i-flex Solutions Limited and subsidiaries …(Thousands of US Dollars) (Translated) Balance as of...

September 2002 September 2002 September 2001 March 2002

Thousands of US dollars

(Translated)ASSETS

Current assets

Cash and cash equivalents 43,532 2,104,337 1,518,743 1,122,346 Trade receivable from related parties, net 14,885 719,521 570,638 902,980 Trade receivables - others, net 20,946 1,012,518 806,060 988,106 Bank deposits 59,475 2,875,000 - 1,150,000 Employee receivables 151 7,291 10,540 8,219 Prepaid expenses 1,976 95,518 105,816 98,999 Deferred income taxes, net 1 35 34 2,533 Marketable securities, available for sale 397 19,205 27,152 20,861 Other assets 3,272 158,183 53,687 67,624 Total current assets 144,635 6,991,608 3,092,670 4,361,668

Property and equipment, net 7,743 374,359 225,730 308,283 Other investments 1,552 75,006 124,875 74,875 Investment in equity investee 200 9,660 33,529 23,834 Rental deposits 5,609 271,130 307,080 291,541 Employee receivables 330 15,949 26,813 23,984 Deferred income taxes, net 592 28,609 5 24,624 Other assets 264 12,798 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 4,421 213,731 149,519 253,781 Accrued employee costs 3,699 178,792 35,231 64,248 Accrued referral fees 1,550 74,907 54,907 70,935 Accrued rates and taxes 719 34,744 45,959 48,284 Accounts payable 716 34,592 15,948 55,180 Taxes payable 2,768 133,808 51,403 68,333 Other current liabilities 4,263 206,091 126,795 111,585 Current portion of capital lease obligations 118 5,694 4,527 6,035 Total current liabilities 18,254 882,359 484,289 678,381

Deferred revenue 977 47,225 56,788 99,420 Accrued employee costs 2,190 105,844 58,142 72,714 Capital lease obligations 187 9,133 7,477 10,018 Total liabilities 21,608 1,044,561 606,696 860,533

Stockholders' equity

Common stock, Rs 5/- par value;100,000,000 equity shares authorised 37,315,400 shares outstanding as of September 30, 2002 3,860 186,577 166,382 169,777 Additional paid-in capital 46,911 2,267,687 168,805 606,760 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

CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 2002, SEPTEMBER 30, 2001 AND MARCH 31, 2002

i-flex Solutions Limited and subsidiaries

Thousands of Indian rupees


Thousands ofUS Dollars

(Translated)

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 18,630 900,622 510,748 1,140,092

Other than temporary dimunition in value of securitiesavailable 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 20,269 979,833 532,848 1,184,012

Provision for income taxes (2,645) (127,844) (91,337) (148,002)

NET INCOME 17,624 851,989 441,511 1,036,010

Basic earnings per share (in US $, Rs) 0.52 25.19 14.41 32.98 Diluted earnings per share (in US $, Rs) 0.50 24.29 13.54 31.64

The accompanying notes are an integral part of these financial statements.



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)

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income 17,624 851,989 441,511 1,036,010

Adjustments to reconcile net income to net cashprovided by operating activities

Depreciation and amortization 1,353 65,400 54,985 140,468 (Profit)/loss on retirement/sale of property and equipment, net (9) (506) 324 334 Loss on sale of investment - - - 1,500 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 Provision for doubtful debt, net (372) (17,987) - 54,284 Deferred tax benefit, net (82) (3,986) 11,947 (12,667)

18,804 908,934 545,802 1,276,860 Change in assets and liabilities

Trade receivables 3,477 168,098 (186,969) (761,296) Other assets (1,161) (56,124) (84,856) (73,848) Current liabilities and other liabilities 3,460 167,272 (11,112) 251,298

Net cash provided by operating activities 24,580 1,188,180 262,865 693,014

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 11 545 207 207 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 7,500 - - Sale of investment - - - 48,500

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 1,780,800 - - IPO expenses (1,343) (64,906) - - Proceeds from private placement of shares - - - 441,350 Repayment of loan from Employee Stock Purchase Scheme (ESPS) Trust 451 21,805 483 8,549 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 informationCashTaxes paid

Domestic taxes 1,373 66,356 23,003 47,932 Foreign taxes - - 56,399 94,808 Dividend taxes - - 4,243 4,243

1,373 66,356 83,645 146,983 Non CashAssets acquired under capital leases 51 2,447 1,670 9,193

