Y inancials. i-flex solutions ltd. and Subsidiaries. Financial statements for the year ended. March 31, 2003 prepared in accordance with

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1 Y inancials i-flex solutions ltd. and Subsidiaries Financial statements for the year ended March 31, 2003 prepared in accordance with Indian Generally Accepted Accounting Principles (Indian GAAP) (Consolidated).

2 Auditors report To the Board of Directors of i-flex Solution Limited: 1 We have examined 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)) as at March 31, 2003, the Consolidated Profit and Loss Account and Consolidated Cash Flow Statement for the year then ended prepared in accordance with accounting principles generally accepted in India. 2 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 audit. We conducted our audit in accordance with generally accepted auditing standards in India. These 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. We believe that our audit provides a reasonable basis for our opinion. Statements, issued by the Institute of Chartered Accountants of India and on the basis of the separate financial statements of i-flex solutions limited and its subsidiaries and joint ventures included in the consolidated financial statements. 4 On the basis of the information and explanations given to us, we are of the opinion that in conformity with the accounting principles generally accepted in India: a. the Consolidated Balance Sheet gives a true and fair view of the consolidated state of affairs of Group as at March 31, 2003; b. the Consolidated Profit and Loss Account gives a true and fair view of the consolidated results of Group for the year then ended; and c. the Consolidated Cash Flow Statement gives a true and fair view of the consolidated cash flows of Group for the year then ended. S.R. Batliboi & Associates Chartered Accountants 3 We report that the consolidated financial statements have been prepared by the Company in accordance with the requirements of Accounting Standard (AS) 21, Consolidated Financial Chennai May 16, 2003 Subramanian Suresh Partner i-flex annual report

3 Consolidated Balance sheet as at March 31 (All amounts in thousands of Indian Rupees) Note Sources of funds Shareholders funds Share capital 3 186, ,777 Reserves and surplus 4 7,809,725 4,542,316 7,996,302 4,712,093 Application of funds Fixed Assets 2(c) & 5 Cost 972, ,562 Less: Accumulated depreciation 664, ,449 Net book value 307, ,113 Capital work-in-progress and advances 221,383 4, , ,989 Investments 2(d) & 6 355,825 95,736 Deferred tax assets 7 29,703 24,658 Current Assets, Loans and Advances 8 Sundry debtors 1,446,960 1,887,483 Cash and bank balances 5,768,059 2,280,983 Other current assets 48,851 10,886 Loans and advances 822, ,928 8,086,682 4,989,280 Less: Current Liabilities and Provisions 9 Current liabilities 771, ,182 Provisions 233, ,388 1,004, ,570 Net Current Assets 7,081,922 4,260,710 The accompanying notes 1 to 25 are an integral part of these financials statements. 7,996,302 4,712,093 S.R. Batliboi & Associates Rajesh Hukku Y.M. Kale Nihar Mody Deepak Ghaisas Chartered Accountants Chairman & Director Director Company Secretary Managing Director Subramanian Suresh Partner Chennai Mumbai May 16, 2003 May 16, 2003

4 Consolidated statement of profit and loss for the year ended March 31 (All amounts in thousands of Indian Rupees) Note Revenues 2(e) & 10 6,098,543 4,194,772 Cost of Revenues 11 (2,524,284) (1,566,410) Gross profit 3,574,259 2,628,362 Selling and marketing expenses 12 (870,969) (599,726) General and administrative expenses 13 (743,448) (642,057) Depreciation and amortisation 2(c) & 5 (151,298) (156,422) Income from operations 1,808,544 1,230,157 Reversal for diminution in value of investments, net 12,427 24,172 Profit/(Loss) on sale of investment 35 (51,500) Interest income ,042 66,672 Other income/(expenses) 15 (68,441) 33,827 Income before provision for income taxes 1,961,607 1,303,328 Provision for income taxes 2(k) & 16 (252,729) (150,337) Net income 1,708,878 1,152,991 Weighted average earnings per share of Rs 5/- each (in Rs) 2(l) & 21 Basic Diluted Number of shares used in computing earnings per share Basic 36,532,934 33,328,488 Diluted 37,213,927 33,328,488 The accompanying notes 1 to 25 are an integral part of these financials statements. S.R. Batliboi & Associates Rajesh Hukku Y.M. Kale Nihar Mody Deepak Ghaisas Chartered Accountants Chairman & Director Director Company Secretary Managing Director Subramanian Suresh Partner Chennai Mumbai May 16, 2003 May 16, 2003 i-flex annual report

