i-flex annual report 2004-2005 - Oracle · C M Y CM MY CY CMY K The 2002-2003 Annual Report carried the theme of global flight, using the metaphor of a resilient, flexible feather.

C M Y CM MY CY CMY K

i-flex annual report 2004-2005www.iflexsolutions.com


The 2002-2003 Annual Report carried the theme of global flight, using the metaphor of a resilient, flexible feather.The 2003-2004 Annual Report used the metaphor of a thread, to weave a fabric of growth, value and success.For excellence in design, production and communication, we won:• Silver at the League of American Communications Professionals Awards• Silver at the Society for Technical Communication – Annual Competition, India Chapter• Distinguished Award at the 2004 STC Competition (Australian Chapter)


i-flex annual report 2004-2005

R


Vision 4

Striving for perfection 6

Solutions centered on customer needs 14

Partnerships in perfect synchrony 20

People: at the center of the i-flex circle 26

i-flex global presence 30

Key management personnel 32

Corporate information 36

Directors’ report 37

Corporate governance report 42

Financials

Indian GAAP

Unconsolidated 53

Consolidated 95

US GAAP 121

i-flex solutions b.v. 161

i-flex solutions pte ltd 175

i-flex America inc. 193

i-flex solutions inc. 207

SuperSolutions Corporation 219

ISP Internet Mauritius Company 231

Equinox Corporation 247

Equinox Global Services Private Limited 255

C O N T E N T S


Simple, seamless, symmetric and all-encompassing, the ring symbolizes the integrated and comprehensive

approach that we at i-flex bring to our chosen mission - to enable financial institutions worldwide excel through

the effective use of information technology. It represents our exclusive focus on financial services, and our

unique and expanding 360-degree coverage of this domain. But, above all, it signifies our abiding and lasting

commitment to our customers, investors, partners and

employees.

Simple,

seamles s , symmetr ic and a l l -

encompassing, the ring symbolizes the integrated

and comprehensive approach that we at i-flex bring to our

chosen mission – to enable financial institutions worldwide excel

through the effective use of information technology. It represents

our exclusive focus on financial services, and our unique and

expanding 360-degree coverage of this domain. But, above

all, it signifies our abiding and lasting commitment

to our customers, investors, partners and

employees.


Vision

i-flexplans to take customer empowerment, domain expertise and global reach to

newle

vels

.


Guiding Principles

Global Reach

• Mitigate risk by addressing a global market• Build global presence with local capability• Build a global delivery model• Leverage partners and alliances

Customer Focus

• Mission defined by customer success• Behavior driven by customer satisfaction• Strategy defined by

customer need

Domain Expertise

• Specialize through sharpfocus on the financial

services industry• Invest in domain expertise and

intellectual property• Leverage business understanding

to solve customer problems andadd value

Mission:Enable financial

institutionsworldwide through the

effective use of InformationTechnology.

Goal:Become the leading specialty

Information Technology solutionsprovider for the global financial

services industry.

Vision

Our goal is to become the world’s leading, specialized,

IT solutions provider to the global financial

services industry.

Ever since our inception, we’ve been guided by three

principles: customer focus, domain expertise and

global reach. These principles have guided our every

new initiative.

At the heart of our ideology is our customers’ success.

The insights we derive from each success story encourages

us to innovate and create cutting-edge solutions.

Our vision for the future will continue to be ordained

by our sharp and exclusive focus on the financial services

industry. We continue to invest in the requisite domain

expertise and intellectual property, leveraging

this business understanding to add value to our

customers’ businesses.

With our products and services being implemented

across the globe, and with new strategic global partner

alliances, product acquisitions and global marketing

and development centers, we are on the right track of

endowing our solutions with a ‘global reach’.

We also pledge ourselves to total customer satisfaction –

achieved with uncompromising integrity. In the years

ahead, as now, our customers will benefit from the many

opportunities we will open up for them with our

technology solutions, the strong values we uphold,

and solutions that carry the essential imprints of value

and quality.

i-flex annual report 2004-05 5


Striving for perfection

Recognition, Achievements and Milestones


read on the occasion, Dr. Lagos credited i-flex with

bringing state-of-the-art banking software to the

Chilean financial services sector.

• “One of the 100 Best Companies under a billion in

the Asia-Pacific region,” ranking by Forbes Global.

• One of the “Best Small Companies” in Euromoney’s

Best Asian Companies poll.

• “One of the ten technology companies to watch,” by

Bank Technology News and BusinessWeek

International.

• Selected as one of Red Herring’s Top 100 Innovative

Companies, USA.

• For the third consecutive year, FLEXCUBE® was

ranked the world’s top-selling core banking solution

by International Banking Systems, UK, in its annual

Sales League Table for 2004.

Accolades

i-flex is proud to have been honored last year, from

around the world, with awards and recognition:

• The Global Entrepolis @ Singapore Award 2004

presented by the Prime Minister of Singapore, Lee

Hsien Loong. The award honors Asia’s emerging

technopreneur for an invention that best applies

technology to a strong business model. i-flex won the

award for FLEXCUBE®.

• The Order Bernardo O’Higgins, Great Official, to

Rajesh Hukku, Chairman and Managing Director,

i-flex solutions. Presented by the Chilean Ambassador

to India, H.E. Dr. Jorge Heine, on behalf of the

President of Chile, Dr. Ricardo Lagos. In his statement

• The Golden Peacock Innovation Award to

FLEXCUBE® in the financial solutions category. This

award recognizes new and innovative ideas, products,

services, inventions, processes, financial techniques

and business structures.



• The Maharashtra IT Award, presented by Vijaysinh

Mohite Patil, Deputy Chief Minister – State of

Maharashtra, India. The Maharashtra IT Awards

have been constituted by the Government of

Maharashtra to recognize innovative Information

Technology (IT) and IT Enabled Services (ITES)

companies from the state, who have made the

state proud.

• The IMC Ramakrishna Bajaj National Quality Award

for 2004 in the Services Category for outstanding

customer orientation and quality management systems.

• The “Brand Equity Award” presented by the PHD

Chamber of Commerce and Industry for creating a

highly successful global brand, FLEXCUBE®.

• “#1 Specialty Application Developer” by neoIT and

“Managing Offshore” (leading outsourcing advisors).

• Reveleus™, a finalist in the Analytic Application

Category for DM Review’s World Class Solution

Award, 2004. DM Review, USA, is one of the most

respected data warehousing and business intelligence

publications.

• The ‘Excellence in Export’ Award from the

Department of Industries and Commerce, State of

Karnataka, India.

• ‘Karnataka’s Best IT Export Award’ from Dayanidhi

Maran – Union Minister, Communications and

Information Technology, India.


Achievements

i-flex continues to scale newer peaks every year. We

marked last year with success and growth on all fronts.

• 44 percent revenue growth, with all lines of business

making strong contributions

• i-flex’s services business, PrimeSourcing™, registered

a record 73 percent growth in its revenues on the

strength of demand for domain specialists

• FLEXCUBE® registered record new wins; fresh

license fees exceeded USD 55 million after consistent

success with Tier-1 banks

• Announced the availability of FLEXCUBE® on

DB2, Oracle 10g and Linux, greatly enhancing our

ability to address diverse customer requirements

• Signed 64 new customers, increasing the tally of

customers serviced to 544 across 112 countries

• Demonstrated ability to rapidly scale up operations:

record expansion of the delivery capacity – added

2,540 professionals, highest ever for the company;

and doubled our infrastructure during the year

• Significantly expanded market presence, opening

offices in Australia, Canada, China and Russia

Completed several strategic acquisitions, expanding

our portfolio and augmenting our capabilities:

- Acquired Equinox Corporation, a specialized services

provider to US-based mortgage lenders and auto

finance institutions, giving us a much-needed base

in the knowledge-based outsourcing industry (KPO)

- Acquired a 33 percent stake in France-based Login

SA, and significantly strengthened our product line

with its treasury product, Acumen

- Castek Software Inc., a Toronto-based provider of

insurance systems for the global Property & Casualty

(P&C) Insurance industry

Established new alliances with:

- SunTec Corporation for an enterprise-billing

solution

- Fundtech Corporation for a payments solution

- BNX Systems for identity and access management

software

- Computerland SA for the sale and implementation

of FLEXCUBE® in 16 countries in Eastern Europe

- DMR Consulting for implementation services of

our product offerings in Spain, Venezuela and Chile

Attained several international quality benchmarks

- Achieved SEI-CMMI Level 5 certification in the

PrimeSourcing™ Division for all 22 CMMI process

areas and 425 practices

- For the third consecutive year, certified compliant

with SAS 70 standards (Type II certification). Used

to certify the system of internal controls

in a service organization, SAS 70 is a standard

developed and maintained by the American Institute

of Certified Public Accountants

- Achieved BS7799 compliance, one of the most

widely recognized British information security

governance standards for our development center

at SEEPZ, Mumbai



Operating revenues

Rs. M

illio

n

0

2000

4000

6000

8000

10000

6,141

2003-04

4,157

2002-03

3,039

2001-022000-01*

12000

2004-05

7,881

11,386

Earnings per share

Rupe

es

0

5

15

20

25

30

2003-042002-032001-022000-01*

35

2004-05

10

22.86

15.43

23.92

31.04

14.72

All figures in Rs. Million except EPS & Book ValueAs per Indian GAAP Consolidated Results except for 2000-01

i-flex solutions financials at a glance

Key performance indicators – 2004-05

*As per Indian GAAP Standalone

2000-01* 2001-02 2002-03 2003-04 2004-05

Total Revenues 3,211.21 4,295.27 6,239.14 8,017.87 11,679.76Total Expenses 2,016.85 2,991.95 4,277.53 5,703.26 8,728.37EBT 1,194.36 1,303.32 1,961.61 2,314.61 2,951.39Tax 94.15 150.33 252.73 526.75 627.06EAT 1,100.21 1,152.99 1,708.88 1,787.86 2,324.33EPS 14.72 15.43 22.86 23.92 31.04Book Value 42.48 63.05 106.99 124.82 152.96

Reserves and surplus 3,008.71 4,542.32 7,809.73 9,144.85 11,078.51

Note: All EPS and Book Values are computed based on the current equity capital base of 74,879,650 shares

EVA 548.39 472.33 669.33 720.91 903.50

Book value

Rupe

es

0

60

100

120

140

160

2003-042002-032001-022000-01*

180

2004-05

80

106.99

63.05

124.82

152.96

42.48

Book value is computed on the equity capital base of 74,879,650 shares as on March 31, 2005

40

20

Net income

Rs. M

illio

n

0

500

1000

1500

20001,709

1,1531,100

2500

1,788

2,324

Economic value added

Rs. M

illio

n

0

200

400

600

800

669

472548

1000

721

904900

700

500

300

100

2003-042002-032001-022000-01* 2004-05

2003-042002-032001-022000-01* 2004-05


Number of employees

0

2000

3000

3500

4000

4500

2003-042002-032001-022000-01

5000

2004-05

2500 2,3272,032

2,974

4,747

1,5901500

1000

500

. . . across countries

0

40

60

80

100 9384

74

120108

112

20

2003-042002-032001-022000-01 2004-05

Customers serviced . . .

0

200

300

400

500

404

345

281

600

480

544

100

2003-042002-032001-022000-01 2004-05

47%Services Revenue

Operating Revenue

53%Products Revenue

Region-wise Revenue

50%USA

15%India, Middle East

& Africa

14%Asia Pacific

19%Europe

2%Latin America& Caribbean



Solutions centered on customer needs

The

customer i s

thecentral focus of the

i-flexuniverse. O

ur solutions – FLEXCUBE ®, PrimeSourcing™, Reveleus™, i-flex Consulting, Daybreak™, Equinox and M

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Providing effective solutions to customer needs is the

force that binds our ever-growing portfolio. Our

suite of solutions continued to evolve during

the year, keeping pace with rapidly changing

market requirements – arming our customers

with competitive advantage.

The FLEXCUBE® suite

FLEXCUBE® continued its winning streak, once again

topping the annual Sales League Table published by

International Banking Systems, UK. Today,

FLEXCUBE® has been chosen by 228 financial

institutions in 92 countries. Continued investments

have ensured that FLEXCUBE® retains its edge over

competition by offering rich functionality to a wide

variety of global, regional, local and specialized financial

institutions. It continues to offer enormous scalability

along with cost-effective processing to financial

institutions both large and small.

Last year:

• A top-tier US financial institution chose the product

to expand its global consumer banking operations.

• FLEXCUBE® entered several new markets and

countries. To name a few: Ta Chong Bank, Taiwan;

International Moscow Bank, Russia; Bank Fur Arbeit

Und Wirtschaft (Bawag), Austria; Bank Sicredi,

Brazil; and a major financial group headquartered

in the UK for its operations in the US and the UK.

• Citigroup’s Global Markets, one of the world’s largest

portfolio managers, selected FLEXCUBE® for its

loan origination, loan syndication and secondary

loan trading businesses in the US and the UK.

Faster, functionally richer, more global... FLEXCUBE®

integrates transaction processing for Retail,

Corporate and Investor Servicing operations.

No matter what the focus and scale of a

banking enterprise, FLEXCUBE® offers a

scalable, cost-effective and robust technology

platform. Complemented by solutions from

best-of-breed, niche solution providers from around

the world, FLEXCUBE® delivers capabilities that

encompass CRM, workflow management, anti-money-

laundering, private banking and wealth management,

credit cards, and payments systems.

FLEXCUBE® is now available on Oracle Database 10g

and Oracle Application Server 10g, becoming one of

the industry’s first solutions to be available on this

platform. This means open standards, simpler, more

automated data centers, and, most importantly,

competitive advantage for our customers.

The FLEXCUBE® Retail Banking suite crossed a very

important landmark when it was made available on the

latest versions of EJB and IBM DB2. The solution is

now ideally positioned as a compelling choice for

institutions looking to replace large, in-house, legacy

core banking applications.

The FLEXCUBE® product suite has also been expanded

to address the challenges of new customers and new

markets. The product now offers banks complete

compliance with several local and regional regulations.

FLEXCUBE has also been localized for Polish, Bulgarian,

Japanese, German, Arabic-speaking, and Spanish users.

“We recognized that in order to improve our time-to-market with newproducts and services for our customers, we needed a state-of-the-artsolution. i-flex solutions is an industry leader, bringing their domain expertiseto the table, as well as the FLEXCUBE® product suite's proven trackrecord of successful large and complex implementations in bilingualenvironments.”

– Pablo GranifoChief Executive Officer, Banco de Chile



“Daybreak Lending Suite™ provides us with the cost-effective system weneed to continue to grow our business. With Daybreak’s end-to-endsolution, we will be able to process more loans in less time and improvecustomer satisfaction levels as well.”

– Jeff Curry, PresidentUS Auto Credit

“We chose Reveleus™ because of the pre-built nature of the solution, thefit with BMO’s technology platform and Reveleus’ commitment to theevolution of the product to meet BMO’s ongoing needs and the Basel IImarketplace.”

_ Wendy Lockyer, Senior Vice-PresidentBasel and InSight Initiatives, BMO Financial Group

Reveleus™

Reveleus™ continues to provide the financial services

industry with comprehensive, enterprise-wide risk

management and Basel II solutions. One example of

this is the key win for Reveleus™ at the Bank of

Montreal, one of the largest and most respected financial

services providers in North America.

No less impressive was the selection of Reveleus™ for

mortgage analytics at CitiMortgage, USA – a “Top

Tech Deal” according to Bank Technology News,

and one that strengthened Reveleus’ standing in

the marketplace.

The product also made inroads outside North America

last year, specifically in Taiwan and Brazil.

A number of complex implementations, including

Woori Financial Group in Korea were also completed

last year. HDFC Bank’s implementation of Reveleus™

was noteworthy enough to be selected as a finalist at

the DM Review’s 2004 World Class Solution Award,

which recognizes world-class strategic initiatives.

Daybreak™

Daybreak™, our comprehensive lending system for the

consumer lending industry, was sold to seven new

customers last year, including Bay View Acceptance

Corporation, a leading automotive financing company,

which replaced its legacy systems with the Daybreak™

lending suite. Bay View expects Daybreak™ to deliver

cost savings of 50 percent and enable them to implement

a true, end-to-end, loan servicing and collection system.

US Auto Credit, an indirect auto lender in the USA,

is replacing both its front-end origination and back-

end collection systems with the Daybreak™ suite. This

solution will provide US Auto Credit with a single,

complete, Web-based system for loan origination, loan

servicing, and loan collections.

H Van Doom, CFO AFAB Holdings, M G M Schouten, CEO AFABHoldings & O Van Paridon, i-flex solutions b.v.

Holandsche Disconto Voorschotbank, the second largest

intermediary for credit facilities in the Netherlands,

signed up to implement Daybreak™ outside the US.

This is the first step in the globalization of the

Daybreak™ suite.


PrimeSourcing™

Financial year 2004-05 was a remarkably successful year

for PrimeSourcing™, our Global IT Services Division,

on many counts. The division crossed the coveted USD

100-million mark in revenues, with an impressive growth

of 82 percent year on year. We also increased our

PrimeSourcing™ customers serviced to over 160 across

48 countries.

A domain-based engagement model supported by a

unique relationship management framework helped

add several marquee top-tier global financial institutions.

While adding new customers to our fold, we continued

to maintain a healthy contribution of 65 percent

revenues from existing customers in the form of repeat

businesses – proof of high customer satisfaction levels.

To effectively service this growing customer base, the

PrimeSourcing™ human resource base grew by over

100 percent in the year. The PrimeSourcing™ division

expanded its strength in all development centers in

India (Mumbai, Pune, Chennai and Bangalore).

The division also embarked on several key initiatives,

primarily driven by market trends:

• A new array of payments solutions was one of the

significant successes of the Payments Center of

Excellence (CoE). The center also established a

strategic alliance with Fundtech Corporation to

offer a total payments solution: combining Fundtech’s

highly scalable, browser-based, Global PAYplus™

payments system with PrimeSourcing’s domain

expertise and integration services.

The team responsible for the CMMI certification

Business Processes in BFSI

Reta

il Ba

nkin

g

Corp

orat

e Ba

nkin

g

Inve

stm

ent B

anki

ng

Priv

ate

Bank

ing

Insu

ranc

e

Dedicated ODCs

Solution Engineering & Consulting

Rela

tions

hip

Man

agem

ent

TDMS

CRM

Testing

Data & BI

COEs

Payments



• The growth strategy of the Testing CoE engendered

rapid deployment of innovative and cost-effective

testing tools, practices and methodologies while,

simultaneously, leveraging strong domain knowledge

and project management skills.

• The CRM CoE launched its own CRM product,

FLEXCUBE CRM – with functionality covering

sales, service, marketing and knowledge management–

as a module within our flagship product,

FLEXCUBE®. The center added new services such

as call center consulting, business process design

and performance tuning. In addition to

implementing Siebel, the center also supports full

lifecycle implementation of Oracle’s CRM product.

• Offering a comprehensive range of service offerings,

the Business Intelligence CoE grew to over 300

professionals, providing offshore and on-site services

to customers around the world.

• To align our solutions more closely to the business

lines of our customers, PrimeSourcing™ established

dedicated practice lines in Investment Banking,

Private Banking, Retail Banking, and Corporate

Banking.

“The initial reason to outsource was to reduce costs. Now we are seeinga whole range of benefits including risk reduction, process oriented workflows,testing support and business analysis. Our firm benefits not only throughthe consistently high quality resources deployed but more importantlythrough the scalability that an outsourcing model provides. Consider us ahappy customer!”

– Ralph Martens, CBTO/RISK IT/Compliance ITDeutsche Bank, New York

“The i-flex ODC model has enabled us to expand our Engineering andQuality Assurance resources in a fiscally responsible manner and helpedus meet our market demands for product expansion. The quality anddedication of the team is impressive and we continue to be sold on thispartnership after almost 2 years.”

– BNX Systems Corporation


i-flex Consulting

Our Consulting Division reached new heights over the

past financial year, winning its 100th customer and,

specifically, its 50th customer for Process and

Compliance Management Consulting. The group’s

revenue grew by over 100 per cent as compared to the

previous year’s. Intended to provide value through

specialized domain and technology consulting, our

consulting services made a significant contribution to

our overall success.

Process and Compliance Management

In 2004, the Process and Compliance Management

(PCM) practice achieved impressive results in both

delivery capability and global reach. With new customers

in countries such as Taiwan, Hong Kong, the UK and

the US, and by adopting an onsite-offshore integrated

delivery model, the PCM practice line successfully

executed assignments in IT processes, IT security and

technology risk assessment.

Business Process Transformation

The Business Process Transformation (BPT) practice

shifted into high gear by moving from a focus on process

redesign to true business transformation. This meant

including not only the alignment of processes with

technology, but also the inclusion of metrics-driven

strategies to increase profitability, reduce costs, and

optimize manpower. This expanded charter has been

successfully applied at top-tier banks in Europe and

North America.Rajesh Hukku and Vijay Sharma celebrating i-flex Consulting Division’s100th customer milestone, joined in by other i-flexers



Risk Management

With the release of the Basel II Convergence Document

in June 2004, banks across the globe have launched

initiatives to implement the framework. i-flex

Consulting’s Risk Management practice released a Self-

Assessment tool for banks to assess their current status

and established a “7-Step Methodology” for complying

with Basel II (both in corporate and retail banks). This

allowed us to successfully execute a number of important

assignments ranging in scope from Initial Gap

Assessment to Implementation.

Capping the high-end offering is the work of the

Architecture, Strategy, and Domain Competency

practice, which offered strategic technology and business

advice to a number of key customers and the System

Integration practice which has successfully managed

large and complex implementations around the world.

“...the resulting business process review undertaken by i-flex was completedin a short span of three weeks, with some real, high-value, recommendationsfor the bank. Efficiencies of about 30 per cent are expected to be achieved.”

– Graham Thorpe, Trade Finance ManagerFBN Bank Ltd. (UK)

Compliance

A L M

Market Risk

Credit Risk

Operational Risk

Credit Risk

Market Risk

A L M

Processes

Policies

Organization

CorporateGovernance

Enterprise Risk Managem

ent

Data

Systems

Analytics

ProgramManagement

Implementation

Solution Selection

Services

Solutions

Strategy

Planning

Comprehensive services and solutions across areas of Risk and Compliance

BASEL IISelf-Assessment Toolkit

Login SA

Reveleus ORTOS(Operational Risk Tool Suite)


Equinox Corporation

i-flex acquired Equinox Corporation, a specialized

services provider to US-based lenders in the mortgage

finance industry and the auto finance and credit

card domains.

This acquisition gives i-flex a foundation in the

knowledge-based outsourcing industry (KPO), allowing

us to offer truly comprehensive solutions to our

customers. Equinox’s focus on the financial services

industry is also aligned with our own focus.

Employing its proprietary products, Equinox helps

enterprises retain customers while enhancing the value

of every marketing dollar they spend on acquiring new

customers. It also provides services across the mortgage

finance value chain, including processing loan

applications. Equinox has highly evolved intellectual

property and products and an experienced management

team. It has about 500 employees, most of whom are

based in Gurgaon, near New Delhi, in India.

“Now at the end of two fabulous work years, we as customers have beenleft simply thrilled.”

– Toshiaki KurokiShinsei Bank

Technology Deployment and Management

Services

Technology Deployment and Management Services

(TDMS) specializes in the architecture, design, setup,

and lifecycle management of all IT infrastructure

elements. The group has realigned its services portfolio

to focus on eight key domains, with a special

emphasis on information security. This has resulted in

eleven new customers and 66 percent year on year

revenue growth.

TDMS Services - The 8 Layer Service Model

CoB & IT Infrastructure Process Consulting Services

Information Security Services

Networking Services

Application Management Services

Database Governance Services

Server Management Services

Infrastructure Planning & Deployment & Hosting

CO

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SA

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Integrated Help Desk Services



Partnerships in perfect synchrony

Together with our partners, we offer the industry synchronous solutions.


Models of racing cars given away as part of the direct marketing exercisei-flex undertook along with its partner, Hewlett-Packard

Delivering value through partnerships

We ensure that our solutions are customer-driven,

flexible and technologically contemporary by forming

alliances with global organizations that are in perfect

synergy with our own commitment to excel.

IBM

The partnership with IBM gained momentum during

the year, when we jointly launched FLEXCUBE® for

core banking on IBM WAS, DB2 and the p-series server

platforms. Targeted at retail banks, this new offering

was launched in November 2004 at the “BAI Retail

Delivery Conference Expo 2004” in Las Vegas. Joint

sales and marketing campaigns are underway in select

geographies to promote this option.

Reveleus™, our Business Analytics product, was also

made available on IBM DB2, WAS and the p-series

platforms in November 2004.

Oracle

Our partnership with Oracle progressed impressively

over the past financial year. In the course of the year,

we qualified FLEXCUBE® on the 10g platform.

We were also delighted to be selected by Oracle as a

finalist for its “Partner of the Year” award (Independent

Software Vendor category).

Hewlett-Packard

In 2004, Hewlett-Packard (HP) and i-flex embarked

on an important joint direct marketing campaign in

North America.

FLEXCUBE® was also qualified to operate on HP Integrity

Servers running on Intel Itanium microprocessors.

Other Alliances

i-flex entered into a strategic alliance with Castek

Software Inc., a Toronto-based provider of insurance

systems for the global Property & Casualty (P&C)

Insurance industry. As part of the alliance, i-flex has

established an equity financing arrangement that allows

it to become the largest shareholder in Castek.

We deepened our engagement with Fundtech

Corporation, a leading provider of payments, settlement

and cash management solutions. An important aspect

of our current agreement is to work together to position

Fundtech’s Global PAYPlus as a large-bank, standalone,

system – with i-flex providing systems integration,

analysis, and implementation services.

We appointed Computerland SA for sales and

implementation of FLEXCUBE® in 16 Eastern

European countries.

We tied-up with DMR Consulting, a leading

multinational consultancy, for implementation of our

product offerings in Spain, Venezuela and Chile.



Tran Phuong Binh - General Director, Eastern Asia Commercial Bank,Nguyen Thi Ngoc Van - Deputy General Director, Eastern AsiaCommercial Bank, Rajesh Hukku - Chairman and Managing Director,i-flex solutions, and Kishore Kapoor - CEO, i-flex solutions pte ltd.,presided over the conference marking i-flex’s entry into Vietnam

NESS Technologies provides implementation support

in the Czech Republic.

We acquired a 33 percent stake in Login SA, a France-

based, specialist, treasury software firm. Login’s product,

Acumen, complements and strengthens our award-

winning product suite, FLEXCUBE®.

We also established an alliance with SunTec

Corporation for an enterprise-billing solution that

allows banks to offer flexible billing and pricing to

their customers.

We signed a partnership with BNX Systems to resell

identity and access management software.

Events

Organizing and participating in thought leadership

events are an intrinsic part of our communications

strategy. We also engage with our customers through

the periodic Customer Meets we organize. Last year,

we were part of events that established our leadership

position in the financial services industry.

i-flex events

We conducted a series of customer and thought

leadership events right through the year. While some

events marked our entry into new markets, others were

hosted along with our partners and alliances.

i-flex’s entry into the Vietnamese Financial Services

Market, Ho Chi Minh City, Vietnam, May 7-8, 2004.

Representatives from Citibank, Eastern Asia

Commercial Bank, State Bank of Vietnam, IDG

Vietnam and other leading financial institutions

attended this two-day event that commemorated our

entry into the Vietnamese banking industry.

The FLEXCUBE® implementation at the Eastern Asia

Commercial Bank was announced at a press conference

held the following day.


V Senthil Kumar hosts the i-flex Round Table on Linux in London

Financial Times – i-flex Round Table on Linux -

London, UK, July 29, 2004. This Round Table on

Linux, conceived and anchored by The Banker, a leading

trade publication from the Financial Times Group, was

jointly sponsored by i-flex and Oracle. CIOs and

operation heads from Barclays Capital, Dresdner,

Citigroup and ING took part in discussions which

centered on Linux’s role in today’s environment.

V Senthil Kumar – CEO, i-flex solutions b.v., talked

about i-flex’s experiences in adopting Linux in

collaboration with Oracle.

i-flexers at the Waldorf-Astoria, the venue for the Executive LeadershipSummit, in September 2004

i-flex solutions Executive Leadership Summit -

New York, USA, September 12-14, 2004. The

Executive Leadership Summit focused on the theme

“Bank strategies to achieve competitive advantage and

market differentiation.” Leading experts from the

financial services industry including Sanford Weill

(former Chairman, Citigroup) and Don Free (Principal

Analyst, Gartner Research Group) shared their insights

with the audience. Leveraging investment solutions to

suit a global infrastructure, core banking transformation,

and outsourcing trends and strategies were some of the

topics discussed.

A Reinsurance Breakfast Event - London, UK,

September 24, 2004. Our Insurance Center of

Excellence conducted a breakfast event for the

Reinsurance Industry.

This seminar helped participants discover how a

collaborative approach can empower existing technology

systems maximize technology investments, and provide

agility in responding to the end customer.

‘i-deate’ - a discussion on 'Harnessing the core to

meet emerging banking challenges’ - London, UK,

October 27, 2004. ‘i-deate’, our thought leadership

forum, held in London in October last year, focused on

the theme, ‘Harnessing the core to meet emerging

banking challenges’. This event was co-sponsored by

IBM. Speakers at the forum included Martin Whybrow

- Editor, IBS Publishing, Pablo Suarez - Practice Leader,

IBM Corporation-UK, Jin Hang Lee - General Manager,

Korea First Bank (London) and V Senthil Kumar -

CEO, i-flex solutions b.v.



i-flex Africa and Middle East Financial Services

Leadership Conclave - Egypt, December 5-7, 2004.

The i-flex Africa and Middle East Financial Services

Leadership Conclave, held at Sharm el Sheikh in Egypt,

saw 86 delegates from more than 20 countries and 44

organizations congregate to discuss the new imperative

for banking and financial institutions – Maximizing

Returns in a High Growth Era.

With Oracle as the event partner and Hewlett-Packard

as co-sponsor, the event brought together prominent

leaders in the financial services industry.

Steve Kirby from Gartner Consulting initiated the two-

day meet with his interactive talk on how banks could

see growth with new technology. Tamer Farouk from

Oracle, Aigboje Aig-Imokheude from Access Bank,

Nigeria, Sheriff Mansour from the Egyptian American

Bank, and Gamil Salem, Banque du Caire, presented

unique case studies that highlighted the challenges

faced by the Nigerian banking industry.

Our Technology Deployment and Management Services

were launched at this event. Our Chief Operating

Officer - India Operations, N R K Raman, presented

i-flex’s roadmap for the region.

A Forrester Research Briefing on ‘Renewal of Banking

Platforms’ - Mumbai, India, March 02, 2005

i-flex hosted this briefing along with Forrester Research

for the banking and equity analyst community. Jost

Hopperman - Vice-President and Research Analyst,

Financial Services Group, Forrester Research, presented

his views on the subject and elaborated on how banking

platforms need to cope with continuously changing

business environments and a constant flood of new

requirements, while staying sufficiently agile.

Participants at the i-flex Africa and Middle East Financial ServicesLeadership Conclave at Sharm el Sheikh, Egypt

Sharm el Sheikh, Egypt, provided the perfect setting for the i-flex Africaand Middle East Financial Services Leadership Conclave in December,2004

Jost Hopperman - Vice-President and Research Analyst, Forrester Research,addressing the bankers at the Forrester Research briefing at Mumbai, India


HP’s Fifth Financial Services Industry Forum

Florida, USA, May 26-29, 2004

HP’s Financial Services forum primarily focused on the

issues and challenges faced by banks in Latin America.

Following a theme of “Channel Integration”, this event

provided an insight on how multi-channel integration

technology can deliver a consistent customer experience

across numerous points of service.

Industry Events

During the year, we participated in 41 events held across

the USA, South Africa, the Netherlands, Hong Kong,

China, Singapore, Malaysia, the Czech Republic, Brazil,

Guatemala, India, the Caribbean Islands and Pakistan.

The i-flex booth at SIBOS, 2004, was based on the theme “AccelerateYour Business”. We hosted an evening of racing and sports at AndrettiSpeed Labs, Atlanta, USA, for our guests

Partner Events

Oracle’s Executive Banking Conference

Nairobi, Kenya, May 10-11, 2004

Focusing on the theme, ‘The Future of Banking in

Africa: Improving Customer Insight and Risk

Management’, Oracle’s Executive Banking Conference

provided a forum for chief executives from the financial

services industry to discuss strategic issues that

affected their business. i-flex was the platinum sponsor

of this conference.



People: at the center of the i-flex circle

Across

countries and

cultures, the people of i-flex are united in their common zeal toempower

finan

cial

inst

itut

ions

.


We in i-flex would like to believe we are part of a larger

circle – the circle of the community we live in. As

much as we draw sustenance and support from our larger

community, we have, in turn, spread ripples of hope

and strength through various initiatives, both private

and company sponsored.

Community initiatives

Our Corporate Social Responsibility policy stresses the

need for conscientious involvement in children’s welfare.

Children’s education and health remained our focus

last year.

The Government Tamil Model Primary Girls’ school

at Bangalore was in a state of disrepair and desperately

needed helping hands to provide basic facilities to the

children. Along with a voluntary organization, we made

a substantial contribution towards repair and

construction work.

As part of our “i-flex for the

c h i l d ” c o m m u n i t y

initiative, we have been

mentoring and supporting

a few ‘i-flex pearls’ at the

Freedom Trust at Chennai,

India. Two of these children

were invited to our

Bangalore office to showcase their talents. Karthick,

a 14-year-old affected with cerebral palsy, and displaying

exceptional talent in chess, took part in ‘CheckMates’,

a chess tournament organized at our offices in Bangalore.

Karthick played with the finalists from each of our

premises in Bangalore, winning one match and losing

the other.

Another ‘i-flex pearl’,

Vidarthi, a 15-year-old

physically challenged child,

visited our Bangalore office

along with 19 paintings that

she had created from the

onset of her training in

fine arts.

We helped the tsunami victims by wholeheartedly

contributing monetary help to the Bhaktivedanta

Hospital, Mumbai, and SoS Children’s Village in

Bangalore. These two organizations were chosen for

their outstanding services to the affected victims.

Our contributions helped them build houses and

replace damaged fishing boats, and reinforced

efforts at their 16 Emergency Child Relief Centers

in Tamil Nadu, India.

G Vasudev volunteered as

a r e l i e f w o r k e r a t

Nagapattinam, India, one of

the worst-hit areas by the

tsunami. The money he

collected from colleagues was

used to buy food and

medicines for the victims.



Communicating with i-flexers

We reach out to our most immediate circle, our

employees, in several ways. These include our highly

participatory employee newsletter, our corporate

Intranet, and message boards.

Softrek, our internal newsletter, was recognized by

the India Chapter of the Society for Technical

Communication (STC) and the League of American

Communications Professionals for the second year in

a row as an outstanding communications tool.

i-opener, delivered via the Intranet, provides

global and local news about the company to employees

worldwide. It also serves as a forum for staff

creativity, is a workflow manager, and a knowledge

management portal.

Aditi Vyas and her college mates developed amachine that manufactures water, which hasbeen exhibited at several science forums

Sachin Madhavan was runner up at the BrandEquity quiz show at Bangalore

The Open House Annual is a forum that provides an opportunity foremployees to ask questions to the senior management

Our Executive and Senior Management continually

communicate with i-flexers through organization-wide

events such as the Open House Annual, or OHA as it

is popularly referred to, as well as through personal

encounters with “star performers”.

The OHA is an annual celebration involving all i-flex

employees. It focuses on key issues facing the global

financial services industry as well as the company. It

also provides an opportunity for people to interact and

socialize with colleagues who are usually thousands of

miles apart. i-exceed – the theme for last year’s OHA –

reinforced our belief that we need to look beyond, to

surpass expectations, to excel.


Fintech, Kenya, and Compu-Data, Ghana, at a partner training sessionat i-flex Park, Bangalore

Partner Training. Our partners play a significant role

not just in sales promotion but also in product

development and implementation. The FLEXCUBE®

Center of Learning has spearheaded a partner

enablement initiative, wherein, curricula customized

for the needs of a partner are designed and administered.

The sessions last year were attended by partner

organizations and customers from across the globe.

Training

We continually invest in our people. In the past year,

we honed the skills and nurtured the abilities of our

employees through sustained training initiatives.

Clearly-defined initiatives ensured that every single i-

flexer followed a well-defined learning path – beginning

from the new recruit to senior employees. On the whole,

we conducted 1,445 days of instructor-led training and

our employees spent 34,876 days on training from across

locations and businesses. 1,791 i-flexers were trained

in functional domains such as Java, Microsoft, Oracle,

CISCO, Sybase and technical domains like CFP, FFP,

CISA, CSQM and PMP.

Foundation Finance - Deep domain expertise. The

PrimeKnowledge initiative was launched to help

PrimeSourcing™ employees hone their domain skills

and take up higher certification programs. This

foundation course was designed to add to an i-flexer’s

understanding of risk, retail, corporate and investment

banking and financial markets. 1,645 people from the

PrimeSourcing™ team took these tests and cleared

them successfully. In exactly six months, the group has

achieved 100 percent results with a significant number

scoring above 90 percent.



BulgariaBruneiCyprusEgyptGermanyGhanaHungaryIcelandIndiaJamaicaJapanKenyaKuwaitMalaysiaMauritiusNetherlandsNigeria

PolandRomaniaSingaporeSouth AfricaSri LankaUAEUgandaUKUSAVenezuelaZambiaZimbabwe

Asia PacificHong Kong SARIndonesiaJapanKoreaMacauPeople’s Republic Of ChinaTaiwanThailandVietnam

Latin AmericaBrazilGuatemalaEl SalvadorHondurasNicaragua

EuropeBelgiumCzech RepublicDenmarkFinlandFranceGreeceHungaryLuxembourgMonacoNorwayPolandPortugalRussiaSpainSwedenTurkey

Middle East & IndiaBangladeshCyprusIndiaKuwaitNepalSaudi ArabiaSri Lanka

AfricaAlgeriaAngolaBeninBotswanaEgyptEritreaEthiopia

GhanaKenyaLibyaMalawiMaliMauritiusMozambiqueNamibiaNigeriaSenegalSeychellesSouth AfricaSwazilandTanzaniaUgandaZambiaZimbabwe

Distributor Coverage

i-flex Offices

Support Presence

BangaloreChennaiMinneapolisMumbaiNew YorkPuneSingapore

Development CentersAmsterdamBangaloreBostonChennaiDelhiDubaiFrankfurtLos AngelesLondonMiamiMinneapolisMoscowMumbai

New JerseyNew YorkPuneSingaporeShanghaiSydneyTokyoToronto

i-flexglobal

presence


Customer PresenceAfghanistanAlbaniaAntiguaArgentinaAustraliaAustriaAzerbaijanBahrainBangladeshBarbadosBelgiumBenin RepublicBhutanBoliviaBotswanaBrazilBruneiBulgariaCambodia

CameroonCanadaCayman IslandsChileChinaColumbiaCyprusCzech RepublicDenmarkDominican RepublicEgyptEthiopiaFinlandFranceGabonGeorgiaGermanyGhanaGreece

Hong KongHungaryIcelandIndiaIndonesiaIrelandIsraelIvory CoastJamaicaJapanJordanKazakhstanKenyaKosovoKuwaitLebanonLibyaLuxembourgMacau

MadagascarMalawiMalaysiaMaltaMauritiusMexicoMozambiqueNepalNetherlandsNew ZealandNigeriaNorth KoreaNorwayOmanPakistanPapua New GuineaParaguayPhilippinesPoland

PortugalPuerto RicoQatarRomaniaRussiaRwandaSamoaSaudi ArabiaSerbiaSenegalSeychellesSingaporeSlovakiaSloveniaSouth AfricaSouth KoreaSpainSri LankaSweden

SwitzerlandTaiwanTanzaniaThailandTrinidadTurkeyUAEUgandaUKUkraineUSAVanuatuVenezuelaVietnamYemenZambiaZimbabwe


Rajesh HukkuChairman and Managing Director

Deepak GhaisasCEO - India Operations and CFO

Key management personnel

R RavisankarCEO - International Operations and Business Development

Executive management office

Olivier TrancartExecutive Vice-President

Global Sales

Joseph JohnExecutive Vice-President

Universal Banking Products

V ShankarExecutive Vice-President

PrimeSourcing

Executive vice-presidents

N R K RamanCOO - India Operations


Kapil GuptaVice-President,

FLEXCUBE Development

Gratian PerezVice-President,

Corporate Accounts

Manmath KulkarniVice-President,

Retail Banking Products

Atul GuptaSr Vice-President,

Process and QualityManagement Group

Anand PhanseVice-President,

Citigroup Relationship andChief of Staff, US

Senior management team

Dennis RomanChief Marketing Officer

Dilip KulkarniChief Compliance Officer

Darshan KarkiPresident and COOSuperSolutions Inc

Don GangulyCEO,

Equinox Corporation

G NarasimhanVice-President,

Customer FulfilmentEurope and Africa

Gayathri ParthasarathyVice-President,

PrimeSourcing Developmentand Integration Services

Gopinath GovindanVice-President,

HR Systems andCorporate Initiatives

Meenakshy IyerVice-President,

Reveleus Development

Makarand PadalkarChief of Staff andInvestor Relations

Avadhut (Vinay) KetkarChief Accounting Officer

A SrinivasanVice-President,

Latin America andCaribbean Sales

Cafó BogaChief Operating Officer,

i-flex solutions inc.

Dinesh ShettyVice-President,Administration

George ThomasVice-President,

Customer Fulfilment andSolutions Architecture

North America

Kishore KapoorCEO,

i-flex solutions pte.



Senior management team

Vikram GuptaVice-President,

PrimeSourcing e-solutions

Vivek GovilkarSr Vice-President,

Human Resources and Training

Nandu KulkarniSr Vice-President,

Retail Banking, Products

P PrasannavadananVice-President,

Customer FulfilmentAfrica and Middle East

Prabhakar RavooriVice-President,

Software Engineering andProcess Group

R RamamurthiVice-President,

Middle East Sales andPre-Sales Consulting

R NarasimhanVice-President,

Customer FulfilmentAsia Pacific, India, Middle East

S HariharanSr Vice-President,

Infrastructure Services

S SundararajanVice-President,

Universal Banking Products

Sajal MukherjeeCEO SuperSolutions Inc

and Vice-President,North America Sales

Swati SrinivasanVice-President,

Software Quality Assurance

V SrinivasanVice-President,

Corporate Development

V Senthil KumarCEO,

i-flex solutions b.v.

Venkata SubramanianVice-President,

Customer FulfilmentRetail Banking

Vijay SharmaSr Vice-President,

i-flex Consulting andSystem Integration

Thomas MathewVice-President,

Knowledge Management

S RamakrishnanCEO,

Reveleus

R MaheshVice-President,PrimeSourcing

Business Intelligence Group

Mohan BhatiaSr Principal Consultant,

i-flex consulting


Board of directors

Y M Kale Ajay Relan(Alternate Director to Mr. William T Comfort, Jr)

William T Comfort, JrTarjani Vakil

Joseph P Kennedy II Sam Bharucha




Company SecretaryDeepak Ghaisas

Chief Accounting OfficerAvadhut (Vinay) Ketkar

SolicitorsRamesh P. Makhija & Co.

AuditorsS. R. Batliboi & Associates

Internal AuditorsMukund M. Chitale & Co.

BankersBank of IndiaCitibank N.A.HDFC Bank Ltd.Kotak Mahindra Bank Ltd.State Bank of Mauritius Ltd.YES BANK Ltd.

Registrars and Transfer AgentsIntime Spectrum Registry LimitedC 13, Pannalal Silk Mills CompoundL.B.S. Marg, Bhandup (W)Mumbai 400 078

Registered Office10-11 SDF 1 SEEPZAndheri (E), Mumbai 400 096

Branch Officesi-flex Center, 399 Subhash RoadVile Parle (E), Mumbai 400 057

i-flex Park, Nirlon CompoundWestern Express HighwayGoregaon (E), Mumbai 400 063

Corporate Centre ‘A’Andheri Kurla RoadAndheri (E), Mumbai 400 059

2nd Floor, Marchon House,J.B. Nagar, Andheri-Kurla Road,Andheri (E)Mumbai 400 059

i-flex Park, C/o Embassy Business ParkC.V. Raman Nagar, Bangalore 560 075

i-flex center, 133, KundalahalliBrooke Fields, Millennium TowerBangalore 560 037

i-flex Centre of learningDoddenekundi Phase IIBrookefield, Bangalore 560 048

Pride Silicon Plaza, Next to ChatushringiSenapati Bapat Road, Pune 411 053

i-flex Centre, Block 9, Ambrosia - 1Bhavdhan Khurd, Tal. MulshiPune 411 021

143/1 Uttamar Gandhi SalaiNungambakam, Chennai 600 034

Millennium House, 12, Trubnaya StreetMoscow 103045, Russia

Subsidiary Office – Europei-flex solutions b.v.Strawinskylaan 12451077 XX AmsterdamWorld Trade CenterThe Netherlands

Branch Officesi-flex solutions b.v.Niederlassung DeutschlandMainzer Landstraße 49a60329 Frankfurt am MainGermany

i-flex solutions b.v.121, Meridian PlaceOff Marsh WallSouth QuayLondon E149FE

Subsidiary Office – Asia Pacifici-flex solutions pte ltd27 International Business Park# 04-05 Primefield Landmark BuildingSingapore 609 924

Branch Officei-flex solutions pte ltd6, 17th floor Fukoku Seimei Building2-2-2 Uchisaiwaicho, Chiyoda-kuTokyo 100 0011, Japan

i-flex solutions pte ltdLevel 10, Margaret StreetSydney, NSW 2000

Subsidiary Office – North Americai-flex America inc.99 Park Avenue Suite 1530New York, NY 10016

i-flex solutions inc.99 Park Avenue Suite 1530New York, NY 10016

SuperSolutions Corporation10340 Viking Drive, Suite 150Eden Prairie, MN 55344 - 7255

Branch Officesi-flex solutions inc.Reveleus Office510 Thornall Street, Suite 380Edison, NJ 08837

i-flex solutions inc.60 State Street, Suite 700Boston, MA 02109

i-flex solutions inc.5805 Blue Lagoon Drive, Suite 295Miami, Florida 33126

Subsidiary Office – MauritiusISP Internet Mauritius Company10, Frere Felix de Valois StreetPort Louis, Mauritius

Branch OfficesEquinox Corporation10, Corporate Park, Suite 130Irvine, CA 92606, USA

Equinox Global Services Pvt. Ltd.2nd Floor, Block ‘A’, First India PlaceSushant Lok Phase IGurgaon 122002Haryana, India

Middle East Representative Officei-flex solutions ltd.Office Suite G15, Bldg No.9P O Box 500053Dubai Internet CityDubai, UAE

Corporateinformationi-flex solutions ltd.


Directors’ reportFinancial year 2004-05

Dear Members,

The Directors take great pleasure in presenting their report on the business and operations of your Company along with the Annual Report and audited financial statements for the Financial Year 2004-05.

Financial highlights

As per Indian GAAP Unconsolidated Financial Statements(Thousands of Indian Rupees)

Year ended March 31, 2005


Revenues 9,028,604 6,844,609Income from Operations Before Depreciation 2,559,292 2,188,710Less: Depreciation 265,944 35,999Interest/Other Income (Expenses), etc. 177,759 101,232Profit Before Tax 2,471,107 2,253,943Less: Provision for Tax 494,706 495,076Net Profit After Tax 1,976,401 1,758,867Add: Balance brought forward 443,036 229,372Profit available for appropriation 2,419,437 1,988,239Transfer to general reserve 1,500,000 1,250,000Proposed dividend 374,398 261,644Corporate dividend tax 52,513 33,527Dividend paid on ESOP allotment 32 32Balance carried forward 492,494 443,036

As per Indian GAAP Consolidated Financial Statements (Thousands of Indian Rupees)

Year endedMarch 31, 2005


Revenues 11,385,928 7,881,289Income from Operations Before Depreciation

3,001,455 2,226,693

Less: Depreciation 309,347 50,688Interest/Other Income (Expenses), etc.

259,285 138,609

Profit Before Tax 2,951,394 2,314,614Less: Provision for Tax 627,063 526,758Net Profit After Tax 2,324,331 1,787,856

Performance

On an unconsolidated basis, revenues grew to Rs. 9,028.60 million this year from Rs. 6,844.61 million last year, a growth of 32%. The Earnings before tax, as per Indian GAAP Unconsolidated, stood at Rs. 2,471.10 million during the year from Rs. 2,253.94 million last year, translating into a growth of 10%. The Company’s earnings after tax increased to Rs. 1,976.40 million from Rs. 1,758.87 million – a growth of 12% on an unconsolidated basis.

Revenues as per Indian GAAP Consolidated reached Rs. 11,385.92 million this year, an increase of 44% as compared to Rs. 7,881.29 million in the last year. The Earnings before tax on a consolidated basis were Rs. 2,951.39 million this year as compared to Rs. 2,314.61 million in the last year, posting an increase of 28%. The Company’s earnings after tax increased to Rs. 2,324.33 million this year as compared to Rs. 1,787.86 million in the last year, an increase of 30%.

The Management Discussion and Analysis that forms part of the Annual Report provides a detailed analysis of the Company’s financials.

Dividend

Your Directors are pleased to recommend a dividend of Rs. 5.00 per share (100% on par value of Rs. 5/-). The dividend, if approved at the forthcoming Annual General Meeting, will be paid out of the profits of the Company to those shareholders whose names appear on the Register of Members as on the Record Date.

The total amount of dividend payable is Rs. 374.39 million this year against Rs. 261.64 million for the previous year. Under the current provisions of the Indian Income Tax Act, 1961, receipt of dividend is tax-free in the hands of the shareholders.

Share capital

As approved in the last Annual General Meeting, your Company has issued, on September 1, 2004, 91,347 options to IBM Global Services India Pvt. Ltd. (IBM), with an option to convert the same into equal number of equity shares of face value of Rs. 5/- each, within a period of 18 months from the date of issue. Your Company also allotted 139,500 equity shares to its employees who, during the year, exercised their options under the Employee Stock Option Plan. Consequently the paid-up equity share capital of the Company increased to 7,48,79,650 equity shares of face value of Rs. 5/- each on March 31, 2005.

Use of IPO proceeds

In June 2002, your Company completed its Initial Public Offer (IPO) in India and listed its shares on the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE). The utilization of the IPO proceeds is given below:

(Thousands of Indian Rupees)

IPO Proceeds 1,780,800Issue Expenses 103,074Net Proceeds 1,677,726Utilization as on March 31, 2005 For enhancing delivery infrastructure 737,276For increasing marketing presence 105,373Balance as on March 31, 2005 835,077

The balance amount is earmarked towards the development of the Company’s new facility at Goregaon, Mumbai, expected to be completed by December 2006.

Financial_Section_037_180.indd 37Financial_Section_037_180.indd 37 7/16/05 11:02:16 AM7/16/05 11:02:16 AM

Infrastructure

During the year, your Company made significant additions to its infrastructure to meet its growing business requirements. Your Company opened a new office in Mumbai with a capacity to house about 850 professionals; a new office in Bangalore with 1,000 seats; and expanded the Pune office to house 300 additional professionals. In addition, your Company commenced the construction of what will be a landmark building at its plot in Goregaon, Mumbai. This office when completed will have a capacity for 3,000 professionals.

During the year, your Company expanded its sales and marketing network. Your Company opened new offices in Moscow, Shanghai and Sydney.

Quality certifications

Your Company has always been at the forefront of implementing the international quality practices and regularly benchmarks these against globally accepted standards.