The accompanying notes are an integral part of these financial statements



CONSOLIDATED STATEMENT OF CASH FLOW FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30,2001 AND YEAR ENDED MARCH 31, 2002

No. of Shares Par Value Additional paid-in capital Comprehensive incomeAccumulated other

comprehensive income Loan to Trust Retained earnings Total stockholders' equity Balance as of March 31, 2001 (As restated ) 33,276,400 166,382 168,805 (3,283) (300,198) 2,793,264 2,824,970

Cash Dividend declared - - - - - - (41,596) (41,596) Repayment of loan by ESPS Trust - - - - - 483 - 483 Net income for the period - - - 441,511 - - 441,511 441,511 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, 2001 33,276,400 166,382 168,805 (13,204) (299,715) 3,193,179 3,215,447

Cash dividend declared - - - - - - - - Common stock issued upon Preferential allotment 679,000 3,395 437,955 - - - - 441,350 Repayment of loan by ESPS Trust - - - - - 8,066 - 8,066 Net income for the period - - - 594,499 - - 594,499 594,499 Translation gain - - - 4,655 4,655 - - 4,655 Unrealised loss on securities available for sale - - - (3,792) (3,792) - - (3,792) Comprehensive income 595,362

Balance as of March 31, 2002 33,955,400 169,777 606,760 (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 1,764,000 - - - - 1,780,800 IPO related expenses - - (103,073) (103,073) Repayment of loan by ESPS Trust - - - - - 21,805 - 21,805 Net income for the period - - - 851,989 - - 851,989 851,989 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, 2002 37,315,400 186,577 2,267,687 (42,885) (269,844) 4,593,023 6,734,558

(Thousands of US Dollars)

(Translated) Balance as of September 30, 2002 37,315,400 3,860 46,911 (887) (5,582) 95,015 139,317 The accompanying notes are an integral part of the financial statements

Common Stock


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

(Thousands of Indian rupees)


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2002, SEPTEMBER 30, 2001 AND YEAR ENDED MARCH 31,2002

(All amounts in thousands of Indian rupees, unless 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, 1989. The Company’s principal shareholder is OrbiTech Limited (‘OrbiTech’) formerly Citicorp Overseas Software Limited with shareholding of 43.19 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 49.49 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.

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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 48.34. 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-for-one 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.

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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 Con rac s t t

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 post-contract support are recognised rateably over the term of the contract on a straight-line basis.

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So ware Development and Consulting Services ft

f

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-o -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. 01-14 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’.

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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 long-lived 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. 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 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. 2.12 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. 2.13 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. 2.14 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. 2.15 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. 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.

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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). 2.17 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. 123. 2.18 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. 133. 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. 2.19 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:


Thousands of US Dollars Thousands of Indian rupees

Cash on hand 13 652 428 506

Bank balances

Current accounts 35,356 1,709,111 751,652 882,651

Time deposits 8,163 394,574 766,663 239,189

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.

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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:



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 784 37,925 6,715 54,691

5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following:


Estimated useful life (years)


Freehold land 925 44,734 — 44,734

Improvement to leasehold premises 7 1,733 83,756 68,264 83,479

Building 20 147 7,116 7,116 7,116

Computer equipments 3 8,938 432,074 348,304 401,650

Electrical and office equipment 7 3,059 147,893 108,656 143,349

Furniture and fixtures 7 2,527 122,136 80,200 120,228

Vehicles on lease 4-5 552 26,702 20,728 26,890

Capital advances 1,943 93,924 30,728 2,412

19,824 958,335 663,996 829,858

Less: Accumulated depreciation and amortisation (12,081) (583,976) (438,266) (521,575)

Property and equipment, net 7,743 374,359 225,730 308,283

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Property and equipment above include the following assets held under capital leases:

September2002 September 2002 September 2001 March 2002

Thousands of

US Dollars Thousands of Indian Rupees

Vehicles 552 26,702 20,728 26,890

Less: Accumulated amortisation (275) (13,286) (10,122) (12,370)

277 13,416 10,606 14,520

6. FINANCIAL INSTRUMENTS

6.1 Fair Value of Financial Instruments

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 non-performance by counterparties. The Group’s cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. As at September 30, 2002 38.1 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, 2002 90% 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, 2002.

