**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

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**FORM 20-F**

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**(MarkOne)**

| **o**      | ** ** | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                             |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **x**      | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended December 31, 2005**                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **o**      | ** ** | **SHELL COMPANY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**Date of event  requiring this shell company report**For the transition period from                      to                    ** |

 

**Commission File Number: 001-32692**

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**Patni Computer Systems Limited**(Exact nameof registrant as specified in its charter)

Not applicable

(Translation of registrant’s name into English)

**Republic of India**

(Jurisdiction of incorporation or organization)

**Akruti Softech Park, MIDCCross Road No.21**

**Andheri (E), Mumbai 400093, India**

**+91 22 5693 0500**

(Address of principalexecutive offices)

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**Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:**

| **Title of each class:**                                                                                                                                                                                       | ** ** | ** **                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|
| American  Depositary Shares, each representing two equity shares, par value Rs.2 per  share. Equity shares, par value Rs. 2 per share* * Not for trading but only  in connection with Registration of the ADSs |       | **Name of  each exchange  on which registered:**  NewYork Stock Exchange |

 

**Securities registeredpursuant to Section 12(g) of the Act:**

**None**

**Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act:**

Not applicable

**The number of outstandingshares of each of the issuer’s classes of capital or**

**common stock as of December 31,2005 was:**

Equity shares:   137,798,399

**Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405**

**of theSecurities Act of 1933, or the Securities Act.**

YES   o      NO   x

**If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.**

YES   o        NO   x.

Note—Checking the box abovewill not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligationsunder those Sections.

**Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.**

Yes   x        No   o

**Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):**

| Large accelerated filer |   | o |   | Accelerated filer |   | o |   | Non-accelerated filer |   | x |
|-------------------------|--------|---|--------|-------------------|--------|---|--------|-----------------------|--------|---|

 

**Indicate by check markwhich financial statement item the registrant has elected to follow.**

Item 17   o        Item18   x

**If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).**

YES   o        NO   x.

 

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**TABLEOF CONTENTS**
| **PART - I** | ** ** | ** **                                                                                      | ** ** | ** ** |
|--------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|
| ITEM 1.      |       | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                                           |       | 2          |
| ITEM 2.      |       | OFFER STATISTICS AND EXPECTED TIMETABLE                                                         |       | 2          |
| ITEM 3.      |       | KEY INFORMATION                                                                                 |       | 2          |
| ITEM 4.      |       | INFORMATION ON THE COMPANY                                                                      |       | 22         |
| ITEM 5.      |       | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                                    |       | 45         |
| ITEM 6.      |       | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                                      |       | 69         |
| ITEM 7.      |       | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                               |       | 78         |
| ITEM  8.     |       | FINANCIAL  INFORMATION                                                                          |       | 83         |
| ITEM  9.     |       | THE  OFFER AND LISTING                                                                          |       | 84         |
| ITEM 10.     |       | ADDITIONAL INFORMATION                                                                          |       | 90         |
| ITEM 11.     |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK       |       | 120        |
| ITEM 12.     |       | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                                          |       | 121        |
| **PART II**  | ** ** | ** **                                                                                      | ** ** | ** ** |
| ITEM 13.     |       | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                                 |       | 121        |
| ITEM 14.     |       | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF PROCEEDS                   |       | 121        |
| ITEM 15.     |       | CONTROLS AND PROCEDURES                                                                         |       | 122        |
| ITEM 16A.    |       | AUDIT COMMITTEE FINANCIAL EXPERT                                                                |       | 123        |
| ITEM 16B.    |       | CODE OF ETHICS                                                                                  |       | 123        |
| ITEM 16C.    |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                          |       | 123        |
| ITEM 16D.    |       | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT  COMMITTEES       |       | 124        |
| ITEM 16E.    |       | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND  AFFILIATED PURCHASES           |       | 124        |
| **PART III** | ** ** | ** **                                                                                      | ** ** | ** ** |
| ITEM  17.    |       | FINANCIAL  STATEMENTS                                                                           |       | 124        |
| ITEM  18.    |       | FINANCIAL  STATEMENTS                                                                           |       | 124        |
| **ITEM 19.** | ** ** | **EXHIBITS**                                                                                    | ** ** | 125        |

 

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**CURRENCY OFPRESENTATION AND CERTAIN DEFINED TERMS**

Unless otherwisestated in this Annual Report or unless the context otherwise requires,references in this Annual Report on Form 20-F, or “Annual Report”,

·       “we,”“us,”, “our”, “our company” and “Patni” refer to Patni Computer Systems Limitedand its consolidated subsidiaries;

·       “India”refers to the Republic of India;

·       allreferences to “Indian rupees,” “rupees” and ”Rs.” are to the legalcurrency of India and all references to “U.S. dollars,” “dollars” and ”$”are to the legal currency of the United States; and

·       referencesto a particular “fiscal” year are to our fiscal year ended December 31 ofsuch year.

For your convenience, this Annual Report containstranslations of certain Indian rupee amounts into U.S. dollars which should notbe construed as a representation that those Indian rupee or U.S. dollar amountscould have been, or could be, converted into U.S. dollars or Indian rupees, asthe case may be, at any particular rate, the rate stated below, or at all.

Except as otherwise stated in this Annual Report, alltranslations from Indian rupees to U.S. dollars contained in this Annual Reporthave been based on the noon buying rate in the City of New York on December 31,2005 for cable transfers in Indian rupees as certified for customs purposes bythe Federal Reserve Bank of New York. The noon buying rate on December 31,2005 was Rs. 44.95 per $1.00.

Information contained inour websites, including our corporate website, www.patni.com, is not part ofthis Annual Report.

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

This Annual Reportcontains forward-looking statements. The forward-looking statementsare contained principally in the sections entitled “Key Information—RiskFactors,” “Information on the Company,” and “Operating and Financial Review andProspects”. These statements involve known and unknown risks, uncertainties andother factors which may cause our actual results, performance or achievementsto be materially different from any future results, performance or achievementsexpressed or implied by the forward-looking statements. Forward-lookingstatements include statements about:

·       ourability to attract and retain clients;

·       theanticipated benefits and risks associated with our business strategy, includingthose relating to our current and future service offerings;

·       ourfuture operating results;

·       theanticipated benefits and risks of our strategic customer relationships andacquisitions;

·       theanticipated size or trends of the market segments in which we compete and theanticipated competition in those markets;

·       governmentregulation and the outcome of any tax, legal or regulatory review, action orlitigation; and

·       ourfuture capital requirements and our ability to satisfy our capital needs.

In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,”“intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,”the negative of such terms or other comparable terminology. These statementsare only predictions. Actual events or results may differ materially. Inevaluating these statements, you should 

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specifically considervarious factors, including the risks outlined in the “Key Information—Risk Factors”section above. These factors may cause our actual results to differ materiallyfrom any forward-looking statement. Although we believe that theexpectations reflected in the forward-looking statements are reasonable,we cannot guarantee future results, levels of activity, performance orachievement.

Forward-looking statements speak only as of the datethey are made. Other than required by law, we do not undertake any obligationto update them in light of new information or future developments.

This Annual Reportincludes statistical data about the IT industry that comes from informationpublished by sources including Gartner, Inc., or Gartner, a provider ofmarket information and strategic information for the IT industry, the NationalAssociation of Software and Service Companies, or NASSCOM, an industry tradegroup, and International Data Group, or IDC, a provider of market informationand advisory services for the information technology, telecommunications, andconsumer technology markets. This type of data represents only the estimates ofGartner, NASSCOM, IDC and other sources of industry data. In addition, althoughwe believe that data from these companies is generally reliable, this type ofdata is inherently imprecise. We caution you not to place undue reliance onthis data.

**PART I**

**ITEM 1. IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

Not applicable.

**ITEM 2. OFFERSTATISTICS AND EXPECTED TIMETABLE**

Not applicable.

**ITEM 3. KEYINFORMATION**

**3.A. Selectedfinancial data**

*The selectedconsolidated historical financial data set forth below should be read inconjunction with our consolidated financial statements, the notes to thosestatements and “Item 5. Operating and Financial Review and Prospects” includedelsewhere in this Annual Report. The selected data presented below under thecaptions “Statement of Income Data”, “Balance Sheet Data” and “Cash Flow Data”for, and as of the end of, each of the years in the five-year period ended December 31,2005, are derived from our consolidated financial statements and have beenprepared and presented in accordance with U.S. GAAP except for cash dividendper equity share. The consolidated financial statements as of December 31,2005 and 2004 , and for each of the years in the three-year period ended December 31,2005, and the audit report thereon, are included elsewhere in this AnnualReport. Historical results are not necessarily indicative of the results to beexpected for any future period.*