Your Company’s PrimeSourcing Division was assessed at the SEI CMMI Level 5, the highest possible level for the software development processes under the Capability Maturity Model of The Software Engineering Institute, USA. Your Company completed the BS7799 certification, the most widely accepted British information security governance standard, for its development center in SEEPZ, Mumbai. Your Company also received the Type II SAS 70 audit certification, an internationally accepted standard developed by the American Institute of Certified Public Accountants (AICPA), for the internal controls that are defined and implemented at service organizations.

During the year, the Company was awarded the prestigious Ramakrishna Bajaj National Quality award for 2004 in the Services Category. Modeled on the Malcolm Baldrige National Quality Award, USA, it is awarded to companies that demonstrate outstanding customer orientation and quality management systems.

Acquisitions and alliances

Your Company, as part of its build-buy-ally strategy for expanding and strengthening its solutions portfolio, entered into strategic alliances and made several acquisitions during the year.

In December 2004, your Company acquired a 100% stake in ISP Internet Mauritius Company which owns Equinox, a specialized services provider to U.S.-based lenders in the real estate mortgage finance industry, auto finance and credit cards. Employing its proprietary products, Equinox helps its clients in customer retention and enhances the efficacy of marketing dollars spent on acquiring new customers. It also provides services across the mortgage finance value chain, including processing loan applications. Equinox has an experienced management team and has developed intellectual property and products. It has about 500 employees, most of whom are based in Gurgaon, near New Delhi, in India.

Your Company also took a 33% stake in Login SA, France, a specialized supplier of the Treasury front-end software product, Acumen. In addition, the Company acquired the IPRs for a

workflow management software and a CRM software, which would be offered to customers of your Company after integrating these with its flagship product, FLEXCUBE.

On the alliance front, your Company strengthened its solutions offering by entering into a strategic alliance with the following:

• SunTec Corporation, a specialized supplier of an enterprise-billing product

• Fundtech Corporation, a global leader for interbank payments solutions that are positioned for top-tier global banks in the world

• BNX Systems, a specialty supplier of identity and access management software

• Computerland SA, for the sale and implementation of FLEXCUBE in 16 countries in Eastern Europe

• DMR Consulting for FLEXCUBE implementation services in Spain, Venezuela and Chile

These acquisitions/alliances help i-flex broaden its portfolio and enhance its ability to offer end-to-end solutions to its customers.

Subsidiaries

As you are aware, your Company has subsidiaries in the USA, Singapore and The Netherlands to lead the marketing and sales efforts in the North American, Asia Pacific and European markets, and to ensure deeper penetration in these regions. These subsidiaries have contributed significantly to i-flex’s business. New offices or branches have been opened in Russia, China and Australia. The operating subsidiaries of SuperSolutions and ISP Internet have also shown good potential for growth.

Awards, honors and recognition

Your Company has received numerous awards and accolades during the year for its market leadership. Some of them are listed below:

• The Global Entrepolis@ Singapore Award 2004 by the Government of Singapore. From a field of 84 firms in various industries across Asia, i-flex was selected for its innovation: FLEXCUBE.

• The Order Bernardo O’Higgins, Great Official, to Rajesh Hukku, Chairman and Managing Director, i-flex solutions, on behalf of the President of Chile. The award was given to i-flex for bringing state-of-the-art banking software to the Chilean financial services sector.

• i-flex named as: • One of the 100 best companies under a billion in the

Asia-Pacific region, ranking by Forbes Global.• One of the Best Small Companies in Euromoney’s Best

Asian Companies poll.• One of the Ten Technology Companies to Watch,

by Bank Technology News and BusinessWeek International.



• One of Red Herring’s Top 100 Innovative Companies, USA.

• #1 Specialty Application Developer, by neoIT and Managing Offshore, leading outsourcing advisors.

• For the third consecutive year, FLEXCUBE was ranked the world’s top-selling core banking solution by International Banking Systems, UK, in its annual Sales League Table for 2004.

• The Golden Peacock Innovation Award to FLEXCUBE

in the finance solutions category. This award recognizes new and innovative ideas, products, services, inventions, processes, financial techniques and business structures.

• The “Brand Equity Award” presented by the PHD Chamber of Commerce and Industry for creating a highly successful global brand, FLEXCUBE.

• Reveleus, a finalist in the Analytic Application Category for DM Review’s World Class Solution Award, 2004, DM Review, USA, one of the world’s most respected data warehousing and business intelligence publications.

• The IMC Ramakrishna Bajaj National Quality Award for 2004 in the Services Category for outstanding customer orientation and quality management systems.

• The Maharashtra IT Award, from the Government of Maharashtra, given to innovative Information Technology (IT) and IT Enabled Services (ITES) companies from the state.

• The ‘Excellence in Export’ award from the Department of Industries and Commerce, State of Karnataka, India.

Litigation

There are no litigations pending against the Company.

Corporate governance

In line with the recommendations of the Securities and Exchange Board of India (SEBI) on Corporate Governance, your Company has constituted three separate committees for Audit, Compensation and Protection of Shareholder’s interest. Your Company has also taken steps to comply with the requirements of Clause 49 of the listing agreement and Section 292A of the Companies Act, 1956, regarding Corporate Governance. A separate report on Corporate Governance, along with a certificate of Statutory Auditors of the Company, is annexed herewith.

A list of the committees of the Board and names of their members is given below. The scope of each of these committees and other related information is detailed in the enclosed Corporate Governance Report.

Audit Committee

Mr. Y M Kale (Chairman)Mr. William T. Comfort, Jr.Ms. Tarjani Vakil

Compensation Committee

Mr. William T. Comfort Jr. (Chairman)Mr. Joseph P. Kennedy II Mr. Y M Kale

Shareholders’ Grievances Committee

Ms. Tarjani Vakil (Chairperson)Mr. Deepak Ghaisas

Allotment of ESOP shares

The shareholders of the Company had approved the Employees Stock Option Scheme (ESOP) of the Company in its Annual General Meeting of 2001. According to the said scheme, the Company has granted shares to eligible employees from time to time. The details are given below:

Total number of Options granted2001-02 4,548,9202002-03 80,0002003-04 36,0002004-05 60,000Total 4,724,920

Pricing formulaAt the fair market value

as on the date of grantOptions vested 2,173,082Options exercised during 2004-05 139,500Total number of shares arising as a result of exercise of options during 2004-05 139,500Options lapsed 2001-02 – 2002-03 129,520 2003-04 112,500 2004-05 82,200Total 344,220Variation of terms of options NoneMoney realized by exercise of options (Rs.) 36,967,500Total number of options in force 4,151,850

Employee-wise details of options granted during 2004-05

Number of Options

i) Director – Ms. Tarjani Vakil 10,000ii) Other employee who receives grant in any

one year of option amounting to 5% or more of option granted during that year – Mr. Olivier Trancart 50,000

iii) Identified employees who were granted options, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant Nil

iv) Diluted Earnings Per Share (EPS) pursuant to the issue of shares on exercise of option calculated in accordance with accounting standard 20 ‘Earnings Per Share’ issued by the Institute of Chartered Accountants of India Rs. 25.64


Had compensation cost for the Company’s ESOP been determined based on the fair value at the grant dates, Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

March 31, 2005Rs.

Net income:As reported 1,976,401Less: stock based compensation expense determined under the fair value method

16,814

Pro forma 1,959,587Basic earning per share:As reported 26.43Pro forma 26.20Diluted earning per share:As reported 26.40Pro forma 25.40

The fair value of the options granted under the ESOP was estimated on the date of the grant using the Black-Scholes model with the following assumptions:

March 31, 2005Dividend yield 0.47 %Expected volatility 64.81 %Risk-free interest rates 8.49 %Expected life 6.21 yearsMarket price (NSE)August 18, 2004 – Rs. 559.60November 15, 2004 – Rs. 554.25

Options issued at market price

• Number of options – 96,000• Weighted average exercise price – Rs. 539.91• Weighted average fair value – Rs. 290.27

Directors’ responsibility statement

As required under Section 217 of the Companies Act, the Directors hereby confirm that:

i) In preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

ii) The Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period;

iii) The Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

iv) The Directors have prepared the annual accounts on a ‘going concern’ basis.

Directors

Mr. William T. Comfort Jr. and Mr. Y M Kale retire by rotation at the ensuing Annual General Meeting, and being eligible, offer themselves for re-appointment.

The term of appointment of Mr. Rajesh Hukku, Managing Director of the Company expires on August 8, 2005. The Board of Directors of the Company have re-appointed Mr. Hukku as Managing Director of the Company for a further period of five years with effect from August 9, 2005 on the terms and conditions mentioned in Resolution No 7 of the notice.

Mr. S. P. Bharucha, whose term as an Additional Director concludes at this Annual General Meeting, and being eligible, offers himself for appointment as a Director liable to retire by rotation.

The Directors recommend to the shareholders the resolutions for re-appointment of Mr. William T. Comfort Jr., Mr. Y M Kale and Mr. Rajesh Hukku, and the appointment of Mr. Bharucha.

Senior management promotions/appointments

During the year, Mr. N R K Raman was promoted as the Chief Operating Officer, India Operations of the Company, and was nominated to the Executive Management Office of the Company. Mr. V Shankar and Mr. Joseph John were promoted as the Executive Vice Presidents of the Company. Mr. Shankar heads the PrimeSourcing Division of the Company and Mr. John heads the Universal Banking Products Division.

Mr. Olivier Trancart joined the Company as Executive Vice President in charge of global sales.

Auditors

M/s S. R. Batliboi & Associates, the present Statutory Auditors of the Company, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office, if re-appointed.

Conservation of energy, technology absorption and foreign exchange earnings and outgo

The particulars as prescribed under sub-section (1)(e) of Section 217 of the Companies Act, 1956 read with Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988, the relevant data pertaining to conservation of energy, technology absorption on foreign exchange earnings and outgo are furnished hereunder:

(A) Conservation of Energy:

The operations of the Company are not energy-intensive. However, measures have been taken to reduce energy consumption by using energy efficient computers and by the purchase of energy efficient equipment with the latest technologies. The expense on power in relation to income is nominal and under control.



(B) Technology Absorption

Since businesses and technologies are changing constantly, investment in research and development activities is of paramount importance. Your Company continued its focus on quality up-gradation of software development process and software product enhancements. It has helped maintain margins despite changes in technology.

(C) Foreign Exchange Earnings and Outgo:

(Rs. millions)

Foreign Exchange Earnings* 8,794.24Foreign Exchange Outgo 3,077.37(Including capital goods & other expenditure)

*After excluding reimbursement of traveling expenses and interest income

Prospects

The global financial services industry, which is your Company’s area of focus, regards IT as a key enabler. These institutions are increasingly becoming discerning and are looking for complete solutions that help them expand their business and increase cost effectiveness. A increasingly regulated business environment (BASEL II, Anti-Money-Laundering regulations, Sarbanes Oxley, etc.), is also increasing investments in technology.

Your Company has continued to build a vast portfolio of products and services that address almost every need of financial institutions. With the launch of FLEXCUBE for core banking, your Company is well positioned to tap the growing demand for legacy system replacement. Your Company’s investments in BASEL II solutions, and other alliances in the domain of risk management, make it a very strong player in the risk management and compliance space. Combined with its services business, PrimeSourcing, the Company is well poised to address exciting opportunities in this area.

Employee particulars

Information pursuant to Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 and under Section 217 (1)(e) of the said Act, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, to the extent applicable are set out in the Annexure hereto.

Acknowledgements

Your Directors take this opportunity to thank the Company’s customers, shareholders, vendors, auditors and bankers for their continued support during the year. Your Directors also wish to thank the Government of India and its various agencies, Department of Electronics, the Software Technology Parks at Bangalore, Mumbai, Chennai and Pune, the Santacruz Export Processing Zone, the Customs and Excise department, the Ministry of Commerce, the Ministry of Finance, the Department of Telecommunication, the Reserve Bank of India, the state governments of Maharashtra, Karnataka and Tamil Nadu, and other local government bodies for their support, and look forward to their continued support in the future.

Your Directors’ also place on record their appreciation for the excellent contribution made by all employees of i-flex through their commitment, competence, co-operation and diligence to duty in achieving consistent growth.

For and on behalf of the Board,


MumbaiJune 14, 2005


The detailed report on Corporate Governance for the financial year April 1, 2004 to March 31, 2005, as per the format prescribed by SEBI and incorporated in Clause 49 of the Listing Agreement, is set out below:

1. Company’s philosophy on code of governance

The Company believes in adopting and adhering to all the globally recognized corporate governance practices and continuously benchmarking itself against each such practice. The Company understands and respects its fiduciary role and

Corporate governance report

responsibility to the shareholders and strives hard to meet their expectations.

2. Board of Directors

2.1 Composition and category

The Company has five Directors including the Chairman. Of these, three Directors are independent Directors. The Chairman of the Board is an Executive Chairman and is also the Managing Director of the Company. The Company also has one Alternate Director.

The composition of the Board of the Company as of March 31, 2005 is given below:

Name Designation CategoryMr. Rajesh Hukku Chairman and Managing Director Executive, Non-Independent DirectorMr. William Twyman Comfort, Jr. Director Non-Executive, Non-Independent DirectorMr. Y M Kale Director Non-Executive, Independent DirectorMr. Joseph P. Kennedy II Director Non-Executive, Independent DirectorMs. Tarjani Vakil* Director Non-Executive, Independent DirectorMr. Ajay Relan Alternate Director to Mr. William

Twyman Comfort, Jr.Non-Executive, Non-Independent Director

* Ms. Tarjani Vakil was appointed as an Additional Director of the Company on May 26, 2004 and was appointed as a Director in the Annual General Meeting of August 19, 2004.

2.2 Attendance of each Director at the Board Meetings and the last Annual General Meeting

The Company holds regular Board Meetings. The detailed agenda along with the explanatory notes is circulated in advance. The Directors can suggest inclusion of any item(s) in the agenda at the Board Meeting.

During the Financial Year 2004-2005, 9 Board Meetings were held on the following dates:

May 25, 2004, May 26, 2004, July 30, 2004, August 18, 2004, September 1, 2004, October 29, 2004, November 15, 2004, January 28, 2005 and February 11, 2005.

The attendance of the Directors at the Board meetings and the Annual General Meeting held during the year 2004-2005 was as follows:

Name of the Director Number of board meetings held

Number of board meetings attended

Last AGM Attended

In personOn phone/ video

conferenceMr. Rajesh Hukku 9 6 3 YesMr. William Twyman Comfort, Jr. 9 5 2 YesMr. Y M Kale 9 9 – YesMr. Joseph P. Kennedy II 9 5 4 YesMs. Tarjani Vakil* 7 7 – Yes




2.3 The details of the directorships of the Company’s Directors in other companies as on March 31, 2005 are given below:

Name of Director Other Directorships held as on March 31, 2005Mr. Rajesh Hukku i-flex solutions inc.

i-flex America inc. i-flex Processing Services Ltd.

Mr. William Twyman Comfort, Jr. 399 Venture Partners Inc.Citigroup Venture Capital Ltd.Court Square Capital Ltd.Flender AG

Mr. Y M Kale Hutchison Max Telecom Ltd.IndusInd Telecom Network Ltd.Ashok Leyland Ltd. (Alternate Director)Ennore Foundries Ltd. (Alternate Director)

Mr. Joseph P. Kennedy II Citizens Energy Corporation Provide Commerce

Ms. Tarjani Vakil * Asian Paints India Ltd.Indian Rayon & Industries Ltd.Mahindra Intertrade Ltd.D S P Merrill Lynch Trustee Co. Pvt. Ltd.Alkyl Amines and Chemicals Ltd.

Mr. Ajay Relan ** Citicorp Finance (India) LimitedOrbitech LimitedMicro Abrasives LimitedMonnet Ispat LimitedYes Bank LimitedSuzlon Energy LimitedJubilant Organosys LimitedHT Media Limited

* Ms. Tarjani Vakil was appointed as an Additional Director of the Company on May 26, 2004 and was appointed as a Director in the Annual General Meeting of August 19, 2004. ** Mr. Ajay Relan is Alternate Director to Mr. William Twyman Comfort, Jr.

2.4 Details of memberships of Board Committees

None of the Directors of the Company hold memberships of more than ten Committees nor is any Director a Chairperson of more than five Committees of the Board of all the companies where he/she holds Directorships. For this purpose, ‘Committees’ comprise Audit Committee, Compensation Committee and Shareholders’ Grievances Committee. The details of the memberships of the Directors in the abovementioned committees as on March 31, 2005 are given below:

Name of Director CommitteesMembership Chairpersonship

Mr. Rajesh Hukku Nil NilMr. William Twyman Comfort Jr. 4 3Mr. Y M Kale 2 2Mr. Joseph P. Kennedy, II 3 1Ms. Tarjani Vakil * 6 4Mr. Ajay Relan** 8 –

* Ms. Tarjani Vakil was appointed as an Additional Director of the Company on May 26, 2004 and was appointed as a Director in the Annual General Meeting of August 19, 2004.** Alternate Director to Mr. William Twyman Comfort Jr.

2.5 Brief resume of Director who will be retiring by rotation at the ensuing Annual General Meeting of the Company

Mr. William T. Comfort Jr.

Mr. William Twyman Comfort Jr. is the Chairman of Citigroup Venture Capital Limited. He received his B.A. and LL.B. at the University of Oklahoma and his LL.M. at New York University Law School.

Mr. Comfort is a Trustee of the New York University Law Center Foundation and of the John A. Hartford Foundation, Inc., and was an adjunct professor at the Columbia Business School.

Mr. Comfort has been a member of the Board of Directors of the Company since February 27, 1998. He is the Chairman of the Compensation Committee.

Mr. Y M Kale

Mr. Y M Kale was President of the Institute of Chartered Accountants of India in the year 1995-96 and is also a Fellow member of the Institute of Chartered Accountants of England


and Wales. He has contributed to various governmental and regulatory bodies such as committees of Securities & Exchange Board of India including Committee of Offer Documents, Committee of Takeovers and Committee on Accounting for Corporates, and participated as a member of the Group for Introduction of Concurrent Audit of Banks, organized by the Reserve Bank of India and was also member of the National Drugs and Pharmaceutical Development Council of Central Government. Mr. Kale was also on the Board of the International Accounting Standards Committee from 1995 to 1998 as India representative. He is also a Director on the Board of various Public companies.

Mr. Kale is a member of the Board of Directors of the Company since June 25, 2001. He is the Chairman of the Audit Committee and is a member of the Compensation Committee of the Company.

2.6 Brief resume of new Director who is proposed to be appointed at the ensuing Annual General Meeting of the Company

Mr. S P Bharucha

Born on May 6, 1937, Mr. Bharucha, started his carrier as an advocate in 1960 in Bombay High Court and then to Supreme Court of India. He was appointed as an Additional Judge of Bombay High Court in 1977 and was appointed as Chief Justice of Karnataka High Court in 1991. On July 1, 1992 he was appointed as Judge of Supreme Court of India.

During his tenure in the Supreme Court, Mr. Bharucha established reputation for independence and has delivered landmark judgements. After retirement he has his Chamber in Mumbai.

2.7 Brief resume of a director who is proposed to be re-appointed at the ensuing Annual General Meeting of the Company

Mr. Rajesh Hukku

Rajesh Hukku is Chairman and Managing Director of i-flex solutions.

Since taking on the role of Chief Executive Officer in 1992, Rajesh Hukku has led the transformation of i-flex solutions, from a player primarily in the emerging markets, into India’s first global software product company. Today, with revenues of over USD 260 million and more than 540 customers in over 110 countries, i-flex solutions is one of India’s Top 10 software companies, and the only one to have placed itself on the global map with a ‘Made in India’ brand.

Rajesh Hukku has served on the NASSCOM (National Association of Software and Service Companies, India) Executive Committee, and championed India Inc.’s brand expansion into new geographies and service lines. Recognized as a visionary entrepreneur, Rajesh Hukku has spoken at the World Economic Forum Summit, the Asia-Pacific Leadership Summit, Harvard Business School and various banking forums including the World Congress of Bankers in Jamaica and the Latin American Business Convention.

For his role in scripting India’s first global software product success story, Rajesh Hukku was conferred the prestigious

Ernst & Young ‘Entrepreneur of the Year Award 2002’ in the Information Technology, Communications and Entertainment category. Rajesh Hukku is the recipient of the Government of India’s most prestigious IT award - ‘The Dewang Mehta award for innovation in IT’. He also received the 2004 Global Entrepolis Award, an honour bestowed on Asia’s emerging technopreneur. More recently, for his contribution to IT transformation in Chile, he was conferred the ‘Order Bernardo O Higgins – Great Official’ - the highest civilian honor conferred on a foreign national by the Chilean Government.

Rajesh Hukku has been profiled in several publications, prominent among them – TIME Magazine’s feature on ‘Technology Gurus who survived the global meltdown’ and Business Week’s Star of Asia-2003. i-flex’s unique business model and Rajesh Hukku’s vision for the financial services industry has featured in the Economist, the Wall Street Journal and the Far Eastern Economic Review.

Rajesh Hukku completed his BE (Hons) in Electrical and Electronics Engineering from the Birla Institute of Technology and Science, India and undertook Post Graduate Research at the University of Maryland, USA.

3. Audit Committee

3.1 Primary objectives and powers of the Audit Committee

The primary objective of Audit Committee is to monitor and provide effective supervision of the management’s financial reporting process with a view to ensure accurate, timely and proper disclosures and transparency, integrity and quality of financial reporting.

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

3.2 Broad terms of reference

The terms of reference of the Audit Committee are as follows:

1. Oversight of the Company’s financial reporting process and the disclosure of its financial information to ensure that the financial statements are correct, sufficient and credible.

2. Recommending to the Board, the appointment, re-appointment and if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.

4. Reviewing, with the management, the quarterly and annual financial statements before submission to the Board for approval, with particular reference to:

a. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s



report in terms of clause (2AA) of section 217 of the Companies Act, 1956

b. Changes, if any, in accounting policies and practices and reasons for the same

c. Major accounting entries involving estimates based on the exercise of judgment by management

d. Significant adjustments made in the financial statements arising out of audit findings

e. Compliance with listing and other legal requirements relating to financial statements

f. Disclosure of any related party transactions

g. Qualifications in the draft audit report

h. Compliance with accounting standards in the preparation of the quarterly and annual financial statements

5. Reviewing, with the Management the quarterly financial statements before submission to the Board for approval.

6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.

8. Discussion with internal auditors any significant findings and follow up there on.

9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

12. To review the functioning of the Whistle Blower mechanism, in case the same is existing.

13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

Explanation: The term “related party transactions” should have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India.

3.3 Composition of the Committee

The Composition of Audit Committee as on March 31, 2005 was as follows:

Mr. Y M Kale Chairman, Non-Executive, Independent Director

Ms. Tarjani Vakil* Member, Non-Executive, Independent Director

Mr. William Twyman Comfort, Jr.

Member, Non-Executive, Non-Independent Director

* Ms. Tarjani Vakil was appointed as an Additional Director of the Company on May 26, 2004 and was appointed as a Director in the Annual General Meeting of August 19, 2004. She was appointed as a member of the Audit Committee on May 26, 2004.

3.4 Meetings and attendance

The Audit Committee held four meetings during the Financial Year 2004-2005.

The member’s attendance at the Committee Meetings was as under:

Name of Director/Member Number of meetings attended

In person On phoneMr. Y M Kale 4 –Ms. Tarjani Vakil* 3 –Mr. William Twyman Comfort, Jr. – 1


3.5 Audit Committee’s recommendations

The Committee reviewed the financial results of the Company prepared in accordance with Indian GAAP (including consolidated results) and US GAAP as at and for the periods ended June 30, 2004, September 30, 2004, December 31, 2004 and March 31, 2005 and recommended the same to the Board of Directors for their adoption.

The Committee also recommended to the Board of Directors the re-appointment of M/s S. R. Batliboi & Associates, Chartered Accountants, as statutory auditors of the Company from conclusion of 2004 Annual General Meeting to the forthcoming Annual General Meeting.

The Committee also reviewed Internal Auditors’ reports, Income tax related matters, utilization of IPO proceeds, Risk management policies, the steps taken by the Company towards consolidation of accounts of its subsidiaries etc. from time to time.

Internal Auditors and Statutory Auditors of the Company participated in the Audit Committee meetings as necessary.


4. Remuneration (Compensation) Committee

4.1 Brief description of terms of reference

The scope of this committee is to determine the compensation of Executive Management Office (EMO) comprising Mr. Rajesh Hukku, Chairman and Managing Director; Mr. R Ravisankar, Chief Executive Officer – International Operations and Technology and Mr. Deepak Ghaisas, Chief Executive Officer – India Operations and Company Secretary and N R K Raman, Chief Operating Officer – India Operations. The EMO in turn, decides the compensation of key managerial personnel and other employees. The Compensation Committee also approves, allocates and administers the Employee Stock Option Plan 2002, reviews performance appraisal criteria and sets norms for ESOP allocation.

4.2 The Composition of Remuneration (Compensation) Committee as on March 31, 2005 was as follows:

Mr. William Twyman Comfort, Jr.

Chairman, Non-Executive, Non-Independent Director

Mr. Y M Kale Member, Non-Executive,Independent Director

Mr. Joseph P. Kennedy II Member, Non-Executive,Independent Director

4.3 Meeting & attendance

This Committee met four times during the year and the meetings were attended by all the members.

4.4 Remuneration policy

The Committee has the mandate to review and recommend compensation payable to the Executive Directors and Senior Executives of the Company. It also sets norms for ESOP allocation.

4.5 Details of remuneration paid to the Directors during financial year 2004-2005

Name of Director ESOPs granted under Employee

Stock Option Plan (ESOP)

Commission paid to Non-executive

Directors(Rs.)

Salary(Rs.)

Contribution to PF (Rs.)

Total Amount paid (Rs.) during

financial year 2004-2005

Mr. Rajesh Hukku ** Nil – 330,000 23,760 353,760Mr. William Twyman Comfort Jr. Nil – – – –Mr. Y M Kale Nil 1,000,000 – – 1,000,000Mr. Joseph P. Kennedy II Nil 11,261,430 – – 11,261,430Ms. Tarjani Vakil * 10,000 508,767 – – 508,767Mr. Ajay Relan(Alternate Director )

Nil – – – –

Total 10,000 12,770,197 330,000 23,760 13,123,957 * Ms. Tarjani Vakil was appointed as an Additional Director of the Company on May 26, 2004 and was appointed as a Director in the Annual

General Meeting of August 19, 2004.** In addition to the above, Mr. Rajesh Hukku received fixed and performance based variable remmuneration of USD 842,836 from i-flex solutions

inc., USA for the duties performed for i-flex solutions inc. for the financial year 2004-05.*** There were no sitting fees and/or perquisites applicable and paid to the Directors during the financial year 2004-2005 except as stated above.**** There are no severance fees payable to any Director and/or there is no notice period.

The terms of Employee Stock Purchase Scheme grants made to the Directors are given below.

Name of Director Scheme # of offered shares outstanding as at March 31, 2005

Offered shares exercised during the

year

Grant price (Rs.) Expiry Date

Rajesh Hukku ESPS 1998 132,724 147,540 25.00 December 31, 2008Rajesh Hukku ESPS 2000 134,400 Nil 112.50 December 31, 2010

The above shares were offered at Fair Market Value on the date of the grant. The director becomes entitled to purchase the shares in a phased manner over a period of 5 years from the date of grant based on continued employment/directorship with the Company.



The terms of Employee Stock Options granted to the Directors are given below:

Name of Director # of options outstanding as on March 31, 2005

Options exercised during the year

Grant price (Rs.) Expiry Date

Rajesh Hukku 409,400 Nil 265.00 March 3, 2012Joseph P. Kennedy II 660,000 Nil 265.00 March 3, 2012Y M Kale 8,000 Nil 418.92 February 17, 2013Tarjani Vakil * *(Granted during the year)

10,000 Nil 559.60 August 17, 2014

The above options were issued at Fair Market Value on the date of the grant. Options granted vest over a period of 5 years from the date of grant and is subject to the continued employment/directorship with the Company.

5. Shareholders’ Grievances Committee

5.1 Composition of the Committee

The composition of Shareholders’ Grievances Committee as on March 31, 2005 was as follows:

Ms. Tarjani Vakil * Chairperson, Non-Executive, Independent Director

Mr. Deepak Ghaisas Chief Executive Officer – India Operations and Company Secretary

* Ms. Tarjani Vakil has been appointed as the Chairperson of the Shareholders’ Grievances Committee on May 26, 2004.

5.2 Scope of Shareholders’ Grievances Committee’s activities

The scope of the Shareholders’ Grievances Committee is to review and address the grievances of the shareholders in respect of share transfers, transmission, dematerialization and remateralisation of shares and other share related activities.

The committee held 4 meetings during the year, which were attended by both the members of the Committee.

5.3 Company Secretary

Name of Company Secretary Mr. Deepak GhaisasAddress i-flex solutions ltd.

i-flex Center399, Subhash RoadVile Parle (East)Mumbai 400 057

Contact Telephone +91-22-5668 5000Fax +91-22-2832 3374

5.4 Compliance Officer

Name of Compliance Officer

Mr. Avadhut (Vinay) Ketkar

Address i-flex solutions ltd.i-flex Center399, Subhash RoadVile Parle (East)Mumbai 400 057

Contact Telephone + 91-22-5668 5000Fax + 91-22-2832 3374e-mail [email protected]

5.5 Details of shareholders’ complaints received, resolved during the year 2004-2005 and pending share transfers as on March 31, 2005.

Nature of Complaints Opening Balance Received Cleared PendingNon-receipt of refund order 1 – 1 –Non-receipt of dividend warrant 2 30 32 –Non-receipt of demat credit (IPO) – 1 1 –Non-receipt of share certificate – 15 15 –Non-receipt of demat credit/rej. – 19 19 –SEBI/stock exchange/DCA queries – 3 3 –Legal queries – 2 2 –Others 4 15 19 –

No. of pending share transfers as on March 31, 2005 – Nil


6. General Body Meetings

6.1 Location, date and time where last three Annual General Meetings were held

Financial Year Venue Date Time2003-2004 The Leela, Near Sahar Airport, Andheri (East), Mumbai 400 059 August 19, 2004 3.00 p.m.

2002-2003 The Leela, Near Sahar Airport, Andheri (East), Mumbai 400 059 July 31, 2003 3.00 p.m.

2001-2002 ITC Grand Maratha Sheraton, Near Sahar Airport, Andheri (East), Mumbai 400 059

September 6, 2002 3.00 p.m.

7. Disclosures

a. All the relevant information in respect of materially significant related party transactions, i.e., transactions of the Company of material nature with its Promoters, Directors or Management, or their relatives or subsidiaries of the Company, etc. having potential conflict with the interest of the Company at large has been given in the Annual Report.

b. The Company has complied with statutory compliances and no penalty or stricture is imposed on the Company by the Stock Exchanges or Securities Exchange Board of India (SEBI) or any other statutory authority on any matter related to the capital markets during the last three years.

8. Means of communication

8.1 The quarterly and half yearly results were published in English and Marathi News Papers.

8.2 The Company organized investor conference calls to discuss its financial results every quarter where the investor queries were answered by the Executive Management of the Company.

8.3 The Company’s Audited & Un-audited periodic financial results, Press Releases and transcripts of investor conference calls are posted on the Company’s website www.iflexsolutions. com.

8.4 Detailed Management Discussion and Analysis Reports covering Indian GAAP and US GAAP financials have been included in this Annual Report.

8.5 The Company has also posted information relating to its financial results and Distribution of shareholding on quarterly basis on Electronic Data Information Filing and Retrieval System (EDIFAR) http://sebiedifar.nic.in as required by The Stock Exchange, Mumbai.

9. General shareholder information

Annual General Meeting Date August 12, 2005Time 3.00 p.m.Venue Intercontinental The Grand,

Sahar Airport Road, Mumbai 400 059Financial Year April 1 to March 31Date of Book Closure August 8, 2005 to August 12, 2005 (both days inclusive)Dividend Payment Date August 19, 2005Listing on Stock Exchanges at The Stock Exchange, Mumbai (BSE) and

National Stock Exchange of India Ltd. (NSE)

Stock CodeThe Stock Exchange, Mumbai (BSE) 532466National Stock Exchange of India Ltd. (NSE) I-FLEX



10. Market price data

Monthly high/low of the shares of the Company from April 1, 2004 to March 31, 2005 are given below:

BSE NSE

Month and Year High (Rs.) Low (Rs.) Volume ofShares

High (Rs.) Low (Rs.) Volume ofShares

April 2004 620.00 519.00 4,97,041 627.00 503.40 20,31,194May 2004 572.90 380.00 13,09,491 573.00 340.00 38,37,166June 2004 598.00 523.15 5,02,923 596.00 525.00 18,69,842July 2004 587.00 510.00 3,82,768 615.15 505.85 11,62,069August 2004 628.90 520.05 5,14,058 590.95 519.20 18,81,045September 2004 668.50 584.50 17,44,858 669.65 519.90 15,23,739October 2004 669.00 584.00 4,43,625 670.00 520.00 15,51,029November 2004 588.95 525.00 13,97,306 595.00 521.35 38,30,298December 2004 675.00 573.10 13,99,592 656.00 573.50 44,88,698January 2005 685.00 578.00 8,72,227 682.00 576.05 26,05,886February 2005 651.80 598.25 4,96,700 650.00 505.25 19,21,616March 2005 646.00 574.00 7,36,562 648.00 571.10 17,36,259

Relative movement chart

The chart below gives the relative movement of the closing price of the Company’s share and BSE Sensex relative to the closing price. The period covered is June 28, 2002 to June 14, 2005.

The share price has been adjusted for the bonus issue made on September 11, 2003.


11. Registrars and transfer agent

Name Intime Spectrum Registry Limited

Address C-13, Pannalal Silk Mills Compound L. B. S. Marg Bhandup (West) Mumbai 400 078Telephone No. +91-22- 5555 5454Fax No. +91-22- 5555 5353e-mail: [email protected]

Branch 203 Dawer House,197/199 D. N. Road, FortMumbai 400 001Telephone No. +91-22- 2269 4127

12. Share transfer system

The Registrar and Transfer Agent (“the Registrar”) on receipt of transfer deed with respective share certificate(s) scrutinize the same and verify signature(s) of transferor(s) on the transfer deed with specimen signature(s) registered with the Company.

A list of such transfers is prepared and checked thoroughly and a transfer register is prepared. The transfer register is placed before the Transfer Committee Meeting for approval.

To expedite the process of transfer of shares, the Board has delegated the power of approval of transfer of shares to a Transfer Committee. Mr. Nihar Mody ceased to be a Director and member of the Transfer Committee on April 1, 2004. Consequently the Transfer Committee was reconstituted and on May 26, 2004 Ms. Tarjani Vakil, Director was appointed as Chairperson of the Committee. Transfer Committee of the Company comprises of Ms. Tarjani Vakil, Director and Mr. Deepak Ghaisas, Company Secretary.

On approval by the Transfer Committee, the Register of Members is updated. The transfer endorsement stickers are printed through the system and affixed on reverse of respective share certificates, which are signed by the officials of the Company. The certificates then are dispatched to transferees by registered post/courier.

During the last financial year, 2,400 equity shares were transferred in physical mode.

13. Distribution of shareholding as on March 31, 2005

Distribution schedule as on March 31, 2005Equity shares of face value of Rs. 5/- Each

Shares of nominal value of Number of % Share amount %Rs. Shareholders Rs.

UPTO 2,500 16,220 85.69 53,41,500 1.422,501 – 5,000 573 3.02 22,58,965 0.605,001 – 10,000 506 2.67 38,78,030 1.0310,001 – 20,000 443 2.34 68,84,290 1.8420,001 – 30,000 193 1.02 49,48,720 1.3230,001 – 40,000 201 1.07 71,51,475 1.9140,001 – 50,000 103 0.54 47,41,795 1.2750,001 – 1,00,000 328 1.74 2,31,43,425 6.191,00,001 & ABOVE 362 1.92 31,60,50,050 84.42Total 18,929 100.00 37,43,98,250 100.00

14. Shareholding per category

As on March 31, 2005 Category Number of Shares %

Promoters 3,22,36,000 43.05Mutual funds and UTI 25,05,691 3.34Banks, Financial Institutions, Insurance Companies 6,26,467 0.84Foreign Institutional Investors 1,08,53,388 14.50Private Corporate Bodies 5,43,378 0.73Indian Public 2,16,12,041 28.86Non Resident Indians/Overseas Corporate Bodies 60,18,385 8.04Any other – Foreign Company 4,84,300 0.64Total 7,48,79,650 100.00

During the financial year 2004-2005, the Company issued and allotted 1,39,500 equity shares to its employees/Directors who exercised their ESOPs during the year.



15. Dematerialization of shares and liquidity

Procedure for dematerialisation/ rematerialisation of scrips The shares of the Company are under compulsory demat mode. To avail of the facility of demat/remat of shares, the shareholders are required to submit demat/remat request to the Depository Participants (DP) with whom they maintain a demat account. Depository Participants send requests for demat of shares along with the physical share certificates to Registrars and Transfer Agents (“the Registrar”) of the Company. The Registrar liaisons with Depository Participant (DP) and National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL) within 10 days from date of log

in of the demat request in the system and acknowledges receipt of physical shares for demat and verifies the genuineness of share certificates, creates transaction and generates edit list. After verification of edit list and effecting corrections, if any, the Registrar updates the final Demat Register. The Registrar forwards confirmation report of the transaction to NSDL/CDSL or the rejection report, as the case may be. The Registrar does reconciliation and confirmation of capital. The Registrar also corresponds with the DP and shareholder in case of rejection.

As on March 31, 2005, 94.16 % of the shares of the Company were in electronic form.

16. Address for correspondence

Registered Office Corporate Officei-flex solutions ltd.Unit 10-11SDF-1, SEEPZAndheri (East)Mumbai 400 096

Telephone No. +91-22- 5676 2000 Fax No. +91-22- 2829 2767

i-flex solutions ltd.i-flex Center399, Subhash RoadVile Parle (East) Mumbai 400 057

Telephone No. +91-22- 5668 5000 Fax No. +91-22- 2832 3374

e-mail: [email protected]

Additionally, as on March 31, 2005 the Company also had following branch offices in the States of Maharashtra, Karnataka and Tamil Nadu.

1. Corporate Centre ‘A’Andheri-Kurla RoadAndheri (E)Mumbai 400 059

6. i-flex Park, Embassy Business ParkC V Raman Nagar Bangalore 560 075

2. Nirlon CompoundWestern Express Highway Pahadi Village, Goregaon (E)Mumbai 400 063

7. 4th Floor, Shankar Narayan Building 25 M G Road Bangalore 560 001

3. 2nd Floor Marchon HouseJ B Nagar, Andheri-Kurla RoadAndheri (East)Mumbai 400 059

8. i-flex Center # 333, Kundalahalli MahadevapuraBangalore 560 037

4. 2nd Floor, Pride Silicon PlazaSenapati Bapat RoadPune 411 053

9. 143/1, Uttamar Gandhi Salai4th Floor, NungambakkamChennai 600 034

5. Block 9, Ambrosia, Baudhan KhurdTal. Mulshi, Pune 411 021


Auditors’ certificate

To The Members of i-flex Solutions Limited

We have examined the compliance of conditions of corporate governance by i-flex Solutions Limited, for the year ended on March 31, 2005, as stipulated in clause 49 of the Listing Agreement of the said Company with stock exchange(s).

The compliance of conditions of corporate governance is the responsibility of the management. Our examination was limited to procedures and implementation thereof, adopted by the Company for ensuring the compliance of the conditions of the Corporate Governance. It is neither an audit nor an expression of opinion on the financial statements of the Company.

In our opinion and to the best of our information and according to the explanations given to us, we certify that the Company has complied with the conditions of Corporate Governance as stipulated in the above mentioned Listing Agreement.

We state that no investor grievance is pending for a period exceeding one month against the Company as per the records maintained by the Investors Grievance Committee.

We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiency or effectiveness with which the management has conducted the affairs of the Company.

For S. R. Batliboi & Associates Chartered Accountants

Farokh T. Balsara Partner Membership No.: 44757 MumbaiJune 14, 2005


i-flex solutions ltd.Financial statements for the year ended

March 31, 2005 prepared in accordance with Indian Generally Accepted Accounting

Principles (Indian GAAP) (Unconsolidated).

Financials



The following discussion is based on our audited unconsolidated financial statements, which have been prepared in accordance with Accounting Standards referred to in section 211 (3C) of the Companies Act 1956.

You should read the following discussion of our financial condition and results of operations together with the detailed unconsolidated Indian GAAP financial statements and the notes to those statements. Our fiscal year ends on March 31 of each year.

Information Technolgy (IT) Industry

Over the past decade, the financial services industry has become increasingly dependent on IT. Today, IT is considered an important competitive advantage by financial institutions, and the global financial services industry spends more on IT than any other industry. According to industry estimates, total IT spending in the financial services industry is projected to grow from USD 383 billion in 2004 to USD 437 billion by 2007. Financial institutions are seeking to address several business priorities including enhancing operational efficiency, improving customer acquisition and retention and strengthening regulatory and risk management systems. These priorities have significant implications for IT spending in the global financial services industry as they will drive decisions such as the replacement of core legacy systems, purchasing of packaged solutions, improvement in customer relationship management and outsourcing of business and IT processes.

Overview

i-flex is in the business of providing comprehensive IT solutions to the financial services industry world-wide. The company has a comprehensive range of solutions which include packaged applications for the financial services industry (encompassing consumer banking, commercial banking, investor servicing and asset management for mutual funds, internet delivery of financial services, as well as business intelligence and analytical applications); custom application software development, deployment, maintenance and support services (both onsite and offshore) for financial institutions; and business and IT consulting services in the financial services domain. i-flex’s range of products and customized services enable financial institutions to cut costs, respond rapidly to market needs, enhance customer service levels and mitigate risk.

As of March 31, 2005, the company had serviced 544 customers in 112 countries through its portfolio of products and services. The company’s de-risking revenue model continues to deliver consistent results despite changing global economic conditions. The company is not overly dependent on any one country or geographical region and has a diversified revenue stream from a widespread customer base.

We are organised by region and by business segment. We have two primary business segments – the Products Business (comprising product licensing, customisation, implementation and support); and the Services Business (providing customized software and consulting services). These are described in greater detail below:

Products

Our flagship product offering is the FLEXCUBE suite, which comprises a comprehensive range of packaged solutions addressing the transaction processing, accounting, business intelligence, analytical application and internet delivery needs of a wide range of financial institutions, including corporate banks, consumer banks, universal banks, capital market intermediaries, investment banks and other specialized financial institutions.

Reveleus is i-flex’s latest offering that addresses the Business Intelligence and Analytics market. Reveleus, the industry’s only metadata-driven information management infrastructure, coupled with a suite of integrated analytical applications, is a business intelligence solution. Reveleus improves quality and consistency of information, thereby helping organizations reduce risk and improve efficiencies in information gathering, analysis and distribution.

Services

i-flex offers financial institutions customized IT solutions through its domain and technology centers of Excellence under the brand name PrimeSourcing. The offerings encompass areas such as Capital Markets, Business Intelligence & Data Warehousing, CRM, Development & Integration Services, e-services, Insurance & Payment Systems. PrimeSourcing offerings include Business and Technology Consulting, Application Development, Application Reengineering, Maintenance & Support, Technology Deployment & Management, System Integration and Quality Management services through a cost-effective combination of onsite, offsite/near-shore and offshore delivery models.

Business metrics

Our total revenues in fiscal 2005 were Rs. 9,028.6 million, representing an increase of 32% from Rs. 6,844.6 million in fiscal 2004. The net income in fiscal 2005 was Rs. 1,976.4 million, against Rs. 1,758.9 million in fiscal 2004. Our net income margins were 22% and 26% in fiscal years 2005 and 2004 respectively. We define net income margins for a particular period as the ratio of net income to total revenues during such period. We had 4,533 employees as on March 31, 2005 as against 2,438 at the end of the previous year in India.

Products business

Millions of Indian Rupees

Year ended March 312005 2004

Product revenues 5,163.8 4,364.8 Cost of product revenues (1,817.3) (1,325.2)Sales and marketing expenses (441.8) (420.7)General and administrative expenses (264.3) (339.5)Depreciation and amortization (81.8) (49.3)Income from operations 2,558.6 2,230.1 Operating margin* 50% 51%

* Operating margin is defined as income from operations from the Products Business (excluding corporate expenses) as a percentage of total products revenue.

Management’s discussion and analysis of financial condition and results of operations


Products business

Products revenues

Our products revenues represented 57% and 64% of the total revenues for fiscal years ended 2005 and 2004, respectively. Our products revenues were Rs. 5,163.8 million during the fiscal year ended March 31, 2005; an increase of 18% from Rs. 4,364.8 million during the fiscal year ended March 31, 2004.

Products revenues comprise license fees, professional fees for implementation & enhancement services and annual maintenance contract (Post Contract Support – PCS) fees for our products.

License fee

Our standard licensing arrangement for our products provides the user a perpetual right to use the product for a pre-defined number of users and sites upon the payment of a license fee. The license fee is a function of a variety of quantitative and qualitative factors including the number of copies sold, the number of concurrent users supported, the number and combination of the modules sold and the number of sites & geographical locations. The licenses are non-exclusive, personal, non-transferable and royalty free.

Implementation fee

After products are licensed to customers, we provide services related to the implementation of the products at the customer sites, integration with other customer systems and enhancement of the products to address the specific requirements of the customers. The customer is typically charged a service fee either on a fixed price basis or a time and materials basis. The implementation and enhancement services comprise functional enhancements, interface building, implementation planning, data conversion, training and product walkthrough and are provided to customers who enter into licensing arrangements with us.

Annual maintenance contracts fees

We also earn fees relating to the provision of annual maintenance contracts after the implementation of a product and following the expiry of the warranty period. Under these agreements, we provide technical support, maintenance, problem solving and upgrades of the licensed products. These support agreements are typically entered for a period of 12 months.

While the revenues from license fees and implementation and enhancement services rendered by us depend on the number of new customers we add and the implementation project life cycle, therefore would vary from year to year. The annual maintenance contracts generate steady revenues and would grow to the extent of new customers coming under the PCS. The percentage of our revenues from these streams is as follows:

Fiscal Year Ended 2005 2004License fees 39% 37%Implementation and customization fees

42% 43%

PCS arrangements 19% 20%Total 100% 100%

Cost of products revenues and operating expenses

The cost of our product revenues consists of costs attributable to the implementation, enhancement, maintenance and continued development, including research and development efforts, of our core product, the FLEXCUBE suite of products, Reveleus and other products. These costs primarily consist of compensation expenses for all of our IT professionals working in the Products Business, project-related travel expenses, professional fees paid to software services vendors and the cost of application software for internal use.

Research and development costs are expensed as incurred. Software development costs are expensed as incurred until technological feasibility is established. Software product development cost incurred subsequent to the achievement of technological feasibility is not material and is expensed as incurred.

Operating expenses include selling and marketing expenses, general and administrative expenses that consist of commissions payable to our partners, product advertising, marketing expenses and allocated overhead expenses associated with support and monitoring functions such as human resources, facilities and infrastructure expenses, quality assurance and finance.

Services business



Services revenues 3,864.80 2,479.8 Cost of services revenues (3,033.6) (1,920.4)Sales and marketing expenses (27.1) (31.2)General and administrative expenses (225.8) (237.3)Depreciation and amortization (121.4) (61.8)Income from operations 456.9 229.1 Operating margin* 12% 9%

* Operating margin is defined as income from operations from the Services Business (excluding corporate expenses) as a percentage of total services revenue.



Services revenues

Our services revenues represented 43% and 36% of the total revenues for the fiscal years ended March 31, 2005 and 2004 respectively. The services revenues were Rs. 3864.8 million in the fiscal year ended March 31, 2005, an increase of 56% from Rs. 2,479.8 million in the fiscal year ended March 31, 2004.

The contracts relating to Services Business are either time and material contracts or fixed price contracts. The percentage of total services revenues from time and material contracts was 82% in fiscal 2005 and 78% in fiscal 2004, with the remainder of the services revenues attributable to fixed price contracts.

We provide our services through offshore centers located in India, onsite teams operating at the customers’ premises and our development centers located in other parts of the world. Offshore services revenues consist of revenues from work conducted at our development centers in India on behalf of foreign customers and onsite revenue comprises work conducted at customer’s premises outside India. India revenue represents

work done for Indian customers at their locations and at our development centers in India. The composition of our onsite and offshore revenue is determined by the project life cycle. Typically, the work involving the design of new systems or relating to a system roll-out would be conducted onsite, while the core software development, maintenance and support activity may be conducted offshore. We received 55% of our services revenue from onsite work and 45% from offshore work during the fiscal year 2005.

Cost of services revenues and operating expenses

The cost of revenues for services consists primarily of compensation expenses for our software professionals, cost of application software for internal use, travel expenses and professional fees paid to software services vendors. We recognize these costs as incurred. Our operating expenses include selling, general and administrative expenses and allocated overhead expenses associated with human resources, corporate marketing, information management systems, quality assurance and finance.

Geographic breakup of revenues

In line with the Company’s strategy to increase penetration in the advanced markets, the contribution in the revenues from USA and Europe have increased by 4% as compared to the previous year while the overall revenues are well diversified. The following table represents the percentage breakup of our revenues for Products and Services businesses by region:

Year ended March 31, 2005 Year ended March 31, 2004Products

RevenuesServices

RevenuesTotal

RevenuesProducts

RevenuesServices

RevenuesTotal

RevenuesUSA 26% 69% 45% 26% 70% 43%Middle East and Africa 29% 3% 17% 26% 5% 18%Asia Pacific 17% 13% 15% 19% 16% 18%Europe 26% 14% 21% 26% 9% 19%Latin America and Caribbean 3% 1% 2% 3% – 2%Total 100% 100% 100% 100% 100% 100%

Customer concentration

Our operations and business depend on our relationships with a number of large customers. Revenues from the top ten customers for fiscal 2005 and 2004 were 33% and 28%, respectively, as a percentage of the total revenues. The top ten customers in Services Business contributed 50% of the total services revenues, while the top ten customers in Products Business contributed 41% of the total products revenues during fiscal 2005.

The percentage of total revenues during the fiscal years 2005 and 2004 that we derived from our largest customer, largest five customers and largest ten customers is provided in the accompanying table. In the table, various affiliates of Citigroup are classified as separate customers and the last row sets forth the percentage of total revenues we earned from the various affiliates from Citigroup in respect of our Products and Services Business individually and in respect of our business taken as a whole.

Products Revenues Services Revenues Total2005 2004 2005 2004 2005 2004

Top customer 15% 10% 8% 8% 9% 6%Top 5 customer 30% 26% 33% 29% 21% 17%Top 10 customer 41% 38% 50% 43% 33% 28%Citigroup and its affiliates 24% 26% – 2% 14% 17%


Trade receivables

Trade receivables as of March 31, 2005 and March 31, 2004 were Rs. 6,200.8 and Rs. 3,957 million respectively. Our days of sales outstanding (which is the ratio of sundry debtors to total sales in a particular year multiplied by 365) for fiscal 2005 and 2004 were approximately 235 and 199 respectively. The Company periodically reviews its account receivables outstanding as well as the ageing, quality of the account receivable, customer relationship and history of the client. The following table presents the age profile of our sundry debtors:

Year ended March 31

Period in days 2005 20040 – 180 64% 69%More than 180 36% 31%Total 100% 100%

Foreign currency and treasury operations

A substantial portion of our revenues is generated in foreign currencies while a majority of our expenses are incurred in Indian Rupees and the balance is incurred in US Dollars and European Currencies.

