KNR CONSTRUCTIONS LTD.

KNR CONSTRUCTIONS LTD. BOARD OF DIRECTORS Sri B.V.Rama Rao Chairman Sri T.R.Sridharan Independent Director (up to 21.08.2007) Sri L. B. Reddy Independent Director Sri D.Ramaiah Independent Director Sri J.S.R. Chandramouli Independent Director Sri K.Narsimha Reddy Managing Director Sri K.Jalandhar Reddy Executive Director Sri J.V. Panindra Reddy Executive Director Sri M.Rajesh Reddy Executive Director Sri. M. V. Venkata Rao Company Secretary AUDITORS M/s. Sukumar Babu & Co., Chartered Accountants, Flat. No: 513, Aditya Encalve, Annapurna Block, Ameerpet, Hyderabad. BANKERS State Bank Of Patiala State Bank Of Indore State Bank Of Mysore ING Vysya Bank Ltd., Oriental Bank Of Commerce. Centurion Bank Ltd., ICICI Bank Ltd., Regd. & Administrative Office: 6-3-635, Akash Ganga, III Floor, Khairatabad, Hyderabad - 500 004 Andhra Pradesh, INDIA Tel: +91-40- 66669379 Fax: +91-40-66669349 Corporate Office: 12th Square Building,3rd Floor, Road No.12, Banjara Hills,Hyderabad - 500034. Andhra Pradesh, INDIA Tel: +91-40- 23323435 / 36 / 37 Fax: +91-40-23323439 Website: www.knrcl.com 1

NOTICE: Notice is hereby given that the 12th Annual General Meeting of the KNR CONSTRUCTIONS LIMITED will be held on 24th day of September 2007 at 11.00 A.M at the Corporate Office of the Company at 12th Square Building, 3rd Floor, Road No.12, Banjara Hills, Hyderabad - 500034 ORDINARY BUSINESS: 1. To receive, consider and adopt the Audited Balance Sheet as at 31 st March, 2007 and Profit & Loss Account for the Financial Year ended as on that date and the Report of the Board of Directors and Auditors thereon 2. To declare Dividend on Equity Shares for the financial year 2006-07. 3. To appoint a Director in place of Sri J. V. Phaninder Reddy, who retires by rotation and being eligible, offers himself for reappointment 4. To appoint a Director in place of Sri M. Rajesh Reddy, who retires by rotation and being eligible, offers himself for reappointment 5. To appoint a Director in place of Sri B. V. Rama Rao, who retires by rotation and being eligible, offers himself for reappointment 6. To consider and if thought fit to pass with or without modification, the following resolution as an Ordinary Resolution RESOLVED THAT M/s. Sukumar Babu & Co., Chartered Accountants, be and are hereby reappointed as Statutory Auditors of the Company from the Conclusion of this Annual General Meeting till the conclusion of the next Annual General Meeting at such remuneration as may be determined by the Board of Directors of the Company. NOTES: i. A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE INSTEAD OF HIMSELF/HERSELF AND THE PROXY NEED NOT BE A MEMBER OF THE COMPANY The instrument appointing proxy should, however be deposited at the Registered Office of the Company not less than 48 hours before commencement of the meeting. ii. Corporate Members intending to send their authorized representatives to attend the meeting are required to send a certified copy of their Board Resolution authorizing their representative to attend and vote on their behalf at the Meeting. iii. Register of members and share Transfer Books shall remain closed from 21.09.2007 to 24.09.2007 (both days inclusive) in connection with the Annual General Meeting. iv. Sri J. V. Phaninder Reddy, Sri M. Rajesh Reddy and Sri B.V. Rama Rao, Directors will retire by rotation at the Annual General Meeting and being eligible, offers themselves for re-appointment. The Board of Directors of your Company recommends the respective re-appointments of the aforesaid Directors. By Order of the Board of Directors Sd/- M. V. Venkata Rao Company Secretary Place: Hyderabad Date: 22-08-2007 2

TM BRIEF RESUME OF THE DIRECTORS SEEKING RE-APPOINTMENT Name J. V. Phaninder Reddy M. Rajesh Reddy B.V. Rama Rao Date of Birth 04.09.1966 23.08.1972 21.09.1939 Appointed on 01.06.1999 21.03.2005 26.12.2005 Qualifications B.E (Computers) B.E (Electronics) M.A Directorships KNR Infrastructure KNR Infrastructure Nil held in other Public Projects Pvt. Ltd. Projects Pvt. Ltd. Companies Trapezoid Software Trapezoid Software Solutions Pvt. Ltd. Solutions Pvt. Ltd. Vishnu Publicity Vishnu Publicity Solutions Limited Solutions Limited Memberships / Investor Grievance Investor Grievance Audit Committee Chairmanships of & Share Transfer & Share Transfer And committees across Committee Committee, Remuneration the public (KNR Constructions Executive Finance Committee companies Limited) Committee and (KNR Constructions Public Issue Limited) Committee (KNR Constructions Limited) Shareholding 18,32,115 18,32,115 Nil in the company 3

DIRECTOR S REPORT To The Members, Your Directors take pleasure in presenting the 12th Annual Report together with the Audited Accounts for the year ended 31 st March, 2007. FINANCIAL RESULTS: (Rs. In Lakhs) PARTICULARS 2006 07 2005 06 Gross Income 33395.00 16784.37 Profit before Interest and Depreciation 4312.38 2978.34 Less: Interest and Financial charges 890.67 40.87 Profit before depreciation 3421.71 2937.47 Less: Depreciation 736.42 478.21 Profit before tax 2685.29 2459.26 Less: Provision for Tax 693.73 382.11 Wealth Tax 0.91 - Provision for Deferred Tax Liability (52.24) 428.20 Fringe Benefit Tax 5.54 4.41 Profit after tax 2037.35 1644.54 Less: Prior period adjustments and taxes 49.65 107.09 Net Profit for the year 1987.70 1537.45 Balance brought forward from previous year 2236.85 2430.20 Profit available for Appropriation 4224.55 3967.66 Appropriations: Transfer to General Reserve 150.00 1499.93 Dividend (10%) 202.49 202.48 Dividend Tax 34.41 28.40 Balance Carried forward 3837.65 2236.85 Paid up Capital 2024.89 2024.89 Reserves and Surplus 4587.65 2836.84 4

REVIEW OF PERFORMANCE: Your company continues to be in the business of work contracts specializing in Roads and Bridges and other infrastructure projects like irrigation projects. During the year under consideration, your company has achieved a turnover of Rs 33395.00 Lakhs as against Rs 16,784.37 Lakhs in the previous year, thus registering an increase of 98.96 %. The company has earned a gross profit of Rs 4312.38 Lakhs before interest and depreciation as against Rs 2978.34 Lakhs in the previous year, thus registering a growth of 44.79%. After deducting interest of Rs.890.67 Lakhs, providing for Rs.736.42 Lakhs towards depreciation, Rs.647.94 Lakhs towards provision for income tax, wealth tax, fringe benefit tax and deferred tax, Rs 49.65 Lakhs towards prior period items and taxes, the operations resulted in a net profit of Rs 1987.70 Lakhs as against Rs 1537.45 Lakhs in the last year, registering a growth of 29.29 %. Following are the major works awarded to our Company during the period, 1st April 2006-30th June, 2007 Sl. Particulars of the Project Amount No. (Rs. In Millions) 1 Package No: KNT-1 - Work order received from Patel-KNR Infrastructure Pvt Ltd., - SPV as an Engineering procurement contract (EPC).Design, Construction, Development, Finance, Operation and Maintenance of Km 463.6 (AP/Karnataka border) to Km 524.0 (Avathi Village) and (ii) Improvement, Operation and Maintenance of Km 524 (Avathi Village) to Km 527 (Nandi Hills Crossing) and Km 535 (Devanhalli Village) to Km 539 (Meenukunte Village) on NH-7 in the State of Karnataka under North-South Corridor (NHDP Phase II). 2 Package No.UPSRP/UPG/6 Up-gradation of Road works of Lucknow Mohan Bangermau Road SH-40 From Ch. 16.200 (Lucknow) to Ch. 89.429 (Bangermau). 3 Package No.UPSRP/RMC/24 Rehabilitation of Road works of Raniganj Raibareilly Road SH 15 From Ch. 54.000 (Raniganj) to Ch. 11.000 (Raibareilly). 4 Contract Package No: M32A Improvement of Road from PWD Km 62+000 to 92+500 of Mysore Mananthawadi road in Mysore District. 5 Package AP - 7 - Design, Construction, Development, Finance, Operation and Maintenance of Km 230/000 (Islam Nagar) to Km 278/000 (kadtal) on NH-7 in the state of Andhra Pradesh under North South Corridor (NHDP Phase II) on BOT (Annuity) Basis Patel-KNR Heavy Infrastructure Pvt Ltd., - Special Purpose Vehicle (SPV). Company Share 40%. 3,500.00 553.78 559.41 131.46 6,389.28 With the above fresh orders on hand, the order book position as on 30 th June 2007 stands at Rs.12,729.36 millions. 5

