amounts already provided for in the financial statements, if any. 6.3 Derivative Financial Instruments The Group does not use derivative financial instruments and does not engage in any hedging activities. However, some of the license arrangements entered into by the Group with its customers are denominated in a currency which is neither the functional currency of the Group nor the local currency of the customer, and thus qualify as embedded derivative instruments as per SFAS No Such contracts are bifurcated into functional currency denominated sale contracts and contractual currency denominated forward contracts. As at September 30, 2002 the Company has committed to deliver US $ 7,157,445 pursuant to such contracts, these contracts mature between 0 to 27 months. 7. STOCKHOLDERS' EQUITY 7.1 Common stock The Group has only one class of common stock referred to herein as equity shares. 7.2 Voting Each holder of equity shares is entitled to one vote per share. 7.3 Dividends Final dividends proposed by the Board of Directors are payable when formally approved by the shareholders, who have the right to decrease but not increase the amount of the dividend recommended by the Board of Directors. With respect to equity shares issued by the Company during a particular fiscal year, cash dividends declared and paid for such fiscal year generally will be prorated from the date of issuance to the end of such fiscal year. The Company accrues for dividend upon obtaining shareholders approval. The Company paid cash dividends of Rs 46,644, Rs 41,596 and Rs 41,596, during the period ended September 30, 2002, September 30, 2001 and year ended March 31, For the six month ended September 30, 2002, September 30, 2001 and year ended March 31, 2002 the Company paid Rs Nil, Rs 4,243 and Rs 4,243 respectively as dividend tax. 7.4 Liquidation In the event of liquidation of the Company, the holders of equity shares shall be entitled to receive all of the remaining assets of the Company, after distribution of all preferential amounts, if any. Such amounts will be in proportion to the number of equity shares held by the shareholders. 7.5 Initial public offering In June 2002, the Company completed an IPO of 3,961,700 equity shares of Rs 5 each at a price of Rs 530/- per share, comprising a fresh issue of 3,360,000 equity shares and offer for sale of 601,700 equity shares held by existing shareholders. The proceeds from the fresh issue of shares was Rs 1,677,727, net of underwriting commissions and other direct offering costs of Rs 103,073. The proceeds from the offer for sale was Rs 300,772, net of underwriting commissions and other direct offering costs of Rs 18,129. The proceeds from the offer for sale have been offset against the corresponding amount payable to the selling shareholders in the consolidated balance sheet as at September 30, The entire proceeds from the offer for sale have been paid to the selling shareholders in July, The aggregate offering costs have been charged against the proceeds from the offering in the accompanying shareholders equity, balance sheet and statements of income and cash flows. On June 28, 2002, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. 9

14 8. MARKETABLE SECURITIES, AVAILABLE FOR SALE The fair values of the available for sale securities are as follows: Indian rupees Unit Trust of India 1964 Scheme Carrying value/cost ,861 46,688 46,688 Less: Other than temporary diminution in value (16,887) (16,887) Less: Excess of cost over market value (34) (1,656) (2,649) (8,940) ,205 27,152 20,861 The Group holds 3,311,258 units (and 278 fractions) of Rs 10 each of Unit Trust of India Scheme ( US 64 ). During the prior years the net asset value of US 64 has reduced substantially. During January 2002, Unit Trust of India ( UTI ) declared a special liquidity scheme for all unit holders holding units in excess of 5,000 units under which UTI, as on May 31, 2003 would repurchase the units at Rs 10/- per unit or at net asset value per unit, as at that date, which ever is higher. The Group considers the excess of its cost over this future repurchase price of units amounting to Rs 16,887 as other than temporary diminution in value and has therefore charged Rs 16,887 to the income statement for the year ended March 31, The excess of the future repurchase price over the market price amounting to Rs 1,656, Rs 2,649 and Rs 8,940 as at September 30, 2002, September 30, 2001 and March 31, 2002 respectively, is considered as temporary diminution in value and has been classified as part of 'other comprehensive income'. 9. OTHER INVESTMENTS 10

15 Other investments comprise: Indian rupees Unquoted equity Securities Times Online Money Limited ( TOML ) 100,000 Less: Other than temporary diminution in value (50,000) 50,000 EBZ Online Private Limited ( EBZ ) ,000 45,000 45,000 Eastern Software Systems Limited ( ESSL ) Held to maturity debt securities 204 9,875 9,875 9,875 1,135 54, ,875 54, % KEONICS Mahiti Bonds Series ,000 20,000 20,000 National Saving Certificates ,552 75, ,875 74,875 The Company s ownership interest in EBZ and ESSL is 19.5 percent and 6.65 percent respectively. The nature of business of each of these companies is as follows: EBZ is a strategic partnership between Brihans Technologies Private Limited ( BTPL ) and the Company to integrate the selected and adapted software provided under Group s products with BTPL s products for Co-operative banking sector in India. ESSL is primarily engaged in catering to the needs of small businesses through its flagship product, ebizframe. The Group does not exert significant influence directly/indirectly on the operations of EBZ and ESSL by way of representation on the Board of Directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel or technological dependency. Accordingly these investments are valued at cost less any decline in fair value below original cost when considered to be other than temporary. Management believes that there is no other than temporary decline in the value of these investments. Investments in debt securities of 12.75% KEONICS Mahiti Bonds Series -1 allotted on February 1, 2001 are non-convertible redeemable at par at the end of seven years from the date of allotment. As per the terms of the securities, the Group has a put and call option at par at the end of five years from the date of allotment. 11