We have a conservative philosophy of treasury operations and the policy is to invest funds substantially in time deposits with well-known, sound Indian and Foreign banks. The Company has ensured adequate controls over asset management including cash management operations, credit management and debt collection operations.

The Company also balances funds in USD accounts or INR deposits based on the comparative interest rates and currency requirements. The Company books forward covers from time to time in line with its treasury management philosophy.

Income taxes

Currently, we benefit from the tax holidays the Government of India gives to software products and IT services exporters from specially designated Software Technology Parks in India. As a result of these incentives, our operations have been subject to relatively lower tax liabilities in India. These tax incentives currently include a 10-year tax holiday from Indian corporate income-taxes for the operations of six of our Indian facilities .

The Finance Act, 2000 restricts the ten-year tax holiday available from the fiscal year in which the undertaking begins to manufacture or produce or until fiscal 2009, whichever is earlier. Accordingly, facilities set up after fiscal 2000 will enjoy the benefit of the tax holiday only until fiscal 2009. For six of our facilities, these benefits expire in stages through 2009. Income taxes also include foreign taxes representing income taxes payable overseas by us in the United States, Kuwait, Singapore, Canada, Japan and Poland.

Employee Stock Purchase Scheme (‘ESPS’)

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 , April 1, 2001 and June 1, 2004 the Company adopted other Stock based schemes (‘1999 Scheme’, ‘2000 Scheme’, ‘2001 Scheme’ and ‘2004 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 employee. 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 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 employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favor 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.

The Securities and Exchange Board of India (‘SEBI’) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 (‘SEBI guidelines’), which are applicable to stock option schemes for employees of all listed Companies. In accordance with these guidelines, the excess of market price of the underlying equity shares on the date of grant of the stock options over the exercise price of the options is to be recognised in the books of account and amortised over the vesting period. However, no compensation cost would need to be recorded as the scheme terms are fixed and the exercise price equals the market price 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 the shares have been allocated to the employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purpose, the share, which are not yet eligible for exercise, have



also been considered as outstanding to the extent these shares are dilutive.

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 had 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 4,753,600 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the employees and directors of the Company and its subsidiaries. According to the Scheme the Company has granted 4,548,920 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the eligible employees and directors of the Company and its subsidiaries prior to the IPO, and 116,000 options thereafter. As per the terms of the Scheme the exercise price would equate the IPO price for the options granted prior to the IPO and at the fair market value on the date of grant for options granted thereafter. 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 from the date of and is subject to the continued employment of the employee or the 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 for the option granted prior to the IPO and the fair market value on the date of grant for option granted thereafter. Accordingly no compensation cost would need to be recorded as the exercise price would equal to the fair value of the shares.

Analysis of our financial results

Comparison of fiscal 2005 with fiscal 2004

Revenues

Our total revenues in the fiscal year ended March 31, 2005 were Rs. 9,028.6 million, an increase of 32% over total revenues of Rs. 6,844.6 million in the fiscal year ended March 31, 2004. The increase in revenues was attributable to a 18% increase in the revenues from Products Business and a 56% increase in the revenues from Services Business.

Products revenues

Our products revenues in the fiscal year ended March 31, 2005 were Rs. 5,163.8 million, an increase of 18% over our products revenues of Rs. 4,364.8 million in the fiscal year ended March 31, 2004. The revenues from license fees comprised

39% of the revenues, implementation fees comprised 42% and annual maintenance contracts comprised 19% of the revenues for the fiscal 2005.

Services revenues

Our services revenues in the fiscal year ended March 31, 2005 were Rs. 3,864.8 million, an increase of 56% over our services revenues of Rs. 2,479.8 million in the fiscal year ended March 31, 2004. Revenues from time and material contracts comprised 82% of the revenues and fixed price contracts comprised 18% for the fiscal 2005.

Interest and other income

Our interest and other income in the fiscal year ended March 31, 2005 was Rs. 232 million, an increase of 131% over our interest and other income of Rs. 100.5 million in the fiscal year ended March 31, 2004. The increase was due to decrease in foreign exchange losses amounting to Rs. 11 crores a result of effective hedging policy and increase in interest from Bank deposits of Rs. 4.6 crores as compared to fiscal 2004.

Cost of revenues and operating expenses

Cost of revenues

Our cost of revenues in the fiscal year ended March 31, 2005 was Rs. 4850.9 million, an increase of 49% over cost of revenues of Rs. 3,245.6 million in the fiscal year ended March 31, 2004. Our cost of revenues as a percentage of total revenue was 54% in the fiscal year ended March 31, 2005, compared to 47% in the fiscal year ended March 31, 2004.

Our cost of products revenues in the fiscal year ended March 31, 2005 was Rs. 1,817.3 million, an increase of 37% over cost of products revenues of Rs. 1,325.2 million in the fiscal year ended March 31, 2004. This increase was primarily attributable to increased employee cost, travel cost, professional fees paid to software services vendors and application software cost. The increase in the employee cost was due to increases in the number of our personnel. Our cost of products revenues as a percentage of products revenue was 35% in the fiscal year ended March 31, 2005, compared to 30% in the fiscal year ended March 31, 2004.

Our cost of services revenues in the fiscal year ended March 31, 2005 was Rs. 3,033.6 million, an increase of 58% over cost of services revenues of Rs. 1,920.4 million in the fiscal year ended March 31, 2004. The primary reasons for the increase were higher employee cost, professional fees paid to sotware services vendors and travel costs for projects. There is a rise in the professional fees on account of hiring of professional vendor services for turnkey projects in US region. The employee and travel costs rose due to a higher number of personnel and increased travel to customer sites on assignments. Our cost of services revenues as a percentage of services revenue was 78% in


the fiscal year ended March 31, 2005, compared to 77% in the fiscal year ended March 31, 2004.

Sales and marketing expenses

Our sales and marketing expenses in the fiscal year ended March 31, 2005 were Rs. 469 million, remained almost steady over sales and marketing expenses of Rs. 451.9 million in the fiscal year ended March 31, 2004. Our sales and marketing expenses as a percentage of total revenues decreased to 5% for the fiscal year ended March 31, 2005 from 7% in the fiscal year ended March 31, 2004.

Our sales and marketing expenses for Products Business in the fiscal year ended March 31, 2005 were Rs. 441.8 million that is almost steady over sales and marketing expenses for Products Business of Rs. 420.7 million in the fiscal year ended March 31, 2004. Sales and marketing expenses for our Products Business as a percentage of products revenues was 9% in the fiscal year ended March 31, 2005, compared to 10% in the fiscal year ended March 31, 2004.

Our sales and marketing expenses for our Services Business in the fiscal year ended March 31, 2005 were Rs. 27.1 million, a decrease of 13% over our sales and marketing expenses for our Services Business of Rs. 31.2 million in the fiscal year ended March 31, 2004. The decrease is attributable to the reduction in travel cost and professional fees. Sales and marketing expenses for our Services Business as a percentage of services revenues remained at 1% in the fiscal year ended March 31, 2005 and fiscal year ended March 31, 2004.

General and administrative expenses

Our general and administrative expenses in the fiscal year ended March 31, 2005 were Rs. 1,149.5 million, an increase of 20% over our general and administrative expenses of Rs. 958.4 million in the fiscal year ended March 31, 2004. The increase was primarily due to higher professional fees; government tariffs; increased senior management personnel costs; application software and increased infrastructure and facilities costs like repairs, maintenance, rent, power and communication costs for our Services Business in Bangalore, Chennai and Mumbai, India. Our general and administrative expenses as a percentage of total revenues was 13% in the fiscal year ended March 31, 2005, compared to 14% in the fiscal year ended March 31, 2004.

Our general and administrative expenses for our Products Business in the fiscal year ended March 31, 2005 were Rs. 264.3 million, a decrease of 22% over our general and administrative expenses for our Products Business of Rs. 339.5 million in the fiscal year ended March 31, 2004.

The decrease is attributable to extraordinary expenses incurred during the previous year on account of sums paid for disputed settlement expenses and write off of bad debts. Our general and administrative expenses for our Products Business as a percentage of products revenues was 5% in the fiscal year ended March 31, 2005, compared to 8% in the fiscal year ended March 31, 2004.

Our general and administrative expenses for our Services Business in the fiscal year ended March 31, 2005 were Rs. 225.8 million, a marginal decrease of 5% over our general and administrative expenses for our Services Business of Rs. 237.3 million in the fiscal year ended March 31, 2004. Our general and administrative expenses for our Services Business as a percentage of services revenues was 6% in the fiscal year ended March 31, 2005, compared to 10% in the fiscal year ended March 31, 2004.

Income taxes

Our provision for income taxes in the fiscal year ended March 31, 2005 was Rs. 494.7 million, remained almost steady over our provision for income taxes of Rs. 495.1 million in the fiscal year ended March 31, 2004. Our effective tax rate was 20% in the fiscal year ended March 31, 2005 compared to 22% in the fiscal year ended March 31, 2004. The decrease in tax rate was because of two new units under Section 10 A benefit have commenced operations in the current fiscal year.

Income from operations and net income

As a result of the foregoing factors, income from operations increased 7% from Rs. 2,152.7 million in fiscal 2004 to Rs. 2,293.3 million in fiscal 2005 and net income was Rs. 1,976.4 million in fiscal 2005 against to Rs. 1,758.9 million in fiscal 2004. We define net income margins for a particular period as the ratio of net income to total revenues during such period.

Liquidity and capital resources

Our capital requirements relate primarily to financing the growth of our business. We have historically financed the majority of our working capital, capital expenditure and other requirements through our operating cash flow. During fiscal 2005 and 2004 we generated cash from operations of Rs. 666.3 million and Rs. 676.5 million respectively.

i-flex is a zero debt company. We expect that our primary financing requirements in the future will be capital requirements in connection with the expansion of our business. We believe that cash generated from operations, along with the net proceeds of the Initial Public Offer will be sufficient to satisfy our currently foreseeable capital expenditure and working capital requirements.



Material development in human resources

We recruit graduates from leading engineering and management institutions. We also hire functional experts from the banking industry. We had net addition of 2,095 employees during the fiscal year taking our employee strength to 4,533 employees as on March 31, 2005. The blend of functional knowledge and technical expertise, coupled with i-flex training and experience make our employees unique.

We have very cordial relationships with our employees and we endeavor to give them an excellent, professionally rewarding and enriching work environment. We have effective performance management system with a focus on employee development. This measures key result areas, competencies and training needs ensuring all-round employee development.

Risks and concerns

Quantitative and Qualitative Disclosures about Market RiskOur primary market risk exposures are due to the following:

• foreign exchange rate fluctuations, principally relating to the fluctuation of the US Dollar to Indian Rupee;

• fluctuations in interest rates; and • fluctuations in the value of our investments.

As of March 31, 2005, we had cash and bank balances of Rs. 5393.86 million, out of which Rs. 4238.5 million in interest-bearing bank deposits. Consequently, we face a market risk exposure on account of fluctuation in interest rates. These funds were invested in the bank deposit of longer maturity (more than 90 days) to earn a higher rate of interest income.

A substantial portion of our revenues are generated in foreign currencies while a majority of our expenses are incurred in Indian Rupees and the balance in US Dollars and European currencies. Our functional currency for Indian operations is the Indian Rupee. We expect a majority of our revenues will continue to be generated in foreign currencies for the foreseeable future and a significant portion of our expenses, including personnel costs and capital and operating expenditure, to continue to be incurred in Indian Rupees.

In addition, we face normal business risks such as global competition and country risks pertaining to countries that we operate in.

Integration of mergers and acquisitions

The Company continues to pursue mergers and acquisitions strategy of complementary companies as part of its growth

plans. The Company may acquire complementary companies and businesses. We acquired Republic of Mauritius-based ISP Internet Mauritus ltd., in an all cash deal in the current financial year. ISP Internet Mauritius ltd with its wholly owned subsidiaries Equinox corporation and Equinox global services pvt. Ltd. is engaged in providing business process outsourcing services to the mortgage banking industry. We also acquired two product IPR from SRA Systems Ltd. and TriVium Systems Inc. and its subsidiaries. In addition company has acquired an IT consulting master services contract of a large investment bank from Trigyn Technologies Limited and its subsidiaries. These mergers and acquisitions involve inherent risks, including:

• unforeseen contingent risks or latent liabilities relating to these businesses that may only become apparent after the merger or acquisition is finalized;

• integration and management of the operations, sales and marketing, personnel and systems;

The company as part of its policies ensures that the companies acquired are successfully integrated into the mainstream business.

SWOT analysis for the company

Strengths:

• Comprehensive solutions portfolio.• World-class technology• Deep domain expertise• Extensive global client base• Superior quality and cost-efficient delivery• High quality manpower resources• Strong R&D capability, well linked with business

Weaknesses:

• Exposure to various economies

Opportunities:

• India is becoming a favored outsourcing destination• Increasing momentum in purchasing of in core banking

systems by large and global financial institutions• Entry into new hitherto untapped markets• Expanding solutions portfolio and entry into new market

segments-consumer finance, anti-money laundering, etc.

Threats:

• Increasing competition• Growing backlash of outsourcing from advanced markets• Legislative and visa related restrictions


Outlook

Acquisition

In December 31, 2004, i-flex Solutions Ltd (‘i-flex’) acquired all of the shares in ISP Internet Mauritius Company (‘ISP’), a corporation organized under the laws of the Republic of Mauritius. ISP holds all the shares in Equinox Corporation, a Delaware corporation (‘Equinox US’), and in Equinox Global Services Pvt. Limited, a corporation organized under the laws of India (‘Equinox India’). Equinox India and Equinox US are engaged in providing business process outsourcing services to the mortgage banking industry. The acquisition was carried out in two stages, where the Company acquired a 84 per cent stake for a consideration of USD 4.35 million, and also repaid a debt of ISP aggregating USD 0.95 million, through a loan to ISP. The Company also entered into separate agreements with the other three shareholders to acquire the balance 16 per cent stake. The consideration for this 16 per cent stake is linked to the profit of the ISP business over the next three fiscal years and is payable based on a pre-determined formula.

This acquisition strengthen the Company’s plans of diversification into Knowledge Process Outsourcing (KPO) Operations related to the existing IT solutions portfolio

Subsidiaries

The Company has established subsidiaries in the US, Singapore, the Netherlands and Republic of Mauritius to strengthen marketing and sales efforts in North American, Asia Pacific and European markets and to ensure deeper penetration in these regions.

Global alliances

i-flex entered into a global strategic alliance with IBM to deliver and market core banking replacement solutions to medium and large size banks in major markets worldwide. The joint solution will help financial solutions reduce costs and streamline operational efficiencies by transitioning a bank’s legacy core banking infrastructure and applications to a modern banking platform.

Under the terms of the alliance, i-flex will make FLEXCUBE for Retail Banking available in a phased manner on IBM’s J2EE-based WebSphere Internet infrastructure software and DB2 Universal Database. This move will make FLEXCUBE available on open standard IBM platforms thereby enhancing your Company’s ability to target Tier 1 and Tier 2 banks across the globe. FLEXCUBE, which already runs on IBM’s eServer pSeries servers, will now run on the complete range of IBM servers.

The company continues to strengthen its go-to-market strategy and further its alliances with its preferred platform partners including IBM, Intel, Hewlett Packard, Oracle, and Microsoft.

Internal control systems and their adequacy

The Company has in place adequate systems of internal control and documented procedures covering all financial and operating functions. These have been designed to provide reasonable assurance with regard to maintaining proper accounting controls, monitoring economy and efficiency of operations, protecting assets from unauthorized use or losses, and ensuring reliability of financial and operational information. The Company has continued its efforts to align all its processes and control with global best practice.



Reconciliation Statement of profit as per the Indian GAAP unconsolidated, Indian GAAP consolidated with US GAAP

Thousands of Indian Rupees

Year endedMarch 31,2005

Year endedMarch 31,2004

Net profit as per Indian GAAP unconsolidated 1,976,401 1,758,867

Add : Revenue of subsidiaries, neti-flex solutions b.v. 337,033 237,762 i-flex solutions pte 255,456 176,105 i-flex America – consolidated 1,705,380 620,923 ISP Internet 48,296 –

2,346,165 1,034,790

Other income from subsidiaries, net 61,381 35,512 2,407,546 1,070,302

Less : Expenses of subsidiaries, neti-flex solutions b.v. (306,862) (306,026)i-flex solutions pte (181,613) (129,128)i-flex America – consolidated (1,513,195) (604,522)ISP Internet (77,508) –

328,368 30,627

Profit after consolidating subsidiaries 2,304,769 1,789,493

Add : Proportionate Revenue of joint venture, net 15,442 5,557 Proportionate Other income from joint venture, net 279 1,865

15,721 7,422 Less :

Proportionate Expenses of joint ventures, net (16,019) (9,059)Reversal of diminution in value of investment 20,680 –

4,661 (9,059)

Loss on equity investment (820) –

Net profit as per Indian GAAP consolidated 2,324,331 1,787,856

Unrealized (loss)/gain on forward contract (49,658) 6,172 Amortization of intangible assets (30,319) (5,975)Additional Gratuity (provision)/reversal of provision as per FAS 87 (16,448) 18,718 Other Income related to US-64 units conversion – 12 Reversal of loss related to US-64 units – 165 Dividend tax paid – (11,957)Reversal of provision/(Provision) for vacation pay (8,733) 8,559 Deferred revenue, net (115,191) (12,263)Charge of options granted to IBM (6,755) – Accounting for embedded derivatives 3,978 (22,788)Implication of SAB 104 – US GAAP (105,000) – Implication of SOP 81.1 – US GAAP 22,750 – Translation effect – Adjusted in stockholders equity 12,457 10,042 Net profit as per US GAAP 2,031,412 1,778,541


Auditors’ report

To The Members of i-flex Solutions Limited

1. We have audited the attached Balance Sheet of i-flex Solutions Limited (‘the Company’) as at March 31, 2005 and also the Profit and Loss account and the Cash Flow statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 (‘the Order’) (as amended) issued by the Central Government of India in terms of sub-section (4A) of Section 227 of the Companies Act, 1956 (‘the Act’), we enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order.

4. Further to our comments in the Annexure referred to above, we report that:

i. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

ii. In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

iii. The balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account;

iv. In our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Act.

v. On the basis of the written representations received from the directors, as on March 31, 2005, and taken on record by the Board of Directors, we report that none of the directors is disqualified as on March 31, 2005 from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Act.

vi. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Act, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India;

a) in the case of the balance sheet, of the state of affairs of the Company as at March 31, 2005;

b) in the case of the profit and loss account, of the profit for the year ended on that date; and

c) in the case of cash flow statement, of the cash flows for the year ended on that date.

For S.R. Batliboi & AssociatesChartered Accountants

Farokh T. Balsara PartnerMembership No.: 44757

MumbaiApril 29, 2005



(i) (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

(b) Fixed assets have been physically verified by the management during the year and as informed, no material discrepancies were identified on such verification.

(c) There was no substantial disposal of fixed assets during the year.

(ii) Due to the nature of its business, clause (ii) of the Order, relating to physical verification of inventory is not applicable to the Company.

(iii) (a) As informed, the Company has not granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, 1956.

(b) As informed, the Company has not taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, 1956.

(iv) In our opinion and according to the information and explanations given to us, there is an adequate internal control system commensurate with the size of the Company and the nature of its business, for the purchase of fixed assets and for the sale of goods and services. During the course of our audit, no major weakness has been noticed in the internal control system in respect of these areas. Due to the nature of its business the Company does not purchase any inventory.

(v) According to the information and explanations provided by the management, we are of the opinion that there are no transactions that need to be entered into the register maintained under section 301 of the Act.

(vi) The Company has not accepted any deposits from the public.

(vii) In our opinion, the Company has an internal audit system commensurate with the size and nature of its business.

(viii) To the best of our knowledge and as explained, the Central Government has not prescribed maintenance of cost records under clause (d) of sub-section (1) of section 209 of the Companies Act, 1956 for the products of the Company.

(ix) (a) The Company is regular in depositing with appropriate authorities undisputed statutory dues including provident fund, investor education and protection fund, employees’ state insurance, income-tax, sales-tax, wealth-tax, service tax, custom duty, excise duty, cess and other material statutory dues applicable to it.

(b) According to the information and explanations given to us, no undisputed amounts payable in respect of provident fund, investor education and protection fund, employees’ state insurance, income-tax, wealth-tax, service tax, sales-tax, customs duty, excise duty, cess and other undisputed statutory dues were outstanding, at the year end, for a period of more than six months from the date they became payable.

(c) According to the information and explanation given to us, there are no dues of income tax, sales-tax, wealth tax, service tax, custom duty, excise duty and cess which have not been deposited on account of any dispute.

(x) The Company has no accumulated losses at the end of the financial year and it has not incurred cash losses in the current and immediately preceding financial year.

(xi) The Company did not have any dues to any financial institution, bank or debenture holder during the year.

(xii) According to the information and explanations given to us and based on the documents and records produced to us, the Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

(xiii) In our opinion, the Company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore, the provisions of clause 4(xiii) of the Companies (Auditor’s Report) Order, 2003 (as amended) are not applicable to the Company.

(xiv) In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Companies (Auditor’s Report) Order, 2003 (as amended) are not applicable to the Company.

(xv) According to the information and explanations given to us, the Company has not given any guarantee for loans taken by others from bank or financial institutions.

(xvi) The Company did not have any term loans outstanding during the year.

(xvii) According to the information and explanations given to us and on an overall examination of the balance sheet and cash flow statement of the Company, we report that no funds raised on short-term basis have been used for long-term investment.

(xviii) The Company has not made any preferential allotment of shares to parties or companies covered in the register maintained under Section 301 of the Act.

(xix) The Company did not have any outstanding debentures during the year.

(xx) We have verified that the end use of money raised by public issues is as disclosed in the notes to the financial statements.

(xxi) Based upon the audit procedures performed for the purpose of reporting the true and fair view of the financial statements and as per the information and explanations given by management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For S.R. Batliboi & AssociatesChartered Accountants

Farokh T. Balsara PartnerMembership No.: 44757

MumbaiApril 29, 2005

Annexure referred to in paragraph 3 of our report of even dateRe: i-flex Solutions LimitedMarch 31, 2005


Balance sheet as at March 31

(All amounts in thousands of Indian Rupees, unless otherwise stated)

Schedules 2005 2004

Sources of fundsShareholders’ fundsShare capital 1 374,398 373,701 Reserves and surplus 2 10,877,489 9,291,761

11,251,887 9,665,462

Application of fundsFixed assets 3Cost 2,127,784 1,579,584 Less: accumulated depreciation and amortisation 806,255 661,332 Net book value 1,321,529 918,252 Capital work-in-progress and advances 85,618 113,596

1,407,147 1,031,848

Investments 4 425,414 547,914

Deferred tax asset 5 1,208 1,950

Current assets, loans and advances 6 Sundry debtors 6,200,778 3,957,005 Cash and bank balances 5,393,856 5,275,787 Other current assets 168,947 84,386 Loans and advances 1,673,995 1,266,341

13,437,576 10,583,519 Less: current liabilities and provisions 7Current liabilities 3,558,597 2,177,746 Provisions 460,861 322,023

4,019,458 2,499,769

Net current assets 9,418,118 8,083,750

11,251,887 9,665,462

Notes to accounts 16

The schedules referred to above and notes to accounts form an integral part of the balance sheet.

As per our report of even date For and on behalf of the Board of Directors

S.R. Batliboi & Associates Rajesh Hukku Y M Kale Chartered Accountants Chairman Director

& Managing Director

Farokh T. Balsara Deepak Ghaisas Tarjani Vakil Partner Company Secretary Director Membership No. 44757

Mumbai MumbaiApril 29, 2005 April 29, 2005



Profit and loss account for the year ended March 31


Schedules 2005 2004

Revenues 8 9,028,604 6,844,609

Cost of revenues 9 (4,850,863) (3,245,625)

Gross profit 4,177,741 3,598,984

Selling and marketing expenses 10 (468,964) (451,871)General and administrative expenses 11 (1,149,485) (958,403)Depreciation and amortisation net of write-back of opening cumulative effect of accounting change of Rs. Nil (March 31, 2004 – Rs. 88,526)

(265,944) (35,999)

Income from operations 2,293,348 2,152,711 Reversal/(provision) for dimunition in value of investment, net

(71,208) 73,062

Profit/(loss) on sale/conversion of investment 16,804 (72,299)Interest income 12 264,419 218,234 Other income/(expense) 13 (32,256) (117,765)

Income before provision for income taxes 2,471,107 2,253,943 Provision for income taxes 14 (494,706) (495,076)

Net income 1,976,401 1,758,867 Profit and loss account, beginning of the year 443,036 229,372 Amount available for appropriation 2,419,437 1,988,239

Transfer to general reserve (1,500,000) (1,250,000)Proposed dividend (374,398) (261,644)Corporate dividend tax (52,509) (33,527)Dividend paid on ESOP allotment (32) (32)Corporate dividend tax (4) –Profit and loss account, end of the year 492,494 443,036

Earnings per share of Rs. 5/- each (in Rs.) Basic 26.43 23.56 Diluted 25.64 22.73 Weighted average number of shares used in computing earnings per share

15

Basic 74,782,487 74,668,190 Diluted 77,071,820 77,372,038

Notes to Accounts 16

The schedules referred to above and notes to accounts form an integral part of the profit and loss account.



& Managing Director




Statement of cash fl ow for the year ended March 31


2005 2004

Cash flows from operating activitiesIncome before provision for income taxes 2,471,107 2,253,943

Adjustments to reconcile income before provision for income taxes to cash provided by operating activities :Depreciation and amortisation 265,944 35,999 (Profit)/Loss on retirement/sale of fixed assets, net (3,947) (971)(Profit)/Loss on sale/conversion of investments (16,804) 72,299 Provision/(Reversal) for diminution in the value of investments, net 71,208 (73,062)Interest income (264,419) (218,234)Effect of exchange difference on cash and bank balances (12,202) (108,889)Finance charge on leased assets 1,218 2,961 Reversal of provision for doubtful advances – (7,253)Provision for doubtful debts 1,395 42,393 3,847 (293,303)

2,513,500 1,960,640 Changes in assets and liabilitiesIncrease in sundry debtors (2,283,715) (1,522,906)Increase in loans and advances (321,410) (31,689)Increase in current liabilities and provisions 1,294,974 (1,310,151) 864,096 (690,499)Cash from operating activities 1,203,349 1,270,141 Receipt of refund of previous assessment years 10,539 30,296 Payment of domestic and foreign income taxes (547,598) (623,933)Net cash from operating activities 666,290 676,504

Cash flows from investing activitiesAdditions to fixed assets including capital work in progress (384,041) (530,794)Acquisition of Customer Contract from Trigyn Technologies Limited (106,811) –Acquisition of IPR from SRA Systems Limited (39,672) –Acquisition of IPR from TriVium Technologies Limited (47,138) –Investment in ISP Internet Mauritius Company (192,115) –Investment in Login SA (6,593) –Proceeds from sale of fixed assets 11,430 738 Loan to i-flex America inc. – (439,200)Bank fixed deposits having maturity of more than 90 days matured during the year

2,877,613 2,910,000

Bank fixed deposits having maturity of more than 90 days booked during the year

(4,238,540) (2,877,613)

Share Application money paid to i-flex America inc. – (91,160)Proceeds from maturity of JM High Liquidity Fund 266,804 928 Interest received 218,647 214,625 Net cash (used in) investing activities (1,640,416) (812,476)

Cash flows from financing activitiesIssue of shares against ESOP Scheme 36,968 29,593 Advance towards grant of options to IBM 5,367 –Advance against equity shares to be issued under ESOP Scheme 6,546 –Repayment of loan from Employee Stock Purchase Scheme(‘ESPS’) Trust

67,000 78,501

Loan to subsidiaries (91,558) –Payment of dividend and tax thereon (295,167) (105,242)Payment for lease obligations (9,949) (8,077)Net cash provided by financing activities (280,793) (5,225)

Effect of exchange difference on cash and bank balances 12,202 108,889

Net decrease in cash and cash equivalents (1,242,717) (32,308)Cash and cash equivalents at beginning of the year 2,395,932 2,428,240 Cash and cash equivalents at end of the year (Note 1) 1,153,215 2,395,932



Statement of cash fl ow (continued)for the year ended March 31


2005 2004Note 1:Cash in hand 320 427 Balances with scheduled banks:

– Current accounts in foreign currency 320,754 1,185,988 – Deposit accounts 4,064,209 2,997,554 – Deposit amount of unutilised IPO funds (Refer Note 11 of Schedule 16) 835,077 929,233 – Margin money deposit 121,388 121,330 – Other current accounts 49,830 38,790 – Unclaimed dividend accounts 2,101 2,242

Balances with non-scheduled banks: – – – Current accounts in foreign currency 177 223

Total Cash and Bank Balance 5,393,856 5,275,787 Less:Bank deposits having maturity of more than 90 days (4,238,540) (2,877,613)Unclaimed dividend accounts (2,101) (2,242)Cash and cash equivalents at the end of the year 1,153,215 2,395,932



& Managing Director




Schedules annexed to and forming part of the accountsfor the year ended March 31

As at March 31, 2005


Schedule 1: Share capital

Authorised:100,000,000 equity shares of Rs. 5/- each(March 31, 2004 – 100,000,000 equity shares) 500,000 500,000

Issued, subscribed and paid-up:74,879,650 equity shares of Rs. 5/- each, fully paid up(March 31, 2004 – 74,740,150 equity shares) 374,398 373,701

(a) Of the above, 62,121,800 equity shares of Rs. 5/- each had been issued as fully paid up bonus shares by capitalising the securities premium account.

(b) During the year ended March 31, 2005, the Company allotted 139,500 shares (March 31, 2004 – 87,250 shares) to its employes who exercised their options under the ESOP scheme (Refer Note 6(b) of Schedule 16).

(c) Refer Note 6(b) of Schedule 16 for options granted for unissued equity shares.(d) In Annual General Meeting of the Company held on August 19, 2004, the shareholders have approved a resolution to issue upto

98,000 options, representing 0.13% of paid up capital of the Company to IBM Global Services India Pvt. Ltd. (IBM). The Board of Directors of the Company at their meeting held on September 1, 2004, allotted 91,347 options to IBM at a price of Rs. 587.47 determined in accordance with the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 (“the SEBI Guidelines”). These options are convertible at a future date into equal number of equity shares of face value of Rs. 5/- each. IBM is entitled to subscribe to these options in two tranches over a period of 13 to 18 months from the date of issue of options subject to the completion of predetermined conditions. As required by SEBI guidelines, IBM has deposited Rs. 5.367 million, an amount equivalent to 10% of total consideration.

Schedule 2: Reserves and surplus

Securities premiumBalance, beginning of the year 2,110,156 2,267,687 Received during the year 36,270 29,157 Capitalized towards issue of bonus shares – (186,688)Balance, end of the year 2,146,426 2,110,156

General reserveBalance, beginning of the year 6,738,569 5,488,569 Transferred from profit and loss account 1,500,000 1,250,000 Balance, end of the year 8,238,569 6,738,569

Profit and loss account 492,494 443,036 10,877,489 9,291,761



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Schedule 4: Investments

a) Long term investments

(i) Trade (unquoted)

EBZ Online Private Limited (Note a) 45,000 45,000 242,240 equity shares of Rs. 10/- each, fully paid-up (March 31, 2004 – 242,240)Less : Provision for diminution in value of investment (45,000) –

– 45,000

Flexcel International Private Limited (Note b) 20,680 20,680 2,068,000 equity shares of Rs. 10/- each, fully paid-up(March 31, 2004 – 2,068,000)Less : Provision for diminution in value of investment (20,680) –

– 20,680

(ii) Other than trade investments (unquoted)

Eastern Software Systems Limited (Note a) 7,406 7,406 268,283 equity shares of Rs. 10/- each, fully paid-up (March 31, 2004 – 268,283)Less : Provision for diminution in value of investment (5,528) –

1,878 7,406

12.75% KEONICS Mahithi Bonds Series-1 (Note c) 20,000 20,000 400 Bonds of Rs. 50,000/- each, fully paid(March 31, 2004 – 400)

National Savings Certificate – VIII issue 131 131

JM High Liquidity Fund – Serial Plan 2004 (Growth) (Note d) – 250,000 March 31, 2004 – 24,965,796 (and 858 fractions) units of Rs. 10/- each Login SA (Note j) 6,593 –33,000 equity shares of EUR 2/- each fully paid up (March 31, 2004 – Nil)

(iii) Other than trade investments (quoted)

6.75% Tax Free US-64 Bonds (Note e) 33,123 33,123 331,225 Bonds of Rs. 100/- each, fully paid(March 31, 2004 – 331,225)

(iv) In subsidiaries (unquoted)

i-flex solutions b.v. (Note f) 25,119 25,119 a wholly owned subsidiary company incorporated in The Netherlands5,185 equity shares of EUR 100/- each, fully paid-up (March 31, 2004 – 5,185)





i-flex solutions pte limited (Note g) 6,626 6,626 a wholly owned subsidiary company incorporated in Singapore250,000 equity shares of SGD 1/- each fully paid up (March 31, 2004 – 250,000)

i-flex America inc. (Note h) 139,829 139,829 a wholly owned subsidiary company incorporated in the United States of America1 equity share of USD 0.01/- each fully paid up (March 31, 2004 – 1)

ISP Internet Mauritius Company (Note i) 192,115 –a wholly owned subsidiary company incorporated in the Republic of Mauritius 30,000 equity shares of USD 1/- each fully paid up (March 31, 2004 – Nil)

425,414 547,914

Aggregate cost of quoted investments 33,123 33,123 Aggregate market value of quoted investments 34,613 35,898 Aggregate amount of unquoted investments 392,291 514,791

Note a) The Company’s ownership interest in Eastern Software Systems Limited (‘ESSL’) is 6.62%. The Company also holds 19.5% shares in EBZ Online Private Limited (‘EBZ’). EBZ is a strategic partnership between Brihans Technologies Private Limited (‘BTPL’) and i-flex to integrate the selected and adapted software provided under i-flex’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’. Both companies are unlisted companies. The Company’s rights are limited to protecting its investments in ESSL and EBZ and it does not exert significant influence on the operations of these companies by way of representation on the board of directors, participation in policy making processes, material intercompany personnel or technological dependency. Accordingly, these investments are stated at cost less any decline in fair value below original cost when considered to be other than temporary. Management is of the view that the fair value of its investment in ESSL and EBZ has declined permanently. Hence, management has made a provision of Rs. 45 million towards diminution in the value of its investment in EBZ and Rs. 5.53 million towards partial diminution in the value of its investment in ESSL.

Note b) Flexcel is a 40:40:20 joint venture between i-flex, HDFC Bank Limited and its group companies and Lord Krishna Bank, which provides the capability of FLEXCUBE through an Application Service Provider (‘ASP’) model to various banks and financial institutions in India who may not wish to invest in creating and maintaining their own internal IT infrastructure. As per the unaudited financial statements as at March 31, 2005, Flexcel had incurred accumulated losses of Rs. 16.57 million. Management is of the view that the fair value of its investment in Flexcel has declined permanently. Hence, considering the uncertainty about the future profitability of Flexcel, management has made a provision of Rs. 20.68 million towards diminution in the value of its aggregate investment in Flexcel.

Note c) Investments in debt securities of 12.75% KEONICS Mahithi Bonds Series-1 allotted on February 1, 2001 are redeemable at par at the end of seven years from the date of allotment and have a put and call option at the end of five years from the date of allotment.

Note d) Investment in JM High Liquidity Fund - Serial Plan 2004 (Growth) was an investment in debt instrument funds. Consideration amounting to Rs. 266,804 was received on maturity of the fund in April 2004. Note e) On June 1, 2003 units in UTI US-64 were converted into 6.75% Tax free US-64 bonds. The first 5,000 units were converted at the repurchase price of Rs. 12/- each and the balance 3,306,258.278 units at Rs. 10/- each. These bonds are redeemable at par on June 1, 2008. Note f) i-flex b.v. was incorporated as a 100% subsidiary in The Netherlands to undertake marketing of the Company’s software products and information technology services to clients in Europe and work on the business development efforts in the region. As per the unaudited financial statements, i-flex b.v. has profit of EUR 1.62 million (approximately Rs. 91.22 million) during the year ended March 31, 2005 and accumulated losses of EUR 1.20 million (approximately Rs. 67.24 million). Management considers that there is no permanent diminution in the value of its investment in i-flex b.v. and hence it is stated at cost. Note g) i-flex pte. was incorporated as a 100% subsidiary in Singapore to undertake marketing of the Company’s software products and provide software and related services to clients in Asia Pacific region and work on the business development efforts in the region. As per the unaudited financial statements as at March 31, 2005 i-flex pte. has a net profit of SGD 4.75 million (approximately Rs. 127.44 million) for the year ended March 31, 2005 and an accumulated profit of SGD 6.87 million (approximately Rs. 182.94 million) and it is stated at cost. Note h) In December 2003, i-flex America inc., a Delaware based company, was incorporated as a 100% subsidiary in the United States of America to hold the investments of the Company in various ventures/companies in the United States of America. As per the unaudited consolidated financial statements, i-flex America inc. has a net profit of USD 3.13 million (approximately Rs. 139.56 million) during the year ended March 31, 2005. The accumulated profits as per the unaudited financial statements as at March 31, 2005 is of USD 2.55 million (approximately Rs. 112.53 million).


Note i) Effective December 31, 2004, i-flex solutions ltd. (‘i-flex’) acquired all of the shares in ISP Internet Mauritius Company (‘ISP’), a corporation organized under the laws of the Republic of Mauritius. ISP holds all the shares in Equinox Corporation, a Delaware corporation (‘Equinox US’), and in Equinox Global Services Pvt. Limited, a corporation organized under the laws of India (‘Equinox India’). Equinox India and Equinox US are engaged in providing business process outsourcing services to the mortgage banking industry. The acquisition was carried out in two stages, where the Company acquired a 84 per cent stake for a consideration of USD 4.35 million, and also repaid a debt of ISP aggregating USD 0.95 million, through a loan to ISP. The Company also entered into separate agreements with the other three shareholders

to acquire the balance 16 per cent stake. The consideration for this 16 per cent stake is linked to the profit of the ISP business over the next three fiscal years and is payable based on a pre-determined formula.

Note j) In January, 2005, i-flex solutions ltd. (‘i-flex’) acquired 33% equity stake in a France based treasury software specialists firm, Login SA from its existing shareholders for EUR 66,000. Login SA is a highly specialised front and mid office treasury solution provider with its product Login Acumen. The share purchase agreement was signed on November 15, 2004 between the parties. However, the arrangement closed only on January 7, 2005, post receipt of the requisite regulatory approvals.

As at As atMarch 31, 2005 March 31, 2004

Schedule 5: Deferred tax asset

Difference between book and tax depreciation 1,208 1,950

Schedule 6: Current assets, loans and advances

(a) Sundry debtors (unsecured)Debts outstanding for a period exceeding six months:– Considered good 2,256,382 1,264,795 – Considered doubtful 31,735 30,582

2,288,117 1,295,377

Other debts – considered good 3,944,396 2,692,210 6,232,513 3,987,587

Less: Provision for doubtful debts (31,735) (30,582) 6,200,778 3,957,005

Amount due from subsidiaries 5,163,221 2,973,860




(b) Cash and bank balancesCash in hand 320 427 Balances with scheduled banks: – Current accounts in foreign currency 320,754 1,185,988 – Deposit accounts 4,064,209 2,997,554 – Deposit amount of unutilised IPO funds (Refer Note 11 of Schedule 16) 835,077 929,233 – Margin money deposit 121,388 121,330 – Other current accounts 49,830 38,790 – Unclaimed dividend accounts 2,101 2,242 Balances with non-scheduled banks: – Current accounts in foreign currency 177 223

5,393,856 5,275,787

Balances with non-scheduled banksCitibank, Dubai 177 223

Maximum balance held during the year:Citibank NY, USA – 1,423 Citibank, Dubai 1,548 223

(c) Other current assetsInterest accrued on:– Bank deposits 57,752 22,215 – Bonds 1,202 1,208 – Loan to subsidiary 12,059 1,818 Unbilled debtors 97,934 59,145

168,947 84,386


As at As at March 31, 2005 March 31, 2004

(d) Loans and advances (unsecured, considered good unless otherwise stated)

Advances recoverable in cash or in kind or for value to be received:Loan to ESPS Trust (Refer Note 6(a) of Schedule 16) 122,425 189,425 Loans to employees (secured) 1,922 7,694 Loan to subsidiaries (Refer Note 5 of Schedule 16) 529,058 439,200 Premises and other deposits 597,594 402,495 Prepaid expenses 119,221 79,701 Advance tax, net of provision for taxes 108,067 65,662 Other advances 195,708 82,164

1,673,995 1,266,341

Schedule 7: Current liabilities and provisions

(a) Current liabilitiesAmount due to subsidiaries 2,003,727 1,120,061 Accrued expenses 683,961 473,237 Deferred revenues 622,748 435,680 Accounts payable 73,421 87,824 Employee related liabilities 14,338 7,691 Advances from customers 14,480 9,118 Finance lease obligations 25,202 17,189 Advance against Options granted to IBM (Refer Note (d) of Schedule 1) 5,367 –Investor Education and Protection Fund to be credited by unclaimed dividends* 2,101 2,242 Advance against equity shares to be issued under the ESOP scheme 6,546 –Deferred forward exchange contracts 37,831 5,316 Other current liabilities 68,875 19,388

3,558,597 2,177,746

* There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund.

(b) ProvisionsProposed dividend 374,398 261,644 Corporate dividend tax 52,509 33,523 Provision for leave encashment 33,954 26,856

460,861 322,023

Year ended Year endedMarch 31, 2005 March 31, 2004

Schedule 8: Revenues

Product licenses and related activities 5,163,846 4,364,845 IT solutions and consulting services 3,864,758 2,479,764

9,028,604 6,844,609




Schedule 9: Cost of revenues

Employee costs 3,367,083 2,109,318 Travel related expenses (net of recoveries) 1,008,998 827,737 Application software 165,396 154,667 Professional fees 309,386 148,577 Contract acquistion cost – 5,326

4,850,863 3,245,625

Schedule 10: Selling and marketing expenses

Employee costs 170,639 116,162 Travelling expenses 98,342 123,432 Professional fees 90,538 118,538 Advertising expenses 33,014 34,631 Communication expenses 8,961 8,901 Miscellaneous expenses 67,470 50,207

468,964 451,871

Schedule 11: General and administrative expenses

Employee costs 417,364 375,251 Rent 97,109 104,807 Communication expenses 88,360 99,210 Application software 72,188 –Professional fees 111,215 59,135 Dispute settlement expenses – 40,000 Bad debts written off – 34,553 Power 63,447 44,758 Travelling expenses 40,192 36,018 Rates and taxes 10,370 14,516 Miscellaneous expenses 249,240 150,155

1,149,485 958,403

Schedule 12: Interest income

Interest on:– Bank deposits 248,153 205,293

[includes tax deducted at source of Rs. 44,376 (March 31, 2004 – Rs. 37,547)]– Bonds 4,812 4,606

[includes tax deducted at source of Rs. 533 (March 31, 2004 – Rs. 561)]– Loans to employees 384 1,066 – Loan to subsidiaries 10,417 2,209 – Income tax refunds 653 5,060

264,419 218,234



Schedule 13: Other income/(expense)

Foreign exchange loss, net (41,827) (154,126)Profit on retirement/sale of fixed assets, net 3,947 971 Reversal of provision for doubtful advance – 7,253 Advances written back – 26,352 Miscellaneous income 5,624 1,785

(32,256) (117,765)

Schedule 14: Provision for taxation

Current Taxes– Domestic taxes 442,859 437,926 – Foreign taxes 51,105 27,654

Deferred tax net of opening cumulative effect of Rs. Nil (March 31, 2004 – 23,410)

742 29,496

494,706 495,076

Under the Indian Income-tax Act 1961, for the year ended March 31, 2005 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% during the year, of the profits earned from export revenues from six of its seven units registered under the Software Technology Park (‘STP’).Foreign taxes represents income taxes payable overseas by the Company in the United States of America, Kuwait, Singapore, Canada, Japan and Poland.


Schedule 15: Reconciliation of basic and diluted shares used in computing earning per share

No. of shares No. of sharesWeighted average shares outstanding for Basic EPS 74,782,487 74,668,190 Add: Effect of dilutive stock options 2,289,333 2,703,848 Weighted average shares outstanding for Diluted EPS 77,071,820 77,372,038




Schedule 16: Notes to accounts for the year ended March 31, 2005

1. Background and nature of operations

i-flex solutions limited (‘i-flex’ or ‘the Company’), a listed company, was incorporated in India with limited liability on September 27, 1989. The Company’s principal shareholder is OrbiTech Limited (‘Orbitech’). Orbitech is a subsidiary of Citicorp Technology Holdings Inc., USA.

The Company has unilateral/joint control in the following entities:

• 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;

• Flexcel International Private Limited (‘Flexcel’), a 40 per cent owned joint venture company incorporated in March 2001 under Indian laws.

• i-flex America inc., (‘i-flex America’), a 100 per cent owned subsidiary company incorporated in December 2003 under the laws of the United States of America.

• SuperSolutions Corporation. (‘SuperSolutions’), a 100 per cent owned subsidiary of i-flex America inc., incorporated under the laws of the United States of America.

• i-flex solutions inc., (‘i-flex inc.’), a 100 per cent owned subsidiary company of i-flex America inc., incorporated under the laws of United States of America.

• ISP Internet Mauritius Company (‘ISP’), a 100 per cent owned subsidiary company registered under the laws of Republic of Mauritius.

• Equinox Corporation, (‘Equinox US’), a 100 per cent owned subsidiary company of ISP, incorporated under the laws of the United States of America.

• Equinox Global Services Private Limited, (‘Equinox India’), a 100 per cent owned subsidiary company of ISP Internet Mauritius Company, incorporated in India with limited liability.

The Company is principally engaged in the business of providing information technology solutions to the financial services industry worldwide. i-flex has a suite of products, which caters to the needs of corporate, retail and investment banking as well as treasury operations and data warehousing. With the acquisition of Equinox business the Company has entered the area of business process outsourcing services to the mortgage banking industry.

2. Summary of significant accounting policies

(a) Basis of presentation

The financial statements are prepared under the historical cost convention, on the accrual basis of accounting, in conformity with accounting principles generally accepted in India and in accordance with the Accounting Standards referred to in section 211(3C) of the Companies Act,1956 (‘the Act’). The accounting policies applied by the Company are consistent with those used in the previous years. The financial statements are presented in the general format specified in Schedule VI to the Companies Act 1956 (‘the Act’).

The significant accounting policies adopted by the Company, in respect of the financial statements are set out below.

(b) 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 liabilities at the date of the financial statements and the results of operations during the reporting period/year end. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates.

(c) Fixed assets, depreciation and amortization

Fixed assets including assets under finance lease arrangements are stated at cost less accumulated depreciation. The Company capitalises all direct costs relating to the acquisition and installation of fixed assets. Depreciation is provided on the straight-line method, at the rates specified in Schedule XIV to the Act or based on the estimated useful life of assets, whichever is higher. Vehicles under finance lease are amortized over the useful life or lease term, which ever is lower (four to five years). Improvement to leasehold premises is depreciated over the useful life or lease period, whichever is lower (seven years).The estimated useful life considered for depreciation of fixed assets are as follows:

Estimated useful life (years)

Buildings 20Computer equipments 3Electrical and office equipments 7Furniture and fixtures 7

Costs incurred towards acquisition of customer contracts are capitalized based on a fair value of the same and amortized on a straight line basis over the remaining life of the contracts acquired. Product IPR is amortized on a straight line method over its estimated useful life of 60 months.

Goodwill on acquisition represents the difference between purchase price paid by the Company and the fair value of assets and liabilities acquired by the Company as part of the contract acquisition. (Refer note 8 of Schedule 16). Goodwill is amortized on a straight line method over a 42 month period.

The Company purchases certain specific use application software, which is in ready to use condition, for internal use. It is estimated that such software has a relatively short useful life, usually less than one year. The Company, therefore, charges to income the cost of acquiring such software. Enterprise wide resource software purchased by the Company and which will be implemented by the Company over a period of time is capitalized and depreciated, from its date put to use, over its estimated useful life.

Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets not ready to use before such date are disclosed under ‘Capital work-in-progress and advances’.


The carrying amounts of assets are reviewed at each balance sheet date if there is any indication of impairment based on internal/external factors. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the asset’s net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value at the weighted average cost of capital.

After impairment, depreciation is provided on the revised carrying amount of the assets over its remaining useful life.

A previously recognized impairment loss is increased or reversed depending on changes in circumstances. However the carrying value after reversal is not increased beyond the carrying value that would have prevailed by charging usual depreciation if there was no impairment.

(d) Investments

Trade investments refer to the investments made with the aim of enhancing the Company’s business interests in providing information technology solutions to the financial services industry worldwide. Long term investments are stated at cost less provision for diminution on account of other than temporary decline in the value of the investment. Current investments are stated at lower of cost and fair value determined on an individual investment basis.

(e) Revenue recognition

Revenues are recognized as follows:

(i) Product licenses and related revenues:• License fees are recognized, on delivery and subsequent

milestone schedule as per the terms of the contract with the end user.

• Implementation/Enhancement services are recognized as services are provided when arrangements are on a time and material basis. Revenues for fixed price contracts are recognized using the Proportionate Completion method to the extent of achievement of customer certified milestones.

• Product maintenance revenues are recognized, over the period of the maintenance contract.

(ii) 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 using the Proportionate Completion method to the extent of achievement of customer certified milestones.

Proportionate Completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the Proportionate Completion efforts are higher than the related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received.

The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract

revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss.

Reimbursable expenses for projects are invoiced separately to customers and although reflected as sundry debtors to the extent outstanding as at year-end, are not included as revenues or expenses.

(f) Foreign currency transactions

Foreign currency transactions during the period are recorded at the exchange rates prevailing on the date of the transaction. Foreign currency denominated monetary items are translated into rupees at the closing rates of exchange prevailing at the date of the balance sheet except for sundry debtors covered under forward exchange contracts, which are translated at forward rates. Non-monetary items, which are carried in terms of historical cost denominated in a foreign currency, are reported using the exchange rate at the date of the transaction. In respect of forward exchange contracts entered into by the Company to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction and which are not intended for trading or speculation purposes, the difference between the forward rate and the exchange rate at the inception of a forward exchange contract, is recognized as an income or expense on a straight-line basis over the life of the contract. All exchange differences are dealt with in the statement of profit and loss. There are no exchange differences relating to the acquisition of fixed assets.

(g) Research and development expenses for software 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.

(h) Retirement benefits

Retirement benefits to employees comprise payments to gratuity, superannuation and provident funds as per the approved schemes of the Company.

The Company has schemes of retirement benefits of provident fund, superannuation fund and gratuity fund in respect of which the Company’s contribution to the funds are charged to the statement of profit and loss. The gratuity fund and superannuation fund benefits of the Company are administered by a trust formed for this purpose through the Group Schemes of the Life Insurance Corporation of India (‘LIC’). In respect of gratuity, the adequacy of the accumulated funds available with the LIC has been confirmed on the basis of an actuarial valuation made at the year-end and provision has been made for the shortfall if any.

(i) Leave encashment

Accrual for leave encashment is estimated on the basis of an actuarial valuation for the unavailed leave balance standing to the credit of the employees at the year-end.



(j) Operating leases

Leases of assets under which all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under operating leases are recognized as an expense on a straight-line basis over the lease term.

