i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except for share data or as otherwise stated)

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1 i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except for share data or as otherwise stated) December 31, 2003 December 31, 2003 March 31, 2003 See note 2.2(b) ASSETS Current assets Cash and cash equivalents 59,487 2,709,642 2,849,362 Bank deposits 70,247 3,199,738 2,910,000 Marketable securities, available for sale ,288 Trade receivable from related parties, net 16, , ,110 Trade receivables - others, net 29,021 1,321, ,025 Employee receivables ,224 28,986 Prepaid expenses 2, ,177 85,551 Other current assets 8, , ,762 Total current assets 186,812 8,509,241 7,601,084 Property and equipment, net 16, , ,220 Investment in equity investee 53 2,410 7,738 Other investments 7, , ,537 Employee receivables 180 8,234 11,721 Restricted cash and cash equivalents 2, ,330 - Rental deposits 6, , ,542 Deferred income taxes, net ,642 29,703 Other assets ,918 15,509 TOTAL ASSETS 222,010 10,112,570 8,723,054 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable 1,659 75,559 20,218 Accrued employee costs 8, , ,003 Accrued referral fees/commission 1,841 83,877 78,301 Accrued rates and taxes 1,642 74,783 45,087 Deferred revenue 9, , ,123 Income taxes payable 201 9, ,077 Other current liabilities 4, , ,003 Current portion of capital lease obligations 126 5,759 4,786 Total current liabilities 27,113 1,234,993 1,025,598 Deferred revenue ,167 25,941 Capital lease obligations 163 7,433 6,761 Total liabilities 27,872 1,269,593 1,058,300 Stockholders' equity Common stock, Rs 5/- par value; 100,000,000 equity shares authorised 74,675,000 (March ,630,800) shares outstanding as of December , , ,154 Additional paid-in capital 46,003 2,095,449 2,083,957 Accumulated other comprehensive loss (970) (44,178) (36,135) Loan to Employees Stock Purchase Scheme (ESPS) Trust (4,832) (220,109) (267,926) Retained earnings 145,740 6,638,440 5,511,704 Total stockholders' equity 194,138 8,842,977 7,664, ,010 10,112,570 8,723,054 The accompanying notes are an integral part of these financial statements.

2 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except for share data or as otherwise stated) Nine months ended Nine months ended Nine months ended Year ended December 31, 2003 December 31, 2003 December 31, 2002 March 31, 2003 See note 2.2(b) REVENUES 129,759 5,910,527 4,759,273 6,408,889 Cost of Revenues (57,158) (2,603,531) (1,949,896) (2,743,071) Gross profit 72,601 3,306,996 2,809,377 3,665,818 Selling and marketing expenses (20,595) (938,094) (647,679) (872,270) General and administrative expenses (16,924) (770,908) (510,195) (731,607) Depreciation and amortisation (2,065) (94,083) (100,632) (142,327) INCOME FROM OPERATIONS 33,017 1,503,911 1,550,871 1,919,614 Loss on equity investments (130) (5,914) (15,540) (17,924) Interest income 3, , , ,637 Other income/(expense) (1,113) (50,691) (64,394) (86,928) INCOME BEFORE PROVISION FOR INCOME TAXES 35,407 1,612,769 1,623,270 2,023,399 Provision for income taxes (8,622) (392,712) (183,136) (252,729) NET INCOME 26,785 1,220,057 1,440,134 1,770,670 Basic earnings per share Diluted earnings per share Number of shares used in computing earnings per share Basic 72,570,792 72,570,792 68,694,062 71,010,144 Diluted 76,606,086 76,606,086 71,572,388 73,614,298 The accompanying notes are an integral part of these financial statements.

