helios & matheson | annual report 2005-06 report 2005-06.… · all significant changes in...

helios & matheson | annual report 2005-06

Contents

Page No

Directors’ Report 19

Corporate Governance Report 23

General Shareholder Information 27

Investor FAQs 30

Risk Management Report 31

Corporate Governance - Auditor Certificate 35

Auditors’ Report on consolidated Accounts 36

Audited Consolidated Accounts 37

Auditors’ Report on helios & matheson IT Ltd 47

Audited Accounts of helios & matheson IT Ltd 50

Management Discussion and Analysis 60

Audited Accounts of Subsidiaries 68

The management cautions the readers that this report contains statements, which are forward - looking in nature, such statements are subject to risks and

uncertainties that could cause actual results to differ materially from the expected results. Such risks include, but are not limited to, the risk factors described in

the Risk Management Report herein. Readers are requested to exercise their own judgment in assessing the risks associated with the company.


BOARD OF DIRECTORS Chandra Ramesh

Diwakar Sai Yerra

Muralikrishna G.K. Managing Director

Ramachandiran V. Chairperson COMPANY SECRETARY & Kumar K.M.COMPLIANCE OFFICER

BOARD COMMITTEES

AUDIT COMMITTEE Chandra Ramesh

Diwakar Sai Yerra

Ramachandiran V.

INVESTOR SERVICES COMMITTEE Diwakar Sai Yerra

Chandra Ramesh

Ramachandiran V.

LEADERSHIP TEAM Divya R. M & A and Strategy - Healthcare Practice

Ganesan C.S. Global Shared Services

Kumar K.M. Finance, Compliance & Legal

Muralikrishna G.K. Chief Executive Officer

Pat Krishnan Healthcare & Technology Solutions

Ravindran N.S. Architecture & Processes

Shankar Ram US Operations

Sundararaman V. Corporate Treasury

Suparna N.R. Human Capital Management

Suresh A. International Sales & Marketing

AUDITORS Venkatesh & Co., Chennai

LEGAL ADVISORS Pais, Lobo & Alvares, Chennai

BANKERS Bank of Maharashtra, Bank of India, UTI Bank LtdICICI Bank Ltd

INVESTOR SERVICE CENTRE Integrated Enterprises (I) Ltd., Chennai

LISTED AT Mumbai (BSE), Chennai (MSE), National (NSE)

STOCK CODE HELIOS MAT I / 532347 (BSE) / HELIOSMATH (NSE)

DEPOSITORIES FOR DEMAT SHARES CDSL, NSDL, ISIN NO: INE 674B01012

URL www.heliosmatheson.com

REGISTERED OFFICE 9, South Boag Road, T. Nagar, Chennai 600 017

CORPORATE OFFICE 6D, Ganga Griha, Nungambakkam High Road, Chennai 600 034


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18

Chief Executive Officer (CEO) / Chief Financial Officer (CFO) Certification

We, G.K. Muralikrishna, Managing Director and K.M. Kumar, Vice President (Finance) & Company Secretary of Helios & Matheson

Information Technology Limited, to the best of our knowledge and belief hereby certify that:

a) We have reviewed financial statements and the cash flow statement for the year and that to the best of our knowledge and

belief:

i. These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be

misleading;

ii. These statements together present a true and fair view of the Company's affairs and are in compliance with existing accounting

standards, applicable laws and regulations.

b) There are, to the best of our knowledge and belief, no transactions entered into by the company during the year which are

fraudulent, illegal or violative of the Company's code of conduct.

c) We accept responsibility for establishing and maintaining internal controls for financial reporting and that we have evaluated the

effectiveness of internal control systems of the Company pertaining to financial reporting and we have disclosed to the auditors

and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which we are aware and the

steps we have taken or propose to take to rectify these deficiencies.

d) We have disclosed based on our most recent evaluation, wherever applicable, to the company’s auditors and the audit committee of

the company’s Board of Directors (and persons performing the equivalent functions)

i. All deficiencies in the design or operation of internal controls, which could adversely affect the company’s ability to record, process,

summarize and report financial data, and have identified for the company’s auditors, any material weaknesses in internal controls

over financial reporting including any corrective actions with regard to deficiencies;

ii. Significant change in internal controls during the year covered by this report;

iii. All significant changes in accounting policies during the year, if any that the same have been disclosed in the notes to the financial

statements.

iv. Instances of significant fraud of which we are aware, that involves management or other employees who have a significant role in

the company’s internal controls system;

Place : Chennai Name : G.K.Muralikrishna Name : K. M. KumarDate : August 25, 2006 Designation : Managing Director Designation : Vice President ( Finance)

& Company Secretary

Declaration

This is to confirm that the Company has adopted a Code of Conduct for its Board members and the senior management and the same is

available on the Company's website.

I confirm that the Company has, in respect of financial year ended March 31, 2006, received from the senior management team of the

Company and the members of the Board a declaration of compliance with the Code of Conduct as applicable to them.

For the purpose of this declaration, the term 'senior management' means the direct reportees of the Chairman and Managing Director.

G.K.Muralikrishna Managing Director

To the Members of the Company

Your Directors have great pleasure in presenting the Annual Report together with audited statement of accounts for the year ended

March 31, 2006.

145,22,89,794

Financial Highlights 2005-06 2004-05 2005-06 2004-05

(Consolidated) in Rs in Rs in Rs in Rs

Gross revenue from operations 66,48,16,252

Net revenue from operations 122,31,03,255 66,48,16,252

Operating profit (PBIDT) 33,16,38,048 23,95,92,163

Interest 3,74,05,358 3,44,37,463

Profit before depreciation & tax (PBDT) 29,42,32,691 20,51,54,700

Depreciation 8,95,10,680 6,35,14,581

Profit 20,47,22,011 14,16,40,119

Provision for taxation 84,00,000 67,00,000

Profit after tax 19,63,22,011 13,49,40,119

Provision for deferred tax 1,04,00,000 85,00,000

Profit after deferred tax 18,59,22,011 12,64,40,119

Balance brought forward 13,10,01,087 3,49,03,551

Debenture redemption reserve write back 7,10,00,000 - 7,10,00,000 -

Balance of profit available for

ppropriation 31,69,23,097 16,13,43,669

Appropriations

Proposed dividend 2,40,98,273 1,50,07,500

Dividend distribution tax 30,12,720 21,04,802

General reserve 1,00,00,000 1,00,00,000

Balance carried forward 27,98,12,105 13,42,31,367

236,80,96,658 120,76,46,849

221,34,42,057 120,76,46,849

56,94,01,249 40,61,67,608

3,13,06,821 2,32,99,243

53,80,94,458 38,28,68,365

12,34,46,545 8,71,70,950

before tax (PBT) 41,46,47,882 29,56,97,415

1,87,44,855 1,47,99,500

39,59,03,027 28,08,97,915

1,57,00,200 1,28,00,200

(PAT) 38,02,02,827 26,80,97,715

27,98,12,105 13,42,31,368

a 73,10,14,932 47,33,29,082

3,91,65,173 3,00,15,000

51,17,523 42,09,604

1,00,00,000 1,00,00,000

67,67,32,236 42,91,04,478

Business & Results of operation

Income for the year ended March 31, 2006 was Rs. 236.81 cr as

compared to Rs. 145.23 cr for the previous year. This is an

increase of 63%.

Net profit after tax for the year ended March 31, 2006 was

Rs.38.02 cr vis-à-vis Rs.18.59 cr for FY 05, a YoY growth of

105%.

DIRECTORS' REPORT

Earnings per share increased to Rs. 19.00 (post 1:1 bonus issue

of shares) as compared to Rs.18.58 for the previous year.

Your company believes in delivering unmatched business value

to customers through a combination of process excellence and

service delivery commitments. The company’s continued focus

on healthcare vertical is further expected to push the growth

rate much beyond the industry average.

Share Capital

The paid up share capital of the company as on March 31, 2006

stood at Rs. 20.01 cr and the Reserves and Surplus stood at

Rs. 86.25 cr. The increase in share capital was because of the

issue of bonus shares in the year 2005 on a 1:1 basis.

FCCB - Offer and Placement - US $ 20million

Your company had placed US $ 20mn unsecured foreign

currency convertible bonds in July 2006 (due 2011) with an

option to convert (100%) into ordinary shares of the company

and subject to an over allotment option of up to an additional

US $ 5 mn. The issue was subscribed in full and listed on 7th

July 2006 in the overseas exchange. The decision favoring the

placement was taken keeping in view the company’s strong,

predictable revenue streams and positive outlook in business.

The proceeds will be used to fund our infrastructure

development and strategic acquisition plans.

Dividend in Rs Lakhs


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Dividend

Your Directors are pleased to recommend a dividend of 15%

(tax free) on a paid up capital of Rs.20.010 cr, thus doubling

the pay-out to Rs.3,00,15,000 from 1,50,07,500 over the

previous year.

Bonus Shares

Pursuant to the approval accorded by the shareholders at the

Annual General Meeting held on September 28, 2005, your

company issued bonus shares in the ratio 1:1. The bonus

shares have since become part of demat account of the

shareholders and the physical shares have been dispatched as

per guidelines.

The bonus shares were duly listed for trading on the National

Stock Exchange (NSE), The Stock Exchange Mumbai (BSE) and

the Madras Stock Exchange (MSE).

Redemption of Debentures

The company has redeemed in full the outstanding

debentures placed with Unit Trust of India for a sum of Rs. 10

crore in the year 2001. consequently debenture redemption

reserve created in earlier years for Rs. 7.10 crore has been

written back during the year.

Subsidiary Companies and Consolidated Financial

Statements

During the year, your company has acquired a controlling

stake in TACT Inc, USA, thus strengthening its healthcare

presence. At the annual shareholders meeting of TACT held on

August 22, 2006 the shareholders of the company approved

changing the name of the company to helios and matheson

north america inc.

The following five nominees of h&m, namely

were elected as directors. With

these appointments the board strength has to nine.

Daniel L.

Thomas, Divya Ramchandiran, Jambunathan S, Kishan

Ananthram & Shankar Ram

, gone up

Subsidiary companies viz. The Laxmi Group Inc, CA, USA,

Maruthi Consulting, CA, USA, Jayamaruthi Software Systems,

Chennai, India and SystemLogic Solutions, Bangalore, India

have all performed creditably during the year.

Audited annual accounts of the subsidiary companies are

consolidated and presented as per Indian GAAP and as required

by Sec 212 of the Companies Act, 1956. The accounts of

individual companies are also annexed to this report.

Acquisition of the 3 vmoksha companies in usa, singapore

and india

Your company signed a definitive share purchase agreement

(SPA) to acquire 100% equity in three vmoksha entities based at

Bangalore, Singapore and USA in the month of May 2005.

However the sellers tried to renege the SPA and hence your

company initiated arbitration proceedings.

The decks have now been cleared for arbitration proceedings

in the share purchase transaction with vmoksha. A detailed

note on the transaction is enclosed elsewhere in the report.

Based on its present knowledge of the facts and as per legal

opinion obtained the current arbitration proceeding will not,

in the opinion of management, have a material adverse effect

on the results of operations of helios & matheson.

Particulars of Employees

As required by the provisions of section 217 (2A) of the

Companies Act, 1956, read with companies (Particulars of

Employees) Rules, 1975, as amended, the names and other

particulars of the employees are set out in the annexure to the

Directors’ Report. However, as per the provisions of the Section

219 (1) (b) (iv) of the Companies Act, 1956, the report of the

directors is being sent to all the shareholders of the company

excluding the aforesaid information. Any shareholder of the

company interested in obtaining such information may write to

the Secretary at the registered office of the Company.

Total Revenuein Rs. Lakhs

Operating Profitin Rs. Lakhs


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Prospects

Outsourcing has become mainstream globally and an important driver for the Indian Economy. Diverse fields such as healthcare, life sciences, technology and manufacturing offer significant growth opportunity.

Your company is positioned well to take advantage of this booming opportunity.

Your company’s key strengths continue to be strong client relationship nurtured over a period of time, expansion of geographies and focus on high growth.

Recognition

We are happy to share that your company has been listed and ranked among the top 30 fast growing IT Companies by the NASSCOM Survey 2005 and also ranked among India’s 500 most valuable companies by Business Today (December 2005).

Corporate Governance Report and Management Discussion Analysis Statement

A report on corporate governance is attached to this report as also a management discussion and analysis statement.

Statement relating to Listing Agreements

The company’s shares are listed on National Stock Exchange, Mumbai (NSE), The Bombay Stock Exchange Ltd., (BSE) and Madras Stock Exchange (MSE).

The company has paid the respective annual listing fees to all the stock exchanges and there are no arrears.

Directors’ responsibility statement

Pursuant to the requirement under section 217 (2AA) of the Companies Act, 1956, with respect to Directors Responsibility Statement, it is hereby confirmed:

· That in the preparation of the annual accounts for the financial year ended March 31, 2006, the applicable accounting standards have been followed along with proper explanation relating material departures.

· That the Directors have selected such accounting policies and applied them consistently and made judegments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit of the company for the year under review.

· That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with provisions of the Companies Act, 1956, for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

· That the Directors have prepared the accounts for the financial year ended March 31, 2006 on a “going concern” basis.

Directors

Ms.Chandra Ramesh retires by rotation at this Annual General Meeting and is eligible for reelection.

Ms. Chandra Ramesh is President of Armour Consultants Ltd, a pioneer in field of Insurance broking She is a member of


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EPS (Rs)

National Stock Exchange, India and is an acknowledged financial consultant. Ms. Chandra is a B.Com, FCA, ACS, GRAD. AICWA, with a Post graduation in Management from the prestigious Indian Institute of Management, Ahmedabad (IIM-Ahd). She is on the boards of C R Finance Securities Pvt Ltd and CR Financial Options Pvt Ltd., She is a member of our corporate committees on audit and investors services. She does not hold any share in the company.

Conservation of Energy, Research & Development, Technology Absorption, Foreign Exchange Earnings and outgo

The provisions of subsection (1) (e) of section 217 of the Companies Act, 1956,read with Companies (disclosure of particulars in the report of board of directors) Rules, 1988, are set out in the annexure to this report.

Auditors

M/s. Venkatesh & Co., Chartered Accountants, Chennai, retire at the ensuing Annual General Meeting and are eligible for reappointment. A certificate under Section 224 (I-B) of the Companies Act, 1956, has been received from them.

Acknowledgement

Your directors thank the clients, vendors, investors, financial institutions and bankers for their continued support for your company’s growth. Your directors place on record their appreciation of the contribution made by the employees at all levels, who, through their competence, hardwork, solidarity, cooperation and support, have enabled the company to achieve rapid growth.

Your directors thank the Government of India, particularly the Department of Electronics, Software Technology Parks-Chennai and Bangalore, Ministry of Information Technology, Ministry of Commerce, the Reserve Bank of India, the Department of Telecommunications, the state governments, and other government agencies for their support during the year and look forward to their continued support in the future.

Mr.A.Gopal Rao retired on June 01 2006. The Board places on record its appreciation of the services rendered by Mr.Gopal Rao during the period of his directorship in the Company.

For and on behalf of the BoardPlace: Chennai V. RAMACHANDIRANDate : August 25, 2006 Chairperson

ANNEXURE TO DIRECTORS REPORT

Conservation of Energy

The operations of your company are not energy-intensive. Adequate measures have however been taken to reduce energy consumption

by using energy efficient computer terminals and by the purchase of energy efficient equipment incorporating the latest technology.

Your company constantly evaluates new technologies and invests in them to make its infrastructure more energy efficient. These

measures have enhanced energy efficiency. As energy forms a very small part of the total cost, the impact on cost is not material.

Research & Development

Research & Development of new services, designs, frameworks, and methodologies continue to be important to your company. This

allows your company to reuse designs across projects, and thereby increase quality and productivity.

Technology Absorption and innovation

Provision of state of art communication facilities to all the software development centers and total technology solutions to its clients

contribute to technology absorption and innovations.

Foreign Exchange

The details of foreign exchange earnings and outgoes are given in Schedule O.

For and on behalf of the BoardPlace: Chennai V. RAMACHANDIRANDate : August 25, 2006 Chairperson


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REPORT ON CORPORATE GOVERNANCE

Board of Directors

Including the Managing Director, there are four Directors in the Company. Mr.Gopal Rao, Director retired from the Board in June ‘06. The board of directors and its committees meet at regular intervals.

The following functions come under the preview of the Board of Directors and its committees.

· Review of financial plans and budgets· Formulating strategic business plans · Monitoring high end projects· Keeping shareholders informed regarding strategies, plans and performance

In accordance with the listing agreement entered into with the stock exchanges, the board has constituted 2 committees, namely, the

Audit Committee and the Investors’ Services Committee.

A total of 10 meetings of the Board of Directors were held during the year 2005-06 on April 20, 2005, May 9, 2005, June 20, 2005, July 25,

2005, August 25, 2005, September 28, 2005, October 20, 2005, November 07, 2005, January 19, 2006 and March 29, 2006.

Details of helios & matheson board of directors, their attendance at helios & matheson board meetings and their directorships are set out

below: Name of Director Board Meetings Attended Attendance No of other

held during the year at last (AGM) directorships

Chandra Ramesh 10 5 Yes 2

Diwakar Sai Yerra 10 8 Yes 2

Muralikrishna G.K. MD 10 10 Yes 2

Gopal Rao A. (retired on June 1, 2006) 10 - No -

Ramachandiran V. Chairperson 10 10 Yes 1 -

Category of Directors

Founder directors 2

Independent – Non Executive Directors 2

Shares held by non executive directors

The non executive directors, Mr. Diwakar S. Yerra and Ms. Chandra Ramesh do not hold any share in the company.

Disclosures regarding appointment or reappointment of Directors

Ms.Chandra Ramesh retires by rotation at this Annual General Meeting and is eligible for reelection.

Information supplied to the Board

Besides other information given to the Board, information is also provided to enable the top management to review: · Annual operating plans of business, capital budgets, acquisitions etc.,· Quarterly results of the company· Minutes of meetings of audit committee and other committees.· Information on recruitment and remuneration of senior officers below the board level· Details of any foreign investment · Significant development on the human resources and industrial relations front.

helios & matheson has complied with the requirements of the corporate governance in terms of Clause 49 of the Listing Agreement.

Company’s Philosophy on Code of Governance

Having been part of the transition in the Indian business environment specially in the last few years, your company always believes in improved performance with integrity. The company’s philosophy is aimed at efficient running of its business and meeting the expectations of the shareholders. It has always, been guided by a strong conviction of adhering to transparency, accountability and integrity. The importance of its decisions has always been high keeping in mind its customers, employees, investors, regulatory bodies. Your company’s disclosures always seek to emulate the best practices in corporate governance. Your company also endeavours to maximise value for all its stakeholders. The company over a period of years has been at the forefront setting bench marks over its internal systems. The company strongly believes in maintaining highest business ethics and complies with all statutory and regulatory requirements.


23

The board of helios & matheson is routinely presented with the aforesaid information wherever applicable and materially significant.

Necessary follow up reports also presented to the board regularly.

Directors with materially significant related party transactions, pecuniary or business relationship with the Company

There has been no materially significant related party transactions, pecuniary transaction or relationship between helios & matheson

and its directors that may have potential conflict with the interests of the company at large.

Remuneration Committee

As the constitution of the remuneration committee is not mandatory, a report of the same is not attached, for the year under review.

Details of remuneration paid to the directors during the year under review is as under:

Name of Director Relationship with other Directors Salary Totalin Rs. in Rs.

G.K.Muralikrishna None 3,00,000 3,00,000

The Directors are not paid any commission on net profits or any other perquisite or sitting fees for attending the meetings of the board or

committee meetings.

Audit committee

The company has constituted an audit committee of two independent directors possessing rich experience in the areas of finance, audit

and systems. The committee is headed by Mr. Diwakar Sai Yerra, while Ms. Chandra Ramesh, Director, is the other independent member.

Minutes of each audit committee meeting are placed before the board and discussed in full. The company’s external auditors are also

invited to participate in these meetings. Both the external and internal auditors have full and unrestricted access to the members of the

audit committee.

The terms of reference stipulated by the board of directors to the audit committee are, as contained in Clause 49 of the listing

agreement and section 292A of the Companies Act, 1956, as follows:

· Overseeing the company’s financial reporting process and disclosure of financial information to ensure that the financial statement

is correct, sufficient and credible.

· Recommending the appointment / reappointment of external auditor, fixation of audit fee and approval for payment of other

services.

· Reviewing with management the half yearly and annual financial statements before submission to the Board, focusing primarily on (i)

any changes in accounting policies and practices, (ii) major accounting entries based on judgement by management (iii)

qualifications in draft audit report, (iv) significant adjustments arising out of audit report, (v) the going concern assumption, (vi)

compliance with accounting standards (vii) compliance with stock exchange and legal requirements concerning financial statements

and (vii) any related party transactions i.e. transactions of the Company of material nature, with promoters or the management,

their subsidiaries etc., that may have potential conflict with the interests of the company at large.

· Reviewing with the management and external auditors, the adequacy and compliance of internal control systems.

· Discussion with external auditors before the audit commences on the nature and scope of audit, as well as having post-audit

discussion to ascertain any area of concern and steps needed to correct the same.

· Reviewing the company’s financial and risk management policies.

The Audit Committee mandatorily reviews the terms and reference and the information as laid down before it in terms of the Listing

Agreement.

During the year the committee met four times on 20/04/2005, 25/7/2005, 20/10/2005, and 19/1/2006. The Statutory auditors of

the company were also invited to take part in the proceedings.


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Attendance record of audit committee members

Name of director No of meetings held No of meetings attended

Diwakar Sai Yerra 4 4

Chandra Ramesh 4 4

V. Ramachandiran 4 2

Investors’ Grievance Committee

The Investors’ Grievance Committee functions under the nomenclature of Investors’ Services Committee that specifically looks into redressing of shareholders and investors’ complaints such as transfer of shares, non-receipt of declared dividends and to ensure expeditious share transfer process. The committee comprises of the following members.

Ramachandiran V - ChairpersonDiwakar Sai YerraChandra Ramesh

The committee met twice during the year on 25/7 /2005 & 19/1/2006.Given below is the attendance record.

Attendance record of investor grievances committee members

Name of Director No of meetings Meetings attended

Ramachandiran V 2 2

Diwakar Sai Yerra 2 2

Chandra Ramesh 2 1

The committee acts in close liaison with its share transfer agents and registrars, M/s Integrated Enterprises India Ltd. The company has received a certificate from its share transfer agents and registrars that all the complaints received from the company’s shareholders till 31/07/2006 have been suitably redressed. The company regularly follows up with Registrars for redressal of all complaints in time as per statutory requirements.

Investor services

Year Ended March 31

Particulars 2006 2005

Received Attended Received Attended

Non receipt of share certificates 27 27 25 25Correction in share certificates - - 14 14

Non receipt of bonus shares/split shares 8 8 77 77

Letter from stock exchanges, SEBI etc., Nil Nil 4 4

Non receipt of dividend warrants 20 20 21 21

Revalidation 25 25 21 21

Change of address/bankmandate/ 13 13 113 113

General Queries 4 4 31 31

Procedure for loss of share certificate 22 22 78 78

Procedure for transmission - - 7 7

Letter from SEBI (Complaint) - - 1 1

Total 119 119 392 392

All the letters(119 ) received covering “information and services” have been answered and there is no ‘complaint’ received during the year.


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Management

Management discussion and analysis

This annual report has a detailed chapter on management discussion and analysis.

Disclosures by management to the Board

All details relating to financial and commercial transactions where directors may have a potential interest are provided to the board and

the interested directors neither participate in the discussion nor do they vote on such matters.

Internal Controls

Management feels that the internal controls in place are sufficient considering the size, nature and complexities of the operations of the

company. Audit committee overlooks the operation and if required, modifications are put in place. The internal audit function is also

reviewed by the audit committee of the Board.

Shareholders

Means of Communication

Investor Grievances

The company has constituted an Investors’ Services Committee for redressing shareholders’ and investors’ complaints. The status on

complaints is reported to the board of directors at its meetings. Mr. K.M.Kumar, Company Secretary is the compliance officer. All the

queries of the investors are attended to within a reasonable time limit.

Share Transfers & Dematerialization requests

All share transfers as well as requests for dematerialization of the company’s shares by the shareholders are handled by Integrated

Enterprises India Ltd., Registrars & Share Transfer Agents, who have been registered with SEBI as a category I Registrar. The demat

requests are complied with within the statutory time limit.

Details of non-compliance

The company has complied with all provisions relating to the capital market in the listing agreement.

Payment of listing fees to stock exchanges

The company has remitted the annual listing fees to the respective stock exchanges where its shares have been listed (MSE, BSE & NSE).

General Body Meetings

Details of the last Annual General Meetings

Financial year ended Date Time Venue

thMarch 31, 2005 13 AGM September 28, 2005 3PM Rani Seethai Hall,Anna Salai, Chennai 600 006



The following special resolutions were passed by the members during the past 3 Annual General Meetings.

helios & matheson has its own website and all vital information relating to the company and its performance including quarterly results

and official press releases are updated and posted on the websites. Online ticker information is also provided so as to keep the investor

informed regarding the movement of the share prices in the market. The company’s website address is www.heliosmatheson.com.


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Postal ballot

For the year ended March 31, 2005, there has been no ordinary or special resolution passed by the company’s shareholders through postal ballot.

Auditors’ Certificate on Corporate Governance

As required by Clause 49 of the Listing Agreement, the Auditors’ Certificate is given as annexure to the Directors’ Report.

CEO / CFO Certification

As required by Clause 49 of the agreement, the CEO / CFO certification is provided elsewhere in the Annual Report.

General Shareholder Information

1. Date, time and venue of AGM : Thursday, September 28, 2006, 3.00 PM, Rani Seethai Hall, Anna Salai, Chennai – 6

2. Dates of book closure : September 22 to September 28, 2006

3. Dividend Payment : On or after September 28, 2006 but within the statutory time limit of 30 days

4. Financial Calendar FY 2007(tentative and subject to change) : Results for QE June 30, 2006 : July 24, 2006

Results for QE Sept 30, 2006 : Last week of Oct 2006Results for QE Dec 31, 2006 : Last week of Jan 2007Results for QE March 31, 2007 : Last week of April 2007Annual General Meeting : September 2007

5. Listing on Stock Exchanges : National Stock Exchange of India Ltd., Mumbai (NSE)Bombay Stock Exchange Ltd., Mumbai, (BSE)Madras Stock Exchange Ltd., Chennai (MSE)

6. Stock Code & Trading Symbol : National Stock Exchange : HELIOSMATHBombay Stock Exchange : HELIOS MAT I (532347)Madras Stock Exchange : HMSBloomberg Code : HMIT IN (BSE)

7. Listing fees : Paid for all the stock exchanges for the year 2006 – 07

8. Registered office : Adwave Towers, 9, South Boag Road, T.Nagar, Chennai – 600 017

9. Corporate office : 6D, Ganga Griha, Nungambakkam High Road, Chennai - 600 034

10. Registrars & Share Transfer Agents : Integrated Enterprises (India) Ltd., Kences Towers, 1, Ramakrishna Street, T.Nagar, Chennai – 600 017

11. Share Transfer System : total number of shares transferred during the year 2005-06 in physical form was 193,098 shares versus 206,062 during the previous year.