(k) Income-tax

Provision for current income tax is made on the assessable income at the tax rate applicable to the relevant assessment year. Deferred income taxes are recognized for the future tax consequences attributable to timing differences between the financial statement determination of income and their recognition for tax purposes. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. Unrecognized deferred tax assets of earlier years are re-assessed and recognized to the extent that it has become reasonably certain that future taxable income will be available against which deferred tax assets can be realized. Deferred tax asset is recognized only on those timing differences, which

reverses in post tax free period, as company enjoys exemption under section 10A/10B.

(l) Earning per share

The earnings considered in ascertaining the Company’s earnings per share comprise the net profit after tax. The number of shares used in computing basic earnings per share is the weighted average number of shares outstanding during the period. The number of shares used in computing diluted earnings per share comprises the weighted average number of shares considered for deriving basic earnings per share, and also the weighted average number of shares, if any which would have been issued on the conversion of all dilutive potential equity shares. The number of shares and potentially dilutive equity shares are adjusted for the bonus shares and sub-division of shares.

(m) Provision and contingencies

A provision is recognized when an enterprise has a present obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on management estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current management estimates.

3. Commitments

(a) Capital commitments

Contracts remaining to be executed on capital account and not provided for (net of advances) aggregates to Rs. 68,988 as at March 31, 2005 (March 31, 2004 – Rs. 98,612).

(b) Forward contracts

The Company enters into forward foreign exchange contracts where the counter party is a bank. The Company considers the risk of non-performance by the counter party as non-material. As at March 31, 2005 the Company held forward foreign exchange contracts of USD 108 million. (Rs. 4,809 million) (March 31, 2004 – USD 37 million (Rs. 1,684 million)).

(c) Lease commitments

(i) Finance leases The Company takes vehicles under finance leases of upto five years. Future minimum lease payments under finance leases as at

March 31, 2005 and March 31, 2004 are as follows:

As at March 31, 2005 Principal Interest TotalNot later than one year 6,823 1,858 8,681 Later than one year and not later than five years 18,379 2,394 20,773 Total minimum payments 25,202 4,252 29,454



March 31, 2005 March 31, 2004

Not later than one year 56,972 45,611 Later than one year and not later than five years 109,755 56,405 Later than five years 38,175 51,495

204,902 153,511

(ii) Operating leasesThe Company has taken certain office premises and residential premises for employees under operating leases, which expire at various dates through year 2012. Gross rental expenses for the year ended March 31, 2005 aggregated to Rs. 92,757 (March 31, 2004 – Rs. 105,898). The minimum rental payments to be made in future in respect of these leases are as follows:


Particulars Products Services Corporate Total

Revenues 5,163,846 3,864,758 – 9,028,604 Cost of revenues (1,817,276) (3,033,587) – (4,850,863)Gross profit 3,346,570 831,171 – 4,177,741 Selling and marketing expenses (441,828) (27,136) – (468,964)General and administrative expenses (264,265) (225,804) (659,416) (1,149,485)Depreciation and amortisation (81,787) (121,374) (62,783) (265,944)Income from operations 2,558,690 456,857 (722,199) 2,293,348 Provision for dimunition in value of investment (71,208)Profit on sale/conversion of investment 16,804 Interest income 264,419 Other income/(expense) (32,256)Income before provision for income taxes 2,471,107 Provision for income taxes (494,706)Net profit 1,976,401

Other informationAs at March 31, 2005Segment assets 3,216,594 4,826,550 7,228,201 15,271,345 Segment liabilities 919,367 316,583 2,783,508 4,019,458 Share capital and reserves and surplus – – 11,251,887 11,251,887 Capital expenditure by segment 195,391 301,331 200,908 697,630

4. Segment information

Business segments are defined as a distinguishable component of an enterprise that is engaged in providing a group of related products or services and that is subject to differing risks and returns and 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 Company is organised geographically and by business segment. For management purposes the Company is primarily organised on a worldwide basis into two business segments:

a) Product licenses and related activities (‘Products’) andb) IT solutions and consulting services (‘Services’).

The business segments are the basis on which the Company reports its primary segment information to management.

Product licenses and related activities segment deals with banking software products like the FLEXCUBE suite of products, Reveleus 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, provision of 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.

The Company does not track assets and liabilities geographically.



Year ended March 31, 2004Particulars Products Services Corporate Total

Revenues 4,364,845 2,479,764 – 6,844,609 Cost of revenues (1,325,193) (1,920,432) – (3,245,625)Gross profit 3,039,652 559,332 – 3,598,984 Selling and marketing expenses (420,696) (31,175) – (451,871)General and administrative expenses (339,525) (237,256) (381,622) (958,403)Depreciation and amortisation (49,286) (61,765) 75,052 (35,999)Income from operations 2,230,145 229,136 (306,570) 2,152,711 Reversal for dimunition in value of investment, net 73,062 Loss on sale/conversion of investment (72,299)Interest income 218,234 Other income/(expense) (117,765)Income before provision for income taxes 2,253,943 Provision for income taxes (495,076)Net profit 1,758,867

Other InformationAs at March 31, 2004Segment assets 2,554,069 2,518,740 7,092,422 12,165,231 Segment liabilities 569,563 178,126 1,752,080 2,499,769 Share capital and reserves and surplus – – 9,665,462 9,665,462 Capital expenditure by segment 477,000 30,454 199,181 706,635

Segment revenue and expense:

Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consulting services. The expenses which are not directly attributable to a business segment are shown as corporate expenses.

Segment assets and liabilities:

Segment assets include all operating assets used by a segment and consist principally of debtors, deposits for premises and fixed

assets, net of allowances. Segment liabilities primarily includes deferred revenues, finance lease obligation, advance from customer, accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual segments, the carrying amount of certain assets and liabilities used jointly by two or more 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.

Geographical segments

The following table shows the distribution of the Company’s sales by geographical market :

Year ended Year endedRegions March 31, 2005 March 31, 2004

Amount % Amount %

United States of America 4,026,328 45% 2,894,315 43%Europe 1,875,670 21% 1,344,314 19%Asia Pacific 1,372,126 15% 1,206,155 18%Middle East and Africa 1,592,145 17% 1,275,351 18%Latin America and Carribean 162,335 2% 124,474 2%

9,028,604 100% 6,844,609 100%


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Names of Related Parties and description of relationship:

Promoter Company and its affiliates OrbiTech Limited OrbiTech Solution Limited Citigroup Inc.Citicorp Technology Holdings Inc., USACitibank branchesCiticorp Information Technology, Inc. e-Serve International Limited

Subsidiaries i-flex b.v., The Netherlandsi-flex pte., Singaporei-flex inc., USAi-flex America inc., USASuperSolutions, USAISP Internet Mauritius Company, MauritiusEquinox Corporation, USAEquinox Global Services Private Ltd., India

Joint Ventures Flexcel International Private Limited

Other entities where company has significant influence i-flex Employee Stock Purchase Scheme Trust

Key Managerial Personnel (‘KMP’) Rajesh Hukku – Chairman and Managing DirectorR Ravisankar – Chief Executive Officer – International Operations

and Business DevelopmentDeepak Ghaisas – Chief Executive Officer – India Operations,

Chief Financial Officer and Company SecretaryN R K Raman – COO – India OperationsMakarand Padalkar – Chief of Staff and Investor RelationsJoseph John – Executive Vice President, Universal Banking Products

DivisionV Shankar – Executive Vice President, PrimeSourcingOlivier Trancart – Head Global Sales and MarketingNandkumar Kulkarni – Sr. Vice President, Retail Banking Products

DivisionAtul Gupta – Sr. Vice President, Process and Quality Management

GroupVijay Sharma – Sr. Vice President, Consulting and System

IntegrationS Hariharan – Sr. Vice President, Infrastructure ServicesVivek Govilkar – Sr. Vice President, Human Resources DivisionSajal Mukherjee – Vice President North America Sales



6. Stock based compensation scheme

a) Employee stock purchase scheme (‘ESPS’)

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, April 1, 2001 and June 1, 2004 the Company adopted other Stock based schemes (‘1999 Scheme’, ‘2000 Scheme’, ‘2001 Scheme’ and ‘2004 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 employee. 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 employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to 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.

The Securities and Exchange Board of India (‘SEBI’) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 (‘SEBI guidelines’), which are applicable to stock option schemes for employees of all listed Companies. In accordance with these guidelines, the excess of market price of

the underlying equity shares on the date of grant of the stock options over the exercise price of the options is to be recognised in the books of account and amortised over the vesting period. However, no compensation cost would need to be recorded as the scheme terms are fixed and the exercise price equals the market price 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 the shares have been allocated to the employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purpose, the shares, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are dilutive.

b) 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 had 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 4,753,600 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the employees and directors of the Company and its subsidiaries. According to the Scheme, the Company has granted 4,598,920 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the eligible employees and directors of the Company and its subsidiaries prior to the IPO, and 176,000 options thereafter. 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 from the date of grant and is subject to the continued employment of the employee or the 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 the book building process for the options granted prior to the IPO and the fair market value on the date of grant for options granted thereafter. Accordingly, no compensation cost would need to be recorded as the exercise price would equal to the fair value of the shares on the date of grant.

The summary of the activity in the Company’s ESOP is as follows:

March 31, 2005 March 31, 2004

No. of shares No. of sharesOutstanding at the beginning of the year 4,313,550 4,499,400 Granted during the year 60,000 36,000 Exercised during the year (139,500) (109,350)Forfeited during the year (82,200) (112,500)Outstanding at the end of the year 4,151,850 4,313,550


7. Summary of assets and liabilities in joint venture

The summary of proportionate assets and liabilities of Flexcel, a 40% joint venture company are as follows:Flexcel (unaudited)

March 31, 2005 March 31, 2004Reserve and surplusCapital reserve 2,536 2,536 Share premium 310 310 Profit and loss account (16,582) (16,284)Net reserve and surplus (13,736) (13,438)

Fixed assetsCost 11,034 10,640 Less: Accumulated depreciation 7,288 4,670 Net book value 3,746 5,970 Capital advances – –

3,746 5,970 Current assets, loan and advancesSundry debtors 4,471 2,113 Cash and bank balances 1,453 2,327 Loans and advances 1,083 1,339

7,007 5,779 Less: Current liabilities and provisionsCurrent liabilities 5,626 6,324 Net current assets 1,381 (545)Net assets 5,127 5,425

The summary of proportionate income and expenses of Flexcel, a 40% joint venture company are as follows:

Flexcel (unaudited)

Year ended Year ended

March 31, 2005 March 31, 2004

RevenuesSales 15,442 5,480 Other income 279 585

15,721 6,065 ExpenditureGeneral and administrative expenses 13,330 6,817 Depreciation 2,689 1,559

16,019 8,376

Loss before tax (298) (2,311)

8. Contract acquisitions

On July 1, 2004, i-flex solutions limited acquired an IT consulting master services contract of a large investment bank from Trigyn Technologies Limited and its subsidiaries (‘Trigyn’) for a maximum total consideration of USD 4.042 million (Rs. 190,615) payable in tranches based on the actual revenues generated under the contract. In accordance with AS 26 – Intangibles issued by the Institute of Chartered Accountants of India, the Company has recognised an intangible asset of

Rs. 21,798 representing the value of the contracts acquired. This value has been determined based on an independent valuation obtained by the Company and will be amortised over the life of the contracts currently estimated at 12 months. The balance amount of Rs. 168,817 represents goodwill which will be amortised over a period of 42 months which represents the period of non-solicitation by Trigyn of similar services to the investment bank.



10. Aggregate expenses

a) Following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to the Companies Act 1956:


Salaries and bonus 3,725,197 2,415,466 Staff welfare expenses 132,923 91,377 Contribution to provident and other funds 96,966 93,888 Travel related expenses (net of recoveries) 1,147,532 987,187 Professional fees 511,139 326,250 Application software 277,845 154,667 Communication expenses 97,321 108,112 Rent 100,466 111,020 Advertising expenses 40,399 38,810 Power 65,549 46,706 Insurance 3,465 2,552 Repairs and maintenance:– Leasehold premises 6,246 4,860 – Computer equipments 19,752 34,275 – Others 10,802 10,884 Rates and taxes 14,605 14,516 Finance charge on leased assets 1,218 2,961 (Reversal)/Provision for doubtful debts, net 1,395 3,847 Bad debts written off – 34,553 Dispute settlement expenses – 40,000 Contract acquisition cost – 5,326 Other expenses 216,492 128,642

6,469,312 4,655,899

b) Managerial RemunerationSalary and Incentives 330 330 Contribution to Providend and Other Funds 24 24 Commission to non whole time Directors 12,770 12,912

13,124 13,266

In addition to the above, the Managing Director of the Company has also been provided remuneration aggregating Rs. 36,874 for the year ended March 31, 2005 (March 31, 2004 – Rs. 35,468) from i-flex inc., a subsidiary of the Company. The Company accrues for gratuity benefit for all employees as a whole. It is not possible to ascertain the provision for individual director and hence the same has not been disclosed above.

9. Acquisition of product IPR

a) On October 1, 2004, i-flex solutions ltd., acquired all rights, title, interest, ownership and benefit with respect to copyrights, licences, IPRs and trademarks for two software products (i.e. Flowmate and Documate) from SRA Systems Limited (‘SRA’) for a total consideration of Rs. 44,080. i-flex is entitled to exercise these rights only with respect to entities operating in the Banking, Financial Services and Insurance sectors. This arrangement has been recognized as an intangible asset in accordance with AS 26, Intangible Assets, as the Company has control over the assets and expects future economic benefits there from. Accordingly an amount of Rs. 44,080 has been recognized as Product IPR and will be amortised on a straight line basis over

its estimated useful life of 60 months. The charge for the current year amounts to Rs. 4,408.

b) On November 29, 2004, i-flex solutions ltd., acquired all rights, title, interest and ownership with respect to a software product ‘SimpleRM’ and entered into a service agreement for the transitioning of the software to i-flex from TriVium Systems Inc. and its subsidiaries (‘TriVium’) for a total consideration of USD 1.5 million (Rs. 66,736) payable in tranches. The rights under this arrangement are restricted to entities operating in the Banking, Financial services and Insurance sectors. In accordance with AS 26 – Intangible Assets, the Company has recognised the entire amount of Rs. 66,736 as intangible asset and will be amortised on a straight line basis over its estimated useful life of 60 months. The charge for the current year amounts to Rs. 4,449.


Computation of net profit for calculating commission payable to non-whole time directors in accordance with Section 198 of the Act


Net profit after tax 1,976,401 1,758,867 Add:Managerial remuneration 354 354 Commission to non-wholetime Directors 12,770 12,912 Provision for bad and doubtful debts 1,395 3,847 Provision/(Reversal) for doubtful advance – (7,253)Depreciation and amortisation 265,944 124,525 Provision for income taxes 494,706 495,076

2,751,570 2,388,328 Less:Profit/(Loss) on sale of investment – – Profit on retirement/sale of fixed assets, net 3,947 971 Depreciation and amortisation as per Section 350 of the Act (Note 1 below) 265,944 124,525 Net profit on which commission is payable 2,481,679 2,262,832

Maximum allowed as per the Act (11 percent) 272,985 22,628 Maximum approved by the shareholders (1 percent) 24,817 22,628 Commission approved by the board of directors 12,770 12,912

Note 1:The company depreciates fixed assets based on estimated useful lives that are lower than those implicit in Schedule XIV of the Act. Accordingly, the rates of depreciation used by the company are higher than the minimum rates prescribed by Schedule XIV.

(c) Payments to auditorsStatutory audits 3,900 3,500 Tax audit 500 500 Special reports 2,781 1,400 Certifications 388 432 Reimbursement of out-of-pocket expenses 400 200

7,969 6,032 (d) Earnings in foreign currency (on accrual basis)

Product licenses and related revenues 4,934,873 4,062,387 IT solutions and consulting services 3,859,367 2,459,346 Reimbursement of travelling expenses 233,837 173,245 Interest income 10,417 2,209

9,038,494 6,697,187

(e) Expenditure in foreign currency (on accrual basis)Travelling 917,059 894,278 Professional fees 298,590 187,582 Application software 90,658 110,195 Foreign taxes 43,565 37,492 Advertising 14,488 8,711 Salaries and bonus 1,543,491 986,318 Representative office expenses 2,069 1,454 Seminar expenses 21,937 11,813 Others 77,965 114,576

3,009,822 2,352,419

Exchange gain/(loss) on sales (144,789) (103,013)Exchange gain/(loss) other than on sales 102,962 (51,113)

(41,827) (154,126)

(f) Value of imports on CIF basis – capital goods 139,733 107,475




11. Utilisation of IPO Funds up to March 31, 2005

Proceeds from issue of Shares 1,780,800 Less : Issue Expenses (103,074)Net IPO Proceeds 1,677,726 Less : Utilisation of Funds

Bangalore Development Centre (548,404)Mumbai Development Centre (188,872)Investment in/Loans to subsidiary companiesi-flex solutions b.v. (24,380)i-flex solutions pte. (6,626)i-flex solutions inc. (73,064)Setting up Dubai marketing office (1,303)

Unutilised IPO Funds 835,077

12. Prior year comparatives

Prior year amounts have been reclassified, where necessary to confirm with current year’s presentation.

As per our report of even date attached For and on behalf of the Board of Directors


& Managing Director




Balance sheet abstract and company’s general business profile

I. Registration detailsRegistration number 5 3 6 6 6 State Code 1 1

Balance Sheet date 3 1 0 3 2 0 0 5Date Month Year

II. Capital raised during the year (amount in Rs. thousands)Public issue Rights issue

N I L N I LBonus issue Private placement

N I L N I L

III. Position of mobilisation and deployment of funds (amount in Rs. thousands)Total liabilities Total assets

1 1 2 5 1 8 8 7 1 1 2 5 1 8 8 7Sources of funds Paid-up capital Reserves and surplus

3 7 4 3 9 8 1 0 8 7 7 4 8 9Secured loans Unsecured loans

N I L N I LApplication of funds Net fixed assets Investments

1 4 0 7 1 4 7 4 2 5 4 1 4

Net current assets Miscellaneous expenditure9 4 1 8 1 1 8 N I L

Accumulated lossesN I L

IV. Performance of company (amount in Rs. thousands)Turnover Total expenditure

9 2 6 0 7 6 7 6 7 8 9 6 6 0+/– Profit/loss before tax +/– Profit/loss after tax

+ 2 4 7 1 1 0 7 + 1 9 7 6 4 0 1

(Please tick appropriate box + for profit, – for loss)Earning per share in Rs. Basic Dividend rate %

2 6 . 4 3 1 0 0

Earning per share in Rs. Diluted2 5 . 6 4

V. Generic names of three principal products/services of company(as per monetary terms)Item Code number(ITC code) N . A .

Product description

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i-flex solutions ltd. and SubsidiariesFinancial statements for the year ended

March 31, 2005 prepared in accordance with Indian Generally Accepted Accounting

Principles (Indian GAAP) (Consolidated).

Financials



Auditors’ report

To the Board of Directors ofi-flex Solutions Limited:

1. We have audited the attached consolidated balance sheet of i-flex Solutions Limited and its subsidiaries and joint ventures (together referred to as ‘the Group’ as described in Note 2 (a) of schedule 16 to the financial statements) as at March 31, 2005, the consolidated profit and loss account and the consolidated cash flow statement for the year then ended prepared in accordance with accounting principles generally accepted in India. These financial statements are the responsibility of the Group’s management and have been prepared by the management on the basis of separate financial statements and other financial information regarding components. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with auditing

standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes, examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

3. We report that the consolidated financial statements have been prepared by the Group’s management in accordance with the requirements of Accounting Standard (AS) 21,

Consolidated Financial Statements, Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements and Accounting Standard (AS) 27, Financial Reporting of Interests in Joint Ventures issued by the Institute of Chartered Accountants of India.

4. In our opinion and to the best of our information and according to the explanations given to us, the consolidated financial statements give a true and fair view in conformity with the accounting principles generally accepted in India:

a. in the case of the Consolidated Balance Sheet, of the state of affairs of the Group as at March 31, 2005;

b. in the case of the Consolidated Profit and Loss Account, of the profit of the Group for the year then ended; and

c. in the case of the Consolidated Cash Flow Statement, of the cash flows of the Group for the year then ended.

For S. R. Batliboi & Associates Chartered Accountants

Farokh T. Balsara Partner Membership No.: 44757 MumbaiApril 29, 2005


Consolidated balance sheet as at March 31


Schedules March 31, 2005 March 31, 2004Sources of fundsShareholders’ fundsShare capital 1 374,398 373,701 Reserves and surplus 2 11,078,505 9,144,847 Deferred tax liabilities 3 409 –

11,453,312 9,518,548

Application of fundsFixed assets 4Cost 3,095,872 2,220,107 Less: accumulated depreciation and amortisation 880,253 691,997 Net book value 2,215,619 1,528,110 Capital work-in-progress and advances 85,618 147,506

2,301,237 1,675,616

Investments 5 60,905 355,660

Deferred tax assets 3 – 687

Current assets, loans and advances 6Sundry debtors 3,790,998 2,376,504 Cash and bank balances 6,634,799 5,788,368 Other current assets 175,064 90,450 Loans and advances 1,153,934 963,544

11,754,795 9,218,866 Less: current liabilities and provisions 7Current liabilities 2,196,319 1,401,855 Provisions 467,306 330,426

2,663,625 1,732,281

Net current assets 9,091,170 7,486,585 11,453,312 9,518,548

Notes to accounts 16The schedules referred to above and notes to accounts form an integral part of the balance sheet.


S.R. Batliboi & Associates Rajesh Hukku Chairman

Y M Kale Chartered Accountants Director

& Managing Director

Farokh T. Balsara Deepak Ghaisas Tarjani Vakil Partner Company Secretary Director Membership No. : 44757




Consolidated statement of profit and loss for the year ended March 31


Year ended Year ended Schedules March 31, 2005 March 31, 2004

Revenues 8 11,385,928 7,881,289

Cost of revenues 9 (5,701,107) (3,494,071)

Gross profit 5,684,821 4,387,218

Selling and marketing expenses 10 (1,528,386) (1,158,650)General and administrative expenses 11 (1,154,979) (1,001,875)Depreciation and amortisation,net of write-back of opening cumulative effect of accounting change Rs. Nil (March 31, 2004 – Rs. 92, 888)

(309,347) (50,688)

Income from operations 2,692,109 2,176,005

Profit/(loss) on sale/conversion of investment 16,804 (16,877)(Provision)/reversal for diminution in value of investment, net (50,528) 16,712 Loss on equity investment (820) – Interest income 12 259,231 217,295 Other income/(expense) 13 34,598 (78,521)Income before provision for income taxes 2,951,394 2,314,614

Provision for income taxes 14 (627,063) (526,758)

Net income 2,324,331 1,787,856

Earnings per share of Rs. 5/- each (in Rs.)Basic 31.08 24.36 Diluted 30.16 23.26

Weighted average number of shares used in computing earnings per share

15

Basic 74,782,487 73,379,472 Diluted 77,071,820 76,868,821

Notes to accounts 16 The schedules referred to above and notes to accounts form an integral part of the profit and loss account.



& Managing Director

Farokh T. Balsara Deepak Ghaisas Tarjani Vakil Partner Company Secretary Director Membership No. : 44757



Consolidated statement of cash flow for the year ended March 31


2005 2004

Cash flows from operating activitiesIncome before provision for income taxes 2,951,394 2,314,614

Adjustments to reconcile income before provision for income taxes to cash provided by operating activities:Depreciation and amortisation 309,347 50,688 Loss on retirement/sale of fixed assets, net (3,960) (1,065)Share of associate loss 820 – (Profit)/Loss on sale/conversion of investments (16,804) 16,877 Reversal of diminution in the value of investments 50,528 (16,712)Interest income (259,231) (217,295)Effect of exchange difference on cash and bank balances (12,202) (108,889)Finance charge on leased assets 1,220 3,241 Profit on sale of Investment in Joint Venture – (2,188)Provision for doubtful debts 1,787 4,107 Reversal of provision for doubtful advance – (7,253)

71,505 (278,489) 3,022,899 2,036,125

Changes in assets and liabilitiesIncrease in sundry debtors (1,467,230) (945,415)Increase in loans and advances (275,380) (120,647)Increase in current liabilities and provisions 786,360 (956,249) 482,452 (583,610)Cash from operating activities 2,066,649 1,452,515 Receipt of refund of previous assessment years 10,539 30,296 Payment of domestic and foreign income taxes (599,235) (694,811)Net cash from operating activities 1,477,953 788,000

Cash flows from investing activitiesAdditions to fixed assets including capital work in progress (447,047) (583,497)Acquisition of SuperSolutions – (504,895)Acquisition of Customer Contract from Trigyn Technologies Limited

(186,195) –

Acquisition of IPR from SRA Systems Limited (39,672) – Acquisition of IPR from TriVium Technologies Limited (47,138) – Investment in ISP Internet Mauritius Company (188,046) – Investment in Login SA (6,593) – Proceeds from sale of fixed assets 12,377 1,651 Bank fixed deposits having maturity of more than 90 days matured during the year

2,877,613 2,910,000

Bank fixed deposits having maturity of more than 90 days booked during the year

(4,259,201) (2,877,613)

Proceeds from sale of investment in Joint Venture – 928 Proceeds from maturity of JM High Liquidity Fund 266,804 – Interest received 223,700 215,275 Net cash (used in) investing activities (1,793,398) (838,151)

Cash flows from financing activitiesProceeds from issuance of share capital 36,968 – Advance towards grant of options to IBM 5,367 – Issue of Shares Against ESOP Scheme – 29,593 Advance against equity shares to be issued under ESOP Scheme

6,546 –

Repayment of loan from ESPS Trust 67,000 78,501 Repayment of loan by ISP (41,368) – Payment of dividend and tax thereon (295,167) (105,242)Payment of lease obligations (11,119) (8,845)Net cash provided by financing activities (231,773) (5,993)



Consolidated statement of cash flow (Continued)for the year ended March 31


2005 2004

Effect of exchange difference on cash and bank balances 12,202 108,889

Net decrease in cash and cash equivalents (535,016) 52,745 Cash and cash equivalents at beginning of the year 2,908,513 2,855,768 Cash and cash equivalents at end of the year (Note 1) 2,373,497 2,908,513

Note (1):

Cash in hand 1,174 648 Balances with scheduled banks:

– Current accounts in foreign currency 320,754 1,185,988 – Deposit accounts 4,084,275 2,999,068 – Deposit amount of unutilised IPO funds 835,077 929,233 – Margin money deposit 125,006 121,330 – Other current accounts 48,257 39,600 – Unclaimed dividend amount 2,101 2,242

Balances with non-scheduled banks: – Current accounts in foreign currency 177 223 – Current accounts of foreign subsidiaries 1,217,978 510,036

Total Cash and bank balances 6,634,799 5,788,368

Less: Bank deposits having maturity of more than 90 days (4,259,201) (2,877,613) Unclaimed dividend accounts (2,101) (2,242)

2,373,497 2,908,513



& Managing Director

Farokh T. Balsara Deepak Ghaisas Tarjani Vakil Partner Company Secretary Director Membership No.: 44757



Schedules annexed to and forming part of the accountsfor the year ended March 31

As atMarch 31, 2005


Schedule 1: Share capital

Authorised:100,000,000 equity shares of Rs. 5/- each 500,000 500,000 (March 31, 2004 – 100,000,000 equity shares)

Issued, subscribed and paid-up:74,879,650 equity shares of Rs. 5/- each, fully paid up 374,398 373,701 (March 31, 2004 – 74,740,150 equity shares)

(a) Of the above, 62,121,800 equity shares of Rs. 5/- each had been issued as fully paid up bonus shares by capitalising the securities premium account.

(b) During the year ended March 31, 2005, the Company allotted 139,500 shares (March 31,2004 – 87,250 shares) to its employees who exercised their options under the ESOP scheme [Refer Note 6(b) of Schedule 16]

(c) Refer Note 6(b) of Schedule 16 for the options granted for unissued equity shares.(d) In Annual General Meeting of the Company held on August 19, 2004, the shareholders have approved a resolution to issue up to

98,000 options, representing 0.13% of paid up capital of the Company to IBM Global Services India Pvt. Ltd. (IBM). The Board of Directors of the Company at their meeting held on September 1, 2004, allotted 91,347 options to IBM at a price of Rs. 587.47 determined in accordance with the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 (“the SEBI Guidelines”). These options are convertible at a future date into equal number of equity shares of face value of Rs. 5/- each. IBM is entitled to subscribe to these options in two tranches over a period of 13 to 18 months from the date of issue of options subject to the completion of predetermined conditions. As required by SEBI guidelines, IBM has deposited Rs. 5.367 million, an amount equivalent to 10% of total consideration.

Schedule 2: Reserves and surplus

General reserveBalance, beginning of the year 6,738,569 5,488,569 Transferred from profit and loss account 1,500,000 1,250,000 Balance, end of the year 8,238,569 6,738,569

Securities premiumBalance, beginning of the year 2,110,466 2,267,997 Received during the year 36,270 29,157 Capitalised towards issue of bonus shares – (186,688)Balance, end of the year 2,146,736 2,110,466

Gain on dilution of equity investment in joint venture 2,536 2,536

Profit and loss accountBalance, beginning of the year 293,276 50,623 Net profit for the year 2,324,331 1,787,856 Transfer to general reserve (1,500,000) (1,250,000)Dividend paid on ESOP allotment (32) (32)Proposed dividend (374,398) (261,644)Corporate dividend tax (52,513) (33,527)Balance, end of the year 690,664 293,276

11,078,505 9,144,847

Schedule 3: Deferred tax (liability)/asset

Difference between book and tax depreciation, net (409) 687



Sche

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88,

358

179

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59,

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171

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Com

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133

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As atMarch 31, 2005


Schedule 5: Investments

a) Long term investments (i) Trade (unquoted)

EBZ Online Private Limited (Note a) 45,000 45,000 242,240 equity shares of Rs. 10/- each, fully paid-up (March 31, 2004 – 242,240)Less : Provision for diminuition in value of investment (45,000) –

– 45,000 (ii) Other than trade investments (unquoted)

Eastern Software Systems Limited (Note a) 7,406 7,406 268,283 equity shares of Rs. 10/- each, fully paid-up (March 31, 2004 – 268,283)Less : Provision for diminuition in value of investment (5,528) –

1,878 7,406

12.75% KEONICS Mahiti Bonds Series-1 (Note b) 20,000 20,000 400 Bonds of Rs. 50,000/- each fully paid-up(March 31, 2004 – 400)

National Savings Certificate – VIII issue 131 131

JM High Liquidity Fund - Serial Plan 2004 (Growth) (Note c) – 250,000 (March 31, 2004 – 24,965,796 units (and 858 fractions) of Rs. 10/- each)

Login SA (Note d) 6,593 – 33,000 equity shares of EUR 2/- each fully paid up (March 31, 2004 – Nil)Less: Loss of equity investment (820) –

5,773 – (iii) Other than trade investments (quoted)

6.75% Tax Free US-64 Bonds (Note e) 33,123 33,123 331,225 Bonds of Rs. 100/- each, fully paid-up(March 31, 2004 – 331,225 )

60,905 355,660

Aggregate cost of quoted investments 33,123 33,123 Aggregate market value of quoted investments 34,613 35,898 Aggregate amount of unquoted investments 27,782 322,537

Note a) The Company’s ownership interest in Eastern Software Systems Limited (‘ESSL’) is 6.62% . The Company also holds 19.5% shares in EBZ Online Private Limited (‘EBZ’). EBZ is a strategic partnership between Brihans Technologies Private Limited (‘BTPL’) and i-flex to integrate the selected and adapted software provided under i-flex’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’. Both companies are unlisted companies. The Company’s rights are limited to protecting its investments in ESSL and EBZ and it does not exert significant influence on the operations of these companies by way of representation on the board of directors, participation in policy making processes, material intercompany personnel or technological dependency. Accordingly, these investments are stated at cost less any decline in fair value below original cost when considered to be other than temporary. Management is of the view that the fair value of its investment in ESSL and EBZ has declined permanently.Hence, management has made a provision of Rs. 45 million towards diminution in the value of its investment in EBZ and Rs. 5.53 million towards partial diminution in the value of its investment in ESSL.

Note b) Investments in debt securities of 12.75% KEONICS Mahiti Bonds Series-1 allotted on February 1, 2001 are redeemable at par at the end of seven years from the date of allotment and have a put and call option at the end of five years from the date of allotment.

Note c) Investment in JM High Liquidity Fund – Serial Plan 2004 (Growth) was an investment in debt instrument funds. Consideration amounting to Rs. 266,804 was received on maturity of fund in April 2004.

Note d) In January, 2005, i-flex solutions ltd (‘i-flex’) acquired 33% equity stake in a France based treasury software specialists firm, Login SA from its existing shareholders for EUR 66,000. Login SA is a highly specialised front and mid office treasury solution provider with its product Login Acumen. The share purchase agreement was signed on November 15, 2004 between the parties. However, the arrangement closed only on January 7, 2005, post receipt of the requisite regulatory approvals.

Note e) On June 1, 2003 units in US-64 were converted into 6.75% Tax free US-64 bonds. The first 5,000 units were converted at the re-purchase price of Rs. 12/- each and the balance 3,306,258.278 units at Rs. 10/- each.These bonds are redeemable at par on June 1, 2008.



As atMarch 31, 2005


Schedule 6: Current assets, loans and advances

(a) Sundry debtors (unsecured)Debts outstanding for a period exceeding six months:– Considered good 1,389,528 275,604 – Considered doubtful 45,152 41,499

1,434,680 317,103 Other debts – Considered good 2,401,470 2,100,900

3,836,150 2,418,003

Less: Provision for doubtful debts (45,152) (41,499) 3,790,998 2,376,504

(b) Cash and bank balancesCash in hand 1,174 648 Balances with scheduled banks: – Current accounts in foreign currency 320,754 1,185,988 – Deposit accounts 4,084,275 2,999,068 – Deposit amount of unutilised IPO funds 835,077 929,233 – Margin money deposit 125,006 121,330 – Other current accounts 48,257 39,600 – Unclaimed dividend amount 2,101 2,242 Balances with non-scheduled banks: – Current accounts in foreign currency 177 223 – Current accounts of foreign subsidiaries 1,217,978 510,036

6,634,799 5,788,368 (c) Other current assets

Interest accrued on:– Bank deposits 57,752 22,215 – Bonds 1,202 1,208 Unbilled debtors 116,110 67,027

175,064 90,450

(d) Loans and advances (unsecured, considered good unless otherwise stated)Advances recoverable in cash or in kind or for value to be received:Loan to ESPS Trust 122,425 189,425 Loans to employees (secured) 1,922 8,335 Premises and other deposits 625,395 430,212 Prepaid expenses 140,114 97,409 Advance tax, net of provision for taxes 28,767 66,038 Other advances 235,311 172,125

1,153,934 963,544


As atMarch 31, 2005


Schedule 7: Current liabilities and provisions

(a) Current liabilitiesAccrued expenses 918,458 555,169 Deferred revenues 754,887 542,490 Accounts payable 155,024 136,332 Deferred forward exchange contracts 37,831 5,316 Advances from customers 36,939 9,118 Employee related liabilities 30,783 7,236 Finance lease obligations 32,444 22,912 Investor Education and Protection Fund to be credited by unclaimed dividends*

2,101

2,242

Advance against options granted to IBM (Refer Note (d) of Schedule 1) 5,367 – Advance against equity shares to be issued under the ESOP scheme 6,546 – Other current liabilities 215,939 121,040

2,196,319 1,401,855 * There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund.

(b) ProvisionsProposed dividend 374,398 261,644 Corporate dividend tax 52,509 33,523 Provision for leave encashment 40,399 35,259

467,306 330,426



Schedule 8: Revenues

Product licenses and related activities 5,975,085 4,790,468 IT solutions and consulting services 5,395,401 3,085,264 Share of sales of joint venture companies 15,442 5,557

11,385,928 7,881,289

Schedule 9: Cost of revenues

Employee costs 4,170,476 2,327,931 Travel related expenses (net of recoveries) 1,028,283 829,082 Professional fees 335,752 160,374 Application software 166,596 154,856 Contract acquisition cost – 21,828

5,701,107 3,494,071

Schedule 10: Selling and marketing expenses

Employee costs 775,574 416,675 Professional fees 215,138 216,621 Travelling expenses 165,489 203,814 Rent 65,372 62,308 Communication expenses 47,008 38,435 Advertising expenses 45,997 79,923 Miscellaneous expenses 213,808 140,874

1,528,386 1,158,650





Schedule 11: General and administrative expenses

Employee costs 452,741 397,671 Professional fees 122,167 62,417 Rent 99,744 106,253 Communication expenses 92,670 99,697 Power 63,795 45,164 Travelling expenses 47,696 36,332 Rates and taxes 11,722 15,053 Provision for doubtful debts, net – 50,474 Dispute settlement expenses – 40,000 Miscellaneous expenses 264,444 148,814

1,154,979 1,001,875

Schedule 12: Interest income

Interest on:– Bank deposits 253,380 206,537 [includes tax deducted at source of Rs. 44,376 (March 31, 2004 – Rs. 37,547)]– Bonds 4,812 4,606 [includes tax deducted at source of Rs. 533 (March 31, 2004 – Rs. 561)]– Loans to employees 386 1,092 – Income tax refunds 653 5,060

259,231 217,295

Schedule 13: Other income/(expense)

Foreign exchange loss, net (31,769) (118,775)Profit on retirement/sale of fixed assets, net 3,960 1,065 Profit on sale of investment in joint venture – 2,188 Reversal of provision for doubtful advance – 7,253 Advances written back – 26,352 Miscellaneous income 62,407 3,396

34,598 (78,521)

Schedule 14: Provision for taxation

Current taxesDomestic taxes 442,859 437,926 Foreign taxes 183,108 59,816 Deferred tax, net of opening cumulative effect of Rs. Nil (March 31, 2004 – Rs. 23,410)

1,096

29,016

627,063 526,758

Under the Indian Income-tax Act 1961, for the year ended March 31, 2005 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% during the year, of the profits earned from export revenues from six of its seven units registered under the Software Technology Park (‘STP’).Foreign taxes represents income taxes payable overseas by the Company in the United States of America, Kuwait, Singapore, Canada, Poland, the Netherland, Germany and Japan

As atMarch 31, 2005

As atMarch 31, 2004

Schedule 15: Reconciliation of basic and diluted shares used in computing earning per share

No. of shares No. of sharesWeighted average shares outstanding for Basic EPS 74,782,487 73,379,472 Add: Effect of dilutive stock options 2,289,333 3,489,349 Weighted average shares outstanding for Diluted EPS 77,071,820 76,868,821


Schedule 16: Notes to accounts for the year ended March 31, 2005

1. Background and nature of operations

i-flex solutions limited (‘i-flex’ or ‘the Company’), a listed company, was incorporated in India with limited liability on September 27, 1989. The Company’s principal shareholder is OrbiTech Limited (‘Orbitech’). Orbitech is a subsidiary of Citicorp Technology Holdings Inc., USA.

The Company has unilateral/joint control in the following entities:

• 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;

• Flexcel International Private Limited (‘Flexcel’), a 40 per cent owned joint venture company incorporated in March 2001 under Indian laws.

• i-flex America inc., (‘i-flex America’), a 100 per cent owned subsidiary company incorporated in December 2003 under the laws of the United States of America.

• SuperSolutions Corporation.,(‘SuperSolutions’), a 100 per cent owned subsidiary of i-flex America inc., incorporated under the laws of the United States of America.

• i-flex solutions inc., (‘i-flex inc.’), a 100 per cent owned subsidiary company of i-flex America inc., incorporated under the laws of the United States of America.

• ISP Internet Mauritius Company, (‘ISP’), a 100 per cent owned subsidiary company registered under the laws of Republic of Mauritius.

• Equinox Corporation, (‘Equinox US’), a 100 per cent owned subsidiary company of ISP, incorporated under the laws of the United States of America.

• Equinox Global Services Private Limited, (‘Equinox India’), a 100 per cent owned subsidiary company of ISP, incorporated in India with limited liability.

The Company together with its wholly owned and controlled subsidiaries, i-flex b.v., i-flex pte , i-flex inc., SuperSolutions and i-flex America inc., is principally engaged in the business of providing information technology solutions to the financial services industry worldwide. i-flex has a suite of products, which caters to the needs of corporate, retail and investment banking as well as treasury operations. With the acquisition of ISP business the Company has entered into the area of knowledge process outsourcing services to the mortgage banking industry. The Company also provides consulting services and develops bespoke software for its customers from the financial services industry. The Company derives a substantial portion of its revenues from the overseas markets.

Flexcel is a 40:40:20 joint venture between i-flex, HDFC Bank Limited and its group companies and Lord Krishna Bank Limited, which provides the capability of FLEXCUBE through an Application Service Provider (‘ASP’) model to various banks and financial institutions in India who may not wish to invest in creating and maintaining their own internal IT infrastructure.


(a) Basis of presentation and consolidation

The accompanying consolidated financial statements are prepared under the historical cost convention, on the accrual basis of accounting, in conformity with accounting principles generally accepted in India, to reflect the financial position and the results of operations of the Company together with its wholly owned subsidiary companies i.e. i-flex b.v., i-flex pte. i-flex America and ISP and joint venture company i.e. Flexcel (hereinafter collectively referred to as ‘the Group’). In preparing consolidated financial statements, the financial statements of the Company’s wholly owned subsidiaries are combined on a line to line basis by adding together like items of assets, liabilities, income and expenses. Any excess of the cost to the parent company of its investment in a subsidiary and the parent company’s portion of equity of subsidiary at the date, at which investment in the subsidiary is made, is described as goodwill and recognised separately as an asset in the consolidated financial statements. In respect of the joint venture companies, the Group applies the proportionate consolidation method. All material inter-company transactions and balances between the entities included in the consolidated financial statements have been eliminated. The financial statements are presented in the general format specified in Schedule VI to the Companies Act 1956 (‘the Act’). However, as these financial statements are not statutory financial statements, full compliance with the Act are not required and hence these financial statements do not reflect all the disclosure requirements of the Act.

The accounting policies have been consistently applied by the Company and are consistent with those used in the previous years.

The significant accounting policies adopted by the Group, in respect of the consolidated financial statements are set out below.

(b) 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 these estimates.

(c) Fixed assets and depreciation

Fixed assets including assets under finance lease arrangements are stated at cost less accumulated depreciation. The Company capitalises all direct costs relating to the acquisition and installation of fixed assets. Depreciation is provided on the straight-line method, at the rates specified in Schedule XIV to the Act or based on the estimated useful life of assets, whichever is higher. Vehicles under finance lease are amortized over the useful life or lease term, which ever is lower (four to five years). Improvement to leasehold premises is depreciated over the



useful life or lease period, whichever is lower (seven years).The estimated useful life considered for depreciation of fixed assets are as follows:

Estimated useful life (years)

Improvement to leasehold premises 7Buildings 20Computer equipments 3Electricals and office equipments 7Furniture and fixtures 7

Costs incurred towards acquisition of customer contracts are capitalized based on a fair value of the same and amortized on a straight line basis over the remaining life of the contracts acquired. Product IPR (Intellectual Property Rights) is amortized on a straight line method over its estimated useful life of 60 months.

Goodwill on acquisition represents the difference between purchase price paid by the Company and the fair value of assets and liabilities acquired by the Company as part of the contract acquisition. (Refer note 8 of Schedule 16). Goodwill is amortized on a straight line method over a 42 month period.

Goodwill arising on consolidation of the Company’s wholly owned subsidiary is evaluated for impairment annually.

The Group purchases certain specific use application software, which is in ready to use condition, for internal use. It is estimated that such software has a relatively short useful life, usually less than one year. The Company, therefore, charges to income the cost of acquiring such software. Enterprise wide resource software purchased by the Company and which will be implemented by the Company over a period of time is capitalized and depreciated, from its date put to use, over its estimated useful life.

Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets not ready to use before such date are disclosed under ‘Capital work-in-progress and advances’.

The carrying amounts of assets are reviewed at each balance sheet date if there is any indication of impairment based on internal/external factors. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the assets net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value at the weighted average cost of capital.

After impairment, depreciation is provided on the revised carrying amount of the assets over its remaining useful life.

A previously recognized impairment loss is increased or reversed depending on changes in circumstances. However the carrying value after reversal is not increased beyond the carrying value

that would have prevailed by charging usual depreciation if there was no impairment.

(d) Investments

Trade investments refer to the investments made with the aim of enhancing the Company’s business interests in providing information technology solutions to the financial services industry worldwide. Long term investments are stated at cost less provision for diminution on account of other than temporary decline in the value of the investment.

Current investments are stated at lower of cost and fair value determined on an individual investment basis.

(e) Revenue recognition

Revenues are recognized as follows:

(i) Product licenses and related revenues:• License fees are recognized, on delivery and subsequent

milestone schedule as per the terms of the contract with the end user.

• Implementation/Enhancement services are recognized as services are provided when arrangements are on a time and material basis. Revenues for fixed price contracts are recognized using the Proportionate Completion method to the extent of achievement of customer certified milestones.

• Product maintenance revenues are recognized, over the period of the maintenance contract.

(ii) 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 using the Proportionate Completion method to the extent of achievement of customer certified milestones.

Proportionate Completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the Proportionate Completion efforts are higher than the related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received.

The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss.

Reimbursable expenses for projects are invoiced separately to customers and although reflected as sundry debtors to the extent outstanding as at year-end, are not included as revenues or expenses.

(f) Foreign currency transactions

Foreign currency transactions during the year are recorded at the exchange rates prevailing on the date of the transaction.


Foreign currency assets and liabilities are translated into rupees at the rates of exchange prevailing at the date of the balance sheet except for sundry debtors covered under forward exchange contracts, which are translated at forward rates. In respect of forward exchange contracts entered into by the Group to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction and the difference between the forward rate and the exchange rate at the inception of a forward exchange contract is recognised as an income or expense on a straight-line basis over the life of the contract.

All the foreign operations of the Company are classified as integral foreign operations. The financial statements of an integral foreign operation are translated using the same principal as stated above. All exchange difference is dealt with in the statement of profit and loss. There are no exchange differences relating to the acquisition of fixed assets, which are adjusted, if material, in the cost of the fixed assets.

In translating the financial statements of a integral foreign operation for incorporation in the financial statements, the assets and liabilities classified as monetary items are translated using the closing rate and non-monetary items, other than investments and fixed assets, are translated using the exchange rate at the date of transactions i.e. the date when they were acquired. Fixed assets existing at the date of acquisition of a subsidiary are translated using the exchange rate at that date. Fixed asset acquired later are translated at closing rate. Investments are translated at historical cost. Revenue and expense items are translated using appropriate weighted average exchange rates for the respective period. The net exchange difference resulting from the translation of items in the financial statements of the subsidiary is recognised as income and expense for the period.

(g) Research and development expenses for software 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.


Retirement benefits to employees comprise payments to gratuity, superannuation and provident funds as per the approved schemes of the Group.

In India, the Company has schemes of retirement benefits of provident fund, superannuation fund and gratuity fund in respect of which the Company’s contribution to the funds are charged to the statement of profit and loss. The gratuity fund and superannuation fund benefits of the Company are administered by a trust formed for this purpose through the Group Schemes of the Life Insurance Corporation of India (‘LIC’). In respect of gratuity, the adequacy of the accumulated funds available with the LIC has been confirmed on the basis of an actuarial valuation made at the year-end.

(i) Leave encashment

Accrual for leave encashment is estimated on the basis of an actuarial valuation for the unavailed leave balance standing to the credit of the employees at the year-end.

(j) Operating leases

Leases of assets under which all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under operating leases are recognized as an expense on a straight-line basis over the lease term.

(k) Income-tax

Provision for current income tax is made on the assessable income at the tax rate applicable to the relevant assessment year. Deferred income taxes are recognized for the future tax consequences attributable to timing differences between the financial statement determination of income and their recognition for tax purposes. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Unrecognized deferred tax assets of earlier years are re-assessed and recognized to the extent that it has become reasonably certain that future taxable income will be available against which deferred tax assets can be realized. Deferred tax asset is recognized only on those timing differences, which reverses in post tax free period, as company enjoys exemption under section 10A/10B.

(l) Earnings per share

The earnings considered in ascertaining the Group’s earnings per share comprise the net profit after tax. The number of shares used in computing basic earnings per share is the weighted average number of shares outstanding during the year. The number of shares used in computing diluted earnings per share comprises the weighted average number of shares considered for deriving basic earnings per share, and also the weighted average number of shares, if any which would have been issued on the conversion of all dilutive potential equity shares. The number of shares and potentially dilutive equity shares are adjusted for the bonus shares and sub-division of shares.

(m) Provision and contingencies

A provision is recognized when an enterprise has a present obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on management estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current management estimates.



3. Commitments

(a) Capital commitmentsContracts remaining to be executed on capital account and not provided for (net of advances) aggregates to Rs. 74,363 as at March 31, 2005 (March 31, 2004 – Rs. 98,612).

(b) Forward contractsThe Company enters into forward foreign exchange contracts where the counter party is a bank. The Company considers the risk of non-performance by the counter party as non-material. As at March 31, 2005 the Company held forward foreign exchange contracts of USD 108 million. (Rs. 4,809 million) (March 31, 2004 – USD 37 million (Rs. 1,684 million)).

(c) Lease commitments(i) Finance leases

The Group takes vehicles, furniture & fixture, computer and other equipments under finance leases of upto five years. Future minimum lease payments under finance leases as at March 31, 2005 and March 31, 2004 are as follows:



(ii) Operating leasesThe Group has taken certain office premises and residential premises for employees under operating leases, which expire at various dates through year 2012. Gross rental expenses for year ended March 31, 2005 aggregated to Rs. 158,772 (March 31, 2004 Rs. 159,180).

March 31, 2005 March 31, 2004

Not later than one year 124,285 99,603 Later than one year and not later than five years 232,483 162,508 Later than five years 50,697 84,955

407,465 347,066


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Promoter Company and its affiliates OrbiTech Limited OrbiTech Solution Limited Citigroup Inc.Citicorp Technology Holdings Inc, USACitibank branchesCiticorp Information Technology, Inc. e-Serve International Limited

Key Managerial Personnel (‘KMP’) Rajesh Hukku – Chairman & Managing DirectorR Ravisankar – CEO International Operations and Business DevelopmentDeepak Ghaisas – CEO – India Operations, CFO and Company SecretaryN R K Raman – COO – India OperationsMakarand Padalkar – Chief of Staff & Investor RelationsV Senthil Kumar – CEO i-flex solutions b.v. Kishore Kapoor – CEO i-flex solutions pte ltdCafo Boga – COO – i-flex solutions inc.Sajal Mukherjee – CEO SuperSolutions Inc & Vice President North

America SalesSanjib (Don) Ganguly – CEO – Equinox CorporationV Shyam Sundar – COO – Equinox Global services Pvt. Ltd.Olivier Trancart – Head – Global sales and MarktingVivek Govilkar – Sr. Vice President, Human Resources and TrainingS Hariharan – Sr. Vice President, Infrastructure ServicesAtul Gupta – Sr. Vice President, Process & Quality Management GroupVijay Sharma – Sr. Vice President,Consulting & System IntegrationNandakumar Kulkarni – Sr. Vice President, Retail Banking Products

DivisionV Shankar – Executive Vice President, PrimeSourcing Joseph John – Executive Vice President, Universal Banking Products

Division


5. Segment information

Business 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 management purposes the Group is primarily organised on a worldwide basis into three business segments:a) Product licenses and related activities (‘Products’):b) IT solutions and consulting services (‘Services’) andc) Knowledge Processing Services (KPO Sevices)

The business segments are the basis on which the Group reports its primary operational information to management. Product licenses and related activities segment deals with banking software products like the FLEXCUBE suite of

products, Reveleus, Microbanker and Daybreak which cater to needs of corporate, retail and investment banking as well as treasury operations and datawarehousing requirements. The related activities include enhancements, implementation and maintenance activities.