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*We have restated our financial statements to reflectthe effects of recognition of additional payroll and related taxes for ourinternational operations primarily on account of certain wages paid, and short-termfringe benefits given to our employees when working outside of India andreassessment for corporate taxes (which affected our financial statements forfiscal years 2001, 2002, 2003, 2004 and 2005).*

| ** **                                                                                          | ** ** | **Fiscal Year ended December 31,**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2001**                                                  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | ** **                                                | ** ** | ** ** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except share data)** | ** ** |
| **Statement  of Income Data**                                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                            |       | $                                                         | 62,063     |   | $ | 92,416 |   | $ | 147,641 |   | $ | 223,141 |   | $ | 350,973 |   |
| Revenues from a  significant shareholder                                                            |       | 80,500                                                    |       | 95,858 |   | 103,402 |   | 103,441 |   | 99,359 |   |
| Cost of revenues                                                                                    |       | 86,251                                                    |       | 108,629 |   | 157,473 |   | 202,462 |   | 288,481 |   |
| **Gross  Profit**                                                                                   | ** ** | **$**                                                     | **56,312** | ** ** | **$** | **79,645** | ** ** | **$** | **93,570** | ** ** | **$** | **124,120** | ** ** | **$** | **161,851** | ** ** |
| Selling, general  and administrative                                                                |       | 29,656                                                    |       | 39,533 |   | 50,065 |   | 61,195 |   | 89,729 |   |
| Foreign exchange  (gain) loss, net                                                                  |       | (616                                                      | )          | (317 | ) | (172 | ) | 2,082 |   | 1693 |   |
| **Operating  Income**                                                                               | ** ** | **27,272**                                                | ** ** | **40,429** | ** ** | **43,677** | ** ** | **60,843** | ** ** | **70,429** | ** ** |
| Interest and  dividend income                                                                       |       | 1,221                                                     |       | 706 |   | 1,574 |   | 4,223 |   | 4,190 |   |
| Interest expenses                                                                                   |       | (1,999                                                    | )          | (1,114 | ) | (2,146 | ) | (2,083 | ) | (2,044 | ) |
| Gain on sale of  investments, net                                                                   |       | (92                                                       | )          | 391 |   | 1,278 |   | 144 |   | 1,128 |   |
| Other income  (expenses), net                                                                       |       | (392                                                      | )          | (404 | ) | (2,025 | ) | (3,693 | ) | 966 |   |
| Change in fair  value of put option                                                                 |       | —                                                    |       | — |   | 1,186 |   | — |   | — |   |
| **Income  before income taxes**                                                                     | ** ** | **26,010**                                                | ** ** | **40,008** | ** ** | **43,544** | ** ** | **59,434** | ** ** | **74,669** | ** ** |
| Income taxes                                                                                        |       | 3,940                                                     |       | 8,491 |   | 10,240 |   | 12,886 |   | 13,802 |   |
| Cumulative effect  due to change in accounting principle due to adoption of  SFAS No. 150 |       | —                                                    |       | — |   | 3,274 |   | — |   | — |   |
| **Net  income**                                                                                     | ** ** | **$**                                                     | **22,070** | ** ** | **$** | **31,517** | ** ** | **$** | **36,578** | ** ** | **$** | **46,548** | ** ** | **$** | **60,867** | ** ** |
| **Earnings  per share ,basic & diluted**                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of a change in accounting principle (basic and diluted)            |       |                                                      |       |   |   | $ | 0.30 |   |   |   |   |   |
| Cumulative effect  of a change in accounting principle (basic and diluted)                          |       |                                                      |       |   |   | 0.03 |   |   |   |   |   |
| **Net  Income : Basic**                                                                             | ** ** | **$**                                                     | **0.24**   | ** ** | **$** | **0.32** | ** ** | **$** | **0.33** | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** |
| **Diluted**                                                                                         | ** ** | **$**                                                     | **0.24**   | ** ** | **$** | **0.32** | ** ** | **$** | **0.33** | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** |
| Weighted average  number of common shares used in computing earnings per share                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| —Basic                                                                                         |       | 93,735,000                                                |       | 99,059,168 |   | 111,420,849 |   | 123,066,042 |   | 125,736,592 |   |
| —Diluted                                                                                       |       | 93,735,000                                                |       | 99,059,168 |   | 111,420,849 |   | 124,084,992 |   | 127,457,632 |   |
| Cash dividend per equity  share                                                                     |       | $                                                         | 0.002      |   | $ | 0.008 |   | $ | 0.009 |   | $ | 0.025 |   | $ | 0.046 |   |

 

| ** **                                                                     | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                     | ** ** | **2001**                      | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | ** **                    | ** ** | ** ** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**       | ** ** |
| **Balance Sheet Data**                                                         |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                     |       | $                             | 25,655     |   | $ | 32,801 |   | $        47,940 |   | $        77,143 |   | $      148,820 |   |
| Investments in  securities (including liquid mutual fund units)                |       | 483                           |       | 35,341 |   | 49,245 |   | 85,623 |   | 141,776 |   |
| Total assets                                                                   |       | 104,252                       |       | 163,016 |   | 226,084 |   | 373,063 |   | 553,886 |   |
| Capital lease  obligations and long-term debt (excluding current installments) |       | 6760                          |       | 301 |   | 357 |   | 391 |   | 416 |   |
| Redeemable share  capital                                                      |       | 18,174                        |       | 117,373 |   | — |   | — |   | — |   |
| Total shareholders’  equity                                               |       | 50,519                        |       | 758 |   | 154,832 |   | 273,227 |   | 439,029 |   |
|                                                                                |            |                               |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                       | ** ** | **Fiscal Year ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **2001**                                               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | ** **                                             | ** ** | ** ** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **(in thousands)**                                | ** ** |
| **Cash  Flow Data**              |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net cash provided  by (used in): |       |                                                   |       |   |   |   |   |   |   |   |   |
| Operating  activities            |       | $                                                      | 29,271     |   | $ | 50,159 |   | $ | 41,382 |   | $ | 48,662 |   | $ | 75,163 |   |
| Investing  activities            |       | (12,586                                                | )          | (46,112 | ) | (27,816 | ) | (86,354 | ) | (113,854 | ) |
| Financing  activities            |       | 2,017                                                  |       | 3,369 |   | (1,165 | ) | 61,423 |   | 111,875 |   |
| Capital expenditures             |       | 15,497                                                 |       | 12,849 |   | 13,742 |   | 22,461 |   | 55,387 |   |
|                                  |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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        (1) SeeNote 3 to our consolidated financial statements included elsewhere in thisannual report, for a discussion of the restatement of our financial statementsfor fiscal years 2003 and 2004 and the balance sheet as of December 31,2005 relating to the effects of recognition of additional payroll and relatedtaxes for our international operations, primarily on account of certain wagespaid, and short-term fringe benefits given, to our employees when workingoutside of India, for which appropriate withholding taxes were not provided,and reassessment of corporate taxes.

**Exchange rates**

Fluctuations in the exchange rate between the Indianrupee and the U.S. dollar will affect the U.S. dollar equivalent of the Indianrupee price of our equity shares on the Indian Stock Exchanges and, as aresult, will likely affect the market price of the ADSs in the United States,and vice versa. Such fluctuations will also affect the U.S. dollar conversionby the depositary of any cash dividends paid in Indian rupees on our equityshares represented by the ADSs.

The following table setsforth, for the fiscal years indicated, information concerning the number ofIndian rupees for which one U.S. dollar could be exchanged based on the averageof the noon buying rate in the City of New York for cable transfers in Indianrupees as certified for customs purposes by the Federal Reserve Bank of NewYork:

| **Year**                          | ** ** | ** ** | ** ** | **Average(1)** | ** ** | **High**  | ** ** | **Low** | ** ** | **Period-End** | ** ** |
|-----------------------------------|------------|------------|------------|----------------|------------|-----------|------------|---------|------------|----------------|------------|
| 2001                              |       | Rs. 47.22  |       | Rs. 48.91      |       | Rs. 46.39 |       |    | Rs. 48.27  |           |       |
| 2002                              |       | 48.63      |       | 49.07          |       | 47.96     |       |    | 48.00      |           |       |
| 2003                              |       | 46.59      |       | 48.10          |       | 45.29     |       |    | 45.55      |           |       |
| 2004                              |       | 45.26      |       | 46.45          |       | 43.27     |       |    | 43.27      |           |       |
| 2005                              |       | 44.00      |       | 46.26          |       | 43.05     |       |    | 44.95      |           |       |
| 2006 (through July 13, 2006) |       | 44.83      |       | 46.22          |       | 43.89     |       |    | 46.16      |           |       |

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       (1) Represents the average of the noon buying rate on the last day ofeach month during the period.

Thefollowing table sets forth the high and low exchange rates for the previous sixmonths and is based on the noon buying rate in the City of New York on the lastbusiness day of each month during the period for cable transfers in Indianrupees as certified for customs purposes by the Federal Reserve Bank of NewYork:

| ** **                                  | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|----------|------------|---------|------------|
| January 2006                           |       | 44.92    |       | 43.89   |       |
| February 2006                          |       | 44.54    |       | 44.10   |       |
| March 2006                             |       | 44.58    |       | 44.09   |       |
| April 2006                             |       | 45.09    |       | 44.39   |       |
| May 2006                               |       | 46.22    |       | 44.69   |       |
| June 2006                              |       | 46.22    |       | 45.50   |       |
| July 2006 (through July 13, 2006) |       | 46.16    |       | 45.84   |       |

 

On July 13, 2006, the noon buying rate in thecity of New York was Rs. 46.16.

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**3.B. Capitalization and indebtedness**

Not applicable.

**3.C. Reasons forthe offer and use of proceeds**

Not applicable.