5 Consolidated statement of cash flow for the year ended March 31 (All amounts in thousands of Indian Rupees) Cash flows from operating activities Income before provision for income taxes 1,961,607 1,303,328 Adjustments to reconcile income before provision for income taxes to cash provided by operating activities: Depreciation and amortisation 151, ,422 (Profit)/loss on retirement/sale of fixed assets, net (665) 343 Profit/(loss) on sale of investment (35) 51,500 Reversal of diminution in the value of investments (12,427) (24,172) Interest income (209,042) (66,672) Dividend income (3,311) Effect of exchange difference on cash and bank balances 12,781 (26,280) Finance charge on leased assets 2,155 2,577 Provision for doubtful advance 7,253 Provision for doubtful debts, net (18,755) (67,437) 51, ,059 1,894,170 1,445,387 Changes in assets and liabilities (Increase)/decrease in sundry debtors 457,595 (757,524) (Increase) in loans and advances (66,248) (90,730) Increase in current liabilities and provisions 197, , ,091 (741,163) Cash from operating activities 2,482, ,224 Payment of domestic and foreign taxes (218,486) (145,248) Net cash from operating activities 2,264, ,976 Cash flows from investing activities Additions to fixed assets including capital work in progress (363,459) (247,879) Proceeds from sale of fixed assets 1, Increase in bank fixed deposits having maturity of more than 90 days (1,760,000) (1,150,000) Purchase of investments (250,131) (45,000) Proceeds from sale of investment 2,504 48,500 Interest received 193,465 62,525 Dividends received 3,311 Net cash (used in) investing activities (2,176,177) (1,328,336) Cash flows from financing activities Proceeds from Initial Public Offering ( IPO ) 1,780,800 Payment of IPO related expenses (103,073) Proceeds from private placement of shares 4, ,350 Advance against equity shares to be issued 345 Repayment of loan from Employee Stock Purchase Scheme ( ESPS ) Trust 23,723 8,549 Payment of dividend (46,644) (41,596) Payment of corporate dividend tax (4,243) Payment for lease obligations (8,392) (7,683) Net cash provided by financing activities 1,651, ,377 Effect on exchange difference on cash and bank balances (12,781) 26,280 Net increase/(decrease) in cash and cash equivalents 1,726,734 (346,703) Cash and cash equivalents at beginning of the year 1,129,034 1,475,737 Cash and cash equivalents at end of the year 2,855,768 1,129,034

6 Consolidated statement of cash flow (continued) for the year ended March 31 (All amounts in thousands of Indian Rupees) Note: The reconciliation to the cash and bank balances as given in Note 8(b) is as follows: Cash and bank balances, per Note 8(b) 5,768,059 2,280,983 Less: Bank deposits having maturity of more than 90 days (2,910,000) (1,150,000) Unclaimed dividend account (2,291) (1,949) 2,855,768 1,129,034 The accompanying notes 1 to 25 are an integral part of this statement. S.R. Batliboi & Associates Rajesh Hukku Y.M. Kale Nihar Mody Deepak Ghaisas Chartered Accountants Chairman & Director Director Company Secretary Managing Director Subramanian Suresh Partner Chennai Mumbai May 16, 2003 May 16, 2003 i-flex annual report