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Annual General Meeting held on 28.09.2005

· To consider alteration in the capital clause of Articles of Association of the company.


· To include capitalization of Reserves in the Articles of Association· To Issue securities under section 81 (1A) of the Companies Act.· To issue securities on a preferential basis under section 81 of the companies Act.


· To delist the company’s shares from the Hyderabad and Ahmedabad stock exchanges· To Issue securities under section 81 (1A) of the Companies Act.· To consider alteration in the capital clause of Articles of Association of the company.

An extraordinary general meeting of the shareholders was held on July 20, 2005 at 3 PM at Rani Seethai Hall, Anna Salai,

Chennai 600 006.

12. Market Price data (in Rs per share)

Month Bombay Stock Exchange National Stock Exchange Month high Month Low Month high Month Low

April 2005 209 147 209.90 147May 2005 215 183 215.55 183June 2005 330 207 330.45 206July 2005 427.90 310 432.35 309.20August 2005 425 355 417.90 356.30September 2005 449 372.10 447.85 373October 2005 428.90 176.20 428.90 175.25November 2005 239.50 176.50 239.40 176.05December 2005 234 204 237 205January 2006 267 220.50 267 220February 2006 254.90 193.00 255.90 190March 2006 214.90 183.25 214.90 184

13. Share price performance in comparison to broad based indices-BSE Sensex

14. Distribution of shareholding

Shareholding pattern of the members of the company as on March 31, 2006 is given below according to category

Category No. of Voting No. ofShareholders Strength (%) Shares held

Promoters 5 46.26 92,56,160

Foreign institutional investors 4 4.62 9,24,164

Corporate bodies 610 12.08 24,17,054

Non resident Indians / Overseas corporate bodies 281 1.06 2,11,567

Mutual funds / Institutions 5 0.26 52,628

Public 15,964 35.72 71,48,427

16,869 100.00 2,00,10,000


28

helios & matheson

Sensex - BSE

Distribution of shares by size of shareholders as on March 31, 2006

Number of equity shares No. of % of No. of % of Shareholdingshareholders shareholders Shares

1 to 500 14,103 84 24,79,895 12

500 – 1000 1,569 9 12,19,804 6

1000 and above 1,197 7 1,63,10,301 82

Total 16,869 100 2,00,10,000 100

15. Dematerialization of shares

About 96 % of the company’s paid up equity shares has been dematerialized upto March 31, 2006. Trading in equity shares of the company is allowed only in dematerialized form as per notification issued by the Securities and Exchange Board of India (SEBI).

Demat ISIN Numbers in NSDL and CDSL

· For Equity shares : ISIN No. INE674B01012

16. Liquidity

The company’s shares are actively traded on the BSE and NSE. The highest trading activity is witnessed on these exchanges. The data for the total number of shares traded in and the volume thereof is given below for the period from April 1, 2005 to March 31st 2006.

BSE NSEMonth No of shares traded trading volume No shares traded Trading volume

(in Rs. Lakhs) (in Rs. Lakhs)

April 2005 31,05,653 5734.31 37,51,322 6935.39

May 2005 17,00,614 3449.33 19,40,903 3931.47

June 2005 72,20,889 19763.44 1,19,49,263 32620.81

July 2005 25,29,897 9231.51 40,99,442 14921.91

August 2005 9,38,829 3703.71 15,64,145 6158.10

September 2005 6,33,579 2617.80 10,85,246 4486.24

October 2005 4,76,467 1847.62 8,94,734 3436.39

November 2005 8,86,616 1942.42 12,63,629 2761.19

December 2005 9,96,583 2224.84 14,37,624 3212.78

January 2006 12,91,433 3153.48 14,32,939 3501.58

February 2006 24,63,778 5503.50 29,68,614 6606.08

March 2006 10,13,450 2006.64 13,80,245 2720.63

Total

Market capitalization

Based on the closing share prices quoted on the BSE and NSE as at March 31, 2006 the market capitalization of the company was Rs.408.80 cr (BSE) and Rs.408.10 cr (NSE).


29

17. Address of correspondence

For investor matters For queries relating to financial statements

Kumar K.M. Sundararaman V.Company Secretary & compliance Officer Vice President - Corporate TreasuryHelios & Matheson Information Technology Ltd Helios & Matheson Information Technology Limited6D, Ganga Griha 6D,Ganga Griha Nungambakkam High Road Nungambakkam High Road Chennai – 600 034 Chennai – 600 034Tel: +91 44 4391 00 00 Tel: +91 44 4391 00 00 e-mail: [email protected] e-mail: [email protected]

4 What is the history of dividend issue at helios & matheson during the last five years?

Ans: Year 2001 2002 2003 2004 2005

Dividend: Rs 60,03,000 75,03,750 75,03,750 75,03,750 1,50,07,500

% 12(tax free) 15(taxable) 15(tax free) 15(tax free) 15(tax free)

5 What has been the CAGR in revenues, net income and EPS in the last five years?

Ans:

5-year CAGR

Revenues 65.59%

PAT 65.87%

EPS 25.72%

(post two bonus Issues)

6 How do I transfer my shares in India or change my address with the transfer agent?ndAns: To transfer shares held in physical form, you may write to the company’s registrars Integrated Enterprises (India) Ltd., 2 Floor,

Kences Towers, 1, Ramakrishna Street, North Usman Road, T Nagar, Chennai 600017 or else, you can correspond directly with the Company Secretary at the registered office at 9 South Boag Road, T.Nagar, Chennai 600017.

Transfer of shares in electronic form is effected through your depository participant.

General correspondence regarding shares may be addressed to the company’s registrars, Integrated Enterprises(India) Ltd, at the above address or to the Company Secretary at the registered office.

7. How do I get to know of the latest updates/information regarding the company?

Ans : In addition to the information given to the stock exchanges and SEBI, company’s financial results are regularly updated on the company’s website www.heliosmatheson.com. You can also subscribe for the news alerts via the link http://heliosmatheson.com/investors/invest.asp

8 How do I contact helios & matheson by telephone, mail or in person?Ans: Financial analysts and members of the press/media can contact the following members of the helios & matheson management for any information.

V. RamachandiranChairperson Tel: +91 44 4391 00 00G.K. MuralikrishnaManaging Director Tel: +91 44 4391 01 01V. SundararamanVice President - Corporate Treasury Tel: +91 44 4391 00 22

The helios & matheson corporate mailing address is :helios & matheson information technology limited, 6D, Ganga Griha, Nungambakkam High Road, Chennai 600 034.Tel: +91 44 4391 00 00, Fax: +91 44 4391 00 99

9 Is there any investor relations officer in India?

Ans: Kindly contact :Kumar K.M.Company Secretary & Compliance Officerhelios & matheson information technology limited6D, Ganga Griha, Nungambakkam High Road, Chennai 600 034.Tel: +91 44 4391 000, E-mail: [email protected]


30

Investor FAQs

1 Where and in which year was helios & matheson incorporated?Ans: helios & matheson was incorporated in Chennai, in the state of Tamil Nadu, India, on March 8, 1991

2 When did helios & matheson have its initial public offer (IPO) and what was the initial listing price?Ans: helios & matheson made an initial public offer in October 1999 and was listed on the Madras Stock Exchange, Mumbai Stock Exchange, National Stock Exchange, in Dec 1999, Aug 2000 and Feb 2005 respectively. Trading opened at Rs. 209 per share compared to the IPO price of Rs. 50 per share.

3 Which are the stock exchanges where helios & matheson shares are listed and traded?Ans: Shares of helios & matheson are listed and traded on with Bombay Stock Exchange, Mumbai , The National Stock Exchange and the Madras Stock Exchange.

RISK MANAGEMENT REPORT

Any Company needs to ensure that it has a proper continuous risk identification and management process. This would involve the

following steps:

· Identifying the risks inherent in the growth strategy

· Elimination of risks to the extent practical

· Implementing control to manage the remaining risks

· Monitoring the effectiveness of risk management approaches and controls

· Learning from the experience and making improvements.

The information Technology business is witnessing unparalleled growth with the Global Delivery Model gaining mainstream momentum.

Concurrently, changes in the macro economic environment – the outcry against offshoring, shifts in competitive landscape with the

expansion of overseas based competitors in India, stringent immigration laws and predatory pricing – have brought new challenges and

new risks that need to be managed.

helios & matheson comprehensively assesses these risks and this report details the prudent risk management practices of your company.

The management cautions the readers that the risks outlined below are not exhaustive and are for information purposes only. Further,

this report contains statements, which are forward-looking in nature. Such statements are subject to uncertainties that could cause

actual results to differ materially from those reflected in the forward-looking statements.

External Risk Factors

The earlier part of this decade (years 2001 and 2002) witnessed depressed IT spending following the economic downturn, and saw a

gradual recovery of the global markets from the year 2003 and an increased interest in leveraging outsourcing for competitive

advantage. If this slump in the market continues it will likely affect not only Europe and the United States but also India and will continue

to hinder progress for the foreseeable future. Although the Issuer believes that the trends have changed since the year 2003.

Exchange rate risk

The exchange rate between the Indian rupee and the US dollar has changed substantially in recent years and may fluctuate in the future.

We expect a significant proportion of our revenues to be generated in US dollars for the foreseeable future and that a significant portion

of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Indian

rupees. Your company faces the risks associated with exchange rate fluctuations and translation effect, wherein the appreciation of the

rupee against foreign currency impacts its profitability and operating results. helios & matheson risk management policy ensures that

expenses in local currency are met through receipts in the same currency. Increase in revenues from non-dollar geographies such as

Europe help mitigate this risk. Today your company derives its revenues from a basket of currencies that include Euro, GBP etc.

Political environment

While helios & matheson operates in multiple countries across the globe, the US constitutes a major market for your company. Recently,

many organizations and public figures have expressed concerns about a perceived association between offshore IT service providers and

the loss of jobs in the United States. In addition, certain US states have enacted legislation that restricts governmental agencies from

outsourcing their IT work to companies outside the United States. We have however not witnessed any material effect of this outcry in

our clients’ dealing with us and we strongly believe that the economics and competitive advantage offered by offshoring will tip the

scales in its favor. Further, we do not have any major contract with governmental entities in the United States.

Currently, the Issuer benefits from the tax holidays the Government provides to the export of IT services from specially designated STPIs

in India. The profits arising from the exports of software services and ITES are exempt under Section 10A of the Income Tax Act, 1961.

This exemption is available up to the financial year ending 31 March 2009. There can be no assurance that the Government policies with

respect to the IT industry will continue to be governable. Any increase in the taxes or duties payable may adversely affect the financial

condition of the Issuer.

Currently, we benefit from the tax holidays the Government of India gives to the export of IT services from specially designated software

technology parks in India. As all major political parties concur on the importance of the It industry for the Indian economy, it is likely that

future policies relating to the industry will continue to be favorable.

Macro economic factors

Tax benefits enjoyed by the Issuer may be withdrawn.


31

Competitive environment

Client concentration risk

Business concentration risk

Geographic concentration risk

Changes in immigration regulations

The Issuer believes that employee costs in India have been significantly lower than employee costs in the United States and Europe for

comparably skilled professionals, which has been one of the Issuer’s competitive advantages being mainly based in India. However, the

success of the IT industry in India may lead to increased competition for quality resources, leading to increased salaries. The company’s

competitors include large consulting firms or offshore IT service providers with significant resources and financial capabilities combined

with a large number of IT professionals. With the global delivery model, the Issuer’s project teams are distributed across various

locations and provide time zone advantage and round-the-clock availability of project resources. It is gaining mainstream momentum

and overseas competitors are expanding their base in India and are engaging in predatory pricing. However, the corresponding

availability of skilled and trained professionals is not increasing at a matching pace. The company may also face scarcity of skilled

professionals or may be unable to retain its existing professionals. This may have an adverse impact on its ability to service its clients and

therefore its business, financial condition and results of operations.

High-end services combined with proven execution excellence are our competitive advantage and help counter pricing pressure. Your

company continues to focus on rapidly increasing its market share and is undertaking marketing initiatives that would help clients and

prospects make better-informed decisions based on our competitive strengths.

The company continues to focus on rapidly increasing its market share and is undertaking marketing initiatives that would help clients

and prospects make better informed decisions based on its competitive strengths. However, there can be no assurance that the Issuer

will be able to maintain its market share. The loss of the company’s market position or its inability to retain existing customers and/or

attract new customers amidst the competition could have a material adverse effect on its business, financial condition and results of

operations. Furthermore, the competition may lead to downward price pressure for the products and services the Issuer supplies. In the

event that it is unable to reduce its costs amidst declining prices, its profit margin could be affected.

The company has historically earned a sizable portion of its revenues from a limited number of clients. For Fiscal 2006, the Issuer derived

9.5% of its total revenues from a single client and 38.6% of its revenues from its top five clients. Loss of these clients or a significant

downsizing of the projects given to the Issuer by these clients may adversely affect the Issuer’s financial condition and results of

operation.

The company derives more than 50% of its revenues from clients in the healthcare and technology services. The large reliance on this

industry does not create a well diversified business model for the Issuer. As a result, if IT went into decline in these industries, the

company would be greatly affected and could potentially lose one of its largest client base and profit making sources. A downturn in the

fortunes or a material adverse effect to the business, financial condition or the results of operations of these clients or a reduction in

their IT spending or budgets could affect the company’s own profitability. The company believes that its domain knowledge and

competence make them an invaluable partner to its clients. Being a high-end vertical, which is growing faster than the rest of the

industry, the risk of downsizing is minimal. The company believes that the healthcare industry contributes more than 15% of the United

Status’s gross domestic product and is highly regulated and recession proof. The company continues to pursue and win clients in

manufacturing verticals besides clients from the healthcare and technology industries to provide a more balanced opportunity for

growth.

The US market contributed 71% of the revenues of the Issuer in the financial year ended 31 March 2006 which makes the company

susceptible to adverse market conditions and events that might exist in the US. To counter this, the company’s management is actively

pursuing clients in other regions such as Europe and the Asia-Pacific. There can however be no assurance that the Issuer will be

successful in its attempts of gaining new clients or once gained, of retaining them.

The majority of the company’s IT professionals are Indian nationals. Though the companyr employs local talent from the countries where

its offices are located, the company often experiences a gap between the demand and supply of talents in the area of the services that it

provides to its clients. To address this demand-supply gap, the Issuer, sometimes, moves its employees, depending on their talents and

technical know-how to various geographic locations. The ability of the company’s IT professionals to work in the US, Europe and in other

countries depends on its ability to obtain the necessary work visas and work permits. As it stands at the moment, work permits and visas

are not easily obtainable and can take months if not years to be granted, This elongated time frame could greatly affect the productivity

and overall revenue of the Issuer of working abroad.


32

Inflation & Cost Structure

Our cost structure consists of salary and other compensation expenses, depreciation, overseas travel and other general costs. Fast track

development of the economy and increasing demand for global delivery may have a significant impact on these costs and the rate of

inflation as relevant to the IT services industry. Further competition may treat India as a “cost center” and develop the same regardless

of the increasing cost and its impact on their profitability. To derisk we continue to reinforce the variable compensation program. We

have taken steps for cost optimization, cost reduction, and assess the risk of changes in cost of each operational activity.

Inspite of taking, what the Issuer believes are, sufficient safety measures to protect its data, the company may still face data loss which

may adversely affect its business functions (and consequently its) financial condition or results of operations and market reputation.

The company operates in a rapidly changing technology domain. The Issuer needs to constantly evaluate technology obsolescence and

associated risks on a continuing basis and also build skill sets around the existing and emerging technology trends, based on its client’s

technology requirements.

Though the company makes continuous efforts to develop and implement business and technology solutions that anticipate

developments in technology, industry standards and client preferences, the successful implementation of these systems will be critical

to the effective delivery of its services to clients.

Since the company operates in various countries, it must comply with a wide variety of national and local laws and regulations and is

subject to regulatory restrictions on the import and export of certain technologies and multiple and overlapping tax structures.There can be no assurance that the company will not be in breach of such regulations in the future. The costs and liabilities resulting

from any such breaches could have a material adverse effect on the company’s business, financial condition or results of operations.

Internal risk factors

Contractual commitments

This risk pertains to damages and other penalties associated with the non-fulfillment of contractual obligations (such as adherence to

deliverables and service level agreements) either with clients or with other parties.

The management has clearly chartered out a review and documentation process for contracts. The management calls on the legal

advisors of the Company to evaluate the legal risks involved in a contract, ascertain legal responsibilities of the company under the

applicable law of the contract, restrict its liabilities under the contract, and cover the risks involved. All operational teams are briefed

on compliance related issues so that they can ensure adherence to all contractual commitments.

To date, helios & matheson has no material litigation in relation to contractual obligations pending against it in any court, in India or

Overseas.

Liquidity Risk

Our company could face a liquidity crunch due to long payment of cycles, delay in recoveries, bad debts etc. Historically, be have been

maintaining a large postion of our current assets as cash and cash, equivalents to help tide over any such eventuality.

Engagement execution

As explained in the preceding paragraph, a portion of the Company’s revenues is derived from fixed price projects. In some cases, the

specifications may not be completely defined at the inception of the project, where for competitive reasons, the Company still needs to

accept the project. This could lead to differences in opinion with client at the time of delivery of the project. helios & matheson client

relationships are sufficiently strong whereby such differences can be resolved to the mutual satisfaction of the client and the Company.

Human resource management

Continued ability to hire and retain qualified personnel is key to success. Your company strives to provide excellent staff welfare

measures to promote employee satisfaction and thereby attract and retain efficient manpower. Further, to ensure that employees grow

with technology helios & matheson conducts regular training programs.

Disaster recovery and business continuity

Technology risks

Regulatory risks


33

Termination of Contracts by Clients

Sometimes the contracts are awarded to us on project-by-project basis. These projects do not carry a commitment of future volume of

business. Some of the actions that could affect the business are

· Financial difficulties for client

· A demand for reduction in prices

· A change in outsourcing technology

· By shifting to in house IT departments or to the competitors.

By close interaction with clients, helios & matheson engagement managers keep track of changes at the client’s end thereby mitigating

this risk.

Customer Retention

This is an important factor in the amount and predictability of revenue and profits. Our ability to retain existing customers depends on a

number of factors

· Customer satisfaction

· Service offerings by competitors

· Customer service levels

· Price

helios & matheson has an exemplary record of client retention with 90% of the business being repeated.

Acquisition of the 3 vmoksha companies in usa, singapore and india

Your company signed a definitive share purchase agreement (SPA) to acquire 100% equity in three vmoksha entities based at Bangalore,

Singapore and USA in the month of May 2005. However the sellers tried to renege the SPA and hence your company initiated arbitration

proceedings.

The decks have now been cleared for arbitration proceedings in the share purchase transaction with vmoksha. A detailed note on the

transaction is enclosed elsewhere in the report.

Based on its present knowledge of the facts and as per legal opinion obtained the current arbitration proceeding will not, in the opinion

of management, have a material adverse effect on the results of operations of helios & matheson.

Mergers and Acquisitions

One of the company’s growth strategies is to make acquisitions and investments in complementary businesses, technologies that will

enable the company to add services for its core customer base and to expand geographically. helios & matheson ability to make these

acquisitions and investments depends on the availability of suitable candidates and investments of acceptable costs, the ability to

compete effectively for these candidates and investments, and the availability of capital to complete these acquisitions and

investments.

helios & matheson has a strong team of legal and financial advisors to evaluate possible acquisition targets and advise the company on

the transactions. Further, given the company’s history of growing through acquisitions and excellent deal structuring and integration

capabilities, we believe that we are well poised to continue our growth trajectory.


34

CERTIFICATEAUDITORS' CERTIFICATE ON COMPLIANCE WITH THE CONDITIONS OF CORPORATE GOVERNANCE

UNDER CLAUSE 49 OF THE LISTING AGREEMENT

To

The Members of helios & matheson Information Technology Limited

1. We have reviewed the records concerning the company's compliance of conditions of Corporate Governance as stipulated in Clause

49 of the Listing Agreement entered into, with the Stock Exchanges of India, for the financial year ended March 31, 2006.

2. The compliance of conditions of Corporate Governance is the responsibility of the management. Our review was limited to

procedures and implementation thereof, adopted by the company for ensuring the compliance of the conditions of Corporate

Governance. It is neither an audit nor an expression of opinion on the financial statements of the company.

We have conducted our review on the basis of the relevant records and documents maintained by the company and furnished to us

for the review and the information and explanations given to us by the company.

Based on such a review , in our opinion and to best of our information and according to the explanations given to us, the company

has complied with the conditions of Corporate Governance, as stipulated in Clause 49 of the said Listing Agreement.

We further state that , such compliance is neither an assurance as to the future viability of the company, nor as to the efficiency or

effectiveness with which the management has conducted the affairs of the company.

For and on behalf of VENKATESH & CO

Chartered AccountantsPlace: Chennai V. DASARATY Date : August 25, 2006 Partner


35

AUDITORS’ REPORT TO THE BOARD OF DIRECTORS OF HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED ON THE

CONSOLIDATED FINANCIAL STATEMENTS OF HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED AND ITS SUBSIDIARIES

We have audited the attached consolidated balance sheet of helios & matheson information technology limited and its subsidiaries as at

March 31, 2006, and also the related profit and loss account and the cash flow statement for the year then ended. These financial

statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial

statements based on our audit.

The financial statements of the holding company namely helios & matheson Information technology limited and its Indian subsidiaries,

SystemLogic Solutions, Bangalore and Jayamaruthi Software Systems, Chennai were audited by us for the year ended March 31, 2006.

The financial statements of USA subsidiaries namely The Laxmi Group Inc and Maruthi Consulting Inc as reviewed / compiled by The

Chugh Firm, Certified Public Accountants, CA, USA, for the year ended March 31, 2006 and their review reports dated August 19 / August

and 16, 2006, respectively were relied upon by us for consolidation purposes. The financial statements of other foreign subsidiaries viz,

helios & matheson Inc USA, helios & matheson (Singapore) Pte Ltd, Singapore and TACT Inc for the year ended March 31, 2006 and for the

quarter ended March 31, 2006 drawn by the respective subsidiaries were relied up on by us.

Based on the information furnished and certified by the management we conducted our audit in accordance with generally accepted

auditing standards 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 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 statement presentation. We believe that our audit and the

reports of other auditors provide a reasonable basis for our opinion.

We report that the consolidated financial statements have been prepared by the company in accordance with the requirements of

Accounting Standard – 21, ‘Consolidated Financial Statement’ issued by the Institute of Chartered Accountants of India, on the basis of

the individual financial statements of Helios & Matheson Information Technology Limited and its subsidiary companies included in the

aforesaid consolidation.

In our opinion, based on our audit and the reports of other auditors and representations by the management, the consolidated financial

statements referred to above give a true and fair view of the financial position of helios & matheson IT Ltd. and its subsidiaries as at

March 31, 2006 and of the results of their operations and their cash flows for the year ended in conformity with generally accepted

accounting principles in India.

For VENKATESH & COChartered Accountants

Place : Chennai V. DASARATYDate : August 25, 2006 Partner


36

Schedule March 31, 2006 March 31, 2005 in Rs. in Rs.

I. SOURCES OF FUNDS

1. SHAREHOLDERS' FUNDS

Share Capital A 20,01,00,000 10,00,50,000

Reserves and surplus B 66,24,50,072 45,62,71,189

Minority Interest 18,48,57,565 2,09,00,050

Advance received towards subscription of Redeemable preference shares 63,04,14,007

2. LOAN FUNDS

Secured loans C 31,90,40,669 15,89,29,231

Unsecured loans D 2,33,21,801 11,08,25,707

3. DEFERRED TAX 13,85,40,348 9,95,73,457

4. DEFERRED CONSIDERATION 11,09,50,000 -

226,96,74,461 94,65,49,634

II. APPLICATION OF FUNDS

1. FIXED ASSETS E

Gross Block 175,44,52,078 80,85,85,398 Less : Depreciation 75,55,21,576 30,40,31,426

Net Block 99,89,30,503 50,45,53,972

Capital work in progress at cost 3,18,43,194 2,97,04,091

103,07,73,697 53,42,58,063

2. INVESTMENTS F 38,83,702 –

3. ADVANCE G 65,02,50,007 -

4. CURRENT ASSETS, LOANS AND ADVANCES

Cash and Bank Balances H 36,47,85,693 31,93,01,752Sundry Debtors I 64,08,48,464 27,54,81,277Unbilled revenue 10,91,24,244 6,47,82,651Loans and advances J 12,23,92,654 9,32,27,741

123,71,51,055 75,27,93,4214. LESS: CURRENT LIABILITIES &

PROVISIONS K 65,23,84,000 34,05,01,849

Net Current Assets 58,47,67,056 41,22,91,572

226,96,74,461 94,65,49,634

Notes forming part of the Accounts N

As per our Report of even dateFor VENKATESH & CO

For and on behalf of the Board

Place: Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMAR V. DASARATYDate : August 25, 2006 Chairperson Managing Director Company Secretary & Partner

Vice President-Finance

Chartered Accountants

CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 2006


37

As per our Report of even date

For VENKATESH & COFor and on behalf of the Board

Place: Chennai V.RAMACHANDIRAN G.K.MURALIKRISHNA K.M.KUMAR V.DASARATYDate : August 25, 2006 Chairperson Managing Director Company Secretary & Partner



Schedule March 31, 2006 March 31, 2005

in Rs. in Rs.