IT solutions and consulting services comprise of bespoke software development, provision of computer software solutions and related consulting services arising from such activities. This segment is further sub-divided in the following subsegments i.e. Business intelligence, Customer relationship management, Brokerage, e-commerce, Internet services and IT and Business consulting. Knowledge Processing Services comprise business process outsourcing services for mortgage industry.

The Group does not track assets and liabilities geographically.

The activities of the joint venture are disclosed as a separate segment.


Particulars Products Services KPO – Services

Joint venture

Corporate Eliminations Total

RevenuesExternal revenue 5,975,084 5,347,106 48,296 15,442 – – 11,385,928 Inter-segment revenue 4,283 – – – – (4,283) – Total revenue 5,979,367 5,347,106 48,296 15,442 – (4,283) 11,385,928 Cost of revenues (2,021,241) (3,643,911) (27,668) (8,287) – – (5,701,107)Gross profit 3,958,126 1,703,195 20,628 7,155 – (4,283) 5,684,821 Selling and marketing expenses

(1,259,336) (255,704) (13,346) – – – (1,528,386)


(240,673) (225,806) (33,515) (760) (654,225) – (1,154,979)

Depreciation and amortisation

(111,457) (129,439) (2,979) (2,689) (62,783) – (309,347)

Inter segment expense – – – (4,283) – 4,283 – Income from operations 2,346,660 1,092,246 (29,212) (577) (717,008) – 2,692,109

Loss on equity investment (820)Interest income 259,231 Other income/(expenses) 874 Income before provision for income taxes

2,951,394

Provision for income taxes (627,063)Net income 2,324,331

Other informationAs at March 31, 2005Segment assets 2,896,104 2,712,691 298,660 10,753 8,221,220 – 14,139,428 Segment liabilities 1,051,506 316,583 42,277 5,626 1,270,534 – 2,686,526 Share capital and reserves and surplus

– – – – 11,452,903 – 11,452,903

Capital expenditure by segment

195,391 301,331 19,554 1,430 510,037 – 1,027,743




Particulars Products Services Joint ventures Corporate Eliminations Total

RevenuesExternal revenue 4,790,468 3,085,264 5,557 – – 7,881,289 Inter-segment revenue 3,668 – – – (3,668) – Total revenue 4,794,136 3,085,264 5,557 – (3,668) 7,881,289 Cost of Revenues (1,369,360) (2,124,711) – – – (3,494,071)Gross profit 3,424,776 960,553 5,557 – (3,668) 4,387,218 Selling and marketing expenses (987,009) (171,641) – – – (1,158,650)General and administrative expenses (356,795) (238,792) (3,543) (402,745) – (1,001,875)Depreciation and amortisation (52,827) (70,648) (1,848) 74,635 – (50,688)Inter segment expense – – (3,668) – 3,668 – Income from operations 2,028,145 479,472 (3,502) (328,110) – 2,176,005 Interest income 217,295 Other income/(expenses) (78,686)Income before provisionfor income taxes

2,314,614

Provision for income taxes (526,758)Net income 1,787,856

Other informationAs at March 31, 2004Segment assets 2,154,596 1,345,595 11,669 7,549,544 – 11,061,404 Segment liabilities 663,467 178,126 1,989 888,699 – 1,732,281 Share capital and reserves and surplus – – – 9,329,123 – 9,329,123 Capital expenditure by segment 488,239 30,454 2,645 752,142 – 1,273,480

Segment revenue and expense:Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consulting services. The expenses which are not directly attributable to a business segment are shown as corporate expenses.

Segment assets and liabilities:Segment assets include all operating assets used by a segment and consist principally of debtors, deposits for premises and fixed assets, net of allowances. Segment liabilities primarily includes deferred revenues, finance lease obligation, advance from customer, accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributable to individual segments, the carrying amounts of certain assets and liabilities used jointly by two or more 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.

Geographical segmentsThe following table shows the distribution of the group’s consolidated sales by geographical market:

Year ended Year ended Regions March 31, 2005 % March 31, 2004 %

United States of America 5,731,708 50% 3,515,236 45%Asia Pacific 1,627,582 14% 1,387,820 18%Europe 2,212,703 19% 1,582,076 20%Middle East and Africa 1,651,601 15% 1,271,683 15%Latin America and Carribean 162,334 2% 124,474 2%

11,385,928 100% 7,881,289 100%


6. Stock based compensation scheme

a) Employee stock purchase scheme (‘ESPS’)

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, April 1, 2001 and June 1, 2004 the Company adopted other Stock based schemes (‘1999 Scheme’, ‘2000 Scheme’, ‘2001 Scheme’ and ‘2004 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 employee. 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 employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to 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.

The Securities and Exchange Board of India (‘SEBI’) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 (‘SEBI guidelines’), which are applicable to stock option schemes for employees of all listed Companies. In accordance with these guidelines, the excess of market price of

the underlying equity shares on the date of grant of the stock options over the exercise price of the options is to be recognised in the books of account and amortised over the vesting period. However, no compensation cost would need to be recorded as the scheme terms are fixed and the exercise price equals the market price 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 the shares have been allocated to the employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purpose, the share, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are dilutive.

b) 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 had 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 4,753,600 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the employees and directors of the Company and its subsidiaries. According to the Scheme, the Company has granted 4,598,920 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the eligible employees and directors of the Company and its subsidiaries prior to the IPO, and 126,000 options thereafter. 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 from the date of grant and is subject to the continued employment of the employee or the directorwith the Company or its subsidiaries.

As per the terms of ‘the Scheme’, the exercise price would equate the price determined for the IPO through the book building process for the options granted prior to the IPO and the fair market value on the date of grant for options granted thereafter. Accordingly, no compensation cost would need to be recorded as the exercise price would equal to the fair value of the shares on the date of grant.

The summary of the activity in the Company’s ESOP is as follows:

March 31, 2005 March 31, 2004

No. of shares No. of sharesOutstanding at the beginning of the year 4,313,550 4,499,400 Granted during the year 60,000 36,000 Exercised during the year (139,500) (109,350)Forfeited during the year (82,200) (112,500)Outstanding at the end of the year 4,151,850 4,313,550



7. Summery of assets and liabilities in joint venture

For the year ended March 31, 2005, the Company had a joint ventures, Flexcel International Private Limited. Flexcel is a 40:40:20 joint venture between i-flex, HDFC Bank Limited and its group companies and Lord Krishna Bank LimitedAs described in Note 2(a) of Schedule 16, the summery of proportionate assets, liabilities, income and expenses (including inter-company transactions) considered for consolidated with financial statements of the Company are as follows:

Proportionate assets and liabilities Flexcel (unaudited)

March 31, 2005 March 31, 2004

Reserve and surplusCapital reserve 2,536 2,536 Share premium 310 310 Profit and loss account (16,582) (16,284)Net reserve and surplus (13,736) (13,438)

Fixed assetsCost 11,034 10,640 Less: Accumulated depreciation 7,288 4,670 Net book value 3,746 5,970 Current assets, loan and advancesSundry debtors 4,471 2,113 Cash and bank balances 1,453 2,327 Loans and advances 1,083 1,339

7,007 5,779 Less: Current liabilities and provisionsCurrent liabilities 5,626 6,324

Net current assets 1,381 (545)

Net assets 5,127 5,425

Proportionate income and expenses for the year ended

Flexcel (unaudited)

March 31, 2005 March 31, 2004 RevenuesSales 15,442 5,480 Other income 279 585

15,721 6,065 ExpenditureGeneral and administrative expenses 13,330 6,817 Depreciation 2,689 1,559

16,019 8,376

Loss before tax (298) (2,311)

8. Contract acquisition

On July 1, 2004, i-flex solutions limited acquired an IT consulting master services contract of a large investment bank from Trigyn TechnologiesLimited and its subsidiaries (‘Trigyn’) for a maximum total consideration of USD 4.042 million (Rs. 190,615) payable in tranches based on the actual revenues generated under the contract. In accordance with AS 26 - Intangibles, issued by the Institute of Chartered Accountants of India, the Company has recognised an intangible asset of Rs. 21,798 representing the value of the contracts acquired. This value has been determined

based on an independent valuation obtained by the Company and will be amortised over the life of the contracts currently estimated at 12 months. The balance amount of Rs. 168,817 represents goodwill which will be amortised over a period of 42 months which represents the period of non-solicitation by Trigyn of similar services to the investment bank.

9. Acquisition of product IPR

a) On October 1, 2004, i-flex solutions ltd. acquired all rights, title, interest, ownership and benefit with respect to copyrights, licences, IPRs and trademarks for two software products


(i.e. Flowmate and Documate) from SRA Systems Limited (‘SRA’) for a total consideration of Rs. 44,080. i-flex is entitled to exercise these rights only with respect to entities operating in the Banking, Financial Services and Insurance sectors. This arrangement has been recognized as an intangible asset in accordance with AS 26, Intangible Assets, as the Company has control over the assets and expects future economic benefits there from. Accordingly an amount of Rs. 44,080 has been recognized as Product IPR and will be amortised on a straight line basis over its estimated useful life of 60 months. The charge for the current year amounts to Rs. 4,408.

b) On November 29, 2004, i-flex solutions ltd. acquired all rights, title, interest and ownership with respect to a software product ‘SimpleRM’ and entered into a service agreement for the transitioning of the software to i-flex from TriVium Systems Inc. and its subsidiaries (‘TriVium’) for a total consideration of USD 1.5 million (Rs. 66,736) payable in tranches. The rights under this arrangement are restricted to entities operating in the Banking, Financial services and Insurance sectors. In accordance with AS 26 – Intangible Assets, the Company has recognised the entire amount of Rs. 66,736 as intangible asset and will be amortised on a straight line basis over its estimated useful life of 60 months. The charge for the current year amounts to Rs. 4,449.

10. Strategic investment

a) In March 2005, i-flex through one of its subsidiaries entered into an arrangement with Castek Software Inc. (‘Castek’), which provides i-flex an option to purchase a 34 per cent stake in Castek. As per the terms of the arrangement, i-flex has made a payment of USD 180,000, which has been considered as an advance towards investments

b) On November 15, 2004, the Board of Directors approved to acquire a 33% equity stake in France based treasury software specialists firm, Login SA for EUR 66,000. The share purchase agreement (‘agreement’) was signed on November 15, 2004 betweeen the parties. Login SA is a highly specialised front and mid-office treasury solution provider with its product Login Acumen. However, the arrangement closed only on January 7, 2005, post receipt of the requisite regulatory approvals.

11. Acquisition of ISP internet Mauritius

Effective December 22, 2004, i-flex acquired all the shares in ISP Internet Mauritius Company (‘ISP’), a corporation organized under the laws of the Republic of Mauritius. ISP holds all the shares in Equinox Corporation, a Delaware corporation (‘Equinox US’), and in Equinox Global Services Pvt. Limited, a corporation incorporated under the laws of India (‘Equinox India’). Equinox India and Equinox US (together referred to as ‘the Equinox Business’) are engaged in providing business process outsourcing services to the mortgage banking industry.The acquisition of ISP is in line with the Group’s business policy and will enable it to enrich and complement its existing product lines.

The acquisition was carried out in two stages, where the Company acquired a 84 per cent stake from one shareholder for a consideration of USD 4.35 million, and also repaid a debt of Equinox US to that shareholder aggregating USD 0.95 million, through a loan to Equinox US. Pursuant to this acquisition, the Company also entered into separate agreements with the other three shareholders to acquire the balance 16 per cent stake. The consideration for this 16 per cent is linked to the profit of the Equinox business over the next three fiscal years and is payable based on a pre-determined formula.

The total cost of acquisition of ISP is Rs. 192,115. Following is the value of the assets and liabilities acquired:

Particulars Amount in Rs.Property plant and equipment, net 17,741 Current assets 31,270 Current Liabilities (42,216)Long-term loan (41,368)The differential amount of Rs. 226,689 has been recognized as goodwill.



12. Other disclosure as required by schedule vi to the companies act,1956

Following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to the Act :


Salaries and bonus 5,105,988 2,916,593 Staff welfare expenses 172,004 138,102 Contribution to provident and other funds 114,092 87,583 Travel related expenses (net of recoveries) 1,241,467 1,069,228 Professional fees 673,057 458,179 Application software 210,154 156,370 Rent 168,473 168,561 Communication expenses 139,921 138,132 Advertising expenses 53,382 52,750 Power 67,520 48,141 Rates and taxes 15,957 17,206 Repairs and maintenance:

– Leasehold premises 7,190 5,385 – Computer equipments 20,404 35,030 – Others 14,052 12,746

Insurance 8,070 3,929 Finance charge on leased assets 4,241 3,241 Provision for doubtful debts, net 2,658 4,107 Contract acquisition cost – 21,828 Bad debts written off – 50,474 Dispute settlement expenses – 40,000 Other expenses 365,838 227,008

8,384,471 5,654,592

13. Prior year comparatives

Prior year amounts have been reclassified, where necessary to conform with current year’s presentation.

As per our report of even date attached For and on behalf of the Board of Directors


& Managing Director




i-flex solutions ltd. and SubsidiariesFinancial statements for the year ended

March 31, 2005 prepared in accordance with United States Generally Accepted

Accounting Principles (US GAAP).

Financials



Management’s discussion and analysis of financial condition and results of operations

The following discussion is based on our audited consolidated financial statements, which have been prepared in accordance with US GAAP.

The financial statements are consolidated for i-flex (The Group) that includes i-flex solutions limited and its wholly-owned subsidiaries, i-flex solutions b.v. i-flex solutions pte ltd. i-flex America inc., i-flex solutions inc, SuperSolutions Corporation and ISP Internet Mauritius Company. Investment in joint venture company Flexcel International Private Limited is accounted for using the equity method since we exert significant influence over their operations.

You should read the following discussion of our financial conditions and results of operations together with the detailed consolidated US GAAP financial statements and the notes to those statements. Our fiscal year ends on March 31 of each year.

Our industry

Over the past decade, the financial services industry has become increasingly dependent on IT. Today, IT is considered an important competitive advantage by financial institutions, and the global financial services industry spends more on IT than any other industry.

According to industry estimates, total IT spending in the financial services industry is projected to grow from USD 383 billion in 2004 to USD 437 billion by 2007. Financial institutions are seeking to address several business priorities including enhancing operational efficiency, improving customer acquisition and retention and strengthening regulatory and risk management systems. These priorities have significant implications for IT spending in the global financial services industry as they will drive decisions such as the replacement of core legacy systems, purchasing of packaged solutions, improvement in customer relationship management and outsourcing of business and IT processes.

Overview

i-flex is in the business of providing comprehensive Information Technology solutions to the financial services industry world-wide. The Group has a range of solutions which include packaged applications for the financial services industry (encompassing consumer banking, commercial banking, investor servicing and asset management for mutual funds, Internet delivery of financial services, as well as business intelligence and analytical applications); custom application software development, deployment, maintenance and support services (both onsite and offshore) for financial institutions; and business and IT consulting services in the financial services domain. i-flex’s range

of products and customized services enable financial institutions to cut costs, respond rapidly to market needs, enhance customer service levels and mitigate risk.

As of March 31, 2005, the Group had serviced 544 customers in 112 countries through its portfolio of products and services. The Group’s de-risking revenue model continues to deliver consistent results despite changing global economic conditions. The Group is not overly dependent on any one country or geographical region and has a diversified revenue stream from a widespread customer base.

We are organised by region and by business segment. We have three primary business segments – the Products Business (comprising product licensing, customisation, implementation and support); the Services Business (providing customized software and consulting services) and the Knowledge Process Outsourcing Services (provides value added knowledge outsourcing). These are described in greater detail below:

Products

Our flagship product offering is the FLEXCUBE suite, which comprises a comprehensive range of packaged solutions addressing the transaction processing, accounting, business intelligence, analytical application and Internet delivery needs of a wide range of financial institutions, including corporate banks, consumer banks, universal banks, capital market intermediaries, investment banks and other specialized financial institutions.

Reveleus is i-flex’s latest offering that addresses the Business Intelligence and Analytics market. Reveleus, the industry’s only metadata-driven information management infrastructure, coupled with a suite of integrated analytical applications, is a business intelligence solution. Reveleus improves quality and consistency of information, thereby helping organizations reduce risk and improve efficiencies in information gathering, analysis and distribution.

We have added the Daybreak Lending Suite to our portfolio through the acquisition of US based SuperSolutions. Daybreak is a comprehensive lending system that automates all aspects of financing for the consumer lending industry. Daybreak is designed to handle specialized lending requirements, enabling lending institutions to create new revenue streams and increase profits. Daybreak can be implemented as a specialized point solution or as part of a core banking solution such as FLEXCUBE.

TriVium – Simple RM acquisition

During the year we acquired rights, title, interest and ownership with respect to a software product SimpleRM (‘Product’) and


services for successful transitioning of the software to i-flex, from TriVium Systems Inc. and its subsidiaries (‘TriVium Group’).i-flex has been granted rights to modify, change, distribute the license to any customer in the Banking, Financial Services and Insurance sector.

SRA systems – flowmate & documate

During the year we also acquired all rights, title, interest, ownership and benefit with respect to copyrights, licenses, IPRs and trademarks for software products – Flowmate and Documate (‘the Products’) of SRA Systems Limited (‘SRA’). These rights are restricted only to the Banking, Financial Services and Insurance sector. However, SRA retains the right to license Documate to all clients. Further, we have also procured the employees who are trained in developing, testing, implementing, supporting and maintaining the Products.

Services

i-flex offers financial institutions customized IT solutions through its domain and technology Centers of Excellence under the brand name PrimeSourcing. Our offerings encompass areas such as Capital Markets, Business Intelligence and Data Warehousing, CRM, Development & Integration Services, e-Solutions, Insurance and Payment Systems. PrimeSourcing offerings include Business and Technology Consulting, Application Development, Application Reengineering, Maintenance and Support, Technology Deployment & Management, System Integration and Quality Management services through a cost-effective combination of onsite, offsite/near-shore and offshore delivery models.

Knowledge Process Outsourcing (KPO) services

During the year i-flex acquired all of the issued and outstanding equity shares of ISP Internet Mauritius Company (‘ISP Internet’) a corporation organized under the laws of the Republic of Mauritius along with its two wholly owned subsidiaries: (i) Equinox, Inc., (‘Equinox US’), and (ii) Equinox Global Services Pvt. Ltd.,(Equinox India)

(‘Equinox India’ together with ‘Equinox US’, as ‘Equinox’).

Equinox is engaged in providing business process outsourcing services to the mortgage banking industry. The acquisition of ISP is in line with the Group’s business policy and will enable it to enrich and complement its existing IT Solutions Portfolio. With this acquisition i-flex has made a foray in the Knowledge Process Outsourcing (KPO) Sector of the software industry.

Business metrics

Our total revenues in fiscal 2005 were Rs. 11,404.4 million, representing an increase of 42% from Rs. 8,053.3 million in fiscal 2004 and a CAGR of 38% since fiscal 2002. The net income in fiscal 2005 was Rs. 2,031.4 million, against as

Rs. 1,778.5 million in fiscal 2004 and a CAGR of 25% since fiscal 2002. Our net income margins are 18% and 22% for the fiscal years 2005 and 2004 respectively. We define net income margins for a particular period as the ratio of net income to total revenues during such period. We had 4,747 employees as on March 31, 2005 against 2,974 at the end of the previous year.

Products business



Product revenues 6,061.2 4,924.3Cost of product revenues (2,206.5) (1,501.2)Sales and marketing expenses (1,260.2) (985.7)General and administrative expenses

(240.7) (355.8)

Depreciation and amortization (138.5) (64.4)Income from operations 2,215.3 2,017.2 Operating margin* 37% 41%

* Operating margin is defined as income from operations from the Products Business (excluding corporate expenses) as a percentage of total products revenue.

Products revenues

As of March 31, 2005, our products included the FLEXCUBE suite, Reveleus and Daybreak Lending Suite. Our product revenues represented 53.1% and 61% of our total revenues for fiscal years ended 2005 and 2004, respectively. Our product revenues were Rs. 6,061.2 million during the fiscal year ended March 31, 2005, an increase of 23% from Rs. 4,924.3 million during the fiscal year ended March 31, 2004.

Our product revenues comprise license fees, professional fees for implementation and enhancement services and annual maintenance contract (post contract support) fees for our products.

License fee

Our standard licensing arrangements for our products provides the user a perpetual right to use the product for a pre-defined number of users and sites upon the payment of a license fee. The license fee is a function of a variety of quantitative and qualitative factors including the number of copies sold, the number of concurrent users supported, the number and combination of the modules sold, and the number of sites and geographical locations. The licenses are non-exclusive, personal, non-transferable and royalty free.

Implementation fee

After products are licensed to customers, we provide services related to the implementation of the products at the customer sites, integration with other customer systems and enhancement



of the products to address the specific requirements of the customers. The customer is typically charged a service fee either on a fixed price basis or a time and material basis. The implementation and enhancement services comprise functional enhancements, interface building, implementation planning, data conversion, training and product walkthrough and are provided to customers who enter into licensing arrangements with us.

Annual maintenance contracts fees

We also earn fees relating to the provision of annual maintenance contracts after the implementation of a product and following the expiry of the warranty period. Under these agreements, we provide technical support, maintenance, problem solving and upgrades of the licensed products. These support agreements are typically entered for a period of 12 months.

While the revenues from license fees and implementation and enhancement services rendered by us depend on the number of new customers we add and the implementation project lifecycle therefore would vary from year to year. The annual maintenance contracts generate steady revenues and would grow to the extent of new customers coming under the PCS. The percentage of our revenues from these streams is as follows:

Fiscal Year Ended March 31 2005 2004License fees 35% 36%Implementation and customization fees

47% 46%

PCS arrangements 18% 18%Total 100% 100%

The consistency, from one period to another, of the revenues recognized from license fees and implementation and customization services rendered by us, depends on the number of new customers and timing of the related implementation. Our Post Contract Support arrangements, though, generate steady revenues that are therefore more predictable.

Cost of products revenues and operating expenses

The cost of our product revenues consists of costs attributable to the implementation, customization and maintenance of our Products Business. These costs primarily consist of compensation expenses for all of our IT professionals working in the Products Business, project-related travel expenses, professional fees paid to software services vendors and the cost of application software for internal use.

Research and development costs are expensed as incurred. Software development costs are expensed as incurred until technological feasibility is established. Software product development cost incurred subsequent to the achievement

of technological feasibility is not material and is expensed as incurred.

Our operating expenses include selling and marketing expenses, general and administrative expenses that consist of commissions payable to our partners, product advertising, marketing expenses and allocated overhead expenses associated with support and monitoring functions such as human resources, facilities and infrastructure expenses, quality assurance and finance. Our sales and marketing expenses have increased faster than our other operating expenses, and we expect this trend to continue given the growing strength of our marketing efforts and entry into newer markets.

Services business



Services revenues 5,294.9 3,129.0Cost of services revenues (3,713.9) (2,155.0)Sales and marketing expenses (255.7) (171.6)General and administrative expenses

(225.8) (237.6)

Depreciation and amortization (129.4) (72.6)Income from operations 969.9 492.1 Operating margin* 18% 16%

* Operating margin is defined as income from operations from the Services Business (excluding corporate expenses) as a percentage of total services revenue.

Services revenues

Our services revenues represented 46.4% and 39% of our total revenues for the fiscal year ended March 31, 2005 and 2004. Our services revenues were Rs. 5,294.9 million in the fiscal year ended March 31, 2005, an increase of 69% from Rs. 3,129.0 million in the fiscal year ended March 31, 2004.

The contracts relating to our Services Business are either time and material contracts or fixed price contracts. The percentage of total services revenues from time and material contracts was 82% in fiscal 2005 and 79% in fiscal 2004, with the remainder of our services revenues attributable to fixed price contracts.

We provide our services through offshore centers located in India, onsite teams operating at our customers’ premises and our development centers located in other parts of the world. Offshore services revenues consists of revenue from work conducted at our development centers in India and for Indian customers at their locations. Onsite revenues consist of work conducted at customer premises outside India and our development centers outside India. The composition of our onsite and offshore revenue is determined by the project life cycle. Typically, the


work involving the design of new systems or relating to a system roll-out would be conducted onsite, while the core software development, maintenance and support activity may be conducted offshore. We received 63% of our services revenue from on-site work and 37% from off-shore work during the fiscal years 2005 and 2004.

Our services revenues and profits are also affected by the rate at which our software professionals are utilized. The utilization rate is calculated as the percentage billed for our personnel in a particular period to average number of staff that is considered billable in that same period. For the purpose of calculating the number of billable staff, we exclude the personnel that are engaged in management, administration, marketing support, initial training (six months for personnel without any prior work experience and three months for personnel with over two years experience) and personnel allocated to the approved internal investments projects. Our onsite personnel deployment on projects is based on project needs and therefore such personnel are fully utilized. Utilization rates for our Services Business were 76% and 84% for fiscal 2005 and 2004 respectively.

Cost of services revenues and operating expenses

The cost of revenues for services consists primarily of compensation expenses for our software professionals; cost of application software for internal use, travel expenses and professional fees paid to software services vendors. We recognize these costs as incurred. Our operating expenses include selling, general and administrative expenses and allocated overhead expenses associated with support and monitoring functions such as human resources, corporate marketing, information management systems, quality assurance and finance.

Knowledge Process Outsourcing (KPO) services business


Year ended March 31

2005Services revenues 48.3 Cost of services revenues (27.7)Sales and marketing expenses (13.3)General and administrative expenses (33.6)Depreciation and amortization (6.3)Income from operations (32.5) Operating margin* (67%)

* (This year being the first year of operation of KPO Services after acquisition of ISP Internet Mauritius Company in December 2004 comparable data cannot be given)

Our KPO services revenues represented 0.5% of our total revenues for the fiscal year ended March 31, 2005.

Cost of Knowledge Process Outsourcing (KPO) services revenues and operating expenses

The cost of revenues for KPO Services consists primarily of compensation expenses for our professionals, travel expenses and professional fees paid to vendors. We recognize these costs as incurred. Our operating expenses include selling, general and administrative expenses and allocated overhead expenses.

Geographic breakup of revenues

In line with the Group’s strategy to increase penetration in the advanced markets the contribution in the revenues from USA and Europe have increased 5% as compared to previous year while the overall revenues are well diversified. The following table represents the percentage breakup of our revenues for our Products and Services Businesses by region:

Year ended March 31, 2005 Year ended March 31, 2004Products

RevenuesServices

RevenuesTotal

RevenuesProducts

RevenuesServices

RevenuesTotal

RevenuesUSA 30% 72% 50% 26% 73% 44%Middle East and Africa 24% 3% 14% 25% 4% 16%Asia Pacific 18% 12% 15% 20% 15% 18%Europe 25% 12% 19% 27% 8% 20%Latin America and Caribbean 3% 1% 2% 2% – 2%Total 100% 100% 100% 100% 100% 100%



Customer concentration

Our operations and business depend on our relationships with a number of large customers. Revenues from our top ten customers for fiscal 2005 and 2004 were 27% and 31%, respectively, as a percentage of our total revenues. The top ten customers in our Services Business contributed 37% of the total services revenues, while the top ten customers in our Products Business contributed 36% of the total products revenues during fiscal 2005.

The percentage of total revenues during fiscal years 2005 and 2004 that we derived from our largest customer, largest five customers and largest ten customers is provided in the accompanying table. In the table, various affiliates of Citigroup are classified as separate customers, and the last row sets forth the percentage of total revenues we earned from the various affiliates of Citigroup in respect of our Products and Services Business individually and in respect of our business taken as a whole.

Fiscal years ended March 31Products Revenues Services Revenues Total

2005 2004 2005 2004 2005 2004Top customer 14% 15% 6% 8% 7% 9%Top 5 customers 26% 31% 24% 30% 18% 21%Top 10 customers 36% 42% 37% 44% 27% 31%Citigroup and its affiliates 22% 24% 65% 70% 42% 42%

Trade receivables

Trade receivables as of March 31, 2005 and fiscal 2004 were Rs. 3,822.14 and Rs. 2,387.50 million respectively. Our days of sales outstanding (which is the ratio of sundry debtors to total sales in a particular year multiplied by 365) for fiscal 2005 and 2004 were approximately 115 and 108 respectively. The Group periodically reviews its account receivables outstanding as well as the aging, quality of the account receivables, customer relationship and history of the client. The following table presents the age profile of our debtors:

Period in days 2005 20040 – 180 86% 88%More than 180 14% 12%Total 100% 100% Foreign currency and treasury operationsA substantial portion of our revenues is generated in foreign currencies while a majority of our expenses are incurred in Indian Rupees and the balance is incurred in US Dollars and European currencies. We have a conservative philosophy of treasury operations and the policy is to invest funds substantially in time deposits with well-known, sound Indian and foreign banks. The Group has ensured adequate controls over asset management

including cash management operations, credit management and debt collection operations.

The Group also balances funds in USD accounts or INR deposits based on the comparative interest rates and currency requirements. The Group books forward covers from time to time in line with its treasury management philosophy.

Income taxes

Currently, we benefit from the tax holidays the Government of India gives to software products and IT services exporters from specially designated software technology parks in India. As a result of these incentives, our operations have been subject to relatively lower tax liabilities in India. These tax incentives currently include a 10-year tax holiday from Indian corporate income-taxes for the operation of six of our Indian facilities. As a result a substantial portion of our pre-tax income has not been subject to significant tax in recent years.

The Finance Act, 2000 restricts the ten-year tax holiday available from the fiscal year in which the undertaking begins to manufacture or produce or until fiscal 2009, whichever is earlier. Accordingly, facilities set up after fiscal 2000 will enjoy the benefit of the tax holiday only until fiscal 2009. For six of our facilities, these benefits expire in stages through 2009.


Income taxes also include foreign taxes representing income taxes payable overseas by us in various countries.

Employee Stock Purchase Scheme (ESPS)

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, April 1, 2001 and June 1, 2004, the Company adopted another Stock based schemes (“1999 Scheme”, “2000 Scheme”, “2001 Scheme” and “2004 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.

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 recognize 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.

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 had 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 4,753,600 options to the employees and directors of the Group. According to the ESOP, the Company has granted 4,548,920 options to the eligible employees and directors of the Company and its subsidiaries, prior to the IPO, and 176,000 options thereafter. As per the terms of the Scheme, the exercise price would equate the IPO price for the options granted prior to the IPO and at the fair market value on the date of grant for options granted thereafter. 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.

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 recognized 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 or the fair market value on the date of grant for options granted thereafter.

A summary of the activity in the Group’s ESOP is as follows:

March 31, 2004 March 31, 2005

Movement during the yearNumber of

OptionsWeighted-average

PriceNumber of

OptionsWeighted-average

Price

Outstanding at beginning of year 4,499,400 268.01 4,313,550 270.08Granted during the year 36,000 514.52 60,000 555.14Exercised during the year (109,350) (270.63) (139,500) (265.00)Forfeited during the year (112,500) (265.00) (82,200) (294.55)Outstanding at end of year 4,313,550 270.08 4,151,850 273.88



Price range for the options outstanding as on March 31, 2005:

Grant Price (Rs.) No of options outstandingMarch 31

2004 2005250 – 400 4,201,550 3,992,650400 – 550 112,000 159,200

Analysis of our financial results

Comparison of fiscal 2005 with fiscal 2004

Revenues

Our total revenues in the fiscal year ended March 31, 2005 were Rs. 11,404.4 million, an increase of 42% over our total revenues of Rs. 8,053.3 million in the fiscal year ended March 31, 2004. The increase in revenues was attributable to a 23% increase in the revenues from our Products Business and a 69% increase in the revenues from our Services Business.

Products revenues

Our products revenues in the fiscal year ended March 31, 2005 were Rs. 6,061.2 million, an increase of 23% over our products revenues of Rs. 4,924.3 million in the fiscal year ended March 31, 2004. The revenues from license fees comprised 35% of the revenues, implementation fees comprised 47% and Annual Maintenance Contracts comprised 18% of the revenues for the fiscal 2005.

Services revenues

Our services revenues in the fiscal year ended March 31, 2005 were Rs. 5,294.9 million, an increase of 69% over our services revenues of Rs. 3,129.0 million in the fiscal year ended March 31, 2004. Revenues from time and material contracts comprised 82% of the revenues and fixed price contracts comprised 18% for the fiscal 2005.

Knowledge Process Outsourcing (KPO)

Our revenues from KPO Services in the fiscal year ended March 31, 2005 were Rs. 48.3 million. This year being the first year of operation of KPO Services after acquisition of ISP Internet Mauritius Company in December 2004 comparable data cannot be given.

Interest and other income

Our interest and other income in the fiscal year ended March 31, 2005 was Rs. 277.1 million, an increase of 111% over our interest and other income of Rs. 131.4 million in the fiscal year ended March 31, 2004. The increase was mainly due to decrease in the foreign exchange losses amounting to Rs. 67 million a result of effective hedging policy and increase in interest from Bank Deposits of Rs. 42 million as compared to fiscal 2004.

Cost of revenues and operating expenses

Cost of revenues

Our cost of revenues in the fiscal year ended March 31, 2005 was Rs. 5,948.1 million, an increase of 63% over our cost of revenues of Rs. 3,656.2 million in the fiscal year ended March 31, 2004. Our cost of revenues as a percentage of total revenue was 52% in the fiscal year ended March 31, 2005, compared to 45% in the fiscal year ended March 31, 2004.

Our cost of products revenues in the fiscal year ended March 31, 2005 was Rs. 2,206.5 million, an increase of 47% over our cost of products revenues of Rs. 1,501.2 million in the fiscal year ended March 31, 2004. This increase was primarily attributable to increased employee cost, travel cost, professional fees paid to software services vendors and application software cost. The increase in the employee cost was due to the increase in the number of our personnel. Our Products Business employed 1,514 and 1,148 employees as of March 31, 2005 and 2004, respectively, growth of 32% over last year. Our cost of products revenues as a percentage of products revenue was 36% in the fiscal year ended March 31, 2005, compared to 30% in the fiscal year ended March 31, 2004.

Our cost of services revenues in the fiscal year ended March 31, 2005 was Rs. 3,713.9 million, an increase of 72% over our cost of services revenues of Rs. 2,155.0 million in the fiscal year ended March 31, 2004. The primary reasons for the increase were higher employee cost, professional fees paid to software services vendors and travel costs for projects. The employee and travel costs rose due to a higher number of personnel and increased travel to customer sites on assignments. There is a rise in the professional fees on account of hiring of professional vendor services for turnkey projects in US region. Our Services Business employed 2,673 and 1,401 employees as of March 31, 2005 and 2004, respectively, growth of 91% over last year. Our cost of services revenues as a percentage of services revenue was 70% in the fiscal year ended March 31, 2005, compared to 69% in the fiscal year ended March 31, 2004.

Sales and marketing expenses

Our sales and marketing expenses in the fiscal year ended March 31, 2005 were Rs. 1,529.2 million, an increase of 32% over our sales and marketing expenses of Rs. 1,157.4 million in the fiscal year ended March 31, 2004. The increase in sales and marketing expenses of Rs. 371.8 million was principally due to enhanced international marketing efforts, which resulted in increased employee strength, increase in the marketing seminars and commissions to marketing partners and alliances. Our sales and marketing expenses as a percentage of total revenues was at 13% for the fiscal year ended March 31, 2005 compared to 14% for the fiscal year ended March 31, 2004.

Our sales and marketing expenses for our Products Business in the fiscal year ended March 31, 2005 were Rs. 1,260.2 million,


an increase of 28% over our sales and marketing expenses for our Products Business of Rs. 985.7 million in the fiscal year ended March 31, 2004. The increase was principally attributable to the increased international marketing efforts, which resulted in higher employee cost, increase in the marketing seminars and professional fees. Sales and marketing expenses for our Products Business as a percentage of products revenues was 21% in the fiscal year ended March 31, 2005, compared to 20% in the fiscal year ended March 31, 2004.

Our sales and marketing expenses for our Services Business in the fiscal year ended March 31, 2005 were Rs. 255.7 million, an increase of 49% over our sales and marketing expenses for our Services Business of Rs. 171.6 million in the fiscal year ended March 31, 2004. The increase was principally attributable to the increased international marketing efforts, which resulted in higher employee cost. Sales and marketing expenses for our Services Business as a percentage of services revenues remained at 5% in the fiscal year ended March 31, 2005, and the fiscal year ended March 31, 2004.


Our general and administrative expenses in the fiscal year ended March 31, 2005 were Rs. 1157.0 million, an increase of 16% over our general and administrative expenses of Rs. 996.2 million in the fiscal year ended March 31, 2004. The increase was primarily due to higher employee costs, professional fees, government tariffs, increased senior management personnel costs, recruitment costs and increased infrastructure and facilities costs like repairs, maintenance and power costs. Our general and administrative expenses as a percentage of total revenues was 10% in the fiscal year ended March 31, 2005, compared to 12% in the fiscal year ended March 31, 2004.

Our general and administrative expenses for our Products Business in the fiscal year ended March 31, 2005 were Rs. 240.7 million, a decrease of 32% over our general and administrative expenses for our Products Business of Rs. 355.8 million in the fiscal year ended March 31, 2004. The decrease is attributable to extraordinary expenses incurred during the previous year on account of sums paid for disputed settlement expenses and write off of bad debts. Our general and administrative expenses for our Products Business as a percentage of products revenues was 4% in the fiscal year ended March 31, 2005, compared to 7% in the fiscal year ended March 31, 2004.

Our general and administrative expenses for our Services Business in the fiscal year ended March 31, 2005 were Rs. 225.8 million, a marginal decrease of 5% over our general and administrative expenses for our Services Business of Rs. 237.6 million in the fiscal year ended March 31, 2004. Our general and administrative expenses for our Services Business as a percentage of services revenues was 4% in the fiscal year

ended March 31, 2005, compared to 8% in the fiscal year ended March 31, 2004.

Income taxes

Our provision for income taxes in the fiscal year ended March 31, 2005 was Rs. 627.1 million, an increase of 22% over our provision for income taxes of Rs. 515.3 million in the fiscal year ended March 31, 2004. Our effective tax rate was 23.6 % in the fiscal year ended March 31, 2005 compared to 23.2% in the fiscal year ended March 31, 2004. There is only a marginal increase in the effective tax rate. The reason being that the decrease in the effective tax rate of Domestic taxes has been offset by the increase in taxes provided by the Subsidiaries on profits accrued in this fiscal year.

Income from operations and net income

As a result of the foregoing factors, income from operations increased by 16% to Rs. 2,432.9 million in fiscal 2005 from Rs. 2,096.6 million in fiscal 2004, and net income increased toRs. 2,031.4 million in fiscal 2005 from Rs. 1,778.5 million in fiscal 2004. Our net margins decreased to 18% from 22% in fiscal 2005. We define net income margins for a particular period as the ratio of net income to total revenues during such period.

Liquidity and capital resources

Our capital requirement relate primarily to financing the growth of our business. We have historically financed the majority of our working capital, capital expenditure and other requirements through our operating cash flow. During fiscal 2005 and 2004 we generated cash from operations of Rs. 1,705.5 million and Rs. 1,107.7 million respectively.

i-flex is a zero debt company. We expect that our primary financing requirements in the future will be capital expenditure and working capital requirements in connection with the expansion of our business. We believe that the cash generated from operations, along with the net proceeds of the Initial Public Offer, will be sufficient to satisfy our currently foreseeable capital expenditure and working capital requirements.

Human capital

We recruit graduates from leading engineering and management institutions. We also hire functional experts from the banking industry. We had net addition of 1,773 employees during the fiscal year taking our employee strength to 4,747 employees as on March 31, 2005. The blend of functional knowledge and technical expertise, coupled with i-flex training and experience make our employees unique.

We have very cordial relationships with our employees and we endeavor to give them an excellent, professionally rewarding and enriching work environment. We have effective performance



management system with a focus on employee development. This measures key result areas, competencies and training needs ensuring all-round employee development.

Risks and concerns

Quantitative and qualitative disclosures about market risk

Our primary market risk exposures are due to the following:

• fluctuations in interest rates; and • fluctuations in the value of our investments.• foreign exchange rate fluctuations, principally relating to

the fluctuation of the US Dollar to Indian Rupee;

As of March 31, 2005, we had Cash and Bank Balances of Rs. 6,506.2 million out of which Rs. 4,134.2 million was in interest–bearing bank deposits. Consequently, we face a market risk exposure on account of fluctuation in interest rates. These funds were invested in bank deposits of longer maturity (more than 90 days) to earn a higher rate of interest income.

A substantial portion of our revenues are generated in foreign currencies while a majority of our expenses are incurred in Indian Rupees and the balance in US Dollars and European currencies. Our functional currency for Indian operations is the Indian Rupee. We expect a majority of our revenues will continue to be generated in foreign currencies for the foreseeable future and a significant portion of our expenses, including personnel costs and capital and operating expenditure, to continue to be incurred in Indian Rupees.

In addition we face normal business risks such as global competition and country risks pertaining to countries that we operate in.

Integration of mergers and acquisitions

The Company continues to pursue mergers and acquisitions strategy of complementary companies as part of its growth plans. The Company may acquire complementary companies and businesses. We acquired Republic of Mauritius -based ISP Internet Mauritus ltd. in an all cash deal in the current financial year. ISP Internet Mauritius ltd with its wholly owned subsidiaries Equinox corporation and Equinox global services pvt. Ltd. is engaged in providing business process outsourcing services to the mortgage banking industry. We also acquired two product IPR from SRA Systems Ltd. and TriVium Systmes Inc. and its subsidiaries. In addition company has acquired an IT consulting master services contract of a large investment bank from Trigyn Technologies Limited and its subsidiaries. These mergers and acquisitions involve inherent risks, including:

• unforeseen contingent risks or latent liabilities relating to these businesses that may only become apparent after the merger or acquisition is finalized;

• integration and management of the operations, sales and marketing, personnel and systems;

The company as part of its policies ensures that the companies acquired are successfully integrated into the mainstream business.

SWOT analysis for the company

Strengths:

• Comprehensive solutions portfolio.• World-class technology• Deep domain expertise• Extensive global client base• Superior quality and cost-efficient delivery• High quality manpower resources• Strong R&D capability, well linked with business

Weaknesses:

• Exposure to various economies

Opportunities:

• India is becoming a favored outsourcing destination• Increasing momentum in purchasing of core banking

systems by large and global financial institutions• Entry into new hitherto untapped markets• Expanding solutions portfolio and entry into new market

segments – consumer finance, business analytics, Basel II, anti-money laundering, etc.

Threats:

• Increasing competition• Growing backlash of outsourcing from advanced markets• Legislative and visa related restrictions

Outlook

Acquisition

In December 2004, i-flex Solutions Ltd (‘i-flex’) acquired all of the shares in ISP Internet Mauritius Company (‘ISP’), a corporation organized under the laws of the Republic of Mauritius. ISP holds all the shares in Equinox Corporation, a Delaware corporation (‘Equinox US’), and in Equinox Global Services Pvt. Limited, a corporation organized under the laws of India (‘Equinox India’). Equinox India and Equinox US are engaged in providing business process outsourcing services to the mortgage banking industry. The acquisition was carried


out in two stages, where the Company acquired a 84 per cent stake for a consideration of USD 4.35 million, and also repaid a debt of ISP aggregating USD 0.95 million, through a loan to ISP. The Company also entered into separate agreements with the other three shareholders to acquire the balance 16 per cent stake. The consideration for this 16 per cent stake is linked to the profit of the ISP business over the next three fiscal years and is payable based on a pre-determined formula.

This acquisition strengthens the Company’s plans of diversification into Knowledge Process Outsourcing Operations related to the existing IT solutions portfolio.

Subsidiaries

The Company has established subsidiaries in the US, Singapore and the Netherlands to strengthen marketing and sales efforts in North American, Asia Pacific and European markets and to ensure deeper penetration in these regions.

Global alliances

i-flex entered into a global strategic alliance with IBM to deliver and market core banking replacement solutions to medium and large size banks in major markets worldwide. The joint solution will help financial solutions reduce costs and streamline operational efficiencies by transitioning a bank’s legacy core banking infrastructure and applications to a modern banking platform.

Under the terms of the alliance, i-flex will make FLEXCUBE for Retail Banking available in a phased manner on IBM’s J2EE-based WebSphere Internet infrastructure software and DB2 Universal Database. This move will make FLEXCUBE available on open standard IBM platforms thereby enhancing your Company’s ability to target Tier 1 and Tier 2 banks across the globe. FLEXCUBE, which already runs on IBM’s eServer pSeries servers, will now run on the complete range of IBM servers.

The company continues to strengthen its go-to-market strategy and further its alliances with its preferred platform partners including IBM, Intel, Hewlett Packard, Oracle, and Microsoft.

Internal control systems and their adequacy

The Company has in place adequate systems of internal control and documented procedures covering all financial and operating functions. These have been designed to provide reasonable assurance with regard to maintaining proper accounting controls, monitoring economy and efficiency of operations, protecting assets from unauthorized use or losses, and ensuring reliability of financial and operational information. The Company has continued its efforts to align all its processes and control with global best practice.



Report of independent auditors

To the Board of Directors of:i-flex Solutions Limited

We have audited the accompanying consolidated balance sheet of i-flex Solutions Limited, a Company incorporated in India, and its subsidiaries (‘the Group’) as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flow for the years then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of March 31, 2005 and 2004 and the consolidated results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

S.R. Batliboi & AssociatesApril 29, 2005


Consolidated balance sheetsas at March 31, 2004 and 2005

(Amounts in thousands, except for share data or as otherwise stated)

2004 2005 2005

Rs. Rs. $

Assets

Current assets:Cash and cash equivalents 2,906,186 2,372,046 54,380 Bank deposits 2,756,282 4,134,194 94,777 Marketable securities, available for sale 266,370 – – Accounts receivables from related parties 896,440 1,181,250 27,080 Accounts receivables – others, net 1,491,063 2,524,781 57,881 Employee receivables 50,365 58,862 1,350 Advance tax 65,560 28,209 647 Prepaid expenses 91,383 128,198 2,939 Other current assets 371,710 379,425 8,699 Total current assets 8,895,359 10,806,965 247,753

Goodwill 389,098 583,540 13,378 Intangible assets, net 144,407 386,814 8,868 Property and equipment, net 1,125,121 1,285,285 29,465 Investment in equity investee 5,428 10,903 250 Other investments 105,660 55,132 1,264 Employee receivables 7,808 1,722 39 Restricted cash and cash equivalents 121,330 125,006 2,866 Rental deposits 253,620 570,105 13,070 Deferred tax assets 1,950 1,208 28 Other assets 17,107 21,690 497 Total assets 11,066,888 13,848,370 317,478

Liabilities and stockholders’ equity

Current liabilities:Accounts payable 140,043 128,457 2,945 Accrued employee costs 394,186 721,451 16,539 Accrued referral fees/commission 93,413 117,509 2,694 Accrued rates and taxes 110,182 167,002 3,829 Deferred revenue 616,570 1,121,926 25,720 Other current liabilities 194,773 266,327 6,107 Current portion of capital lease obligations 8,581 10,444 239 Total current liabilities 1,557,748 2,533,116 58,073

Deferred revenue 24,439 377 9 Capital lease obligations 14,331 22,000 504 Deferred tax liabilities 1,262 1,618 37 Total liabilities 1,597,780 2,557,111 58,623

Stockholders’ equity

Authorized, 100,000,000 equity shares of Rs. 5/- par value; Issued and outstanding, 74,740,150 and 74,879,650 equity shares as of March 31, 2004 and March 31, 2005

373,701 374,398 8,583

Additional paid-in capital 2,113,003 2,160,853 49,538 Accumulated other comprehensive loss (25,095) (54,700) (1,254)Loan to Employees Stock Purchase Scheme (‘ESPS’) Trust (189,425) (122,425) (2,807)Retained earnings 7,196,924 8,933,133 204,795 Total stockholders’ equity 9,469,108 11,291,259 258,855 Total liabilities and stockholders’ equity 11,066,888 13,848,370 317,478

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



Consolidated statements of incomefor the year ended March 31, 2004 and 2005


2004 2005 2005

Rs. Rs. $

Revenues 8,053,318 11,404,408 261,449 Cost of Revenues (3,656,181) (5,948,105) (136,361)Gross profit 4,397,137 5,456,303 125,088

Selling and marketing expenses (1,157,361) (1,529,280) (35,060)General and administrative expenses (996,160) (1,157,058) (26,526)Depreciation and amortisation (146,968) (336,975) (7,725)Income from operations 2,096,648 2,432,990 55,777

Loss on equity investments (2,896) (1,118) (26)Provision for diminution in value of investment – (50,528) (1,158)Interest income 217,025 259,050 5,939 Other income/(expense), net (85,658) 18,080 414 Income before provision for income taxes 2,225,119 2,658,474 60,946 Provision for income taxes (515,305) (627,062) (14,376)Income before cumulative effect of accounting change 1,709,814 2,031,412 46,570 Cumulative effect of accounting change, net of tax 68,727 – – Net income 1,778,541 2,031,412 46,570

Basic earnings per share 24.24 27.34 0.63 Diluted earnings per share 23.14 26.48 0.61

Number of shares used in computing earnings per share – Basic 73,379,472 74,289,899 74,289,899 – Diluted 76,868,822 76,702,472 76,702,472



Consolidated cash flow statementsfor the year ended March 31, 2004 and 2005


2004 2005 2005Rs. Rs. $

Cash flows from operating activitiesNet Income 1,778,541 2,031,412 46,570

Adjustments to reconcile net income to net cashprovided by operating activitiesDepreciation and amortization 146,968 336,975 7,725 (Profit)/loss on retirement/sale of property and equipment, net (971) (3,946) (91)(Profit)/loss on sale/conversion of investment (2,171) (16,804) (385)Provision for diminution in value of Investment – 50,528 1,158 Loss from equity investments 2,896 1,118 26 Provision for doubtful debts, net 4,107 1,787 41 Cumulative, effect of accounting change, net of taxes (68,727) – – Provision for doubtful advances (7,253) – – Deferred tax benefit, net 5,605 1,098 25

1,858,995 2,402,168 55,069 Change in assets and liabilitiesTrade receivables (984,133) (1,543,873) (35,394)Other assets (173,966) (236,007) (5,411)Current liabilities and other liabilities 406,790 1,083,218 24,833 Net cash provided by operating activities 1,107,686 1,705,506 39,097

Cash flows from investing activitiesPurchase of property and equipment including capital advances (587,355) (430,469) (9,868)Acquisition of IT services business from Trigyn Technologies Limited – (186,195) (4,269)Acquisition of IPR from SRA Systems Limited – (39,672) (909)Acquisition of IPR from TriVium Technologies Limited – (47,138) (1,081)Investment in ISP Internet Mauritius Company – (188,045) (4,311)Investment in Login SA – (6,593) (151)Sale of property and equipment 738 11,430 262 Increase in bank deposits/Restricted Cash and cash equivalents 32,387 (1,381,588) (31,673)Acquisition of SuperSolutions Corporation, net of cash acquired (504,895) – – Sale of investment 928 266,804 6,117 Net cash (used in) investing activities (1,058,197) (2,001,466) (45,883)

Cash flows from financing activitiesAdvance against equity shares to be issued under ESOP Scheme – 6,546 150 Proceeds from issuance of Employee Stock Option Plan (“ESOP”)Shares 29,593 36,968 848 Advance towards grant of options to IBM – 5,367 123 Repayment of loan by ISP Internet Mauritius Company – (41,368) (948)Repayment of loan from ESPS Trust 78,501 67,000 1,536 Capital lease payments (5,291) (9,898) (227)Dividend and tax paid thereon (93,318) (295,203) (6,768)Net cash provided by financing activities 9,485 (230,588) (5,286)

Net increase/(decrease) in cash and cash equivalents during the period 58,974 (526,548) (12,072)Effect of exchange rate changes on cash and cash equivalents (2,150) (7,592) (173)Cash and cash equivalents at the beginning of the year 2,849,362 2,906,186 66,625 Cash and cash equivalents at the end of the year 2,906,186 2,372,046 54,380

Supplementary informationCashTaxes paidDomestic taxes 499,854 454,521 10,420 Foreign taxes 181,682 133,612 3,063

681,536 588,133 13,483 Non CashCapital Creditors 61,185 26,566 609 Assets acquired under capital leases 15,471 25,369 582




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Notes to consolidated financial statements

1. Background

i-flex solutions limited (“i-flex” or the “Company”) was incorporated in India with limited liability on September 27, 1989. The Company’s principal shareholder is OrbiTech Limited (“OrbiTech”). OrbiTech is subsidiary of Citicorp Technology Holdings Inc., USA.