8

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. 133. 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, 2002. 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, 2002. The entire proceeds from the offer for sale have been paid to the selling shareholders in July, 2002. 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

8. MARKETABLE SECURITIES, AVAILABLE FOR SALE The fair values of the available for sale securities are as follows:


Thousands of

US Dollars Thousands of Indian rupees

Unit Trust of India –1964 Scheme – Carrying value/Cost 431 20,861

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)

397 19,205 27,152 20,861 The Group holds 3,311,258 units (and 278 fractions) of Rs 10 each of Unit Trust of India - 1964 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, 2002. 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

Other investments comprise:



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’) 931 45,000 45,000 45,000

Eastern Software Systems Limited (‘ESSL’) 204 9,875 9,875 9,875

1,135 54,875 104,875 54,875

Held to maturity debt securities 12.75% KEONICS Mahiti Bonds Series –1 414 20,000 20,000 20,000

National Saving Certificates 3 131 — — 1,552 75,006 124,875 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

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 49.49 percent shares in Flexcel while HDFC Bank Limited and its group companies hold the balance of 50.51 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, 2001.

September2002 September 2002 September 2001 March 2002

Thousands of US Dollars


Original Cost

DotEx 1,014 49,000 24,500 49,000

Flexcel 2 98 — 98

Add: Advance against share capital given to

Dotex 152 7,350

15,560

—

Flexcel 457 22,120 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

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

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

200 9,660 5,072 23,834

Carrying value

DotEx — (2) 5,072 3,598

Flexcel 200 9,662 — 20,236

200 9,660 5,072 23,834

Share of (loss) of equity investee

DotEx (227) (10,950) (20,148) (30,562)

Flexcel (64) (3,074) — (9,482)

(291) (14,024) (20,148) (40,044)

(Loss) included in net income

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

Current assets 99 4,769 8,838 9,586

Fixed assets, (net) 142 6,841 21,475 17,677

Total assets 241 11,610 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 2069 1,00,000 10,350 100,000

Advance against Share application 310 15,000 — —

Accumulated losses (2379) (115,015) — (92,659)

Total liabilities and stockholders’ equity 241 11,610 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

The summarised unaudited financial statements of Flexcel are as follows:




Balance sheet

Current assets 447 21,592 — 33,318

Fixed assets, (net) 192 9,260 — 11,551

Total assets 639 30,852 — 44,869

Current liabilities 308 14,866 — 24,314

Shareholder’s equity

Share Capital 4 198 — 198

Advance against Share application 851 41,160 — 39,520

Accumulated losses (524) (25,372) — (19,163)

Total liabilities and stockholders’ equity 639 30,852 — 44,869

Income statement

Revenues 30 1,468 — 542

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:




Communication expenses 816 39,435 10,923 11,291

Travelling expenses 780 37,703 54,102 47,394

IPO related expenses 790 38,167 — —

Professional fees 560 27,087 29,267 22,681

Other liabilities 1,317 63,699 32,503 30,219

4,263 206,091 126,795 111,585

14

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. 12.1 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. 12.2 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 30 2002, 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. 12.3 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. 12.4 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

Thousands of


Change in benefit obligation Benefit obligation at beginning of period/year 412 19,959 10,955 Service cost 47 2,274 2,480 Interest cost 19 924 1,011 Benefits paid (2) (107) (158)Actuarial loss 1 (64) 5,671 Benefit obligation at end of period/year (A) 477 22,986 19,959

15



Change in plan assets Fair value of plan assets at beginning of period/year

137

6,640

6,243

Return on plan assets 15 747 555 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) 303 14,520 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:


Thousands of


Components of net periodic benefit cost Service cost 47 2,274 2,480 Interest cost 19 924 1,011 Expected return on plan assets (6) (298) (534)Amortisation of Transition liabilities 6 268 314 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

13. OTHER INCOME, NET Other income comprises of the following:




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 1,639 14

26 1,240 27,708 34,607 14. 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, 2004. 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:



Thousand of Indian rupees

Current tax expense Domestic taxes 1,655 80,000 27,743 53,550

Foreign taxes

Subsidiary Taxes

1,014

58 49,048

2,782

51,647

—

107,119

—

Deferred tax (income)/expense relating to the origination and reversal of temporary differences (82) (3,986) 11,947 (12,667)

2,645 127,844 91,337 148,002

17

The components of the deferred tax asset are as follows: September 2002 September 2001 March 2002