INCOME - Revenue from operations L 236,80,96,658 145,22,89,794

Less : Intra group sales 15,46,54,600 22,91,86,539

221,34,42,057 122,31,03,255

Software services & administrative expenses 164,40,40,809 89,14,65,206

Profit before interest depreciation & tax (PBIDT) 56,94,01,249 33,16,38,048

Interest M 3,13,06,821 3,74,05,358

Profit before depreciation (PBDT) 53,80,94,428 29,42,32,691

Depreciation 12,34,46,545 8,95,10,680

Profit before tax (PBT) 41,46,47,882 20,47,22,011

Provision for taxation 1,87,44,855 84,00,000

Profit after tax 39,59,03,027 19,63,22,011

Provision for deferred tax 1,57,00,200 1,04,00,000

Profit after deferred tax (PAT) 38,02,02,827 18,59,22,011

Concern share 37,60,41,873 18,02,87,351

Minority 41,60,955 56,34,660


Balance Of Profit 66,00,14,932 31,69,23,097

Appropriations

Proposed Dividend 3,91,65,173 2,40,98,273

Dividend Tax 51,17,523 30,12,720

General Reserve 1,00,00,000 1,00,00,000

Debenture Redemption Reserve written back 7,10,00,000 -


Earning per share-Basic 19.00 18.58

Number of shares 2,00,10,000 1,00,05,000

Notes forming part of the Accounts N

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2006


38

SCHEDULES FORMING PART OF THE CONSOLIDATED ACCOUNTS

March 31, 2006 March 31, 2005 in Rs. in Rs.

SCHEDULE - A : SHARE CAPITAL

AUTHORISED

2,50,00,000 (1,50,00,000) equity shares of Rs.10 each 25,00,00,000 15,00,00,000

1,00,00,000 Redeemable preference shares of Rs. 10 each 10,00,00,000 -

35,00,00,000 15,00,00,000

ISSUED,SUBSCRIBED AND FULLY PAID UP

2,00,10,000 (10,005,000) equity shares of Rs.10 each 20,01,00,000 10,00,50,000fully paid up

20,01,00,000 10,00,50,000

SCHEDULE - C : SECURED LOANS

From Financial Institutions.

i. Nil (4,00,000) OFCD of UTI Rs.100 each fully paid up - 4,00,00,000

ii. 40,000 (70,000) NCD of LIC MF Rs. 100 each fully paid up 40,00,000 70,00,000

From banks 31,41,94,899 11,16,90,422

From Others 8,45,770 2,38,809

31,90,40,669 15,89,29,231

SCHEDULE - D : UNSECURED LOANSUnsecured loan 2,33,21,801 11,08,25,707

2,33,21,801 11,08,25,707SCHEDULE - F : INVESTMENTS

Investments of subsidiary 38,83,702 -

SCHEDULE - G : ADVANCE

Advance for investment in shares of vMoksha entities. 65,02,50,007 -

3,31,165 equity shares of Rs. 100 each. (Unquoted)

SCHEDULE - B : RESERVES AND SURPLUS

Opening Adjustments Addition Total Balance of Exchange Rates

General Reserve 7,38,50,000 - 1,00,00,000 8,38,50,000

Capital Reserve 13,51,500 - - 13,51,500

Share premium 11,66,32,710 - (5,26,47,000) 6,39,85,710

Debenture Redemption Reserve 7,10,00,000 - (7,10,00,000) –

Profit & Loss Account 27,98,12,104 - 39,69,20,132 67,67,32,236

Prior period adjustments - - (2,62,09,492) (2,62,09,492)

Adjustment towards bonus issue - - (4,74,03,000) (4,74,03,000)

Restatement on consolidation (6,54,75,075) 11,53,546 - 6,43,21,528

Total 47,71,71,239 11,53,546 20,96,60,640 68,79,85,424

Less Minority interest in Reserves & Surplus 2,09,00,050 4,74,348 41,60,955 2,55,35,352

Total Reserves March 31, 2006 45,62,71,189 66,24,50,072


39

SCHEDULES FORMING PART OF THE CONSOLIDATED ACCOUNTS

March 31, 2006 March 31, 2005in Rs. in Rs.

SCHEDULE - H : CASH & BANK BALANCES

Balances with schedule bank 24,67,35,993 18,26,75,641

i Fixed Deposit account

ii. Current accounts : 10,37,25,799 5,35,18,324

In Foreign Currency 1,42,73,237 8,27,94,417

In Rupee Account 50,663 3,13,370

Cash on hand 36,47,85,693 31,93,01,752

SCHEDULE - I : SUNDRY DEBTORS (Unsecured, considered good)

Debts outstanding for a period exceeding six months 2,69,94,221 2,10,43,830

Other debts 61,38,54,243 25,44,37,447

64,08,48,464 27,54,81,277SHEDULE - J : LOANS AND ADVANCES(Unsecured, considered good)

Advance Income Tax 2,09,76,183 1,51,20,352

Advance recoverable in cash or in kind orfor value to be received 10,14,16,471 7,81,07,389

12,23,92,654 9,32,27,741

SHEDULE - K : CURRENT LIABILITIES AND PROVISIONS

Sundry creditors 21,20,12,328 13,35,80,347

Other liabilities 12,64,83,000 -


Provision for dividend tax 51,17,523 30,12,720

Provision for taxation 3,39,81,505 87,38,605TOD against own deposits 23,56,24,471 17,10,71,904

65,23,84,000 34,05,01,849

SCHEDULE - L : REVENUE FROM OPERATIONS

Income from software sales & services 234,24,28,729 142,85,49,586Other income 1,91,94,356 1,92,66,635Dividend Income 64,73,573 44,73,573

236,80,96,658 145,22,89,794

SCHEDULE - M : INTEREST PAID

on fixed loans 56,03,333 1,08,51,036on others 2,57,03,488 2,65,54,322

3,13,06,821 3,74,05,358


40


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Year ended Year endedMarch 31, 2006 March 31, 2005

in Rs. in Rs.I. Cash Flow From Operating Activities

Net profit before interest, tax and extra ordinary items 44,59,54,703 24,21,27,369Adjustment for:-Depreciation 12,34,46,545 8,95,10,680Loss on sale of assets 4,407 64,571Misc. expenses (w/off) - 16,79,064Effect of foreign exchange change 13,18,711 (2,92,720)Operating profit before working capital changes 57,07,24,366 33,30,88,963Adjustment for:Work in progress (2,49,55,738) 12,25,355Sundry debtors (19,05,68,657) (2,34,86,485)Loans and Advances (1,42,80,653) 1,27,36,282Sundry creditors (2,30,63,308) 8,57,21,028Cash generated from operations 31,78,56,011 40,92,85,143Interest paid (3,13,06,821) (3,74,05,358)Dividend paid (2,71,10,993) (1,61,59,095) Tax paid (87,38,605) (52,70,192) Net cash from operating activities 25,06,99,592 35,04,50,498

II. Cash Flow From Investing ActivitiesPurchase of fixed assets (23,68,72,125) (15,94,47,921)Sale of Investment - -Purchase of Investments (20,11,20,164) (7,04,10,511)Advance paid for investments in vMoksha entities (63,04,14,007) -Misc. expenses not w/off -Net cash from Investing activities (106,84,06,296) (22,98,58,432)

III. Cash Flow From Financing ActivitiesProceeds from issue of capital - 4,362Proceeds(Application) of share premium - -Advance received towards subscription towards redeemable preference shares 63,04,14,007Pre acquisition effect in reserve (2,48,75,400)Transfer to capital Reserve - 12,49,000Proceeds of unsecured loans (8,81,05,204) 54,73,263Proceeds from Secured loans (net of TOD) 22,46,64,005 4,27,36,565 Repayment of Secured loansRepayment of Unsecured LoansNet cash from financing activities 76,69,72,808 2,45,87,790

IV. Net Inflow/outflowNet increase/(decrease) in cash & cash equivalents (5,07,33,896) 14,51,79,855 Cash and cash equivalents(opening) *41,55,19,589 17,41,21,896Cash and cash equivalents(closing) 36,47,85,693 31,93,01,752Net increase/(decrease) in cash & cash equivalents (5,07,33,896) 14,51,79,855

Notes :The cash flow statement has been prepared in accordance with the requirements of Accounting Standard -3 "cash flow statement" and

Accounting Standard - 21 - "Consolidated Financial Statements " issued by the Institute of Chartered Accountants of India. The figures

of the previous year have been regrouped and rearranged, wherever necessary.* Opening cash balance includes TACT Inc closing balances for previous year.

For and on behalf of the BoardPlace : Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMARDate : August 25, 2006 Chairperson Managing Director Company Secretary &


CERTIFICATE

We have examined the attached consolidated Cash Flow Statement of helios & matheson information technology limited in

accordance with the requirements of Accounting Standard - 3 "cash flow statement" and Accounting Standard - 21 " consolidated

financial statements " issued by the Institute of Chartered Accountants of India.


Place: Chennai V. DASARATYDate : August 25, 2006 Partner

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED MARCH 31, 2006


42


43

SCHEDULE N

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO THE ACCOUNTS FOR THE CONSOLIDATED FINANCIAL STATEMENT OF HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED FOR THE YEAR ENDED 31.03.2006

Accounting Convention

The preparation of consolidated financial statements in conformity with Indian generally accepted accounting principles requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and

disclosure of contingent assets and liabilities.

Basis of preparation of financial statements

The financial statements have been prepared under the historical cost convention in accordance with Indian Generally Accepted

Accounting Principles (GAAP) and all Income and Expenditures having a material bearing on the financial statements are recognised and

on accrual basis . The accounts of the Parent and other subsidiaries have been prepared in accordance with the Accounting Standards

issued by the Institute of Chartered Accountants of India, and those of foreign subsidiaries have been prepared in accordance with the

local laws and applicable Accounting Standards/generally accepted accounting principles.

Principles of consolidation

The financial statements of the parent company and its subsidiaries have been consolidated on a line-by-line basis by adding together

the book values of like items of assets, liabilities, income and expenses, after fully eliminating intra-group balances, intra-group

transactions and the un realized profits.

The financial statements of the parent company and its subsidiaries have been consolidated using uniform accounting policies for like

transactions and other events in similar circumstances.

The excess of the cost to the parent company of its investments in each of the subsidiaries over its share of equity in the respective

subsidiary, is recognized in the financial statements as goodwill.

Revenue Recognition Revenue from software services and projects comprise income from time and material and fixed price contracts. Revenue from time and

material contracts is recognized on the basis of software developed and billable in accordance with terms of the contracts with the

clients . Revenues from fixed price contracts is recognized using percentage of completion of method calculated as a percentage of the

cost of efforts incurred up to the reporting date to estimated total cost of efforts. Maintenance revenue is recognized over the period of underlying maintenance contracts. Un billed revenue primarily comprises the revenue recognized in relation to efforts incurred up on fixed Price , fixed time frame

contracts until the balance sheet date.

Fixed Assets

Fixed assets are stated at the cost of acquisition and the value of acquired business assets less accumulated depreciation . Direct costs

are capitalized till the assets are ready to put to use and include financing costs relating to acquisition. Capital work in progress

includes the cost of fixed assets that are not yet ready for their intended use and the cost of assets not put to use before the balance

sheet.

The consideration paid for acquisition and take over of businesses includes value of business contracts, customer rights, employees

,technology , know how, software and hardware products and other assets in connection with the acquired businesses and is part of

company’s capital expenditure. The value is based on independent valuation ..

Depreciation

Fixed assets are stated at the cost of acquisition, less accumulated depreciation. Direct costs are capitalized till the assets are ready to

be put to use. These costs include financing costs relating to specific borrowing (s) attributable to fixed assets as per AS 16 “Borrowing

cost” issued by the Institute of Chartered Accountants of India.

Depreciation on fixed assets is provided using the straight-line method at the rates specified in schedule XIV to the Companies Act, 1956

as amended except the USA subsidiary, The Laxmi Group Inc, Maruthi Consulting Inc, and TACT, USA follow the rates computed by taking

only the estimated useful life of the assets, which is not in accordance with Schedule XIV to the Companies Act, 1956. Depreciation is

charged on a pro-rata basis for assets purchased/sold during the year. Individual assets costing less than Rs.5000 are depreciated in full in

the year of purchase.

Investments

Investments are stated at cost. No provision is being made for diminution in the value of investments as they are long-term investments.

During the year the company had acquired 100 % equity in vMoksha Technologies Private Ltd, India ,vMoksha Technologies Pte Ltd,

Singapore and vMoksha Technologies Inc, USA under share Purchase agreement dated 11.05.2005. However, as the sellers had tried to

renege on the agreement , the company had initiated arbitration proceedings and appointed an arbitrator.

Based on its present knowledge of the facts and as per legal opinion obtained the arbitration current proceedings will not, in the

opinion of management, have a material adverse effect on the results of operations of the company.

Deferred consideration

During the year the company acquired a controlling stake in TACT Inc USA., a Nasdaq listed company for a consideration of USD 8.75

Millions. (Rs. 38.83 Crore) According to the terms of the share purchase agreement, an amount of USD 3.40 Millions (Rs.15.17 crore) was

paid in cash to the selling shareholders of TACT. The remaining consideration, amounting to USD 5.35 Millions (Rs. 23.66 crore) is

payable over a period of two years as deferred payouts as per the aforesaid agreement. The deferred payouts are payable upon the

satisfaction of certain conditions stipulated in the aforesaid agreement. As a consequence , the company has accounted USD 2.85

Millions (Rs.12.64 crore) payable in FY 07 as other liability and balance payable of USD 2.50 Millions (Rs.11.09 crore) payable in FY 08 as

deferred payment consideration.

Advance towards subscription of redeemable preference shares

The advance towards subscription of redeemable preference shares has been received by the company from the sellers as per SPA dt.

11/05/2005 and the Foreign Investment Promotion Board (FIPB) approval for investment in redeemable preference shares in

pursuance of Press Note 9/ 1999 has been received vide Ministry of Finance , FIPB unit, letter Ref 158(2005)/162(2005) dated June 30

, 2005. A detailed note on this transaction is enclosed elsewhere in the report..

Foreign Currency Transactions

Foreign currency transactions are recorded in the books by applying the exchange rate as on the date of transaction. Investments in

foreign currency are reported using the exchange rate at the date of transaction. Other foreign currency transactions are converted at

the exchange rate prevailing on the last working day of the accounting year. Fluctuations in the exchange rate transactions are charged

to Profit & Loss Account, wherever necessary.

Taxation

Indian Companies Income tax expense comprises current tax and deferred tax charge or credit. The deferred tax asset and deferred tax

liability is calculated by applying tax rate and tax laws that have been enacted or substantially enacted by the Balance Sheet date. The foreign subsidiary recognizes deferred tax assets and liabilities in accordance with the local laws and the applicable accounting

standards or generally accepted accounting principles.

Sundry Debtors

Sundry debtors amount to Rs.64.08 crore as of March,2006 as compared to Rs. 27.54crore as of March, 2005 . The debtors represent 82

days of sales on annualised basis as of March ,2006 as against 88 days of sales on as of March, 2005 .The debtors are considered good and

realizable.

Notes to Accounts

In accordance with Accounting Standard 21 “Consolidated Financial Statements” issued by the Institute of Chartered Accountants of

India, the Consolidated Financial Statements of Helios & Matheson Information Technology Ltd include the financial statements of all

subsidiaries which have more than 50% shareholding and board control to govern the financial and operating polices of subsidiaries as

follows.


44

Name of the subsidiary Country of Incorporation % holding

SystemLogic Solutions Ltd. India 100

Jayamaruthi Software Systems Ltd. India 100

The Laxmi Group Inc USA 51

Helios & Matheson Inc. USA 100

Maruthi Consulting Inc USA 100

Helios & Matheson(Singapore) Pte. Ltd Singapore 100

TACT, USA USA 43

The reporting dates for the consolidated accounts are as under

Helios and Matheson Information

Technology Limited - Parent Company March 31, 2006

SystemLogic Solutions Ltd., India March 31, 2006

Jayamaruthi Software Systems Ltd. , India March 31, 2006

The Laxmi Group Inc., USA March 31, 2006

Helios & Matheson Inc., USA March 31, 2006

Maruthi Consulting Inc., USA March 31, 2006

Helios & Matheson(Singapore) Pte. Ltd, Singapore March 31, 2006

TACT., USA March 31, 2006

Uniform Accounting Policies

In preparing the consolidated financial statements of Helios & Matheson Information Technology Ltd, and the Indian subsidiaries

depreciation method is followed as per Schedule XIV of the Companies Act, 1956, whereas for US subsidiaries, the method for

depreciation is followed by using the estimated useful lives of the assets.

The financial statements of the holding company and its Indian & foreign subsidiaries used in the consolidation are drawn up to the same

reporting date as that of the parent company i.e., March 31,2006.


45



Place : Chennai V. RAMACHANDIRAN G.K.MURALIKRISHNA K.M.KUMARDate : August 25, 2006 Chairperson Managing Director Company Secretary &



Place : Chennai V. RAMACHANDIRAN G.K.MURALIKRISHNA K.M.KUMARDate : August 25, 2006 Chairperson Managing Director Company Secretary &


46

a) Name of subsidiary company

b) Financial year/ periodof the Subsidiaryended on

c)Holding company’s interest:

i)No of equity sharesFace ValuePaid up value

ii)Extent of shareholding

d)Net aggregate amount ofSubsidiary’sProfits(Losses)Not dealt with the Holding Company’s accounts:

i) For the subsidiary’s financial year

ii)for its previous financial years

e)Net aggregate amount of Subsidiary’s Profits (Losses) dealt with the Holding Company’s accounts:

i) for the subsidiary’s financial year

ii) for its previous financial years

f)changes in the interest of the holding company between the end of the subsidiary’s financial year

stended 31 March, 2006 st and 31 March, 2005

i) Holding company’s interest as on 31.03.2006Number of Equity sharesFace value Paid up value

ii) Extent of shareholding

g) Material changes between the end of the subsidiary’s financial year

stended 31 March, 2006 st and 31 March 2005 in

respect of :

i)Subsidiary’s Fixed Assets

ii)subsidiary’s Investments

iii) Monies lent by the subsidiary

iv) Monies borrowed by the subsidiary other than for meeting current

SystemLogic Solutions Ltd

31.03.2006

25,89,429Rs 10 eachRs 2,58,94,290

100%

Rs 2,94,17,627

Rs 2,55,10,751

NIL

NIL

No change

25,89,429Rs 10 each

Rs 2,58,94,290

100%

No change

No change

No change

No change

No change

Jayamaruthi Software Systems P Ltd

31.03.2006

1,00,000Rs 10 eachRs 10,00,000

100%

Rs 2,82,01,536

Rs 6,30,192

NIL

NIL

No change

1,00,000Rs 10 each

Rs 10,00,000

100%

No change

No change

No change

No change

No change

The Laxmi Group Inc., USA

31.03.2006

5,10,000NPVUS $ 510

51%

US $ 652,598

US $ 263,625

NIL

NIL

No change

5,10,000NPV

US $ 510

51%

No change

No change

No change

No change

No change

helios & matheson Inc., USA

31.03.2006

1,500NPVUS $ 1 mn

100%

NA

NA

NA

NA

No change

1,500NPV

US $ 1 MN

100%

No change

No change

No change

No change

No change

helios & matheson (Singapore) Pte Ltd

31.03.2006

2NPVS $ 2

100%

NA

NA

NA

NA

No change

2NPV

S $ 2

100%

No change

No change

No change

No change

No change

Maruthi Consulting, Inc., USA

31.03.2006

10,000NPVUS $ 45,765

100%

US $ 710,219

US $ 500,725

NA

NA

No change

10,000NPV

US $ 45,765

100%

No change

No change

No change

No change

No change

TACTInc., USA

31.03.2006

10,24,697US $ 0.01US $ 8,750,000

43%

NA

NA

NA

NA

NA

10,24,697US $ 0.01

US $ 8,750,000

43%

NA

NA

NA

NA

NA

Statement regarding subsidiary companiesPursuant to Section 212 of the Companies Act, 1956.

AUDITORS’ REPORT TO THE MEMBERS OF HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED

1. We have audited the attached Balance Sheet of Helios & Matheson Information Technology Limited as at March 31, 2006 and

the Profit & Loss account of the company for the year ended on that date annexed thereto. These financial statements are the

responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based

on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material

misstatements. An audit includes examining, on a test basis, evidence to support the financial statement amounts and

disclosures in the financial statements, assessing the accounting principles used in the preparation of financial statements,

assessing significant estimates made by management in the preparation of financial statements and evaluating overall

financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Company Law Board in terms of section 227 (4A) of

the Companies Act, 1956, we enclose in the annexure a statement on the matters specified in paragraphs 4 & 5 of the said

order.

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 law, have been kept by the company, so far as appears from our

examination of such 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 Profit and Loss account ,Balance Sheet and Cash flow statement comply with Accounting Standards

referred to in sub section (3C) of section 211 of the Companies Act, 1956.

e. On the basis of written representation received from the directors as at March 31, 2006 and taken on record by the board of

directors, we report that none of the directors is disqualified from being appointed as a 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 Balance Sheet and

Profit and Loss account read together with the other notes and accounting policies give the information required by the

Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles

generally accepted in India:

i. in so far as it relates to the Balance Sheet of the state of affairs of the company as at March 31, 2006

ii. in so far as it relates to the Profit and loss account, of the profit of the company for the year ended on that date and

iii. in so far as it relates to the Cash Flow Statement of the company for the year ended on that date.


Place : Chennai V.DASARATYDate : August 25, 2006 Partner


47

ANNEXURE TO THE AUDITORS’ REPORT

(Referred to in paragraph 3 of our report of even date)

In terms of the information and explanation given to us and the books and records examined by us in the normal course of audit and to the

best of our knowledge and belief, we state as under

1. a. The company has maintained proper records showing full particulars including quantitative details and situation of fixed

assets.

b. The fixed assets of the company have been physically verified by the management at reasonable intervals. No material

discrepancies were noticed on such verification.

c. No fixed assets have been disposed off during the year.

2. The company’s nature of operations does not require it hold inventories. Accordingly, Clause 4(ii) of the Companies Auditors

Report (Order), 2003 is not applicable.

3. The company has not granted and taken loans, secured or unsecured to and from companies, firms or other parties covered in

the register maintained under Section 301 of the Companies Act, 1956 and hence, clauses (iii)(b), (iii)(c),(iii)(d),(iii)(f) and

(iii)(g) of paragraph 4 of the said order are not applicable to the company.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures

commensurate with the size of the company and the nature of its business with regard to purchases of fixed assets and the sale

of services.. No instances of continuing failure to correct major weaknesses in internal control were noticed by us during the

course of audit..

5. a. In respect of contractual arrangements entered in the register maintained in pursuance of section 301 of The Companies

Act, 1956 and to the best of our knowledge and belief and according to the information and explanations given to us , where

each if such transactions made in pursuance of contracts or arrangements , is in excess of Rs.5 lacs in respect of each party,

the transactions have been made at prices which are prima facie reasonable having regard to the prevailing market prices at

the relevant time.

b. In respect of sale of services to parties listed in the register maintained under Section 301 of the Companies Act, 1956, these

transactions have been made at prices which are reasonable having regard to prevailing market prices at the relevant time.

6. The company has accepted deposits from the public. The provisions of Sections 58A & 58AA of the Companies Act, 1956, and the

rules made there under are complied with.

7. In our opinion, the company has an adequate internal audit system commensurate with the size of the company and the nature

of its business.

8. The Central Government has not prescribed the maintenance of cost records under Section 209 (1) (d) of the Companies Act,

1956.

9. a. According to the records of the company, the company is regular in depositing undisputed statutory dues including provident

fund, income tax, , cess and other statutory dues with the appropriate authorities. According to the information and

explanation given to us, no undisputed amount payable in respect of sales tax, wealth tax, customs duty and excise duty

were outstanding as at 31 March 2006 for a period of more than six months from the date they became payable.

b. According to the information and explanations produced to us, there are no dues in respect of income tax, sales tax, customs

duty, excise duty and cess that have not been deposited with the appropriate authorities on account of any dispute.


48

10. The company has no accumulated losses at the end of the financial year. The company has not incurred cash losses in the

financial year under report and in the financial year immediately preceding such financial year.

11. The company has not defaulted in the repayment of dues to financial institutions or banks or debenture holders.

12. The Company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other

securities.

13. The Company has not given any guarantee for loans taken by others from banks or financial institutions.

14. The Company has obtained term loans during the year and as per records of the company, the term loans were applied for the

purpose for which they were raised.

15. As per the records of the company, funds raised on short-term basis were not used for long term investment and vice-versa.

16. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained

under Section 301 of the Companies Act, 1956. However, the company has received Rs.63,04,14,007 towards subscription of

redeemable preference shares during the year.

17. The Company has not issued any debentures and hence, creation of securities in respect of debentures does not arise.

18. The Company has not raised money by way of public issues.

19. According to the information and explanations furnished to us, no fraud on or by the company has been noticed or reported

during the year.

For VENKATESH & CO


Place : Chennai V.DASARATY

Date : August 25, 2006 Partner


49


I. SOURCES OF FUNDS


Share capital A 20,01,00,000 10,00,50,000Reserves and surplus B 46,56,53,978 33,18,30,867

Advance received towards subscription ofRedeemable preference shares 63,04,14,007 -

2. LOAN FUNDS

Secured loans C 30,27,87,013 13,51,88,848Unsecured loans D 1,90,83,550 11,08,25,707

3. DEFERRED TAX 8,97,43,735 7,69,43,536

4. DEFERRED CONSIDERATION 11,09,50,000 -

181,87,32,283 75,48,38,958


1. FIXED ASSETS E

Gross Block 64,44,78,677 49,30,35,103Less : Depreciation 31,50,32,616 22,78,61,666

Net Block 32,94,46,060 26,51,73,437

Capital work in progress at cost 3,18,43,194 2,97,04,091

36,12,89,254 29,48,77,528

2. INVESTMENTS F 64,36,48,261 22,49,31,097

3. ADVANCE G 65,02,50,007


Cash and Bank balances H 26,47,40,215 29,42,33,346Sundry debtors I 31,72,09,135 16,17,93,748 Unbilled revenue 5,26,48,306 3,69,14,283Loans and advances J 5,25,17,406 4,32,45,987

68,71,15,061 53,61,87,364

4. LESS: CURRENT LIABILITIES & PROVISIONS K 52,35,70,301 30,11,57,031


181,87,32,283 75,48,38,958

Notes forming part of the Accounts O - -

As per our Report of even dateFor VENKATESH & CO



Place: Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMAR V. DASARATYDate : August 25, 2006 Chairperson Managing Director Company Secretary & Partner


BALANCE SHEET AS AT MARCH 31, 2006


50

Schedule March 31, 2006 March 31, 2005in Rs. in Rs.