**3.D. Risk factors**

*Investors should carefully consider all of theinformation set forth in this Annual Report and the following risk factors thataffect us and our industry. The risks below are not the only ones we face.Additional risks not currently known to us or that we presently deem immaterialmay also affect our business operations. Our business, financial condition orresults of operations could be materially or adversely affected by any of theserisks. This Annual Report also contains forward-looking statements that involverisks and uncertainties. Our results could materially differ from thoseanticipated in these forward-looking statements as a result of certain factors,including the risks we face as described below and elsewhere. See “Special NoteRegarding Forward-Looking Statements.”*

**Risks Related toour Operations**

***Our revenues arehighly dependent on a limited number of clients and the loss of any one of ourmajor clients could adversely affect our revenues.***

We derive a significantportion of our revenues from a limited number of clients in a few selectindustries. In 2003, 2004 and 2005 our largest client and one of our principal shareholders,General Electric, accounted for 41.2%, 31.7% and 22.1% of our revenues and oursecond largest client, State Farm Insurance, accounted for 17.4%, 14.9% and11.5% of our revenues. In 2003, 2004 and 2005, our top ten clients accountedfor 79.6%, 69.0% and 59.3% of our revenues. As a result of our reliance on alimited number of clients, we may face pricing and other competitive pressures.The volume of work performed for specific clients is likely to vary from yearto year, especially since we are not the exclusive external service providerfor substantially all of our clients. In addition, there are a number offactors, other than our performance, that could cause the loss of a client andthat may not be predictable. For example, our clients may decide to reducespending on IT services or sourcing from us due to a challenging economicenvironment and other factors, both internal and external, relating to theirbusiness such as restructuring or supplier rationalizations. The loss of anyone of our major clients, a decrease in the volume of work they outsource to usor a decrease in the price at which we sell our services to them couldadversely affect our revenues.

***Our clientcontracts, including those with our two largest customers, typically can beterminated without cause and with little or no notice or penalty, which couldnegatively impact our revenues and profitability.***

Our clients typicallyretain us through non-exclusive master services agreements, or MSAs. Most ofour client project contracts, including those that are on a fixed-priceand fixed-price service level agreement, or SLA, basis, can be terminatedwith or without cause, with 0 to 90 days notice and without termination-relatedpenalties. Our MSAs typically do not include any commitment by our clients togive us a specific volume of business or future work. Additionally, certain ofour MSAs do not require the client to make payments for any services or workproduct reasonably deemed unacceptable to the client. Our business is dependenton the decisions and actions of our clients, many of which are outside ourcontrol, that might result in the termination of a project or the loss of aclient and we could face liabilities as a result of such termination. Ourclients may demand price reductions, change their outsourcing strategy bylimiting the number of suppliers they use, moving more work in-house or to ourcompetitors or replacing 

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theirexisting software with packaged software supported by licensors. Any of thesedecisions or actions could adversely affect our revenues and profitability.

***Our revenues arehighly dependent on clients located in the United States. Economic slowdowns orfactors that affect the economic health of the United States may adverselyaffect our business.***

In 2003, 2004 and 2005,approximately 88.8%, 87.8% and 84.8% of our revenues were derived from clientslocated in the United States. If the current economic recovery in the UnitedStates does not continue, our clients may reduce or postpone their technologyspending significantly, which may in turn lower the demand for our services.

***Our clients operatein a limited number of industries. Factors that adversely affect theseindustries or IT spending by companies within these industries may adverselyaffect our business.***

We derive a largeproportion of our revenues from clients which operate in a limited number ofindustries. In 2003, 2004 and 2005 we derived 33.2%, 32.8% and 27.7% of ourrevenues from the insurance industry, 34.0%, 28.3% and 21.9% of our revenuesfrom the manufacturing industry, and 18.6%, 19.2% and 16.0% of our revenuesfrom the financial services industry. Any significant decrease in IT servicesspending by clients in these industries or other industries from which wederive significant revenues in the future may reduce the demand for ourservices. Further, any significant decrease in the growth of the insurance,manufacturing, financial services or telecommunications industries, orsignificant consolidation in those industries, or any decrease in growth orconsolidation in other industry segments in which we operate, may reduce thedemand for our services.

***We face intensecompetition for employees in our market. Our success depends in large part uponour highly skilled software professionals and our ability to attract and retainthese personnel.***

Our ability to execute projects and to obtain newclients depends largely on our ability to attract, train, motivate and retainhighly-skilled software professionals, particularly project managers andother mid-level professionals. Our attrition rates have been high due to ahighly competitive labor market in India. Our attrition rates were 20.3%, 19.4%and 20.1% in 2003, 2004 and 2005. We define our attrition rate as the ratio ofthe number of employees that have left us during a defined period to theaverage number of employees that are on our payroll during such period.

We invest in training theprofessionals that we hire to perform the services we provide. Theseprofessionals are often targeted by the lateral recruitment efforts of ourcompetitors. If we cannot hire and retain additional qualified personnel, ourability to bid on and obtain new projects may be impaired and our revenuescould decline. In addition, we may not be able to expand our business effectively.We believe that there is significant worldwide competition for softwareprofessionals with the skills necessary to perform the services we offer,including from non-Indian, international service providers such as AccentureLimited, or Accenture, and International Business Machines Corporation, or IBM.Additionally, we may not be able to redeploy and retrain our softwareprofessionals to keep pace with continuing changes in technology, evolvingstandards and changing client preferences.

***Our revenues, expensesand profits are difficult to predict and can vary significantly from quarter toquarter. This could cause the market value of our equity shares and the ADSs todecline.***

Our quarterly operating results may vary significantlyfrom quarter to quarter. Therefore, we believe that period-to-periodcomparisons of our results of operations are not necessarily meaningful andshould not be relied upon as an indication of our future performance. It ispossible that in the future some of our quarterly results of operations may bebelow the expectations of market analysts and our investors, which could leadto a significant decline of the market value of our equity shares and the ADSs.

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In the eight quarters ended December 31, 2005,our quarterly revenue growth varied from 2.2% to 4.8% and during the sameperiod our operating income as a percentage of revenues also variedsignificantly. As a large part of any quarter’s revenues are derived fromexisting customers, revenue growth can vary due to project start and stops andcustomer-specific situations. Operating income variation is due tovarious factors such as changes in compensation, which are typically effectedin the second quarter and reduce our operating margin in such quarter; changesin our use of onsite subcontractors, with higher usage in any quarter leadingto lower operating income; changes in the ratio of onsite and offshoreservices, with higher offshore revenues enhancing the particular quarter’soperating income; changes in utilization of resources, with lower utilizationleading to reduction in operating income; and changes in foreign exchangerates. We also experience variations in immigration costs.

Factors whichaffect the fluctuation of our revenues, expenses and profits include:

·       variations,expected or unexpected, in the duration, size, timing and scope of ourprojects, particularly with our major clients;

·       changesin our pricing policies or those of our clients or competitors;

·       theproportion of services that we perform in our development centers in India asopposed to outside India;

·       theeffect of seasonal hiring patterns, unanticipated attrition and the timerequired to train and productively utilize our new employees, particularlysoftware professionals;

·       annualincreases in compensation of our employees;

·       thesize and timing of expansion of our facilities;

·       unanticipatedcancellations, non-renewal of our contracts by our clients, contractterminations or deferrals of projects; and

·       changesin our employee utilization rate, which is affected by various factors.

A significant partof our expenses, particularly those related to personnel and facilities, arefixed in advance of any particular quarter. As a result, unanticipatedvariations in the number and timing of our projects or employee utilizationrates may cause significant variations in our operating results in anyparticular quarter. There are also a number of factors other than ourperformance that are not within our control that could cause fluctuations inour operating results from quarter to quarter. These include:

·       theduration of tax holidays or exemptions and the availability of other Governmentof India incentives;

·       theoutcome of any tax, legal or regulatory review, action or litigation;

·       currencyexchange rate fluctuations, particularly when the rupee appreciates in valueagainst the U.S. dollar since the majority of our revenues are in U.S. dollarsand a significant part of our expenses are in rupees; and

·       other general economicfactors.

***Our earnings may beadversely affected if we receive an adverse determination resulting from apending U.S. Internal Revenue Service tax review of our U.S. operations.***

We face challenges fromdomestic and foreign tax authorities regarding the amount of current taxes due.These challenges include questions regarding the timing and amount ofdeductions and the allocation of income among various tax jurisdictions. To theextent we are able to prevail in matters for which accruals have beenestablished or are required to pay amounts in excess of our reserves related tofuture 

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events,our effective tax rate in a given financial statement period may be materiallyaffected. The U.S. Internal Revenue Service, or IRS, has commenced, but not yetcompleted, a tax review of our U.S. operations for 2001 to 2004. Thedetermination of our tax liabilities relating to payroll, corporate taxes andthe consequential interest and related expenses for 2001 and 2002 has been  finalized by the IRS. As a result, we haverestated our financial statements for the years ended December 31, 2003and 2004 and the balance sheet as of December 31, 2005 for the additionalliability arising on account of this final determination, which for accountingpurposes constitutes the correction of an error. We have also reassessed our obligationsfor corporate taxes, payroll and related taxes, interest and related expensesfor  the years ended December 31,2001 to 2005. This revision, representing changes in estimates, is expected toresult in an additional charge of approximately $13.1 million in our financialstatements for the year ending December 31, 2006. Additionally,consequential interest and deferred tax charge in an amount of $4.5 millionwould be accrued and will be accounted in our financial statements for the yearending December 31, 2006. As the IRS review for 2003 to 2004 is still inprogress, we cannot currently assess whether this review may result in anyincreased tax liability. If, however, this review were to ultimately result inthe imposition of additional material tax liabilities to us, it could have anadverse affect on our earnings. See Notes 3.1.2 and 27.1.1 to our consolidatedfinancial statements for 2005.

***Our earnings may beadversely affected if we receive an adverse determination resulting from areview on compliance matters relating to our past and present internationallabor practices.***

We are currentlycooperating with the US Department of Labor with respect tocompliance matters related to our past and present labor practices. We estimatethe liability to be up to $2 million. Any adverse finding from thisreview could adversely impact  our earnings. See Note 27.1.2 to ourconsolidated financial statements for 2005.