Loss on sale of investment 10,815 — 10,506

Other than temporary diminution in value of investments 3,546 10,200 3,445

Unrealised loss on marketable securities 2,920 4,120 2,499

Share of loss in equity investees 14,471 7,193 11,196

Difference between book and tax depreciation 28,609 5 24,624

Other differences 35 34 34

60,396 21,552 52,304

Less: Valuation allowance (31,752) (21,513) (25,147)

Total deferred tax asset 28,644 39 27,157

The Group has created a valuation allowance, for the tax effect of loss on sale of investment, provision for diminution in value of investments, unrealised loss on marketable securities and share of losses in equity investee in the year/period it is recorded. The above losses would be deductible for tax only when the investments are sold and if the Group has offsetting capital gains. Given these uncertainties, the Group has fully reserved the tax benefits of the loss on sale/provision for diminution in value of investments, unrealised loss on marketable securities and share of losses of equity investee. For the period ended September 30, 2002 and 2001 and year ended March 31, 2002 the Group has not recognised deferred tax asset for an excess of tax basis over financial reporting basis for losses of its subsidiaries. The management considers that the temporary difference on account of these losses will not reverse in the foreseeable future.

The following is a reconciliation of the statutory tax rate under the Indian Income-tax Act, 1961 and the Group's effective tax rate:




Accounting profit 20,269 979,832 532,848 1,184,012

Enacted tax rate % 36.75% 36.75% 35.70% 35.70%

Computed tax expense 7,449 360,088 190,227 422,692

Tax effect on exempt profit/income (6,335) (306,212) (196,937) (455,820)

Difference in tax rate between Indian and Foreign taxes

(13)

(650)

—

—

Taxes on dividend paid —- —- 4,243 4,243

Impact of change in tax rates 14 665 3,650 10,578

Tax effect on loss of subsidiaries 437 21,147 16,994 36,656

Valuation allowance, during the period/year 78

3,758 21,513 22,795

Others — — — (261)

Income tax expense, net 1,630 78,796 39,690 40,883

Add: Foreign taxes 1,015 49,048 51,647 107,119

Total 2,645 127,844 91,337 148,002

18

The total deferred tax asset has been presented in the balance sheet as follows:




Current deferred tax asset 1 35 34 2,533

Non current deferred tax asset 592 28,609 5 24,624

593 28,644 39 27,157

15. LEASES The Group takes vehicles under capital lease upto five years. Future minimum lease payments under capital leases as at September 30, 2002 are as follows:

September 30, 2002 Thousands of US Dollars


2003 157 7,601

2004 111 5,367

2005 75 3,619

2006 32 1,606

2007 9 440

Total minimum payments 384 18,633

Less: Amount representing future interest (79) (3,806)

Present value of minimum payments 305 14,827

Less: Current portion (118) (5,694)

Long term lease obligation 187 9,133 The Group has taken certain office premises, residential premises and vehicles for employees under operating lease, which expire at various dates through to 2012. Gross rental expense for the periods ended September 30, 2002 and 2001 and year ended March 31, 2002 was Rs 65,152, Rs 48,673 and Rs 99,393 respectively. The minimum rental payments to be made in future in respect of these leases:

September 30, 2002 Thousands of US Dollars


2003 1,928 93,222

2004 1,463 70,707

2005 764 36,993

2006 303 14,636

2007 277 13,410

Thereafter till 2012 1,296 62,636

19

16. 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, a subsidiary of OrbiTech towards software development. The Group has also entered into certain transactions with its investee companies DotEx and Flexcel. The related party transactions other than disclosed elsewhere in the financial statements can be categorised as follows: 16.1 Revenues Banking product revenues

September 2002

September 2002




Citibank branches 10,078 487,183 182,295 578,326

CITI 244 11,798 2,351 3,646

e-Serve

1 42

42 169

DotEx — — — 100

Flexcel — 23 324 358

10,323 499,046 185,012 582,599

IT solutions and consulting service revenues

September 2002

September 2002

September 2001

March 2002



Citibank branches 16,799 812,078 228,939 617,536

CITI — — 377,014 693,396

DotEx 29 1,390 2,661 9,560

e-Serve — — 21 21

16,828 813,468 608,635 1,320,513

20

16.2 Expenses

September 2002

September 2002

September 2001

March 2002



Communication expenses paid to Citibank 964 46,617 — —

Finance lease payments to e-serve (Principal & Interest) 61 2,950 3,058 7,136

Professional fees paid to OrbiTech Solutions Ltd. for software development 38 1,849 15,985 25,155