INCOME - Revenue from operations L 120,76,46,849 66,48,16,252

120,76,46,849 66,48,16,252

Software services & administrative expenses M 80,14,79,241 42,52,24,089

Profit before interest depreciation & taxes (PBIDT) 40,61,67,608 23,95,92,163

Interest N 2,32,99,243 3,44,37,463

Profit before depreciation & taxes 38,28,68,365 20,51,54,700

Depreciation 8,71,70,950 6,35,14,581

Profit before taxes 29,56,97,415 14,16,40,119


Profit after tax 28,08,97,915 13,49,40,119


Profit after tax (PAT) 26,80,97,715 12,64,40,119

Balance brought forward from previous year 13,42,31,368 3,49,03,551

Balance of profit 40,23,29,082 16,13,43,669

Appropriations


Dividend Tax 42,09,604 21,04,802

General Reserve 1,00,00,000 1,00,00,000

Debenture Redemption Reserve written back 7,10,00,000 –


40,23,29,082 16,13,43,669

Earning per share-Basic 13.40 12.64

Number of shares 2,00,10,000 1,00,05,000

Notes forming part of the Accounts O

For VENKATESH & COChartered Accountants.




Place: Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMAR V. DASARATY

Date : August 25, 2006 Chairman Managing Director Company Secretary & Partner

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2006


51


SCHEDULE - A : SHARE CAPITALAUTHORISED2,50,00,000 (1,50,00,000) Equity shares of Rs.10 each 25,00,00,000 15,00,00,0001,00,00,000 Redeemable preference shares of Rs. 10 each 10,00,00,000

35,00,00,000 15,00,00,000ISSUED,SUBSCRIBED AND FULLY PAID UP2,00,10,000 (1,00,05,000) equity shares of Rs.10 each 20,01,00,000 10,00,50,000fully paid up

SCHEDULE-B : RESERVES AND SURPLUSGeneral Reserve 8,38,50,000 7,38,50,000Capital Reserve 1,02,500 1,02,500Share Premium - 5,26,47,000Debenture Redemption Reserve - 7,10,00,000Profit & Loss Account 38,17,01,478 13,42,31,367

46,56,53,978 33,18,30,867SCHEDULE - C : SECURED LOANSFrom Financial Institutions0 (4,00,000) OFCD of UTI Rs.100 each fully paid up - 4,00,00,00040,000 (70,000) NCD of LIC MF Rs. 100 each fully paid up 40,00,000 70,00,000From banks 29,87,87,013 8,81,88,848

30,27,87,013 13,51,88,848SCHEDULE - D : UNSECURED LOANSUnsecured Loans 1,90,83,550 11,08,25,707

1,90,83,550 11,08,25,707SCHEDULE - F : INVESTMENTS (Non-trade at cost)i. 25,89,429 equity shares of Rs.10/-each 9,58,24,475 9,58,24,475

in systemlogic solutions (unquoted)(face value Rs.2,58,94,290/-)

ii. 1500 shares in helios & matheson Inc, USA 4,80,09,951 4,80,09,951(unquoted)

iii. 2 shares of S$1 each in helios & matheson (Singapore) Pte Ltd 49 49(unquoted)

iv. 1,00,000 equity shares (of Rs. 10/- each) jayamaruthi software systems 2,43,07,500 2,43,07,500v. 10,000 equity shares of (no par value) maruthi consulting, USA 8,71,81,286 5,67,89,122vi 1024697 shares of common stock in TACT Inc., USA 38,83,25,000 -

64,36,48,261 22,49,31,097

SCHEDULE - G : ADVANCE

Advance for investment in shares of vMoksha entities. 65,02,50,007 -

3,31,165 equity shares of Rs. 100 each. (Unquoted)

SCHEDULE - H : CASH & BANK BALANCESBalances with scheduled banksi. Fixed Deposit account 24,67,35,993 18,26,75,641ii. Current accounts 1,11,64,674 8,10,45,555iii. Foreign currency accounts 68,24,096 3,02,51,704Cash on hand 15,452 2,60,446

26,47,40,215 29,42,33,346

SCHEDULE - I : SUNDRY DEBTORS (Unsecured, considered good)Debts outstanding for a period exceeding six months 1,36,19,733 96,49,226Other debts 30,35,89,402 15,21,44,522

31,72,09,135 16,17,93,748

SCHEDULES FORMING PART OF THE ACCOUNTS


52


SCHEDULE- J : LOANS AND ADVANCES (Unsecured, considered good) Advance Income Tax 1,97,78,530 1,12,36,159

Advances recoverable in cash or in kind orfor value to be received 3,27,38,876 3,20,09,828

5,25,17,406 4,32,45,987

SCHEDULE - K : CURRENT LIABILITIES AND PROVISIONS

Sundry creditors 11,24,38,726 10,62,72,825

Other liabilities 12,64,83,000


Provision for dividend tax 42,09,604 21,04,802

Provision for taxation 1,47,99,500 67,00,000TOD against own deposits 23,56,24,471 17,10,71,904

52,35,70,301 30,11,57,031

SCHEDULE - L : REVENUE FROM OPERATIONS

Income from software sales & services 118,32,85,500 65,43,14,858

Other income 1,78,87,776 60,27,821Dividend Income 64,73,573 44,73,573

120,76,46,849 66,48,16,252

SCHEDULE - M : SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES

Software services and development expenses 65,12,42,621 36,32,27,174

Staff welfare 1,27,44,167 43,68,261

Rent and amenities 1,38,07,114 58,10,761

Electricity charges 74,71,206 30,87,811

Postage telegram & telephones 87,15,746 51,61,236

Printing & stationary 90,26,743 41,29,132

Repairs & maintenance 97,15,006 48,11,998

Travelling & conveyence 1,51,76,436 64,55,053

Advertisement & promotional expenses 4,18,26,158 1,15,15,230

Bad debts written off 61,44,838 41,26,387

Rates & taxes 39,64,139 12,56,170

Auditors remuneration 3,50,000 2,50,000

Miscellaneous expenses 99,65,139 48,06,247

Professional & consultancy charges 95,64,253 51,24,308Bank charges 17,65,634 10,94,322

80,14,79,241 42,52,24,089SCHEDULE - N : INTEREST PAID

on fixed loans 56,03,333 1,08,51,036

on others 1,76,95,910 2,35,86,427

2,32,99,243 3,44,37,463



53

SCHEDULE - E : FIXED ASSETS

Particulars Gross Block Depreciation Net Block

Asset As on Additions As on As on For the As on As on As on 1.4.2005 31.3.2006 1.4.2005 Year 31.3.2006 31.3.2006 31.3.2005

Plant & Machinery 44,87,98,551 12,30,68,329 57,18,66,880 21,67,38,876 8,25,16,864 29,92,55,740 27,26,11,140 23,20,59,675

Furniture & Equipments 3,63,08,890 1,76,29,036 5,39,37,926 94,98,394 31,35,291 1,26,33,685 4,13,04,240 2,68,10,496

Vehicles 79,27,662 1,07,46,209 1,86,73,871 16,24,396 15,18,795 31,43,191 1,55,30,680 63,03,266

Total 49,30,35,103 15,14,43,574 64,44,78,677 22,78,61,666 8,71,70,950 31,50,32,616 32,94,46,060 26,51,73,437

(39,89,27,255) (9,41,07,848) (49,30,35,103)(16,43,47,085) (6,35,14,581) (22,78,61,666) (26,51,73,437) (23,45,80,170)


54

SIGNIFICANT ACCOUNTING POLICIES AND NOTES ON ACCOUNTS

SCHEDULE –O

Significant accounting policies

Basis of preparation of financial statements

The financial statements are prepared under the historical cost convention, in accordance with Indian Generally Accepted Accounting Principles (GAAP), the accounting standards issued by the Institute of Chartered Accountants of India and the provisions of the Companies Act, 1956, as adopted consistently by the company. All income and expenditure having a material bearing on the financial statements are recognized on accrual basis.

The preparation of the financial statements in conformity with Indian GAAP requires that the management make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

Fixed Assets

Fixed assets are stated at the cost of acquisition and the value of acquired business assets less accumulated depreciation . Direct costs are capitalized till the assets are ready to put to use and include financing costs relating to acquisition. Capital work in progress includes the cost of fixed assets that are not yet ready for their intended use and the cost of assets not put to use before the balance sheet.

The consideration paid for acquisition and take over of businesses includes value of business contracts, customer rights, employees, technology , know how , software and hardware products and other assets in connection with the acquired businesses and is part of capital expenditure. This value is based on independent valuation .

Impairment of assets As per Accounting standard 28 ,the company assesses at each balance sheet date whether there is any indication that an asset including good will is impaired. If any such indication exists , the company estimates the recoverable amount of the asset. If such recoverable amount of the asset is less than the carrying amount then carrying amount is reduced to recoverable amount. The reduction is treated as an impairment and recognized in profit and loss account. If at the balance sheet date there is an indication that if previously assessed impairment loss no longer exists , the recoverable amount is reassessed and the asset is reflected at the recoverable amount subject to a maximum of depreciated historical cost. In respect of goodwill the impairment loss will be reversed only when it was caused by specific external event and their effects have been reversed by subsequent events. During the year no such impairment has occurred..

Revenue Recognition Revenue from software services and projects comprise income from time and material and fixed price contracts. Revenue from time and material contracts is recognized on the basis of software developed and billable in accordance with terms of the contracts with the clients . Revenues from fixed price contracts is recognized using percentage of completion of method calculated as a percentage of the cost of efforts incurred up to the reporting date to estimated total cost of efforts. Maintenance revenue is recognized over the period of underlying maintenance contracts. Interest receipt is recognised on accrual basis. Dividend is recognised on receipt basis.

Unbilled revenue primarily comprises the revenue recognized in relation to efforts incurred on fixed Price, fixed time frame contracts until the balance sheet date.

Foreign Currency Transactions

Foreign currency transactions are recorded in the books by applying the exchange rate as on the date of transaction. Investments in foreign currency are reported using the exchange rate at the date of transaction. Other foreign currency transactions are converted at the exchange rate prevailing on the last working day of the accounting year. Fluctuations in the exchange rate transactions are charged to Profit & Loss Account, wherever necessary. In respect of foreign currency transactions in fixed assets, the exchange gain or loss is adjusted in the carrying amount of fixed assets and accordingly depreciation is charged.

Expenditure

Expenses are accounted on accrual basis and provisions are made for all known losses and liabilities.Provisions are made for future unforeseeable factors, which may affect the ultimate profit on fixed price. Software development and service contracts are charged to revenue in the same year.

Depreciation

Depreciation on fixed assets is provided using the straight-line method at the rates specified in schedule XIV to the Companies Act, 1956 as amended. Depreciation is charged on a pro-rata basis for assets purchased/sold during the year. Individual assets costing less than Rs.5000 are depreciated in full in the year of purchase.

Retirement benefits

The company has a scheme of provident fund for its employees, registered with the Regional Provident Fund Commissioner, Chennai. The company’s contributions to provident fund are charged to the Profit and Loss Account every year.

Taxes on Income

Provision is made for income tax on an annual basis, under the tax payable method, based on the tax liability as computed after taking credit for allowances and exemptions. In case of matters under appeal, due to disallowances or otherwise, full provision is made when the said liabilities are accepted by the company.

Deferred tax is recognised, subject to the consideration of prudence, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods.

Deferred tax assets are not recognised on unabsorbed depreciation and carry forward of losses unless there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised as per AS-22 “Accounting for Taxes on Income” issued by the Institute of Chartered Accountants of India”.

Investments

Investments in subsidiaries are accounted as per AS - 13 of ' Accounting for Investments issued by the Institute of Chartered Accountants of India. Investments are stated at cost including advisory and related expenses incurred in connection with the investments. No provision is made for diminution in the value of investments as they are long term in nature. During the year the company acquired controlling stake in TACT Inc, USA a Nasdeq listed company for a consideration of USD 8.75 Mn (Rs.38.83 crore) According to terms of the Share purchase agreement an amount of USD 3.40 Mn ( Rs.15.17 crore) was paid in cash to the selling share holders of TACT . The remaining consideration amounting to USD 5.35 Mn (Rs. 23.66 crore) is payable over a period of two years as deferred pay outs as per the share purchase agreement .

During the year the company acquired 100 % equity in vMoksha Technologies Private Ltd, India, VMoksha technologies Pte Ltd, Singapore and vMoksha Technology Inc, USA under share purchase agreement dated May 11 ,2005 The consideration due to the sellers was fully paid and the required statutory documents viz., declaration by the sellers with regard to sale and transfer of shares to the buyer namely helios & matheson in Form FC-TRS under FEMA regulations ,SPA and the valuation report by Ernst & Young were filed with Reserve Bank Of India and other relevant authorities. A detailed note on this transaction is enclosed elsewhere in the report.

Deferred consideration

During the year the company acquired a controlling stake in TACT Inc USA., a Nasdaq listed company for a consideration of USD 8.75 Millions. (Rs. 38.83 Crore) According to the terms of the share purchase agreement, an amount of USD 3.40 Millions (Rs.15.17 crore) was paid in cash to the selling shareholders of TACT. The remaining consideration, amounting to USD 5.35 Millions (Rs. 23.66 crore) is payable over a period of two years as deferred payouts as per the aforesaid agreement. The deferred payouts are payable upon the satisfaction of certain conditions stipulated in the aforesaid agreement. As a consequence , the company has accounted USD 2.85 Millions (Rs.12.64 crore) payable in FY 07 as other liability and balance payable of USD 2.50 Millions (Rs.11.09 crore) payable in FY 08 as deferred payment consideration.

Sundry Debtors

Sundry debtors amount to Rs.31.72 crore as of March,2006 as compared to Rs. 16..17 crore as of March ,2005 . The debtors are considered good and realizable. The debtors are 96 days of sales as of March ,2006 as against 85 days of sales as of March, 2005 .


55


56

Share Capital

March 31, 2006 March 31, 2005

Number ( in Rs.) Number ( in Rs.)

Opening Balance as of April 1 1,00,05,000 10,00,50,000 50,02,500 5,00,25,000Add Bonus issue during the year 1,00,05,000 10,00,50,000 50,02,500 5,00,25,000Closing Balance as at 31st March 2,00,10,000 20,01,00,000 1,00,05,000 10,00,50,000

Secured loans

Secured loans from financial institutions are secured by a charge on all immovable and movable properties of the company subject to prior charges created / to be created in favour of the company’s bankers and are guaranteed by the directors.

Secured loans from banks and others are secured by hypothecation of assets, fixed deposits of the company and are guaranteed by the directors.

Cash and bank balances

The cash and bank balance isRs. 26,47,40,215as on March 31, 2006 (previous year - Rs.29,42,33,346).

Managerial remuneration paid to the Managing Director

2006 ( in Rs.) 2005 (in Rs.)Total remuneration paid to theManaging Director 3,00,000 3,00,000

Auditors' remuneration

March 31, 2006 (in Rs.) March 31, 2005 (in Rs.)

Audit Fees 1,25,000 95,000Tax Audit & Tax Representation 1,00,000 75,000Certification Fees 1,00,000 65,000Out of Pocket Expenses 25,000 15,000

Total 3,50,000 2,50,000

Quantitative details

The company is engaged in training development and maintenance of computer software. The production of sale of such software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain information as required under part II of Schedule VI to the Companies Act, 1956.

Minority interest

Minority interest represents that part of profit/ loss and net assets of subsidiaries which are owned and controlled by the minority shareholders.

Advance towards subscription of redeemable preference shares

The advance towards subscription of redeemable preference shares has been received by the company from the sellers as per SPA dt.

11/05/2005 and the Foreign Investment Promotion Board (FIPB) approval for investment in redeemable preference shares in

pursuance of Press Note 9/ 1999 has been received vide Ministry of Finance , FIPB unit, letter Ref 158(2005)/162(2005) dated June 30 ,

2005. A detailed note on this transaction is enclosed elsewhere in the report..

Unearned revenue primarily consists of client billings on fixed price , fixed time fame contracts for which the costs have not been incurred.

2.7 Deferred Tax Liabilities

2006 (in Rs.) 2005 (in Rs.)

On fiscal allowance on fixed assets 1,28,00,200 85,00,000

2.8 Dues to small-scale industrial undertakings

As of March 31, 2006 the company had no outstanding dues to small-scale industrial undertakings.

2.9 2006 (in Rs.) 2005 (in Rs.)

Earnings in Foreign Exchange 101,64,31,634 59,42,65,435

Foreign Exchange Outgo

Service charges 72,39,77,595 35,09,04,970Seminar Fee - 2,51,611Repayment of loan 2,48,29,852 1,88,77,880Interest 47,56,298 33,70,561Imports - 10,56,002

2.10 Related party disclosure

Name / Description Nature of Payment Relationship Amount (in Rs.)

Maruthi Consulting Inc Investment Subsidiary 3,03,97,164

The Laxmi Group Inc Exports-services Subsidiary 8,34,53,840

Maruthi Consulting Inc Exports-services Subsidiary 7,11,00,760

G.K.Muralikrishna Remuneration Managing Director 3,00,000

TACT Inc, USA Investment Subsidiary 15,17,08,827

3. acquisition of the 3 vmoksha companies in usa, singapore and india

arbitration proceedings

helios & matheson (the company) initiated arbitration proceedings (february 2006) to release the documents from escrow and for due compliance of the other technical formalities undertaken by the sellers.

the decks have now been cleared for arbitration proceedings in the share purchase transaction with vmoksha.

this follows an undertaking given to the madras high court by all the parties concerned to participate and co-operate in the expeditious disposal of arbitration proceedings and to furnish their local indian addresses for service of notices in order to avoid delays in arbitration proceedings.

a two-member bench of the madras high court comprising hon’ble chief justice mr. a p shah and hon’ble justice mr. d murugesan has since ordered that pending arbitration, all the vmoksha shares would continue to be with the escrow agents, pricewaterhousecoopers and khaitan & co.

the hon’ble high court further issued a directive to mr. pawan kumar, one of the promoters of vmoksha, on soliciting/offering jobs and services. the company agreed not to show vmoksha group of companies as its firms in its website. the hon’ble bench issued a directive to the parties not to issue / send any adverse statements to the press and / or media with respect to vmoksha group of companies and m/s. helios & matheson.

all the parties to the transaction have agreed and nominated hon’ble justice mr. k. venkataswami, retd judge, supreme court of india, as the sole arbitrator in the above matter.

as part of the arbitration proceedings, helios & matheson has filed a claim petition before the arbitral tribunal.

the reliefs claimed are inter alia as follows :

specific performance of the provisions of the share purchase agreement by the sellers and delivery to helios & matheson of duly transferred share certificates and related documents.


57


58

to ascertain the present valuation of vmoksha and issue directions to helios & matheson to allot redeemable preference shares to the sellers - vmoksha technologies ltd., mauritius, mr. tapan garg and mrs. madhuri garg on the basis of such ascertained valuation after adjusting the eroded value, if any, towards indemnification in terms of clause 15.4 of the share purchase agreement in respect of the obligation of helios & matheson under the share subscription agreement dated may 11, 2005 read with the spa of even date.

to award an amount of 21 million us dollars towards loss of profit as reasonably expected and computed on the basis of the terms and conditions contained in the share purchase agreement and the representations and warranties made by the sellers and as projected by the sellers towards the legitimately expected profit potential of vmoksha.

to award rs.50 crores specifically against mr. pawan kumar and mr. rajeev sawhney towards the loss caused to helios & matheson directly and indirectly by their twisted statements made to the press causing irreparable loss (reputation / goodwill) to the company and its investors.

to award interest on the amounts awarded at the rate of 18% p.a. from september 7, 2005 till the date of claim, award interest @ 18% p.a. from the date of this claim till the date of award and 18% p.a. from the date of the award till the date of payment.

expected impact of the arbitration proceedings

in line with helios & matheson’s prudent financial management practices and conservative approach, the company’s investment in vmoksha is secured in the definitive agreements.

based on its present knowledge of the facts and as per legal opinion obtained, the current arbitration proceedings will not, in the opinion of management, have a material adverse effect on the results of operations of helios & matheson.

transaction background

helios & matheson vide a definitive share purchase agreement on may 11, 2005 for 100% equity in vmoksha technologies inc., usa, vmoksha technologies pte ltd, singapore and vmoksha technologies pvt ltd, india from the sellers - vmoksha mauritius (holding company - 92.4% holding) and mr. tapan garg (son of mr. pawan kumar) and mrs. madhuri garg (wife of mr. pawan kumar), who together held 7.6%.

professional firms of high standing have been advising and assisting in the vmoksha transaction:

pricewaterhousecoopers (pwc) – vmoksha was brought to helios & matheson by pwc, who had a sell mandate from vmoksha promoters and pwc is the transaction advisor. khaitan & co., leading legal counsel in india, provided legal documentation support for the transaction. pwc and khaitan & co. are the escrow agents for the transaction. kpmg carried out the due diligence. ernst & young performed the valuation. deloitte is the statutory auditor of vmoksha india and vmoksha singapore.

the definitive agreements (share purchase agreement and related agreements) were signed on may 11, 2005 after due diligence by kpmg of the 3 vmoksha entities.

in line with an escrow agreement of even date (may 11, 2005), all the original share certificates and duly executed share transfer forms in favor of helios & matheson were deposited by the sellers with pwc and khaitan & co., who were appointed as escrow agents by all the parties to the transaction.

though not part of escrow, copies of relevant board resolutions of the 3 vmoksha entities and the seller, vmoksha mauritius were also deposited with the escrow agents. the entire board of the seller, vmoksha mauritius, was present and the resolution authorizing and approving the sale of the 3 vmoksha entities to helios & matheson was unanimously carried in the presence of pwc, transaction advisor and escrow agent.

advance towards subscription of redeemable preference shares:

the escrow arrangement was envisaged inter alia to procure approval from the foreign investment promotion board (fipb) for the transaction, as it involved transfer of shares from a non-resident (vmoksha mauritius) to a resident (helios & matheson). in line with clause 2 of the share purchase agreement, pwc obtained the fipb approval for helios & matheson.

the finance ministry under a common order approved the application for investment by vmoksha mauritius in helios & matheson. the same was shown in the finance ministry website on june 20, 2005.

the approval from the fipb unit of the ministry of finance dated june 30, 2005 was received by helios & matheson through the advisors, pwc. the said approval letter by paragraph 6 made it clear that the approval was subject to conditions as covered under press note 9 of 1999. in view of the conditions under press note 9 of 1999 and in terms of clause 23 of the spa, to give effect to the original intent of simultaneous wire transfer of funds, the parties went ahead with the transaction as could validly be executed. there has been no complaint from any party whatsoever in that regard till the vmoksha promoters unilaterally committed breach of the contract.

the amount received is treated as advance towards subscription of redeemable preference shares in the annual accounts.

as stated earlier, as part of the arbitration proceedings, helios & matheson has filed a claim petition before the arbitrator, hon’ble justice mr. k. venkataswami, (retd), former judge, supreme court of india.


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the reliefs claimed are inter alia as follows :

to ascertain the present valuation of vmoksha and issue directions to helios & matheson to allot redeemable preference shares to the sellers - vmoksha technologies ltd., mauritius, mr. tapan garg and mrs. madhuri garg on the basis of such ascertained valuation after adjusting the eroded value, if any, towards indemnification in terms of clause 15.4 of the share purchase agreement in respect of the obligation of helios & matheson under the share subscription agreement dated may 11, 2005 read with the spa of even date.

to award an amount of 21 million us dollars towards loss of profit as reasonably expected and computed on the basis of the terms and conditions contained in the share purchase agreement and the representations and warranties made by the sellers and as projected by the sellers towards the legitimately expected profit potential of vmoksha.

to award rs.50 crores specifically against mr. pawan kumar and mr. rajeev sawhney towards the loss caused to helios & matheson directly and indirectly by their twisted statements made to the press causing irreparable loss (reputation / goodwill) to the company and its investors.

to award interest on the amounts awarded at the rate of 18% p.a. from september 7, 2005, till the date of claim, award interest @ 18% p.a. from the date of this claim till the date of award and 18% p.a. from the date of the award till the date of payment.

advance for investment in shares of vmoksha entities

as provided in clause 2.2.1 of the spa, helios & matheson remitted the consideration of rs. 62.5164 crores for purchase of the entire shareholding of 3,31,165 equity shares of rs.100 each in the vmoksha india held by the sellers - vmoksha mauritius, mr. tapan garg and mrs. madhuri garg, at the rate of rs.1,887.77 per share. vmoksha mauritius held 92.6% (3,06,665 shares) of shares, mrs. madhuri garg and mr. tapan garg held 7.4% (24,490 shares and 10 shares respectively).

the transaction was structured such that vmoksha india was the holding company of vmoksha usa and vmoksha singapore (ie vmoksha usa and vmoksha singapore were wholly owned subsidiaries of vmoksha india) and helios & matheson bought 100% of the equity of vmoksha india including vmoksha usa and vmoksha singapore, for the said consideration.

it was therefore agreed that any reference to vmoksha india may be construed as including vmoksha usa and vmoksha singapore. the required documents (declaration by seller, vmoksha mauritius, in form fc-trs; the valuation report by ernst & young on the 3 vmoksha entities etc) have been filed with the reserve bank of india (rbi) and other relevant authorities.

the amount paid is treated as advance for investments in the annual accounts. in line with helios & matheson’s prudent financial management practices and conservative approach, the company’s investment in vmoksha is thus secured in the definitive agreements.

updates on arbitration proceedings:

all the latest updates on the current arbitration proceedings are provided in the investors section of our website (url -http://www.heliosmatheson.com/investors/invest.asp). please scroll down to the section - helios & matheson in the news - where the latest communication with the stock exchanges is provided. our prompt communiqué to the stock exchanges is also provided in the websites of the bse and nse. these provide details and clarifications on the latest developments.



Place: Chennai V.RAMACHANDIRAN G.K.MURALIKRISHNA K.M.KUMAR V.DASARATYDate : August 25, 2006 Chairperson Managing Director Company Secretary & Partner




MANAGEMENT DISCUSSION AND ANALYSIS

Industry Overview

Global IT Industry

In recent years, technology has become increasingly important to the success of organisations worldwide and has transformed

businesses, driven productivity gains, enhanced operational efficiencies and created new business models. In this context,

organisations have increased their spending on IT services, which enable them to realise greater values from their technology

infrastructure and achieve productivity gains. Therefore, despite the recent global economic downturn which caused many

organisations to reduce their IT budgets, particularly in 2001 and 2002, global companies continue to view technology as a critical source

of competitive advantage and the long-term growth prospects for IT services continue to remain positive. According to a February 2004

report by Gartner, total worldwide IT services spending is projected to grow from US$535.9 billion in 2002 to US$727.7 billion by 2007,

which represents a CAGR of 6.3%.

The chart below sets forth the total estimated IT services spending worldwide by service segment from 2004 to 2009, along with the

corresponding CAGR.

Worldwide IT Services Market Forecast (figures in US$ billions)

IT services 2004 2009 CAGR

Gartner 594.55 796.76 6%

IDC 573.1 803.9 7%

Indian IT Industry

India’s IT industry ranks amongst the fastest growing sectors within the country’s economy. Driven primarily by exports, the industry has

experienced rapid annual growth. NASSCOM projects that the size of the Indian IT industry is expected to increase by approximately 79%

from US$17.2 billion in the financial year ended 31 March 2004 to US$48 billion in the financial year ended 31 March 2008. The IT

industry’s contribution to the Indian gross domestic product is expected to be approximately 5% for calendar / financial year 2006.