16 10. INVESTMENTS IN EQUITY INVESTEES The Group exercises significant influence over the affairs of Flexcel and DotEx and hence its investment in these companies is accounted for based on the equity method. DotEx is a 51:49 joint venture between NSE.IT Limited, a wholly owned subsidiary of The National Stock Exchange of India Limited ( NSE ) and the Group for setting up a Broker Plaza enabling brokers and their clients to transact in stock/securities markets through the internet. Flexcel is a joint venture with HDFC Bank Limited and its group companies to provide the Group s products through an Application Service Provider ( ASP ) model to various banks and financial institutions in India. The Group holds percent shares in Flexcel while HDFC Bank Limited and its group companies hold the balance of percent shares. Investment in Flexcel as at September 30, 2002 aggregated to Rs 22,218 out of which Flexcel has allotted equity shares amounting to Rs 98 while the balance Rs 22,120 is disclosed as advance against the investments with Flexcel since the shares have not been allotted to the Group pending completion of legal formalities. Hence advance against shares has been separately disclosed below as part of the carrying value of this investment. For the six month period ended September 30, 2001, the group has not applied equity method of accounting for investment in Flexcel since no shares were allotted to the group and there were no significant operations in Flexcel till September 30, September2002 September 2002 September 2001 March 2002 Indian rupees Original Cost DotEx 1,014 49,000 24,500 49,000 Flexcel Add: Advance against share capital given to Dotex 152 7,350 15,560 Flexcel ,120 28,458 29,620 Less: Group's share of accumulated losses in DotEx (1,165) (56,352) (34,989) (45,402) Flexcel (260) (12,556) (9,482) 200 9,660 33,529 23,834 12

17 The analysis of the carrying amount of investments and the earnings of the investee included in net income is as follows: Share of net assets Indian rupees DotEx (2) 5,072 3,598 Flexcel 164 7,912 10,172 Advance against share capital paid to Flexcel in excess of committed share 36 1,750 10,064 Carrying value 200 9,660 5,072 23,834 DotEx (2) 5,072 3,598 Flexcel 200 9,662 20,236 Share of (loss) of equity investee 200 9,660 5,072 23,834 DotEx (227) (10,950) (20,148) (30,562) Flexcel (64) (3,074) (9,482) (Loss) included in net income (291) (14,024) (20,148) (40,044) DotEx (227) (10,950) (20,148) (30,562) Flexcel (64) (3,074) (9,482) (291) (14,024) (20,148) (40,044) The summarised unaudited financial statements of DotEx are as follows: Balance sheet Indian rupees Current assets 99 4,769 8,838 9,586 Fixed assets, (net) 142 6,841 21,475 17,677 Total assets ,610 30,313 27,263 Current liabilities 167 8,056 15,963 15,438 Unsecured loans 74 3,569 4,000 4,484 Shareholder s equity Share Capital ,00,000 10, ,000 Advance against Share application ,000 Accumulated losses (2379) (115,015) (92,659) Total liabilities and stockholders equity ,610 30,313 27,263 Income statement Revenues 41 1,964 2,374 3,778 Expenses (493) (24,320) (43,494) (66,149) Loss from operations (452) (22,356) (41,120) (62,371) Net loss (452) (22,356) (41,120) (62,371) 13

18 The summarised unaudited financial statements of Flexcel are as follows: Balance sheet Indian rupees Current assets ,592 33,318 Fixed assets, (net) 192 9,260 11,551 Total assets ,852 44,869 Current liabilities ,866 24,314 Shareholder s equity Share Capital Advance against Share application ,160 39,520 Accumulated losses (524) (25,372) (19,163) Total liabilities and stockholders equity ,852 44,869 Income statement Revenues 30 1, Expenses (159) (7,675) (19,706) Loss from operations (129) (6,207) (19,164) Net loss (129) (6,207) (19,164) 11. OTHER CURRENT LIABILITIES Other current liabilities primarily comprise of: Indian rupees Communication expenses ,435 10,923 11,291 Travelling expenses ,703 54,102 47,394 IPO related expenses ,167 Professional fees ,087 29,267 22,681 Other liabilities 1,317 63,699 32,503 30,219 4, , , ,585 14