Provision for doubtful debts for Citibank branches (25) (1,221) — —

Bank charges paid to Citibank branches 21 1,026 1,110 1,852

1,059 51,221 20,153 34,143 16.3 Assets Amounts due on account of sales


Thousands of


Citibank branches

[net of provision for doubtful debts Rs Nil (September 2001 – Nil and March 2002 – Rs 1,221)]

13,458 650,551 241,877 618,835

CITI 1,355 65,480 322,685 276,761

DotEx 72 3,490 5,653 6,999

Flexcel — — 381 385

e-Serve — — 42 —

14,885 719,521 570,638 902,980 Loans outstanding


Thousands of


i-flex ESPS Trust 5,582 269,844 299,715 291,649

Key managerial personnel 83 4,000 6,618 4,844

5,665 273,844 306,333 296,493

21

Repayment of loan during the period/year


Thousands of


i-flex ESPS Trust 451 21,805 483 8,549

Key managerial personnel 18 844 55 1,703

469 22,649 538 10,252 Bank balance with Citibank branches


Thousands of


Current accounts 18,249 882,137 345,167 427,681

Deposits 5,416 261,800 219,600 90,000

23,665 1,143,937 564,767 517,681 Interest accrued on fixed deposits


Thousands of


Citibank branches 29 1,414 1,214 361 16.4 Liabilities Amount due to related parties


Thousands of


e-Serve towards lease obligations repayable (Principal and interest) 228 11,024 15,230 14,896

OrbiTech Solutions Ltd. towards professional fees 7 351

15,985 1,427

235 11,375 31,215 16,323

22

Deferred revenue from related parties


Thousands of


Citibank branches 62 3,001 45,789 88,145

e-serve — — — 42

62 3,001 45,789 88,187 17. SEGMENTAL INFORMATION The Group has adopted SFAS No. 131, “Disclosures about Segments of an Enterprises and Related Information” which requires reporting information about operating segments in annual financial statements. It has also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available. This information is reviewed and evaluated regularly by the management, in deciding how to allocate resources and in assessing the performance. The Group is organised geographically and by business segment. For the management purpose the Group is primarily organised on a worldwide basis into two business segments: �� Product licenses and related activities; and �� IT solutions and consulting services The segments are the basis on which the Group reports its primary segment information to the management. The Product license segment has banking products like FLEXCUBE suite of products and Microbanker which cater to needs of corporate, retail and investment banking as well as treasury operations and data warehousing requirements. The related activities include enhancements, implementation and maintenance activities. IT solutions and consulting services comprise of bespoke software development, computer software solutions and related consulting services arising from such activities. This segment is further sub-divided in the following sub-segments i.e. Business intelligence, Customer relationship management, Brokerage, e-commerce, Internet services and IT and business consulting. Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consultancy. The expenses, which are not attributable to a business segment, are shown as unallocated expenses. Cost of revenues comprise of all direct cost towards employee cost, travel cost of software professionals, Professional fees to software vendors and application software cost used for internal use. These costs are direct costs for each segment. The group allocates expenditure incurred on selling and marketing expenses in the ratio of the revenues between products and services, or in the ratio of the efforts spent in marketing products and services, as it is rational and appropriate. General and administrative costs are costs, which primarily comprise of rent, power, communication, repairs and maintenance for a particular segment. Additionally employee costs, rent, power and communication costs for support groups are allocated in the ratio of revenues between the two segments. All other segment revenue and expense are directly attributable to the segments.

23

Segment assets include all operating assets used by a segment and consist principally of receivables, deposits for premises and property and equipment, net of allowances and provisions. Segment liabilities primarily include deferred revenues, capital lease obligation, advances from customers, accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual business segments, the carrying amount of certain assets and liabilities used jointly by both segments is allocated to the segment on a reasonable basis. Assets and liabilities that cannot be allocated between the segments are shown as part of corporate assets. Period ended September 30, 2002 Thousands of Indian rupees