DIVIDEND: Your directors take pleasure in recommending to the Members for approval of payment of dividend for the financial year ending 31 st March, 2007 at Re. 1/- per share(previous year Re1/- per share) on 20,248,890 shares which would result in an outgo of Rs. 236.90 Lakhs including the corporate dividend tax. The said dividend, if approved, at the Annual General Meeting by the members, will be paid to all those equity shareholders, whose names appear in the register of members as on 24 th day of September 2007. DIRECTORS: In accordance with the requirements of the Companies Act, 1956 Sri J. V. Phaninder Reddy, Sri M. Rajesh Reddy and Sri B.V. Rama Rao, Directors of the Company are liable to retire by rotation at the Annual General Meeting and being eligible, offers themselves for reappointment. Sri J V Phaninder Reddy is a Executive Director of the Company. He is a member of Investor Grievance & Share Transfer Committee. Sri M. Rajesh Reddy is a Executive Director of the Company. He is a member of Investor Grievance & Share Transfer Committee, Executive Finance Committee and Public Issue Committee Sri B. V. Rama Rao is Non Executive Independent Chairman of the Company. He is a member of Audit Committee and Remuneration Committee The Board of Directors of your Company recommends the respective re-appointments of the aforesaid Directors and attention of the members is invited to the relevant items of the Notice of the Annual General Meeting and Explanatory Statement. AUDITORS: The Statutory Auditors of the Company, M/s. Sukumar Babu & Co., and Chartered Accountants retire at the conclusion of the ensuing Annual General Meeting and being eligible, offer themselves for reappointment to hold office from the conclusion of this Annual General Meeting up to the conclusion of the next Annual General Meeting. DEPOSITS: Your Company has neither invited nor accepted any fixed deposits from the public during the year and review. PARTICULARS OF EMPLOYEES: Particulars of employees as required under section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975 are as under: Sri K. Narasimha Reddy, aged about 58 years is the Managing Director of the Company drawing a gross remuneration of Rs.24 lacs per annum. He is the promoter Director of the Company. He holds Bachelors degree and has an experience of 38 years in the industry. Before floating this company, he was an independent sub-contractor in the field of construction. FUTURE OUTLOOK: India has witnessed an economic growth of 9.2% in the period 2006-07. It is aiming for sustainable growth trajectory with a rate of approximately 10% by the end of the next plan period (2007-2012). The higher growth rate expectations are based on the likely better performance from the manufacturing and service sectors and strong consumer demand. In order to achieve and sustain the anticipated growth levels, large investments in infrastructure segments are required. As outlined in Approach Paper to 11 th Plan, investment in infrastructure defined as road, rail, air and water transport, power generation, transmission and distribution, telecommunication, water supply, irrigation and storage will need to increase from 4.60% to around 8 % of GDP in the 11 th Plan period. In other words, of the increase of 6 percentage points in average gross domestic investment rate from 29.10% to 35.10% of GDP needed to accelerate GDP growth rate from 7% to 9%,about half should be in infrastructure. This would place a heavy burden on Government finances.since government resources are scarce; an aggressive effort at promoting public private partnership in infrastructure development will be needed. A number of initiatives have been taken in the last two years of 6

the 10 th Plan by both the Central and State Governments to promote infrastructure development through public private partnership. Over the next 5 years, roads are slated to be the key driver of construction investments among infrastructure sectors. Road Development Programs such as the National Highway Development Program (NHDP) and Pradhan Mantri Gram Sadak Yojana (PMGSY) together with the state-level projects will provide a fillip to the construction industry. As part of infrastructure growth, it has become essential for the transport sector to flourish efficiently between various industrial towns, Special Economic Zones, airports, ports etc and for a wide and well-developed network of roads is required. DIRECTORS RESPONSIBILITY STATEMENT: Pursuant to the provisions of Section 217 (2AA) of the Companies Act, 1956, the Board of Directors hereby state that i) in the preparation of the annual accounts for the year ended March 31, 2007, the applicable accounting standards have been followed along with proper explanations relating to material departure; ii) iii) we 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 as at March 31, 2007 and profit for the year ended on that date; we 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 and iv) The accounts for the year ended March 31, 2007 have been prepared on a going concern basis. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND OUT GO: The particulars relating Conservation of Energy, Technology absorption, Foreign Exchange earnings and outgo as required under section 217 (1) (e) of the Companies Act, 1956 read with Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988 are as follows a) Conservation of Energy The Company has taken suitable measures for conservation of energy. The Company s main business is Civil Contract Works and mainly depends on heavy vehicles, which run on diesel. b) Technology absorption, Adoption and Innovation There is no information to be furnished regarding Technology Absorption as your Company has not undertaken any research and development activity in any manufacturing activity nor any specific technology is obtained from any external sources, which need to be absorbed or adapted. Innovation is a culture in the Company to achieve cost efficiency in the construction activity to be more and more competitive in the prevailing environment that cannot be quantified. c) Foreign Exchange earnings and outgo Foreign Exchange Earnings Nil Foreign Exchange outgo towards a) Travel Rs. 20,038/- b) Import of capital goods Rs.3,40,35,650/- EMPLOYEE RELATIONS: The relations with the employees continued to be cordial. The Directors would like to place on record their appreciation for the services rendered by all the employees of the Company. TM 7

EXPLANATION TO AUDITORS OBSERVATIONS: 1. With reference to Clause 3 b) of Annexure to the Auditors Report, the members may note that no specific agreements were entered into with the parties thereto since the said parties are the Directors of the Company and the amounts are payable on demand. 2. With reference to Clause 4 of Annexure to the Auditors Report, the management feels that keeping in view the requirements of the business the Directors themselves are supervising the operations and hence the purpose is served. 3. With reference to Clause 7 of Annexure to the Auditors Report, the management has taken note of the same and appropriate actions will be taken in this regard. 4. With reference to Clause 9 a) of Annexure to the Auditors Report, it may be noted that the Company is generally regular in payment of its statutory dues. However, due to oversight there was some delay in certain instances 5. Clause 9 b) of Annexure to the Auditors Report is self explanatory. ACKNOWLEDGEMENTS: Your Directors wish to place on record their gratitude to the Company s shareholders, customers, vendors and bankers for their continued support to KNR s growth initiatives Your Directors also wish to place on record, their appreciation of the contribution made by employees at all levels, who through their competence, sincerity, hard work, solidarity and dedicated support, have enabled your Company to make rapid strides in its business initiatives Your Directors also thank the Central and State Government and their various agencies, particularly, National Highway Authority of India and other Governmental agencies for extending their support during the year, and look forward to their continued support. For and on behalf of the Board Place: Hyderabad Date: 20-08-2007 Sd/- Sd/- K. Narasimha Reddy M. Rajesh Reddy Managing Director Executive Director 8