7 Notes to the consolidated financial statements for the year ended March 31, 2003 (All amounts in thousands of Indian Rupees unless otherwise stated) 1 Background i-flex solutions limited ( i-flex or the Company ), a public limited Company, was incorporated in India with limited liability on September 27,1989. The Company s principal shareholder is OrbiTech Limited ( Orbitech ) with shareholding of per cent. Orbitech is a 100 per cent subsidiary of Citicorp Technology Holdings Inc, USA. In June 2002, the Company completed an Initial Public Offering ( IPO ) and issued 3,360,000 equity shares of Rs 5/- each at a price of Rs 530/- per share. Concurrently, 601,700 equity shares held by existing shareholders were also offered for sale. Consequently, on June 28, 2002, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. The Company 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; i-flex solutions inc., ( i-flex inc. ), a 100 per cent owned subsidiary company incorporated in December 2001 under the laws of the United States of America. DotEx International Limited ( DotEx ), a 49 per cent owned joint venture company incorporated in June 2000 under the laws of India; and Flexcel International Private Limited ( Flexcel ), a 40 per cent owned joint venture company incorporated in March 2001 under the laws of India. The Company together with its wholly owned subsidiaries, i-flex b.v., i-flex pte and i-flex inc., 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. 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. DotEx is a 51:49 joint venture between NSE.IT Limited, a wholly owned subsidiary of NSE and i-flex. DotEx has set up a broker s plaza which enables brokers and their clients to transact in stock/ securities markets through the internet. 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. 2 Summary of significant accounting policies (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 and i-flex inc. and joint venture companies i.e. DotEx and Flexcel (hereinafter collectively referred to as the Group ). 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 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 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 Group capitalises all direct costs relating to the acquisition and installation of fixed assets. Depreciation is provided pro-rata to the period of use, on the written down value 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 leases are amortised over the useful life or lease term, as appropriate (four to five years). The rates at which fixed assets are depreciated are as follows: % Improvement to leasehold premises 35 Buildings 15 Computer equipment 60 Electrical and office equipment 35 Furniture and fixtures 35 The Group purchases certain application software for internal use. It is estimated that such software has a relatively short useful life, usually less than one year. The Group, therefore, charges to income the cost of acquiring such software. Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets not put to use before such date are disclosed under Capital work-in-progress.

8 (d) Investments Trade investments refer to the investments made with the aim of enhancing the Group 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. (e) Revenue recognition Revenues are recognised as follows: (i) Product licenses and related revenues: License fees, on delivery and subsequent milestone schedule as per the terms of the contract with the end user. Product maintenance revenues, over the period of the maintenance contract. Implementation/Enhancement services are recognised upon the percentage of completion method based on the proportion of efforts spent to total efforts to complete or on the basis of contractually determined milestones as certified by the customer and as the services are provided for time and material contracts. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on current contract estimates. (ii) Software development services are recognised upon the percentage of completion method based on the proportion of efforts spent to total efforts to complete or on the basis of contractually determined milestones as certified by the customer and as the services are provided for time and material contracts. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on current contract estimates. 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 denominated assets and liabilities are revalued into rupees at the rates of exchange prevailing at the date of the balance sheet. The results of each entity in the Group are translated into Indian Rupees, the reporting currency, at the average rates of exchange during the year and the balance sheet is translated at the rate in effect at the balance sheet date. All exchange differences are dealt with in the statement of profit and loss, except for those relating to the acquisition of fixed assets, which are adjusted, if material, in the cost of the 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 Group. In India, the Group has schemes of retirement benefits of provident fund, superannuation fund and gratuity fund in respect of which the Group 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 recognised 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 recognised 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 recognised 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 recognised and carried forward only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. During the year ended March 31, 2002, the Company had adopted Accounting Standard 22, Accounting for taxes (AS 22) issued by the Institute of Chartered Accountants of India. Accordingly, the Company had recorded a deferred tax credit of Rs 6,089 for the year ended March 31, In accordance with the transitional provisions of AS 22, the deferred tax asset pertaining to the years prior to April 1, 2001 amounting to Rs 18,569 had been adjusted against general reserve. i-flex annual report

9 (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 equity shares outstanding during the year. The number of shares used in computing diluted earnings per share comprises the weighted average share considered for deriving basic earnings per share, and also the weighted average number of equity 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. As at As at March 31, 2003 March 31, Share capital Authorised 100,000,000 equity shares of Rs 5/- each 500, ,000 (March 31, ,000,000 equity shares) Issued, subscribed and paid-up 37,315,400 equity shares of Rs 5/- each, fully paid up 186, ,777 (March 31, ,955,400 equity shares) (a) Of the above, 24,784,300 equity shares of Rs 5/- each (March 31, ,784,300 equity shares) have been issued as fully paid-up bonus shares by capitalising the share premium account. (b) In June 2002, the Company made an IPO of 3,360,000 fresh equity shares of Rs 5/- each at a price of Rs 530/- per share. (c) Refer Note 20(b) for option granted for unissued equity shares. 4 Reserves and surplus General reserve Balance, beginning of year 3,988,569 2,720,000 Opening deferred tax credit (Refer Note 2(k)) 18,569 Transferred from profit and loss account 1,500,000 1,250,000 Balance, end of year 5,488,569 3,988,569 Share premium Balance, beginning of year 606, ,805 Received during the year 1,764, ,955 Share of Share premium received by joint venture 310 Utilised towards share issue expenses (103,073) Balance, end of year 2,267, ,760 Gain on dilution of equity investment in joint venture (Refer Note 23) 2,536 Profit and loss account Balance, beginning of year (53,013) 90,640 Net profit for the year 1,708,878 1,152,991 Transfer to general reserve (1,500,000) (1,250,000) Proposed dividend (93,289) (46,644) Corporate dividend tax (11,953) Balance, end of year 50,623 (53,013) 7,809,725 4,542,316