19 12. EMPLOYEE BENEFIT PLANS The Group has employee benefit plans in the form of certain statutory and welfare schemes covering substantially all of its employees Provident fund In accordance with Indian law, all employees of the Company, are entitled to receive benefits under the Provident Fund, a defined contribution plan in which both the employee and the Company, contribute monthly at a determined rate (currently 12 per cent of the employees' base salary). These contributions are made to the Government Provident Fund and the Company has no further obligation under Provident Fund, beyond its monthly contributions. The Company s contribution during the six month periods ended September 30, 2002 and 2001 and year ended March 31, 2002, amounted to Rs 17,091, Rs 12,155 and Rs 28,048 respectively Superannuation The superannuation plan is a defined contribution pension plan for certain category of employees of the Company. The Company contributes to employees superannuation fund at 5 to 10 per cent of the employee s base salary. The superannuation fund is administered by a trust formed for this purpose through the Group Scheme of the Life Insurance Corporation of India ( LIC ). The contributions made are recorded in the income statement on an accrual basis. The amounts contributed to the superannuation fund during the six month periods ended September , 2001 and year ended March 31, 2002 amounted to Rs 6,306, Rs 4,145 and Rs 9,942 respectively. The Company has no further obligations under the plan beyond its contribution Vacation pay Vacation pay liability has been determined at the actuarial estimate. The amount accrued for the six month period ended September 30, 2002 and 2001 and year ended March 31, 2002 amounted to Rs 91,172, Rs 47,803 and Rs 65,673 respectively Gratuity In accordance with Indian law, the Company provides for gratuity, a defined benefit retirement plan ( the gratuity plan ) covering all its employees. The Gratuity Plan provides a lump sum payment to vested employees on retirement or on termination of employment of an amount based on the respective employees' salary and the years of employment with the Company. The gratuity plan fund benefits of the Company are administered by a trust formed for this purpose through the Group Schemes of Life Insurance Corporation of India ('LIC'). The Company provides for the gratuity benefit through actuarially determined contributions. Based on the disclosure requirements of SFAS 132 the change in benefit obligation and funded status of the gratuity plan for the six month period ended September 30, 2002 and year ended March 31, 2002 is as follows: September 2002 March 2002 Indian rupees Change in benefit obligation Benefit obligation at beginning of period/year ,959 10,955 Service cost 47 2,274 2,480 Interest cost ,011 Benefits paid (2) (107) (158) Actuarial loss 1 (64) 5,671 Benefit obligation at end of period/year (A) ,986 19,959 15

20 September 2002 March 2002 Indian rupees Change in plan assets Fair value of plan assets at beginning of period/year 137 6,640 6,243 Return on plan assets Actual contribution 24 1,186 Benefits paid (2) (107) (158) Fair value of plan assets at end of period/year (B) 174 8,466 6,640 Funded status (A-B) ,520 13,319 Unrecognised net transition obligation (10) (470) (628) Unrecognised net actuarial loss (104) (5,026) (5,650) Accrued benefit cost 189 9,024 7,041 Net gratuity cost for the six-month period ended September 30, 2002 and year ended March 31, 2002 comprises of the following components: September 2002 March 2002 Indian rupees Components of net periodic benefit cost Service cost 47 2,274 2,480 Interest cost ,011 Expected return on plan assets (6) (298) (534) Amortisation of Transition liabilities Recognised net actuarial loss Net periodic benefit cost 66 3,168 3,271 The assumptions used in accounting for the gratuity plan for the period ended September 30, 2002 are set out below: Discount rate 9.5% p.a. Expected return on plan assets 9.0% p.a. Rate of compensation increase 5.0% p.a. The Company evaluates these assumptions based on its long-term plans of growth and industry standards. 16

21 13. OTHER INCOME, NET Other income comprises of the following: US Dollars Indian rupees Foreign exchange gain, net 22,758 32,782 Dividend 3,311 3,311 Loss on sale of investment (1,500) Miscellaneous income 26 1,240 1, ,240 27,708 34, INCOME TAXES Under the Indian Income-tax Act, 1961, for the year ended March 31, 2003 the Company is eligible to claim benefits with respect to 90% as against 100% till last year of the profits earned from export revenues from its five units registered under the Software Technology Parks ('STP') and one unit forming part of a Special Economic Zone ('SEZ'). The benefit as per the current tax laws is restricted to 10 consecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operations from each location. These benefits will expire for certain of the Company's units beginning from April 1, Foreign taxes are towards income taxes payable in the United States of America, Malaysia, United Kingdom and Singapore. The provision for income tax consists of the following: Current tax expense Thousand of Indian rupees Domestic taxes 1,655 80,000 27,743 53,550 Foreign taxes Subsidiary Taxes 1, ,048 2,782 51, ,119 Deferred tax (income)/expense relating to the origination and reversal of temporary differences (82) (3,986) 11,947 (12,667) 2, ,844 91, ,002 17