Information to the Shareholders Board of Directors The Board of your Company consists of Five Non-Executive Independent Directors, and Four Executive Directors. The Chairman is a Non-Executive Independent Director. Sri K. Narasimha Reddy, Managing Director of the Company is entrusted with the responsibility of day-to-day management of the Company subject to supervision, control and direction of the Board of Directors. The particulars of Directors are as follows: Sl No Name and Qualification Category Designation Attendance in Board Meetings Held Present 1 Sri B. V. Rama Rao, M.A. Non- Executive Chairman 4 4 2 Sri K. Narasimha Reddy, B.A. Executive Managing Director 4 3 3 Sri K. JalandharReddy, B.E. Executive Executive Director 4 1 4 Sri J. V. Panindra Reddy, B.E. Executive Executive Director 4 2 5 Sri M. Rajesh Reddy, B.E. Executive Executive Director 4 4 6 Sri T. R. Sridharan, B.Com. (Hons), CAIIB Non- Executive Director 4 2 7 Sri L. B. Reddy, F.C.A. Non- Executive Director 4 4 8 Sri D. Ramaiah, M.A. Non- Executive Director 4 4 9 Sri J S R Chandramouli, B.E Non- Executive Director 4 4 The meetings of the Board of Directors of the Company were held Four times during the financial year under review and no meeting was held beyond a time gap of four months between two meetings. The dates on which Board meetings were held during the financial year 2006-2007: 30.06.2006 27.09.2006 14.12.2006 29.03.2007 9

AUDIT COMMITTEE: The Audit Committee consists of the following directors, all of whom are financially literate and have relevant finance and / or audit exposure. Sri L.B Reddy is a financial expert and qualified Chartered Accountant. Sri L. B. Reddy Chairman Sri B. V. Rama Rao Member Sri K. Jalandhar Reddy Member The Audit Committee of the Board, inter alia, provides reassurance to the Board on the existence of an effective internal control environment that assures: a. Reviewing the findings of any internal investigations by the internal auditors and the executive management s response on matters whether there is suspected fraud or irregularity or failure of internal control systems of a material nature and reporting the matter to the Board; b. Reviewing the Company s financial and risk management policies; c. Discussion with the external auditors, before the audit commences, on nature and scope of audit, as well as after conclusion of the audit, to ascertain any areas of concern and review the comments contained in their management letter; d. Looking for into the reasons for substantial defaults, if any, in payment to the shareholders (in case of non-payment of declared dividend) and creditors; e. Considering such other matters as may be required by the Board. M/s Sukumar Babu & Co., Chartered Accountants are the Company s Independent Statutory Auditors. It is responsible for performing an independent audit of the Financial Statements and expressing an opinion on the conformity of that Financial Statement with accounting principles generally accepted in India. REMUNERATION COMMITTEE: The Remuneration Committee consists of the following Non-Executive Directors: Sri T. R. Sridharan Chairman Sri L. B. Reddy Member Sri B. V. Rama Rao Member The main object of this Committee is to recommend the remuneration package of executive directors of the Company. DETAILS OF REMUNERATION: The remuneration paid during the year to the following directors was decided by the Board, which was approved by the members at the General Meeting. Sl. No Name Amount (Rs.) 1 Sri K. Narasimha Reddy 24,00,000 2 Sri K. Jalandhar Reddy 18,00,000 3 Sri J. V. Panindra Reddy 18,00,000 4 Sri M. Rajesh Reddy 16,50,000 Total76,50,000 GENERAL BODY MEETINGS: Date: 29 th September 2006 Friday Location: 12 th Square Building,3 rd Floor, Road No.12,Banjara Hills,Hyderabad - 500034Andhra Pradesh, INDIA Time: 11.00 AM Date: 30 th September 2005 Friday Location: 6-3-635, Akasha Ganga,III rd Floor, Khairatabad,Hyderabad - 500004Andhra Pradesh, INDIA Time: 11.00 AM Date:29 th September 2004 Wednesday Location:6-3-635, Akasha Ganga,III rd Floor, Khairatabad,Hyderabad - 500004Andhra Pradesh, INDIA Time: 11.00 AM 10

TM SPECIAL BUSINESS: An Extra-Ordinary General Meeting was held on 12.07.2007 and the following items were resolved: a. To obtain authorization for the proposed public issue. b. Ratification of Corporate Guarantee given to Patel KNR Infrastructure Private Limited (for Rs.415 Crores). c. To obtain authorization for borrowing upto Rs.500 Crores under Sec 293(1)(d). d. To obtain authorization to sell, lease or dispose of the properties of the Company under Sec 293(1)(a). e. To adopt new articles of association of the Company (this is to comply with the BSE and NSE requirements). POSTAL BALLOT CONDUCTED DURING THE YEAR No Postal Ballot was conducted during the year. GENERAL SHAREHOLDER INFORMATION Annual General Meeting: The 12 th Annual General Meting of the Company will be held on Monday, 24 th day of September 2007 at 11.00 A M at the Corporate Office of the Company at 12 th Square Building, 3 rd Floor, Road No.12, Banjara Hills, Hyderabad 500034, Andhra Pradesh, INDIA. Financial Year: 1 st April 2006 to 31 st March 2007 Dates of Book Closure: Address for Correspondence: 21.09 2007 to 24.09.2007 (both days inclusive) M. V. Venkata Rao Company Secretary KNR CONSTRUCTIONS LTD 12 th Square Building, 3 rd Floor, Road No.12, Banjara Hills, Hyderabad 500034, Andhra Pradesh, INDIA. On behalf of the Board Sd/- Sd/- Place: Hyderabad K. Narasimha Reddy M. Rajesh Reddy Date: 20-08-2007 Managing Director Executive Director 11

AUDITORS REPORT To The Members 1. We have audited the attached Balance Sheet of as at 31 st March, 2007, the Profit and Loss Account for the year ended on that date and the Cash Flow Statement for the year ended on that date both 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 have conducted our audit in accordance with auditing standards generall 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 (Auditors Report) Order, 2003 issued by the Central Government of India, in terms of section (4A) of Section 227 of the Companies Act, 1956, 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 in Paragraph -3 above, we report that: a) we have obtained all the information and explanations, which to the best of our Knowledge and belief were necessary for the purpose of our audit; b) in our opinion, proper books of account as required by the law have been kept by the Company so far as it appears our examination of those books; c) the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report are in agreement with the books of account; d) in our opinion, the Balance Sheet, Profit & 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 Companies Act, 1956. e) On the basis of written representations received from the Directors, as on 31st March, 2007 and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March, 2007 from being appointed as Director in terms of Clause(g) of Sub section (1) of Section 274 of the Companies Act, 1956; f) 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 Companies Act, 1956, in the manner so required and give a true and fair view in conformity with accounting principles generally accepted in India: i) in the case of the Balance Sheet, of the state of affairs of the Company as at 31st March 2007; ii) in the case of Profit and Loss Account, of the profit for the year ended on that date; and iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date. for Sukumar Babu & Co., Chartered Accountants Sd/- Place : Hyderabad C.SUKUMAR BABU Partner Date : 20-08-2007 M.No: 200/24293 12