10 5. Fixed assets Gross Block Depreciation Written Down Value Particulars As at Additions Sale/deletions As at As at For the On As at As at As at during the year for the year year Sale/deletions for the year Land 44,734 44,734 44,734 44,734 Improvement to leasehold premises 85,624 18, ,242 48,106 14, ,005 41,237 37,518 Buildings* 7,116 13,000 20,116 3, ,129 15,987 3,897 Computer equipment 420,684 75,792 10, , ,730 84,842 7, ,810 93, ,954 Electrical and office equipment 145,333 12,574 1, ,716 80,183 24, ,135 52,581 65,150 Furniture and fixtures 121,663 14, ,108 66,722 20, ,304 48,804 54,941 Leased vehicles 27,408 2,462 4,808 25,062 12,489 6,043 3,995 14,537 10,525 14,919 Total 852, ,700 16, , , ,298 12, , , ,113 As at , ,979 4, , , ,422 2, ,449 Capital work-in-progress and advances 221,383 4, , ,989 * Includes 10 shares of Rs 50/- each in Takshila Building No.9, Co-op Housing Society Ltd. i-flex annual report

11 As at As at March 31, 2003 March 31, Investments a) Long term investments (unquoted) (i) Trade investments EBZ Online Private Limited (Note a) 45,000 45, ,260 (March 31, ,260) equity shares of Rs 10/- each, fully paid-up (ii) Non-trade investments Eastern Software Systems Limited (Note a) 7,406 9, ,283 (March 31, ,711) equity shares of Rs 10/- each, fully paid-up 12.75% KEONICS Mahithi Bonds Series-1 (Note b) 20,000 20, (March 31, ) Bonds of Rs 50,000/- each National Savings Certificate-VIII issue 131 JM High Liquidity Fund Serial Plan 2004 (Growth) (Note c) 250,000 24,965,796 (and 858 fractions) units of Rs 10/- each (March 31, 2002 Nil) 322,537 74,875 b) Current investments (non-trade, quoted) Unit Trust of India 1964 Scheme (US-64) (Note d) 50,000 50,000 3,311,258 units (and 278 fractions) of Rs 10/- each (March 31, ,311,258 units and 278 fractions) Less: Excess of cost over market value (16,712) (29,139) 33,288 20, ,825 95,736 Aggregate cost of quoted investments 50,000 50,000 Aggregate market value of quoted investments 33,288 20,861 Aggregate amount of unquoted investments 322,537 74,875 Note a) The Company s ownership interest in Eastern Software Systems Limited ( ESSL ) is 6.62%. During the year ended March 31, 2003, the Company accepted the buyback offer from ESSL for 89,428 shares. As a result the ownership interest has reduced from 6.65% to 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 the Group to integrate the selected and adapted software provided under the Group s products with BTPL s products for Co-operative banking sector in India. ESSL is primarily engaged in catering to the needs of small businesses through its flagship product, ebizframe. 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 inter-company 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 does not believe that currently there is any other than temporary decline in the value of these investments. Note b) 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 c) Investment in JM High Liquidity Fund Serial Plan 2004 (Growth) is investment in debt instrument funds. As per the term of the funds, the maturity of the funds is in April Note d) Units in US-64 are valued at the closing market price on the NSE as at March 31, 2003.