***We operate in ahighly competitive environment and this competitive pressure on our business islikely to continue.***

The market for ITservices is rapidly evolving and highly competitive. We expect that competitionwill continue to intensify. We face competition or competitive pressure from:

·       IndianIT services companies, such as HCL Technologies Limited, Infosys TechnologiesLimited, Satyam Computer Services Limited, Tata Consultancy Services Limitedand Wipro Limited;

·       internationalIT services companies, such as Accenture, Cognizant Technology Solutions,Computer Sciences Corporation, Sapient Corporation and Electronic Data Systems;

·       divisionsof large multinational technology firms such as IBM, and Hewlett-PackardCompany, or Hewlett-Packard;

·       in-houseIT departments of large corporations;

·       otherinternational, national, regional and local firms from a variety of marketsegments, including major international accounting firms, systems consultingand implementation firms, applications software firms, service groups ofcomputer equipment companies, general management consulting firms, programmingcompanies and temporary staffing firms;

·       offshoreservice providers in other countries with low wage costs such as China and thePhilippines, and countries in Eastern Europe; and

·       involvementof third party intermediaries who negotiate IT services and outsourcingcontracts on behalf of their clients.

A number of our international competitors are settingup operations in India. Further, a number of our international competitors withexisting operations in India are ramping up their presence in India as offshoreoperations in India have become an important element of their deliverystrategy. This has resulted 

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in increased employeeattrition among Indian vendors and increased wage pressure to retain softwareprofessionals and reduce such attrition.

Many of our competitorshave significantly greater financial, technical and marketing resources andgenerate greater revenues than we do. Clients may prefer vendors that havedelivery centers located globally or are based in countries that are morecost-competitive than India. Therefore, we cannot assure you that we will beable to retain our clients while competing against such competitors. We believethat our ability to compete also depends in part on a number of factors beyondour control, including the ability of our competitors to attract, train,motivate and retain highly skilled technical employees, the price at which ourcompetitors offer comparable services and the extent of our competitors’responsiveness to client needs.

***Any inability tomanage our growth could disrupt our business and reduce our profitability.***

We have experienced significant growth in recentyears. Our revenues have grown at a compound annual growth rate of 33.3% from$142.6 million in 2001 to $450.3 million in 2005. The total number ofour employees has grown from 4,900 as of December 31, 2001 to 11,802 as ofDecember 31, 2005.

Our operations havealso expanded in recent years through the development, enhancement andacquisition of new service offerings and industry expertise, and the broadeningof our geographic presence. Specifically, we:

·       augmentedour offerings in our service lines in business process outsourcing, productengineering, infrastructure management services and quality assurance;

·       gainedexpertise and operations in the provision of services to clients in thetelecommunications industry through our acquisition of Patni Telecom Solutions,Inc or Patni Telecom (formerly Cymbal),

·       expandedour expertise and operations in our ISV and product engineering technologypractices;

·       enhancedoperations in Europe and Asia; and

·       expandedour facilities in India.

We expect ourfuture growth to place significant demands on both our management and ourresources. This will require us to continuously evolve and improve ouroperational, financial and internal controls across the organization. Inparticular, continued expansion increases the challenges we face in:

·       recruiting,training and retaining sufficient skilled technical, sales and managementpersonnel;

·       adheringto our high quality and process execution standards;

·       maintaininghigh levels of client satisfaction;

·       creatingand managing economies of scale;

·       managinga larger number of clients in a greater number of industry sectors;

·       integratingexpanded operations while preserving our culture, values and entrepreneurialenvironment; and

·       developingand improving our internal administrative infrastructure, particularly ourfinancial, operational, communications and other internal systems.

Any inability to manageour growth may have an adverse effect on our business, results of operationsand financial condition.

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***We may facedifficulties in providing services within our industry and technologypractices, offering new and existing service lines and managing increasinglylarge and complex projects, which could lead to clients discontinuing theirwork with us.***

We have been expanding the nature and scope of ourengagements by extending the breadth of our practices and the services weoffer. In addition, we have recently added new service lines such as qualityassurance services, and new capabilities within infrastructure managementservices and product engineering services. The success of these new andexpanded practices and service offerings is dependent, in part, upon demand forsuch services by our existing and new clients and our ability to meet thisdemand in a cost-competitive and effective manner. We cannot be certain that wewill be able to attract existing and new clients for such new services oreffectively meet our clients’ needs.

We intend for theincreased breadth of our practices and service offerings to result in largerand more complex projects for our clients. To achieve this result, we need toestablish closer relationships with our clients and develop a thorough understandingof their operations. Our ability to establish such relationships will depend onthe proficiency of our management personnel, software professionals and, ifnecessary subcontractors, as well as other competitive factors such as ourperformance and delivery capability. Larger and more complex projects mayinvolve multiple engagements or stages, and there is a risk that a client maychoose not to retain us for additional stages or may cancel or delay additionalplanned engagements. Such cancellations or delays make it difficult to plan forproject resource requirements, and failure to plan appropriately may have anegative impact on our business, results of operations and financial condition.

***Our business willsuffer if we fail to keep pace with the rapid changes in technology in theindustries on which we focus. We need to anticipate and develop new servicesand enhance existing services in order to keep our clients satisfied.***

The IT services market ischaracterized by rapid technological changes, evolving industry standards,changing client preferences and new product and service introductions. Ourfuture success will depend on our ability to anticipate these advances anddevelop new service offerings to meet client needs. We may not be successful inanticipating or responding to these advances on a timely basis or, if we dorespond, the services or technologies we develop may not be successful in themarketplace. Furthermore, services or technologies that are developed by ourcompetitors may render our services non-competitive or obsolete.

***We have undertakenand may continue to undertake strategic acquisitions, which may prove to bedifficult to integrate and manage or may not be successful, and may result inincreased expenses or write-offs.***

We have pursued and may continue to pursue strategicacquisition opportunities to enhance our capabilities and address gaps inindustry expertise, technical expertise and geographic coverage. It is possiblethat we may not identify suitable acquisition or investment candidates or jointventure partners, or if we do identify suitable candidates or partners, we maynot complete those transactions on terms commercially acceptable to us or atall. The inability to identify suitable acquisition targets or investments or jointventures or the inability to complete such transactions may adversely affectour competitiveness and our growth prospects.

In November 2004, we completed the acquisition ofCymbal (now Patni telecom), a U.S.-based provider of IT services toclients in the telecommunications industry, which is now integrated with ouroperations.

If we acquire anothercompany, we could have difficulty in assimilating that company’s personnel,operations, products, services, technology and software into our operations. Inaddition, the key personnel of the acquired company may decide not to work withus. These difficulties could disrupt our ongoing business, distract ourmanagement and employees and increase our expenses. Further, any such 

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acquisition,merger or joint venture that we attempt, whether or not completed, or any mediareports or rumors with respect to any such transactions, may adversely affectthe value of our equity shares and the ADSs.

***We are investingsubstantial cash assets in new facilities and physical infrastructure, and ourprofitability could be reduced if our business does not grow proportionately.***

We expect to investapproximately $250 million to $300 million in capital expendituresthrough 2008, which is a significant increase from our past capitalexpenditures. Most of the new spending will be for construction of newfacilities and physical infrastructure. However, we may not receive thebenefits that we expect from our investment in these facilities. Further, wemay encounter cost overruns or project delays in connection with newfacilities. These expansions will increase our fixed costs. If we are unable togrow our business and revenues proportionately, our profitability will bereduced.

***We are subject torisks arising from exchange rate fluctuations.***

Although our functional currency is the Indian rupee,we transact a significant portion of our business in several other currencies,particularly the U.S. dollar. Our exchange rate risk primarily arises from ourforeign currency revenues, receivables, payables and other foreign currencyassets and liabilities. We expect that a majority of our revenues will continueto be generated in U.S. dollars for the foreseeable future. In 2003, 2004 and2005, our dollar denominated revenues represented 92.7%, 94.3% and 90.3%, ofour total revenues respectively.

A significant portion of our expenses, comprising costof revenues and selling, marketing and general administrative expenses, are andwill continue to be denominated and incurred in Indian rupees. In 2003, 2004and 2005, rupee costs represented 36.9%, 37.6% and 39.1%  of these cost of revenues and selling,marketing and general administrative expenses. Therefore, changes in theexchange rate between the rupee and other currencies, especially with respectto the U.S. dollar, may have a material adverse effect on our revenues, otherincome, cost of services, operating costs and net income, which may in turnhave a negative impact on our business, operating results and financialcondition. On December 31, 2005, the exchange rate per U.S. dollar wasRs. 44.95 compared to Rs. 43.27 on December 31, 2004 andRs. 45.55 on December 31, 2003. The exchange rate between the rupeeand the dollar has changed substantially in recent years and may fluctuatesubstantially in the future.

We have sought to reducethe effect of exchange rate fluctuations on our operating results by purchasingderivative instruments such as foreign exchange forward contracts to cover aportion of outstanding accounts receivables. As of December 31, 2005, wehad outstanding forward contracts in the amount of $77.0 million. We haveincreased our foreign currency hedging activity given the recent volatility inthe value of Indian rupee against the U.S dollar. However, we may not be ableto purchase contracts to insulate ourselves adequately from foreign currencyexchange risks. In addition, any such contracts may not perform effectively asa hedging mechanism. See “Item 5. Operating and Financial Review and Prospects—ExchangeRates.”