3 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF CASH FLOW (Amounts in thousands, except for share data or as otherwise stated) Nine months Nine months Year ended December 31, 2003 December 31, 2003 March 31, 2003 See note 2.2(b) Indian rupees CASH FLOWS FROM OPERATING ACTIVITIES Net Income 26,785 1,220,057 1,770,670 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,065 94, ,327 (Profit)/loss on retirement/sale of property and equipment, net (1) (38) (458) (Profit)/loss on sale/conversion of investment (48) (2,171) (35) Loss from equity investments 130 5,914 17,924 Provision for doubtful debts, net 95 4,324 (18,755) (Reversal)/Provision for doubtful advances (159) (7,253) 7,253 Deferred tax benefit, net (86) (3,939) (5,045) 28,781 1,310,977 1,913,881 Change in assets and liabilities Trade receivables (12,764) (581,408) 443,065 Other assets (5,204) (237,024) (134,280) Current liabilities and other liabilities 4, , ,562 Net cash provided by operating activities 15, ,251 2,484,228 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment including capital advances (7,373) (335,839) (366,883) Sale of property and equipment Increase in bank deposits (9,025) (411,068) (1,760,000) Purchase of investments - - (257,481) Share capital refund from equity investee - - 9,038 Sale of investment ,504 Net cash (used in) investing activities (16,362) (745,244) (2,371,929) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Initial Public Offering ('IPO') - - 1,780,800 IPO expenses - - (103,073) Proceeds from issuance of ESOP shares ,713 - Advance against equity shares to be issued under ESOP Scheme 78 3, Repayment of loan from Employee Stock Purchase Scheme (ESPS) Trust 1,050 47,817 23,723 Capital lease payments (76) (3,444) (6,237) Dividend paid (2,049) (93,318) (46,644) Net cash provided by financing activities (740) (33,695) 1,648,914 Net (decrease)/increase in cash and cash equivalents during the period/year (1,773) (80,688) 1,761,213 Effect of exchange (loss) on cash and cash equivalents (1,295) (59,032) (34,197) Cash and cash equivalents at the beginning of the period/year 62,555 2,849,362 1,122,346 Cash and cash equivalents at the end of the period/year 59,487 2,709,642 2,849,362 Supplementary information Cash Taxes paid Domestic taxes 8, , ,905 Foreign taxes 2, ,777 76,071 Refund of previous assessment year (554) (25,236) - Dividend Taxes ,957-10, , ,976 Non Cash Assets acquired under capital leases 107 4,894 2,447 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 (Amounts in thousands, except for share data or as otherwise stated) Common Stock Additional paid-in Accumulated other Retained Total stockholders' No. of Shares Par Value capital comprehensive loss Loan to Trust earnings equity Balance as of March 31, ,630, ,154 2,083,957 (36,135) (267,926) 5,511,704 7,664,754 Cash dividend declared (93,321) (93,321) Shares allotted under ESOP * 44, , ,713 Repayment of loan by ESPS Trust ,817-47,817 Net income for the period ,220,057 1,220,057 Translation loss (7,866) - - (7,866) Reversal of unrealised gain on securities available for sale (177) - - (177) Comprehensive income 1,212,014 Balance as of December 31, ,675, ,375 2,095,449 (44,178) (220,109) 6,638,440 8,842,977 * Includes bonus on shares allotted under ESOP during the period See note 2.2(b) Balance as of December 31, ,675,000 8,197 46,003 (970) (4,832) 145, ,138 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 NINE MONTH PERIOD ENDED DECEMBER 31, 2003 AND YEAR ENDED MARCH 31, 2003 (In thousands of, except share data or as otherwise stated) 1. BACKGROUND 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 ) with shareholding of per cent. OrbiTech is a 100 per cent subsidiary of Citicorp Technology Holdings Inc, USA. The Company had a controlling/significant influence 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; i-flex solutions pte ltd ( i-flex pte ), a 100 per cent owned subsidiary company incorporated in November 2001 under the laws of Singapore; 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; Flexcel International Private Limited ( Flexcel ), a 40 per cent owned investee company incorporated in March 2001 under the Indian laws. i-flex America inc., ( i-flex America ), a subsidiary company with 100 per cent controlled incorporated in December 2003 under the laws of the United States of America. The Company along with i-flex b.v., i-flex pte, i-flex inc. and i-flex America 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Principles of consolidation The accompanying consolidated financial statements of the Group 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. Flexcel ( Flexcel ) is accounted for using the equity method since the Group exerts significant influence on the operations of Flexcel. All material transactions and balances between the Group entities have been eliminated. 1