12 As at As at March 31, 2003 March 31, Deferred tax assets Difference between book and tax depreciation 29,703 24,624 Preliminary expenses written off in books 34 29,703 24,658 8 Current assets, loans and advances (a) Sundry debtors (unsecured) Debts outstanding for a period exceeding six months: Considered good 365, ,800 Considered doubtful 38,840 55, , ,096 Other debts: Considered good 1,081,092 1,757,683 (includes Unbilled revenue of Rs 14,508 (March 31, 2002 Rs 9,363) Considered doubtful 616 1,485,800 1,943,395 Less: Provision for doubtful debts (38,840) (55,912) 1,446,960 1,887,483 (b) Cash and bank balances Cash in hand Remittance in transit 7,091 Balances with scheduled banks: Current accounts in foreign currency 1,978, ,335 Deposit accounts 1,953,253 1,393,404 Deposit amount of unutilised IPO funds 1,359,017 Other current accounts 51,671 35,816 Unclaimed dividend account 2,291 1,949 Balances with non-scheduled banks: Current accounts in foreign currency 1,423 26,565 Current accounts of foreign subsidiaries 413,591 59,405 5,768,059 2,280,983 (c) Other current assets Interest accrued on: Bank Deposits 26,009 10,432 Bonds Contract acquisition Cost (Refer Note 22) 22,388 48,851 10,886 (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 (Note 20 (a)) 267, ,649 Loan to employees (secured) 10,267 19,284 Deposits 379, ,648 Prepaid expenses 94, ,273 Share application money 14,961 Other advances Considered good 70,840 31,113 Considered doubtful 7, , ,928 Less: Provision for doubtful advance (7,253) 822, ,928 i-flex annual report

13 As at As at March 31, 2003 March 31, Current liabilities and provisions (a) Current liabilities Accrued expenses 471, ,109 Deferred revenues 172, ,694 Advances from customers 14,495 5,428 Finance lease obligations 11,547 16,053 Accounts payable 22,770 58,417 Investor Education and Protection Fund to be credited by Unclaimed dividends * 2,291 1,949 Advance against equity shares to be issued 345 Other current liabilities 76,283 87, , ,182 * There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund (b) Provisions Proposed dividend 93,289 46,644 Corporate dividend tax 11,953 Provision for leave encashment 23,285 9,919 Provision for taxation, net of advance payment of taxes Rs 255, ,077 65,825 (March 31, 2002 Rs 150,839) 233, ,388 Year ended Year ended March 31, 2003 March 31, Revenues Product licenses and related activities 3,853,455 2,506,119 IT solutions and consulting services 2,285,188 1,649,299 Exchange (loss)/gain arising on sales, net (42,670) 37,590 Share of sales of joint venture companies 2,570 1,764 6,098,543 4,194, Cost of revenues Employee costs 1,286, ,059 Travel related expenses (net of recoveries) 945, ,161 Application software 157,171 88,305 Professional fees 122, ,885 Contract acquisition cost (Refer Note 22) 12,788 2,524,284 1,566, Selling and marketing expenses Employee costs 285, ,351 Travelling expenses 186, ,236 Professional fees 163, ,810 Advertising expenses 65,650 59,683 Rent 50,426 24,579 Communication expenses 29,273 4,723 Seminar expenses 11,783 9,660 Power 2,180 1,189 Miscellaneous expenses 75,733 83, , , General and administrative expenses Employee costs 314, ,073 Communication expenses 120,260 72,507 Rent 89,379 93,530 Professional fees 50,572 23,966 Travelling expenses 32,674 77,516

14 Year ended Year ended March 31, 2003 March 31, 2002 Power 35,810 30,342 Advertising expenses 6,961 2,274 Finance charge on leased assets 2,155 2,577 Loss on retirement/sale of fixed assets, net 343 Provision for doubtful debts, net (18,755) 43,276 Provision for doubtful advance 7,253 Miscellaneous expenses 102, , , , Interest income Interest Bank Deposits 204,278 61,170 (Includes tax deducted at source of Rs 39,672 (March 31, 2002 Rs 10,751) Bonds 2,550 2,550 (Includes tax deducted at source of Rs 536 (March 31, 2002 Rs 512) Loan to employees 2,214 2, ,042 66, Other income/(expenses) Exchange gain/(loss) other than on sales, net (70,950) 30,502 Profit on retirement/sale of fixed assets, net 665 Dividend on current investments 3,311 Miscellaneous income Share of other income of joint venture companies 886 (68,441) 33, Provision for taxation Domestic Indian taxes 169,778 49,307 Subsidaries 2,188 Foreign taxes 85, ,119 Deferred taxes (5,045) (6,089) 252, ,337 Under the Indian Income-tax Act, 1961, for the year ended March 31, 2003, the Company is eligible to claim benefits with respect to 90% as against 100% till last year of the profits earned from export revenues from its five units registered under the Software Technology Parks ( STP ) and one unit forming part of a Special Economic Zone ( SEZ ) in India. The benefit as per the current tax laws is restricted to ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operations from each location. These benefits will expire for certain of the Company s units beginning from April 1, Foreign taxes represents income taxes payable overseas in the United States of America, Malaysia, United Kingdom, Singapore, Japan and Kuwait. 17 Commitments and contingencies (a) Capital commitments Contracts remaining to be executed on capital account and not provided for (net of advances) aggregate Rs 507,642 as at March 31, 2003 (March 31, 2002 Rs 139,594). (b) Contingencies The Dutch authorities have alleged violation of immigration and taxation rules by i-flex b.v. in the Netherlands. i-flex b.v. has not received any written communication from the authorities yet. If such communication is received, the Company shall defend itself vigorously. The determination of the liability, if any, is not possible at this point. i-flex annual report