According to NASSCOM, IT exports are expected to be approximately 53.7% of the Indian IT industry, approximately US$17.1 billion in for

the year ended 31 March 2006. Within the IT exports, the software and services segment comprised approximately 56% of the total IT

exports. The size of the domestic IT market is expected to be approximately US$6.1 billion for the year ended 31 March 2006.

Software and services exports continue to be the dominant factor in the overall growth of the Indian IT industry. In the financial year

2006, Indian software and services exports is expected to witness a healthy growth, with total exports reaching US$23.4 billion, an

increase of 32% from the previous financial year. National Association of Software and Service Companies (“NASSCOM”) estimates that

this segment is expected to continue to show a robust growth and the total value of software and services export is expected to reach

US$48 billion by the end of the financial year 2008.

IT Software and Services Industry Structure and Trends

IT services and software continue to be the mainstay of Indian IT-IT enabled services (“IT-ITES”), and are expected to account for nearly

48% of industry revenues earned in the financial year ended 31 March 2006. Exports account for a majority share of the segment revenue

with the United States of America and Australasia as the key markets. Accompanying the remarkable performance in exports is the

steady growth in domestic demand, which further contributes to this segment’s standing in the Indian IT-ITES industry.

Indian IT services and software product exports are categorised into core IT services, which include project oriented services, IT

outsourcing, support and training and R&D services and software products, which includes product development, design and

development of embedded systems and sales of packaged/ proprietary software.

In general, it is believed that scale matters in the IT services business. The global IT services market is highly fragmented, and even in a

segment such as IT outsourcing which is asset intensive and conducive to scale economics, the top five players account for less than 50%

of the market.

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· The top Indian companies are no longer seen as simply a labour cost ‘arbitrage’ opportunity. Margin pressures for larger companies

have been contained, and billing rates have stabilised. Moreover, price under-cutting by competing vendors has decreased, with

vendors countering pricing pressure by offering more value-added services.

· US outsourcing to India continues unabated, as US companies continue to look at India as an outsourcing market despite the anti-

outsourcing opinions.

Company Overview

The company provides consulting and IT services to clients globally – as partners to conceptualise and realise technology driven business

transformation initiatives. The company believes that a strong US presence, deep client relationships and sustained infrastructure

investments over the last 15 years, have helped create a world-class knowledge networked work environment, from where the

company’s team provides high quality solutions to its clients. The company believes that its low-risk seamless global delivery model

accelerates schedules with a high degree of time and cost predictability.

The company transforms existing operational systems to truly interactive business solutions for clients in the healthcare, financial

services and technology verticals. The company believes that its ability to manage large client relationships, deliver complex

outsourcing services through innovative engagement models and maintain high quality standards are some of its important

differentiators. The company delivers high quality and cost effective services to its clients through its mature delivery processes,

scalable infrastructure and skilled global resource base. Its services are delivered through a mix of onsite resources located in the cities

of its clients as well as the offshore resources at its facilities in India. Apart from a strong on-site presence, the company believes that it

also has an extensive offshore infrastructure comprising offshore development centres in India to provide world class solutions to clients

worldwide.

Indian IT Services Market Forecast (figures in US$ billions)

IT Services 2004 2008 CAGR

Nasscom 17.2 48 29.2%

We believe that the following trends will continue to be an integral part of the industry’s growth and development.

Alignment between Corporate Strategy and IT Strategy

IT has transformed the way enterprises conduct their business and has evolved into a strategic necessity from being a support function.

As IT assumes a central role in the enterprise’s ability to respond to changing market trends, drive productivity across the value chain and

increase competitiveness, IT decisions are taking place to help drive business strategy.

Increasing Size and Complexity of IT Requirements

Corporate IT requirements have become increasingly complex. Existing systems generate enormous amounts of data, which need to be

utilised effectively and shared with other systems and applications. The rapid proliferation of non-traditional computing devices has led

to an increased need to integrate applications and unify end-user platforms and devices. The critical nature of IT is increasing the

importance of quality and business continuity considerations. Enterprises are increasingly selecting IT services companies that can

effectively manage complexity, IT related risks and costs.

Development of Complex Engagement Models

Clients are becoming increasingly astute in managing their IT budgets and are demanding higher value from their IT projects. Complex

engagement models have evolved to realise continuous productivity gains. These include one or more combinations of time and

material, fixed-price, fixed-price and fixed-time, fixed-price and service level agreements, build-operate-transfer and asset and

resource transfers. Further, maturity with the outsourcing and off-shoring process have resulted in clients becoming increasingly

sophisticated in the vendor selection process. Clients are also turning to third-party consultants to manage their outsourcing and/or

offshore vendor selection process. In order to provide the necessary expertise, risk mitigation and cost advantage, these vendors must

have:

· a world-class global delivery infrastructure;

· process maturity to meet quality commitments;

· depth of managerial talent;

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· the ability to ramp up delivery capabilities;

· the ability to reduce costs consistently; and

· the financial stability to continuously invest in resources.

Industry Familiarity Becoming Important

IT services clients have moved from staff augmentation and generic technology services to more strategic business needs. We believe a

strong industry familiarity is becoming an important element in winning, retaining and attracting clients. According to a Gartner report

dated 5 February 2003 (“Management Update: Application Outsourcing. Trends for 2003 and 2004”, R. Terdiman and A. Young) clients

are looking for services to be delivered by organisations with a deep understanding of their particular business challenges and problems.

The Healthcare, Financial Services and Services Industries Constitute a Large Part of Global IT Services Spending

According to a Gartner Dataquest report dated 7 January 2004, the healthcare, financial services (including insurance, banking,

securities and other financial services industries), and services industries contributed to approximately 30% of global IT spending in 2002.

IT spending by clients in these industries is expected to grow at a combined CAGR of approximately 5.23% over the period from 2002 to

2007.

Opportunity

Of all the verticals, services and healthcare are growing the fastest, at a CAGR of 5.98% and 5.55% respectively, over the period from 2002

to 2007.

Offshore Becoming Increasingly Mainstream

The economic downturn, globalisation and increased competition are forcing corporations to seek high quality IT services at more

competitive costs. Concurrently, select offshore vendors have created the process expertise necessary to quickly ramp up operations

while maintaining quality levels. Corporations are increasingly using these offshore vendors for a definitive cost-value benefit. This has

resulted in offshore services becoming mainstream, and the ability to manage global delivery processes has become important to

competing in the global IT services outsourcing market.

The India Advantage

India has consolidated its position as the “destination-of-choice” for corporations seeking offshore IT services. NASSCOM estimates that

export revenues generated from the software and services industry in India was approximately US$12.2 billion for the year ended 31

March 2005 and expects these revenues to reach US$48.0 billion for the year ending 31 March 2008. India is also an emerging destination

for global IT enabled services and business process outsourcing. NASSCOM estimates export revenues from the Indian IT enabled services

industry to reach US$21.0 billion for the year ending 31 March 2008.

More than 70% of large US corporations ranked India as the primary country for supplying offshore IT services for the following reasons:

· high quality delivery;

· significant cost benefits;

· abundant skilled resources;

· strong government support; and

· time zone advantage.

Industry Trends – Moving Towards Mid-Size

· As outsourcing increases, most of the large clients are adding a second vendor to an already existing top-tier company, opening a new

window for the mid-tier companies.

· Despite the expectations and clamour of large multi-million deals, most of the large accounts and new deals are actually “ramped-

up” and are not the ones that start off with a “big bang” approach. This opens up the window for mid-tier players, who were earlier

halted by their revenue base, and are now seeking an entry into the large client group.

· NASSCOM estimates that approximately 50-60% of the industry revenues will be from the small and medium enterprise segment by

2008. This figure is currently less than 10-15%.

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Key Market Highlights for the Healthcare Vertical

According to a Gartner report dated 7 January 2004, IT spending by the healthcare market is driven by the numerous pressures with

which healthcare providers and payers must contend, including the need to improve clinical care and customer satisfaction, curtail

medical errors and inaccuracies, stem revenue leakage, address staff shortages and reduce manual intervention. As such, clinical

automation, the Health Insurance Portability and Accountability Act of 1996, integration, standardisation, infrastructure build-out and

revenue cycle improvement top the list of technology priorities in the healthcare provider market. The inability to efficiently manage IT

and business processes will continue to drive healthcare organisations to outsourcing along with consulting, systems integration,

business process outsourcing and transformation services that are increasingly being bundled into outsourcing contracts by vendors.

Opportunities, Threats, Risks and Concerns

The fact that offshore outsourcing is being increasingly accepted as a strategic imperative by more organizations today than ever before

translating in to a healthy pipeline in terms of opportunities. This year and the next few years would correspondingly see that such

opportunities are taken to our best advantages and we shall continue to invest in sharpening our skills & processes in partnering with

good clients to achieve business excellence. Relationship management is being given top most priority to help us achieve goals and win

more “ Global 2000 Companies”.

The growing share of revenues in Europe and Asia Pacific are a matter of interest for us and with the Indian economy on the high growth

phase, there is a great promise of growth in the domestic IT also. This will further open up the growth avenues for the IT industry.

Brand building has been recognized as one of the key areas where your company will be making significant investments in the coming

years. JWT continues to advise the company on brand building and communication strategies.

The roll back of H1 Visa limits, regulatory measures that can impact our business are some of the issues which could cause concerns.

While the resource availability at the entry level is high the demand for skilled manpower is leading to challenges in human resources

cost management.

Over the last year, the exchange rate mechanism has been very volatile between Indian Rupee and US $. This affects margin from

business and translation losses. We are trying to face the impact by covering ourselves with forward contracts and enhancing operational

efficiency. By enhancing presence in Europe where, GBP or Euros are the currencies used, we have “a built in hedge” through a

diversified currency basket.

Overview

The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, and generally accepted

accounting principles (GAAP) in India. The management of helios & matheson accepts responsibility for the integrity and objectivity of

these financial statements, as well as for various estimates and judgements used therein. In addition to the historical information

contained herein, the following discussion includes forward looking statements, which involve risks and uncertainties including, but not

limited to, risks inherent in the company’s growth strategy, dependence on certain clients, dependence on availability of qualified

technical consultants and other factors discussed in this report.

Financial Analysis

Share Capital March 31, 2006 March 31, 2005

Number Value in Rs Number value in Rs

Opening balance 100,05,000 10,00,50,000as of April 1, 2005 50,02,500 5,00,25,000Balance as at March 31,2006 200,10,000 20,01,00,000 1,00,05,000 10,00,50,000

Internal control systems and their adequacy

The CEO / CFO certification provided elsewhere in the report discusses about the adequacy of our internal control systems and procedures.

Secured Loans

Secured loans from financial institutions and banks are secured by a charge on all immovable and movable properties of the company subject to prior created / to be in favour of the company’s bankers and is guaranteed by the directors.

Fixed Assets

During the year, the company added Rs. 15,14,43,574 to its gross block of assets, including investments in technology assets, and upgrade training centers to meet the present trend. Capital work in progress as on March 31, 2006 amounting to Rs. 3,18,43,194 represents advance paid towards work in progress.


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Sundry Debtors

Sundry debtors amount to Rs. 31,72,09,135 representing 96 days sales as against Rs. 16,17,93,748 in the previous year representing 88 days sale. These ae considered good and realizable. However, a significant portion of receivables is since received.

Cash & Bank Balances

Fixed Deposits with banks amount to Rs. 24,67,35,993.

Current Liabilities

Sundry Creditors include the amount payable to vendors for the supply of goods and amounts accrued for various other operational expenses.

Results of Operations

Income

Your company experienced impressive growth this year as well. Total revenues grew to Rs. 120.76 cr from Rs. 66.48 cr last year reflecting a growth rate of 81.65% (42.69%).

Profit after tax increased to Rs. 28.09 cr from Rs.13.49 cr showing an increase of 108.22% (106.27%)

The Net worth of your company is Rs. 66.58 cr as against Rs. 43.18 cr

Financial Highlights 2005-06 2004-05in Rs. in Rs.

Revenue from operations 120,76,46,849 66,48,16,252

Operating profit (PBIDT) 40,61,67,608 23,95,92,163

Interest 2,32,99,243 3,44,37,463

Profit before depreciation & tax(PBDT) 38,28,68,365 20,51,54,700

Depreciation 8,71,70,950 6,35,14,581

Profit after depreciation 29,56,97,415 14,16,40,119


Profit after tax 28,08,97,915 13,49,40,119


Profit after deferred tax (PAT) 26,80,97,715 12,64,40,119


Balance of profit available for Appropriation 40,23,29,083 16,13,43,669

Appropriations


Proposed Dividend Tax 42,09,604 21,04,802

General reserve 1,00,00,000 1,00,00,000

Debenture Redemption Reserve written back 7,10,00,000 -


Operating Profit

During the current year, operating profits grew by 69.52% (48.65%)

Interest

Interest for the current year had gone down to Rs. 2,32,99,243 from Rs. 3,44,37,463 for the previous year.

Depreciation to total revenue

The percentage of depreciation to total revenue is at 7.22% (9.55%)


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Ratio Analysis of Financial Performance for the Year ended March 31 2006Synopsis of Financial Performance

2005-06 2004-05

Growth in Turnover (%) 81.65 42.69

Depreciation / total revenue (%) 7.22 9.55

PBIDT / total revenue (%) 33.63 36.04

PAT / total revenue (%) 22.20 19.01

PAT / networth (%) 40.27 29.27

Book Value Rs. 33.27 43.18

EPS Rs. 13.40 12.64

CPS Rs. 17.75 18.99

Dividend (%) 15.00 15.00

Dividend Per Share 1.50 1.50

Expenses / Total revenue (%) 66.37 63.96

Debt Equity 0.48:1 0.56:1

Debtors No.of Days 96 88

Current Ratio 1:1.67 1:1.78


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CASH FLOW STATEMENT FOR THE YEAR ENDED MARCH 31, 2006

Year ended Year endedMarch 31, 06 March 31, 05

in Rs. in Rs.I. CASH FLOW FROM OPERATING ACTIVITIES

Net profit before interest, tax and extra ordinary items 31,89,96,658 17,60,77,582Adjustment for:Depreciation 8,71,70,950 6,35,14,581Loss on sale of assetsMisc. expenses (w/off)Profit on sale of investmentLoss on sale of investmentOperating profit before working capital changes 40,61,67,608 23,95,92,163Adjustment for:-Work in progress (1,57,34,023) 46,36,862Sundry debtors (15,54,15,387) (1,11,62,396)Other Current AssetsLoans and Advances (92,71,418) 46,01,997Sundry creditors (26,38,901) 8,29,44,184Cash generated from operations 22,31,07,878 32,06,12,810Interest paid (2,32,99,243) (3,44,37,463)Dividend paid (1,50,07,500) (75,03,750)Net cash from operating activities 18,48,01,135 27,86,71,597

II. CASH FLOW FROM INVESTING ACTIVITIES

Sale of fixed assetsPurchase of fixed assets (15,35,82,677) (9,31,26,547)Sale of InvestmentPurchase of Investments (20,11,20,164) (7,04,10,511)Advance paid for investment in vMoksha entities (63,04,14,007) -Misc. expenses not w/offnet cash from Investing activities (98,51,16,848) (16,35,36,968)

III. CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from issue of capitalProceeds(Application) of share premiumAdvance received towards subscription of redeemable preference shares 63,04,14,007Transfer to capital ReserveRepayment of unsecured loansProceeds from Secured loans (net of TOD) 23,21,50,731 3,87,90,993Proceeds from Unsecured loan (9,17,42,157) 1,15,20,055Repayment of Secured loansNet cash from financing activities 77,08,22,581 5,03,11,048

IV. NET INFLOW/OUTFLOW

Net increase/(decrease) in cash & cash equivalents (2,94,93,131) 16,54,45,677Cash and cash equivalents(opening) 29,42,33,346 12,87,87,670Cash and cash equivalents(closing) 26,47,40,215 29,42,33,346Net increase/(decrease) in cash & cash equivalents (2,94,93,130) 16,54,45,676

CERTIFICATE

We have examined the attached Cash Flow Statement of helios & matheson IT Ltd for the year ended March 31, 2006. The Statement has been prepared by the company in accordance with the requirements of Listing Agreement, Clause 32 with the Stock Exchanges and is based on and in agreement with the corresponding Profit and Loss Account and Balance Sheet of the company covered by our Report of the August 25,2006 to the Members of the Company.

For VENKATESH & COChartered Accountants.




Place: Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMAR

Date : August 25, 2006 Chairperson Managing Director Company Secretary &


66

I. Registration Details

Registration No. State Code

Balance Sheet code

II. Capital raised during the year (Rs. in 000's)

Public Issue Rights Issue

Bonus Issue Private Placement

III. Position of Mobilisation and Deployment of Funds

Source of Funds

Total Liabilities Total Assets

Paid-up Capital Reserves & Surplus

Share application money Secured Loans

Deferred Tax Unsecured Loans

Deferred compensation

IV. Application of Funds

Net Fixed Assets Investments

Net Current Assets Misc. Expenses

V. Performance of the Company

Turnover Total Expenditure

+-- Profit Before Tax +--Profit After Tax

Earnings per share

(Annualised) in Rs. Dividend Rate

VI. Generic Names of the three principal products / services of company

Item Code No.(itc Code)

Product Description

Product Description

Place: Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNA K.M. KUMAR

BALANCE SHEET ABSTRACT AND COMPANY’S GENERAL BUSINESS PROFILE AS PER PART IV OF SCHEDULE VI TO THE COMPANIES ACT, 1956

2

3

0

1

4

0

4

3

3

2 0

1 8

0 6

N I L

N I

N I L

L

0001 5 0

N I L

1 8 1 8 7 3

0 2 0 1 0 0

1 8 1 8 7 3 2

4 6 5 6 5 4

6 3 0 4 1 4 2

9

03

1

7

0

8 7

8 3

3 6

8

11

1

9

0

2

7

9

8

4

5

9

4

0

1 2 9 3 8 9 8

1 6 3 5 4 5

7 6 4 71 2 0

+ 2 9 5 6 9 7

9 1 1 9 5 0

2+ 6 8 0 9 8

1 53 1 . 4 0

N O T A P P L I C A B L E

S O F T W A R E S E R V I C E S

P M E N TS O F T W A R E D E V E L O

Date : August 25, 2006 Chairperson Managing Director Company Secretary &



2

67

BOARD OF DIRECTORS

PRESIDENT & CEO

Diwakar Sai Yerra

Patil S.K.

Suparna N.R.

Muralikrishna G.K.

Venkatesh & Co, Chartered Accountants, Chennai

State Bank of India

1281, 21st Main 2nd Phase, J.P. Nagar, Bangalore - 560078

AUDITORS

BANKERS

REGISTERED OFFICE

SYSTEMLOGIC SOLUTIONS LIMITED

systemlogic solutions | annual report 2005-06

68

To the members,

Your Directors have pleasure in presenting the Tenth Annual Report together with the audited statement of accounts for the year ending on March 31, 2006

Financial Highlights 2005-06 2004-05 Rs Rs.

Revenue from operations 15,93,83,264 13,53,91,989Operating profit [PBIDT] 7,01,54,737 5,44,65,873

Interest 28,21,073 22,65,998

Profit before depreciation & tax 6,73,33,664 5,21,99,875

Depreciation 3,21,36,687 2,30,89,125

Profit after depreciation and before tax 3,51,96,977 2,91,10,751


Profit after current year tax 3,23,17,627 2,74,10,751

Provision for deferred tax 29,00,000 19,00,000

Profit after tax 2,94,17,627 2,55,10,751


Balance of Profit 11,33,53,111 9,13,16,975

Appropriations

Proposed dividend 64,73,573 64,73,573

Dividend tax 9,07,919 9,07,919


PERFORMANCE

The Company’s revenue and profit has grown 18% and 12 % respectively over the previous year. The company’s core competency in specialised corporate training programs has contributed to the bottom line significantly

Dividend

In view of the satisfactory results your directors recommend a dividend of 25% amounting to Rs.64,73,573/- at last year level.

PROSPECTS

The company has launched several initiatives that offer end to end solutions for customers both on site engagement and offshore which would yield higher revenues in the years ahead The business prospects appear to be excellent in specialised corporate training program in view of encouraging response from clients DIRECTORS

Mr. G.K.Muralikrishna retires by rotation and being eligible, offers himself for reappointment.

Mr.A.Gopal Rao retired on June 01 2006. The Board places on record its appreciation of the services rendered by Mr.Gopal Rao during the period of his directorship in the Company.

DIRECTORS’ RESPONSIBILITY STATEMENT

Pursuant to the requirements under Section 217(2AA) of the Companies Amendment Act, 2000 with respect to Directors Responsibility Statement, it is hereby confirmed:

st1. That in the preparation of the annual accounts for the financial year ended 31 March 2006, the applicable accounting standards have been followed along with proper explanation relating to material departures.

DIRECTORS' REPORT


69


2. That the Directors have selected such accounting policies and applied them consistently and made judgements and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for the year under review;

3. That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

st 4. That the Directors have prepared the accounts for the financial year ended 31 March 2006 on a ‘going concern’ basis.

PARTICULARS OF EMPLOYEES

As required by the provisions of section 217 (2A) of the Companies Act, 1956, read with companies (particulars of employees) rules 1975 as amended the names and other particulars of the employees are set out in the annexure to the Directors’ Report. However as per the provisions of section 219 (1)(b)(iv) of the Companies Act, 1956, the report of the companies is being sent to all the shareholders of the company excluding the aforesaid information. Any shareholder interested in obtaining such particulars may write to the registered office of the company.

AUDITORS

M/s Venkatesh & Co., Chartered Accountants, Chennai retire at the Annual General Meeting and are eligible for reappointment. A certificate under section 224 (1-B) of the Companies Act, 1956 has been received from them.

Conservation of Energy / Technical absorption, research and development/Foreign Exchange earnings and out-goings:

a) Total Foreign Exchange earnings and outgo :

1) Total Foreign Exchange earnings : Rs.1,57,87,368

2) Total Foreign Exchange out-go : Rs. 1,13,54,528 ACKNOWLEDGEMENT

Your Company acknowledges the sustained support it has received from the suppliers, buyers, customers and bankers and thanks them for their co-operation and support.

Your Directors wish to acknowledge and place on record their appreciation for the services rendered by the employees of your Company.

By Order of the Board

Place: Bangalore G.K. MURALIKRISHNADate : August 18, 2006 Director

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AUDITORS' REPORT TO THE MEMBERS OF SYSTEM LOGIC SOLUTIONS LIMITED


Place : Chennai V.DASARATYDate : August 18, 2006 Partner

We have audited the attached Balance sheet of Systemlogic Solutions Limited as at March 31, 2006 and the Profit & Loss account of the

company for the year ended on that date annexed thereto. These financial statements are the responsibility of the company’s

management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit

includes examining, on a test basis, evidence to support the financial statement amounts and disclosures in the financial statements,

assessing the accounting principles used in the preparation of financial statements, assessing significant estimates made by management

in the preparation of financial statements and evaluating overall financial statement presentation. We believe that our audit provides a

reasonable basis for our opinion.

1. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Company Law Board in terms of section 227 (4A) of the

Companies Act, 1956, we enclose in the annexure a statement on the matters specified in paragraphs 4 & 5 of the said order.

2. 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.



c. The Balance Sheet and Profit and Loss account dealt with by this report are in agreement with the books of account.

d. In our opinion, the Profit and Loss account and Balance Sheet comply with accounting standards referred to in sub section (3C) of

section 211 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 Balance Sheet and Profit

and Loss account read together with the other notes and accounting policies give the information required by the Companies Act

1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in

India.

i. in so far as it relates to the Balance Sheet of the state of affairs of the company as at March 31, 2006.

ii. in so far as it related to the Profit and loss account, of the profit of the company for the year ended on that date.


71



In terms of the information and explanation given to us and the books and records examined by us in the normal course of audit and to

the best of our knowledge and belief, we state as under:

1. a. The company has maintained proper records showing full particulars including quantitative details and situation of fixed assets.

b. The fixed assets of the company have been physically verified by the management at reasonable intervals. No material

discrepancies were noticed on such verification.

c. No substantial part of the fixed assets has been disposed off during the year.

2. The company’s nature of operations does not require it hold inventories. Accordingly, Clause 4(ii) of the Companies Auditors

Report(Order) , 2003 is not applicable.

3. The company has not granted/taken any loans to companies, firms or other parties covered in the register maintained under

Section 301 of the Companies Act, 1956.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures

commensurate with the size of the company and the nature of its business with regard to purchases of stores, raw materials

including components, plant and machinery, equipment and other assets with regard to the sale of goods. No instances of

continuing failure to correct major weaknesses in internal control were noticed.

5. a. According to the information and explanation given to us, there were no transactions of purchase of goods and materials made

in pursuance of contracts or arrangements entered in the register maintained under section 301 of the Companies Act, 1956 and

aggregating Rs 5 lakhs or more during the year in respect of each party.

b. In respect of sale of goods, payment for services to parties listed in the register maintained under Section 301 of the Companies

Act, 1956, these transactions have been made at prices which are reasonable having regard to prevailing market prices at the

relevant time.

6. The company has not accepted deposits from the public during the year within the meaning of section 58A of the Companies Act,

1956, and the rules made thereunder.

7. In our opinion, the company has an adequate internal audit system commensurate with the size of the company and the nature of its

business.

8. The Central Government has not prescribed the maintenance of cost records under Section 209 (1) (d) of the Companies Act, 1956.

9. a. According to the records of the company, the company is regular in depositing undisputed statutory dues including provident

fund, income tax, sales tax, customs duty, excise duty, cess and other statutory dues with the appropriate authorities.

According to the information and explanation given to us, no undisputed amounts payable in respect of sales tax, wealth tax,

customs duty and excise duty were outstanding as at March 31, 2006 for a period of more than six months from the date they

became payable.

b. According to the information and explanation produced to us, there are no dues in respect of income tax, sales tax, customs

duty, excise duty and cess that have not been deposited with the appropriate authorities on account of any dispute.

10. The company has no accumulated losses at the end of the financial year. The company has not incurred cash losses in the financial

year under report and in the financial year immediately preceding such financial year.


12. The company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other

securities.

13. The company has not given any guarantee for loans taken by others from banks or financial institutions.

14. The company has not obtained term loans during the year.


16. The company has not made any preferential allotment of shares to parties and companies covered in the register maintained under

Section 301 of the Companies Act, 1956.