Particulars

Product license And related

activities

IT solutionsand consulting

services Corporate Total

Revenue 1,902,048 1,084,545 — 2,986,593Cost of revenue (557,065) (711,752) — (1,268,817)Gross profit 1,344,983 372,793 — 1,717,776Selling and marketing expenses (345,654) (39,843) — (385,497)General and administrative expenses (123,923) (104,256) (138,078) (366,257)Depreciation and amortisation (22,722) (34,825) (7,853) (65,400)Operating income of the segment 852,684 193,869 (145,931) 900,622Share of associate companies loss (14,024)Interest income 91,995Other income, net 1,240Income before provision for taxes 979,833Provision for income taxes (127,844)Net income 851,989

Other information

Segment assets 1,059,642 1,275,553 5,443,924 7,779,119Segment liabilities 527,473 164,502 352,586 1,044,561Capital expenditure by segment 15,244 17,875 7,548 40,667

24

Period ended September 30, 2002 Thousands of US dollars

Particulars

Product license and related

activities

IT solutions and consulting


Revenue 39,347 22,436 — 61,783

Cost of revenue (11,524) (14,724) — (26,248)Gross profit 27,823 7,712 — 35,535

Selling and marketing expenses (7,150) (825) — (7,975)

General and administrative expenses (2,563) (2,157) (2,857) (7,577)

Depreciation and amortisation (470) (720) (163) (1,353)

Operating income of the segment 17,639 4,010 (3,020) 18,630

Share of associate companies loss (290)

Interest income 1,903

Other income, net 26

Income before provision for taxes 20,269Provision for income taxes (2,645)

Net income 17,624

Other information

Segment assets 21,921 26,387 112,617 160,925

Segment liabilities 10,912 3,403 7,294 21,609

Capital expenditure by segment 315 370 156 841

25

Period ended September 30, 2001 Thousands of Indian rupees

Particulars Product

license and

related

activities

IT solutions

and consulting

services

Corporate Total

Revenue 1,138,344 793,002 — 1,931,346

Cost of revenue (346,970) (452,753) — (799,723)

Gross profit 791,374 340,249 — 1,131,623

Selling and marketing expenses (236,385) (22,655) — (259,040)

General and administrative expenses (82,167) (86,751) (137,932) (306,850)

Depreciation and amortisation (19,621) (27,561) (7,803) (54,985)

Operating income of the segment 453,201 203,282 (145,735) 510,748

Other than temporary diminution in value of marketable securities (16,887)

Share of associate company loss (20,148)

Interest income 31,427

Other income 27,708

Income before provision for taxes 532,848

Provision for income taxes (91,337)

Net income 441,511

Other information

Segment assets 901,201 1,042,729 1,878,213 3,822,143

Segment liabilities 306,458 100,508 199,730 606,696

Capital expenditure by segment 12,133 22,234 8,452 42,819

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Year ended March 31, 2002 Thousands of Indian rupees

Particulars

Product license And related

activities

IT solutionsand consulting


Revenue 2,614,393 1,742,782 — 4,357,175Cost of revenue (836,935) (1,072,476) — (1,909,411)Gross profit 1,777,458 670,306 — 2,447,764Selling and marketing expenses (559,932) (43,227) — (603,159)General and administrative expenses (173,064) (147,415) (243,566) (564,045)Depreciation and amortisation (49,296) (78,061) (13,111) (140,468)Operating income of the segment 995,166 401,603 (256,677) 1,140,092Other than temporary diminution in value

of marketable securities (16,887)Share of associate companies loss (40,044)Interest income 66,244Other income, net 34,607Income before provision for taxes 1,184,012Provision for income taxes (148,002)Net income 1,036,010

Other information

Segment assets 1,326,768 1,179,260 2,614,730 5,120,758Segment liabilities 477,119 117,356 266,058 860,533Capital expenditure by segment 51,465 122,269 66,287 240,021

Geographical segments: The following table shows the distribution of the Group’s consolidated sales by geographical market:

Region September 2002

September 2002


Thousands of


United States of America 20,767 1,003,876 662,550 1,378,167

Middle East and Africa 16,669 805,790 493,790 1,096,343

Asia Pacific 12,128 586,258 350,449 959,710

Europe 11,784 569,626 412,058 897,662

Latin America and Caribbean 435 21,043 12,499 25,293

61,783 2,986,593 1,931,346 4,357,175

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Region September 2002


Percentage

United States of America 34 34 32

Middle East and Africa 26 26 25

Asia Pacific 20 18 21

Europe 19 21 21

Latin America and Caribbean 1 1 1

100 100 100 The Group derives more than 10 per cent of its revenues from the following customer:

September 2002

September 2002




Customer 1 6,539 316,080 65,383 350,621

Customer 2 2,837 137,154 195,088 391,207

Customer 3 244 11,798 379,366 697,042

18. COMMITMENTS AND CONTINGENCIES 18.1 Capital expenditure

18.2 Guarantees The Group accounts for loss contingencies when the likelihood of the underlying adverse event occurring is probable and the loss can be reasonably estimated.