The Company has following wholly owned subsidiaries:

• i-flex solutions b.v. (“i-flex b.v.”), incorporated in May 2000 under the laws of The Netherlands;

• i-flex solutions pte ltd (“i-flex pte”), incorporated in November 2001 under the laws of Singapore;

• i-flex America inc., (“i-flex America”), incorporated in December 2003 under the laws of the United States of America. i-flex America has wholly owned subsidiaries:

• i-flex solutions inc. (“i-flex inc.”), incorporated in December 2001 under the laws of the United States of America;

• SuperSolutions Corporation, (‘SuperSolutions’), acquired in January 2004, incorporated under the laws of the United States of America.

• ISP Internet Mauritius Company, (‘ISP’), incorporated under the laws of Republic of Mauritius. ISP has the following wholly owned subsidiaries:

• Equinox Corporation, (‘Equinox US’) incorporated under the laws of the United States of America.

• Equinox Global Services Private Limited, (‘Equinox India’) incorporated in India.

The Company along with i-flex b.v., i-flex pte, i-flex America, i-flex inc., SuperSolutions, ISP, Equinox US and Equinox India (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. With the acquisition of Equinox business the Group has entered the area of business process outsourcing services to the mortgage banking industry.

The Group holds 40% of the shareholding in Flexcel International Private Limited (“Flexcel”), a company incorporated in March 2001 under the Indian laws.


2.1. Principles of consolidation

The consolidated financial statements include all the entities in the Group. 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.

2.2. Basis of presentation

(a) The accompanying consolidated financial statements of the Group are prepared by management in conformity with

accounting principles generally accepted in the United States of America (“US GAAP”).

(b) For the convenience of readers, the consolidated financial statements for the year ended March 31, 2005 have been translated into United States Dollars (“USD”) at the noon buying rate in New York city on March 31, 2005 for cable transfers in Indian Rupees, as certified for customs purposes by the Federal Reserve bank of New York of 1 USD = Rs. 43.62. The convenience translation should not be construed as a representation that the Indian Rupee amounts or the USD amounts referred to in these consolidated financial statements have been, could have been, or could in the future be, converted into USD or Rs., as the case may be, at this or at any other rate of exchange, or at all.

(c) The Company had the following stock bonus/stock splits through March 31, 2005:

Bonus/Stock Split Date RatioBonus October 9, 1999 1:1Bonus October 31, 2000 1:1Stock split January 19, 2002 1:1Bonus September 11, 2003 1:1

Accordingly, all share and per share amounts both recorded and disclosed herein have been retroactively adjusted.

(d) The Group also separately presents its consolidated financial statements for the same periods prepared in accordance with accounting principles generally accepted in India (“Indian GAAP”). The significant differences between the Indian GAAP and US GAAP so far as concerns the financial statements referred to above are primarily relating to the deferral of revenues pertaining to post-contract support, compensated absences, employee benefit plans, marketable securities, foreign forward exchange contracts, derivatives and business combinations.

(e) Certain reclassifications have been made to confirm prior year 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 US GAAP 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 consolidated 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 dates. Transactions in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the date of the transaction. All transaction 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 dates. Translation adjustments are included in accumulated other comprehensive income/(loss), as a separate component of stockholders’ equity.

2.5. Revenue recognition

The Group derives revenues from software licensing and related services and IT solutions and consulting services.

Software licensing and related services – The Group enters into agreements to generally convey a perpetual license to its customers and also provides implementation services and customization as required. Customers also have the option to enter into a maintenance arrangement (post contract support or ‘PCS’), which is generally an annual contract, and commences when the implementation is complete and the warranty period has ended.

License revenues for perpetual licenses are recognized, separately from the other elements of the contract such as implementation and customization, when services are not considered essential to the functionality of the software and 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 accordingly revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied.

In limited situations the Group enters into time-based or term licenses for a specified period, the license and PCS revenue is recognized ratably over the period of the arrangement.

Services are not considered essential to the functionality of the software when such services primarily consist of minor functional enhancements, simple interfaces, implementation planning, data conversion, training and product walkthrough and the realizability of the license fees is not dependent on such services. When the vendor specific objective evidence (“VSOE”) of the fair value of the services, based on the historical evidence of sales of similar services exists, revenue related to implementation services are recognized as services are provided when arrangements are on a time and material basis. In the case of fixed price arrangements, subject to VSOE being established, revenue related to implementation services is recognized using the proportional performance method of accounting. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realisability of the services fees are dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

When an arrangement provides for significant modification or customization of the product or if services are essential to the functionality of the product or the realization of the license fees is the dependent on the services, the revenue related to both the license and services is recognized using the percentage of completion method of accounting. Percentage of completion

is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realisability of the services fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

The Group enters into PCS 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 ratably over the period of the PCS. VSOE of PCS is based on the renewal rate for the PCS arrangement. When the arrangement includes a free maintenance period, including the implied benefit to receive upgrades during the implementation and warranty period, a portion of the license fees based on the VSOE of PCS is deferred and recognized over the free PCS period.

If an up-front discount is provided in an arrangement, a proportionate portion of that discount, relative to the VSOE of that element, is applied to each element in the arrangement based on each element’s fair value.

IT solutions and consulting services – The Group provides bespoke software development and other consulting services to customers primarily in banking and financial services.

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 based on a proportional performance method. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the proportional performance is higher than a related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received.

The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss as soon as such event occurs.

The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as deferred revenue. Deferred revenue also includes the revenue remaining to be recognized on PCS arrangements.

Reimbursement for out-of-pocket expenses

Reimbursements of out-of-pocket expenses amounting to Rs. 186,003 and Rs. 233,837 for the year ended March 31, 2004 and 2005 respectively are included in revenue in accordance with Emerging Issues Task Force Consensus (“EITF”)01-14 “Income Statement Characterization of Reimbursement received for “Out of Pocket” expenses incurred”.


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

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. These costs primarily consist of salaries and employee benefits and other related expenses. Research and development cost for the year ended March 31, 2004 and 2005 to Rs. 97,322 and Rs. 120,229 respectively and has been included in cost of revenue.

2.8. Cash and cash equivalents

Cash and cash equivalents include 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 and purchased software are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Assets under capital leases are amortized 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 capitalized.

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”.

2.10. Goodwill and intangibles assets

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired businesses in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 – ‘Goodwill and Intangible Asset’, goodwill is not amortized and evaluated for impairment at least annually. The impairment test is conducted at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it were less, an impairment loss would be recognized for the difference.

Identified intangible assets are amortized over their respective individual estimated useful lives on straight-line basis over a period of two to five years. These are also tested for impairment

at least annually. Amortizable intangible asset primarily consist of technology and customer relationship. Intangible asset such as Trademarks are considered to have indefinite life and are tested for impairment at least annually.

2.11. Impairment of long-lived assets & amortizable intangible 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.

2.12. 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 in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. A decline in fair value below original cost is recorded in the income statement when it is considered to be other than temporary.

2.13. Other investments

Investments where the Group controls between 20% and 50% of the voting interest are accounted for using the equity method. Investments in unquoted equity where the Group controls less than 20% of the voting interest and debt securities held to maturity are accounted for at cost. A decline in fair value below original cost is recorded in the income statement when it is considered to be other than temporary.

2.14. Dividends

Dividends distributed to the shareholders are accounted based on the approval of shareholders in their general meeting.

2.15. 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 recognized 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 recognized in the income statement in the year/period the change is enacted. Deferred tax assets are recognized in full, subject to a valuation allowance to reduce the amount recognized to that, which is more likely than not to be realized.

2.16. Employee benefit plans

In accordance with Indian law, all employees of the Company in India are entitled to receive benefits under the Government Provident Fund, a defined contribution plan in which both the



employee and the Company contribute monthly at a determined rate (currently 12% 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% 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 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 year 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 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 year-end.

2.17. Leases

The Group classifies all leases at the inception date as either a capital lease or an operating lease. Lease of assets under which there is transfer of substantially all of the risks and rewards incident to ownership as per FAS 13 are classified as capital leases otherwise all leases are classified as operating lease. Assets under capital leases are capitalized and leases payments are appropriated towards the lease obligation and interest on the obligation amount. Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term.

2.18. 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 year. Diluted earnings per share is computed using the weighted average of common and dilutive common equivalent shares outstanding during the 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.

2.19. Stock-based compensation

The Group accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinions (“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 recognized 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 date of the grant.

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. 123.

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 SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

March 312004 2005 2005(in thousands except per share data)

Rs. Rs. $Net incomeAs reported 1,778,541 2,031,412 46,570Less: Stock based compensation expense determined under the fair value method

219,448 127,633

2,925Pro forma 1,559,093 1,903,779 43,645Basic earning per shareAs reported 24.24 27.34 0.63Pro forma 21.25 25.62 0.59Diluted earning per shareAs reported 23.14 26.48 0.61Pro forma 20.28 24.82 0.57

The fair value of granted under the ESOP was estimated on the date of the grant using the Black-Scholes model with the following assumptions:

March 312004 2005

Dividend yield 0.18 % 0.47 %Expected volatility 45 % 64.81 %Risk-free interest rates 7.5 % 8.49 %Expected life 5.5 years 6.21 years

2.20. Derivative instruments and hedging activities

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, the changes in the fair value of derivatives that are either not designated as a hedge or is so designated but do not qualify for hedge accounting, is recognized in the income statement.


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. 133. Accordingly, gains or losses on such embedded derivative instruments are recognized in the Group’s consolidated income statements based on the fair value of the embedded derivative contracts at year end and the corresponding asset/liability is recorded in the balance sheet under other current assets or other current liabilities.

2.21. Accounting change

Through March 31, 2003, the Group had been accounting for depreciation on property and equipment, except for vehicles based on the written-down value method, which is an accelerated method of depreciation. As of March 31, 2003, the Group’s property and equipment primarily consisted of computers and related equipment. Significant additions during the year ended March 31, 2004 included a building and related equipment for which the Group believes straight-line method would be more appropriate. Further the Group also believes that the predominant industry practice for all assets for depreciation is straight-line method and accordingly with effect from April 1, 2003, the Group has adopted straight-line method.

Had the previous method of depreciation continued to be applied to assets as of March 31, 2003, it would have resulted in additional depreciation of Rs. 4,378. In accordance with APB 20, the cumulative impact of the accounting change amounting to Rs. 68,727 net of tax charge of Rs. 23,410 has been disclosed as “cumulative effect of accounting change, net of tax” separately in the consolidated income statement for the year ended March 31, 2004.

2.22. Recent accounting pronouncements

In September 2004, the Financial Accounting Standards Board (‘FASB’) issued FASB Staff Position (‘FSP’) Emerging Issues Task Force (‘EITF’) Issue 03-1-1, Effective Date of Paragraphs 10–20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which delays the effective date for the recognition and measurement guidance in EITF Issue No. 03-1. In addition, the FASB has issued a proposed FSP to consider whether further application guidance is necessary for securities analyzed for impairment under EITF Issue No. 03-1. The Group believes that the adoption of FSP will not have a material impact on Group’s financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces

it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Group believes that the adoption of SFAS No. 153 will not have a material impact on Group’s financial statements. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. The Group continues to assess the potential impact that the adoption of SFAS No. 123(R) could have on its financial statements.

3. Cash and cash equivalents

Cash and cash equivalents consist of physical cash 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:

March 31

2004 2005 2005

(in thousands)

Rs. Rs. $

Cash on hand 645 1,172 27

Bank balances

Current accounts 1,735,036 1,588,740 36,422

Time deposits 1,170,505 782,134 17,931

2,906,186 2,372,046 54,380

Cash and cash equivalents of the Company which is in Indian banks, amounting to Rs. 1,185,988 and Rs. 320,754 at March 31, 2004 and 2005, respectively are subject to local exchange control restrictions and can be remitted overseas only with prior approval from the relevant regulatory authorities.



4. Allowance for doubtful accounts/accounts receivable – others, net

Accounts receivables – others as of March 31, 2004 and 2005 net of allowance for doubtful accounts of Rs. 41,499 and Rs. 42,918 respectively amounted to Rs. 1,491,063 and Rs. 2,537,352 respectively. The movement in allowance for doubtful accounts is given below:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Allowance for doubtful accountsTrade receivables – others Opening balance 38,842 41,499 952Additions 57,593 1,265 29Bad debts (48,453) – –Adjustments related to changes in estimates (1,087) 154 4Collections (5,396) – –Closing balance 41,499 42,918 985

The collectibility of receivables are reviewed by management based on a specific identification basis. The allowance for doubtful accounts represents the Company’s best estimate regarding receivables that are doubtful of recovery.

5. Goodwill and intangible assets, net

The following table presents the changes in goodwill for the following segmentsa) Product licenses and related activities (“Products”); andb) IT solutions and consulting services (“Services”)

Product Services(in thousands)

Balance as at March 31, 2003 – – Acquired during the yearSuperSolutions (Note 25) 389,098 – Balance as at March 31, 2004 389,098 –Acquired during the yearISP Internet Mauritius (Note 23) – 194,442Balance as at March 31, 2005 389,098 194,442

Goodwill is tested for impairment annually. The impairment test is conducted at the reporting unit level using the fair value approach, in accordance with the provisions of SFAS 142.

If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value goodwill will be evaluated for impairment between annual tests.


The following table presents the changes in intangible assets



(in thousands)

Gross carrying value

Accumulated amortization

Net carrying value

Gross carrying value

Accumulated amortization

Net carrying value

ProductsAmortizable Intangible AssetsTechnology 118,584 4,941 113,643 118,584 27,300 91,284Customer relationship 15,372 641 14,731 15,372 3,541 11,831Website 922 64 858 922 354 568Non compete 3,162 329 2,833 3,162 1,818 1,344IPR – – – 110,816 8,857 101,959Non Amortizable Intangible AssetsTrademark 12,342 – 12,342 12,342 – 12,342

ServiceAmortizable Intangible AssetsCustomer relationship and non compete

– – – 168,817 35,227 133,590

Customer contracts–

– –

21,798 16,350 5,448

KPOAmortizable Intangible AssetsProcess know how – – – 14,601 730 13,871Customer contracts – – – 6,747 1,687 5,060Customer relationship – – – 10,382 865 9,517

150,382 5,975 144,407 483,543 96,729 386,814

The useful life of the intangible assets is as follows:

Estimated useful life

Technology 5 yearsCustomer relationship SS 5 yearsWebsite 3 yearsNon compete 2 yearsCustomer Contracts 1 yearCustomer relationship and non compete 3.5 yearsProduct IPR 5 yearsProcess know how 5 yearsCustomer relationship ISP 3 years

The amortisation expense for the year ended March 31, 2004 and 2005 is Rs. 5,975 and Rs. 90,754 respectively. Intangible assets are amortised on a straight line basis over their respective useful life. The amortisation expense was Rs. 5,975 and Rs. 90,754 for the year ended March 31, 2004 and March 31, 2005 respectively. The estimated future amortisation expense is:

March 31 Rs. $(in thousands)

2006 116,329 2,6672007 104,404 2,3932008 92,181 2,1132009 46,061 1,0562010 15,496 355



6. Property and equipment, net

Property and equipment consist of the following:

Estimated Useful Life March 31(Years) 2004 2005 2005

(in thousands)

Rs. Rs. $Land 232,674 232,674 5,334Leasehold improvements 7 102,477 124,415 2,852Building 20 229,408 249,267 5,715Computer equipments 3 573,495 829,992 19,028Electrical and office equipment 7 245,668 266,725 6,115Furniture and fixtures 7 255,582 276,990 6,350Vehicles on lease 4-5 30,686 37,180 852Capital advances 147,506 85,618 1,963

1,817,496 2,102,861 48,209Less: Accumulated depreciation and amortization (692,375) (817,576) (18,744)Property and equipment, net 1,125,121 1,285,285 29,465

Assets held under capital leases included above are as follows:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Computer equipments 799 7,028 161Furniture and fixtures 3,263 3,263 75Vehicles 30,686 37,180 852

34,748 47,471 1,088Less: Accumulated amortization (15,738) (16,720) (383)

19,010 30,751 705

The depreciation expense for the year ended March 31, 2004 and 2005 is Rs. 34,428 and Rs. 124,219 respectively.

7. Financial instruments

7.1 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 consolidated financial statements of Rs. 7,808, and Rs. 1,722 at March 31, 2004 and 2005, respectively.

Restricted cash and cash equivalents of Rs. 125,006 with Citibank represent 110% margin money against the bank guarantee of EUR 2 Million. The Group receives interest on these deposits, which are at 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 consolidated 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. Long-term rental deposits amounted Rs. 253,620 and Rs. 570,105 respectively, at March 31, 2004 and 2005 and their fair value determined using market rates of interest as of March 31, 2004 and 2005 is approximately Rs. 197,702 and Rs. 489,919 respectively.

7.2.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 non-performance by counter parties.

The Group’s cash equivalents, bank deposits and restricted cash are invested with banks with high investment grade credit ratings. Trade receivables (primarily denominated in USD) 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 of March 31, 2004 and 2005, 99% and 99 %, respectively, of trade receivables from related parties was recoverable from Citigroup.


As of March 31, 2004 and 2005, 9% and 9% are recoverable from Customer 1 and 7% and 6% from Customer 2, respectively (non-related parties).

Management believes there is no significant risk of loss in the event of non-performance of the counter parties to these consolidated financial instruments, other than the amounts already provided for in the consolidated financial statements.

7.3. Derivative financial instruments

License contracts are bifurcated into functional currency denominated sales contracts and contractual currency denominated forward contracts. As at March 31, 2004 and 2005, the Group has committed to deliver USD 18,455,628 and USD 21,863,090 respectively pursuant to such contracts. These contracts mature between 0 to 13 months. The Group has recorded Rs. 22,788 as derivative related losses for the year ended March 31, 2004 and Rs. 3,978 as derivative related profits for the year ended March 31, 2005 respectively. In addition, the Group has accounted for Rs. 31,007 and Rs. 28,472 as other current liabilities as at March 31, 2004 and 2005, 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 of March 31, 2005, the Group held forward foreign exchange

contracts of USD 108 million. These forward foreign exchange contracts mature between 1 to 12 months. The Group has recorded Rs. 49.66 million as forward foreign exchange loss for the year ended March 31, 2005.

8. Stockholders’ equity

The Group has only one class of common stock referred to herein as equity shares. Each holder of equity shares is entitled to one vote per share.

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. The Company accrues for dividend upon obtaining shareholders approval. The Company paid cash dividends of Rs. 93,321 (Rs. 2.50 per share) and Rs. 261,676 (Rs. 3.50 per share) during the year ended March 31, 2004 and 2005 respectively. During the year ended March 31, 2005, the Company paid Rs. 33,527 as dividend tax.

Under the Indian Companies Act, all Indian Companies are mandatorily required to restrict certain portion of its retained earnings for distribution of dividend and transfer such amount to general reserve. General reserves for the Company as at March 31, 2004 and 2005 amounted to Rs. 6,738,569 and Rs. 8,238,569 and is included in retained earnings.

9. Marketable securities, available for sale

The fair values of the available for sale securities are as follows:

March 312004 2005 2005

(in thousands)

Rs. Rs. $JM High Liquidity Fund – Serial Plan 2004Opening carrying value 250,000 266,370 6,107Add: Unrealized gain during the year 16,370 – –Less: Reversal of unrealized gain – 16,370 375Less: Redemption value – 266,804 6,117Add: Gain on redemption – 16,804 385Carrying value of the investment 266,370 – –

Total 266,370 – –

During the year ended March 2003 the Group invested Rs. 250,000 in the JM High Liquidity Fund – Serial Plan 4 that matured on April 15, 2004. The Group has valued this investment based on its net assets value as on March 31, 2004 and unrealized gain of Rs. 16,370 has been included in Stockholders’ equity as part of Other Comprehensive income. Subsequently, on the date of maturity i.e. April 15, 2004 the Group received Rs. 266,804 as redemption value as against cost of Rs. 250,000. Accordingly Rs. 16,804 has been recorded in the income statement as gain on maturity on the date of redemption for the year ended March 31, 2005.



10. Other investments

Other investments comprise:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Equity securities – UnquotedEBZ Online Private Limited (“EBZ”) 45,000 – –Eastern Software Systems Limited (“ESSL”) 7,406 1,878 43

52,406 1,878 43Held to maturity debt securities 12.75% KEONICS Mahithi Bonds Series –1 20,000 20,000 459UTI US-64 – 6.75% Tax free Bonds 33,123 33,123 759National Saving Certificates 131 131 3

53,254 53,254 1,221105,660 55,132 1,264

The Group held 3,311,258 units (and 278 fractions) of Rs. 10/- each of Unit Trust of India – 1964 Scheme (“US 64”). During the previous 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-64 6.75 % Tax-free bonds. The first 5,000 units were converted at the repurchase price of Rs. 12/- each and the balance 3,306,258.278 units at Rs. 10/- each. These bonds are redeemable at par on June 1, 2008.

The Company’s ownership interest in EBZ and ESSL is 19.5% and 6.62%, 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”.

Management is of the view that the fair value of its investment in ESSL and EBZ has declined permanently. Hence, management has made a provision of Rs. 45 million towards diminution in the value of its investment in EBZ and Rs. 5.53 million towards partial diminution in the value of its investment in ESSL.

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.

11. Investments in equity investee

Flexcel is a 40:40:20 joint venture between HDFC Bank Limited, Lord Krishna Bank Limited and the Company to provide the Group’s products through an Application Service Provider (“ASP”) model to various banks and financial institutions in India. During the year ended March 31, 2004 and 2005, the

Group recorded Rs. 2,311 and Rs. 298 as its share of loss while the carrying value of total investment of Rs. 20,680 amounted to Rs. 5,428 and Rs. 5,130 as on respective balance sheet date.

In January, 2005, i-flex solutions ltd (‘i-flex’) acquired 33% equity stake in a France based treasury software specialists firm, Login SA for EUR 66,000. Login SA is a highly specialized front and mid office treasury solution provider with its product Login Acumen. The share purchase agreement was signed on November 15, 2004 between the parties. However, the arrangement closed only on January 7, 2005, post receipt of the requisite regulatory approvals. During the year ended March 31, 2005 the Group recorded Rs. 820 as its share of loss while the carrying value of total investment of Rs. 6,593 amounted to Rs. 5,773 as on the balance sheet date.

12. Other current liabilities

Other current liabilities comprise of:

March 312004 2005 2005

(in thousands)Rs. Rs. $

Purchased software 3,962 27,092 621Communication expenses 11,434 15,057 345Travelling expenses 18,512 20,393 468Professional fees 75,292 148,083 3,395Embedded derivatives 31,007 28,472 654Business promotion and advertisement 13,863 9,028 207Others 40,703 18,202 417

194,773 266,327 6,107


13. Employee benefit plans

The Group’s cost related to defined contribution plans and compensated absences is as follows:

March 312004 2005 2005


Provident Fund 46,210 63,810 1,463Superannuation 17,635 24,212 555Compensated absences 5,635 41,359 948 69,480 129,381 2,966

Based on the disclosure requirements of SFAS 132 the change in benefit obligation and funded status of the Gratuity Plan for the year ended March 31, 2004 and 2005 is as follows:

March 312004 2005 2005


Change in benefit obligation Benefit obligation at beginning of year 33,676 51,920 1,190Service cost 7,275 11,138 255Interest cost 2,634 3,484 80Benefits paid (1,996) (2,671) (61)Actuarial loss 10,331 1,673 38Benefit obligation at end of year (A) 51,920 65,544 1,502

Change in plan assetsFair value of plan assets at beginning of year

8,425 8,822 202

Return on plan assets 1,074 (3) (0.07)Actual contribution 1,319 950 22Benefits paid (1,996) (2,671) (61)Fair value of plan assets at end of year (B)

8,822 7,098 163

Funded status (A-B) 43,098 58,446 1,339Unrecognized net transition obligation – – –

Unrecognized net actuarial loss

(22,169) (24,038) (551)Accrued benefit cost 20,929 34,408 788

Net gratuity cost for the year ended March 31, 2004 and 2005 comprises of the following components:

March 312004 2005 2005


Components of net year benefit costService cost 7,275 11,138 255Interest cost 2,634 3,484 80Expected return on plan assets

(596) (1,813) (42)

Amortization of transition liabilities

314 – –

Recognized net actuarial loss

571 1,620 37

Net periodical benefit cost 10,198 14,429 330

The assumptions used in accounting for the gratuity plan are set out below:

March 312004 2005

Rs. $Discount rate 7.00 % 7.50%Expected return on plan assets 7.50 % 7.50%Rate of compensation increase 5.00 % 5.00%

The Company evaluates these assumptions based on its long-term plans of growth and industry standards. The expected Group’s contribution to the fund for the year ended March 31, 2006 would be Rs. 35,000.

The expected benefit payments from the fund as of March 31, 2005 are below:

March 31(in thousands)Rs. $

2006 6,355 1462007 7,482 1722008 8,388 1922009 9,432 2162010 12,993 2982011-2015 71,591 1,641



14. Other income/(expense)

Other income comprises of the following:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Foreign Exchange (loss), net (108,967) (68,958) (1,581)Profit on sale/conversion of investments 12 16,804 385Profit on sale of investment 2,183 – –Liabilities written back 26,352 – –Embedded derivatives (loss)/profit (22,788) 3,978 91Refund of withholding tax – 56,988 1,306Miscellaneous income/ (expense) 17,550 9,268 213

(85,658) 18,080 414

15. Income taxes

Under the Indian Income-tax Act 1961, for the year ended March 31, 2005 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% of the profits earned from export revenues from six of its seven units 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 or March 31, 2009 whichever is earlier. Foreign taxes represent income taxes payable overseas in the United States of America, Malaysia, United Kingdom, Singapore, Kuwait, Japan, Germany, Poland and The Netherlands.

In determining the tax provisions, the Group also provides for tax exposures based on the Group’s assessment of regulatory reviews. Such accruals, which are recorded in income taxes payable, are based on management’s estimates and accordingly are subject to revision based on additional information and are dependent upon the judgment of regulatory reviewers.

The provision for income tax consists of the following:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Current tax expenseDomestic taxes 449,883 442,859 10,153Foreign taxes 59,810 183,105 4,198

Deferred taxes Domestic taxes 6,086 742 17Foreign taxes (474) 356 8

515,305 627,062 14,376

The components of the deferred tax assets are as follows:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Deferred tax assets – Non currentLoss on sale of investment 25,379 22,373 513Share of loss in equity investees 4,249 4,567 105Difference between book and tax depreciation

1,950 1,208 28

Provision for diminution in value of investment – 10,565 242Accumulated losses of subsidiaries

64,470 65,759 1,508 96,048 104,472 2,396

Less: Valuation allowance (94,098) (103,264) (2,368) 1,950 1,208 28

Deferred tax liability Difference between book and tax depreciation (1,262) (1,618) (37)Net deferred tax assets/(liability) 688 (410) (9)

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 2001. No provisions for deferred taxes have been made on the unremitted earnings, which are currently expected to be indefinitely invested in foreign subsidiaries.

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

March 312004 2005 2005

(in thousands)

Rs. Rs. $Income before provisionfor income taxes 2,225,119 2,658,474 60,946Enacted tax rate (%) 35.875% 36.5925% 36.5925%Computed tax expense 798,261 972,802 22,301Tax effect on exempt profit/income (323,027) (450,454) (10,327)Effect of change in tax rate (1,774) 1,882 43Incremental taxes paid in foreign jurisdictions 27,654 51,105 1,172Tax effect on losses of subsidiaries 3,202 – –Changes in valuation allowance 594 7,285 168Others 10,395 44,442 1,019Income tax expense, net 515,305 627,062 14,376


16. Leases

a) Finance leases

The Group takes vehicles, computers, furniture fixtures and other equipment under capital lease up to five years. Future minimum lease payments under capital leases as at March 31, 2005 are as follows:

March 312006 12,900 2962007 10,108 2322008 8,302 1902009 5,139 1182010 1,321 30Total minimum payments 37,770 866Less: amount representing future interest (5,326) (123)Present value of minimum payments 32,444 743Less: current portion of capital lease obligation (10,444) (239)Long-term capital lease obligation 22,000 504

b) Operating leases

The Group has taken certain office premises, residential premises and vehicles for employees under operating leases, which expire at various dates through year 2012. Gross rental expenses for the year ended March 31, 2004 and 2005 was Rs. 159,180 and Rs. 158,772 respectively.

The minimum rental payments to be made in future in respect of these leases:

March 31 (in thousands)

Rs. $2006 124,285 2,8492007 108,897 2,4962008 61,958 1,4202009 33,318 7642010 28,310 649Thereafter till 2012 50,697 1,162

17. Segmental information

The Group has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise 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 organized by business segment. For the management purpose the Group is primarily organized on a worldwide basis into three business segments:

a) Product licenses and related activities (“Products”);

b) IT solutions and consulting services (“Services”): and

c) Knowledge Processing Services (KPO)

The Group reports operating performance of its business units to the management. The Product license segment has banking products like the FLEXCUBE suite of products, Microbanker and Daybreak 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. Substantially all of the product revenue relate to FLEXCUBE product.

IT solutions and consulting services comprise of bespoke software development, computer software solutions and related consulting services arising from such activities. The services provided under this segment includes Business intelligence, Customer relationship management, Brokerage, e-commerce, Internet services and IT and business consulting.

Knowledge processing services comprise the business process outsourcing services for the mortgage industry.

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.

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.



Year ended March 31, 2005Particulars Products Services KPO-services Corporate Total

(in Rs. thousands)

Revenues 6,061,202 5,294,910 48,296 – 11,404,408Cost of revenues (2,206,465) (3,713,972) (27,668) – (5,948,105)Gross profit 3,854,737 1,580,938 20,628 – 5,456,303Selling and marketing expenses (1,260,231) (255,703) (13,346) – (1,529,280)General and administrative expenses (240,673) (225,804) (33,515) (657,066) (1,157,058)Depreciation and amortization (138,483) (129,437) (6,260) (62,795) (336,975)Income from operations 2,215,350 969,994 (32,493) (719,861) 2,432,990Share of associate company loss (1,118)Provision for diminution in value of investment (50,528)Interest income 259,050Other income/(expense), net 18,080Income before provision for income taxes 2,658,474Provision for income taxes (627,062)Net income 2,031,412

Other informationAs at March 31, 2005Segment assests– Long-lived assests 570,146 442,978 239,441 1,003,074 2,255,639– Others 2,268,212 2,229,993 54,998 7,039,528 11,592,731Segment liabilities 1,282,239 461,485 41,739 771,649 2,557,112Capital expenditure by segment 195,391 301,331 245,725 283,347 1,025,794

Year ended March 31, 2005Particulars Products Services KPO-services Corporate Total

(in US Dollars thousands)

Revenues 138,955 121,387 1,107 – 261,449Cost of revenues (50,584) (85,143) (634) – (136,361)Gross profit 88,371 36,244 473 – 125,088Selling and marketing expenses (28,892) (5,862) (306) – (35,060)General and administrative expenses (5,517) (5,177) (768) (15,064) (26,526)Depreciation and amortization (3,175) (2,967) (144) (1,439) (7,725)Income from operations 50,787 22,238 (745) (16,503) 55,777Share of associate company loss (26)Provision for diminution in value of investment (1,158)Interest income 5,939Other income/(expense), net 414Income before provision for income taxes 60,946Provision for income taxes (14,376)Net income 46,570

Other informationAs at March 31, 2005Segment assests– Long-lived assests 13,071 10,155 5,489 22,996 51,711– Others 51,999 51,124 1,261 161,383 265,767Segment liabilities 29,396 10,580 957 17,690 58,623Capital expenditure by segment 4,479 6,908 5,633 6,496 23,516


Year ended March 31, 2004Particulars Products Services Corporate Total

(in Rs. thousands)

Revenues 4,924,322 3,128,996 – 8,053,318Cost of revenues (1,501,160) (2,155,021) – (3,656,181)Gross profit 3,423,162 973,975 – 4,397,137Selling and marketing expenses (985,720) (171,641) – (1,157,361)General and administrative expenses (355,792) (237,643) (402,725) (996,160)Depreciation and amortization (64,414) (72,619) (9,935) (146,968)Income from operations 2,017,236 492,072 (412,660) 2,096,648Loss on equity investments (2,896)Interest income 217,025Other expense, net (85,658)Income before provision for income taxes 2,225,119Provision for income taxes (515,305)Cumulative effect of accounting change, net of tax 68,727Net income 1,778,541

Other informationAs at March 31, 2004Long-lived assests 2,125,532 1,314,841 7,626,515 11,066,888Segment liabilities 766,826 208,261 622,693 1,597,780Capital expenditure 448,239 30,454 748,814 1,227,507

Geographical segments

The following table shows the distribution of the Group’s consolidated sales by geographical market based on the location of the customers:

March 312004 2005 2005

(in thousands)

Rs. Rs. $United States of America 3,542,033 5,682,587 130,275Middle East and Africa 1,324,492 1,634,142 37,463Asia Pacific 1,465,468 1,719,813 39,427Europe 1,608,282 2,186,585 50,128Latin America and Caribbean 113,043 181,281 4,156

8,053,318 11,404,408 261,449

The following table shows the distribution of the Group’s consolidated sales percentage by geographical market based on the location of the customers:

March 312004 2005

United States of America 44 50Middle East and Africa 16 14Asia Pacific 18 15Europe 20 19Latin America and Caribbean 2 2

100 100

The Group does not track its profits, assets and liabilities region wise.

The Group derives more than 10% of its revenues from the following customer:

March 312004 2005 2005

(in thousands)

Rs. Rs. $Citigroup and its entitiesProduct segment related 1,171,484 1,339,730 30,714Service segment related 2,202,938 3,456,389 79,239Total 3,374,422 4,796,119 109,953



18. Related party transactions


Promoter Company and its affiliates

OrbiTech Limited

(Collectively “Citigroup”) OrbiTech Solution Limited Citigroup Inc.Citicorp Technology Holdings Inc., USACitibank branchesCiticorp Information Technology, Inc. e-Serve International Limited

Joint Ventures DotEx International Limited (‘DotEx’) till August 1, 2003Flexcel International Private Limited (‘Flexcel’)

Citigroup Joint VentureMarch 31 March 31

2004 2005 2005 2004 2005 2005(in thousands)

Rs. Rs. $ Rs. Rs. $RevenueProduct 1,171,779 1,339,899 30,714 9,169 10,707 245Services revenues 2,202,938 3,456,389 79,239 – – –ExpensesCommunication expenses 16,248 – – – – –Finance charges on finance leases 670 386 9 – – –Professional fees 23,455 – – – – –Bank charges 2,477 3,990 93 – – –AssetsSundry debtors 885,804 1,181,250 27,080 10,636 – –Bank balances 1,811,392 2,175,352 49,871 – – –Interest accrued on time deposits 4,720 9,838 226 – – –LiabilitiesFinance lease obligation 3,046 434 10 – – –Deferred revenue 17,244 15,556 357 831 2,099 48Payment of lease obligations (Principal)

4,011 1,727 40 – – –


19. Commitments and contingencies

19.1 Capital expenditure

The Group had committed to spend as at March 31, 2004 and March 31, 2005 approximately Rs. 98,612 and Rs. 68,988 under agreements to purchase property and equipment.

19.2 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.

Guarantees provided by banks on behalf of the Group amounted to Rs. 141,719 and Rs. 226,811 at March 31, 2004 and 2005, respectively. 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.

19.3 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”) in India. 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. Management believes that it would meet the required export obligations.

20. Stock-Based compensation

20.1 Employee Stock Purchase Scheme (“ESPS”)

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, April 1, 2001 and June 1, 2004 the Company adopted another Stock based schemes (“1999 Scheme”, “2000 Scheme”, “2001 Scheme” and “2004 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.

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 recognize 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.

A summary of the activity in the Company’s ESPS is as follows:

March 312004 2005

Number of sharesOpening balance of unallocated shares 254,658 340,681Shares acquired by the Trust – –Shares allocated to employees – (330,000)Shares forfeited during the year 86,023 59,925Closing balance of unallocated shares 340,681 70,606Closing balance of allocated shares 7,024,117 6,984,817Shares exercised till date (2,899,039) (3,900,255)Shares eligible for exercise (3,177,044) (2,975,955)Shares not eligible for exercise 948,034 417,981

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.

20.2 Employee Stock Option Plan (“ESOP”)

The Company has granted 4,753,600 options to the employees and directors of the Group. As per the scheme, 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.

The Group applied APB Opinion 25 and related interpretations in accounting for this plan. In accordance with APB Opinion 25, no compensation cost has been recognized for the Employee Stock Option Plan as the exercise prices were equal to the fair market value of value of the shares at the date of the grant.

A summary of the activity in the Group’s ESOP is as follows:

March 31, 2004 March 31, 2005

Number of OptionsWeighted-average

PriceNumber of Options

Weighted-average Price

Movement during the yearOutstanding at beginning of year 4,499,400 268.01 4,313,550 270.08Granted during the year 36,000 514.52 60,000 555.14Exercised during the year (109,350) (270.63) (139,500) (265.00)Forfeited during the year (112,500) (265.00) (82,200) (294.55)Outstanding at end of year 4,313,550 270.08 4,151,850 273.88

Price range for the options outstanding as on March 31, 2005

Grant Price (Rs.) No of options outstandingMarch 31 March 31

2004 2005250-400 4,201,550 3,992,650400-600 112,000 159,200

21. IBM options

Pursuant to a subscription agreement entered into between the Company and IBM Global Services Pvt. Ltd. (IBM), the shareholders of the Company, at the Annual General Meeting held on August 19, 2004, approved a resolution authorizing the Board to issue up to 99,000 options, representing upto 0.13% of paid up capital of the Company to IBM. Subsequently the Board of Directors of the Company allotted 91,347 options to IBM at a price of Rs. 587.47, determined as per Securities and Exchange Board of India (SEBI) Guidelines. IBM will be entitled to subscribe these options in two tranches and after completion of and compliance with certain predetermined requirements, including the provision of certain marketing and business promotion support. As required by SEBI guidelines 2003, IBM has deposited Rs. 5.30 million, an amount equivalent to 10% of total consideration as a deposit.

As per the requirements of SFAS 123 and EITF 96-18, the fair value of the equity instruments issued is being used to measure the transaction as that value is more reliably measurable than the fair value of the services received. The fair value of the options measured using the date of issue as the measurement date aggregates approximately Rs. 11,580. This has been recognized as discounts, as a reduction of revenue with a corresponding credit to additional paid in capital over a period of 12 months. As at March 31, 2005 Rs. 6,755 has been recognised. The fair value of tranche 2 will be remeasured at the time of the vesting of options of tranche 2.

The fair value of the options has been measured using the Black Scholes option-pricing model using the following assumptions:

Risk-free interest rate 6%Expected life 1.25 yearsExpected volatility 39%Expected dividends 25%

22. 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:

March 312004 2005

Weighted average number of common shares used for basic EPS purposes 73,379,472 74,289,899

Dilutive component of shares that are not eligible for exercise 3,489,350 2,412,573

Weighted average number of common shares used for diluted EPS purposes 76,868,822 76,702,472

Number of shares stated above has been computed after giving effect of split of shares and bonus issue as referred in Note 2.2 (c). Basic EPS does not include shares considered by the Company as outstanding but held by the ESPS Trust. Shares that are not eligible for exercise are treated as dilutive.


23. Business combinations

23.1 Acquisition of IT services business from Trigyn Technologies Limited

Effective July 1, 2004, the group acquired the IT consulting services contract of a large investment bank from Trigyn Technologies Limited and its subsidiaries (‘together referred to as ‘Trigyn’). As per the terms of the agreement, Trigyn has assigned the Master Services Agreement and all current Statements of Work to the group. Further, the group has also procured the employees, consultants, and vendors servicing this contract. The group considers this transaction as an acquisition of business and accordingly has accounted for it as a business combination. The acquisition of the services contract is in line with the Group’s business policy and will enable it to enrich and complement its customer base.

The consideration for this assignment consists of a one time payment of Rs. 106.53 million and certain amounts of contingent consideration, which are dependent on the revenues. The total consideration under the agreement has been capped at Rs. 218.02 million.

Based on the independent valuation obtained the group has valued the intangible assets, using a cost approach at Rs. 186.20 million; Rs. 21.80 million for the customer contracts and Rs. 168.82 million for the customer relationship and non-compete arrangement.

The initial consideration has been determined at Rs. 183.47 million. Accordingly, an amount of Rs. 2.73 million (being the lower of the maximum amount of contingent consideration or the excess of fair value of assets acquired over cost) has been recognized as a liability until the consideration contingency is resolved. Any excess of the value of the contingent consideration paid or payable over the amount recognized as a liability will be recognized as goodwill.

Upon resolution of the contingency, any excess of the value of the contingent consideration paid or payable over the amount recognized as a liability will be recognized as additional cost of the acquired company.

A breakup of acquired intangibles is as follows:

Estimated Useful Life

(Amount Rs.)

Amortizable assets acquired Customer Contracts 12 months 21,798Customer relationship and non-compete arrangement 42 months 168,817

190,615Less: Amortization after acquisitions (51,577)Total Intangible 139,038

The amortization expenses for the year ended March 31, 2005 were Rs. 53,395. The estimated amortization expense for the next four years is as follows:

March 31 (Amount Rs.)2006 53,6812007 48,2332008 37,1242009 –

23.2 Acquisition of shares in ISP Internet Mauritius

On December 22, 2004, i-flex acquired all of the issued and outstanding equity shares of ISP Internet Mauritius Company (‘ISP Internet’) a corporation organized under the laws of the Republic of Mauritius along with its two wholly owned subsidiaries: (i) Equinox, Inc., (‘Equinox US’), and (ii) Equinox Global Services Pvt. Ltd., a (‘Equinox India” and, together with Equinox US, ‘Equinox’).Equinox is engaged in providing business process outsourcing services to the mortgage banking industry. The acquisition of ISP is in line with the Group’s business policy and will enable it to enrich and complement its existing product lines.

The acquisition was carried out in two stages. The Company acquired 84% of the equity shares from one shareholder for a consideration of Rs. 192,115 and repaid a loan of Rs. 41,368 extended to Equinox US by the former shareholder. Simultaneously, the Company also entered into separate agreements with the other three shareholders to acquire the balance 16% equity shares. The consideration for this is linked to the profit of the Equinox business over the next three fiscal years and is payable based on a pre-determined formula.

The following table summarizes preliminarily estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Fair value of the intangible assets was made by obtaining a third party valuation.

As at March 31, 2005Rs. $

Current assets Cash and cash equivalent 4,070 93Accounts Receivable 20,810 477Other current assets 6,906 158Total current assets 31,786 728

Property and equipment 17,741 407Total assets acquired 49,527 1,135

Current liabilitiesAccount payable 31,300 718Other current liabilities 10,916 250Total current liabilities 42,216 968

Total liabilities acquired 42,216 968

Net assets acquired 7,311 167



As at March 31, 2005(in thousands)

Rs. $Purchase consideration paid/payable 233,483 5,352Less: Net assets acquired 7,311 167 Less: Amount assigned to Intangible assets 31,730 728Goodwill on acquisition 194,442 4,457


Estimated Useful Life March 31, 2005(in thousands)

Amortizable assets acquired Customer Contracts 12 months 6,747 155Customer relationship 36 months 10,382 238Process Knowhow 60 months 14,601 335

31,730 728Less: Amortization after acquisitions

(3,282) (75)

Total Intangible 28,448 653



2006 11,441 2622007 6,381 1462008 5,516 1262009 2,920 672010 2,190 50

There has been no change in carrying value of goodwill and intangibles post acquisition through to March 31, 2005.

23.3 Acquisition of ‘Flowmate’ and ‘Documate’ from SRA Systems Limited

On October 1, 2004, i-flex solutions ltd. (‘i-flex’) acquired all rights, title, interest, ownership and benefit with respect to copyrights, licenses, IPRs and trademarks for software products – Flowmate and Documate (‘the Products’) of SRA Systems Limited (‘SRA’). These rights are restricted only to the Banking, Financial Services and Insurance sector. However, SRA retains the right to license Documate to all clients. The acquisition of the products is in line with the Group’s business policy and will enable it to enrich and complement its existing product lines.

Further, i-flex has also procured the employees who are trained in developing, testing, implementing, supporting and maintaining the Products. The group considers this transaction as an acquisition of business and accordingly has accounted for it as a business combination.

The consideration for this assignment consists of an aggregate payment of Rs. 44,081.

A breakup of acquired intangibles as of March 31, 2005 is as follows:

Estimated Useful Life (Amount)Amortizable assets acquired Assignment of Copyright 60 months 18,704 Assignment of Product IPR, including one man-year effort 60 months

22,583

Trademark Odyssey Documate, Odyssey Flowmate 60 months

2,794



March 31 (Amount Rs.)2006 8,8162007 8,8162008 8,8162009 8,8162010 4,408

24. Acquisition of simple RM from TriVium group

On November 29, 2004, i-flex solutions ltd. (‘i-flex’) acquired rights, title, interest and ownership with respect to a software product SimpleRM (‘Product’) and services for successful transitioning of the software to i-flex, from TriVium Systems Inc. and its subsidiaries (‘TriVium Group’).

i-flex has been granted rights to modify, change, distribute the license to any customer in the Banking, Financial Services and Insurance sector. This transaction has been accounted for as purchase of an intangible asset. The acquisition of the product is in line with the Group’s business policy and will enable it to enrich and complement its existing product lines.


The consideration paid by the Company for purchase of this product aggregates Rs. 66,735, which represents its fair value. Further, based on the period over which the acquired intangible asset will contribute to the cash flows of the Company, management has estimated the useful life of the asset to be 60 months. Due to the nature of the business, the pattern in which economic benefits of the asset are consumed cannot be reliably estimated and accordingly, the asset is to be amortized using the straight-line method.


Estimated Useful Life (Amount Rs.)Amortizable assets acquired Assignment of Copyright 60 months 66,736



March 31 (Amount Rs.)2006 13,3472007 13,3472008 13,3472009 13,3472010 8,898

25. Acquisition of SuperSolutions Corporation

On January 12, 2004 the Group, through its wholly owned subsidiary i-flex America inc., acquired 100% of the SuperSolutions Corporation (‘SS’) based in Minneapolis, USA. SS is a software provider specializing in the consumer lending institutions sector. Its product Daybreak Lending software is a package of loan processing software that automates lending from origination to servicing and collections. The acquisition of SS is in line with the Group’s business policy and will enable it to enrich and complement its existing product lines.

The total cash consideration paid was Rs. 590,690 (USD 13.6 million) for 100% outstanding common shares of SS. The results of SS’s operations have been included in the consolidated financial statements from the date of acquisitions. The following table summarizes preliminarily estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Fair value of the intangible assets was made by obtaining a third party valuation.

As of January 12, 2004(in thousands)

Rs. $Current assets Cash and cash equivalent 85,795 1,977 Accounts Receivable 57,255 1,319Other current assets 1,433 33Total current assets 144,483 3,329

Property and equipment 4,347 100Other assets 743 17Total assets acquired 149,573 3,446

Current liabilitiesAccount payable 9,114 210Deferred revenue 53,526 1,233Accrued expenses 27,796 640Other current liabilities 4,634 107Total current liabilities 95,070 2,190

Long term portion of capital lease obligation 3,293 76Total liabilities acquired 98,363 2,266

Net assets acquired 51,210 1,180Purchase consideration paid 590,690 13,609Less: Net assets acquired 51,210 1,180 Less: Amount assigned to Intangible assets 150,382 3,464Goodwill on acquisition 389,098 8,965



A breakup of acquired intangibles as of March 31, 2004 is as follows:

Estimated Useful Life March 31, 2004(in thousands)

(Years) Rs. $ Non-Amortizable assets acquiredTrademarks 12,342 284

Amortizable assets acquired Technology 5 118,584 2,731Customer relationship 5 15,372 354Website 3 922 21Non-compete covenant 2 3,162 73

138,040 3,179Less: Amortization after acquisitions (5,975) (136)

132,065 3,043Total Intangible 144,407 3,327

The amortization expenses for the year ended March 31, 2004 and March 31, 2005 were Rs. 5,975 and Rs. 27,038 respectively. The estimated amortization expense for the next four years is as follows:


Rs. $2006 29,044 6692007 27,627 6372008 27,379 6312009 20,977 483

There has been no change in carrying value of goodwill and

intangible post acquisition through March 31, 2005.


i-flex solution b.v.Financial statements for the year ended

March 31, 2005.

Financials



Directors’ report

Corporate profile

i-flex solutions b.v is a fully owned subsidiary of i-flex solutions ltd,a world leader in providing IT solutions to the financial services industry. i-flex’s range of products and customized services enable financial institutions to cut costs, respond rapidly to market needs, enhance customer service levels and mitigate risk.

i-flex’s portfolio of offerings comprises FLEXCUBE®, a complete product suite for retail, consumer, corporate, investment and internet banking, asset management, and investor servicing. In addition to the products, i-flex has a large portfolio of customized services to the Banking and finance industry in Europe.

With offices in Amsterdam, Frankfurt and London this subsidiary has been delivering i-flex’s products and services to various customers in this region.

Business model

Since the year 2000 initiatives like The Financial Services Action Plan, The Basel II Accord have been thrusting European Banking on to the Global center stage. The scepticism that set in post huge investments into Banks gave way to increasing pressures driven by Competition, Regulation and Compliance and ever volatile consumer behaviour.

The resolute effort to work to the development of an efficient wholesale EU market and create an open and secure retail market while bringing into play state of the art prudential rules and supervision have been the drivers of change.

Over the last five years, i-flex solutions b.v has been uniquely positioned to address the distinct technology needs of this region because of the parent company’s business model that combined both its products and services to resolve various business challenges faced by the industry.

On the customer engagement front, we witnessed a heartening breakthrough of serving marquee named Banks like Lloyds TSB, BAWAG, Natexis and International Moscow Bank. In addition to these names shining bright on our customer roster, these banks provide significant thrust to our front line engagement with other banks in the United Kingdom and Russia.

Our foray into the East is further powered with FLEXCUBE becoming more Russia-centric. Our investments into product enhancements and customisations have deepened the quality of engaging with customers in this region. With a finely tuned strategy for Central and Eastern Europe in place, such successes can only expedite our go-to market efforts.

The implementation of Caixa Galicia (Spain & Switzerland) also demonstrated our capability to comply with complex cross-border regulations whilst meeting standards of stringent norms of customer data confidentiality. Our Customer in Romania completed the implementation of FLEXCUBE in eight months covering 160 branches and 1.2 million customers.

In all eight customer sites went live on FLEXCUBE thus taking the European live customer tally to forty three sites.

We have continued to build on our past successes to consolidate our position in Germany with the win at Banca Populaire di Milano, Munich. This year our customer presence expanded to France, Czech and Slovakia as well. The parent company’s strategy of cross-selling our products has started paying off with SuperSolutions winning its first customer for Daybreak solutions outside America in the Netherlands.

i-flex successfully competed and won bids for Commercial and Syndicated Lending by configuring FLEXCUBE along with the necessary workflow.