17. The company has not issued any debentures and hence, creation of securities in respect of debentures does not arise.

18. The company has not raised money by way of public issues.

19. According to the information and explanations furnished to us, no fraud on or by the company has been noticed or reported during

the year.

For VENKATESH & CO Chartered Accountants



72


I. SOURCES OF FUNDS


Share Capital A 2,58,94,290 2,58,94,290 Reserves and surplus B 17,12,06,329 14,91,70,194

2. LOAN FUNDSSecured loans C 10,440,009 1,34,61,452

3. DEFERRED TAX 1,82,52,667 1,53,52,667

22,57,93,295 20,38,78,603


1. FIXED ASSETS D

Gross Block 28,14,19,853 20,03,64,407Less : Depreciation 9,54,41,049 6,33,09,806

Net Block 18,59,78,804 13,70,54,601


Sundry Debtors E 3,46,64,092 4,89,30,304Cash and Bank Balances F 17,70,418 1,23,03,347Unbilled revenue 2,60,60,617 2,78,68,368Loans and advances G 3,00,52,022 2,93,67,345

9,25,47,149 11,84,69,363

3. LESS: CURRENT LIABILITIES & PROVISIONS H 5,27,32,659 5,16,45,361


22,57,93,295 20,38,78,603

Notes on accounts K


Place: Bangalore G.K. MURALIKRISHNA DIWAKAR SAI YERRA V. DASARATYDate : August 18, 2006 Director Director Partner




73


INCOME I 15,93,83,264 13,53,91,989


Software services & administrative expenses J 8,92,28,527 8,09,26,116

Profit before interest depreciation & tax (PBIDT) 7,01,54,737 5,44,65,873

Interest Bank 28,21,073 22,65,998

Profit before depreciation & tax 6,73,33,664 5,21,99,875

Depreciation 3,21,36,687 2,30,89,125

Profit before taxes 3,51,96,977 2,91,10,751


Profit after Current Year tax & 3,23,17,627 2,74,10,751before Deferred Tax Provision

Deferred Tax Provision 29,00,000 19,00,000

Profit after Tax (PAT) 2,94,17,627 2,55,10,751

Balance brought forward from previous year 8,39,35,484 6,58,06,224

Balance Of Profit 11,33,53,111 9,13,16,975

Appropriations

Proposed Dividend 64,73,573 64,73,573

Proposed Dividend Tax 9,07,919 9,07,919


Notes on accounts K


For VENKATESH & CO



Place: Bangalore G.K. MURALIKRISHNA DIWAKAR SAI YERRA V. DASARATYDate : August 18, 2006 Director Director Partner



74



AUTHORISED1,00,00,000 Equity shares of Rs.10 each 10,00,00,000 10,00,00,000


25,89,429 Equity shares of Rs.10 each 2,58,94,290 2,58,94,290fully paid up


P & L Account 10,59,71,619 8,39,35,484Share Premium 6,39,85,710 6,39,85,710Capital Reserve 12,49,000 12,49,000

17,12,06,329 14,91,70,194SCHEDULE - C : SECURED LOANS

Term Loan from Bank - 2,05,606Cash Credit from Bank 95,94,239 1,30,17,038Car Loan 8,45,770 2,38,809

1,04,40,009 1,34,61,452

SCHEDULE - E : SUNDRY DEBTORS (Unsecured, considered good)

Outstanding for less than six months 2,12,89,604 3,84,82,771Other debts 1,33,74,488 1,04,47,533

3,46,64,092 4,89,30,304SCHEDULE - F : CASH & BANK BALANCES

Balance with scheduled banks ini. Foreign currency 17,55,684 1,22,16,459ii. Current accounts 50,363Cash on hand 14,734 36,524

17,70,418 1,23,03,347SCHEDULE - G : LOANS AND ADVANCES (Unsecured considered good)

Advances recoverable in cash or in kind orfor value to be received 3,00,52,022 2,93,67,345

3,00,52,022 2,93,67,345

SCHEDULE - H : CURRENT LIABILITIES AND PROVISIONS

Sundry creditors 4,24,71,817 4,25,63,870Proposed dividend 64,73,573 64,73,573Provision for taxation 28,79,350 17,00,000Provision for Dividend tax 9,07,919 9,07,919

5,27,32,659 5,16,45,361



75

Leasehold Building 5,53,078 - - 5,53,078 67,496 9,015 - 76,511 4,76,567 4,85,582

Plant & Machinery 18,66,70,835 6,92,45,068 - 25,59,15,903 5,75,04,516 3,11,70,541 - 8,86,75,056 16,72,40,847 12,91,66,319

Air Conditioners 10,13,282 - - 10,13,282 3,64,763 48,131 - 4,12,894 6,00,388 6,48,518

Electricals Installations 28,39,657 - - 28,39,657 11,25,492 1,99,714 - 13,25,205 15,14,452 17,14,166

Office Equipment 28,69,265 1,32,959 - 30,02,224 10,66,562 1,75,797 - 12,42,359 17,59,865 18,02,703

Furniture & Fixures 55,06,508 1,07,42,928 - 1,62,49,436 28,52,079 3,51,439 - 32,03,517 1,30,45,919 26,54,429

Motor Vehicles 9,11,782 9,46,991 12,500 18,46,273 3,28,899 1,82,051 5,443 5,05,506 13,40,770 5,82,883

Total 20,03,64,407 8,10,67,946 12,500 28,14,19,853 6,33,09,805 3,21,36,687 5,443 9,54,41,050 18,59,78,803 13,70,54,601

(13,62,46,386) (642,51,021) (1,33,000) (20,03,64,407) (4,02,49,113) (2,30,89,125) (28,428) (6,33,09,806) (13,70,54,601) (9,59,97,272)

Asset Opening OpeningAs on 1.4.05

Additions DeletionClosingAs on

31.3.06

ClosingAs on

31.3.06

As on31.3.2006

As on31.3.2005

Net BlockDepreciationGross Block

For the Year Deletion


SCHEDULE - I : REVENUE FROM OPERATIONS

Income from software sales & services 15,87,08,237 13,12,19,767Other income 6,75,027 41,72,222

15,93,83,264 1,35,39,989

SCHEDULE - J : SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES

Software services and development expenses 5,79,59,870 4,85,97,431

Rent and amenities 10,59,834 8,37,999

Postage telegram & telephones 27,092 26,721

Printing & stationary 10,38,530 9,37,031


Travelling & conveyence 20,01,381 18,42,544

Advertisement & promotional expenses 18,744 1,33,323

Bad debts written off - -

Subscription 75,002 65,000

Rates & taxes 4,29,025 2,50,010

Service Charges 66,68,191 68,30,462

Loss on sale of fixed assets 4,407 64,571

Professional charges 1,83,49,755 2,02,08,605

Bank charges 1,58,209 1,99,968

Miscellaneous expenses 74,824 –

8,92,28,527 8,09,26,116

SCHEDULE - D : FIXED ASSETS


(in Rs.)


76

SCHEDULE-K NOTES TO ACCOUNTS AND SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies

a. Accounting convention and concepts: Save as otherwise stated separately, the company follows the Historical Cost Convention and the Mercantile System of Accounting

where the income and expenditure are recognised on accrual basis.

b. IncomeIncome coincides with supply/delivery unless otherwise contractually agreed or required to be delivered later under generally accepted business practices.

c. Fixed assetsThe fixed assets are valued at cost less depreciation. Cost includes all incidental expenses incurred for acquisition of assets.

d. Impairment of assets As per Accounting standard 28 ,the company assesses at each balance sheet date whether there is any indication that an asset including good is impaired. If any such indication exists , the company estimates the recoverable amount of the asset. If such recoverable amount of the asset is less than the carrying amount then carrying amount is reduced to recoverable amount. The reduction is treated as an impairment and recognized in profit and loss account. If at the balance sheet there is an indication that if previously assessed impairment loss no longer exists , the recoverable amount is reassessed and the asset is reflected at the recoverable amount subject to a maximum of depreciated historical cost. In respect of goodwill the impairment loss will be reversed only when it was caused by specific external events and their effects have been reversed by subsequent events. During the year no such impairment has occurred..

e. Revenue Recognition Revenue from software services and projects comprise income from time and material and fixed price contracts. Revenue

from time and material contracts is recognized on the basis of software developed and billable in accordance with terms of the contracts with the clients . Revenues from fixed price contracts is recognized using percentage of completion of method calculated as a percentage of the cost of efforts incurred up to the reporting date to estimated total cost of efforts. Maintenance revenue is recognized over the period of underlying maintenance contracts.

Unbilled revenue primarily comprises the revenue recognized in relation to efforts incurred up on fixed Price , fixed time frame contracts until the balance sheet date.

g. DepreciationThe depreciation has been provided on the basis of Straight line method adopting the rates and the manner as provided in Schedule XIV to the companies Act, 1956.

h. Employees retirement and other benefits

1)The company’s contribution to the Provident Fund account is made to the Provident Fund Commissioner and charged to the profit and loss account.

2)An amount of Rs.72,065/- has been provided for in the year 2005- 2006 (69,058 for 2004-05) towards the Company’s liability to gratuity as per the payment of gratuity Act, 1972.

3)An amount of Rs. 13,395/- has been provided for in the year 2005-2006 (6,189/- for 2004-05) towards the company’s liability for earned leave encashment in accordance with the company’s policy in this regard.

i. Foreign currency transactions (Other than fixed Assets)

The transactions in foreign currency are recorded in the books by applying the exchange rate prevailing as at the date of the transaction. All outstanding asset and liabilities as at the Balance sheet date have been restated at the closing rate. Further the gain or loss on account of fluctuations in exchange rate has been recognised in the Profit and Loss account.

1.The Company is registered as a Software Technology Park under the Software Technology Park Scheme. Consequently the company is entitled to tax holiday under Sec 10A of The Income tax Act, 1961 in respect of its earnings from the STP division.

f. Taxes on IncomeProvision is made for income tax on an annual basis, under the tax payable method, based on the tax liability as computed after taking credit for allowances and exemptions. In case of matters under appeal, due to disallowances or otherwise, full provision is made when the said liabilities are accepted by the company.

Deferred tax is recognised, subject to the consideration of prudence, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods.

Deferred tax assets are not recognised on unabsorbed depreciation and carry forward of losses unless there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised as per AS-22 “Accounting for Taxes on Income” issued by the Institute of Chartered Accountants of India”.


77

SCHEDULE-K NOTES TO ACCOUNTS AND SIGNIFICANT ACCOUNTING POLICIES

Foreign Currency:

a. Expenditure in Foreign currency during the financial year on account of royalty, know-how, professional, consultation fees, repayment of loan, interest and other matters.

Particulars 2005-2006 2004-2005 Rs. Rs.

1. Travelling Expenses 1,43,219 70,7252. Maintenance Allowance 24,49,532 34,92,6003. Professional Charges & others 40,570 26,69,005 4. Repayment of loan 74,53,148 -5 Repayment of Interest 12,68,058 -

b. Earnings in foreign exchange

Particulars 2005-2006 2004-2005 Rs. Rs.

i. Services Provided 1,57,87,368 4,91,55,567

The Security details of Secured loans are as follows:

1) The company has availed a cash credit facility from State Bank Of India with a limit of Rs.2.25 Crore and the security details are as follows:

a) Charge on Fixed and Current Assets of the Company.b) Equitable mortgage of residential flat belonging to the promoter of the holding company.c) Personal guarantee of the directors.

4. There are no sundry creditors outstanding to SSI for more than 30days and more than Rupees one lakh. The amount due to sundry

creditors being SSI units is based on the information obtained and available with the company.

5. The company has received a letter No. BNG/DIC/(U)/SS/IPO-2/29/1/99-2000 DT. 19.11.99 from the Government of Karnataka,

Department of Industries and Commerce sanctioning a grant-in-aid of Rs. 24.98 lakhs. In terms of the said sanction letter, the

company has no contractual right to claim the amount and the said amount shall be released subject to availability of funds at the

appropriate time as decided by the Government. The company has received Rs. 12,49,000/- in the year 2004-05 being 50% of

subsidy and the same is accounted in capital reserves. On receipt of the balance amount, the total subsidy received will be adjusted

against fixed assets as per Accounting Standard 12, Accounting for Grants

6. Sundry Debtors outstanding for less than 6 months include amount due from a Company in which the director is interested as a

director/member of Rs. 3,71,235 (3,27,37,500)

7. The figures for the previous year have been regrouped and reclassified wherever necessary for comparison purposes.

As per our report of even date


For and on behalf of the BoardPlace : Bangalore G.K. MURALIKRISHNA DIWAKAR SAI YERRA V. DASARATY Date : August 18, 2006 Director Director Partner


78



Balance Sheet code





Source of Funds



Secured Loans Unsecured Loans

Deferred Tax

Application of Funds



IV. Performance of the Company



Earnings per share Dividend Rate(Annualised) in Rs.

V. Generic Names of the three principal products / services of company


Product Description

Product Description

Place: Bangalore G.K. MURALIKRISHNA DIWAKAR SAI YERRA

BALANCE SHEET ABSTRACT AND COMPANY'S GENERAL BUSINESS PROFILE AS PER PART IV OF SCHEDULE VI TO THE COMPANIES ACT, 1956

Date : August 18, 2006 Director Director

3 1 0 3 2 0

0 8

0 6

N

N

I

I

L

L

N I L

N I L

N I L

N I L

N I L

01

81

4

2

4

5

0

3

1 7 1 2 0 6

1 8 5 9 7 9

3 9 8 1 4

3 8 3 1 5 9

+ 3 5 1 9 7

21 4 1 8 6

+ 2 9 4 1 8

2 5 . 0 0




1 7 7 6 2

2

2 2

5

2 2

8

5 5

9

7 7

4

9 93 3

11 . 3 6


79

BOARD OF DIRECTORS

REGISTERED OFFICE

Muralikrishna G.K.

Ramachandiran V.

Diwakar Sai Yerra

UTI Bank Ltd, Indian Bank

Venkatesh & Co Chartered Accountants, Chennai

50, Arya Gowda Street, West Mambalam, Chennai - 600 033

BANKERS

AUDITORS

JAYAMARUTHI SOFTWARE SYSTEMS LIMITED

jayamaruthi software systems | annual report 2005-06

80

DIRECTORS REPORT

To the Members of the company

stYour directors have great pleasure in presenting their annual report on the operations of your company for the year ended 31 March

2006.

Financial Highlights 2005-06 2004-05 Rs Rs


Profit before depreciation & tax(PBDT) 3,05,35,839 27,20,774

Depreciation 15,13,653 20,90,582

Profit after depreciation and before tax 2,90,22,186 6,30,192

Provision for taxation 8,20,650 -

Profit after current year tax (PAT) 2,82,01,536 6,30,192

Balance brought forward 31,75,055 25,44,863

Balance of profit carried forward 3,13,76,591 31,75,055

Dividend

In view of the need to conserve the reserves for the business operations of the Company, the Directors have not declared any dividend for

the year.

Business

The Company continues to consolidate its revenues since its acquisition by Helios & Matheson in 2004. During the year, the company

continued to avail the benefits arising from its alliances and investments in the USA and India. Since healthcare is the happening thing in

the global IT sector, the company is well poised to reap the benefits of the same and grow both in size and strength during the ensuing

years. The drop in revenues is on account of the conscious decision to cater to those projects that are viable and profitable.

Prospects

The prospects for the ensuing years are considered bright. The company’s existing clientele, which is spread across USA and the

expected orders, would ensure continuing increase in the volumes of the company.

DIRECTORS’ RESPONSIBILITY STATEMENT

Pursuant to the requirements under Section 217(2AA) of the Companies Amendment Act, 2000 with respect to Directors Responsibility

Statement, it is hereby confirmed:

st1. That in the preparation of the annual accounts for the financial year ended 31 March 2006, the applicable accounting

standards have been followed along with proper explanation relating to material departures.

2. That the Directors have selected such accounting policies and applied them consistently and made judgements and estimates

that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the

financial year and of the profit or loss of the Company for the year under review;

3. That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance

with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting

fraud and other irregularities;

st 4. That the Directors have prepared the accounts for the financial year ended 31 March 2006 on a ‘going concern’ basis.


81

DIRECTORS

Mr.G.K.Muralikrishna, Director retires by rotation at this Annual General Meeting and is eligible for reelection.

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

The provisions of subsection (1) (e) of section 217 of the Companies Act, 1956, read with the Companies (disclosure of particulars in the

report of board of directors) Rules, 1988, are set out in the annexure included in this Report.

PARTICULARS OF EMPLOYEES

As required by the provisions of section 217 (2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) rules 1975

as amended, the names and other particulars of the employees are set out in the annexure to the directors’ report. However as per the

provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the report of the Directors is being sent to all the shareholders of the

Company excluding the aforesaid information.

AUDITORS

M/s. Venkatesh & Co., Chartered Accountants, Chennai retire at the ensuing Annual General Meeting and are eligible for reappointment.

A certificate under Section 224 (I-B) of the Companies Act, 1956 has been received from them.

ACKNOWLEDGEMENT

Your directors thank the clients, vendors, investors, financial institutions and bankers for their continued support of your company’s

growth. Your directors place on record their appreciation of the contribution made by the employees at all levels, who, through their

competence, hard work, solidarity, cooperation and support, have enabled the company to achieve rapid growth.

Your directors thank the Government of India, particularly the Department of Electronics, Software Technology Parks- Chennai Ministry

of Information Technology, Ministry of Commerce, the Reserve Bank of India, VSNL, the Department of Telecommunications, the state

governments, and other government agencies for their support during the year and look forward to their continued support in the future.


Place: Chennai V. RAMACHANDIRAN

Date : August 18, 2006 Director


82

ANNEXURE TO DIRECTORS REPORT

Conservation of Energy

The operations of your Company are not energy-intensive. Adequate measures have however been taken to reduce energy consumption by using energy efficient computer terminals and by the purchase of energy efficient equipment incorporating the latest technology. Your company constantly evaluates new technologies and invests them in its infrastructure to make them more energy efficient. As energy forms a very small part of the total cost, the impact on cost is not material.

Research & Development

Research & Development of new services, designs, frameworks, and methodologies continue to be important to your company. This allows your company to reuse designs across projects, and thereby increase quality and productivity.

Technology absorption, Adaptation and innovation

Provision of state of the art communication facilities and total technology solutions to its clients contribute to technology absorption and innovation.

Foreign Exchange Earnings & Outgo

Foreign exchange earnings –Rs. 4,89,96,500 Outgoings- Rs. 41,93,867


Place: Chennai V. RAMACHANDIRAN

Date : August 18, 2006 Director


83

AUDITORS’ REPORT TO THE MEMBERS OF JAYAMARUTHI SOFTWARE SYSTEMS LIMITED

1. We have audited the attached Balance sheet of Jayamaruthi Software Systems Limited as at March 31, 2006 and the Profit & Loss

account of the company for the year ended on that date annexed thereto. These financial statements are the responsibility of the

company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An

audit includes examining, on a test basis, evidence to support the financial statement amounts and disclosures in the financial

statements, assessing the accounting principles used in the preparation of financial statements, assessing significant estimates

made by management in the preparation of financial statements and evaluating overall financial statement presentation. We

believe that our audit provides a reasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Company Law Board in terms of section 227 (4A) of the

Companies Act, 1956, we enclose in the annexure a statement on the matters specified in paragraphs 4 & 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.



c. The Balance Sheet and Profit and Loss account dealt with by this report are in agreement with the books of account.

d. In our opinion, the Profit and Loss account and Balance Sheet comply with accounting standards referred to in sub section (3C) of

section 211 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 Balance Sheet and Profit

and Loss account read together with the other notes and accounting policies give the information required by the Companies Act

1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in

India.

(i) in so far as it relates to the Balance Sheet of the state of affairs of the company as at March 31, 2006.

(ii) in so far as it related to the Profit and loss account, of the profit of the company for the year ended on that date.

For VENKATESH & CO


Place: Chennai V.DASARATY



84



In terms of the information and explanation given to us and the books and records examined by us in the normal course of audit and to the best of our knowledge and belief, we state as under:

1. a. The Company has maintained proper records showing full particulars including quantitative details and situation of fixed assets.

b. The fixed assets of the company have been physically verified by the management at reasonable intervals. No material discrepancies were noticed on such verification.

c. No substantial part of the fixed assets has been disposed off during the year.

2. The company’s nature of operations does not require it hold inventories. Accordingly, Clause 4(ii) of the Companies Auditors Report(Order) , 2003 is not applicable.

3. The company has not granted/taken any loans to companies, firms or other parties covered in the register maintained under Section 301 of the Companies Act, 1956.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the company and the nature of its business with regard to purchases of stores, raw materials including components, plant and machinery, equipment and other assets with regard to the sale of goods. No instances of continuing failure to correct major weaknesses in internal control were noticed.

5. a. According to the information and explanation given to us, there were no transactions of purchase of goods and materials made in pursuance of contracts or arrangements entered in the register maintained under section 301 of the Companies Act, 1956 and aggregating Rs. 5 lakhs or more during the year in respect of each party.

b. In respect of sale of goods, payment for services to parties listed in the register maintained under Section 301 of the Companies Act, 1956, these transactions have been made at prices which are reasonable having regard to prevailing market prices at the relevant time.

6. The company has not accepted deposits from the public during the year within the meaning of section 58A of the Companies Act, 1956 and the rules made thereunder.

7. In our opinion, the company has an adequate internal audit system commensurate with the size of the company and the nature of its business.

8. The Central Government has not prescribed the maintenance of cost records under Section 209 (1) (d) of the Companies Act, 1956.

9. a. According to the records of the company, the company is regular in depositing undisputed statutory dues including provident fund, income tax, sales tax, customs duty, excise duty, cess and other statutory dues with the appropriate authorities. According to the information and explanation given to us, no undisputed amounts payable in respect of sales tax, wealth tax, customs duty and excise duty were outstanding as at March 31, 2006 for a period of more than six months from the date they became payable.

b. According to the information and explanation produced to us, there are no dues in respect of income tax, sales tax, customs duty, excise duty and cess that have not been deposited with the appropriate authorities on account of any dispute.

10. The company has no accumulated losses at the end of the financial year. The company has not incurred cash losses in the financial year under report and in the financial year immediately preceding such financial year.


12. The company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

13. The company has not given any guarantee for loans taken by others from banks or financial institutions.

14. The company has not obtained any term loans during the year.


16. The company has not made any preferential allotment of shares to parties and companies covered in the register maintained under Section 301 of the Companies Act, 1956.

17. The company has not issued any debentures and hence, creation of securities in respect of debentures does not arise.

18. The Ccompany has not raised money by way of public issues.

19. According to the information and explanations furnished to us, no fraud on or by the company has been noticed or reported during the year.


Place: Chennai V. DASARATY



85


I. SOURCES OF FUNDS


Share Capital A 10,00,000 10,00,000Reserves and surplus B 3,78,76,591 96,75,055

3,88,76,591 1,06,75,055


1. FIXED ASSETS

Gross Block 1,20,41,390 1,20,77,430Less : Depreciation 86,15,050 71,01,396

Net Block C 34,26,340 49,06,034


Sundry Debtors D 3,35,40,978 25,22,652Cash and Bank Balances E 13,59,527 17,08,355Loans and advances F 6,92,92,564 3,91,46,719

10,41,93,069 4,33,77,726

3. LESS: CURRENT LIABILITIES & PROVISIONS G 6,87,42,819 3,76,08,705

Net Current Assets 3,54,50,250 57,69,021

38,876,591 1,06,75,055

Notes on accounts J



Place: Chennai G.K. MURALIKRISHNA V. RAMACHANDIRAN V. DASARATYDate : August 18, 2006 Director Director Partner



86


INCOME - Revenue from operations H 5,68,86,671 7,00,19,443

5,68,86,671 7,00,19,443

Software services & administrative expenses I 2,63,50,832 6,72,98,669

Profit before depreciation & taxes (PBDT) 3,05,35,839 27,20,774

Depreciation 15,13,653 20,90,582

Profit before taxes 2,90,22,186 6,30,192

Provision for taxation 8,20,650 -

Profit after tax (PAT) 2,82,01,536 6,30,192

Balance brought forward from previous year 3,175,055 25,44,863

Balance carried over to balance sheet 3,13,76,591 31,75,055

Notes on accounts J


For VENKATESH & CO



Place: Chennai G.K. MURALIKRISHNA V. RAMACHANDIRAN V. DASARATY

Date : August 18, 2006 Director Director Partner



87



AUTHORISED1,00,000 Equity shares of Rs.10 each 10,00,000 10,00,000


1,00,000 Equity shares of Rs.10 each 10,00,000 10,00,000fully paid up


General Reserve 65,00,000 65,00,000Profit & Loss Account 3,13,76,591 31,75,055

3,78,76,591 96,75,055SCHEDULE - D : SUNDRY DEBTORS (Unsecured, considered good)

Debts outstanding for a period exceeding six months - -Other debts 3,35,40,978 25,22,652

3,35,40,978 25,22,652SCHEDULE - E : CASH & BANK BALANCES

Balance with scheduled banks inCurrent accounts 13,52,879 16,98,498Cash on hand 6,648 9,857

13,59,527 17,08,355

SCHEDULE - F : LOANS AND ADVANCES (Unsecured considered good)

Advance Income Tax 11,97,653 10,49,678Advances recoverable in cash or in kind orfor value to be received 6,80,94,911 3,80,67,041

6,92,92,564 3,91,46,719

SCHEDULE - G : CURRENT LIABILITIES AND PROVISIONS

Sundry creditors 6,75,83,564 3,72,70,100Provision for taxation 11,59,255 3,38,605

6,87,42,819 3,76,08,705

SCHEDULE - H : REVENUE FROM OPERATIONS

Income from software sales & services 5,68,86,250 6,84,85,752Other income 421 15,33,691

5,68,86,671 7,00,19,443



88


SCHEDULE - I : SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES

Software services and development expenses 1,92,55,213 5,01,56,585Staff welfare 1,23,207 4,72,148

Rent and amenities 9,89,220 10,35,200

Electricity charges 8,66,371 8,20,476

Postage telegram & telephones 4,73,361 16,60,162

Printing & stationary 14,950 21,448


Travelling & conveyence 41,79,610 10,97,584

Donation - 27,15,000

Rates & taxes 1,12,502 3,74,317

Auditors fees 56,120 25,000

Miscellaneous expenses 99,106 14,40,505

2,63,50,832 6,72,98,669

SCHEDULE - C : FIXED ASSETS


Asset

Plant & Machinery 86,23,719 7,700 86,31,419 55,65,861 12,25,710 67,91,571 18,39,848.07 30,57,858

Furniture &

Equipments 23,86,831 26,260 24,13,091 7,91,189 2,22,563 10,13,752 13,99,339.33 15,95,642

Motor Vehicles 9,96,880 - 9,96,880 7,44,346 65,381 8,09,727 1,87,152.89 2,52,534

Total 1,20,07,430 33,960.00 1,20,41,390 71,01,396 15,13,653 86,15,050 34,26,340 49,06,034

Previous year figures (1,05,79,956) (14,27,474) (1,20,07,430) (51,77,032) (20,90,582) (71,01,396) (49,06,034) (54,02,924)

As on 31.03.2005

As on 31.03.2005

As on 31.03.2006

As on 31.03.2006

As on 31.03.2005

As on 31.03.2006

Additions

Net Block DepreciationGross Block

For the Year

(in Rs.)