6 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. (b) For the convenience of readers, the financial statements for the period ended December 31, 2003 have been translated into United States Dollars ( US$ ) at the noon buying rate in New York city on December 31, 2003 for cable transfers in, as certified for customs purposes by the Federal Reserve bank of New York of 1 US$ = Rs The convenience translation should not be construed as a representation that the Indian Rupee 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 with 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 37,320,700 equity shares. Further on September 11, 2003 the Company issued bonus shares in the ratio of 1 bonus share for every existing equity share. As a result, the Company issued 37,337,500 equity shares through the capitalisation of reserves. Accordingly, all share and per share amounts have been retroactively restated. (d) The Group also separately presents its consolidated financial statements for the same period prepared in accordance with generally accepted accounting principles in India. The significant differences between the generally accepted accounting principles in India and those generally accepted in the United States of America so far as concerns the financial statements referred to above are primarily relating to the deferral of revenues pertaining to post-contract support and significant discounts, compensated absences, employee benefit plans, marketable securities, foreign forward exchange contracts and derivatives. (e) Certain reclassifications have been made to confirm prior period data to the current presentations. These reclassifications had no effect on reported earnings. 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 period/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, the reporting currency, at the average rates of exchange during the period/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. 2

7 2.5 Revenue recognition The Group derives revenues from: Product licensing and related services - The licensing of banking software products, normally sold as perpetual licenses, along with the provision of related implementation services and post contract support ( PCS ); and IT solutions and consulting services - Providing bespoke software development and other consulting services to certain customers, which comprise primarily banking and financial services companies. License 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. License revenues 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 have been satisfied). If a licensing arrangement provides a customer a right to a significant incremental discount (with reference to Vendor Specific Objective Evidence ( 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. Implementation services essentially comprise, inter alia, minor functional enhancements, interface building, implementation planning, data conversion, training and product walkthrough. Such services are not essential to the functionality of the software and do not affect the realisability of the license fees. Accordingly, implementation services are treated as a separate element. Revenue related to implementation services are recognized as services are provided when arrangements are on a time and material basis. In case of fixed price arrangements, revenue related to implementation services is recognized on a percentage of completion basis. When an arrangement provides for significant modification or customisation of the product or if Implementation Services are essential to the functionality of the product, the revenue related to both the License and Implementation Services is recognized on a percentage of completion basis. The Group enters into support arrangements, which are generally for a period of 12 months and renewable thereafter, to provide technical support, maintenance, query solving and upgrades (on a when and if available basis) to its customers. PCS revenue is recognized rateably over the period of the PCS. The Group allocates a portion of its software revenues to PCS activities provided free of charge to the customer for a specified period as included under the licensing arrangement, based on its VSOE which is derived from the renewals of PCS arrangements. Revenues from IT solutions and consulting services are recognized as services are provided when arrangements are on a time and material basis. Revenues for fixed price contracts are recognized on a percentage of completion basis. Percentage of completion is determined based on the proportion of efforts spent to total efforts to complete or on the basis of contractually determined milestones as certified by the customer. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on current contract estimates. 3

8 Reimbursement for out- of-pocket expenses Reimbursements of out-of-pocket expenses are included in revenue in accordance with Emerging Issues Task Force Consensus ( EITF ) Income Statement Characterization of Reimbursement received for Out of Pocket expenses incurred. Accordingly out-of-pocket expenses amounting to Rs 126,539 and Rs 198,134 for the nine-month period ended December 31, 2003 and year ended March 31, 2003 respectively are included in revenues. Deferred revenue Deferred revenue primarily represents the unexpired amount of PCS. 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 have been expensed. 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, which is an accelerated method of depreciation 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. 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 profit and loss statement. 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 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. 4