***Our success dependsin large part upon our senior management and key personnel and our ability toattract and retain them.***

We are highly dependent onour senior management, including Mr. Narendra K. Patni, our Chairman andChief Executive Officer. Our future performance will be dependent upon thecontinued service of these persons. We do not maintain key man life insurancefor any of the senior members of our management team or other key personnel.Competition for senior management in our industry is intense, and we may not beable to retain such senior management personnel or attract and retain newsenior management personnel in the future. The loss of any of the members ofour senior management or other 

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keypersonnel may adversely affect our business. Our Chief Financial Officer, Mr. DeepakSogani, has announced his intention to leave his employment with us. He iscurrently expected to continue his present responsibilities until August 2006.Mr. Surjeet Singh  has beenappointed as the new Chief Financial Officer. His appointment is effective August 14,2006. See “Item 6. Directors, Senior Management and Employees.”

***Our revenues couldbe significantly affected if the governments in the United States or othercountries in which our customers are based restrict companies from outsourcingwork to non-domestic corporations.***

Offshore outsourcing hasbecome a politically sensitive topic in the United States and Europe due to itsperceived association with the loss of jobs in such countries. Current orprospective clients may elect to perform services we offer or may bediscouraged from transferring these services to offshore providers to avoid anynegative perception that may be associated with using an offshore provider.These trends could harm our ability to compete effectively with competitorsthat operate primarily out of facilities located in the United States. Avariety of U.S. federal and state legislation has been proposed that, ifenacted, could restrict or discourage U.S. companies from outsourcing theirservices to companies outside the United States. In addition, it is possiblethat legislation could be adopted that would restrict U.S. private sectorcompanies that have federal or state government contracts from outsourcingtheir services to offshore service providers. Because most of our clients arelocated in the United States, any expansion of existing laws or the enactmentof new legislation restricting offshore outsourcing by U.S. companies couldadversely impact our ability to do business.

***Our inability tocomplete fixed-price contracts within budget and at the required level ofperformance could reduce our revenues and profitability.***

We derived 42.6% and 40.5%of our revenues from fixed-price contracts in 2004 and 2005. We bear therisk of cost overruns, completion delays and wage inflation in connection withall fixed-price projects, any of which may result in a decrease in our marginsfrom work performed on fixed-price contracts. Our revenues from fixed-pricecontracts also include revenues from fixed-price SLAs, which areconditioned upon our meeting predetermined performance levels. Any failure tomeet such performance levels could result in a reduction in our revenues. Anyfailure to accurately estimate the resources and time required for a project orany failure to complete our contractual obligations at the committedperformance level could adversely affect our revenues and profitability.

***Our ability toexpand our business and procure new contracts or enter into beneficial businessarrangements may be affected by non-competition clauses in our agreements withexisting clients or business partners.***

Certain of our existingMSAs and other agreements have non-competition clauses, which restrict us fromproviding services to competitors of our existing clients or entering newmarkets where a business partner may already have a presence. Many of our MSAscontain clauses that restrict our employees working for a particular clientfrom providing services to a competitor of that client. Such clauses mayrestrict our ability to offer services to clients in a specific industry inwhich we have acquired expertise and may adversely affect our business andgrowth.

***We may be liable toour clients for damages caused by system failures or breaches of securityobligations.***

Many of our contractsinvolve projects that are critical to the operations of our clients’businesses. Further, our client contracts may require us to comply with certainsecurity obligations including maintaining network security and back-up data,ensuring our network is virus free and verifying the integrity of employeesthat work with our clients by conducting background checks. Any failure in aclient’s system or breach of security relating to the services we provide tothe client could damage our reputation or result in a claim for substantialdamages against us. We cannot assure you that any limitations of liability 

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setforth in our service contracts will be enforceable in all instances or willotherwise protect us from liability for damages in the event of a claim forbreach of our obligations. Our insurance coverage may not be sufficient for allsuch claims or damages and additional insurance coverage may not be availablein the future on reasonable terms or in amounts sufficient to cover largeclaims. Successful assertions of one or more large claims against us could havea significant adverse effect on our business, results of operations andfinancial condition.

***Our earnings willbe adversely affected by the change in our accounting policies with respect to the expensing of stock options.***

Historically, we have notdeducted any expense based on stock option grants in determining our netincome. Effective from January 1, 2006, a mandatory change in accountingstandards for employee stock options requires us, in determining net income, torecord the cost of employee services received in exchange for stockcompensation based on the fair value of the stock options on the date of grant.This change will negatively affect our net income. While we have not calculatedthe effect of this mandatory change on our net income for 2003 and 2004, weestimate that the effect would not be materially different from that shown on apro forma basis in our consolidated financial statements, which reflectedadditional expenses of $0.2 million, $1.3 million and $3.5 million in2003, 2004 and 2005. The impact of this mandatory change on our earnings may begreater in the future based on the number of options we grant and their fairvalue. See “Item 5. Operating and Financial Review and Prospects—RecentlyIssued Accounting Pronouncements under U.S. GAAP.”

***Our clients’proprietary rights may be misappropriated by our employees or subcontractors inviolation of applicable confidentiality agreements.***

We require our employeesand subcontractors to enter into non-disclosure arrangements to limit access toand distribution of our clients’ intellectual property and other confidentialinformation as well as our own. We can give no assurance that the steps takenby us in this regard will be adequate to enforce our clients’ intellectualproperty rights. If our clients’ proprietary rights are misappropriated by ouremployees or our subcontractors or their employees, in violation of anyapplicable confidentiality agreements or otherwise, our clients may consider usliable for that act and seek damages and compensation from us.

***We may be subjectto third party claims of intellectual property infringement.***

Although there are currently no material pending orthreatened intellectual property claims against us, infringement claims may beasserted against us in the future. Our contracts contain broad indemnityclauses, and under most of our contracts, we are required to provide specificindemnity relating to third party intellectual property rights infringement. Insome instances, the amount of these indemnities may be greater than therevenues we receive from the client. If we become liable to third parties forinfringing their intellectual property rights, we could be required to pay asubstantial damage award and be forced to develop non-infringing technology,obtain a license or cease selling the applications or products that contain theinfringing technology. We may be unable to develop non-infringing technology orto obtain a license on commercially reasonable terms, or at all. We may also berequired to change our methodologies so as not to use the infringedintellectual property, which may not be technically or commercially feasibleand may cause us to expend significant resources. Any claims or litigation inthis area, irrespective of the outcome, could be time-consuming and costlyand/or injure our reputation.

As the number of patents,copyrights and other intellectual property rights in our industry increases, webelieve that companies in our industry will face more frequent infringementclaims. Defending against these claims, even if not meritorious, could beexpensive and divert our attention and resources from operating our company.

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***We have a limitedability to protect our intellectual property rights, and unauthorized partiesmay infringe upon or misappropriate our intellectual property.***

We rely on a combinationof copyright, trademark and design laws, confidentiality procedures and contractualprovisions to protect our intellectual property, including our brand identity.However, the laws of India may not protect intellectual property rights to thesame extent as laws in the United States. Therefore, our efforts to protect ourintellectual property may not be adequate and we may not be able to detectunauthorized use or take appropriate and timely steps to enforce ourintellectual property rights. Our competitors may independently developproprietary methodologies similar to ours or duplicate our products orservices. Unauthorized parties may infringe upon or misappropriate our servicesor proprietary information. The misappropriation or duplication of ourintellectual property could disrupt our ongoing business, distract our managementand employees, reduce our revenues and increase our expenses. We may need tolitigate to enforce our intellectual property rights or to determine thevalidity and scope of the proprietary rights of others. Any such litigationcould be time consuming and costly and the outcome of any such litigationcannot be guaranteed. For more information regarding our intellectual property,see “Item 4. Information on the Company—Intellectual Property.”

***An economicdownturn may impair our growth and operating results.***

Discretionary spending onIT products and services in many parts of the world has increased after aperiod of decreased spending resulting from a challenging global economicenvironment. If economic growth slows or the current trend reverses, companiesmay cancel, reduce or defer expenditures for IT services. In an economicdownturn, our utilization and billing rates for our software professionalscould decline, which may adversely affect our growth and profitability.

**Risks Related toInvestments in Indian Companies and International Operations Generally**

We are incorporated inIndia and a substantial portion of our assets and our employees are located inIndia. Consequently, our financial performance and the market price of our ADSswill be affected by changes in exchange rates and controls, interest rates,Government of India policies, including taxation policies, as well aspolitical, social and economic developments affecting India.

***Immigrationrestrictions could limit our ability to expand our operations in the UnitedStates. We derive a high proportion of our revenues from clients located in theUnited States which may be affected materially by such restrictions.***

Most of our employees are Indian nationals. Theability of our software professionals to work in the United States, Europe andin other countries depends on our ability to obtain necessary visas and workpermits. As of December 31, 2005, a majority of our software professionalsin the United States held H-1B visas, a temporary visa which allows theemployee to remain in the United States while he or she remains an employee ofthe sponsoring firm, and L-1 visas, an intra company transfer visaallowing managers and executives or employees with specialized knowledge tostay in the United States only temporarily. An H-1B visa may be grantedto certain categories of persons in several “specialty occupations” includingsoftware professionals such as our employees, so long as their compensationmeets annually adjusted minimums. Those adjustments may force increases in thesalaries we pay to our employees with H-1B visas, resulting in lowerprofit margins. Although there is currently no limit to new L-1 visas,there is a limit to the aggregate number of new H-1B visas that may beapproved by the United States government in any fiscal year. Such annual limitis fixed at 65,000 and has already been reached for the year 2006(October 1, 2005 to September 30, 2006). We believe that the demandfor H-1B visas will continue to be high. Further, the United States governmenthas increased the level of scrutiny in granting visas. This may lead to limitson the number of L-1 visas granted. The U.S. immigration laws alsorequire us to comply with other legal requirements including those relating todisplacement and secondary displacement of U.S. workers and 

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recruiting and hiring ofU.S. workers, as a condition to obtaining or maintaining work visas for oursoftware professionals working in the United States.