15 (c) Lease commitments (i) Finance leases The Group takes vehicles under finance leases of upto five years. Future minimum lease payments under finance leases as of March 31, 2003 and March 31, 2002 are as follows: As at March 31, 2003 Principal Interest Total Not later than one year 4,786 1,463 6,249 Later than one year and not later than five years 6,761 1,218 7,979 Total minimum payments 11,547 2,681 14,228 As at March 31, 2002 Not later than one year 6,035 2,035 8,070 Later than one year and not later than five years 10,018 1,928 11,946 Total minimum payments 16,053 3,963 20,016 (ii) Operating leases The Group has taken certain office premises and residential premises for employees under operating leases, which expire at various dates through to Gross rental expenses for the year ended March 31, 2003 aggregated to Rs 120,974 (March 31, 2002 Rs 100,381) The minimum rental payments to be made in future in respect of these leases are as follows: As at March 31, 2003 Amount Not later than one year 95,811 Later than one year and not later than five years 129,985 Later than five years 55,811 Share of joint venture included in above is as follows: Not later than one year Later than one year and not later than five years Later than five years As at March 31, 2002 Not later than one year 88,770 Later than one year and not later than five years 160,447 Later than five years 69,460 Share of joint venture included in above is as follows: Not later than one year 1,124 Later than one year and not later than five years 387 Later than five years 18 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 two business segments: a) Product licenses and related activities and b) IT solutions and consulting services.

16 The 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 and Microbanker 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. The activities of the joint ventures are separately monitored and disclosed as a separate segment. Segmental Information Year ended March 31, 2003 Product license IT solutions Particulars and related and consulting Joint ventures Corporate Eliminations Total activities services Revenues External revenue 3,854,294 2,284,349 2,570 6,141,213 Inter-segment revenue 845 1,403 (2,248) Net exchange gain arising on sales (26,787) (15,883) (42,670) Total revenue 3,828,352 2,269,869 2,570 (2,248) 6,098,543 Cost of Revenues (989,565) (1,534,719) (2,524,284) Gross profit 2,838, ,150 2,570 (2,248) 3,574,259 Selling and marketing expenses (773,902) (97,067) (870,969) General and administrative expenses (242,041) (205,585) (14,797) (281,025) (743,448) Depreciation and amortisation (54,734) (76,301) (5,760) (14,503) (151,298) Inter-segment expense (2,248) 2,248 Income from operations 1,768, ,197 (20,235) (295,528) 1,808,544 Reversal in diminution in value of investment 12,427 Profit on sale of investment 35 Interest income 209,042 Other income/(expenses) (68,441) Income before provision for income taxes 1,961,607 Provision for income taxes (252,729) Net income 1,708,878 Other information Segment assets 926,174 1,019,288 14,993 7,040,608 9,001,063 Segment liabilities 419, ,683 5, ,282 1,004,761 Share capital and reserves and surplus 7,996,302 7,996,302 Depreciation 54,734 76,301 5,760 14, ,298 Capital expenditure by segment 20,085 60,006 2,456 54, ,700 i-flex annual report