9 2.11 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 recorded, net of taxes as comprehensive income/(loss) and reported 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 where the Group controls less than 20 percent voting interest and debt securities held to maturity 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 the income statement in the period/year the change is enacted. 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 Employee Benefit Plans In accordance with Indian law, all employees of the Company in India, 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. The Superannuation Plan is a defined contribution pension plan for a certain category of employees of the Company in India. 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 Company has no further obligation under the Provident Fund or Superannuation Plan, beyond its contributions. Contributions to defined contribution plans are charged to income in the period/year in which they accrue. In accordance with Indian law, the Company provides for gratuity, a defined benefit retirement plan ( the Gratuity Plan ) covering all its employees in India. The Gratuity Plan provides for 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 LIC. Gratuity benefit cost for the period/year is calculated on an actuarial basis. The Company s liability towards compensated absences is determined on an actuarial basis for the entire unavailed vacation balance standing to the credit of each employee as at period/year-end 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. 5

10 2.16 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 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/year. 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. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS No Had compensation cost for the Group's ESOP been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: December 2003 December 2002 March 2003 (in thousands except per share data) Net income As reported 26,785 1,220,057 1,440,134 1,770,670 Pro forma 22,802 1,038,922 1,302,508 1,440,909 Basic earning per share As reported Pro forma Diluted earning per share As reported Pro forma Compensation cost recognized for the fair value of the ESOP as per the requirement of SFAS 123 is based on the Black-Scholes model with the following assumptions: Dividend yield Expected volatility Risk-free interest rates Expected life 0.18 per cent 45 per cent 7.5 per cent 5.5 years 6

11 2.18 Derivative instruments and hedging activities During the current period the Group entered into forward foreign exchange contracts where the counter party is a bank. The Group purchases forward foreign exchange contracts to mitigate the risks of change in foreign exchange rate on accounts receivable denominated in certain foreign currencies. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS 133 as amended. As per SFAS 133 derivatives that are either not designated as a hedge or is so designated but ineffective, is marked to market and recognised to income statement immediately. Further, certain license arrangements entered into by the Group with its customers are denominated in a currency which is neither the functional currency of the Group or 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/year end and the corresponding asset/liability is recorded in the balance sheet under other current assets or other current liabilities Recent accounting pronouncements In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, applicable for contracts entered into after December 31, 2003, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. The Group believes that this will not have a material impact on the accounting for derivative instruments and hedging activities. In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Group believes it will not have a material impact on the Group s accounts or disclosure practices. In December 2003, the FASB issued FASB Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits that improve financial statement disclosures for defined benefit plans. The guidance is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, The Group believes it will not have a material impact on the Group s accounts or disclosure practices. 7

12 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of physical cash, funds in transit 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: December 2003 December 2003 March 2003 Cash on hand Funds in transit 7,091 Bank balances Current accounts 55,669 2,535,735 2,445,422 Time deposits 3, , ,017 59,487 2,709,642 2,849,362 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. 8

13 4. TRADE RECEIVABLES, NET Trade receivable from related parties as of December 31, 2003 and March 31, 2003, net of provision for doubtful accounts of Rs Nil and Rs Nil respectively amounted to Rs 747,360 and Rs 651,110 respectively. Trade receivables - others as of December 31, 2003 and March 31, 2003 net of provisions for doubtful accounts of Rs 43,166 and Rs 38,842 respectively amounted to Rs 1,321,901 and Rs 796,025 respectively. The movement in provision for doubtful accounts is given below: December 2003 December 2003 March 2003 Provision for doubtful debts Trade receivables from related parties Opening balance 1,221 Additions Reversals related to changes in estimates (1,221) Collections Closing balance Trade receivables others Opening balance ,842 54,691 Additions 1,280 58,282 Bad debts (1,064) (48,453) Reversals related to changes in estimates (8,498) Collections (121) (5,505) (7,351) Closing balance ,166 38,842 The Group reviews trade receivables for allowance, whenever an event or change in circumstances indicates that amount of such trade receivable may not be recoverable. Provision for trade receivables are made based on specific identification of amounts doubtful of recovery. 9