Annexure to the Auditors Report (Referred to in Paragraph 3 of our Report of even date) 1) In respect of its fixed assets: (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of its fixed assets on the basis of available information. (b) As explained to us, all the fixed assets have been physically verified by the management during the year in a phased periodical manner, which in our opinion is reasonable having regard to the size of the Company and nature of its assets. No material discrepancies were noticed on such physical verification. (c) The fixed assets disposed off during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the Going Concern status of the Company. 2) In respect of its inventories: (a) According to the information and explanations given to us, the Management has physically verified the inventory at the end of the year. In our opinion, having regard to the nature of business and location of stocks, the frequency of verification is reasonable. (b) In our opinion and according to the information and explanations given to us, the procedures of physical verification of inventory followed by the Management are reasonable and adequate in relation to the size of the Company and nature of its business. (c) In our opinion and according to the information and explanations given to us, the Company has maintained proper records of its inventories. The discrepancies noticed on verification between the physical stocks and the book records were not material and have been properly dealt in the Books of Accounts. 3) (a) According to the information and explanations given to us, the Company has taken loans, secured or unsecured from Companies, firms or other parties covered in the register maint ained under section 301 of the Companies Act, 1956. There are companies under the same management as defined under Sub-section (1-B) of section 370 of the Companies Act. 1956. The details are furnished below: (b) There are no specific agreements for these transactions and were made on account basis. The Company neither paid nor received any interest on these transactions. In the absence of agreements for these loans the terms and conditions, rate of interest, and their impact on the interests of the Company cannot be ascertained. TM Name of the Party Relationship Opening Balance 01-04-2006 Loan Received During the Year Loan Re-paid During the Year Outstanding as on 31-03-2007 K.Narasimha Reddy M.D. 0 31,100,000 27,416,462 3,683,538 K.Jalandhar Reddy E.D. 0 17,200,000 4,018,827 13,181,173 M.Rajesh Reddy E.D. 880,487 3,714,388 4,594,875 0 13

(c) In the absence of agreements and transactions were made on account basis regularity of payment of principal and interest doest not arise. (d) In the absence of specific agreements for these transactions, the question of over due does not arise for these transactions. 4) In our opinion and according to the information and explanations given to us, thereis no formal internal control system commensurate with the size of the company and the nature of its business for the purchase of inventory and fixed assets. However, we have been informed that the Directors are personally supervising such purchases. As the company is a Construction Company, the question of internal control over sale of goods does not arise. During the course of our audit, we have not observed any major weakness in the absence of formal internal control system. 5) In respect of contracts or arrangements entered in the register maintained in pursuance of Section 301 of the Companies Act, 1956 to the best of our knowledge and belief and according to the information and explanations given to us: (a) The particulars of contracts or arrangements referred to in Section 301 that need to be entered into the register, maintained under the said section have been so entered. (b) In our opinion, the transactions made in pursua nce of contracts or arrangements entered in the Register maintained under Section 301 of the Companies Act, 1956 aggregating during the year to Rs. 5 Lakhs and above have been made at prices, which are reasonable having regard to the prevailing market prices at the relevant time. 6) In our opinion and according to the information and explanations given to us, the Company has not accepted any deposits from the public. Accordingly, the provisions of Clause 4(vi) of the Companies (Auditor s Report) Order, 2003 are not applicable to the Company. 7) In our opinion, the internal audit functions carried out during the year by a firm of Chartered Accountants appointed by the Management. Having regard to the size of the company and the nature of its business, the frequency of internal audit reporting needs to be increased. 8) In our opinion, and according to the information and explanations given to us, the Central Government has not prescribed the maintenance of cost records for the activities of the Company. 9) a) According to the information and explanations given to us, there are delays in deposit of Provi dent Fund dues, Taxes Deducted at Source,Fringe Benefit Tax, Sales Tax, Wealth Tax, Service Tax and Municipal Taxes. The Company has been generally regular in depositing undisputed statu tory dues including Sales Tax, WealthTax,Custom Duty, Excise Duty, Cess, Service Tax and any other material statutory dues applicable to it with the appropriate authorities during the year. b) According to the information and explanations given to us, except for Service Tax and Entry Tax dues (which have been deposited subsequent to March 31, 2007), there were no undisputed amounts payable in respect of Income Tax, Wealth Tax, Customs Duty, Excise Duty and Cess which were in arrears as at March 31, 2007 for a period of more than six months from the date they became payable. The undisputed amounts payable for more than 6 months are given below: 1. Entry Tax - Rs. 7,029,847/- 2. Service Tax - Rs. 141,396/- c) The disputed statutory dues that have not been deposited on account of matters pending before appropriate authorities are as under: Sl.No Statute Nature of Dues Period to which Forum where Amount amount relates dispute is pending In. Rs. 1. Income-tax Income Tax 2002-03 Appellate Tribunal 4,455,450 Act, of Income Tax 1961 Hyderabad 2. Andhra Pradesh Sales Tax 1998-99 Sales Tax 2,881,789 Sales Tax Act, 1999-00 Tribunal, Hyderabad 7,800,285 1957 2000-01 4,699,266 2002-03 6,699,688 14

10) The Company does not have accumulated losses and has not incurred cash losses during the financial year covered by our audit and in the immediately preceding financial year. 11) In our opinion and according to the information and explanations given to us, the Company has not defaulted in repayment of dues to financial institutions and banks. 12) In our opinion and according to the information and explanations given to us, the Company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, the provisions of the Clause 4(xii) of the Companies (Auditor s Report) Order,2003 are not applicable to the Company. 13) In our opinion, the Company is not a Chit Fund or a Nidhi or Mutual Benefit Fund / Society. Accordingly, the provisions of the Clause 4(xiii) of the Companies (Auditor s Report) Order,2003 are not applicable to the Company. 14) In our opinion and according to the information and explanations given to us, the Company does not deal or trade in shares, securities, debentures and other investments. Accordingly, the provisions of the Clause 4(xiv) of the Companies (Auditor s Report) Order,2003 are not applicable to the Company. 15) In our opinion and according to the information and explanations given to us, the terms and conditions of the guarantees given by the Company for loans taken by others from banks and financial institutions are not prima facie prejudicial to the interests of the Company. 16) To the best of our knowledge and belief and according to the information and explanations given to us, in our opinion, the term loans availed by the Company were, prima facie, applied by the company during the year for the purposes for which the loans were obtained. 17) According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, funds raised on short-term basis have, prima facie, not been used for long-term investment. 18) According to the information and explanations given to us, the Company has not made preferential allotment of shares during the year to parties and companies covered in the Register maintained under section 301 of the Companies Act, 1956. 19) According to the information and explanations given to us, no debentures have been issued by the Company. Accordingly, the provisions of the Clause 4(xix) of the Companies (Auditor s Report) Order,2003 are not applicable to the Company. 20) The Company has not raised any money by public issues during the year, hence the question of disclosure and verification of end-use of such money does not arise. 21) To the best of our knowledge and belief and according to the information and explanations given to us, no fraud on or by the Company was noticed or reported during the year. for Sukumar Babu & Co., Chartered Accountants Sd/- Place: Hyderabad C.SUKUMAR BABU Date: 20-08-2007 Partner M.No: 200/24293 TM 15

16 TM I. SOURCES OF FUNDS BALANCE SHEET AS AT 31ST MARCH, 2007 As at As at Schedule 31st March, 2007 31st March, 06 Rupees Rupees SHARE HOLDERS FUNDS a) Share Capital 1 202,488,900 202,488,900 b) Reserves & Surplus 2 458,764,596 283,684,839 661,253,496 486,173,739 LOAN FUNDS a) Secured Loans 3 1,102,693,381 551,129,905 b) Un-Secured loans 4 16,864,711 3,912,829 1,119,558,092 555,042,734 DEFERRED TAX LIABILITY 62,015,594 67,240,055 TOTAL 1,842,827,182 1,108,456,528 II. APPLICATION OF FUNDS FIXED ASSETSS 5 Gross Block 1,168,816,558 507,480,003 Less : Depreciation 154,896,471 82,271,447 Net Block 1,013,920,087 425,208,556 CAPITAL WORK IN PROGRESS 2,740,549 18,791,675 INVESTMENTS : 6 315,467,827 307,143,198 CURRENT ASSETS, LOANS & ADVANCES : Inventories 7 49,305,741 67,883,035 Sundry Debtors 8 375,720,629 330,891,560 Cash & Bank Balance 9 123,850,886 97,754,739 Other Current Assets 10 395,329,292 183,641,477 Loans & Advances 11 404,044,037 166,079,903 1,348,250,585 846,250,714 CURRENT LIABILITIES & PROVISIONS a) Current Liabilities 12 705,486,820 427,233,193 b) Provisions 13 132,065,046 61,740,375 837,551,866 488,973,568 Net Current Assets 510,698,719 357,277,146 MISCELLANEOUS EXPENDITURE 14-35,953 (To the extent not written off) TOTAL 1,842,827,182 1,108,456,528 As per our report of even date attached for and on behalf of the Board for Sukumar Babu & Co., Chartered Accountants Sd/- Sd/- Sd/- Sd/- C.Sukumar Babu K.Narasimha Reddy M. Rajesh Reddy M.V. Venkata Rao Partner Managing Director Executive Director Company Secretary Place : Hyderabad Date : 20-08-2007