17 Year ended March 31, 2002 Product license IT solutions Particulars and related and consulting Joint ventures Corporate Eliminations Total activities services Revenues External revenue 2,506,119 1,649,299 1,764 4,157,182 Inter-segment revenue 226 4,684 (4,910) Net exchange gain arising on sales 22,502 15,088 37,590 Total revenue 2,528,847 1,669,071 1,764 (4,910) 4,194,772 Cost of Revenues (625,375) (941,035) (1,566,410) Gross profit 1,903, ,036 1,764 2,628,362 Selling and marketing expenses (556,500) (43,226) (599,726) General and administrative expenses (199,104) (221,232) (27,222) (194,499) (642,057) Depreciation and amortisation (50,638) (82,122) (10,018) (13,644) (156,422) Inter-segment expense (4,910) 4,910 Income from operations 1,097, ,456 (40,386) (208,143) 4,910 1,230,157 Reversal in diminution in value of investment 24,172 Loss on sale of investment (51,500) Interest income 66,672 Other income/(expenses) 33,827 Provision for income taxes (150,337) Net profit 1,152,991 Other information Segment assets 1,328,485 1,181,596 35,558 2,895,024 5,440,663 Segment liabilities 309,695 94,676 18, , ,570 Share capital and reserves and surplus 4,712,093 4,712,093 Depreciation 50,638 82,122 10,018 13, ,422 Capital expenditure by segment 51, ,269 10,883 66, ,979 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 and provisions. 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 can not be allocated between the segments are shown as part of corporate assets. Geographical segments The following table shows the distribution of the group s consolidated sales by geographical market: Year ended Year ended Regions March 31, 2003 % March 31, 2002 % United States of America 2,428, ,333, Middle East and Africa 1,464, ,084, Asia Pacific 1,076, , Europe 1,127, , Latin America and Caribbean 45, , ,141, ,157,

18 19 Related party transactions The list of related parties is as follows: Promoter Company and its affiliates Other entities where Company has significant influence OrbiTech Limited OrbiTech Solution Limited (OSL) Citicorp Technology Holdings Inc, USA Citibank branches Citicorp Information Technology, Inc ( CITI ) Citigroup e-serve International Limited ( e-serve ) i-flex Employee Stock Option Trust Key Managerial personnel Rajesh Hukku Chairman and Managing Director R Ravisankar Chief Executive Officer International Operations and Technology Deepak Ghaisas Chief Executive Officer India Operations, Chief Financial Officer and Company Secretary Makarand Padalkar Chief of Staff Joseph John Head Banking Products Division V Shankar Head Information Technology Services Division N R K Raman Head Marketing & Global Sales Vivek Govilkar Head Process and Quality Management Group S Hariharan Head Infrastructure and Support Services Group R Vidyasagar Head Human Resources Division The related party transactions, other than disclosed elsewhere in the financial statements, have been summerised below: Year ended Year ended March 31, 2003 March 31, 2002 a) Revenues Banking product revenues Citibank branches 1,018, ,669 CITI 11,798 3,300 e-serve ,030, ,138 IT solutions and consulting services revenues Citibank branches 1,386, ,343 CITI 673,370 e-serve 21 1,386,613 1,253,734 Interest on loans received from key managerial personnel b) Expenses Communication expenses paid to Citibank branches 43,811 Remuneration to key management personnel 34,932 27,912 (Comprises of salary, bonus and perquisites) Finance charge paid for finance leases to e-serve 1,532 7,136 Professional fees paid to OSL for software development 1,696 2,630 Provision for doubtful debts for Citibank branches (1,221) 1,221 Bank charges paid to Citibank branches 2,729 1,852 Rent paid for flat taken on lease from relative of key managerial personnel ,595 41,049 i-flex annual report

19 As at As at March 31, 2003 March 31, 2002 c) Assets Sundry debtors Citibank branches 613, ,836 (net of provision for doubtful debts of Rs Nil (March 31, 2002 Rs 1,221) CITI 32, , , ,597 Loans outstanding ESPS Trust 267, ,649 Key managerial personnel 4,000 4, , ,533 Repayment of loan during the year ESPS Trust 23,723 8,549 Key managerial personnel 844 1,703 24,567 10,252 Bank balances with Citibank branches Currrent accounts 1,232, ,286 Deposits 144, ,800 1,377, ,086 Interest accrued on fixed deposits Citibank, India d) Liabilities Amounts due to related parties e-serve towards lease obligations repayable (principal and interest) 7,727 14,896 OSL towards professional services 1,427 7,727 16,323 Deferred revenue from related parties Citibank branches 1,869 7,896 e-serve 42 1,869 7,938 Repayment of lease obligations to e-serve (Principal) 4,963 4,506 e) Other transactions Payment of dividends Orbitech 20,148 20,148 Key managerial personnel Relatives of key managerial personnel 8 8 ESPS Trust 3,921 4,505 24,454 24,879 Grant of Employee Stock Option Plan Key managerial personnel 650,200 Non wholetime Directors 10, ,000 10, , 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 and April 1, 2001, the Company adopted other Stock based schemes ( 1999 Scheme, 2000 Scheme and 2001 Scheme ). These schemes which have similar terms, are administered through a Trust ( the Trust ). The Trust purchases shares of the Company using the proceeds of loans obtained from the Company. Such shares are offered by the Trust to employees at an exercise price, which approximates the fair value on the date of the grant. The employees can purchase the shares in a phased manner over a period of five years based on continued employment, until which, the Trust holds the shares for the benefit of the 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