Immigration laws in theUnited States and in other countries are subject to legislative change, as wellas to variations in standards of application and enforcement due to politicalforces and economic conditions. It is difficult to predict the political andeconomic events that could affect immigration laws, or the restrictive impactthey could have on obtaining or monitoring work visas for our softwareprofessionals. Our reliance on work visas for a significant number of softwareprofessionals makes us particularly vulnerable to such changes and variations.As a result, we may not be able to obtain a sufficient number of visas for oursoftware professionals or may encounter delays or additional costs in obtainingor maintaining such visas.

***Wage pressures inIndia may prevent us from sustaining our competitive advantage and may reduceour profit margins.***

Wage costs in India havehistorically been significantly lower than wage costs in the United States andEurope for comparably skilled professionals, which has been one of ourcompetitive strengths. However, wage increases in India may prevent us fromsustaining this competitive advantage and may negatively affect our profitmargins. Wages in India are increasing at a faster rate than in the UnitedStates, which could result in increased costs for software professionals, particularlyproject managers and other mid-level professionals. We may need to continue toincrease the levels of our employee compensation to remain competitive andmanage attrition.

***Clients may seek toreduce their dependence on India for outsourced IT services or take advantageof the services provided in countries with labor costs similar to or lower thanIndia.***

Clients who presentlyoutsource a significant proportion of their IT services requirements to vendorsin India may, for various reasons, including to diversify geographic risk, seekto reduce their dependence on one country. We expect that future competitionwill increasingly include firms with operations in other countries, especiallythose countries with labor costs similar to or lower than India, such as China,the Philippines and countries in Eastern Europe. Since wage costs in ourindustry in India are increasing, our ability to compete effectively willbecome increasingly dependent on our reputation, the quality of our servicesand our expertise in specific industries.

***Our net incomewould decrease if the Government of India reduces or withdraws tax benefits andother incentives it currently provides to us or otherwise increases oureffective tax rate.***

Presently, we benefit from the tax holidays given bythe Government of India for the export of IT services from specially designatedsoftware technology parks and special economic zones in India. As a result ofthese incentives, which include a 10-year tax holiday from Indiancorporate income taxes for the operation of most of our Indian facilities and apartial taxable income deduction for profits derived from exported IT services,our operations have been subject to relatively low tax liabilities. The 10-yeartax holidays are given for new software units, and the determination of whetheror not certain of our units are new units and eligible for the tax exemption isbeing reviewed and could be challenged by income tax authorities. We areuncertain whether or not we will continue to enjoy the tax benefit from theseunits and whether the income tax authorities will impose tax claims on us forpast deductions. The aggregate benefit of these tax holidays and deductionswith respect to our net income was  $15.0 million,$20.6 million and $19.0 million for 2003, 2004 and 2005, respectively. Thetax benefits available for some of our facilities have expired and certainothers will expire by March 2009.

The provisions of the Income Tax Act of India areamended on an annual basis by enactment of the Finance Act. The Finance Act,2005 has introduced a fringe benefit tax payable by employers on benefits 

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that are givencollectively and not individually to our employees. This tax is likely toincrease our operating expenses.

We may also besubject to changes in taxation resulting from the actions of applicable incometax authorities in India or from Indian tax laws that may be enacted inaddition to the Finance Act, 2005. For example, we may incur increased taxliability as a result of:

·       adetermination by applicable income tax authorities that the transfer priceapplied to transactions involving our subsidiaries and us was not appropriate;and

·       theintroduction of the Export of Service Rules, 2005, effective March 15,2005, which eliminate an exemption from service tax formerly available forservices for which payments are received in India in convertible foreignexchange, except with respect to specified services exported outside India.

Any increases in oureffective tax rate as a result of the expiration of tax benefits we currentlyenjoy, changes in applicable tax laws or the actions of applicable income taxor other regulatory authorities could materially reduce our profitability. Formore information, see “Item 5. Operating and Financial Review and Prospects—Taxes.”

***Any disruption inthe supply of power, IT infrastructure and telecommunications lines to ourfacilities could disrupt our business process or subject us to additionalcosts.***

Any disruption in basicinfrastructure, including the supply of power, could negatively impact ourability to provide timely or adequate services to our clients. We rely on anumber of telecommunications service and other infrastructure providers tomaintain communications between our various facilities in India and our clients’operations in the United States and elsewhere. Telecommunications networks aresubject to failures and periods of service disruption which can adverselyaffect our ability to maintain active voice and data communications among ourfacilities and with our clients. Such disruptions may cause harm to ourclients’ business. We do not maintain business interruption insurance and maynot be covered for any claims or damages if the supply of power, ITinfrastructure or telecommunications lines is disrupted. This could disrupt ourbusiness process or subject us to additional costs.

***Anti-takeoverprovisions under Indian law could prevent or deter an entity from acquiringcontrol of us.***

Indian takeoverregulations contain certain provisions that may delay, deter or prevent afuture takeover or change in control of us. These provisions may discourage athird party from attempting to take control of our company, even if a change incontrol would result in the purchase of ADSs at a premium to the market priceor would otherwise be beneficial to our ADS holders. See “Item 10. AdditionalInformation—Takeover Code.”

***There are certaindifferences in shareholder rights and protections between the laws of India andthe United States and between governance standards for a U.S. public companyand a foreign private issuer such as us.***

We are incorporated inIndia and investors should be aware that there are certain differences inshareholder rights and protections between the laws of India and the UnitedStates. There are also certain differences in the governance standards for aU.S. company and those applicable to a foreign private issuer such as us. AU.S. investor should consider such differences in shareholder rights andgovernance.

***In certaincircumstances, our ability to acquire companies organized outside India mayrequire the approval of the Government of India and/or the Reserve Bank ofIndia and we may fail to obtain such approvals in a timely manner or at all.***

As part of our strategy, we intend to acquirecompanies, in India or abroad, which have a synergistic fit with ouroperations.

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Subject tocompliance with certain Indian laws and regulations, including Indian exchangecontrol laws and regulations, we are permitted

·       tomake overseas direct investments of up to 200% of our net worth as of the dateof our last audited balance sheet;

·       tomake overseas direct investments, without limits on net worth, in any foreignsecurity from the proceeds of an international offering of ADRs or GDRs or fromthe account balances held in our exchange earner’s foreign currency bankaccounts; and

·       subjectto certain conditions, to acquire shares of a foreign company engaged in a *bona fide* business activity in exchangefor our ADRs or GDRs, provided that such an investment, taken together with allour overseas direct investments, does not exceed an amount equivalent to tentimes our export earnings during the preceding financial year as reflected inour audited balance sheet.

Other than the above exceptions, we are required toobtain the approval of the RBI to acquire shares of a foreign company for cashconsideration.

Additionally, if we are to invest in a foreign companythrough a share swap transaction, other than by way of an exchange of our ADRsor GDRs, we are required to obtain the approval of the Government of Indiaand/or the Reserve Bank of India.

In certain circumstances,we may not be able to meet the Indian regulatory requirements with respect tocertain acquisitions of foreign companies and may require the prior approval ofthe Reserve Bank of India and/or the Government of India to consummateacquisitions of such foreign companies. We may not be able to obtain some orall of these approvals in a timely manner or at all, and thereby may be impededin our efforts to acquire companies organized outside India. This inability maylimit our growth, render us uncompetitive relative to our competitors andadversely affect our business, revenues and profitability.

***You may havedifficulty enforcing any judgment obtained in the United States against us orour directors or executive officers in India.***

We are incorporatedunder the laws of India and many of our directors and executive officers resideoutside the United States. Furthermore, most of our assets and the assets ofour directors and executive officers are located outside the United States. Asa result, you may be unable to:

·       effectservice of process upon us or our directors and executive officers; or

·       enforcejudgments obtained in the United States courts against us or such persons inthe United States, including judgments predicated upon the civil liabilityprovisions of the federal securities laws of the United States.

The United  States and India do not currently have atreaty providing for reciprocal recognition and enforcement of judgments (otherthan arbitration awards) in civil and commercial matters.

***Incidents such asterrorist attacks and other acts of violence or war involving India, the UnitedStates, and other countries could adversely affect the financial markets,result in loss of client confidence, and adversely affect our business, resultsof operations and financial condition.***

Incidents such as theterrorist attacks that occurred in New York and Washington, D.C., on September 11,2001, in Delhi on October 29, 2005, and in Mumbai on July11, 2006 and inLondon, U.K., Bali, Indonesia and Madrid, Spain, and other acts of violence orwar, including those involving India, the United States or other countries, mayadversely affect global equity markets and economic growth. These acts may alsoresult in a loss of business confidence and have other consequences that couldadversely affect our business, results of operations and financial condition.Travel advisories, reluctance to travel and 

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increasedvisa scrutiny for travelers as a result of such attacks may have an adverseimpact on our ability to operate effectively. Any of these events couldadversely affect client confidence in India as an outsourcing base.