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH, 2007 YEAR ENDED YEAR ENDED SCHEDULE 31st MARCH, 31st MARCH, 2007 2006 I INCOME Rupees Rupees Total Work Contract Receipts 3,212,032,527 1,455,666,654 (Construction of Road Highways and Irrigation Projects) Less :Company s share in Joint Ventures 589,699,919 170,098,089 2,622,332,608 1,285,568,565 Other Operating Income 15 47,635,128 45,970,929 Other Income 16 79,831,194 176,799,809 2,749,798,930 1,508,339,303 II EXPENDITURE Materials Consumed 17 385,060,023 126,276,484 Work Contract Expenses 18 1,791,943,288 1,063,001,337 Administration And Other Expenses 19 98,491,626 57,728,880 Interest And Financial Charges 20 89,067,099 4,087,053 Depreciation 73,641,828 47,820,695 Increase/Decrease in Work-in-Progress 21 43,030,073 (36,537,177) Preliminary Expenses Written off 35,953 35,952 2,481,269,890 1,262,413,224 Profit Before Tax 268,529,040 245,926,079 Provision for Taxation - Current Tax 69,373,390 38,211,000 - Fringe Benefit Tax 553,860 440,578 - Wealth Tax 91,198 - Deferred Tax (5,224,461) 42,819,908 Profit After Taxation 203,735,053 164,454,593 Add : Prior Period Adjustments 388,740 Less : Prior Year s Taxation 5,353,847 10,708,755 198,769,946 153,745,838 Balance in Profit and Loss account brought forward 223,684,839 243,020,398 Profit Available for Appropriation 422,454,785 396,766,236 APPROPRIATIONS Proposed Dividend 20,248,890 20,248,890 Dividend Tax 3,441,299 2,839,907 Transferred to General Reserve 15,000,000 149,992,600 Balance carried to Balance Sheet 383,764,596 223,684,839 422,454,785 396,766,236 Earning Per share - Basic/Adjusted 9.82 7.59 As per our report of even date attached for and on behalf of the Board for Sukumar Babu & Co., Chartered Accountants Sd/- Sd/- Sd/- Sd/- C.Sukumar Babu K.Narasimha Reddy M. Rajesh Reddy M.V. Venkata Rao Partner Managing Director Executive Director Company Secretary Place : Hyderabad Date : 20-08-2007 17 TM

CASH FLOW STATEMENT FOR THE YEAR ENDED MARCH 31, 2006 A) CASH FLOW FROM OPERATING ACTIVITIES Year ended Year ended 31st March, 2007 31st March, 2006 Rupees Rupees Net Profit before Tax 268,529,040 245,926,079 Adjustments for Depreciation 73,641,828 47,820,695 Miscellaneous Expenditure Written Off 35,953 35,952 Provision for Doubtful Deposits 145,409 2,200,000 Loss on sale of assets and Discarded 870,011 402,604 Profit on sale of Assets (72,553,044) (161,395,374) Profit on sale of Investments - (17,450) Interest and Financial Charges 95,241,474 17,405,869 Interest Received (6,174,375) (13,318,816) Operating Profit before Working Capital Changes 359,736,296 139,059,559 Adjustments for changes in Trade and Other Receivables (436,794,193) (333,493,979) Inventories 18,577,294 (56,981,389) Trade Payables and Other Liabilities 446,506,313 254,395,496 Cash generated from Operations 388,025,710 2,979,687 Prior Period Items 388,740 - Taxes paid (60,972,023) (40,246,167) Net Cash from Operating Activities 327,442,427 (37,266,480) B) CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets and other capital expenditure (714,561,090) (311,537,799) Proceeds from sale of Fixed Assets 139,941,890 253,478,999 Proceeds from sale of Shares - 34,450 Investmnets in Joint Ventures/SPV's (8,324,629) (252,487,575) Interest Received 4,528,096 2,856,300 TDS on Interest Received (862,948) (636,285) Net Cash from Investing Activities (579,278,681) (308,291,910) C) CASH FLOW FROM FINANCING ACTIVITIES Long Term Funds Borrowed / (Repaid) 227,053,136 150,137,786 Mobilisation and Machinery advances received from customers 167,921,943 205,802,208 Interest paid (93,953,881) (16,919,548) Dividend and Dividend Tax paid (23,088,797) (7,696,266) Net Cash from Financing Activities 277,932,401 331,324,180 18

TM D) Net change in Cash and Cash Equivalents(A+B+C) 26,096,147 (14,234,210) as at April 1 (Opening Balance) Cash and Cash Equivalents 97,754,739 111,988,949 as at March 31 (Closing Balance) Cash and Cash Equivalents 123,850,886 97,754,739 Net Cash Flow 26,096,147 (14,234,210) Notes: 1 Cash and Cash equivalents includes: a. Rs. 83,962,645 (Rs. 69,376,840) margin money in fixed deposits account against letters of Guarantee issued. b. Restricted bank balances includes Rs. 10,000 (Rs. 10,000) towards unclaimed dividend. 2 The Cash flow statement is prepared under indirect method as set out in Accounting Standard - 3 on Cash Flow Statements issued by the Institute of Chartered Accountants of India. 3 Previous year s figures have been regrouped, wherever necessary. 4 Notes on Accounts stated in Schedule 22 form an integral part of the Cash Flow Statement. As per our report of even date attached for Sukumar Babu & Co., Chartered Accountants for and on behalf of the Board Sd/- Sd/- Sd/- Sd/- C.Sukumar Babu K.Narasimha Reddy M. Rajesh Reddy M.V. Venkata Rao Partner Managing Director Executive Director Company Secretary Place : Hyderabad Date: 20-08-2007 19

SCHEDULE 1 SHARE CAPITAL : SCHEDULES FORMING PART OF THE BALANCE SHEET AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees Authorised Capital 35,000,000 (Previous Year 35,000,000) Equity Shares 350,000,000 350,000,000 of Rs 10/- each Issued, Subscribed and Paid Up 202,488,900 202,488,900 20,248,890(Previous year 20,248,890) Equity Shares of Rs 10/- each SCHEDULE 2 202,488,900 202,488,900 RESERVES & SURPLUS : General Reserve As per last Balance Sheet 60,000,000 45,000,000 Add: Transfer from Profit & Loss Account 15,000,000 149,992,600 Less: Capitalised for issue of bonus shares - 134,992,600 75,000,000 60,000,000 Balance in Profit & Loss Account 383,764,596 223,684,839 458,764,596 283,684,839 SCHEDULE 3 SECURED LOANS : Working Capital Demand Loan Cash Credit 200,602,886 31,062,607 Term Loans: From Banks 277,641,941 131,051,593 Others 177,406,652 109,895,746 Secured Trade Advance: (Recoverable against work done bills, against bank guarantees) Mobilisation Advance 281,046,852 226,195,520 Machinery Advance 165,995,050 52,924,439 1,102,693,381 551,129,905 Installments falling due within next 12 months 215,715,814 103,427,335 20