20 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. 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 have been earmarked for grant, at any given time to present and future employees and Directors of the Company and its existing and future subsidiaries. Pursuant to the above resolution, the Board of Directors, at their meeting held on March 4, 2002 approved the Employees Stock Option Scheme ( the Scheme ) for issue of 2,376,800 options to the employees and Directors of the Company. According to the ESOP the Company has granted 2,274,460 options (inclusive of 650,200 options to key managerial personnel and 330,000 options to a Director) to the eligible employees and Directors of the Company and its subsidiaries at an exercise price, which equates the issue price determined through the book-building procedure. 20% of the total options granted under the Scheme will vest to the eligible employees and Directors only on the completion of 12, 24, 36, 48 and 60 months respectively and is subject to the continued employment of the employee or Director with the Company or its subsidiaries. As per the terms of the Scheme, the exercise price would equate the price determined for the IPO through book building process 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. A summary of the activity in the Group s ESOP is as follows: As at As at March 31, 2003 March 31, 2002 Outstanding at beginning of year 2,274,460 Granted during the year 40,000 2,274,460 Exercised during the year Forfeited during the year (64,760) Outstanding at end of year 2,249,700 2,274, Reconciliation of basic and diluted shares used in computing earning per share Number of shares considered as basic weighted average shares outstanding 36,532,934 33,328,488 Add: Effect of dilutive stock options 680,993 Number of shares considered as weighted average shares outstanding and potential shares outstanding 37,213,927 33,328, On December 3, 2002 the Group acquired two IT consulting service contracts and 51 employees working on these contracts from Silverline Technologies Limited and its subsidiary, Silverline Technologies Inc. ( Silverline Group ) for a total consideration of Rs 35,176, which includes a cash payment made to/behalf of the Silverline Group and the assumption of certain employee related liabilities of the Silverline Group. The Group has accounted for the above transaction as a purchase. The purchase consideration of Rs 35,176 is fully allocated to the contracts and accordingly, there is no goodwill resulting from the transaction. The consideration allocated to the contracts is charged to Cost of Revenues on a straight line basis over the remaining contract term of 11 months. Accordingly, Rs 12,788 has been charged to income statement as part of Cost of Revenues and Rs 22,388 is carried as deferred contract acquisition cost as part of other current assets. i-flex annual report

21 23 Summary of interest in joint ventures The Company has two joint ventures, DotEx (49%) and Flexcel (40%). During the year, the Company has diluted its equity in Flexcel by 9.49%. This dilution of equity holding in Flexcel has resulted in a capital appreciation of Rs 2,536 which has been included as a part of reserves and surplus. As described in Note 2(a), the consolidated financial statements include proportionate amount of assets, liabilities, income and expenditure relating to the joint venture companies. The summary of proportionate assets, liabilities, income and expenses after elimination of inter-company transactions consolidated with financial statements of the Company are as follows: Proportionate assets and liabilities DotEx (unaudited) Flexcel (unaudited) March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002 Fixed assets Cost 11,402 17,431 8,551 7,568 Less: Accumulated depreciation 9,952 11,233 3,376 1,853 Net book value 1,450 6,198 5,175 5,715 Capital work-in-progress and advances 2,464 1,450 8,662 5,175 5,715 Current assets, loan and advances Sundry debtors Cash and bank balances 210 2,501 6,196 4,186 Other current assets Loans and advances 369 2,175 1,415 12, ,695 7,771 16,486 Less: Current liabilities and provisions Current liabilities 1,938 6,311 3,799 11,840 Provisions ,950 6,332 3,799 11,840 Net current assets (1,353) (1,637) 3,972 4,646 Net Assets 97 7,025 9,147 10,361 Proportionate income and expenses for the year ended Revenues Sales 2,570 1,764 Other income , ,900 1,851 1, Expenditure General and administrative expenses 9,522 19,514 5,275 7,708 Depreciation 3,591 8,166 2,169 1,852 13,113 27,680 7,444 9,560 Net loss (10,213) (25,829) (6,182) (9,292)