The Group had committed to spend as at September 30, 2002 and 2001 and March 31, 2002 approximately Rs 531,310, Rs 73,689 and Rs 140,186 respectively under agreements to purchase property and equipment.

Guarantees provided by banks on behalf of the Group amounted to Rs 41,810 at September 30, 2002 (September 30, 2001 – 28,055; March 31, 2002 – Rs 20,302). The guarantees were provided to various Indian Government agencies and a few customers and prospects. In the event of default the fair value of the guarantee will approximate the outstanding payments due under accrued rates and taxes and accrued expenses. The Group has concluded that the risk of the guarantee being called is remote and accordingly no provision has been made. 18.3 Other commitments i-flex’s operations are carried out from five units registered under the Software Technology Parks (‘STP’) scheme and one unit forming part of Special Economic Zone (‘SEZ’). Under these schemes the registered units have export obligations, which are based on the formula provided by the notifications/circulars issued by the STP and SEZ authorities from time to time. The consequence of not meeting the above commitments would be a retroactive levy of import duty on items previously imported duty free for these units. Additionally the respective authorities have rights to levy penalties for any defaults on a case-by-case basis.

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19. STOCK BASED COMPENSATION

On March 29, 1998 the Company adopted the ESPS to provide equity-based incentives to key employees of the Company ('1998 Scheme'). Subsequently on April 1, 1999, April 1, 2000 and April 1, 2001, the Company adopted another Stock based schemes ('1999 Scheme’, ‘2000 Scheme’ and '2001 Scheme'). These schemes, which have similar terms, are administered through a Trust ('the Trust'). The Trust purchases shares of the Company using the proceeds of loans obtained from the Company. Such shares are offered by the Trust to employees at an exercise price, which approximates the fair value on the date of the grant. The employees can purchase the shares in a phased manner over a period of five years based on continued employment, until which, the Trust holds the shares for the benefit of the employees. The employee will be entitled to receive dividends, bonus, etc that may be declared by the Company from time to time for the entire portion of shares held by the Trust on behalf of the employees. On the acceptance of the offer, the selected employee shall undertake to pay within ten years from the date of acceptance of the offer the cost of the shares incurred by the Trust including repayment of the loan relatable thereto. The repayment of the loan by the Trust to the Company would be dependent on the employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to the shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favour of the Trust. The Trustees have the right of recourse against the employee for any amounts that may remain unpaid on the shares accepted by the employee. The shares that an employee is eligible to exercise during the initial five-year period merely go to determine the amount and scheduling of the loan to be repaid on exercise by the employee. The Trust shall repay the loan obtained from the Company on receipt of payments from employees against shares exercised or otherwise. Accordingly, the scheme eliminates any price risk that the Company could bear and does not contain any option features.

A summary of the activity in the Company’s Stock schemes is as follows: September 2002 September 2001

Opening balance of unallocated shares 78,876 251,000 251,000

- — —

Shares allocated to employees (240,250) (240,250)

Shares forfeited during the year 37,902

19.1 Employee Stock Purchase Scheme (‘ESPS’)

The Company has elected to adopt Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees” (‘APB 25’), in accounting for stock, granted under its scheme. As per APB 25, the Company did not recognise compensation expense on the stock granted because the terms are fixed and the exercise price equals the fair value of the underlying stock on the grant date. The shares issued to the Trust have been considered as outstanding for basic EPS purposes, to the extent these shares have been allocated to employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purposes, the shares, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are dilutive using the treasury stock method. The loan granted to the Trust has been presented as a separate component of equity and repayments of the loan, by way of exercise of the shares by the employees has been applied toward this loan in the equity statement. Dividends paid in respect of allocated shares are charged to retained earnings.