PrimeSourcing engagements with customers include Germany and Greece in addition to Ireland and UK. i-flex consulting provided high-end expertise in SOX, BPR and Process Consulting assignments for European customers.

Events & Partners

i-deate, i-flex’s own banner under which the company articulates its thought leadership was held in London this year. This event customized to International Banks based in UK was received with much enthusiasm. Organized in partnership with IBM, this event generated high quality responses and provided a suitable context for further interaction.

Another testimony to i-flex’s increasing acceptance in the banking industry is the heightened interest and partnership with industry giants like Oracle and IBM. This year too, i-flex was invited to campaign the value proposition at various events organized by these partners in various locations in Europe. A leading trade event company invited i-flex to participate in their “Bank of the Future” endeavour allowing i-flex to jointly shape the technology agenda for the near future.

Towards the end of the fiscal year under review, i-flex also announced the tie-up with Computerland as a business partner. This association with a vibrant business house with strong presence in Poland and Russia, is another strong component in the strategy of addressing a wider market in the European region. To serve more customers with a local flavour, i-flex has also signed up local partners in Czech, Slovakia and Greece.

Infrastructure and people

Coinciding with the visit of Russian President His Excellency Mr. Putin’s visit to India, i-flex solutions announced the setting up of an office in Moscow. Perhaps the first by an Indian IT company, this office will substantially enhance the confidence and comfort to customers and partners in this region. Today with many Global firms evincing interest in leveraging Russian IT talent, this office is a key step in expanding our scope of work in this region.

The Regional customer support centers in Amsterdam, Frankfurt and London have been augmented and this commitment has become a strong rallying point in demonstrating our support to customers.

Over the last year, i-flex solutions b.v. has significantly invested in Sales and Marketing resources.


Awards & accolades

Over the last year, i-flex has found itself in the spotlight with coverage in BBC, CNBC, Financial Times, Sunday Telegraph in addition to mentions in German and Dutch press. The much awaited banking sales league tables published by International Banking Systems listed FLEXCUBE for the number 1 selling core banking solution for the third year in a row (2002, 2003 and 2004). The rankings announcement event held in London was attended the top technology players and i-flex’s thought leadership was reinforced through a panel discussion featuring Rajesh Hukku, Chairman and Managing Director, i-flex solutions and other heads of companies and banks.

With growing Customer traction, enhanced global partnerships and a strong local presence in the market, the Company continues to remain confident about its prospects for success in Europe.

Results from operations

(Currency – thousands of euros)

The company achieved total revenue of € 33,979 (2004: € 21,232) for the financial year ended March 31, 2005 – an increase of 60% over previous year. The company turned into black for the first time since incorporation with a net profit for the year at € 1,207 (2004: loss € 146). The turnaround was achieved by having strict control over costs and increased sales.

London V Senthil KumarJune 16, 2005 Statutory Director



Auditors’ report

Introduction

We have audited the financial statements of i-flex solutions b.v., Amsterdam for the year ended March 31, 2005. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

Scope

We conducted our audit in accordance with auditing standards generally accepted in The Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made

by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the company as at March 31, 2005 and of the result for the year then ended, in accordance with accounting principles generally accepted in The Netherlands and comply with the financial reporting requirements included in Part 9, Book 2 of The Netherlands Civil Code.

Amsterdam Ernst & Young AccountantsJune 16, 2005



(Thousands of EUR)

2,005 2,004

Total tangible fixed assets, net 186 167

Accounts receivable 11,959 6,693 Prepaid expenses and other receivables 3,113 2,207

Total current assets 15,072 8,900

Cash and cash equivalents 3,639 3,115

Total assets 18,897 12,182

Issued share capital 519 519 Accumulated deficit (3,016) (2,870)Net profit for the period 1,207 (146)Total equity (1,290) (2,497)

Accounts payable 276 314 Intercompany Payable 14,088 10,988 Accrued expenses 1,044 525 Advance billing 1,490 934 Deferred revenue 2,090 1,291

Taxes and social security 1,199 627 Total current liabilities 20,187 14,679

Total equity and liabilities 18,897 12,182

Ernst & Young Accountants K Sanjay Iyer V Senthil KumarAuditors Finance Controller and Operations Officer Statutory Director

Amsterdam London LondonJune 16, 2005 June 16, 2005 June 16, 2005



Statement of incomefor the year ended March 31

(Thousands of EUR)

2,005 2,004

Sales 33,979 21,232 Cost of sales 27,564 17,584 Total gross profit 6,415 3,648

Selling and marketing expenses 4,041 2,601 General and administrative expenses 1,074 2,018 Total operating expenses 5,115 4,619

Operating income (loss) 1,300 (971)

Interest income (expenses) 9 (4)Currency exchange result 89 829 Total 98 825

Income before taxes 1,398 (146)Income taxes (191) – Net income after taxes 1,207 (146)

Ernst & Young Accountants K Sanjay Iyer V Senthil KumarAuditors Finance Controller and Operations Officer Statutory Director

Amsterdam London LondonJune 16, 2005 June 16, 2005 June 16, 2005


Notes to financial statementsas at March 31, 2005

(Thousands of EUR)

1. General

a) General

i-flex solutions b.v. (“the company”), having its legal seat in Amsterdam, The Netherlands, is a leading software provider of solutions and services to the financial services industry across Europe. The company has been incorporated on May 19, 2000.

The company is a wholly owned subsidiary of i-flex solutions ltd (“the parent company”), which has its registered office in Mumbai, India.

b) Related party transactions

All products and services sold by the company to third parties are purchased from the parent company. For the year ended March 31, 2005 the company has purchased for an amount of € 27,564 (2004: € 17,584) of the above-mentioned services from the parent company.

c) Groupings

Sales commission amounting to EUR 208 and corporate fees amounting to EUR 599 are shown as part of S&M expenses in the current year. In the comparative financials for last year, the sales commission was netted off against sales figures and corporate fees were part of G&A.

2. Going concern

The company has a negative working capital and a negative equity per March 31, 2005. The parent company has confirmed that it is aware of the current financial position of the company and that the parent company is committed to provide the necessary level of operational and financial support to ensure that the company meets all its liabilities as they fall due, and continues as a going concern at least for a period up to September 2006. The parent company believes that it has the required financial resources to fulfill that commitment.

3. Accounting principles

a) General

The accounting principles of the company are summarized below. These accounting principles have all been applied consistently throughout the year and the preceding period from April 1, 2003 to March 31, 2004.

The financial statements have been prepared under the historical cost convention and in conformity with the requirements of the Netherlands Civil Code. Assets and liabilities are stated at face value unless indicated otherwise. The statement of income fully complies with the classification prescribed by section 2:363; subsection 6 of the Netherlands Civil Code, in order to provide insight in the expenses in line with the business of the company.

Assets and liabilities denominated in foreign currencies are translated into euros at the rates of exchange prevailing at yearend. Transactions in foreign currencies are translated at the rates of exchange prevailing at the date of the transaction. The exchange results are recorded under currency exchange result in the statement of income.

b) Revenue recognition

The Group derives revenues from software licensing and related services and IT solutions and consulting services.

Software licensing and related services – The Group enters into agreements to generally convey a perpetual license to its customers and also provides implementation services and customization as required. Customers also have the option to enter into a maintenance arrangement (post contract support or ‘PCS’), which is generally an annual contract, and commences when the implementation is complete and the warranty period has ended.



License revenues for perpetual licenses are recognized, separately from the other elements of the contract such as implementation and customization, when services are not considered essential to the functionality of the software and 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 accordingly revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied.

In limited situations the Group enters into time-based or term licenses for a specified period, the license and PCS revenue is recognized ratably over the period of the arrangement.

Services are not considered essential to the functionality of the software when such services primarily consist of minor functional enhancements, simple interfaces, implementation planning, data conversion, training and product walkthrough and the realizability of the license fees is not dependent on such services. When the vendor specific objective evidence (“VSOE”) of the fair value of the services, based on the historical evidence of sales of similar services exists, 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, subject to VSOE being established, revenue related to implementation services is recognized using the proportional performance method of accounting. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realisability of the services fees are dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

When an arrangement provides for significant modification or customization of the product or if services are essential to the

functionality of the product or the realization of the license fees is dependent on the services, the revenue related to both the license and services is recognized using the percentage of completion method of accounting. Percentage of completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realisability of the services fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

The Company enters into PCS 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 ratably over the period of the PCS. VSOE of PCS is based on the renewal rate for the PCS arrangement. When the arrangement includes a free maintenance period, including the implied benefit to receive upgrades during the implementation and warranty period, a portion of the license fees based on the VSOE of PCS is deferred and recognized over the free PCS period.

If an up-front discount is provided in an arrangement, a proportionate portion of that discount, relative to the VSOE of that element, is applied to each element in the arrangement based on each element’s fair value.

IT solutions and consulting services – The Group provides bespoke software development and other consulting services to customers primarily in banking and financial services.

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 based on a proportional performance method. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the proportional performance is higher than a


related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received.



c) Tangible fixed assets

Tangible fixed assets are stated at cost, less accumulated depreciation and amortisation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

Costs of normal repairs and maintenance are charged to income as incurred. Major replacements or betterment of property and equipment are capitalised.

d) Accounts receivable

Accounts receivable are stated at face value, less an allowance for possible uncollectible accounts.

e) Other assets and liabilities

All other assets and liabilities are stated at the amounts at which they were acquired or incurred.

f) Income taxes and deferred taxes

The income taxes are calculated based upon the result for the year. Deferred taxes are recognized when considered recoverable.

g) Pension

The pensions of the employees of the company are based on a defined contribution scheme. The contributions for these pensions are directly charged to the income statement.



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5. Accounts receivable

Accounts receivable as presented under current assets mature within one year and are denominated in USD, GBP and EUR. A Provision for bad debt of EUR 215 is included as of March 31, 2005 (2004 – EUR 150).

6. Shareholder’s equity

The movement in shareholder’s equity is as follows:

€Balance March 31, 2004 (2,497)Net profit for the year 1,207Balance March 31, 2005 (1,290)

The authorized share capital consists of 20,000 authorized common shares of which 5,185 shares are issued and outstanding at March 31, 2005. The shares have a par value of € 100 each.

7. Liabilities

Liabilities with a remaining period up to 1 year, including the short-term portion of long-term liabilities, are presented under short-term liabilities and are substantially denominated in USD.

8. Income taxes

Company has recorded Eur 191 as tax liability for the year, as the carry forward loss is not sufficient to set off the current years profit.

9. Credit facilities

The company has no credit facilities apart from the facilities granted by the parent company.

10. Net sales

Net sales for the year ended March 31, 2005 amount to € 33,979 (2004: € 21,232).

11. Commitments and contingencies

Total commitments in connection with the rental obligations and operational lease agreements amount to approximately EUR 1,148. The short term portion of the commitments amounts to EUR 331, the amount due between 1-5 years is EUR 809. The portion that is due after 5 years is EUR 9.

12. Personnel

The number of personnel for the year ended March 31, 2005 was 28 (2004: 26). Internal department wise the numbers are:

2005 2004Sales and Marketing 22 22Support services 6 4

(Includes HR, Finance and Administration)

The Selling and Marketing expenses include the following costs towards salary and wages:

2005 2004Salary and wages 2,461 1,865 Social Securities 357 341Pension Cost 69 75

13. Remuneration of statutory directors

In accordance with Article 383, Book 2 of the Dutch Civil Code, the remuneration of the only statutory director is not presented. The company has no supervisory directors.

London V Senthil KumarJune 16, 2005 Statutory Director



Other information

1. Appropriation of income

The Articles of Association of the company provide that the appropriation of the net result for the year is decided upon at the Annual General Meeting of Shareholders.

Awaiting the decision by the shareholder, the net profit for the year ended March 31, 2005 is separately included in the shareholder’s equity as net profit for the period.

2. Branches

The company currently has following branches:

• i-flex solutions b.v., London, UK• i-flex solutions b.v., Frankfurt, Germany

(Currency – thousands of euros)


i-flex solutions pte ltd(Incorporated in the Republic of Singapore)

Financial statements for the year endedMarch 31, 2005.

Financials



Directors’ report

The Directors present their report together with the audited financial statements of the Company for the financial year ended 31 March 2005.

1. Directors of the company

The Directors in office at the date of this report are:

Deepak Keshav Ghaisas

Kishore Kapoor

2. Arrangements for directors to acquire shares or debentures

Neither at the end nor at any time during the financial year was the Company a party to any arrangement whose object is to enable the directors of the Company to acquire benefits through the acquisition of shares in or debentures of the Company or any other body corporate.

3. Directors’ interest in shares or debentures

The Directors holding office at the end of the financial year and their interests in the shares of the Company and related corporation as recorded in the register kept by the Company for the purposes of Section 164 of the Companies Act, Cap. 50 were as follows:

Shares beneficially held by the Directors

Name of Directors At 01.04.04 At 31.03.05

Holding Corporationi-flex solutions limited

Shares of Rs. 5/- eachKishore Kapoor 32,000 32,000

Shares of Rs. 5/- eachDeepak Keshav Ghaisas 42,000 158,705

Share OptionsKishore Kapoor 85,000 85,000

4. Directors’ contractual benefits

Since the end of the previous financial year, no director has received or become entitled to receive a benefit which is required to be disclosed by Section 201(8) of the Companies Act, Cap. 50 by reason of a contract made by the Company or a related corporation with the director or with a firm of which he is a member, or with a company in which he has a substantial financial interest other than those, which have been disclosed in the financial statements.

5. Auditors

The auditors, Messrs. Rohan • Mah & Partners, Certified Public Accountants, have expressed their willingness to accept re-appointment.

On behalf of the board

Deepak Keshav GhaisasDirector

Singapore,April 25, 2005

Kishore KapoorDirector


Statement by Directors’

In the opinion of the directors, the financial statements set out are drawn up so as to give a true and fair view of the state of affairs of the Company as at 31 March 2005 and of the results of the business, changes in equity and cash flows of the Company for the year ended on that date, and at the date of this statement there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.

On behalf of the board

Deepak Keshav GhaisasDirector

Singapore,April 25, 2005

Kishore KapoorDirector



Auditors’ report

We have audited the accompanying financial statements of i-flex solutions pte ltd as set out for the year ended March 31, 2005. These financial statements are the responsibility of the Company’s directors. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Singapore Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the directors, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion,

(a) the financial statements are properly drawn up in accordance with the provisions of the Companies Act, Cap. 50 (the “Act”) and Singapore Financial Reporting Standards so as to give a true and fair view of the state of affairs of the Company as at March 31, 2005 and the results, changes in equity and cash flows of the Company for the year ended on that date; and

(b) the accounting and other records required by the Act to be kept by the Company have been properly kept in accordance with the provisions of the Act.

Singapore Rohan • Mah & partnersApril 25, 2005 Certified Public Accountants



(All amounts in Singapore Dollars, unless otherwise stated)

Note 2005 2004S$ S$

Assets less liabilities

Non-Current AssetsPlant and equipment 3 382,937 354,635

Current assetsTrade and other receivables 4 31,797,614 15,044,768 Cash and cash equivalent 5 10,551,270 4,882,854

42,348,884 19,927,622 Current liabilitiesTrade and other payables 6 33,682,360 16,748,092 Provision for taxation 1,866,981 1,116,481

35,549,341 17,864,573 Net current assets 6,799,543 2,063,049 Non-Current liabilitiesDeferred taxation 7 61,000 48,200 Net assets 7,121,480 2,369,484

EquityShare capital 8 250,000 250,000 Retained profits 6,871,480 2,119,484 Total equity 7,121,480 2,369,484

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



Profit and loss account for the year ended March 31


Note 2005 2004S$ S$

Revenue 9 54,861,023 47,956,629 Other income 10 641,568 21,551

55,502,591 47,978,180

Costs and Expenses Cost of sales 44,557,095 39,486,627 Staff costs 11 2,379,945 1,632,834 Depreciation 3 197,231 116,810 Other operating expenses 12 1,903,483 1,900,769

49,037,754 43,137,040

Profit before taxation 6,464,837 4,841,140 Taxation 13 (1,712,841) (3,225,608)Net profit for the year 4,751,996 1,615,532



Cashflow statement for the year ended March 31


Note 2005 2004S$ S$

Cash flows from operating activities:

Profit before taxation 6,464,837 4,841,140

Adjustments for:Depreciation of plant and equipment 3 197,231 116,810 Operating profit before working capital changes 6,662,068 4,957,950

Working capital changes, excluding changes related to cash:Trade and other receivables (10,396,519) (1,518,519)Trade and other payable 2,159,743 681,570 Holding company 12,037,226 (58,072)Related party (3,619,030) (573,972)Cash generated in operations 6,843,488 3,488,957 Income taxes paid (949,539) (2,314,927)Net cash generated from operating activities 5,893,949 1,174,030

Cash flows from investing activities:Purchase of plant and equipment (225,533) (154,764)

Net increase in cash and cash equivalents 5,668,416 1,019,266 Cash and cash equivalents at beginning of financial year 4,882,854 3,863,588 Cash and cash equivalents at the end of the financial year 5 10,551,270 4,882,854




Statement of changes in equity for the year ended March 31, 2005


Share RetainedCapital Profits Total

S$ S$ S$

As at April 1, 2003 250,000 503,952 753,952 Net profit for the year – 1,615,532 1,615,532

As at March 31, 2004 250,000 2,119,484 2,369,484 Net profit for the year – 4,751,996 4,751,996

As at March 31, 2005 250,000 6,871,480 7,121,480




Head Office Branch TotalS$ S$ S$

Revenue 54,718,975 – 54,861,023

Less: Cost of sales (44,399,159) – (44,557,095)Gross profit 10,319,816 – 10,303,928

Add: Other income 15,293 11,055 641,568 10,335,109 11,055 10,945,496

Less: Operating expensesAdvertisement 1,195 – 1,195 Auditors’ remuneration 25,000 – 25,000 Bank charges 20,300 2,128 22,428 Business promotion expenses 35,684 14,175 49,859 Conveyance expenses 20,210 11,822 32,032 CPF 32,043 – 32,043 Depreciation of plant and equipment 185,996 11,235 197,231 Director’s remuneration 208,676 – 208,676 Director’s benefits 48,240 – 48,240 Donation 500 – 500 Exchange difference 35,523 (15,814) 19,709 Fees & commission 38,928 – 38,928 General expenses 408 – 408 Housekeeping expenses 4,326 3,674 8,000 Insurance 14,426 51,128 65,554 Internet expenses 6,578 5,432 12,010 Office rental 224,430 100,308 324,738 Postage and courier 34,829 3,811 38,640 Printing and stationery 12,396 6,994 19,390 Professional fees 183,816 96,429 280,245 Recruitment expenses 4,000 – 4,000 Refreshment 9,116 2,127 11,243 Rental of office equipment 1,992 22,643 24,635 Repair and maintenance 19,516 22,524 42,040 Repair and maintenance of premises 15,053 6,956 22,009 Salaries 1,465,570 457,507 1,923,077 Staff accommodation 2,478 92,583 95,061 Staff miscellaneous expenses 27,250 3,598 30,848 Staff leave encashment 42,000 – 42,000 Subscription 1,995 2,602 4,597

Telephone and fax 162,610 30,753 193,363 Travelling expenses 628,494 9,327 637,821 Water and electricity 23,758 1,381 25,139

(3,537,336) (943,323) (4,480,659)

Profit/(Loss) for the year 6,797,773 (932,268) 6,464,837


Detailed profit and loss accounts for the year ended 31 March 2005



Notes to the fi nancial statementsas at March 31, 2005

These notes form an integral part of and should be read in conjunction with the accompanying balance sheet, profit and loss account, statement of changes in equity and statement of cash flows.

1. Corporate information

i-flex solutions pte ltd is a limited liability company incorporated in Singapore with its registered office and its principal place of business at 27 International Business Park #04-05, Primefield Landmark Building, Singapore 609924.

The principal activities of the Company in the course of the financial year are those relating to providing information technology solutions, consulting services and development of software to the financial service industry. There have been no significant changes in the nature of these activities during the financial year.

The Company is a wholly-owned subsidiary of i-flex solutions limited, a company incorporated in India, which is also the Company’s ultimate holding company.

The financial statements of the Company for the year ended March 31, 2005 were authorised for issue in accordance with a resolution of the Directors on April 25, 2005.

The Company has 18 (2004 :15) employees at the end of the financial year.


2.1 Statement of compliance

These financial statements have been prepared in accordance with Singapore Financial Reporting Standards (FRS) as required by the Companies Act.

2.2 Basis of financial statements preparation

The financial statements, expressed in Singapore dollars(SGD or S$), are prepared on the historical cost basis.

2.3 Plant and equipment

2.3.1 Owned assetsItems of property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. The Company capitalises all direct costs relating to the acquisition and installation of plant and equipment.

2.3.2 Depreciation

Depreciation is provided on the straight-line basis so as to write off the cost of plant and equipment over their estimated useful lives as follows:

YearsLeasehold improvementFurniture and fittings

77

Computer 3Office equipment 7

2.4 Revenue recognition

Provided it is probable that the economic benefits will flow to the Company and the revenue and costs, if applicable, can be measured reliably, software revenues are recognised in the profit and loss account as follow:

2.4.1 Product licenses

Revenue is recognised when goods are delivered at the customers’ premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership and subsequent milestone schedules as per the terms of the contract. Revenue excludes goods and services or other sales taxes and is after deduction of any trade discounts.

2.4.2 Product maintenance

Revenue is recognised over the period of maintenance contract.

2.4.3 Product management, development and consultancy service

Revenue is recognised as and when services are rendered.

2.5 Deferred taxation

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised.

2.6 Foreign currency

2.6.1 Translation of foreign currencies

Foreign currency transactions during the year are translated into recording currencies at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Singapore dollars at the exchange rates ruling at the balance sheet date. Exchange gains and losses are dealt with in the profit and loss account.

2.6.2 Financial statements of foreign operations

The results of overseas branches are translated into Singapore dollars at the average exchange rates for the year; balance sheet items are retranslated at the rates of exchange ruling at the balance sheet date. The exchange differences are dealt with in the profit and loss account.


2.7 Operating leases

Rental payable under operating leases are accounted for in the profit and loss account on a straight-line basis over the periods of the respective leases.

2.8 Related parties

For the purposes of these financial statements, parties are considered to be related to the Company if the Company has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

2.9 Impairment

The carrying amounts of the Company assets, are reviewed at each balance sheet date to determine, whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated and the impairment loss is recognised in the profit and loss account.

2.10 Reversals of impairment

An impairment loss is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

2.11 Employee benefits

2.11.1 Defined contribution pension costs

The Company makes contributions to the Central Provident Fund Scheme in Singapore, a defined contribution pension

scheme. These contributions are recognised as an expense in the period in which the related service in performed.

2.11.2 Employee leave entitlement

Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for leave as a result of services rendered by employees up to balance sheet date.

2.12 Financial assets

The Company’s principal financial assets are trade and other receivables and bank balances. Trade receivables are stated at original invoice amount less allowance for any uncollectable amounts. Other receivables are stated at cost less allowance for any uncollectable amounts.

2.13 Financial liabilities

Financial liabilities are classified according to the substance of the contractual arrangements entered into. Financial liabilities include trade and other payables. Trade and other payables are stated at cost.

2.14 Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and fixed deposits which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.



3. Plant and equipment

Leasehold improvement

Furniture and Fittings Computer

Office equipmentTotal

Cost S$ S$ S$ S$ S$

At 01.04.04Additions

–17,942

57,03421,955

455,028166,924

39,96518,712

552,027225,533

At 31.03.05 17,942 78,989 621,952 58,677 777,560

Accumulated Depreciation

At 01.04.04 – 11,714 180,812 4,866 197,392Depreciation for the year 1,923 10,183 177,358 7,767 197,231At 31.03.05 1,923 21,897 358,170 12,633 394,623

Depreciation for 2004Depreciation adjustment *

––

8,117 (3,857)

142,019 (34,139)

4,787 (117)

154,923 (38,113)

– 4,260 107,880 4,670 116,810

Net Book ValueAt 31.03.05 16,019 57,092 263,782 46,044 382,937At 31.03.04 – 45,320 274,216 35,099 354,635

* Depreciation adjustment was due to changes in accounting policy from the reducing balances method to straight line method in year 2003.

4. Trade and other receivables

2005S$

2004S$

Trade debtors Amount due from related parties – tradeAmount due from holding company – non-tradeDepositPrepayments RecoverableOther debtors #Advance costs *

17,518,3926,595,4284,250,086

209,74350,79423,20365,350

3,084,618

5,862,1412,976,3981,489,584

100,08229,666

245,7732,250,3592,090,765

31,797,614 15,044,768

* The advance cost relates to the cost rendered by the holding corporation for the projects, which will be charged to the profit and loss account in the future periods.

# Other debtors included an amount of S$Nil (2004: S$2,178,273) for loan to customer for the payment of withholding tax on behalf of the Company to the Japan tax authority.

5. Cash and cash equivalent

2005S$

2004S$

Cash at bankFixed deposits

9,940,770610,500

4,882,854–

10,551,270 4,882,854


6. Trade and other payables

2005S$

2004S$

Trade creditors 980,753 777,093Deferred revenues 2,246,580 1,752,558Advance billings 1,643,505 759,051Amount due to holding company – trade 27,013,438 11,697,713Amount due to holding company – non-trade 268,410 809,610Accrued operating expenses 925,026 579,117Other creditors 604,648 372,950

33,682,360 16,748,092

Amount due to holding company is unsecured, interest free and with no fixed terms of repayment.

7. Deferred taxation

2005S$

2004S$

At beginning of year 48,200 66,000Provision made/(written back) during the year (note 13) 12,800 (17,800)Balance at end of year 61,000 48,200The deferred taxation arises as a result of:Excess of net book value over tax written down value of plant and equipment 61,000 54,200Other temporary differences – (6,000)

61,000 48,200

8. Share capital

2005No. of shares

S$2004

No. of sharesS$

Authorised :Ordinary shares of S$1 each 300,000 300,000 300,000 300,000Issued and fully paid:At beginning and end of year 250,000 250,000 250,000 250,000

9. Revenue

2005S$

2004S$

Revenue represents the product maintenance and consultancy services rendered.Significant category of revenue during the year is as follow:

IT Solutions and Consultancy Services 32,377,899 46,109,581Product maintenance 22,483,124 1,847,048

54,861,023 47,956,629

10. Other income

2005S$

2004S$

Consumption tax 615,221 –Other income 26,347 21,551

641,568 21,551



11. Staff costs

2005S$

2004S$

Staff costs (including executive directors)Wages, salaries and related costsDefined contribution pension costs

2,347,90232,043

1,624,2918,543

2,379,945 1,632,834

12. Other operating expenses

2005S$

2004S$

Other operating expenses included the following for the year ended March 31:

Exchange loss/(gain) (net) 19,709 (29,381)

13. Taxation

2005S$

2004S$

Major components of income tax expense for the year March 31 were:Current:Singapore 1,300,000 1,100,000Foreign 400,041 2,130,477Underprovision of taxation in prior year – 12,931Deferred:Singapore 12,800 (17,800)

1,712,841 3,225,608

A reconciliation between the tax expense and the product of accounting profit multiplied by the applicable tax rate for the year ended March 31 was as follows:

Profit before tax 6,464,837 4,841,140

Tax expense on profit before tax at 20% (2004: 20%)Adjustments:

1,292,967 968,228

Expenses not deductible for tax purposesForeign tax sufferedTax exemption and reliefTax effect of temporary differences: – Property, plant and equipment – OthersUnderprovision of taxation in prior yearOthers

–400,041

(10,600)

8,884––

21,549

99,1762,130,477

(10,500)

(2,431)10,80612,93116,921

Tax expense 1,712,841 3,225,608

14. Significant parties transactions

2005S$

2004S$

Significant related party transactions on terms agreed between the Company and its related parties are as follows:Holding CompanyCost of salesAdvance cost (note 5)

44,557,0953,084,618

39,486,6272,090,765

Related PartySales 19,218,898 11,827,947


Directors’ Remuneration

Directors’ remuneration amount to S$ 583,746 (2004: S$ 250,068).

15. Operating lease committmentRental expenses were S$419,799 (2004: S$395,360) for the year ended March 31 2005.

Future minimum rental under non-cancellable leases are as follows as of March 31:

2005S$

2004S$

Payable within 1 yearPayable within 2 - 5 years

393,242145,103

182,12536,180

538,345 218,305


Financial risk management objectives and policies

The main risks arising from the Company’s financial instruments are credit, foreign exchange, interest rate and liquidity risks. The policies of managing each of these risks are summarised below:

Credit risk

Credit risk refers to the risk that counter parties may defaulton their contractual obligations resulting in a financial loss to the Company. The Company’s customer portfolio mainly comprises of financial institutions and exposures are monitored and provision for potential credit losses is adjusted when necessary.

Foreign currency risk

Foreign currency risk arises from change in foreign exchange rates that may have an adverse effect on the Company in the current reporting period and in the future years. The Company’s exposure to foreign currency risk is minimal as all transactions are dealt with in foreign currency.

Interest rate risk

Interest rate risk arises from the potential adverse effect that changes in interest rates may have on the Company’s results in the current reporting period and in the future years. The Company does not have such interest rate risks, as the Company has no significant interest bearing assets or liabilities.

Liquidity risk

Liquidity risk refers to the risk that the Company is unable to meet its obligations when fall due. The Company monitors

its cash flow and collections on a regular basis as a means of managing liquidity risk.

Fair value of financial instruments

There are no material differences between the book value and the fair value of the Company’s financial assets and liabilities. The Company does not engage in transactions involving financial derivatives.

DirectorsDeepak Keshav GhaisasKishore Kapoor

SecretaryKong Yuh Ling Doreen

Registered Office27 International Business Park#04-05 Primefield Landmark BuildingSingapore 609924

AuditorsRohan • Mah & Partners

BankerCitibank, N. A.



DR CRS$ S$– –

Certified correct and agreed that the above adjustments be made in the Company’s financial statements for the financial period ended 31 March 2005.

Director(KL/ay)

Audit adjustments as at March 31, 2005



i-flex America inc.Financial statements for the year ended

March 31, 2005.

Financials



Directors’ report

The Directors present their report together with the audited consolidated financial statements of the company for the financial year ended March 31, 2005.



• Rajesh Hukku(Appointed on December 5, 2003, the date of incorporation).

• R. Ravisankar(Appointed on December 5, 2003, the date of incorporation).

• Deepak Ghaisas(Appointed on December 5, 2003, the date of incorporation).

• Cafo Boga(Appointed on January 12, 2004)

2. Principal activities

The principal activities of the company and its subsidiaries in the course of the financial year are those relating to providing information technology solutions, consulting services and development of software to the financial service industry in the United States of America, Canada and South America.

3. Results for the financial year

The Company reported a net profit of USD 2,144,045

4. Current assets

Before the profit and loss account and the balance sheet of the company were made out, the Directors took reasonable steps to ascertain that any current assets which were unlikely to realize their book values in the ordinary course of business have been written down to their estimated realizable values or had been adequately provided for.

5. Charges and contingent liabilities

At the date of this report:(a) There does not exist any charge on the assets of the

company which has arisen since the end of the financial year, which secures the liability of any other person and

(b) There does not exist any contingent liability of the company, which has arisen since the end of the financial year.

6. Contingent or other liabilities enforceable after year-end

No contingent or other liability of the company has become enforceable or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the company to meet its obligations as and when they fall due.

7. Other circumstances

As at the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or in the financial statements of the company, which would render any amount stated in the financial statements of the company misleading.

8. Unusual items

In the opinion of the Directors, the results of the operation of the company during the financial year have not been substantially affected by any item, transaction, or event of a material and unusual nature.

9. Subsequent events

In the opinion of the Directors, no item, transaction or event of a material and unusual nature has arisen in the interval between the end of the financial year and the date of this report, which would affect substantially the results of the operations of the company for the financial year in which this report is made.

On behalf of the Board,

Rajesh HukkuDirector

May 20, 2005



Board of Directors and Stockholderi-flex America inc.

We have audited the accompanying consolidated balance sheets of i-flex America inc. (the “Company”) as of March 31, 2005 and 2004, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of i-flex America inc. at March 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

Ernst & Young LLPMay 20, 2005



(All amounts in US Dollars, unless otherwise stated)

2005 2004AssetsCurrent assets:Cash and cash equivalents 16,208,262 6,222,442Accounts receivable 32,366,051 18,219,076Prepaid expenses and other current assets 2,084,977 1,478,853Total current assets 50,659,290 25,920,371

Fixed assets, net 1,957,498 1,733,217Goodwill 8,963,270 8,859,213Other intangible assets, net 2,669,958 3,287,958Other assets 289,805 414,104Total assets 64,539,821 40,214,863

Liabilities and stockholder’s equityCurrent liabilities:Accounts payable 268,238 880,913Accrued expenses and other current liabilities 4,401,739 1,215,146Due to i-flex solutions b.v. 643,241 –Employee benefits and bonuses payable 2,761,589 700,174Due to Parent 39,682,357 23,199,819Note payable to Parent 10,000,000 10,000,000Capital lease obligation – current portion 80,621 69,839Deferred revenue 2,179,320 1,794,747Total current liabilities 60,017,105 37,860,638

Long-term capital lease obligation 84,914 60,468

Stockholder’s equity:Common stock (USD 0.01 par value), 100 shares authorized, and 1 share issued and outstanding – –Additional paid-in capital 3,000,000 3,000,000Retained earnings (deficit) 1,437,802 (706,243)

Total stockholder’s equity 4,437,802 2,293,757Total liabilities and stockholder’s equity 64,539,821 40,214,863

See accompanying notes.

Consolidated balance sheet as at March 31


Consolidated statements of operationsfor the year ended March 31


2005 2004Revenue 107,002,008 59,977,479Cost of revenue 86,451,270 51,267,251Gross profit 20,550,738 8,710,228

Selling and marketing expenses 9,592,253 4,813,161General and administrative expenses 5,602,530 3,540,346Research and development costs – 100,946Depreciation and amortization 1,195,019 351,494Operating income (loss) 4,160,936 (95,719)

Other income (expense):

Interest income 112,523 21,924Interest expense (260,134) (47,565)Other 1,397 17,486Income (loss) before income taxes 4,014,722 (103,874)

Income taxes 1,870,677 –Net income (loss) 2,144,045 (103,874)





2005 2004Operating activitiesNet income (loss) 2,144,045 (103,874)Adjustments to reconcile net income (loss) to net cashprovided by operating activities:Depreciation and amortization 1,195,019 351,494Amortization of contract rights – 361,564Changes in operating assets and liabilities, net ofeffect of acquisition:Accounts receivable (14,146,975) (6,387,783)Prepaid expenses and other current assets (606,124) (1,045,270)Accounts payable (612,675) 434,341Accrued expenses and other current liabilities 3,186,593 853,343Due to i-flex solutions b.v. 643,241 –Employee benefits and bonuses payable 2,061,415 (291,712)Due to Parent 16,482,538 8,329,118Deferred revenue 384,573 (126,171)Net cash provided by operating activities 10,731,650 2,375,050

Investing activitiesPurchases of fixed assets (730,840) (924,917)Consideration paid for business acquired, net of cashreceived

(104,057) (11,495,770)

Other assets 124,299 21,241Net cash used in investing activities (710,598) (12,399,446)

Financing activitiesCapital contributions, including cash held by i-flexsolutions

– 6,759,322

Proceeds from borrowing from Parent – 10,000,000Repayment of note to Parent – (500,000)Repayment of capital lease obligations (35,232) (12,484)Net cash provided by financing activities (35,232) 16,246,838

Net increase in cash and cash equivalents 9,985,820 6,222,442Cash and cash equivalents, beginning of the year 6,222,442 –

Cash and cash equivalents, end of the year 16,208,262 6,222,442

Supplemental disclosure of cash flow informationCash paid for interest 14,942 17,184

Cash paid for income taxes 46,615 –Acquisition of fixed assets through capital leases 70,460 –


Consolidated statements of cash flowsfor the year ended March 31


Consolidated statements of stockholder’s equityfor the year ended March 31


2005

Common Stock

AdditionalPaid-inCapital

RetainedEarnings(Deficit)

Total Stockholder’s

EquityShares Amount

Capital contributions at December 5, 2003 1 – 2,000,000 – 2,000,000Contribution of i-flex solutions – – 1,000,000 (602,369) 397,631Net loss – – (103,874) (103,874)Balance at March 31, 2004 1 – 3,000,000 (706,243) 2,293,757

Net loss – – – 2,144,045 2,144,045Balance at March 31, 2005 1 – 3,000,000 1,437,802 4,437,802




1. Organization and Significant Accounting Policies

Organization

i-flex America inc. (“i-flex America”) was incorporated on December 5, 2003 in the State of Delaware as a U.S. holding company, wholly owned by i-flex solutions ltd. (a publicly traded company in India, the “Parent”).

Effective January 2, 2004, the Parent transferred to i-flex America its entire ownership interest in i-flex solutions inc.(“i-flex solutions”), a U.S. corporation. This transfer was accounted for in a manner similar to the pooling-of-interest method because it represented the transfer of the investment in a subsidiary between entities under common control. Accordingly, the accompanying consolidated statements of operations and cash flows include the results of i-flex solutions’ operations and cash flows for the year ended March 31, 2004 as though the transfer of the investment in i-flex solutions had occurred at April 1, 2003.

Effective January 12, 2004, i-flex America acquired a 100% ownership interest in SuperSolutions Corporation (“SuperSolutions”) from a third party for approximately USD 13,553,000. The acquisition has been accounted for as a purchase and the operating results of SuperSolutions have been included in the accompanying consolidated statement of operations since the acquisition date.

i-flex solutions is a reseller of the Parent’s proprietary banking software products. i-flex America and its subsidiaries (collectively the “Company”) are principally engaged in the business of providing information technology solutions to the financial services industry in the United States.

The operations of the Company are dependent upon financial support. The Parent has expressed its intention to extend financial support to ensure the continued financial viability of the Company.

Principles of consolidation

The consolidated financial statements include the financial statements of i-flex America and its two subsidiaries, i-flex solutions and SuperSolutions. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue recognition

The Company derives revenues from the licensing of banking software products, along with providing related implementation services and post contract support and providing software development and other consulting services, primarily to large financial institutions.

License revenues for perpetual licenses are recognized separately from the other elements of the contract such as implementation and customization, when services are not considered essential to the functionality of the software and 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, are not considered to be fixed and

Notes to the consolidated financial statementsas at March 31, 2005

determinable at the outset of the arrangement and, accordingly, revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied.

In limited situations, the Company enters into time-based or term licenses for a specified period. In such instances, the license and Post Contract Support (“PCS”) revenue are recognized ratably over the period of the arrangement.

Services are not considered essential to the functionality of the software when such services primarily consist of minor functional enhancements, simple interfaces, implementation planning, data conversion, training and product walkthrough and the realizability of the license fees is not dependent on such services. When the Vendor-Specific Objective Evidence (“VSOE”) of the fair value of the services, based on the historical evidence of sales of similar services exists, revenue related to implementation services is recognized as services are provided when arrangements are on a time and material basis. In case of fixed price arrangements, subject to VSOE being established, revenue related to implementation services is recognized using the proportional performance method of accounting. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the service fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

When an arrangement provides for significant modification or customization of the product or if services are essential to the functionality of the product or the realization of the license fees is dependent on the services, the revenue related to both the license and services is recognized using the percentage of completion method of accounting. Percentage of completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the services fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.


If an up-front discount that decreases over time is provided in an arrangement, a proportionate portion of that discount, relative to the VSOE of that element, is applied to each element in the arrangement based on each element’s fair value.

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 based on a proportional performance method.



Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the proportional performance is higher than a related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received.



For the years ended March 31, 2005 and 2004, software license revenues were approximately USD 17,826,000 and USD 9,890,000, respectively and revenues from IT solutions and consulting services were approximately USD 89,176,000 and USD 50,088,000, respectively.

In April 2002, i-flex solutions entered into a license and service agreement with the Parent under which the Company remits 85% of all related revenues to the Parent (the “License and Service Agreement”). The License and Service Agreement expires in 2005 with automatic one-year renewals thereafter upon 90-day advance notice. The fees paid to the Parent are recorded as cost of revenue.

Cash equivalents

The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents.

Fixed assets

Fixed assets are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred, and expenditures that extend the useful lives of the assets are capitalized.

Goodwill and other intangible assets

Goodwill represents the excess of purchase price over the fair value of acquired companies or businesses.

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests.

Intangible assets, other than goodwill, with finite useful lives are amortized on a straight-line basis over the estimated benefit period of the respective assets, ranging from 2 to 5 years.

Long-lived assets

Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No such impairment indicators were identified by the Company during the years ended March 31, 2005 and 2004.

Accounts receivable

The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers, as well as general economic conditions. Consequently, an adverse change in these factors could affect the Company’s estimate of bad debt. The Company, as a policy, does not require collateral from its customers. The Company concluded that an allowance for doubtful accounts at March 31, 2005 and 2004 was not necessary.

Income taxes

The Company provides for deferred income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred taxes utilizing the liability method whereby deferred tax items are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured based on tax rates expected to be in effect when the differences reverse. Valuation allowances are established when necessary, to reduce deferred income tax assets to the amount expected to be realized.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of accounts receivable. The Company routinely assesses the financial strength of its customers and does not require collateral or other security to support customer receivables. Credit losses, if any, are provided for in the consolidated financial statements in the form of an allowance for doubtful accounts.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the years ended March 31, 2005 and 2004 were approximately USD 225,000 and USD 253,000, respectively.



2. Fixed assets

Fixed assets consist of the following:

2005 2004$ $

Furniture and fixtures 603,792 422,614

Software and equipment 1,188,579 510,097Leasehold improvements 1,101,218 377,932Construction in progress – 781,646

2,893,589 2,092,289

Less accumulated depreciation and amortization (936,091) (359,072)Fixed assets, net 1,957,498 1,733,217

Included in the fixed assets, net as of March 31, 2005 is leased equipment and furniture and fixtures under capital lease of USD 331,000, net of accumulated amortization of USD 91,000.

3. Intangible assets

Intangible assets, other than goodwill, consisted of the following:

2005 2004$ $

Intangible assets with finite useful lifeTechnologies/software 2,700,000 2,700,000Customer relationship 350,000 350,000Covenants not to compete 72,000 72,000

Website 21,000 21,0003,143,000 3,143,000

Accumulated amortization (754,042) (136,042)Net carrying value 2,388,958 3,006,958

Tradename with indefinite useful life 281,000 281,000Intangible assets 2,669,958 3,287,958

The estimated aggregate amortization expense for each of the four succeeding fiscal years is as follows:

Year ending March 31:

$2006 645,5002007 615,542

2008 610,0002009 517,916

2,388,958

4. Acquisition

As mentioned in Note 1, on January 12, 2004, i-flex America acquired a 100% ownership interest in SuperSolutions from a third party for approximately USD 13,449,000 in cash. The purchase price was allocated to each of the assets acquired and liabilities assumed based on estimated fair value at the date of acquisition. This acquisition resulted in goodwill of approximately USD 8,963,270. All of the goodwill is expected to be deductible for income tax purposes. SuperSolutions is a software provider specializing in consumer lending institutions.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

$

Cash 1,953,438Accounts receivable 1,303,629Other current assets 32,630

Fixed assets 98,979Intangible assets other than goodwill 3,424,000Goodwill 8,963,270Other assets 16,918

Liabilities assumed (2,239,599)Considerations paid 13,553,265

Goodwill includes contingent payments made during the year ended March 31, 2005 of USD 104,057.



Approximately USD 61,337,000 and USD 54,382,000 of revenues for the years ended March 31, 2005 and 2004, respectively, was generated in accordance with the License and Service Agreement. Approximately USD 59,556,000 and USD 38,749,000 of revenues was earned from services rendered to a stockholder of the Ultimate Parent. As of March 31, 2005 and 2004, approximately USD 15,771,000 and USD 10,929,000, respectively, of accounts receivable was due from this stockholder.

Balance due from and to the Parent is as follows:

2005 2004$ $

Amount due under License and Service Agreement 79,759,470 46,716,887Other 2,021,443 537,297Total due to Parent 81,780,913 47,254,184Amount due from Parent (42,098,556) (24,054,365)

Net due to Parent 39,682,358 23,199,819

At the formation of i-flex America, i-flex America borrowed USD 10,000,000 from the Parent in exchange for a note. The note bears interest at a rate of LIBOR plus 50 basis points (3.275% at March 31, 2005) as adjusted from time to time payable annually.

6. Income taxes

There was no provision for federal and state income taxes for the year ended March 31, 2005.

The Company’s gross deferred tax assets approximate USD 963,000 and USD 383,000 at March 31, 2005 and 2004, respectively, and gross deferred tax liabilities at March 31, 2005 approximate USD 795,000. Deferred tax assets and liabilities result primarily from accelerated amortization of intangibles for book purposes and net operating losses. The Company has established a valuation allowance equal to the net deferred tax assets as of March 31, 2005 and 2004 due to uncertainties about their realization. During the years ended March 31, 2005 and 2004, the valuation allowance (decreased) increased by approximately (USD 215,000) and USD 229,000, respectively.



At March 31, 2005, the Company has federal net operating loss carryforwards of approximately USD 2,050,000 expiring in 2024. The difference between the effective tax rate and the federal statutory tax rate resulted primarily from losses for which no benefit was provided and permanently non-deducible expenses.

7. Commitments

The Company leases office space under non-cancelable operating leases expiring through 2013 and certain office equipment under capital lease. The future minimum payments required under these leases are approximately as follows:

Year ending March 31: Capital Lease Operating Lease$ $

2006 94,000 649,0002007 53,000 605,0002008 40,000 548,0002009 3,000 232,000

Thereafter – 378,000Total minimum lease payments 190,000 2,412,000Less amount representing interest (24,000)Present value of minimum lease payments 166,000

Less current portion (81,000)Long-term capital lease obligations 85,000

Rent expense pursuant to these operating leases for the years ended March 31, 2005 and 2004 was approximately USD 779,000 and USD 401,000, respectively.

8. Major customers

For the years ended March 31, 2005 and 2004, fees earned from one customer accounted for approximately 57% and 65%, respectively, of revenues.

9. Retirement plan

The Company has established a 401(k) Plan (the “Retirement Plan”) in which all eligible employees may contribute a portion of their compensation up to a maximum amount allowable pursuant to the Internal Revenue Code. The Company’s contributions to the Retirement Plan are discretionary. There were no contributions by the Company to the Retirement Plan for the years ended March 31, 2005 and 2004.



i-flex solutions inc.Financial statements for the year ended

March 31, 2005.

Financials



Directors’ report

The Directors present their report together with the audited financial statements of the company for the financial year ended March 31, 2005.



• Rajesh Hukku (Appointed on December 5, 2001, the date of

incorporation).

• R. Ravisankar (Appointed on December 5, 2001, the date of

incorporation).

• Deepak Ghaisas (Appointed on December 5, 2001, the date of

incorporation).

• Cafo Boga (Appointed on March 14, 2003)


The principal activities of the company in the course of the financial year are those relating to providing information technology solutions, consulting services and development of software to the financial service industry in the United States of America, Canada and South America.


The company reported a net profit of USD 1,240,036

4. Current assets










8. Unusual items





Rajesh HukkuDirector May 20, 2005



Board of Directors and Stockholderi-flex solutions inc.

We have audited the accompanying balance sheets of i-flex solutions inc. (the “Company”) as of March 31, 2005 and 2004, and the related statements of operations, stockholder’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of i-flex solutions inc. at March 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

Ernst & Young LLPMay 20, 2005





2005 2004AssetsCurrent assets:Cash and cash equivalents 13,165,190 3,840,726Accounts receivable 30,580,545 16,856,614Due from i-flex America 2,006,157 1,487,758Due from SuperSolutions 623,111 90,541Prepaid expenses and other current assets 1,670,324 1,448,040Total current assets 48,045,327 23,723,679

Fixed assets, net 1,717,120 1,642,998Other assets 269,303 397,187Total assets 50,031,750 25,763,864

Liabilities and stockholder’s equityCurrent liabilities:Accounts payable 146,350 543,988Accrued expenses and other current liabilities 3,353,505 904,988Due to i-flex b.v. 643,241 –Employee benefits and bonuses payable 2,273,393 436,659Due to Ultimate Parent 41,045,728 23,158,382Deferred revenue 984,838 375,188Total current liabilities 48,447,055 25,419,205

Stockholder’s equity:Common stock (USD 0.01 par value), 3,000 shares authorized, 100 shares issued and outstanding 1 1Additional paid-in capital 999,999 999,999Retained earnings (deficit) 584,695 (655,341)

Total stockholder’s equity 1,584,695 344,659Total liabilities and stockholder’s equity 50,031,750 25,763,864




2005 2004

Revenue 97,291,673 58,746,957Cost of revenue 81,905,598 50,683,913

15,386,075 8,063,044

Selling and marketing expenses 8,569,998 4,813,161General and administrative expenses 4,039,034 3,131,773Depreciation and amortization 494,706 209,342Operating income (loss) 2,282,337 (91,232)

Other income (expenses):Interest income 90,946 20,762Other, net 3,304 17,498Net income (loss) before taxes 2,376,587 (52,972)

Income taxes 1,136,551 –Net income (loss) 1,240,036 (52,972)


Statements of operationsfor the ended March 31



Statements of cash flowsfor the ended March 31


2005 2004Operating activitiesNet income (loss) 1,240,036 (52,972)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization 494,706 209,342Amortization of contract rights – 361,564Changes in operating assets and liabilities:Accounts receivable (13,723,931) (6,328,950)Due from i-flex America (518,399) (1,487,758)Due from SuperSolutions (532,570) (90,541)Prepaid expenses and other current assets (222,284) (1,047,087)Accounts payable (397,638) 304,932Accrued expenses and other current liabilities 2,448,517 840,151Due to i-flex solutions b.v. 643,241 –Employee benefits and bonuses payable 1,836,734 (143,811)Due to Ultimate Parent 17,887,346 8,287,681Deferred revenue 609,650 (297,019)Net cash provided by operating activities 9,765,407 555,532

Investing activitiesPurchases of fixed assets (568,827) (995,368)Other assets 127,884 21,240Net cash used in investing activities (440,943) (974,128)

Financing activitiesRepayment/proceeds from note to Ultimate Parent – (500,000)Net cash used in by financing activities – (500,000)

Net increase (decrease) in cash and cash equivalents 9,324,464 (918,596)

Cash and cash equivalents, beginning of the year 3,840,726 4,759,322Cash and cash equivalents, end of the year 13,165,190 3,840,726

Supplemental disclosure of cash flow information

Cash paid for interest – 17,184Cash paid for income taxes 43,000 –




2005

Common StockAdditional

Paid-inRetainedEarnings

Total Stockholder’s

Shares Amount Capital (Deficit) Equity

Balance at March 31, 2003 100 1 999,999 (602,369) 397,631Net loss – – – (52,972) (52,972)Balance at March 31, 2004 100 1 999,999 (655,341) 344,659

Net income – – – 1,240,036 1,240,036Balance at March 31, 2005 100 1 999,999 584,695 1,584,695


Statements of stockholder’s equityfor the year ended March 31



1. Organization and significant accounting policies

Organization

i-flex solutions inc. (the “Company”) was incorporated on December 5, 2001, in the State of Delaware as a wholly-owned subsidiary of i-flex solutions ltd. (a publicly traded company in India, the “Ultimate Parent”). On December 5, 2003, as part of a reorganization of its United States operations, the Ultimate Parent established in the United States a holding company named i-flex America inc. (“i-flex America”), and on January 2, 2004 transferred its entire ownership interest in the Company to i-flex America. Since then and as a result, the Company is wholly owned by i-flex America. The Company is a reseller of the Ultimate Parent’s proprietary banking software products and is principally engaged in the business of providing information technology solutions to the financial services industry in the United States.