14 5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: December 2003 December 2003 March 2003 Estimated useful life (years) Rates (%) Land 5, ,674 44,734 Improvement to leasehold premises , , ,522 Building ,116 20,116 Computer equipments , , ,781 Electrical and office equipment , , ,687 Furniture and fixtures , , ,965 Vehicles on lease ,796 24,631 Capital advances 6, , ,383 33,203 1,512,386 1,173,819 Less: Accumulated depreciation and amortisation (16,269) (741,059) (656,599) Property and equipment, net 16, , ,220 Depreciation is computed at the rates referred to above, applied to the written-down value of the assets over its estimated useful life. Property and equipment above include the following assets held under capital leases: December 2003 December 2003 March 2003 Vehicles ,796 24,631 Less: Accumulated amortisation (371) (16,882) (14,390) ,914 10,241 10

15 6. FINANCIAL INSTRUMENTS 6.1 Fair Value of Financial Instruments 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. Long-term employee receivables are loans given to employees to acquire assets such as property and cars. Such loans are repayable over fixed periods ranging from three to ten years. The Group recovers interest on such loans at rates, which closely approximate the market rates. Hence, the fair value of the long-term employee receivables closely approximates the carrying value in the financial statements of Rs 8,234 and Rs 11,721 at December 31, 2003 and March 31, 2003 respectively. Restricted cash and cash equivalents of Rs 121,330 with Citibank represent 110% margin money against the bank guarantee of Euro 2.00 Million. The Group receives interest on these deposits which are the rates offered by the bank on such transactions. Hence the fair value of the bank deposits closely approximates the current value of the bank deposits in the financial statements. Long-term rental deposits comprise of interest free deposits maintained for office and residential premises taken on lease. Such deposits are recoverable on termination of such lease agreements. The fair value of the long-term rental deposits carried in the financial statements as at December 31, 2003 and March 31, 2003 at Rs 291,809 and Rs 217,542 respectively, determined using market rates of interest as at December 31, 2003 and March 31, 2003 is approximately Rs 229,027 and Rs 171,144 respectively. 6.2 Concentration of credit risk Financial instruments 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 counter parties. The Group s cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. As at December 31, 2003, 54 per cent (March 31, per cent), 24 per cent (March 31, per cent) 21 per cent (March 31, per cent) of cash equivalents (primarily denominated in US$) were placed with Citibank, Bank of India and HDFC Bank respectively. 58 per cent (March 31, per cent) and 38 per cent (March 31, per cent) of bank deposits were placed with HDFC Bank and Bank of India respectively. Trade receivables (primarily denominated in US$) 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 December 31, 2003 and March 31, 2003, 99 per cent and 94 per cent of trade receivables from related parties was recoverable from various Citibank branches. As at December 31, 2003 and March 31, 2003, 18 per cent and 13 per cent are recoverable from Customer 1 and 12 per cent and 12 per cent from Customer 2 respectively (non-related parties). In management s opinion, as of December 31, 2003, there is no significant risk of loss in the event of non-performance of the counter parties to these financial instruments, other than the amounts already provided for in the financial statements. 11