***Regional conflictsin South Asia could adversely affect the Indian economy, disrupt our operationsand cause our business to suffer.***

South Asia has, from timeto time, experienced instances of civil unrest and hostilities amongneighboring countries, such as between India and Pakistan. In recent yearsthere have been military confrontations along the India-Pakistan border.The potential for hostilities between the two countries is high due to pastterrorist incidents in India and troop mobilizations along the border, and thegeopolitical situation in the region. Military activity or terrorist attacks inthe future could influence the Indian economy by disrupting communications andmaking travel more difficult. Political tensions could increase the perceptionthat investments in Indian companies involve a higher degree of risk thancompanies in other countries such as the United States. This, in turn, couldhave a material adverse effect on the market for securities of Indiancompanies, including our equity shares and our ADSs, and on the market for ourservices.

***Our performance islinked to the stability of policies and the political situation in India.***

The role of the Indian central and state governmentsin the Indian economy and their effect on producers, consumers and regulatorshas remained significant over the years. Since 1991, successive governments ofIndia have pursued policies of economic liberalization, including significantlyrelaxing restrictions on the private sector. The current Government of India,which was formed in May 2004, has announced policies and taken initiativesthat support the continued economic liberalization policies pursued by previousgovernments. We cannot assure you that these liberalization policies willcontinue in the future. The rate of economic liberalization could change, andspecific laws and policies affecting technology companies, foreign investment,currency exchange rates and other matters affecting investment in oursecurities could change as well. A significant change in India’s economicliberalization and deregulation policies could adversely affect business andeconomic conditions in India generally, and our business in particular.

Since 1996, the Governmentof India has changed six times. The current Indian government is a coalition ofmany parties, some of which are communist and other far left parties in India.The withdrawal of one or more of these parties or any dispute between groups ofthose parties could result in political instability. Any political instabilitycould delay or otherwise adversely affect the reform of the Indian economy andcould have a material adverse effect on the market for our equity shares andour ADSs and on the market for our services.

***We are vulnerableto natural disasters that could severely disrupt the normal operation of ourbusiness and adversely affect our earnings.***

India is susceptible tonatural disasters, including tsunamis, floods and earthquakes. On December 26,2004, southeast Asia, including the eastern coast of India, experienced atsunami that caused significant loss of life and property damage. While ourfacilities were not damaged, the tsunami struck Chennai and other areas inwhich we operate. Substantially all of our facilities and IT professionals arelocated in India. If our facilities are damaged by a tsunami, flood, earthquakeor other natural disaster, our global delivery capability could be interruptedor delayed significantly. Although we maintain comprehensive natural perilsinsurance up to policy limits our insurance coverage may not be sufficient tocover all of our potential losses. In addition, disaster management facilitiesin India may not be adequate to protect against potential losses. As a result,a natural disaster in India could have a material adverse effect on ourbusiness, financial condition and results of operations.

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***Compliance with newand changing corporate governance and public disclosure requirements addsuncertainty to our compliance policies and increases our costs of compliance.***

Laws, regulations and standards relating toaccounting, corporate governance and public disclosure, new SEC regulations,NYSE rules, Securities and Exchange Board of India rules, and Indian stockmarket listing regulations are subject to change and can create uncertainty forcompanies like ours. New or changed laws, regulations and standards could lackspecificity or be subject to varying interpretations. Their application inpractice may evolve over time as new guidance is provided by regulatory andgoverning bodies. This could result in continuing uncertainty regardingcompliance matters and higher costs of compliance as a result of ongoingrevisions to such governance standards.

In particular, our efforts to comply with Section 404of the Sarbanes-Oxley Act of 2002 and the related regulations regarding ourrequired assessment of our internal controls over financial reporting and ourexternal auditors’ audit of that assessment requires the commitment ofsignificant financial and managerial resources. Our independent auditors may beunable to issue unqualified attestation reports on management’s assessment onthe operating effectiveness of our internal controls over financial reporting.

We are committed tomaintaining high standards of corporate governance and public disclosure, andour efforts to comply with evolving laws, regulations and standards in thisregard have resulted in, and are likely to continue to result in, increasedgeneral and administrative expenses.

**Risks Relating toOur ADSs and our Trading Market**

***Sales and issuancesof our equity shares or ADSs may adversely affect the market price of the ADSsand our equity shares.***

Sales of a substantialnumber of equity shares, including sales by our insiders, into the publicmarket, whether on the Indian Stock Exchanges or into the United States byissuances of ADSs, or the perception that such sales may occur, could adverselyaffect the market price of the ADSs and our equity shares or our ability toraise capital through an offering of our securities. In the future, we may alsosponsor the sale of shares currently held by some of our shareholders, or issuenew shares. We can make no prediction as to the timing of any such sales or theeffect, if any, that future sales of our equity shares, or the availability ofour equity shares for future sale, will have on the market price of our equityshares or ADSs prevailing from time to time. In addition, we have adopted anemployee stock option plan as a means to reward and motivate our employees. Youmay experience dilution of your shareholding to the extent that we make futureequity offerings or issue equity shares pursuant to the exercise of stockoptions under our employee stock option plan.

***We have controllingshareholders who have the ability to exercise significant control over us, andwhose interests may conflict with the interests of our other shareholders.***

Mr.  Narendra K.Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, together withtheir families and entities controlled by them, and General Atlantic own14.77%, 14.95%, 14.95% and 16.61% of our outstanding equity shares.

Our Articles of Association confer certain rights onour controlling shareholders relating to our governance, includingrepresentation on our board of directors and an ability to adjourn ashareholder or board of directors meeting for lack of quorum if their representativeis not present at the first such meeting. In addition, our Articles ofAssociation can only be amended if members holding not less than 75% of ourequity shares (and who are entitled to vote) cast votes in favor of suchamendments and such votes include the favorable votes of each of thecontrolling shareholders so long as the respective groups hold at least 10% ofour equity shares and vote on such amendment. Pursuant to the terms of ourArticles 

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of Association, Mr. NarendraK. Patni is the permanent Chairman of our Board, with a casting vote in theevent of a tie.

Pursuant to an employment agreement with our U.S.subsidiary, Patni Computer Systems, Inc., and a consultancy agreementbetween our U.S. subsidiary and us, Mr. Narendra K. Patni serves as ourchief executive officer and the chief executive officer of our U.S. subsidiary.So long as our consultancy agreement is in effect, Mr. Narendra K. Patniwill act as our chief executive officer and, pursuant to our Articles ofAssociation, so long as he remains our chief executive officer, he will havethe right to appoint and remove all key senior personnel and senior management,following consultation with General Atlantic. The employment agreement with Mr. Narendra K.Patni has an initial term expiring on December 31, 2008, which can beextended at Mr. Patni’s option for an additional five year term. Inaddition, our board of directors has approved the extension of the consultancyagreement to December 31, 2010.

We have entered into employment agreements with eachof Mr. Gajendra K. Patni and Mr. Ashok K. Patni pursuant to whicheach serves as one of our executive directors. The employment agreement witheach of Mr. Gajendra K. Patni and Mr. Ashok K. Patni had an initialterm which expired on October 23, 2005. Our board of directors hadresolved that, in accordance with our Articles and subject to the provisions ofthe Companies Act, 1956, or Indian Companies Act, and approval of ourshareholders, to reappoint each of Messrs. Gajendra K. Patni and Ashok K.Patni as our executive directors for a further period of five years beginning October 24,2005. Our shareholders at the Annual General Meeting held on June 21, 2006approved these re-appointments for a further period of five years beginning October 24,2005.

In addition, the agreements with each of Messrs. NarendraK. Patni, Gajendra K. Patni and Ashok K. Patni can be terminatedonly upon payment of additional compensation.  Our Articles of Associationrequired that each of Messrs. Narendra K, Patni, Gajendra K. Patni andAshok K. Patni not compete against us; however, these non-compete provisionsexpired in February 2005. None of Messrs. Narendra K. Patni, GajendraK. Patni or Ashok K. Patni has entered into a standard non-solicitation andnon-compete agreement that all of our other employees are required to sign as acondition of employment. In addition, Mr. Gajendra K. Patni and Mr. AshokK. Patni, together with their family members, have management control ofcertain companies, which include PCS Technology Limited, PCS InternationalLimited, PCS Cullinet Private Limited, PCS Finance Private Limited, AshokaComputer Systems Private Limited, Raay Software Private Limited and Raay GlobalInvestments Private Limited. We have not entered into any non-solicitation ornon-compete agreements with any of these companies. While these companiescurrently are not competing with us to a material extent, we cannot assure youthat in the future they may not compete with us, may not solicit our employeesor otherwise have interests that may not conflict with ours.

Each of the four controlling shareholders has theright to appoint one director to our board of directors so long as suchcontrolling shareholder holds 5% or more of our equity shares. In addition, twoof our other directors serve as special advisors to General Atlantic and athird additional director formerly served as a special advisor to GeneralAtlantic.

Accordingly, our controlling shareholders have theability to exercise significant influence over our management, including overmatters requiring shareholder approval or approval by our board of directors.This could delay, defer or prevent a change in control, impede a merger,consolidation, take-over or other business combination involving us, or discouragea potential acquirer from making a tender offer or otherwise attempting toobtain control of us.

Certain of ourshareholders also have certain additional rights with respect to SECregistration for resale of our equity shares. See “Item 7.B. Related party transactions—Registration Rights Agreement.”