The operations of the Company are dependent upon the support of the Ultimate Parent. The Ultimate Parent has expressed its intention to extend financial support to ensure the continued financial viability of the Company.

Revenue recognition

The Company derives revenues from the licensing of banking software products, along with providing related implementation services and post contract support and providing software development and other consulting services, primarily to large financial institutions.

License revenues for perpetual licenses are recognized separately from the other elements of the contract such as implementation and customization, when services are not considered essential to the functionality of the software and 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, are not considered to be fixed and determinable at the outset of the arrangement and, accordingly, revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied.

In limited situations, the Company enters into time-based or term licenses for a specified period. In such instances, the license and Post Contract Support (“PCS”) revenue are recognized ratably over the period of the arrangement.

Services are not considered essential to the functionality of the software when such services primarily consist of minor functional enhancements, simple interfaces, implementation planning, data conversion, training and product walkthrough and the realizability of the license fees is not dependent on such services. When the Vendor-Specific Objective Evidence (“VSOE”) of the fair value of the services, based on the historical evidence of sales of similar services exists, revenue related to implementation services is recognized as services are provided when arrangements are on a time and material basis. In case of fixed price arrangements, subject to VSOE being established, revenue related to implementation services is recognized using the proportional performance method of accounting.

Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the service fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

When an arrangement provides for significant modification or customization of the product or if services are essential to the functionality of the product or the realization of the license fees is dependent on the services, the revenue related to both the license and services is recognized using the percentage of completion method of accounting. Percentage of completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the services fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.






Notes to financial statementsMarch 31, 2005


For the years ended March 31, 2005 and 2004, software license revenues were approximately USD 8,805,000 and USD 8,859,000, respectively, and revenues from IT solutions and consulting services were approximately USD 88,487,000 and USD 49,888,000, respectively.

In April 2002, the Company entered into a license and service agreement with the Ultimate Parent under which the Company remits 85% of all related revenues to the Ultimate Parent (the “License and Service Agreement”). The License and Service Agreement expires in 2005 with automatic one-year renewals thereafter upon 90-day advance notice. The fees paid to the Ultimate Parent are recorded as cost of revenue.

Cash equivalents

The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents.

Accounts receivable

The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers, as well as general economic conditions. Consequently, an adverse change in these factors could affect the Company’s estimate of bad debts. The Company, as a policy, does not require collateral from its customers. The Company concluded that an allowance for doubtful accounts at March 31, 2005 and 2004 was not necessary.

Fixed assets

Fixed assets are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred, and expenditures that extend the useful lives of the assets are capitalized.

Long-Lived assets

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, the Company reviews long-lived assets for impairment whenever

events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No such impairment indicators were identified by the Company during the years ended March 31, 2005 and 2004.

Income taxes

The Company provides for deferred income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred taxes utilizing the liability method whereby deferred tax items are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured based on tax rates expected to be in effect when the differences reverse. Valuation allowances are established when necessary, to reduce deferred income tax assets to the amount expected to be realized.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains its cash balances in one financial institution. These balances are insured by the Federal Deposit Insurance Corporation up to USD 100,000. The Company routinely assesses the financial strength of its customers and does not require collateral or other security to support customer receivables. Credit losses, if any, are provided for in the financial statements in the form of an allowance for doubtful accounts.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the years ended March 31, 2005 and 2004 were approximately USD 209,000 and USD 246,000, respectively.

2. Fixed assets

Fixed assets consist of the following at March 31, 2005 and 2004:

2005 2004$ $

Furniture and fixtures 518,086 343,635Software and equipment 942,833 490,097Leasehold improvements 1,101,218 377,932Construction in progress – 781,646

2,562,137 1,993,310

Less accumulated depreciation and amortization (845,017) (350,312)Fixed assets, net 1,717,120 1,642,998


Approximately USD 61,337,000 and USD 54,382,000 of revenues for the years ended March 31, 2005 and 2004, respectively, were generated in accordance with the License and Service Agreement. Approximately USD 59,556,000 and USD 38,749,000 of



revenues were earned from services rendered to a stockholder of the Ultimate Parent. As of March 31, 2005 and 2004, approximately USD 15,771,000 and USD 10,929,000, respectively, of accounts receivable was due from this stockholder.

Balance due from and to the Ultimate Parent as of March 31, 2005 and 2004 is as follows:

2005 2004$ $

Amount due to Ultimate Parent under License and Service Agreement 79,759,470 46,716,887Other 1,734,814 495,860Total due to Ultimate Parent 81,494,284 47,212,747Amount due from Ultimate Parent (40,448,556) (24,054,365)Net due to Ultimate Parent 41,045,728 23,158,382

4. Income taxes

The Company’s gross deferred tax assets approximate USD 293,000 and USD 363,000 at March 31, 2005 and 2004, respectively. Deferred tax assets and liabilities result primary from accelerated amortization of intangibles for book purposes. The Company has established a valuation allowance equal to the net deferred tax assets as of March 31, 2005 and 2004 due to uncertainties about their realization. During the years ended March 31, 2005 and 2004, the valuation allowance (decreased) increased by approximately (USD 70,000) and USD 130,000, respectively.

The difference between the effective tax rate and the federal statutory tax rate resulted primarily from losses for which no benefit was provided and permanently non-deductible expenses.

5. Commitments

The Company leases office space under non-cancelable operating leases expiring through 2012. The future minimum payments required under these leases are approximately as follows:

Year ending March 31 Amount$

2006 595,000

2007 599,000 2008 548,0002009 232,0002010 103,000

Thereafter 275,000 2,352,000

Rent expense pursuant to these operating leases for the years ended March 31, 2005 and 2004 was approximately USD 633,000 and USD 374,000, respectively.

6. Major customers

For the years ended March 31, 2005 and 2004, fees earned from one customer accounted for approximately 63% and 66%, respectively, of revenues (see Note 3).

7. Retirement plan

The Company has established a 401(k) Plan (the “Retirement Plan”) in which all eligible employees may contribute a portion of their compensation up to a maximum amount allowable pursuant to the Internal Revenue Code. The Company’s contributions to the Retirement Plan are discretionary. There were no contributions by the Company to the Retirement Plan for the years ended March 31, 2005 and 2004.



SuperSolutions Corporation Financial statements for the year ended

March 31, 2005.

Financials



Directors’ report

The Directors present their report together with the audited consolidated financial statements of the company for the financial year ended March 31, 2005.

1. Directors of the Company


• Rajesh Hukku(Appointed on January 12, 2004, the date of incorporation).

• R. Ravisankar(Appointed on January 12, 2004, the date of incorporation).

• Deepak Ghaisas(Appointed on January 12, 2004, the date of incorporation).

• Cafo Boga(Appointed on January 12, 2004).


The principal activities of the company and its subsidiaries in the course of the financial year are those relating to providing information technology solutions, consulting services and development of software to the financial service industry in the United States of America.


The Company reported a net profit of USD 1,141,342

4. Current assets










8. Unusual items





Rajesh HukkuDirector

April 29, 2005



The Board of Directors and Shareholderi-flex America, inc.:

We have audited the accompanying balance sheet of SuperSolutions Corporation (the Company), a division of i-flex America, inc., as of March 31, 2005, and the related statements of income, shareholders’ equity, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Company’s internal control or financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2005, and the results of its operations and its cash flows for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America.

April 29, 2005 Ernst & Young LLP





Assets 2005Current assets:Cash and cash equivalents 2,008,062 Accounts receivable 1,803,804 Due from related party 2,650,000 Prepaid expenses 52,267 Total current assets 6,514,133

Property and equipment:Computer and office equipment 245,746 Furniture and fixtures 85,705 Less accumulated depreciation (91,074) Net property and equipment 240,377 IntangiblesGoodwill 8,661,449 Other intangible assets, net 2,634,958 Other assets 20,503 Total assets 18,071,420

Liabilities and shareholders’ equityCurrent liabilities:Accounts payable 98,511 Due to related party 623,111 Employee benefits and bonuses payable 500,203 Accrued expenses and other current liabilities 711,908 Deferred revenue 1,207,690 Capital lease obligations – current 85,896 Total current liabilities 3,227,319 Long-term capital lease obligation 92,760 Total liabilities 3,320,079

Stockholder’s equityCommon stock 1 Additional paid-in capital 13,553,274 Retained Earnings 1,198,066 Total stockholder’s equity 14,751,341 Total liabilities and stockholder’s equity 18,071,420

See accompanying notes to financial statements.


Statements of incomefor the year ended March 31


2005Revenues:Implementation and task orders 5,033,730 Licenses 1,120,857 Source Code/Daybreak – Related party 1,650,000 Maintenance 1,203,772 Other 688,767 Total revenues 9,697,126

Cost of sales 4,545,671 Gross profit 5,151,455

Selling, general, and administrative expenses 3,269,095 Operating income (loss) 1,882,360

Other (expense) income:Interest expense, net (28,063) Other income, net 19,670 Income before taxes 1,873,967 Tax expense 732,626 Net Income 1,141,341




Statements of cash flowsfor the year ended March 31


2005Operating activities:Net income 1,141,341 Adjustments to reconcile net income (loss) to net cash provided byoperating activities:Depreciation and amortization 735,313 Changes in operating assets and liabilities:Accounts receivable (441,341) Due from/to related party (421,304) Prepaid expenses (21,445) Accounts payable (101,667) Other accrued expenses 214,133 Deferred revenue (181,869) Net cash provided by operating activities 923,161

Investing activities:Purchase of property and equipment (90,106) Increase in other assets (3,585) Net cash used by investing activities (93,691)

Financing activities:Capital lease payments (94,017) Net cash used by financing activities (94,017)Net increase in cash and cash equivalents 735,453 Cash and cash equivalents at beginning of year 1,272,609 Cash and cash equivalents at end of year 2,008,062

Supplemental disclosure of cash flow information:Cash paid during the year for interest 14,942 Asset acquired with capital leases 142,365 Capital contribution for additional payment to previous shareholders 104,057 Purchase accounting adjustment 301,821



Statements of stockholder’s equityfor the year ended March 31


2005

Common stockAdditional paid-in

capitalRetainedEarnings

Total

Shares Amount

Balance, March 31, 2004 – 1 13,449,217 56,725 13,505,943 Additional payment to previous shareholders

104,057 104,057

Net income 1,141,341 1,141,341 Balance, March 31, 2005 – 1 13,553,274 1,198,066 14,751,341




Notes to financial statementsMarch 31, 2005

1. Description of business

SuperSolutions Corporation (the Company) is a division ofi-flex America inc. (the Parent Company), headquartered in India with its holding company located in New York. The Company was acquired on January 12, 2004. The Company derives revenue from sales of its (Enterprise Resource Planning) ERP solution for the consumer finance industry, Daybreak Lending Software (Daybreak); services provided in regard to customized software development of (Relational DataBase Management Systems) RDBMS; and sales of prepackaged software products to customers, primarily in the United States. The Company was incorporated in 1988 in the state of Minnesota and is located in Eden Prairie, Minnesota.


(a) Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates.

(b) Revenue recognition

The Company derives revenues from the licensing of banking software products, along with providing related implementation services and Post Contract Support (PCS) and providing software development and other consulting services, primarily to large financial institutions.

License revenues for perpetual licenses are recognized separately from the other elements of the contract such as implementation and customization, when services are not considered essential to the functionality of the software and 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, are not considered to be fixed and determinable at the outset of the arrangement and accordingly, revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied.

In limited situations, the Company enters into time-based or term licenses for a specified period. In such instances, the license and (“PCS”) revenue are recognized ratably over the period of the arrangement.

Services are not considered essential to the functionality of the software when such services primarily consist of minor functional enhancements, simple interfaces, implementation planning, data conversion, training and product walkthrough and the realizability of the license fees is not dependent on such services. When the vendor-specific objective evidence (“VSOE”) of the fair value of the services, based on the historical evidence of sales of similar services exists, revenue related to implementation services is recognized as services are provided when arrangements are on a time and material basis. In case of fixed price arrangements, subject to VSOE being established,

revenue related to implementation services is recognized using the proportional performance method of accounting. Performance is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the service fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.

When an arrangement provides for significant modification or customization of the product or if services are essential to the functionality of the product or the realization of the license fees is dependent on the services, the revenue related to both the license and services is recognized using the percentage of completion method of accounting. Percentage of completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the realizability of the service fees is dependent on acceptance conditions, revenue is recognized only when such acceptance has been met.







(c) Cash equivalents

The Company considers investments in highly liquid investments having an initial maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market.

(d) Fixed assets

Fixed assets are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred, and expenditures that extend the useful lives of the assets are capitalized.

(e) Goodwill and other intangible assets

Goodwill represents the excess of purchase price over the fair value of acquired companies or businesses.

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests.

Intangible assets, other than goodwill, with finite useful lives are amortized on a straight-line basis over the estimated benefit period of the respective assets, ranging from 2 to 5 years.

(f) Long-Lived assets

Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No such impairment indicators were identified by the Company during the year ended March 31, 2005.

(g) Accounts receivable

The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers, as well as general economic conditions. Consequently, an adverse change in these factors could affect the Company’s estimate of bad debt. The Company, as a policy, does not require collateral from its customers. The Company concluded that an allowance for doubtful accounts at March 31, 2005 was not necessary.

(h) Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of accounts receivable. The Company routinely assesses the financial strength of its customers and does not require collateral or other security to support customer receivables. Credit losses, if any, are provided for in the consolidated financial statements in the form of an allowance for doubtful accounts.

(i) Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the year ended March 31, 2005 were approximately USD 16,200.

(j) Income taxes

The Company’s results of operations are included in the Parent Company’s consolidated tax returns. The tax liability is allocated

from the Parent Company (i-flex solutions, ltd). All taxes are done at the Parent Company level. This year’s allocation was USD 496,126.

(k) Allocated expenses

Some expenses for the Company are allocated from the Parent Company. In fiscal year 2005, the following expenses were allocated to the Company:

$Payroll 97,008Advertising 4,701Consulting 11,740Accountant fees 112,500Attorney 15,514Health costs 227,317Software costs 3,267Worker’s comp 25,633Franchise fees 2,507State income tax 236,500Federal income tax 696,126Total 1,232,813

3. Acquisition

On January 12, 2004, the Parent Company acquired a 100% ownership interest in the Company from a third party for approximately USD 13,553,000 in cash. The purchase price was allocated to each of the assets acquired and liabilities assumed based on estimated fair value at the end of acquisition. This acquisition resulted in goodwill of approximately USD 8,661,449. All of the goodwill is expected to be deductible for income tax purposes. The Company is a software provider specializing in consumer lending institutions.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Cash 1,953,438 Accounts receivable 1,303,629 Other current assets 32,630 Fixed Assets 98,979 Intangible assets other than goodwill 3,424,000 Goodwill 8,661,449 Other assets 16,918 Liabilities assumed (1,937,778)Considerations paid 13,553,265

The change in the carry value of goodwill is summarized as follows:

$Balance March 31, 2004 8,859,213Additional consideration paid by parent 104,057CA Sales tax liability (301,821)Balance March 31, 2005 8,661,449

During 2005, the Company adjusted its estimates of state sales tax owed by USD 301,821. In addition, the Parent Company paid USD 104,057 to the former shareholders of the company as additional consideration.




Intangible assets, other than goodwill, consisted of the following at March 31, 2005:

$Intangible assets with finite useful life Technologies/software 2,700,000Customer relationship 350,000Covenants not to compete 72,000Website 21,000

3,143,000Accumulated Amortization 789,042Net carrying value 2,353,958Trade name with indefinite useful life 281,000Intangible assets 2,634,958

The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

Year ending March 31 $2006 645,5002007 615,5422008 610,0002009 517,916

2,388,958


Approximately USD 1,650,000 of revenues for the year ended March 31, 2005 was generated from the sale of the source code of Daybreak (Company software) to i-flex ltd. As of March 31, 2005, USD 1,650,000 of intercompany receivable was due fromi-flex ltd.

6. Inter-company payable/receivable

Inter-company payable and receivable at March 31, 2005 consists of the following:

2005$

Due from i-flex America 1,000,000 Due from i-flex ltd 1,650,000 Total Inter-company Receivable 2,650,000 Due to i-flex America 623,111

Included in accrued expenses is USD 696,126, the income tax allocation from the Parent Company.

7. Leases

(a) Capital leases

The Company is a party to capital lease agreements for computer and office equipment. The following is a summary of the leased property as of March 31, 2005:

2005$

Computer and office equipment 212,541 Less accumulated amortization (66,896)

145,645

The following is a schedule of future minimum lease payments under capital leases and the present value of the minimum lease payments as of March 31, 2005:

$2006 101,237 2007 59,453 2008 41,728 2009 3,264 2010 – Total minimum leasepayments 205,682 Less amount representing interest (27,025) Present value ofminimum leasepayments 178,657 Less current portion (85,896) Long term portion 92,761

(b) Operating leases

The Company leases office facilities and certain equipment under noncancelable operating leases. Total lease expense aggregated approximately USD 153,551 in fiscal year 2005. The Company’s rental space lease expires on July 31, 2005. At this time, there has not been a new lease signed. Minimum future obligations as of March 31, 2005 are as follows:

$2006 53,499 2007 6,207

59,706

8. Major customers

The Company has three unaffiliated customers who each made up more than 10% of the total revenue for the fiscal year. These were SRA Corporation (19.5%), Pioneer (17.9%) and GMAC (12.9%). In addition, accounts receivable from these three unaffiliated customers were approximately 42%, 11% and 3% of total accounts receivable as of March 31, 2005, respectively. Historically, the Company has not experienced write-offs related to these major customers, and no such losses are expected or were incurred related to the balances from these customers as of March 31, 2005.

9. Litigation

The Company has litigation arising from the normal course of business. In management’s opinion, the ultimate outcome of any existing litigation will not materially affect the Company’s financial condition.

10. Retirement plan

The Company has established a 401(k) Plan (the “Retirement Plan”) to which all eligible employees may contribute a portion of their compensation up to a maximum amount allowable pursuant to the Internal Revenue Code. The Company’s contributions to the Retirement Plan are discretionary. There were no contributions by the Company to the Retirement Plan in 2005.



ISP Internet Mauritius CompanyFinancial statements for the quarter ended

March 31, 2005.

Financials



Directors’ report

Directors’ report to the members

The Directors present a special purpose report, together with report from the auditor on the financial statements of ISP Internet Mauritius Company (the “Company”) and the consolidated financial statements of the Company and its subsidiaries (collectively referred to as the “Group”) for the quarter ended March 31, 2005. No comparatives are presented for the respective figures.

Principal activity

The Company was incorporated on June 15, 1994 and its main activity is the holding of investments.

The Company’s subsidiaries are Equinox Corporation and Equinox Global Services Private Limited, which are incorporated in the USA and India respectively. Both subsidiaries are engaged in the software engineering business. Equinox Corporation is the marketing arm and Equinox Global Services Private Limited is the production arm of the Group.

The latest audited accounts of the Company cover the year ending 31 December 2003. The Company has now changed its annual balance sheet date to March 31 of each year. The Company has been acquired by i-flex solutions limited in December 2004 and as per the request of i-flex solutions limited, the Company need to prepare regularly monthly and quarterly financial statements. As a result, these financial statements have been prepared for just the quarter ended March 31, 2005 and is not the annual audited financial statements of the Company.

Results and dividends

The Group’s loss for the quarter ended March 31, 2005 isUSD 661,850 and the Company’s loss for the quarter ended March 31, 2005 is USD 10,506. The directors do not recommend the payment of a dividend for the period under review.

Preparation of consolidated financial statements

The Company is the holder of 100% of the share capital of Equinox Corporation and 99.83% of the share capital of Equinox Global Services Private Limited. The consolidated financial statements for the quarter ended March 31, 2005 have been prepared on the basis of the management account of the subsidiaries for the quarter ended March 31, 2005.

Statements of directors’ responsibilities in respect of the financial statements

Company law requires the directors to prepare financial statements for each financial year, which give a true and fair view of the state of affairs and of the profit or loss of the Company. In preparing those financial statements, the directors are required to:• Select suitable accounting policies and then apply them

consistently;• Make judgements and estimates that are reasonable and

prudent;• State whether applicable accounting standards have been

followed, subject to any material departures disclosed and explained in the financial statements; and

• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure the financial statement comply with the Companies Act 2001 and International Financial Reporting Standards. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Directors: Uday Kumar Gujadhur – Date of appointment: May 14, 2004 Yuvraj Kumar Juwaheer – Date of appointment: May 14, 2004

Administration & Secretary: Multiconsult Limited, 10, Frere Fellix deValois Street, Port Louis Mauritius

Registered Offi ce: 10, Frere Fellix deValois Street, Port Louis Mauritius


The attached financial statements of ISP Internet Mauritius Company for the quarter ended March 31, 2005 as set out have been approved by management. In accordance with the instructions of i-flex solutions limited, I have compiled the audited accounts from the accounting records and information and explanations supplied to me. My scope of work was limited to transactions within the quarter and I have not conducted any audit on the opening balances. Subject to the above limited scope, I have obtained all such information and explanations, which I considered necessary.

In my opinion:(a) Proper accounting records have been kept by the company

as far as it appears from my examination of those records;(b) The financial statements give a true and fair view of the

state of affairs of the company as at March 31, 2005 and its results and cash flows for the quarter ended, comply with the Companies Act 2001 and have been properly prepared in accordance with International Financial Reporting Standards.

Port-Louis J. Louis Couacaud (F.C.A)Mauritius

June 1, 2005

Auditor’s report to the members




The Group The CompanyNotes

Assets

Non-current assetsFixed assets 3 363,504 –Intangibles 4 3,155,716 –Investments in subsidiaries 5 – 1,253,243Non-current receivables 6 – 2,396,897

3,519,220 3,650,140

Current assetsTrade and other receivables 7 735,515 915Fixed deposits 102,333 –Bank and cash balances 438,292 35

1,276,140 950

Total assets USD 4,795,360 3,651,090

Equity and liabilitiesCapital and reservesShare capital 8 3,214,288 3,214,288Revenue deficit (1,531,333) (559,461)

Shareholders’ equity 1,682,955 2,654,827

Non-current liabilitiesBorrowings 9 2,092,704 949,847

Current liabilitiesTrade and other payables 10 1,019,701 46,416

Total liabilities 3,112,405 996,263

Total equity and liabilities USD 4,795,360 3,651,090

The notes form an integral part of these financial statements.

Consolidated balance sheet as at March 31, 2005



The Group The Company

Notes

IncomeServices income 1 1,103,915 –Interest income 1 543 –Exchange difference 10,379 –

1,114,837 –Expenses

Services expenses 655,177 –Administrative expenses 748,660 10,506Selling & marketing expenses 305,038 –Depreciation 3, 4 66,669 –

1,775,544 10,506

Loss before taxation (660,707) (10,506)Taxation (1,143) –Loss for the quarter USD (661,850) (10,506)


Consolidated income statementfor the quarter ended March 31, 2005




The Group Attributable to equity holders of the CompanyShare

CapitalRevenue deficit

Total

At January 1, 2005 3,214,288 (862,470) 2,351,818Translation adjustments – (7,013) (7,013)Loss for the quarter – (661,850) (661,850)At March 31, 2005 3,214,288 (1,531,333) 1,682,955

The CompanyShare

capitalRevenue deficit

TotalUSD USD USD

At January 1, 2005 3,214,288 (548,955) 2,665,333Loss for the quarter – (10,506) (10,506)At March 31, 2005 3,214,288 (559,461) 2,654,827


Consolidated statement of changes in equityfor the quarter ended March 31, 2005



The Group The CompanyNote

Operating activitiesCash generated from operations 11 460,651 –Interest received 543 –Tax paid (1,143) –

Net cash generated from operating activities 460,051 –

Investing activitiesPurchase of fixed assets (39,044) –

Net cash absorbed in investing activities (39,044) –Financing activitiesNet cash generated from financing activities – –

Net movement in cash and cash equivalents USD 421,007 –

The Group The CompanyMarch 31, 2005 March 31, 2005

At January 1, 2005 93,434 35Net increase for the quarter 421,007 –Effects of exchange rate changes 26,184 –

At March 31, 2005 USD 540,625 35


Consolidated cash fl ow statementfor the quarter ended March 31, 2005



1. General information

ISP Internet Mauritius Company was incorporated in the Republic of Mauritius on June 15, 1994 as an Offshore Company (now known as ‘Category Global Business Licence Company’) and its principal activity is investment holding. It is a private company limited by shares. As at balance sheet date, the Company is 84% owned by i-flex solutions limited, a company incorporated in India and listed on the Stock Exchange of Mumbai (#532466) and the National Stock Exchange of India Ltd (I-FLEX). The other 16% of the Company is at balance sheet date owned by individual shareholders and trust.

The Company owns 99.83% of the share capital of Equinox Global Services Private Limited and 100% of the share capital of Equinox Corporation Ltd. Both subsidiaries are engaged in the software engineering business. Equinox Corporation is the marketing arm and Equinox Global Services Private Limited is the production arm of the Group.


The principal accounting policies applied in the preparation of these consolidated financial statements are set out below:

2.1 Basis of preparation

The consolidated financial statements are prepared in accordance and compliance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements are prepared under the historical cost convention, as modified, wherever applicable, by the revaluation of financial assets and liabilities at fair value through profit and loss.

The preparation of financial statements in accordance with International Financial Reporting Standards requires the directors to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.

2.2 Consolidation

(a) SubsidiariesSubsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of

Notes to the consolidated financial statementsas at March 31, 2005

the subsidiary acquired, the difference is recognised directly in the income statement (see Note 2.5).

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) AssociatesAssociates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition (see Note 2.5).

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on the transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

2.3 Foreign currency translation

(a) Functional and presentation currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in United States Dollar, which is the Company’s functional and presentation currency.

(b) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities are classified as available-for-


sale financial assets, are included in the fair value reserve in equity.

(c) Group companiesThe results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

(ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

(iii) All the resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

2.4 Fixed assets

Items of furniture and fittings, leasehold improvement, computers and office equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of fixed assets.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measures reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

– Furniture and fittings 14.3% per annum– Leasehold improvements 34.3% per annum– Computers 34% per annum

– Office equipment 16.5% per annum

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.6).

Gains and losses on disposals are determined by comparing proceeds with carrying amount. They are included in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings.

2.5 Intangible assets

(a) GoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the Group’s shares of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. As at the balance sheet, there are no indicators for impairment of goodwill.

(b) Computer softwareAcquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives.

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads.

2.6 Impairment of assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

2.7 Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash



flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement.

2.8 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, and fixed deposits.

2.9 Revenue recognition

Interest income are recognised as it accrues, unless collectibility is in doubt. Dividend income is recognised when the shareholder’s right to receive payment is established.Services income is recognised as it accrues, unless collectibility is in doubt.

2.10 Financial instruments

Financial instruments carried on the balance sheet include investments in subsidiaries, non-current receivables, trade and other receivables, fixed deposits, bank and cash balances, borrowings and trade and other payables. The particular recognition methods adopted are disclosed in the individual policy statements associated with them.

Disclosures about financial instruments to which the company is a party are provided in note 13.

2.11 Deferred taxation

Deferred tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred tax.

The principal temporary differences arise from tax losses carried forward. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is possible that future taxable profit will be available against which the unused tax losses can be utilised.

2.12 Related party transactions

Related parties are individuals and companies where the individual or company has the ability directly or indirectly, to control the other party or exercise significant influence over the other party in making operating and financial decisions, or vice versa.

2.13 Investments in subsidiaries

Investments in subsidiaries are shown at cost. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the income statement.

3. Fixed assets

The Group Leasehold Improvements

Furniture and Fittings

Computers Office Equipment Total

USD USD USD USD USDCostAt January 1, 2005 98,190 10,318 588,652 47,533 744,693Additions – – 39,556 118 39,674Disposals – – – – –

At March 31, 2005 98,190 10,318 628,208 47,651 784,367

DepreciationAt January 1, 2005 61,723 2,036 282,610 8,744 355,113Additions 8,423 368 55,195 1,764 65,750Disposals – – – – –

At March 31, 2005 70,146 2,404 337,805 10,508 420,863

NBV at March 31, 2005 28,044 7,914 290,403 37,143 363,504

The Company USD

Net book value at March 31, 2005 –



The Group Goodwill Computer Software TotalUSD USD USD

CostAt January 1, 2005 3,139,721 28,125 3,167,846Additions – 2,807 2,807Deletions – – –

At March 31, 2005 3,139,721 30,932 3,170,653

Depreciation/Written offAt January 1, 2005 – 12,593 12,593Additions – 2,344 2,344Deletions – – –

At March 31, 2005 – 14,937 14,937

Net book value 3,139,721 15,995 3,155,716

The Company USD

Net book value at March 31, 2005 –

5. Investments in subsidiaries


USD USD

At January 1 & March 31, 2005 USD – 1,253,243

Details of the investment held in the subsidiary companies are as follows:

Name of company Country of incorporation

Types of shares held

Number of shares held

% holding

Equinox Global Services Private Limited India Equity Shares of INR10 each

5,808,660 99.83%

Equinox Corporation United States of America

Common stock of USD 0.01 each

20,000 100%

The Company, as required by International Accounting Standards 27, is preparing consolidated financial statements.

6. Non-current receivables

The Group The Company March 31, 2005 March 31, 2005

USD USD

At January 1 & March 31, 2005 USD – 2,396,897



7. Trade and other receivablesThe Group The Company

March 31, 2005 March 31, 2005USD USD

Prepayments 52,707 915Trade receivables 626,196 –Deposits 55,934 –Other receivables 678 –

735,515 915

8. Share capital

The Group and the Company

March 31, 2005USD

Issued and fully paidSeries A ordinary shares of no par value 2,700,002Series B ordinary shares of no par value 514,286

3,214,288

The followings are noted as per the Constitution of the Company:• There is no authorised capital for the Company;• The share capital of the Company consist of two classes of ordinary shares of no par value, called respectively Series A and

Series B shares;• Series A shares, as a class, is entitled to 84% of the voting rights, rights to dividend, right to return of capital and any

distribution in any form whatsoever;• Series shares, as a class, is entitled to 16% of the voting rights, rights to dividend, right to return of capital and any distribution

in any form whatsoever.

9. Borrowings

The Group

The Company

March 31, 2005 March 31, 2005USD USD

At January 1, 2005 & March 2005 2,092,704 949,847

The above comprises of the following:• Loan of USD 949,847 contracted by the Company from one of its shareholder, namely i-flex solutions limited. The loan is

unsecured and bears interest at rate of 1 Year Libor prevailing as of two days prior to the date of disbursement of the loan amount plus 50 Basis Points as adjusted from time to time. The Company shall repay the principal amount of the loan within 18 months from the date it has been disbursed.

• Loan of USD 1,142,857 contracted by Equinox Global Services Private Limited from i-flex solutions limited.

10. Trade and other payables


USD USD

Trade payables 54,114 32,958Accruals 965,587 13,458

1,019,701 46,416


.

11. Notes to the cash flow statement


USD USDOperating activitiesLoss for the quarter (661,850) (10,506)Adjustments for:Tax 1,143 –Depreciation 66,669 –Interest income (543) –Effects of exchange rate changes (10,379) –

(604,960) (10,506)Changes in working capital(Increase)/decrease in trade and other receivables (813,533) 948Increase in trade and other payables 1,879,144 9,558

Cash generated from operations 460,651 –

12. Reporting currency

The financial statements are presented in United States dollar. The Company holds a category 1 Global Business Licence under the Financial Services Development Act 2001, which requires that the Company’s business or other activity to be carried on in a currency other than the Mauritian rupee.


13.1 Fair values

The carrying amounts of investments in subsidiaries, non-current receivables, trade and other receivables, fixed deposits, cash and bank balances, borrowings and trade and other payables, approximate to their fair values. Financial assets and liabilities, which are accounted for at historical cost, are carried at values, which may differ materially from their fair values. It is not practicable within constraints of timeliness and cost to determine the fair values of investments with sufficient reliability.

13.2 Currency profile

The currency profile of the Company’s financial assets and liabilities is summarised as follows:

The Group The CompanyFinancial

assetsFinancial liabilities

Financial assets

Financial liabilities

March 31, 2005 March 31, 2005 March 31, 2005 March 31, 2005USD USD USD USD

Indian Rupee 605,329 1,727,793 1,252,763 –United States Dollar 618,104 1,384,612 2,397,412 996,263

1,223,433 3,112,405 3,650,175 996,263

Prepayments of USD 52,707 for the Group and USD 915 for the Company are not included in financial assets.

13.3 Currency risk

The Company invests in shares denominated in Indian Rupees. Consequently, the Company is exposed to the risk that the exchange rate of the United states dollar relative to Indian Rupee may change in a manner, which has a material effect on the reported values of the Company’s assets, which are denominated in Indian Rupee.


.


14. Holding company

The issued share capital of the Company is owned 84% by i-flex solutions limited and 16% by other individual shareholders and trust. i-flex solutions limited is a company incorporated in India and listed on the Stock Exchange of Mumbai (#532466) and the National Stock Exchange of India Ltd (I-FLEX).


During the quarter ended March 31, 2005, the Group and the Company did not transact with related entities. The balance with a related entity as at March 31, 2005 is as follows:

The Group The Company

March 31, 2005 March 31, 2005

USD USDi-flex solutions limited (shareholder)Borrowings 2,092,704 849,847

16. Taxation

The Company is a category 1 Global Business Company for the purposes of the Financial Services Development Act 2001 and qualifies as a Tax Incentive Company under the Income Tax Act 1995. The profit of the Company, as adjusted for tax purposes, is subject to income tax at the rate of 15%. It is, however, entitled to a tax credit equivalent to the higher of the foreign taxes paid and 80% of the Mauritius tax on its foreign source income. Capital gains are exempt from tax in Mauritius.

As at the balance sheet date, the Company had no tax liabilities due to availability of tax losses

The Group

16.1 Tax charge

The GroupMarch 31, 2005

USD

Mauritius tax –US tax 1,143

1,143

16.2 Tax liability

The GroupMarch 31, 2005

USD

Balance brought forward –Charge for the quarter 1,143Paid during the quarter (1,143)

Balance carried forward –

The CompanyThe Company

March 31, 2005USD

Loss for the quarter, as adjusted for tax purpose (10,506)

Mauritius income tax charge –

17. Incorporation

The Company is incorporated in Mauritius under the Companies Act 2001 as a private company with limited liability.



Equinox CorporationFinancial statements for the quarter ended

March 31, 2005.

Financials



Management report

Your Management has pleasure in presenting their Report, together with Accounts of your Company, for the quarter ended March 31, 2005.

Financial results USDTurnover 1,103,915Expenditure 1,481,300Profit/(Loss) before tax (377,385)Profit/(Loss) after tax (377,385)

Technology absorption

No comment is necessary considering the nature of activities undertaken by your company during the period under review.

Management’s responsibility statement

It is hereby confirmed:

(i) That in the preparation of the accounts for the quarter ended March 31, 2005, the applicable US GAAP have been followed along with proper explanation relating to material departure.

(ii) That the Management has selected such accounting policies and applied them consistently and made judgments and estimates that were responsible and prudent so as to give a true and fair view of the state of affairs of the company at the end of the period and of the Profit or Loss for the quarter under review, of the Company.

(iii) That the Management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the US GAAP for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

(iv) That the Management has prepared the accounts for the period ended March 31, 2005 on a ‘Going concern’ basis.

On behalf of the Management

Don GangulyChief Executive Officer

April 28, 2005



2005 AssetsCurrent assets:Cash and cash equivalents 36,639 Account receivable – others, net 569,016 Prepaid expenses 9,342 Other current assets 12,415 Total current assets 627,412

Property and equipment, net 69,261 Other assets –

Total assets 696,673

Liabilities and stockholder’s equityCurrent liabilities:Accounts payable 927,825Accrued employee cost 79,337 Other current liabilities 1,887 Total current liabilities 1,009,049

Loan 2,396,897 Total liabilities 3,405,946

Stockholder’s equity

Accumulated other comprehensive loss (2,709,273)Total stockholder’s equity (2,709,273)Total liabilities and stockholder’s equity 696,673





2005

Revenue 1,103,915Cost of revenue (929,716)

174,199

Selling and marketing expenses (305,038)General and administrative expenses (235,525)Depreciation and amortisation (11,028)Operating loss (377,392)

Other income/(expenses)Interest income 7Other, net –

Net loss (377,385)

Statement of operations for the quarter ended March 31



2005 Operating activitiesNet loss (377,385)

Adjustment to reconcile net loss to net cash provided by operating activities

Depreciation and amortisation 11,028Change in operating assets and liabilities:Accounts receivable (251,344)Other assets (13,603)Current liabilities and other liabilities 635,925Net cash provided by operating activities 4,621

Investing activitiesPurchase of property equipment including capital advances (2,958)Net cash used in investing activities (2,958)

Net (decrease) increase in cash and cash equivalents 1,663Cash and cash equivalents, beginning of year 34,976

Cash and cash equivalents, end of year 36,639

Statement of cash flowfor the quarter ended March 31



2005

Particular Product Service Corporate TotalUSD

Revenue 183,490 920,425 – 1,103,915 Cost of revenue (68,697) (861,019) – (929,716)Gross profit 114,793 59,406 – 174,199 Selling and marketing expenses (50,703) (254,335) (305,038)General and administrative expenses (190,231) (44,151) (1,143) (235,525)Depreciation and amortisation (3,403) (7,625) (11,028)Income from operations (129,544) (246,705) (1,143) (377,392)

Loss on equity investment –Interest income 7 Other income/(expenses), net –Net loss (377,385)

Segmental Informationfor the quarter ended March 31



Equinox Global Services Private LimitedFinancial statements for the quarter ended

March 31, 2005.

Financials



Directors’ report

Your Directors have pleasure in presenting their Report, together with Accounts of your Company, for the quarter ended March 31, 2005.

Financial highlights(Thousands of Indian Rupees)

Turnover 27,776

Expenditure (40,069)

Net loss (12,293)

Operations

Equinox excels in providing innovative, cost effective Customer Acquisition and Business Process Outsourcing (BPO) services to the companies in the US in the lending industry such as Mortgage, Auto Finance, Credit Card etc.

Staying focused in the lending industry, the Company has built a strong process competency in this vertical and is operating 26 different mortgage processes from offshore. Equinox offers the most comprehensive and innovative customer acquisition and outsourcing solution across the mortgage value chain from loan origination to servicing. Services include several incubation model based customer acquisition programs such as SmartAcquisitionTM, StopLeakageTM and StopRunoffTM and a host of process outsourcing services that include back-office processes. The Company also operates a VoIP based state of the art call center and perform functions like customer service, early stage collections, customer survey, pre-screening, outbound lead generation calls, etc.

The Company has a state-of-the-art communication infrastructure. The Company has its facility in Gurgaon (Haryana) and employs about 260 people. As part of the expansion plans, a new office of the Company in Gurgaon (Haryana) is being furnished which will house 750 people and will be functional in July 2005. The Company has an experienced and dedicated management and operating team drawn from the best talent in the industry.

Technology absorption

No comment is necessary considering the nature of activities undertaken by your company during the period under review.

Foreign exchange earnings and outgo

(Thousands of Indian Rupees)

Foreign exchange earnings 27,776

Foreign exchange outgo 1,417

Employee particulars

A list of employees covered by Section 217 (2A) of the Companies Act, 1956 read with Companies (Particulars of employees) Rules, 1975 as amended, is attached.

Directors’ responsibility statement

Pursuant to the requirement under Section 217 (2AA) of the Companies Act, 1956, with respect to Director’s responsibility Statement, it is hereby confirmed:

(i) That in the preparation of the accounts for the quarter ended March 31, 2005, the applicable accounting standards have been followed along with proper explanation relating to material departure:

(ii) That the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that were responsible and prudent so as to give a true and fair view of the state of affairs of the company at the end of the period and of the Profit or Loss for the quarter under review, of the Company.

(iii) That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the companies Act, 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

(iv) That the Directors have prepared the accounts for the period ended March 31, 2005 on a ‘Going concern’ basis.

For and on behalf of the Board of Directors

Gurgaon April 28, 2005

V Shyam SundarDirector & Chief Operating Officer




Schedules March 31, 2005

Sources of fundsShareholders’ fundsShare capital A 58,187

Loan fundsUnsecured loans 50,000 Total 108,187

Application of fundsFixed assets BCost 30,120Less: Accumulated depreciation 16,547Net book value 13,573

Current assets, loans and advances CSundry debtors 27,155Cash and bank balances 22,048Loans and advances 6,292

55,495Less: current liabilities and provisions DCurrent liabilities 25,590Provisions –

25,590

Net current assets 29,905

Miscellaneous expenditure (To the extend not written off or adjusted)Profit & loss account E 64,709Total 108,187

Notes to accounts H

The schedules referred to above and notes to accounts form an integral part of the balance sheet.


V Shyam SundarDirector &Chief Operating Officer

GurgaonApril 28, 2005



Profit and loss account for the quarter ended March 31, 2005


Schedules March 31, 2005

Revenue 27,776

Cost of revenue F (15,458)

Gross profit 12,318

Selling and marketing expenses – General and administrative expenses G (22,604)Depreciation and amortisation (2,497)

Operating loss (12,783)

Interest income 24Other income/(expenses) 466 Net loss (12,293)

Notes to accounts H

The schedules referred to above and notes to accounts form an integral part of the profit and loss account.






March 31, 2005

Operating activitiesNet loss (12,293)

Adjustment to reconcile net loss to net cash provided by operating activities:

Depreciation and amortisation 2,497

Change in operating assets and liabilities, netAccounts receivable (28,833)Other assets (2,215)Current liabilities and other liabilities 61,915 33,364 Net cash provided by operating activities 21,071

Investing activitiesPurchase of property equipment including capital advances (1,579)Net cash used in investment activities. (1,579)

Net increase/(decrease) in cash and cash equivalent during the period 19,492Cash and cash equivalents, beginning of period 2,556Cash and cash equivalents, end of period 22,048




Statement of cash flowfor the quarter ended March 31, 2005

Schedules annexed to and forming part of the accountsfor the quarter ended March 31



Schedule A: Share capital

Authorised capital10,000,000 shares of Rs. 10/- each 100,000

Issued, subscribed and paid-up capital5,818,660 shares of Rs. 10/- each 58,187



Sche

dule

B :

Fixe

d as

sets

Gro

ss B

lock

D

epre

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ion

Net

Boo

k V

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ular

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s at

31.1

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04

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od

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od

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od

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A

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31.0

3.20

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As a

t 31

.12.

2004

Leas

ehol

d Im

prov

emen

ts4,

296

–

– 4

,296

2,

700

368

–

3,0

68

1,2

27

1,59

5Fu

rnit

ure

& F

ixtu

res

451

–

–

4

51

8916

–

105

3

46

362

Plan

t & M

achi

nery

-Com

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rs21

,658

1,60

1–

23,

259

10,5

601,

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– 1

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0,72

1 11

,098

Plan

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quip

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ts75

55

– 7

61

150

32 –

1

82

579

60

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ant &

Mac

hine

ry-S

oftw

are

1,23

012

3 –

1

,353

55

110

3 –

6

54

700

68

0

Tot

al28

,390

1,7

29

– 3

0,12

014

,050

2,49

7–

16,

547

13,

573

14,3

40

As a

t 31.

12.2

004

–

28,3

90 –

28

,390

–

14,0

50 –

1

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0 14

,340

–



Schedule C: Current assets, loans and advances

(a) Sundry debtors (unsecured)Debts outstanding for a period exceeding six months – Other debts – considered good 27,155

27,155

(b) Cash and bank balancesCash in hand 42 Balance with scheduled banks:

– Deposit accounts 4,477 – Current accounts 17,529

22,048

(c) Loans and advances (Unsecured, Considered Good unless otherwise stated )Advances recoverable in cash or in kind or for value to be received: Other advances 2,008 Prepaid expenses 1,857 Advance tax 30 Deposits 2,397

6,292

Schedule D: Current liabilities and provisions

(a) Current liabilitiesSundry creditors

– For services 7,699 – For accrued wages and salaries 16,349 – For other liabilities 1,542

25,590

(b) Provisions –

Schedule E: Profit & loss account

Profit & loss account Balance, beginning of period (52,416)Add: (Loss) for the period (12,293)Balance, end of the period (64,709)

Quarter endedMarch 31, 2005

Schedule F: Cost of revenue Salary – processing staff 9,410Rewards and recognitions 2,410Transport expenses – process team 2,045Staff welfare – process team 689Equipment rental 473Recruitment expenses 392Training expenses 38

15,457



March 31, 2005

Schedule G: General and administrative expenses Salary – administrative staff 12,309IPLC charges 4,023Office rent 1,562Travel expenses 1,244Utilities 889Recruitment expenses 474Maintenance expenses 469Repair and maintenance – plant and machinery 251Telecommunication expenses 244Consultancy 225Legal and professional expenses 205Fitout rental 156Staff welfare 129Housekeeping services 114Printing and stationery 109Security services 67Repair and maintenance – general 54Audit fees 30Office supplies 19Bank charges 11Insurance 10Books and journals 5Subscription and membership expenses 3Miscelleneous expenses 1

22,603


Schedule H : Note to accountsfor the quarter ended March 31

1. Significant accounting polices:

(a) Basis of accounting

The financial statements have been prepared under the historical cost convention on accrual basis of accounting with generally accepted accounting principles in India and comply with Accounting Standards issued by Institute of Chartered Accountants of India and the relevant presentational requirement of the Companies Act, 1956, to the extent applicable.

(b) Revenue recognition

Revenue from service contracts is recognised based on completion method, under which the sales value of performance is recognised on the basis of effort incurred in respect of each contract. Anticipated losses, if any, up to the completion of contract are recognised immediately.

Interest on deployment of surplus funds is recognised using the time proportion method, based on the interest rate implicit in the transaction.

(c) Expenses

Expenditure accounted for on the accrual basis and provisions are made for all known losses and liabilities.

(d) Fixed assets

Fixed assets are recorded at the cost of acquisition including incidental costs related to acquisition and installation.

(e) Depreciation

Depreciation on fixed assets is provided on Straight Line method on pro-rata basis from day of put in to use. Rate of Depreciation and use full life considered as follows:

Assets class Dep. % Useful life (years)

Computer and system software 33% 3Lease Hold Improvement 14% 7Office Equipment 14% 7Furniture & Fittings 14% 7

Assets costing less than Rs. 5,000 are depreciated fully in the year of purchase. In case of disposal, depreciation is charged till the month of disposal.

(f) Foreign currency transaction

(i) Initial recognition Transaction denominated in foreign currencies are

recorded at the exchange rates prevailing at the date of transaction.

(ii) Conversion At the period end, monetary items denominated in

Foreign currencies other than those covered by forward contracts are converted into rupee equivalent at the period end exchange rate.

(iii)Exchange difference All the exchange difference on settlement and

conversion on foreign currency transaction are included in the Profit & Loss a/c except in cases where they related to acquisition of Fixed Asset, in which case they are adjusted in the cost of corresponding assets.

(g) Taxation

The current charge for the income tax is calculated in accordance with the relevant tax regulations applicable to the company. No deferred tax is being charged as company is a STP registered unit and exempted from Income Tax.


Provision for period end accrued liabilities on account of Gratuity and leave encashment in respect of all eligible employees of the Company is made on the basis of actuarial valuation.

(i) Deferred tax

The company has not recognized the net deferred tax assets, in respect of unabsorbed depreciation and provision for retrial benefits, in view of the tax holiday enjoyed by the company and resultant uncertainty of availing such benefit in future.

(j) Quantitative details

The company is engaged in the business of I.T. enabled services. Such services are not capable of being expressed in any generic units and hence it is not possible to give the quantitative details required in Part II of Schedule VI of the Companies Act, 1956.

(k) Amount due to SSI

There are no dues to SSI Undertaking by the company exceeding Rs. 1,00,000/- as on March 31, 2005.




2. Segmental informationPeriod ended

March 31, 2005Particular Product Service Corporate Total

Revenue – 27,776 – 27,776Cost of revenue – (15,458) – (15,458)Gross profit – 12,318 – 12,318Selling and marketing expenses – – General and administrative expenses (965) (21,639) – (22,604)Depreciation and amortisation – (2,497) – (2,497)Income from operations (965) (11,818) – (12,783)

Interest income 24 Other income/(expenses) 466Net loss (12,293)

3. Managerial remuneration

Salary and allowances 1,445

4. Auditors remuneration

Statutory audit 25Tax audit 5Other services 60

90

5. Earning in foreign currency

Sevice revenue 27,776

6. Expenditure in foreign currency

– Travel overseas 78– Communication charges 1,338

7. CIF value of imports

Capital Goods. Nil

8. Contingent liability in respect of:

a) Bank Guarantee and Letter of Credit issued by the bank on behalf of the company Rs. 3,618 this is covered by keeping an equivalent amount of fixed deposited with the bank.

b) Estimated amount of contracts remaining to be executed on capital account and not provided for Rs. 5,348.


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I. Registration Details

Registration Number 95351 State Code 21

Balance Sheet Date March 31, 2005

II. Capital raised during the Year (Amount in Rs. thousands)

Public Issue Nil Right Issue Nil Bonus Issues Nil Private Placement Nil

III. Position of Mobilization and Deployment of Fund (Amount in Rs. thousands)

Total Liabilities 108,187 Total Assets 108,187Sources of Fund Application of FundPaid-up Capital 58,187 Fixed Assets (Net) 13,573Unsecured Loan 50,000 Capital work-in-Progress NilSecured Loans Nil Investments Nil

Net Current Assets 29,905Accumulated losses 64,709

IV. Performance of the Company (Amount in Rs. thousands)

Current period

Turnover 27,776Total Expenditure 40,069Profit/(Loss) before tax (12,293)Profit/(Loss) after tax (12,293)Earning per share in Rs. Basic N.A.Earning per share in Rs. DilutedDividend Rate Nil

V. Generic name of three principal products/services of company (as per monetary terms) Item code number (ITC code)

N.A.

Product Description

Knowledge Process OutsourcingData Processing Services

Information pursuant to Part IV of Schedule VI to the Company Act, 1956


All Company or product names are trademarks or registered trademarks of their respective owners

New York Tel: +1-646-619 5300 Fax: +1-212-430 1918New Jersey Tel: +1-646-619 5320 Fax: +1-732-548 6030Minneapolis Tel: +1-952-942 6297 Fax: +1-952-942 6451Boston Tel: +1-617-854 7451 Fax: +1-617-549 9304Miami Tel: +1-646-619 5401 Fax: +1-786-275 8681 London Tel: +44-207-531 4400 Fax: +44-207-531 4401 Amsterdam Tel: +31-20-575 4200 Fax: +31-20-575 4201 Frankfurt Tel: +49-69-3085 5901 Fax: +49-69-3085 5104

Dubai Tel: +971-4-391 1890 Fax: +971-4-390 4876

Singapore Tel: +65-6238 1900 Fax: +65-6238 1282 Tokyo Tel: +81-3-5521 1166 Fax: +81-3-5521 1167Mumbai Tel: +91-22-2839 1909 Fax: +91-22-2836 3140Bangalore Tel: +91-80-5759 7000 Fax: +91-80-2534 5090

Shanghai Tel: +86-21-6375 8562 Fax: +86-21-6375 9456

Marketing offi ces

Moscow Tel: +7 095 787 2764



i-flex annual report 2004-2005www.iflexsolutions.com