16 6.3 Derivative Financial Instruments Licence arrangement contracts are bifurcated into functional currency denominated sales contracts and contractual currency denominated forward contracts. As at December 31, 2003 the Company has committed to deliver US$ 15,085,667 (March 31, 2003 US$ 6,747,288) pursuant to such contracts. These contracts mature between 0 to 13 months. As a result, the group has accounted Rs 14,544 and Rs 8,861 as derivative related losses for the period ended December 31, 2003 and year ended March 31, 2003 respectively. Accordingly, the group has accounted for Rs 22,763 and Rs 8,219 as other current liabilities as at December 31, 2003 and March 31, 2003 respectively. The Group enters into forward foreign exchange contracts where the counter party is a bank. The Group considers the risk of non-performance by the counter party as non-material. As at December 31, 2003 the Group held forward foreign exchange contracts of US$ 32 million (March 31, 2003 US$ 0.5 million). These forward foreign exchange contracts mature between 1 to 6 months. 7. STOCKHOLDERS' EQUITY 7.1 Common stock During the period, 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 93,321 and Rs 46,644 during the period ended December 31, 2003 and during the year ended March 31, During the period ended December 31, 2003 the Company paid Rs 11,957 as dividend tax. 12

17 8. MARKETABLE SECURITIES, AVAILABLE FOR SALE The fair values of the available for sale securities are as follows: December 2003 December 2003 March 2003 Unit Trust of India 1964 Scheme Opening carrying value ,288 20,861 Add: Unrealised gain/(loss) during the period/year, net of tax (4) (177) 12,427 Less: Units converted into bonds during the period (727) (33,123) Add: Realised gain on conversion of units in US-64 into bonds 12 33,288 The Group held 3,311,258 units (and 278 fractions) of Rs 10/- each of Unit Trust of India Scheme ( US 64 ). During the current period Unit Trust of India ( UTI ) announced an option of converting these units into Tax-free Bonds or to encash the units at declared rates by UTI. On June 1, 2003, all the units in UTI US-64 were converted into US % Tax-free bonds. The first 5,000 units were converted at the repurchase price of Rs 12/- each and the balance 3,306, units at Rs 10/- each. These bonds are redeemable at par on June 1, Unrealised loss of Rs 177 during the current period represents the reversal of the unrealised gain during the prior year, consequent to the conversion of the units in US-64 into bonds. 9. OTHER INVESTMENTS Other investments comprise: December 2003 December 2003 March 2003 Unquoted equity Securities EBZ Online Private Limited ( EBZ ) ,000 45,000 Eastern Software Systems Limited ( ESSL ) 162 7,406 7,406 Held to maturity debt securities 1,150 52,406 52, % KEONICS Mahithi Bonds Series ,000 20,000 JM High Liquidity Fund - Serial Plan 2004 (Growth) 5, , ,000 Unit Trust of India US % Tax free Bonds (Refer Note 8) ,122 National Saving Certificates , , ,537 13

18 The Company s ownership interest in EBZ and ESSL is 19.5 percent and 6.62 per cent 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 the 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 inter company 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. Investments in debt securities of 12.75% KEONICS Mahithi 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. During March 2003 the group has invested Rs 250 million in JM High Liquidity Fund - Serial Plan 4 which matures on April 15, INVESTMENTS IN EQUITY INVESTEES Flexcel is a 40:40:20 joint venture with the Company, HDFC Bank Limited and Lord Krishna Bank Limited to provide the Group s products through an Application Service Provider ( ASP ) model to various banks and financial institutions in India. During the nine month period December 31, 2003 and year ended March 31, 2003 the Company recorded Rs 5,914 and Rs 17,924 as its share of loss from equity invested while the carrying value of total investment of Rs 20,680 amounted to Rs 2,410 and Rs 7,738 respectively. DotEx was a 51:49 joint venture between NSE.IT Limited, a wholly owned subsidiary of The National Stock Exchange of India Limited ( NSE ) and the Company for setting up a Broker Plaza enabling brokers and their clients to transact in stock/securities markets through the internet. The Group recorded losses in excess of its proportionate investment in DotEx since it was committed to provide further financial support to DotEx. On August 1, 2003, the Group sold its investment in DotEx to NSE India limited for Rs 928 and recorded Rs 2,183 as profit on sale of investment. For the current period till the date of sale the Group recorded Rs 586 as its share of loss from equity invested. 14