89

ACCOUNTING POLICIES AND NOTES ON ACCOUNTSSCHEDULE NO - J

ACCOUNTING POLICIES

1. Accounting Convention

The financial statements have been prepared in accordance with the historical cost convention and generally accepted accounting standards.

2. Method Of Accounting

The Company has maintained its accounts on accrual basis unless stated otherwise hereafter.

3. Fixed Assets

Fixed Assets are stated at cost less Depreciation.

4. Depreciation

Depreciation is provided on the cost of Fixed Assets as per the rates prescribed in the Schedule XIV of the Companies Act, 1956 under Written Down Value Method.

5.Earnings

Export of software is accounted on accrual basis.

6. Expenses

Expenses are accounted on Accrual basis.

7. Foreign Currency Transactions

The Export Sales of Software during the year is accounted in the exchange rates on the date at which the bank has realized the export bills/receipt and at the Bank rate for the sums kept in EEFC Account. The Export Receivables is accounted on Notional rate and any exchange difference at the time of the realisation is disclosed separately.

8. The Company has been registered as a100% EOU with Software Technology Parks of India (STPI), Ministry of Information and Technology, Government of India during the year and its income is exempt U/s.10 B of the Income Tax Act, 1961.

9. Provision for taxation is duly made after taking into account non-exempt income for the year.

10. Additional information pursuant to the Provisions of Paragraph 3, 4C & 4D part II of Schedule VI of the Companies Act, 1956.

The Company has made Export sales of Computer Software and the details required as above are furnished to the extent applicable to this Company.

Details of Sales 2005-06 2004-05in Rs in Rs.

Sale of Software - Export 4,89,96,500 5,30,63,100

Income earned/Expenses incurred in Foreign Exchange

INCOME EARNEDExport Sales of Software’s (FOB Value) 4,89,96,500 5,30,63,100

EXPENSES INCURRED

On Account of Foreign Traveling 41,93,867 14,80,875


Place : Chennai G.K. MURALIKRISHNA V. RAMACHANDIRAN V. DASARATYDate : August 18, 2006 Director Director Partner



90



Balance Sheet code





Source of Funds



Secured Loans Unsecured Loans

Application of Funds



IV. Performance of the Company



Earnings per share Dividend Rate(Annualised) in Rs.

V. Generic Names of the three principal products / services of company


Product Description

Product Description

Place: Chennai G.K. MURALIKRISHNA V. RAMACHANDIRAN

BALANCE SHEET ABSTRACT AND COMPANY'S GENERAL BUSINESS PROFILE AS PER PART IV OF SCHEDULE VI TO THE COMPANIES ACT, 1956

Date : August 18, 2006 DIRECTOR DIRECTOR

3 1 0 3 2 0

1 8

0 6

N

N

I

I

L

L

N

N

I

I

L

L

N I L

N I L

N

N

I

I

L

L

N I L

73 8 7 7

3 4 2 7

53 4 5 0

8 8 75 6

9+ 2 0 2 2

2 7 8 6 5

+ 22 8 0 1




4 5 3 0 2

1

3 3

0

8 8

0

8 8

0

7 77 7

282 . 0 1


91

BOARD OF DIRECTORS

REGISTERED OFFICE

Muralikrishna G.K.

Ramachandiran V.

Shankar N. Ram

The Chugh Firm, Certified Public Accountants, Cerritos, California, USA

7777, Centre Avenue, Suite 270, Huntington Beach, CA-92647, USA

AUDITORS

THE LAXMI GROUP INC

the laxmi group | annual report 2005-06

92

DIRECTORS’ REPORT

To the Stock holders ofThe Laxmi Group Inc

Your directors are pleased to present the reviewed financials along with Review Report of The Chugh Firm, CPA, CA, USA independent

Accountant for the year ended March 31, 2006 .

Financial Highlights (Fig in US$). March 31 ,2006 March 31, 2005 Revenue 6,679,062 6,163,631

EBITDA 671,903 292,203

Interest 7,141 16,091

Depreciation 12,163 12,487

Net Income 652,598 263,625

Dividend 60,000 60,000

Financials :

It has been a year of consolidation and steady growth with focus on increasing the profits. This effort is reflected in increase of profit of

10% on revenue for the year as against 5 % on revenue of the previous year. The financials submitted are in conformity with statements on

standards for Accounting and Review Services issued by The American Institute of Certified Public Accountants as per independent

Accountant’s Report dated August 19, 2006 enclosed.

Prospects

The company’s business prospects continue to be robust and that would result in significant improvement in revenues to the company in

the years to come.

Dividend

Your directors recommend a dividend of $60,000 for the year ended March 31,2006.

Retirement of Director . Mr.A.Gopal Rao , a director of the company has retired from the directorship of the company The board wishes to place its appreciation

on record and thank Mr.. Gopal Rao for his valuable services to the company during his tenure as director.

Place : Huntington Beach, California . Date : 19 August, 2006


93

INDEPENDENT ACCOUNTANT'S REVIEW REPORT

To the Board of DirectorsThe Laxmi Group, Inc. Huntington Beach, CA

We have reviewed the accompanying balance sheet of The Laxmi Group, Inc. (the “Company”) as of March 31, 2006, and the related

statements of income and changes to stockholders’ equity for the year then ended, in accordance with Statements on Standards for

Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these

financial statements is the representation of the management of The Laxmi Group, Inc.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially

less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an

opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in

order for them to be in conformity with generally accepted accounting principles.

Our review was made for the purpose of expressing limited assurance that there are no material modifications that should be made to

the financial statements in order for them to be in conformity with generally accepted accounting principles. The information included

in the accompanying Schedules 1 to 3 is presented only for supplementary analysis purposes. Such information has been subjected to

the inquiry and analytical procedures applied in the review of the basic financial statements, and we are not aware of any material

modifications that should be made thereto.

THE CHUGH FIRMAugust 19, 2006


94

Schedule March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005

USD Rs USD Rs

I. SOURCES OF FUNDS

1. SHAREHOLDERS’ FUNDS

a. Share Capital A 1,000 44,610 1,000 43,620

b. Additional paid in capital 15,600 6,95,916 15,600 6,80,472

c. Reserves and surplus B 1,039,350 4,63,65,397 781,234 3,40,77,443

2. LOAN FUNDS

a. Secured loans C 130,322 58,13,647 235,647 1,02,78,930

b. Unsecured loans D 91,800 40,95,198 161,200 70,31,544

3. DEFERRED TAX 217,236 96,90,890 166,833 72,77,255

1,495,307 6,67,05,658 1,361,515 5,93,89,265


1. FIXED ASSETS

(I) Gross Block 108,873 48,56,828 108,873 47,49,023

Less : Depreciation (81,475) (36,34,618) 69,312 30,23,389

Net Block 27,398 12,22,210 39,561 17,25,633

2. CURRENT ASSETS,

LOANS AND ADVANCES

a. Sundry Debtors E 3,906,335 17,42,61,591 2,681,299 11,69,58,262

b. Cash and Bank Balances F 26,835 11,97,115 43,253 18,86,680

c. Loans and advances G 262,362 1,17,03,987 355,087 1,54,88,901

4,195,533 18,71,62,693 3,079,639 13,43,33,844

3. LESS: CURRENT LIABILITIES &

PROVISIONS H 2,727,623 12,16,79,246 1,757,685 7,66,70,213

Net Current Assets 1,467,910 6,54,83,447 1,321,954 5,76,63,631

1,495,307 6,67,05,658 1,361,515 5,93,89,265

Notes forming part of the Accounts K



95

Schedule March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005USD Rs USD Rs

I. INCOME:

a. Revenue from operations I 6,679,062 29,79,52,934 6,163,631 26,88,57,604

6,679,062 29,79,52,934 6,163,631 26,88,57,604

II. EXPENDITURE:

Software services & administrative expenses J 6,007,159 26,79,79,353 5,871,429 25,61,11,733 Profit before interest depreciation & tax (PBIDT) 671,903 2,99,73,582 292,203 1,27,45,894 Interest 7,141 3,18,580 16,091 7,01,889

Profit before depreciation & tax 664,761 2,96,55,001 276,112 1,20,44,005

Depreciation 12,163 5,42,592 12,487 5,44,682 Profit after depreciation & before tax 652,598 2,91,12,409 263,625 1,14,99,306

Profit after tax (PAT) 652,598 2,91,12,409 263,625 1,14,99,306

APPROPRIATIONS Proposed Dividend 60,000 26,76,600 60,000 2,617,200

Balance carried to balance sheet 592,598 2,64,35,796 203,625 88,82,106

Notes to accounts K



96

March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005

USD Rs USD Rs

SCHEDULE - A : Stockholders’ Equity

AUTHORISED

Common stock, no par value, 1,000,000 shares


1,000,000 shares issued and outstanding 1,000 44,610 1,000 1,000 43,620

Additional paid in capital 15,600 6,95,916 15,600 6,80,472

SCHEDULE-B : RESERVES AND SURPLUS

a. Retained Earnings 781,234 3,48,50,865 577,610 2,51,95,336

b. Profit & Loss Account 592,598 2,64,35,796 203,625 88,82,106

c. Prior Period adjustment (334,483 (1,49,21,285)

1,039,350 4,63,65,397 781,234 3,40,77,443

SCHEDULE - C : SECURED LOANS

From banks 130,322 58,13,647 235,647 1,02,78,930

SCHEDULE - D : UNSECURED LOANS

Unsecured Loan 91,800 40,95,198 161,200 70,31,544

SCHEDULE -E : SUNDRY DEBTORS

(Unsecured, considered good)

a. Debts outstanding for a period exceeding six months - - - -

b. Other debts 3,906,335 17,42,61,591 2,681,299 11,69,58,262

3,906,335 17,42,61,591 2,681,299 11,69,58,262

SCHEDULE F : CASH & BANK BALANCES

a. Balances with banks 26,685 11,90,423 43,103 18,80,137

b. Cash on hand 150 6,692 150 6,543

26,835 11,97,115 43,253 18,86,680

SCHEDULE -G : LOANS AND ADVANCES

(Unsecured,considered good)

Advances recoverable in cash or in kind or

for value to be received 262,362 1,17,03,987 355,087 1,54,88,901

262,362 1,17,03,987 355,087 1,54,88,901

SCHEDULE H :CURRENT LIABILITIES AND PROVISIONS

a. Accounts Payable 2,328,161 10,38,59,246 1,697,685 7,40,53,013

b. Proposed dividend 60,000 2,676,600 60,000 26,17,200

c. Provision for taxation 339,462 1,51,43,400

2,727,623 12,16,79,246 1,757,685 7,66,70,213



97


USD Rs USD Rs

SCHEDULE - I :REVENUE FROM OPERATIONS

a. Income from software sales & services 6,670,873 29,75,87,640 5,992,317 26,13,84,888

b.Other income 8,189 3,65,295 171,314 74,72,715

6,679,062 29,79,52,934 6,163,631 26,88,57,604

SCHEDULE -J :SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES

Software services and development expenses 5,650,642 25,20,75,154 5,227,298 22,80,14,775

Staff welfare 55,057 24,56,108 118,201 51,55,935

Rent and amenities 33,491 14,94,026 139,899 61,02,390

Electricity charges

Postage telegram & telephones 22,815 10,17,788 66,661 29,07,738

Printing & stationary 2,164 96,538 3,939 1,71,824

Repairs & maintenance 3,575 1,59,483 25,507 11,12,596

Travelling & conveyence 26,265 11,71,702 48,073 20,96,944

Advertisement & promotional expenses 32,088 14,31,448 17,622 7,68,671

Bad debts written off 1,990 86,804

Rates & taxes 8,458 3,77,321 51,853 22,61,828

Miscellaneous expenses 1820 81,194 71,701 31,27,593

Service charges 132,657 59,17,817 59,199 25,82,275

Bank charges 4,474 1,99,588 8,170 3,56,364

Commission expenses 33,501 14,94,493 29,441 12,84,209

Subscription 150 6,692 1,875 81,788

6,007,159 26,79,79,353 5,871,429 25,61,11,733



98

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

SCHEDULE K

History and Nature of Business

The Laxmi Group Inc. (the “Company”) was incorporated in the state of California in 1994 and provides information technology consulting, programming services and project management to clients worldwide. In 2001, the Company’s sole stockholder sold a 51% interest in the Company to Helios and Matheson, Inc. (“H&M), a Delaware corporation, and granted the new stockholder an option to acquire its remaining 49% interest through 2005. No new debt was assumed by the Company in the transaction and H&M elected to not “push down” the acquisition to the financial statements. Therefore, the accompanying financial statements are reflected on a historical cost basis as in prior years.

Accounting Method

The Company uses the accrual method of accounting for financial reporting and for income tax reporting.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash and certificates of deposit with maturities of three months or less.

Concentration of Credit Risk

The Company maintains cash balances at financial institutions that are secured by the Federal Deposit Insurance Corporation up to $100,000 for each institution. During the year on many occasions the cash balance exceeded the federal allowed insured limit.

The Company performs periodic credit evaluations of its customers and maintain allowances for potential uncollectible amounts as deemed necessary. The Company generally does not require collateral to secure its accounts receivable. The Company estimates credit losses based on management’s evaluation of historical experience and current industry trends. Although the Company expects to collect amount due, actual collections may differ from the estimated amounts.

Revenue Recognition

For consulting services, revenue is recognized in the period that services are provided by the company.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from five to seven years. Depreciation expense for the year ended March 31, 2006 was $12,163.

Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a major nature are capitalized. Gains or losses are recognized upon sale or disposal of assets.

Income Taxes

The company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “ Accounting for Income Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowance are established when necessary to reduce deferred tax assets to the amount expected to be realized.

NOTE 2 – ACCOUNTS RECEIVABLE

The Company uses the Aging of the Accounts Receivable method for valuation of allowance for doubtful accounts. Accordingly, the Company has written off all accounts that are deemed uncollectible. Therefore, Accounts Receivable represents the net realizable value.

NOTE 3 – SHORT TERM BORROWINGS

The company has a revolving line of credit agreement with the State Bank of India. This line of credit agreement provides for up to $250,000. The applicable rate of interest on the line of credit is 9.5%. Borrowings under the line are secured by the Company’s receivables under lock box arrangement and guaranteed by the stockholders. The outstanding balance of the line of credit as of March 31, 2006 is $85,439.


99

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

NOTE 4 – RELATED PARTY TRANSACTIONS

The Company also paid to affiliate relating to project management cost $95,000 and for management consultancy $5,500 in the normal course of business.

The Company has received revenue and paid consultancy fee to Netwin Solutions, Inc., a company owned by the 49% remaining stockholder of the company in the normal course of business. The total amount of revenue received is $108,000 and total amount paid for consultancy is $5,500.

The Company also has a receivable from one of its stockholder for $26,369 as of March 31, 2006.

As of March 31, 2006, the Company has an outstanding loan payable to Helios & Matheson, Inc. for $91,800.

As of March 31, 2006, the company has an outstanding receivables $ 18,70,742 from related party

NOTE 5 – ACCRUED EXPENSES

As of March 31, 2006, accrued expenses consist of the following:

Accrued Payroll Expenses $ 63,201Accrued Vacation 41,051Other Accrued Expenses 18,898

$ 123,150

NOTE 6 – EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan which is available to eligible employees through payroll deductions within statutory and plan limits. The Company does not make any contributions to the plan but pays for the administrative costs of the plan.

NOTE 7 – DIVIDEND

The Company has declared dividend in the amount of $60,000 for the fiscal year ending March 31, 2006.


100

BOARD OF DIRECTORS

ADVISORS

REGISTERED AGENT

Muralikrishna G.K.

Ramachandiran V.

The Chugh Firm, Certified Public Accountants, Cerritos, CA, USA

120 N Market Street, Suite 606, Willington, DE 19801, Delaware USA

Registered Agents, Legal Services, LLC

REGISTERED OFFICE

HELIOS & MATHESON INC

helios & matheson inc | annual report 2005-06

101


March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005 in $ in Rs. in $ in Rs.

ASSETS

Investments (unquoted) ( Schedule A) 1,000,000 4,46,10,000 1,000,000 4,36,20,000

Other assets:

Preliminary /Deferred revenue Expenses (Schedule B)(related to incorporation/preoperational expenses-not written off) 6,447 2,87,601 5,937 2,58,972

Receivable 91,800 40,95,197 - -

Total Assets 1,098,247 4,89,92,798 1,005,937 4,38,78,972

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:Accounts payable 98,247 43,82,798 5,937 2,58,972Stockholder's equity (see Schedule C)Common stock: no par value, 1500 shares authorized, 1,000,000 4,46,10,000 1,000,000 4,36,20,000issued and outstanding.Total Liabilities 1,098,247 4,89,92,798 1,005,937 4,38,78,972

Statement of Income & Retained Earnings for the year ended March 31,2006

The company was formed on August 1, 2001. The company is yet to start its operations. The company has made a 51% investment in August'2001 in the Equity of The Laxmi Group Inc, California. Since there are no revenue activities during the year under review, no Profit & Loss account is prepared.

SCHEDULES

A Investments March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005 in $ in Rs. in $ in Rs.

Quoted - - - -

Unquoted510000 shares of common stock fully paid up In THE LAXMI GROUP INC, California 1,000,000 4,61,10,000 1,000,000 4,36,20,000

4,61,10,000 1,000,000 4,36,20,000

B. Deferred Revenue /preliminary Expenses

Expenses incurred on company formation 2,500 1,11,525 2,500 1,09,050Expenses incurred on Tax return filing. 1,480 66,022 970 42,311Expenses incurred on accountancy &audit related advice 2,467 1,10,053 2,467 1,07,611

6,447 2,87,601 5,937 2,58,972

C. Stockholders equityCommon Stock, no par value, 1500 shares, issued 1,000,000 4,61,10,000 1,000,000 4,36,20,000and fully paid up

Note : All shares are issued to & owned by helios & matheson IT Ltd, a company incorporated in India .The company is a wholly owned subsidiary of helios & matheson IT Ltd,India.

Place : Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNADate : August 16, 2006 Director Director


helios & matheson inc | annual report 2005-06

102

BOARD OF DIRECTORS Muralikrishna G.K.

Ramachandiran V.

Ramadas V.

B Sharma & Co, Certified Public Accountants

70, Anson Road, 21-08 Apex Tower, Singapore - 079905

Toapayoh Lorong 8, Braddell Tech Building 03-01, Singapore - 319261

AUDITORS

REGISTERED OFFICE

HELIOS & MATHESON (SINGAPORE) PTE LIMITED

helios & matheson (singapore) pte ltd | annual report 2005-06

103

ASSETS March 31, 2006 March 31, 2006 March 31, 2005 March 31, 2005USD Rs. USD Rs.

Current assets:

Bank balance 1,659 74,008 1,679 73,238

Pre-operative expenses 7,688 3,42,962 7,668 3,34,478

9,,347 4,16,970 9,347 4,07,716

Liabilities And Stockholders' Equity

Current liabilities:

Accounts payable 8,131 3,62,724 8,131 3,54,675

Outstanding expenses 1,215 54,201 1,215 52,998

Stockholders' equity:

2 shares of US $ 0.57 (S$1) each fully paid up 1 45 1 45

9,347 4,16,970 9,347 4,07,716

Statement of Income & Retained Earnings for the period ended March 31, 2006

The company was formed on July 11, 2001. The authorized share capital of the company is S$ 100000 divided into 100000 ordinary shares of S$1 each. The company is yet to start its operations.

The name of the company has been changed from Sigma Project Services Pte. Ltd to helios & matheson (Singapore) Pte. Ltd as per Registry of Companies and Businesses, Singapore letter dt. April 27, 2003.

For and on behalf of the BoardPlace : Chennai V. RAMACHANDIRAN G.K. MURALIKRISHNADate : August 16, 2006 Director Director


helios & matheson (singapore) pte ltd | annual report 2005-06

104

BOARD OF DIRECTORS

REGISTERED OFFICE

Muralikrishna G.K.

Ramachandiran V.

The Chugh Firm, Certified Public Accountants, Cerritos, California, USA

969 G, Edgewater Blvd, Ste : 260, Fostercity, C A, 94404

AUDITORS

MARUTHI CONSULTING INC

maruthi consulting | annual report 2005-06

105

To the Board of Directors and Stockholdersof Maruthi Consulting, Inc

We have compiled the accompanying balance sheet of Maruthi Consulting, Inc as of March 31, 2006, and the related statements of income, retained earnings for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying consolidated financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

The Chugh FirmAugust, 16, 2006


106

DIRECTORS’ REPORT

To the Stock holders ofMaruthi Consulting Inc.,

Your directors are pleased to present the financials compiled by The Chugh Firm, CPA, USA independent Accountant together with their report dated August 16,2006 for the year ended March 31 2006 .

Financial Highlights (Fig in US$). March 31 ,2006 March 31, 2005 (15 Months)

Revenue 8,569,533 7,178,916

Operating Profit 710,844 499,346

Other Income 175 1380

Net Income 711,019 500,726

Taxation 800 -

PAT 710,219 500,276 Prospects

The prospects for the company’s business continue to be buoyant. Apart from mining the existing clients for increased volume of business ,the company is in the process of adding new clients .The company continues to offer the most cost effective offshore model to the clients.

Financials

The revenue and profit of the company have grown 49% and 77 % respectively over the previous year on an annualized basis . The financials submitted are in conformity with statements on standards for Accounting and Review Services issued by The American Institute of Certified Public Accountants as per Independent Accountant’s Report dated August 16 ,2006 enclosed.

Retirement of Director Mr.A.Gopal Rao, a director of the company has retired from the directorship of the company . The board wishes to place its appreciation on record and thank Mr Gopal rao for his valuable services to the company during his tenure as director.

Place : California, USA.Date : A gust 16, 2006 G.K. MURALIKRISHNA

Director

For and on behalf of the Boardu


107


I. SOURCES OF FUNDS


a. Share Capital A 45,765 20,41,590 45,765 19,96,282 b. Additional paid in capital 1,872,635 8,35,38,234 1,179,235 5,14,38,218 c. Reserves and surplus B 1,186,492 5,29,29,422 911,035 3,97,39,346

2. Deferred tax 467,452 2,08,53,048

3,572,345 15,93,62,293 2,136,035 9,31,73,846


1. FIXED ASSETS Goodwill 1,681,392 7,50,06,884 949,570 4,14,20,230 Gross Block 99,255 44,27,777 88,482 38,59,576 Less : Depreciation 77,625 34,62,851 81,933 35,73,917 Net Block 1,703,022 7,59,71,809 956,118 4,17,05,889


a. Sundry Debtors C 2,623,514 11,70,34,976 845,238 3,68,69,272 b. Cash and Bank Balances D 358,255 1,59,81,746 210,225 91,70,024 c. Loans and advances E 224,427 1,00,11,683 170,614 74,42,161

3,206,196 14,30,28,404 1,226,076 5,34,81,456

3. LESS: CURRENT LIABILITIES &

PROVISIONS F 1,336,873 5,96,37,921 46,160 20,13,499 Net Current Assets 1,869,323 8,33,90,484 1,179,916 5,14,67,957

3,572,345 15,93,62,293 2,136,035 9,31,73,846

Notes forming part of the Accounts I



108


I. INCOME:

a. Revenue from operations G 8,569,708 38,22,94,685 7,180,296 31,32,04,505

8,569,708 38,22,94,685 7,180,296 31,32,04,505

II. EXPENDITURE:

Software services & administrative expenses H 7,848,687 35,01,29,940 6,673,341 29,10,91,153

Profit before interest depreciation & tax (PBIDT) 721,021 3,21,64,745 506,954 2,21,13,352

Profit before depreciation & tax 721,021 3,21,64,745 506,954 2,21,13,352

Depreciation 10,002 4,46,189 6,229 2,71,709

Profit after depreciation & before tax 711,019 3,17,18,556 500,725 2,18,41,643

Provision for taxation 800 35,688 - - Profit after tax (PAT) 710,219 3,16,82,868 - -




109


USD Rs USD Rs

I. INCOME:


AUTHORISED

Common stock, no par value, 100,000 shares


10,000 (10,000) shares issued and outstanding 45,765 20,41,590 45,765 19,96,282

Additional paid in capital 1,872,635 8,35,38,234 1,179,234 5,14,38,217


a. Retained Earnings 911,035 4,06,41,270 410,309 1,78,97,702

b. Profit & Loss Account 710,219 3,16,82,868 500,725 2,18,41,643

c. prior period adjustment (434,762) 1,93,94,732

1,186,492 5,29,29,422 911,034 3,97,39,345

SCHEDULE -C : SUNDRY DEBTORS


a. Debts outstanding for a period exceeding six months

b. Other debts 2,623,514 11,70,34,976 845,237 3,68,69,271

2,623,514 11,70,34,976 845,237 3,68,69,271

SCHEDULE -D : CASH & BANK BALANCES

a. Balances with banks 358,094 1,59,74,608 - -

b. Cash on hand 160 7,137 210,225 91,70,024

358,254 1,59,81,745 210,225 91,70,024

SCHEDULE -E : LOANS AND ADVANCES


Prepaid State Tax - - 6,106 2,66,343

Advances recoverable in cash or in kind or

for value to be received 224,426 1,00,11,682 164,507 71,75,817

224,426 1,00,11,682 170,613 74,42,160

SCHEDULE - F :CURRENT LIABILITIES AND PROVISIONS

a. Accounts Payable 1,336,873 5,96,37,920 46,160 20,13,499

1,336,873 5,96,37,920 46,160 20,13,499

SCHEDULE - G :REVENUE FROM OPERATIONS

a. Income from software sales & services 8,569,533 38,22,86,871 7,178,916 31,31,44,319

b.Other income 175 7,813 1,379 60,186

8,569,708 38,22,94,685 7,180,295 31,32,04,505



110


USD Rs USD Rs

SCHEDULE -H:

SOFTWARE SERVICES AND ADMINISTRATIVE EXPENSES

Software services and development expenses 7,539,284 33,63,27,459 6,415,372 27,98,38,531

Staff welfare 30,157 13,45,306 34,713 15,14,183

Rent and amenities 45,391 20,24,931 15,516 6,76,822

Electricity charges

Postage telegram & telephones 11,398 5,08,487 12,023 5,24,448

Printing & stationary 951 42,437 2,303 1,00,462

Repairs & maintenance 6,761 3,01,632 6,398 2,79,115

Travelling & conveyence 5,538 2,47,055 5,830 2,54,342

Advertisement & promotional expenses 158,196 70,57,137 73,079 31,87,722

Bad debts written off 18,047 8,05,111

Rates & taxes 2,645 1,18,015 17,432 7,60,383

Auditors remuneration

Miscellaneous expenses 6,426 2,86,680 45,429 19,81,647

Professional & consultancy charges 21,341 9,52,060 44,139 19,25,381

Bank charges 1,653 73,743 902 39,387

Subscription 894 39,881 200 8,724

7,848,687 35,01,29,940 6,673,341 29,10,91,153



111

STATEMENT OF CHANGES TO STOCKHOLDERS’ EQUITY FOR THE YEAR ENDED

Common stock Additional Paid in Retained Total Totacapital Capital Earnings in $ in Rs.