March 2002

Shares acquired by the Trust

-

20,700 68,126

Closing balance of unallocated shares 116,778 31,450 78,876

Closing balance of allocated shares 3,565,622 3,650,950 3,603,524

Shares exercised till date (547,166) (79,000)

Shares eligible for exercise (1,207,664) (1,458,437)

Shares not eligible for exercise 1,810,792 2,610,130

(305,278)

(961,820)

1,839,809

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Weighted average price of the Scheme: September 2001 March 2002

Indian rupees

Opening balance of allocated shares 141.54 124.03 124.03

- 325.00 325.00

Shares forfeited during the period/year 196.01 205.37

Closing balance of allocated shares 145.58 141.54

Shares exercised during the period/year 102.11 137.11

September 2002

Shares allocated to employees during the period/year

242.15

142.57

58.69

Shares eligible for exercise as at period/year end 92.87 77.20 96.12

Unexercised shares as at period/year end 176.4 159.18 177.55

As the shares granted to the employees vest upon the employee accepting the offer, the fair value of the shares granted to the employee computed in accordance with SFAS 123 would not differ significantly from the intrinsic value of the shares as determined in accordance with APB 25.

19.2 Employee Stock Option Plan (‘ESOP’) At the Annual General Meeting of the shareholders of the Company held on August 14, 2001, the Company introduced an additional ESOP, pursuant to which equity shares not exceeding an additional 7.5% of the issued and paid-up equity share capital of the Company have been earmarked for grant, at any given time to present and future employees and directors of the Company and its existing and future subsidiaries. Pursuant to the above resolution, the Board of Directors, at their meeting held on March 4, 2002 approved the Employees Stock Option Scheme (‘the Scheme’) for issue of 2,376,800 options to the employees and directors of the Company. According to the ESOP the Company has granted 2,274,460 options to the eligible employees and directors of the Company and its subsidiaries at an exercise price, which will equate the issue price determined through the book-building procedure. 20% of the total options granted under the Scheme will vest to the eligible employees and directors on the completion of 12, 24, 36, 48 and 60 months and is subject to the continued employment of the employee or director with the Company or its subsidiaries. As per the terms of the Scheme, the exercise price would equate the price determined for the IPO through book building process.

The Group applied APB Opinion 25 and related Interpretations in accounting for this plan. In accordance with APB Opinion 25, no compensation cost would need to be recognised for the Employee Stock Option Plan as the exercise price would equal to the fair value of value of the shares on the date of the IPO. The Company completed its IPO in June 2002 and fixed its IPO price through book building scheme at Rs 530. As per the terms of the plan the IPO price would be the exercise price for the ESOP. 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:

Number of shares and weighted average price stated above has been computed after giving effect of split of shares as referred in Note 2.2(c).

30

September 2002

Particulars Thousands of Indian rupees

Net income As reported 17,625 Pro forma 16,089 777,750 Basic earning per share As reported (in US$, Rs) 0.52 25.19

Pro forma (in US$, Rs) 0.48 22.99

Diluted earning per share 0.50 24.29 Pro forma (in US$, Rs)


851,989

As reported (in US$, Rs)

0.46 22.18

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 0.24 %

Expected volatility Zero

Risk-free interest rates 8.5 %

Expected life 10 years

September 2002 September 2001 March 2002

2,274,460 — —

Granted during the period/year — 2,274,460

Exercised during the period/year — —

Forfeited during the period/year 27,500 —

Outstanding at beginning of period/year

—

—

—

Outstanding at end of period/year 2,244,960 — 2,274,460

20. EARNINGS PER SHARE The following is a reconciliation of the weighted average number of equity shares used in the computation of basic and diluted earnings per equity share:

September 2002 September 2001

Weighted average number of common shares outstanding at period/year end

35,754,744 33,276,400 33,328,488

Weighted average number of unallocated shares (116,778) (31,450) (78,876)

(1,810,792) (26,10,130) (1,839,809)

Weighted average number of common shares used for basic EPS purposes

30,634,820 31,409,803

Dilutive component of shares that are not eligible for exercise

1,241,656

March 2002

Weighted average number of shares that are not eligible for exercise

33,827,174

1,225,167 1,337,260

35,068,830 31,859,987 Weighted average number of common shares used for diluted EPS purposes

32,747,063

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Number of shares stated above has been computed after giving effect of split of shares as referred in Note 2.2(c).

Prior period/year amount have been audited by a firm of independent auditors other than M/s S.R.Batliboi & Associates and have been reclassified, where necessary to confirm with current period presentation.

21. PRIOR PERIODS/YEAR COMPARATIVES

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i-flex Solutions Limited and subsidiaries …(Thousands of US Dollars) (Translated) Balance as of...

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