19 11. OTHER CURRENT LIABILITIES Other current liabilities primarily comprise of: December 2003 December 2003 March 2003 Communication expenses 187 8,524 10,301 Travelling expenses ,137 30,418 Professional fees 1,285 58,553 82,128 Embedded derivatives ,763 8,219 Other liabilities 1,826 83,134 59,937 4, , ,003 15

20 12. EMPLOYEE BENEFIT PLANS The Group s cost related to defined contribution plans and compensated absences is as follows: December 2003 December 2003 December 2002 March 2003 Provident Fund ,454 27,886 37,849 Superannuation ,991 10,478 14,412 Compensated absences (40) (1,844) 1,686 28, ,601 40,050 80,710 Based on the disclosure requirements of SFAS 132 the change in benefit obligation and funded status of the Gratuity Plan for the period ended December 31, 2003 and year ended March 31, 2003 is as follows: December 2003 December 2003 March 2003 Change in benefit obligation Benefit obligation at beginning of period/year ,676 19,959 Service cost 120 5,457 4,549 Interest cost 43 1,975 1,847 Benefits paid (44) (1,996) (500) Actuarial (loss)/gain 119 5,413 7,821 Benefit obligation at end of period/ year (A) ,525 33,676 Change in plan assets Fair value of plan assets at beginning of year 185 8,425 6,640 Return on plan assets ,099 Actual contribution ,186 Benefits paid (44) (1,996) (500) Fair value of plan assets at end of period/year (B) 169 7,723 8,425 Funded status (A-B) ,802 25,251 Unrecognised net transition obligation (2) (79) (314) Unrecognised net actuarial loss (391) (17,808) (12,745) Accrued benefit cost ,915 12,192 16

21 Net gratuity cost for the period ended December 31, 2003 and year ended March 31, 2003 comprises of the following components: December 2003 December 2003 December 2002 March 2003 Components of net periodical/yearly benefit cost Service cost 120 5,457 3,412 4,549 Interest cost 43 1,975 1,385 1,847 Expected return on plan assets (12) (553) (280) (596) Amortisation of Transition liabilities Recognised net actuarial loss Net periodical/yearly benefit cost 166 7,543 4,753 6,337 The assumptions used in accounting for the gratuity plan are set out below: December 2003 % December 2002 % March 2003 % Discount rate Expected return on plan assets Rate of compensation increase The Company evaluates these assumptions based on its long-term plans of growth and industry standards. 13. OTHER INCOME/(EXPENSE) Other income/(expense) comprises of the following: December 2003 December 2003 December 2002 March 2003 Foreign exchange (loss), net (1,360) (61,945) (65,765) (88,283) Profit/(Loss) on sale/conversion of investments Profit on sale of investment in DotEx 48 2,183 Miscellaneous income 199 9,059 1,336 1,320 (1,113) (50,691) (64,394) (86,928) 17

22 14. INCOME TAXES Under the Indian Income-tax Act 1961, for the period ended December 31, 2003 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% during the year, as against 90% for last year, of the profits earned from export revenues from its five units (seven units for the least year) registered under the Software Technology Park ('STP'). The benefit as per the current tax laws is restricted to ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operations from each location. In respect of two of its units where the Section 10A benefits have expired beginning from April 1, 2003, the Company claims deductions under Section 80HHE. Section 80HHE provides for 30% deduction of the profits earned from export revenue for this fiscal year. Foreign taxes represents income taxes payable overseas in the United States of America, Malaysia, United Kingdom and Singapore. The provision for income tax consists of the following: December 2003 December 2003 December 2002 March 2003 Current tax expense Domestic Indian taxes 6, , , ,778 Tax on dividend ,957 Subsidiaries related taxes 168 7,675 3,928 2,188 Foreign taxes 1,613 73,493 51,496 85,808 Deferred taxes (86) (3,939) (5,288) (5,045) 8, , , ,729 18