Balance as on April 1, 2005 10,000 45,765 11,79,235 9,11,305 2,136,03595288521Additional paid in cpaital - - 6,93,400 - 693,400 3,09,32,574

Prior period adjustment - - - (4,34,762) (434,762) (1,93,94,733)

Net Income - – - 7,10,219 710,219 3,16,82,870

Balance March,31,2006 10,000 45,765 18,72,635 11,86,492 3,104,892 13,85,09,232

MARCH 31, 2006


112

STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

SCHEDULE - I

History and Nature of Business

The company Maruthi consulting Inc (the company) formerly known as Maruthi Infotech, Inc was incorporated in the state of California in the year 1999 and provides information technology, consulting, programming services and project management to clients world wide. helios & matheson Information technology ltd, an Indian company registered under The Companies Act, 1956 has acquired 100 % outstanding stocks from the previous owners during the year 2004 and consequently the company has become wholly owned subsidiary of helios & matheson IT Ltd . No new debt was assumed by the company in the transaction and helios & matheson elected to not “push down” the acquisition to the financial statement s. Therefore, the accompanying financial statements are reflected at historical cost basis as in previous years.

Accounting Method

The company uses the accrual method of accounting for financial reporting and cash method of accounting for income tax reporting.

Use of estimates

The preparation of the financial statements are in conformity with generally accepted accounting principles and requires managements to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents generally consist of cash and certificate of deposit with maturities of three months or less.

Concentration of Credit Risk

The company maintains cash balances at financial institutions that are secured by the Federal Deposit Insurance Corporation up to $ 100,000 for each institution.

The company performs periodic credit evaluations of its customers and maintains allowances for potential uncollectible amount as deemed necessary. The company generally does not require collateral to secure its accounts receivable. The company estimates credit losses based on management’s evaluation of historical experience and current industry trends. Although the company expects to collect amount due, actual collections may differ from the estimated amounts.

Revenue Recognition

For consulting services revenue is recognized in the period that services are provided by the company. For project management, revenue is recognized on the percentage of completion method.

Property and equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from five to seven years . Depreciation expenses for the year ended March 31, 2006was $ 10,002.

Accounts receivables

No provision of doubtful accounts has been made as of March 31, 2006 as management considers all amounts fully collectible. Related party transaction

The company provided consulting services to and utilized the services of helios & matheson in the normal course of business. The value of thee transactions amounted to $ 15,93,830

Disclosure made as per section 212 of the Companies Act 1956 and not considered for consolidation.

REGISTERED OFFICE

Mercadien 666 Third Avenue New York, NY 10017

200 Park Avenue South, New York, NY 10003

Deniel Thomas

Divya Ramchandran

Jambunathan S

Kishan Gramma Ananthram

Rabin Dhoble

Shankar Ram

Steven S. Mukamal

Villiam Miller

Shmuel BenTov

AUDITORS

CHAIRMAN, CHIEF EXECUTIVE OFFICER & PRESIDENT

BOARD OF DIRECTORES

TACT INC

tact inc | annual report 2005

113

BUSINESS

General

Incorporated in 1983, The A Consulting Team, Inc., a New York corporation (the “Company” or “TACT” or the “Registrant”) has provided a

wide range of information technology (“IT”) consulting, custom application development and solutions to Fortune 1000 companies and

other large organizations. In August of 1997, TACT became a public company, headquartered in New York, NY. In addition, TACT has an

office in Clark, NJ. The Company supports all major computer technology platforms and supports client IT projects by using a broad

range of third-party software applications.

CM The Company’s shares are listed on The NASDAQ Capital Market under the symbol “TACX”.

Results of Operations

The following table sets forth the percentage of revenues of certain items included in the Company’s Statements of Operations:

Year Ended December 31

2005 2004 2003

Revenues 100.0% 100.0% 100.0%

Cost of revenues 70.5% 69.3% 73.1%

Gross profit 29.5% 30.7% 26.9%

Operating expenses 31.3% 25.2% 27.1%

(Loss)/ Income from operations (1.8)% 5.4% (.2)%

Gain from extinguishment of debt 0.0% 0.0% 0.0%

Net (loss) income (1.8)% 4.9% (.6)%

Comparison Of Year Ended December 31,2005 To Year Ended December 31,2004

Revenues. Revenues of the Company increased by $1.4 million or 5.6% from $25 million for the year ended December 31,2004 to $ 26.4

million for the year ended December 31,2005. The increase was primarily attributable to industry wide increased spending in the IT

industry and an increase in fixed price projects, as a result of increased marketing efforts by the Company.

Software licensing revenues increased by $125,000 or 9.3% from $1.3 million in 2004 to $1.5 million in 2005. Software sales are expected

to remain ancillary to the Company’s revenues in future years.

Gross Profit. The resulting gross profit for 2005 increased by $127,000 or 1.7% from $7.7 million in 2004 to $7.8 million in 2005. As a

percentage of total revenue, gross margin for the year decreased from 30.7% in 2004 to 29.5% in 2005. Gross margin decreased slightly

primarily due to the mix of time and material work compared to fixed price projects.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (“SG&A”) expenses and depreciation

and amortization costs. Operating expenses increased by $1.9 million, or 30.9% from $6.3 million in 2004 to $8.3 million in 2005. The

costs associated with the terminated transaction with Vanguard, represented $1.2 million of this increase. The balance of the increase,

$786,000 in payroll and related costs, and a stock compensation expense in the amount of $134,000 which were partially offset by a

decrease in depreciation and amortization expenses.

Taxes. Taxes in 2005 were $16,000 compared to $99,000 in 2004. The decrease in income taxes was attributable to the decrease in

income before income taxes from income of $1.3 million in 2004 to a loss of ($468,000) in 2005.

Net (Loss) / Income. As a result of the above, the Company had a net loss of ($484,000) in 2005 compared to net income of $1.2 million in

2004.

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003

Revenues. Revenues of the Company increased by $ 3.4 million or 15.7% from $21.6 million for the year ended December 31, 2003 to $ 25

million for the year ended December 31, 2004. The increase was primarily attributable to an industry wide increase in IT spending in 2004

and increased marketing efforts by the Company.

Software licensing revenues decreased by $348,000 or 20.5% from $1.7 million in 2003 to $1.3 million ni 2004. Software sales are

expected to remain ancillary to the Company’s total revenues in future years.


114

Gross Profit. The resulting gross profit for 2004 increase by $1.9 million or 32% from $5.8 million in 2003 to $7.7 million in 2004. As a

percentage of total revenue, gross margin for the year increased from 26.9% in 2003 to 30.7% in 2004.

Gross margin increased primarily due to increased consultant utilization rates (89% in 2004 compared to 79% in 2003) and an increase in

revenues coming from fixed price contracts, which have higher gross margins.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (“SG&A”) expenses and depreciation and

amortization costs. Operating expenses increased by $455,000, or 7.8% from %5.9 million in 2003 to $6.3 million in 2004. The increase

was primarily attributable to an increase of $430,000 in payroll and related costs due to increases in recruiting and sales staffs, $ 150,000

of costs associated with the proposed transaction with Vanguard and an increase in bad debt expenses of $ 105,000 which were partially

offset by a decrease in depreciation and amortization expenses.

Taxes. Taxes in 2004 were $ 99,000 compared to $ 24,000 in 2003. The increase in income taxes was attributable to the increase in

income before income taxes from a loss of ($ 100,000) in 2003 to income of $ 1.3 million in 2004. The company’s effective tax rate is low

due to the utilization of net operating loss carry forwards.

Net Income / (Loss). As a result of the above, the Company had net income of $1.2 million in 2004 compared to a net loss of ($ 123,000) in 2003.


115

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

The A Consulting Team, Inc.

We have audited the accompanying consolidated balance sheet of The A Consulting Team, Inc. and Subsidiaries, (the “Company”) as of

December 31, 2005, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash

flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to

express an opinion on these financial statements based on our audit. The financial statements of the Company for the years ended

December 31, 2004, and 2003 were audited by other auditors whose report, dated February 24, 2005, expressed an unqualified opinion

on those statements.

We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of

material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over

financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a

reasonable basis for our opinion.

In our opinion, the 2005 financial statements referred to above present fairly, in all material respects, the financial position of The A

Consulting Team, Inc. and Subsidiaries as of December 31, 2005, and the results of its operations and its cash flows for the year then

ended in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole for 2005. The

Schedule II listed in the index of financial statements is presented for purposes of additional analysis and is not a required part of the

basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial

statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements for 2005 taken as a

whole.

Mercedien, P.C., Certified Public Accountants

Hamilton, New Jersey

February 15, 2006


116

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

The A Consulting Team, Inc.

We have audited the accompanying consolidated balance sheet of The A consulting Team, Inc. and Subsidiaries, (the “Company”) as of

December 31, 2004 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the each of the two

years in the period ended December 31,2004. These financial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of

material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over

financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test

basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our

audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of

The A Consulting Team, Inc. and Subsidiaries as of December 31, 2004, and the consolidated results of their operations, and their cash

flows for each of the years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the

United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II

listed in the index of financial statements is presented for purposes of additional analysis and is not a required part of the basic financial

statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statement and, in our

opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

GRANT THORNTON LLP

New York, New York

February 24, 2005


117

CONSOLIDATED BALANCE SHEET

December December December December

31, 2005 31, 2005 31, 2004 31, 2004

$ INR $ INR

ASSETS

Current Assets:

Cash and cash equivalents $ 2,156,867 9,62,17,837 $ 2,493,104 11,12,17,369

Accounts receivable - less allowance for doubtful

accounts of $ 320,804 at December 31, 2005, and

$ 296,828 at December 31, 2004 3,918,371 17,47,98,530 3,810,759 16,99,97,959

Unbilled receivables 434,563 1,93,85,855 260,000 1,15,98,600

Prepaid expenses and other current assets 160,414 71,56,069 139,704 62,32,195

Total current assets 6,670,214 29,75,88,247 6,703,568 29,90,46,168

Investments, net 87,059 38,83,702 87,059 38,83,702

Property and equipment, net 480,845 2,14,50,495 556,896 2,48,43,131

Goodwill 1,140,964 5,08,98,404 1,140,964 5,08,98,404

Intangibles, net - - 34,667 15,46,495

Deposits and other assets 114,363 51,01,733 126,363 56,37,053

Total assets $ 8,493,444 37,88,92,537 $ 8,649,515 38,58,54,864

LIABILITIES AND SHAREHOLDS’ EQUITY

Current Liabilities:

Accounts payable and accrued expenses $ 1,764,647 7,87,20,903 $ 1,666,160 7,43,27,398

Capital lease obligation 290,517 1,29,59,963 290,517 1,29,59,963

Deferred revenue 220,005 98,14,423 - -

Deferred income taxes - - 22,500 10,03,725

Current portion of long-term debt 13,479 6,01,298 233,962 1,04,37,045

Total current liabilities 2,288,648 10,20,96,587 2,213,139 9,87,28,131

Other long - term liabilities - - 13,479 6,01,298

Total liabilities $ 2,288,648 10,20,96,587 $ 2,226,617 9,93,29,384

Shareholder’s equity:

Preferred stock, $. 01 par value; 2,000,000 shares

authorized; no shares issued and outstanding as of

December 31, 2005,

and 571, 615 shares issued and outstanding as of

December 31, 2004. Common stock, $. 01 par value;

30,000,000 shares authorized; - - 5,716 2,54,991

2,361,333 issued and outstanding as of December

31,2005, and 2,122,647 issued and outstanding

as of December 31, 2004. 23,614 10,53,421 21,227 9,46,936

Paid - in capital 34,462,262 1,53,73,61,508 34,181,206 1,52,48,23,600

Accumulated other comprehensive loss-foreign

currency translation (2,927) (1,30,573) - -

- Accumulated deficit (28,278,152) (1,26,14,88,361) (27,785,251) (1,23,95,00,047)

Total shareholder’s equity 6,204,797 2,767,95,994 6,422,898 28,65,25,480

Total liabilities and shareholders’ equity $ 8,493,444 37,88,92,537 $ 8,649,515 38,58,54,864

See accompanying notes to consolidated financial statements.


118

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

Year Ended December 31,

2005 2005 2004 2004

$ Rs $ Rs

Revenues $ 26,431,967 117,91,30,048 $ 25,035,167 1,11,68,18,800

Cost of revenues 18,631,523 83,11,52,241 17,361,526 77,44,97,675

Gross profit 7,800,444 34,79,77,807 7,673,640 34,23,21,080

Operating expenses:

Selling, general and administrative 8,057,416 35,94,41,328 5,952,343 26,55,34,021

Depreciation and amortization 203,678 90,86,076 360,859 1,60,97,920

8,261,095 36,85,27,448 6,313,202 28,16,31,941

(Loss) / income from operations (460,651) (2,05,49,641) 1,360,438 6,06,89,139,

Interest income 17,611 7,85,627 8,664 3,86,501

Interest expense (24,724) (11,02,938) (33,313) (14,86,093)

Interest (expense), net (7,113) (3,17,311) (24,649) (10,99,592)

(Loss) / income before income taxes (467,764) (2,08,66,952) 1,335,789 5,95,89,547

Provision for income taxes 16,240 7,24,466 99,085 44,20,182

Net (loss) income $ (484,004) (2,15,91,418) $ 1,236,705 5,51,69,410

Other comprehensive loss-foreign currency adjustment (2,927) (1,30,573) - -

Comprehensive (loss) income $ (486,931) (2,17,21,992) $ 1,236,705 5,51,69,410

Net (loss) income per share Basic $ (0.22) (9.8) $ 0.57 25.4

Diluted $ (0.22) (9.8) $ 0.53 23.6



119


120


121

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31

2005 2005 2004 2004

$ Rs $ Rs

Cash Flows from operating activities

Net (Loss) Income $(484,005) (2,15,91,463) $1,236,705 5,51,69,410

Adjustment to reconcile net (loss) income to net cash

(used in) provided by operating activities, net of acquired assets.

Depreciation and amortization 203,679 90,86,120 360,859 1,60,97,920

Deferred income taxes (22,500) (10,03,725) (22,500) (10,03,725)

Provision for doubtful accounts 35,000 15,61,350 145,000 64,68,450

Amortization of deferred financing cost 12,000 5,35,320 10,000 4,46,100

Compensation expense for stock issued – to non-employees 133,200 59,42,052 - -

Changes in operating assets and liabilities:

Accounts receivable (142,611) (63,61,877) (532,488) (2,37,54,290)

Unbilled receivables (174,563) (77,87,255) (126,395) (56,38,481)

Prepaid expenses and other current assets (20,709) (9,23,828) (53,150) (23,71,022)

Accounts payable and accrued expenses 98,487 43,93,505 223,431 99,67,257

Deferred revenue 220,005 98,14,423 - -

Net cash (used in) provided by operating activities (142,017) (63,35,378) 1,241,460 5,53,81,531

Cash flows from investing activities:

Purchase of property and equipment (92,962) (41,47,035) (168,127) (75,00,145)

Proceeds from sale of investment - - 250,450 1,11,72,575

Deposits - - (38,489) (17,16,994)

Net cash (used in) provided by investing activities (92,962) (41,47,035) 43,834 19,55,435

Cash flows from financing activities:

Proceeds from conversion of stock options 144,527 64,47,349 19,726 8,79,977

Payment of deferred financing cost - - (40,000) (17,84,400)

Dividend paid to Preferred Shareholders (8,897) (3,96,895) (26,850) (11,97,779)

Repayment of long-term debt (233,962) (1,04,37,045) (154,690) (69,00,721)

Net cash (used in) financing activities (98,332) (43,86,591) (201,814) (90,02,923)

Effect of foreign currency exchange rate changes

on cash and cash equivalents (2,927) (1,30,573) - -

Net (decrease) increase in cash and cash equivalents (336,237) (1,49,99,533) 1,083,481 4,83,34,087

Cash and cash equivalents at beginning of period 2,493,104 11,12,17,369 1,409,623 6,28,83,282

Cash and cash equivalents at end of period $ 2,156,867 9,62,17,837 $ 2,493,104 11,12,17,369

Supplemental disclosure of cash flow information:

Cash paid during the period for interest $ 24,724 11,02,938 $ 33,313 14,86,093

Cash paid during the period for income taxes $ 18,863 8,41,478 $ 99,085 44,20,182


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

The A Consulting Team, Inc. (the “Company” or “TACT”) was incorporated on February 16, 1983, in the State of New York and provides

information technology consulting, custom application development services and solutions to Fortune 1000 companies. The Company’s

customers are primarily located in the New York / New Jersey metropolitan area.

The Company’ s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of

assets and satisfaction of liabilities in the normal course of business. For the years ended December 31, 2005, 2004, and 2003, the

Company reported a net loss of $484,004, net income of $1,236,705 and a net loss of $123,305, respectively. Additionally, the Company

has an accumulated deficit of $28,278,152 as of December 31,2005. The Company has implemented a plan whereby it is actively

managing its personnel utilization rates and is constantly monitoring project requirements and timetables.

In management’s opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate

flexibility for funding the Company’s working capital obligations for the next twelve months. There may be circumstances that would

accelerate its use of liquidity resources, including but not limited to, its ability to implement a profitable business model, which may

include further restructuring charges, If this occurs, the Company, may from time to time, incur additional indebtedness or issue, in

public or private transactions, equity or debt securities. However, there can be no assurance that suitable debt or equity financing will

be available to the Company.

Reverse Stock Split

On January 7, 2004, the Company effected a one – for – four reverse stock split of its common stock in order to regain compliance with cm

NASDAQ’s minimum bid price requirement to remain listed on the NASDAQ Capital Market . All share and per share amounts used in the

Company’s financial statements and notes thereto have been retroactively restated to reflect the one – for – four reverse stock split.

Principles of Consolidation

The consolidated financial statements include the account of The A Consulting Team, Inc., its 100% owned subsidiary International

Objective Technology, Inc. (IOT) from its of acquisition on July 19,2002 and its 51% owned subsidiary, T3 Media, Inc., which ceased

operations in 2001, from its date of acquisition in 1999 and its 100% owned subsidiary TACT Global Services from its date of acquisition on

September 30, 2005. All material inter – company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the

reporting period. Actual results could differ from those estimates.

Earnings per share

The Company calculates earnings per share in accordance with Financial Accounting Standards Board (FASB) Statement No.128, Earnings

per share. Basic earnings per share is calculated by dividing net earnings available to common shares by weighted average common

shares outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilative effect of the assumed exercise

of securities except when it is anti-dilutive, including the effect of shares issuable under the Company’s incentive plans. All share and

per share amounts used in the Company’s financial statements and ntoes thereto have been retroactively restated to reflect the one – for

four reverse stock split, which occurred on January 7, 2004.

Cash Equivalents

The Company considers all highly liquid financial instruments with original maturity of three months or less when purchased to be cash

equivalents.


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Fair Value of Financial Instruments

The carrying value of financial instruments (principally consisting of cash, cash equivalents, accounts receivable, long term debt and

capital leases) approximates fair value because of their short maturities.

Property and Equipment

Property and equipment are depreciated using the straight – line method over the estimated useful lives of the assets, which range from

three to ten years.

Long – Lived Assets

The Company adopted the provisions of FASB Statement No.144, “Accounting for the Impairment or Disposal of Long Lived Assets”

effective January 1, 2002. When impairment indicators are present, the Company reviews the carrying value of its assets in determining

the ultimate recoverability of their unamortized values using analyses of future undiscounted cash flows expected to be generated by

the assets. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount

of the asset exceeded its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to

sell.

Goodwill and Intangible Assets

The Company adopted the provisions of FASB Statement No.142, “Goodwill and Other Intangible Assets,” (SFAS No.142) effective

January I, 2002. SFAS No.142 required that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead

tested for impairment using the guidance for measuring impairment set forth in this statement. As prescribed under SFAS 142, the

Company had an evaluation done of its goodwill and intangible assets, which was performed by an independent third party. The

Company tested for impairment using the guidance for measuring impairment set forth in SFAS No.142 and it was determined by the

Company with the results from the independent third party that there was no impairment at December 31,2005, 2004 and 2003.

In accordance with SFAS No. 142, the following are changes in the carrying amount of goodwill for the year ended December 31, 2005,

2004 and 2003:

2005 2004 2003

Balance as of January 1, $ 1,140,964 $1,140,964 $1,181,520

Goodwill acquired during the year - - -

Reclass of reduction in reserve for acquisition costs - - (40,556)

Balance as of December 31, $ 1,140,964 $ 1,140,964 $ 1,140,964

The following summarizes the carrying amounts of acquired intangible assets and related amortization:

Year ended December 31

2005 2004 2003

Amortized intangible assets

Employee Contracts – gross carrying amount $ 312,000 $ 312,000 $ 312,000

Less accumulated amortization (312,000) (277,333) (208,000)

Unamortized intangible assets $ - $ 34,667 $ 104,000

Amortization expense

For the year ended 12/31/03 $ - $ - $ 156,000

For the year ended 12/31/04 $ - $ 69,333 $ -

For the year ended 12/31/05 $ 34,667 $ - $ -

Estimated amortization expense:

For the year ended 12/31/06 $ - $ - $ -

During 2005, the Company record amortization of intangible assets of $34,667. As part of the purchase price of IOT (See Note 2),

the Company recorded intangible assets pertaining to certain employment contracts. The cost of these employment contracts were

being amortized over the three year period of the assets estimated useful life. During 2005, the Company recorded amortization

expense of $34,667 and completed the amortization of these contracts.


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Revenue Recognition

Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and

material contracts, whereby revenue is recognized as hours and costs are incurred. Customers for consulting revenues are billed on a

weekly, semi – monthly and monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the

proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract

losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts

recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is

recongized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company monitors its

accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical

experience to accurately determine its accounts receivable reserve. The Company’s allowance for doubtful accounts is an estimate

based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information

that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the

best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to

the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received

that impacts the amount reserved. The Company also establishes a general reserve for all customers based on a range of percentages

applied to aging categories. These percentages are based on historical collection and write – off experience. If circumstances change,

the Company’s estimate of the recoverability of amounts due to the company could be reduced or increased by a material amount. Such

a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.


124


Schedule March 31, 2006 March 31, 2006

USD Rs

I. SOURCES OF FUNDS


a. Share Capital A 23,823 10,62,744

b. Additional paid in capital 34,522,951 154,00,68,844

c. Reserves and surplus B (28,422,512) (126,79,28,260)

2. LOAN FUNDS

a. Secured loans -

b. Unsecured loans C 9,876 4,40,568

3. DEFERRED TAX 6,134,138 27,36,43,896


1. FIXED ASSETS

Goodwill 1,140,964 5,08,98,404

Gross Block 7,886,226 3,518,04,542

Less : Depreciation 7,404,705 33,03,23,890

Net Block 1,622,485 7,23,79,056

2. INVESTMENTS 87,059 38,83,702


a. Sundry Debtors D 4,156,601 18,54,25,971

b. Cash and Bank Balances E 1,787,417 7,97,36,672

c. Unbilled receivables 681,805 3,04,15,321

d. Loans and advances F 269,386 1,20,17,309

6,895,209 30,75,95,273

4. LESS: CURRENT LIABILITIES & PROVISIONS G 2,470,615 11,02,14,135

Net Current Assets 4,424,594 19,73,81,138

6,134,138 27,36,43,896


tact inc | annual report 2005-06

125

PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED MARCH 31, 2006

Schedule March 31, 2006 March 31, 2006USD Rs

I. INCOME:

a. Revenue from operations H 5,916,437 26,39,32,255

5,916,437 26,39,32,255

II. EXPENDITURE:

Software services & administrative expenses 6,016,486 26,83,95,440

Profit before interest depreciation & taxes (PBIDT) (100,049) (44,63,186)

Profit before depreciation & taxes (100,049) (44,63,186)

Depreciation 36,684 16,36,473

Profit after depreciation & before taxes (136,733) (60,99,659)

Provision for taxation 4,700 2,09,667

Profit after tax (PAT) (141,433) (63,09,326)


126


March 31, 2006 March 31, 2006USD in Rs.


AUTHORISEDCommon stock, $.01 par value; 30,000,000 shares

ISSUED,SUBSCRIBED AND FULLY PAID UP2,382,301 (2,361,333) shares issued and outstanding 23,823 10,62,744

Additional paid in capital 34,522,951 154,00,68,844


a. Accumalated deficit (28,281,079) (126,16,18,934)b. Profit & Loss Account (141,433) (63,09,326)

(28,422,512) (126,79,28,260)

SCHEDULE - C : UNSECURED LOANS

Unsecured Loan 9,876 4,40,568

SCHEDULE -D : SUNDRY DEBTORS(Unsecured,considered good)

a. Debts outstanding for a period exceeding six monthsb. Other debts 4,156,601 18,54,25,971

4,156,601 18,54,25,971

SCHEDULE -E : CASH & BANK BALANCES

a. Balances with banks 1,787,417 7,97,36,672 b. Cash on hand - -

1,787,417 7,97,36,672

SCHEDULE -F : LOANS AND ADVANCES(Unsecured,considered good)

Advances recoverable in cash or in kind or for value to be received 269,386 1,20,17,309

269,386 1,20,17,309

SCHEDULE - G :CURRENT LIABILITIES AND PROVISIONS

a. Accounts Payable 2,470,615 11,02,14,135 b. Proposed dividendd. Provision for taxation

2,470,615 11,02,14,135

SCHEDULE - H :REVENUE FROM OPERATIONS

a. Income from software sales & services 5,910,653 26,36,74,230

b.Other income 5,784 2,58,024

5,916,437 26,39,32,255


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