TM Notes: a) Working Capital Facilities: Cash Credit facilities from consortium of banks are secured by: 1) Hypothecation of entire current assets on pari passu basis with other participating banks, 2) First pari passu charge on equitable mortgage of land & buildings, the WDV of which is Rs 1.46 crores as on 31.03.2006 and hypothecation of equipments of value Rs 16.94 Crores, 3) First pari passu charge on equitable mortgage of 3 plots of approximate value of Rs 13.98 Crores (as per sanctioned letter) 4) Personal guarantee of certain Directors. b) Term Loans Terms Loans availed from bank and others are secured by hypothecation of specific assets, comprising plant and machinery, construction equipment and vehicles acquired out of the said loans and personal guarantee of a director. c) Advances: Mobilisation and Machinery advances are received from clients against bank gurantees. SCHEDULE 4 UN-SECURED LOANS : From Directors 16,864,711 880,487 Others - 3,032,342 16,864,711 3,912,829 21

KNR CONSTRUCTIONS LIMITED SCHEDULE 5 FIXED ASSETS SI No PARTICULARS GROSS BLOCK AT COST DEPRECIATION NET BLOCK As at 01-Apr-06 Additons Deductions/ Adjustments As at 31-Mar-07 Up to 01-Apr-06 For the Period 1-4-06 to 31-3-07 Deductions/ Adjustments Up to 31-Mar-07 As at 31-Mar-07 Rupees As at 31-Mar-06 1 Lands and Plots 44,210,900 287,671,151 66,353,206 265,528,845 - - - - 265,528,845 44,210,900 2 Buildings 12,567,234 87,563-12,654,797 634,629 425,829-1,060,458 11,594,339 11,932,605 3 Plant and Machinery420,605,420 435,221,694 2,922,455 852,904,659 70,665,650 68,499,185 1,016,804 138,148,031 714,756,628 349,939,770 4 Office Equipment 1,814,576 228,485-2,043,061 548,316 193,372-741,688 1,301,373 1,266,260 5 Furniture and Fittings 4,287,991 847,946-5,135,937 1,579,429 570,368-2,149,797 2,986,140 2,708,562 6 Computers 1,605,983 607,804-2,213,787 965,319 367,912-1,333,231 880,556 640,664 7 Constructions Accessories 6,832,846 - - 6,832,846 2,326,402 626,846-2,953,248 3,879,598 4,506,444 8 Lab Equipments and Tools 3,166,873 989,399-4,156,272 1,032,956 348,532-1,381,488 2,774,784 2,133,917 9 Vehicles 12,388,180 4,958,174-17,346,354 4,518,746 2,609,784-7,128,530 10,217,824 7,869,434 507,480,003 730,612,216 69,275,661 1,168,816,558 82,271,447 73,641,828 1,016,804 154,896,471 1,013,920,087 425,208,556 Capital work in progress 2,740,549 18,791,675 1,016,660,636 444,000,231 Previous Year : 413,829,661 292,746,124 199,095,782 507,480,003 141,060,305 47,820,695 106,609,553 82,271,447 425,208,556-22

SCHEDULES FORMING PART OF THE BALANCE SHEET TM SCHEDULE 6 INVESTMENTS - at cost AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees LONG TERM INVESTMENT A) In Associate Companies - Unquoted Fully Paid a) 1,124,000 Equity shares @ Rs.10/- each of 11,240,000 - Patel KNR Infrastructures Pvt Ltd., 5000 Equity shares @ Rs.10/- each ofpatel 50,000 - KNR Heavy Infrastructure Pvt Ltd., 11,290,000 - B) In Joint Ventures 304,177,827 307,143,198 SCHEDULE 7 INVENTORIES : TOTAL 315,467,827 307,143,198 Materials at Site 49,305,741 24,852,962 Work in progress - 43,030,073 49,305,741 67,883,035 SCHEDULE 8 SUNDRY DEBTORS : (Unsecured, considered good) Over 6 months 82,894,022 89,957,733 Less than 6 months 292,826,607 240,933,827 375,720,629 330,891,560 SCHEDULE 9 CASH & BANK BALANCES : Cash on Hand 1,227,427 1,435,109 Balances with Scheduled Banks : In Current Account 38,660,814 26,942,790 In Margin Money Deposits 83,962,645 69,376,840 (Lodged with Banks against guarantee / LC s) 123,850,886 97,754,739 23

SCHEDULES FORMING PART OF THE BALANCE SHEET CHEDULE 10 OTHER CURRENT ASSETS AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees Retention Money 198,043,786 90,173,404 Other Deposits 16,691,453 17,666,017 Due from Customer 170,685,258 67,539,540 Interest Accured But Not Received 12,108,795 10,462,516 397,529,292 185,841,477 Less: Provision for Doubtful Deposits 2,200,000 2,200,000 TOTAL 395,329,292 183,641,477 SCHEDULE 11 LOANS & ADVANCES : (Unsecured considered good unless otherwise stated) Advances Recoverable in cash or kind or for value to be received 316,456,951 134,533,363 Tax Deducted at Source and advances tax 87,587,086 31,546,540 (incl. Fringe Benift Tax) TOTAL 404,044,037 166,079,903 SCHEDULE 12 CURRENT LIABILITIES Current Liabilities Sundry Creditors 703,451,667 426,485,633 Interest Accrued But Not Due 1,988,552 747,560 Interest Accrued But Not Paid 46,601-705,486,820 427,233,193 SCHEDULE 13 24

TM SCHEDULES FORMING PART OF THE BALANCE SHEET PROVISIONS : AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees Provision for Taxation 107,584,390 38,211,000 Provision for Fringe Benefit Tax 553,860 440,578 Provision for Wealth Tax 91,198 - Provision for Dividend Tax 3,441,299 2,839,907 PProvision for Defective Liability Expenses 145,409 - Proposed Dividend 20,248,890 20,248,890 SCHEDULE 14 MISCELLANEOUS EXPENDITURE : 132,065,046 61,740,375 Preliminary & Pre-operative Expenses 35,953 71,905 Less: Written off during the year 35,953 35,952 TOTAL - 35,953 SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT SCHEDULE 15 OTHER OPERATING INCOME : Share of Profit / Loss from Joint Ventures 15,512,970 8,472,088 Hire Charges and Job Work Receipts 32,122,158 37,498,841 SCHEDULE 16 OTHER INCOME : 47,635,128 45,970,929 BG Commission Received - 1,228,065 Profit on Sale of Assets 72,553,044 161,395,374 Profit on Sale of Shares - 17,450 Liabilities no longer required written back 274,600 11,725,440 Miscellaneous Receipts 7,003,550 2,433,480 79,831,194 176,799,809 25

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT SCHEDULE 17 MATERIALS CONSUMED : AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees Stock at Commencement 24,852,962 4,408,750 Add: Purchases 409,512,802 146,720,696 Less: Closing Stock 49,305,741 24,852,962 385,060,023 126,276,484 SCHEDULE 18 WORK EXPENSES : Sub-Contractors Work Bills 1,315,568,566 907,897,199 Transport Charges 17,631,600 10,545,867 Power Charges 735,486 94,215 Seniorage charges 31,750,310 17,249,776 Sales Tax 38,025,355 27,597,645 Recoveries by Clients 116,579 1,429,029 Repairs & Maintenance - Plant & Machinery and Vehicles 51,236,401 15,557,417 - Others 1,981,727 1,136,412 Spreading & Assortment Exp. 278,479,280 77,057,006 Preparatory Works Expenses 46,236,068 2,041,532 Other Expenses 10,181,916 2,395,239 1,791,943,288 1,063,001,337 SCHEDULE 19 ADMINISTRATION AND OTHER EXPENSES : Salaries, Wages and Other Benefits 30,859,472 12,564,360 Contribution to Provident Fund and Other Funds 278,374 296,206 Staff Welfare Expenses 1,151,548 3,510,187 Directors Remuneration 7,650,000 4,872,903 Travelling & Conveyance 3,307,791 2,046,315 Printing & Stationery 1,413,202 600,752 Postage, Telegrams and Telephones 1,771,560 1,215,553 Rates & Taxes 13,213,038 4,962,628 Tender Expenses 112,500 439,070 Business Promotion Exp 599,326 325,031 Office Maintenance 554,083 349,271 Rent Expenses 1,334,583 1,015,294 26