23 The components of the deferred tax asset are as follows: December 2003 December 2003 December 2002 March 2003 Deferred Tax Assets Loss on sale of investment ,379 10,815 10,815 Other than temporary diminution in value of investments 3,546 3,546 Unrealised loss on marketable securities 2,086 Share of loss in equity investees 95 4,326 14,789 14,968 Difference between book and tax depreciation ,934 29,946 31,446 Accumulated Losses of Subsidiaries ,390 30,466 19,670 Deferred Tax Liability 2, ,029 91,648 80,445 Difference between book and tax depreciation (28) (1,292) (1,743) 2, ,737 91,648 78,702 Less: Valuation allowance (1,638) (71,095) (61,702) (48,999) Deferred Tax Assets, Net ,642 29,946 29,703 The Group has created a valuation allowance, for the deferred tax asset related to loss on sale of investment and share of losses in equity investees. The above items would be deductible for tax only when the investments are sold and if the Group has offsetting capital gains. The Group has also created a valuation allowance for the accumulated losses of its subsidiaries since year ended No provision for deferred taxes have been made on the unremitted earnings, which are considered to be indefinitely invested in foreign subsidiaries. The net deferred tax asset has been presented in the balance sheet as follows: December 2003 December 2003 December 2002 March 2003 Current deferred tax asset Non current deferred tax asset ,642 29,946 29, ,642 29,946 29,703 19

24 The following is a reconciliation of the statutory tax rate under the Indian Income-tax Act, 1961 and the Group's effective tax rate: December 2003 December 2003 December 2002 March 2003 Accounting profit 35,408 1,612,769 1,623,270 2,023,399 Enacted tax rate (%) % % 36.75% 36.75% Computed tax expense 12, , , ,600 Tax effect on exempt profit/income (6,283) (286,165) (504,254) (594,137) Difference in tax rate between Indian and Foreign taxes (8) (376) (569) (2,945) Incremental taxes paid in foreign jurisdictions 1,613 73,493 51,496 85,808 Taxes on dividend paid ,957 Impact of change in tax rates (20) (912) 903 1,038 Tax effect on losses of subsidiaries ,188 34,931 19,670 Double taxation relief (4,467) Valuation allowance ,077 4,182 Others (20) Write back of previous year tax provision (151) (6,874) Income tax expense, net 8, , , , LEASES The Group takes vehicles under capital lease upto five years Future minimum lease payments under capital leases as at December 31, 2003 are as follows: December , , , , Total minimum payments ,807 Less: Amount representing future interest (57) (2,615) Present value of minimum payments ,192 Less: Current portion of capital lease obligation (126) (5,759) Long term capital lease obligation 163 7,433 The Group has taken certain office premises, residential premises and vehicles for employees under operating leases, which expire at various dates through to Gross rental expense for the periods 20

25 ended December 31, 2003, December 31, 2002 and year ended March 31, 2003 was Rs 117,702, Rs 65,152 and Rs 120,794 respectively. The minimum rental payments to be made in future in respect of these leases: December , , ,154 52, , , ,315 Thereafter till ,110 96, RELATED PARTY TRANSACTIONS The Group has entered into transactions with various Citibank branches, Citicorp Information Technology, Inc ('CITI'), e-serve International Limited ('e-serve') over which Citigroup and its affiliates have significant ownership interest, controlling interest or exercise significant influence. The Group utilised services of professionals from OrbiTech Solutions Limited ( OSL ), a subsidiary of OrbiTech towards software development. The Group has also entered into certain transactions with its investee company -- Flexcel and its erstwhile investee company Dotex. The related party transactions other than disclosed elsewhere in the financial statements can be categorised as follows: 16.1 Revenues December 2003 December 2003 December 2002 March 2003 Banking product revenues: Citibank branches 18, , ,788 1,133,255 CITI 11,798 11,798 e-serve Flexcel 72 3, ,107 Total 18, , ,651 1,147,202 21