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT TM Advertisement 596,853 1,537,782 Legal & Professional Charges 21,462,772 5,989,196 Electricity Charges 522,743 446,448 Insurance 7,107,511 2,416,913 Vehicle Maintenance - 118,216 Miscellaneous Expenses 4,068,412 3,943,239 Loss on Assets sold / discarded 870,011 402,604 Bad debts / Advances written off 992,847 8,286,912 Provision for doubtful deposits - 2,200,000 Directors Sitting Fees 225,000 65,000 Auditor Remuneration: Audit Fees 150,000 85,000 Tax Audit Fees 75,000 20,000 Out of Pocket Expenses 175,000 20,000 98,491,626 57,728,880 SCHEDULE 20 INTEREST AND FINANCIAL CHARGES : Interest on Working Capital Loans 17,295,656 1,922,511 Interest on Term Loans 29,272,919 10,819,285 Interest on Mobilisation and Machinery advances 21,100,391 1,279,657 Interest to others 12,505,741 2,461,509 80,174,707 16,482,962 Less: Interest received from banks and others 6,174,375 13,318,816 (Gross of Tax Deducted at Source Rs.862,948 (P.Y 636,285) 74,000,332 3,164,146 Finance Charges 15,066,767 922,907 89,067,099 4,087,053 SCHEDULE 21 (INCREASE)/DECREASE IN STOCKS OF WORK - IN - PROGRESS AS AT AS AT 31st MARCH, 31st MARCH, 2007 2006 Rupees Rupees Opening Work in Progress 43,030,073 6,492,896 Less : Closing Work in Progress - 43,030,073 43,030,073 (36,537,177) 27

SCHEDULE: 22 SIGNIFICANT ACCOUNTING POLICIES AND NOTES ON ACCOUNTS Company Overview The Company is engaged in the business of infrastructure development for including roads & highways, irrigation projects and urban water / drainage infrastructure. A SIGINIFICANT ACCOUNTING POLICIES 1 METHOD OF ACCOUNTING The financial statements are prepared under the historical cost convention on accrual basis and are in accordance with the requirements of Companies Act, 1956 and comply with the Accounting Standards referred to in Sub- section (3C) of Section 211 of the said Act. 2 FIXED ASSETS AND DEPRECIATION Fixed Assets are stated at cost of acquisition, or construction including any attributable cost of bringing the assets to its working condition for its intended use less accumulated depreciation. Depreciation is provided on Written Down value method at the rates prescribed in Schedule XIV to the Companies Act, 1956. 3 BORROWING COSTS Borrowing Costs that are directly attributable to acquisition or construction of a qualifying asset is capitalized for the period until the asset is ready for its intended use. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are recognized as an expense of the period in which they are incurred. 4 INVESTMENTS Long-term investments are stated at cost. Current investments are stated at lower of cost and fair value. 5 INVENTORIES Raw Materials and Stores & Spares are valued on weighted average cost method. Cost comprises of all costs of purchase (other than refundable duties and taxes). 6 RETIREMENT BENEFITS: i) Gratuity: In accordance with the Payment of Gratuity Act, 1972 the Company provides for gratuity covering eligible employees.liability on account of gratuity is covered through a recognised Gratuity Fund managed by Life Insurance Corporation of India and contributions are charged to revenue on cash basis.ii) Provident Fund: Contributions to Provident Fund are made to Regional Provident Fund Commissioner and are charged to revenue. iii) Other Benefits: Leave Encashment, Service Compensation, Bonus, and medical re-imbursement are accounted on cash basis. 7 PRELIMINARY EXPENSES Preliminary expenses were amortised over a period of 10 years 8 FOREIGN CURRENCY TRANSACTIONS Transactions in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. In respect of monetary items denominated in foreign currencies, exchange differences arising out of settlement or on conversion at the closing rate are recognized in the profit and loss account, there being no exchange differences arising on acquisition of fixed assets. 9 REVENUE RECOGNITION Fixed price contracts received up to March,31, 2003: Income is recognised by applying percentage of completion to the contract value. Percentage of completion is determined as a proportion of the progress billing to contract value. Fixed price contracts received on or after April, 1, 2003: Contract revenue is recognised using the percentage completion method. Percentage of completion is determined as a proportion of cost incurred to date to the total estimated contract cost. Full provision is made for any loss in the year in which it is foreseen. 10 JOINT VENTURE PROJECTS In respect of Joint Ventures which are jointly controlled entities (JCE) the company s share in JCE profit is taken as income. The company s share of turnover in JCE is added to the turnover of the Company to arrive at the overall company s exposure to work contracts. Investments in joint ventures are stated at cost with adjustment to respective share of profit / loss in JCE. 11 TAXES ON INCOME Provision for current tax is made based on the liability computed in accordance with the relevant tax rates and tax laws applicable. Provision for deferred tax is made for timing differences arising between taxable 28

TM incomes and accounting income using the tax laws and tax rates enacted or subsequently enacted as of the balance sheet date. Deferred Tax Assets are recognized only if there is virtual certainty that there will be sufficient taxable income in future. 12 CONTINGENT LIABILITIES Contingent liabilities are not provided for and are disclosed by way of notes. B. NOTES ON ACCOUNTS: 1. All amounts in the financial statements are presented in Rupees except per share data and as otherwise stated. Figures in brackets represent corresponding previous year figures in respect of Profit & Loss items and in respect of Balance Sheet items as on the Balance Sheet date of the previous year. Figures for the previous year have been regrouped /rearranged wherever considered necessary to confirm to the figures presented in the current year. 2. Contingent Liabilities not provided for Ruppes 1. Bank Guarantees issued by the banks on behalf of the company - for Company Rs. 829,157,792 (P.Y Rs. 626, 487,007) - for Joint Ventures Rs.184,870,000 (P.Y Rs. 130,950,000) -for SPVs Rs. 80,600,000 (P.YNil) TotalRs.1,094, 627,792 (P.Y Rs. 757,437,007) - Corporate guarantee Rs. 500,000,000 (P.Y Nil) 2. Joint and several liabilities in respect of joint venture projects - Amounts are not ascertainable. 3. Disputed Sales Tax (on appeal) Gross Rs.22,081,028 (previous year Rs. 24,081,950). 4. Disputed Income Tax Rs. 4,67,553/- (previous year nil). 3. Estimated amount of contracts remaining to be executed on capital account not provided for Rs.49,195,625 (Previous year Nil) Sl.No. Purpose Amount In.Rs. 2006-07 2005-06 1. For Construction Equipments Rs. 11,546,370 49,195,625 2. For Equity investment in BOT Project Rs. 30,34,80,000 Nil 4. Managerial Remuneration Rupees Particulars 2006-07 2005-06 Salaries and allowances 7,650,000 4,872,903 Sitting Fees 225,000 65,000 Total 7,875,000 4,937,903 Computation of Net Profit in accordance with Section 349 of the Companies Act, 1956. 29

Particulars 2006-07 2005-06 Profit before Taxation 268,529,040 245,926,079 Add: Managerial Remuneratin 7,650,000 4,872,903 Loss on Sale of Fixed Assets / Written off Assets 870,011 402,604 Provision for Doubtful advances - 2,200,000 Sub- Total 277,049,051 253,401,586 Less: Profit on Sale of Fixed Assets 2,773,808 161,395,374 Profit on Sale of Land 72,553,044 - Profit on Sale of Shares - 17,450 Total (Profit for the year as per Section 349) 201,722,199 91,988,762 Maximum remuneration payable 22,189,442 10,118,764 Remuneration paid 7,650,000 4,872,903 5. Deferred Taxes The composition of Deferred Tax assets and liabilities is as below: Deferred Tax Assets on timing difference due to: 7. Expenditure incurred in foreign currency Rs. 340,55,688 (Previous year Nil) Rupees 2006-07 2005-06 Expenditure not allowed u/s 43B and 40 a (i.a) 2,631,847 Deferred Tax Liabilities on timing difference due to : Depreciation (25,92,614) 67,240,055 Net Deferred Tax Liability (A-B) (5,224,461) 67,240,055 6. Earning Per Share Rupees 2006-07 2005-06 A Profit for the year after tax 198,769,946 153,745,838 B Number of equity shares for Basic EPS20,248,890 20,248,890 C Face Value per share 10 10 D Basic EPS (adjusted for previous year) 9.82 7.59 8. In terms of the disclosures required to be made under the accounting standard (AS) 7 (revised) issued by the Institute of Chartered Accountants of India for Construction Contracts, the amounts considered in the financial statements up to the Balance Sheet date are as follows: 30

Rupees TM 31-03-2007 31-03-2006 Contract Revenue recognized as revenue during the year 2,622,332,608 1,285,568,565 Contract costs incurred and recognized Profits, less losses 2,622,332,608 1,285,568,565 Advances received, net of recoveries from Progressive bills 447,041,902 419,765,975 Retention Deposits 198,043,786 90,173,404 Gross amount due from customers 170,685,258 148,755,866 Gross amount due to customers - NIL - - NIL - Interest accrued on claims awarded during the year amounting to Rs. 1,646,279 was recognized as revenue during the year. 9. The Company has not received any intimation from Suppliers regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and hence disclosures, if any relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given. 10. Segmental Reporting: The Company s operations consist of Construction activities. Hence, there are no reportable segments under Accounting Standard 17. During the year under report, the Company has engaged in business in India only and not in any other Country. The conditions prevailing in India being uniform, no separate geographical disclosures are considered necessary. Rupees in Lakhs Name of thecompany Per cent age of Holding Assets Liabilities Contingent Liabilities Capital Commitment Income Expenditure Patel-KNR-JV 50% 6643.08 6643.08 Not ascertainable Nil 9854.03 9754.84 KNR-Patel-JV 51% 330.88 330.88 Nil Nil 53.85 69.43 NCC-KNR-JV Project wise 542.63 542.63 Nil Nil Nil 8.99 KNR-SLEC-JV 60% 171.57 171.57 Not ascertainable Nil 1719.60 1635.05 KNR-BPL-JV 49% 438.34 438.34 Not ascertainable Nil 496.76 496.76 Patel KNR 40% 112.40 112.40 806.00 451.48 Nil Nil Infrastructure Pvt Ltd., Patel KNRHeavy 50% 0.50 0.50 Nil Nil Nil Nil Infrastructure Pvt Ltd. 11. As per the Accounting Standard-27 on Financial Reporting of Interest in Joint Venture issued by the Institute of Chartered Accountants of India, the particulars of Joint Venture and its interest there in are as follows 12. As per Accounting Standard 18, Related Party Disclosure issued by the Institute of Chartered Accountants of India, the disclosures of transactions with the Related Parties as defined in the Accounting Standard are given below: 31

A. List of Related Parties and relationships A B Name of the Related Party KNR Patel JV Patel KNR JV NCC-KNR JV KNR SLEC JV KNR-BPL JV Patel-KNR Infrastructure Pvt Ltd., Patel-KNR Heavy Infrastructure Pvt Ltd. KNR Infrastructure Pvt Ltd. Vishnu Publicity Solutions Ltd. Trapeziod Software Solutions Pvt. Ltd. Yuvashakthi Enterprises Sri K.Narsimaha Reddy Sri K.Jalandhar Reddy Sri J.V.Panindra Reddy Sri M.Rajesh Reddy Relationship Joint Venturer Associate Interested By Key Management Personnel Sub-Contractor Key Management Personnel B. Transactions with related parties. (Previous year figures are given in brackets below the current year figures) 1 Un-secured loan re-paid 122,379,702 36,030,164 - (-) (29,364,363) (-) 2 Un-secured loan received 114,055,073 52,014,388 - (-) (30,244,850) (-) 3 Share of Profit 15,512,970 - - (84,72,088) (-) (-) 4 Sub-Contract Jobs given - - - (-) (100,000) 5 Sub-Contract jobs received 987,793,040 - - (219,125,604) (-) (-) 6 Remuneration - 7,650,000 - (-) (4,872,903) (-) 7 Sitting fees - 225,000 - (-) (65,000) (-) 8 Rent Received - 60,000 - (-) (25,000) (-) 32 Joint Ventures KeyManagement Personnel Rupees Enterprises owned or significantly influenced by KeyManagement Personnel or their relatives

TM 9 Mobilisation Advance Received 853,920 - - (73,846,080) (-) (-) 10 Purchase of Fixed (-) (-) - Assets from Directors (-) 3,263,250 (-) 11 Sale of BOB Shares - - - Amount Received (-) 34,450 (-) 12 Sale of Fixed Assets to - - - Patel-KNR-JV 249,944,000 (-) (-) 13 Consultation charges 3,514,080 - - received by Directors of KNRCL (4,430,600) (-) (-) 14 Advance consultation charges 603,796 - - received by directors of KNRCL (443,465) (-) (-) 15 Debit balances outstanding 71,393,511 - - as on 31st March 2007 NCC-KNR-JV (72,070,332) (-) (-) 16 Credit balances outstanding as on 31st March 2007 Patel-KNR-JV 140,270,669 - - (108,000,911) (-) (-) KNR-BPL-JV 1,190,069 - - (-) (-) (-) 13. There was no impairment Loss on fixed assets on the basis of review carried out by the management in accordance with Accounting Standard-28 issued by the Institute of Chartered Accountants of India. Further, we have been informed by the management that during the review of assets of the company, those assets which were found to be having NIL market value have been written off in the accounts. 14. Information pursuant to paragraph 3, 4C and 4D part II of Schedule VI to the Companies Act 1956. Not Applicable. 15. Debit and credit balances of parties are subject to confirmation by the respective parties.. 16. Figures of the previous year have been regrouped / rearranged wherever necessary to conform to the current year presentation. For and on behalf of the Board Place : Hyderabad Date : 20-08-2007 Sd/- Sd/- Sd/- M. Rajesh Reddy Executive Director K. Narasimha Reddy ManagingDirector M.V.Venkata Rao Company Secretary 33

BALANCE SHEET ABSTRACT AND COMPANY S GENERAL BUSINESS PROFILE 1. Registration details CIN No: U74210AP1995PLC021016 Registration No. State Balance Sheet Date 31 03 2007 Date Month Year 01 2. Capital Raised during the year (Amount in Rs. Thousands) Public Issue Rights Issue Bonus Issue Private Placement Nil Nil Nil Nil 3. Position of Mobilization and deployment of funds (Amount in Rs. Thousands) Total liabilities Total Assets 34 1,842,827 1,842,827 Source of funds Paid-up capital Reserves & Surplus Secured Loans 202489 458,765 1,102,693 Unsecured Loans Share Application Money 16,865 Nil Application of funds Net Fixed Assets Investments Net Current Assets 1,013,920 315,468 510,699 Mis. Expenditure Nil 4. Performance of Company (Amount in Rs. Thousands) Turnover / Income Total Expenditure 2,749,799 2,481,270 Profit/Loss Before tax Accumulated losses Nil Profit/Loss After tax 268,529 198,770 Earning per share in Rs.9.82 Dividend 10% 5. Generic Names of Three Principal Products / Services of the Company (As per monetary terms) Not Allotted Item code No. CIVIL CONTRACT WORKS (ITC Code) Product Description

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