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***Trading suspensionsand closures at the Indian Stock Exchanges may adversely affect the tradingprice of ADSs.***

Our equity shares are listed and traded in India onthe Indian Stock Exchanges. The regulation and monitoring of Indian securitiesmarkets and the activities of investors, brokers and other participants differ,in some cases significantly, from those in the United States. Indian stockexchanges have in the past experienced problems, including temporary exchangeclosures, broker defaults, settlement delays and strikes by brokerage firmemployees, which, if continuing or recurring, could affect the market price andliquidity of the securities of Indian companies, including our equity sharesand ADSs, in both domestic and international markets.

The two Indian stockexchanges on which our equity shares are listed, The Bombay Stock ExchangeLimited and the National Stock Exchange of India Limited, also have a specificprice band for each security listed. When a price fluctuation exceeds thespecific limits of the price band, trading of the security is stopped for thattrading session. Such price volatility controls and the specific price bandsare decided by each individual exchange and may differ from exchange toexchange. A closure of or trading stoppage on the Indian Stock Exchangescould adversely affect the trading price of the ADSs. In addition, theliquidity and trading patterns of securities quoted on the Indian StockExchanges may be substantially different from those of securities listed on theNYSE. Historical trading prices, therefore, may not be indicative of the pricesat which the ADSs will trade in the future.

***Exchange ratefluctuations between the dollar and the rupee will affect the value of theADSs.***

Fluctuations in theexchange rate between the rupee and the dollar will affect the dollar value ofany cash dividends paid in rupees on our equity shares represented by the ADSs.In addition, these fluctuations will affect the dollar equivalent of the rupeeprice of our equity shares on the Indian Stock Exchanges and, as a result, theprices of our ADSs in the United States, as well as the dollar value of theproceeds a holder would receive upon the sale in India of any equity shareswithdrawn from the depositary under the deposit agreement. Holders may not beable to convert rupee proceeds into dollars or any other currency, and there isno guarantee of the rate at which any such conversion will occur, if at all.

***Indian law imposescertain restrictions that limit a holder’s ability to transfer the sharesobtained upon surrender of ADSs and repatriate the proceeds of such transfer,which may cause our ADSs to trade at a premium or a discount to the marketprice of our equity shares.***

Under certaincircumstances, the Reserve Bank of India must approve the sale of equity sharesunderlying ADSs by a non-resident of India to a resident of India. Requiredapproval from the Reserve Bank of India or any other government agency may notbe obtained on terms favorable to a non-resident investor or at all.

***An investor in ourADSs may not be able to exercise preemptive rights for additional equity sharesand may thereby suffer dilution of your equity interest in us.***

Under the Indian CompaniesAct a company incorporated in India must offer its holders of equity sharespreemptive rights to subscribe and pay for a proportionate number of shares tomaintain their existing ownership percentages prior to the issuance of any newshares, unless such preemptive rights have been waived by holders ofthree-fourths of the shares voting on the resolution to waive such rights. Aholder of ADSs may be unable to exercise preemptive rights for equity sharesunderlying ADSs unless a registration statement under the Securities Act iseffective with respect to such rights or an exemption from the registrationrequirements of the Securities Act is available. We are not obligated toprepare and file such a registration statement and our decision to do so willdepend on the costs and potential liabilities associated with any such registrationstatement, as well as the perceived benefits of enabling the holders of ADSs toexercise their preemptive rights, and any other factors we consider appropriateat the time. We 

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cannotassure you that we would file a registration statement under these circumstances.If we issue any such securities in the future, such securities may be issued tothe depositary, which may sell such securities for the benefit of the holdersof the ADSs. There can be no assurance as to the value, if any, the depositarywould receive upon the sale of such securities. To the extent that a holder ofADS is unable to exercise preemptive rights granted in respect of the equityshares represented by the ADSs, his proportional interest in us would bereduced.

***ADS holders may berestricted in their ability to exercise voting rights.***

At our request, thedepositary will mail the holders of ADSs any notice of a shareholder meetingreceived from us together with information explaining how to instruct thedepositary to exercise the voting rights of our shares represented by the ADSs.If the depositary receives voting instructions from the holders in time,relating to matters that have been forwarded to them, it will endeavor to votethe shares represented by the ADSs in accordance with such voting instructions.However, the ability of the depositary to carry out voting instructions may belimited by practical and legal limitations and the terms of the securities ondeposit. We cannot assure that the holders will receive voting materials in timeto enable them to return voting instructions to the depositary in a timelymanner. Shares for which no voting instructions have been received will bevoted by our management. There may be other communications, notices orofferings that we only make to holders of our shares, which will not beforwarded to holders of ADSs. Accordingly, the holders of ADSs may not be ableto participate in all offerings, transactions or votes that are made availableto holders of our shares.

***An active or liquidtrading market for our ADSs is not assured.***

An active, liquid trading market for our ADSs may notbe maintained in the long term. We cannot predict the extent to which anactive, liquid public trading market for our ADSs will exist. Active, liquidtrading markets generally result in lower price volatility and more efficientexecution of buy and sell orders for investors. The lack of an active, liquidtrading market could result in the loss of market makers, media attention andanalyst coverage. If there is no longer a market for our equity shares, or ifwe fail to continue to meet eligibility requirements, we may be required todelist from the NYSE and this may cause our share prices to decreasesignificantly. In addition, if there is a prolonged decline in the price of ourequity shares, we may not be able to issue equity securities to fund ourgrowth, which would cause us to limit our growth or to incur higher costfunding, such as short-term or long-term debt.

Liquidity of a securitiesmarket is often a function of the volume of the underlying shares that arepublicly held by unrelated parties. Although the holders are entitled towithdraw the equity shares underlying the ADSs from our Depositary at any time,there is no public market for our equity shares in the United States.

**ITEM 4. INFORMATIONON THE COMPANY**

**4.A. History anddevelopment of the Company**

We were incorporated as Patni Computer Systems Private Limited onFebruary 10, 1978 under the Indian Companies Act. We are registered with the Registrarof Companies, Pune, Maharashtra, India. Our company registration number is 11020127. In 1988, by virtue of Section 43A of the Indian CompaniesAct, we became a “deemed public company” and subsequently on April 15,1991 we were converted into a private limited company. By virtue of ourturnover exceeding prescribed limits under the then-applicable Section 43Aof the Indian Companies Act, on July 1, 1995, we became a deemed publiccompany and consequent to the deletion of Section 43A from the Indian CompaniesAct, we were converted to a private limited company on June 27, 2002. Wewere again converted to a public limited company on September 18, 2003 andchanged our name to Patni Computer Systems Limited. Our registered office islocated at S-1A 

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Irani Market Compound, Yerawada, Pune 411 006, Maharashtra, India andthe telephone number of our registered office is +91 20 2669 3457.

The original activities of the Company were computertime rental, the resale of imported computer hardware, and software exports. In1981, we promoted PCS Data Products (Private) Limited, or PCSDP, for the saleand marketing of computer equipment and hardware maintenance. In 1987, wepromoted PCS Data General India, or PCSDG, a joint venture with The DataGeneral Corporation, USA, for the manufacture and maintenance of computerhardware. In 1994, the name of PCSDP was changed to PCS Industries Limited, orPCSIL, and PCSDG was merged into PCSIL. Since 1994, we have been entirelyfocused on software exports. In 1999, the shares of PCSIL held by us and othernon-operating assets were de-merged into other group companies and our Companyemerged as a focused IT services company.

Our corporate headquarters are located at AkrutiSoftech Park, MIDC Cross Road No. 21, Andheri East, Mumbai 400 093, India,and our North American headquarters are located at One Broadway Cambridge, MA02142. General Atlantic made a significant investment in our company in 2002. To enhance our domain expertise in financialservices and telecommunications, we made selective acquisitions such as TheReference Inc., which we acquired in April 2003, and Cymbal, which weacquired in November 2004. We completed our initial public offeringof equity shares in India in February 2004 and our initial offering ofADSs listed on the New York Stock Exchange in December 2005.

Our capital expendituresfor 2003, 2004 and 2005 were $13.7 million, $22.5 million and $55.4 million,respectively. These capital expenditures were primarily to finance theexpansion of our existing facilities as well as the construction of newfacilities in India. We anticipate capital expenditures of betweenapproximately $250 million to $300 million from 2005 through 2008, principallyto finance the construction of our new knowledge park facilities in Navi Mumbaiand Chennai and other facilities and physical infrastructure in India*.*We are obliged under a number of contracts relating tocapital expenditure. Estimated amounts remaining to be executed on suchcontracts (net of advances), aggregated approximately $22 million atDecember 31, 2005. We currently intend to finance our planned capitalexpenditure entirely from the proceeds of our ADS offering and funds generatedfrom operations.

**4.B. Businessoverview**

We are a leading Indian provider of informationtechnology services. We deliver a comprehensive range of IT services throughglobally integrated onsite and offshore delivery locations primarily in India,which we call our global delivery model. We offer our services to customersthrough industry-focused practices, including insurance, manufacturing,financial services and telecommunications, and through technology-focusedpractices. Within these practices, our service lines include applicationdevelopment, application maintenance and support, packaged software implementation,infrastructure management services, product engineering services, businessprocess outsourcing and quality assurance services.

We have in-depth knowledge in our industry andtechnology practices. Insurance, manufacturing and financial services accountedfor 32.8%, 28.3% and 19.2% of our revenues in 2004, and 27.7%, 21.9% and 16.0%in 2005. In November 2004, we enhanced our expertise in thetelecommunications industry by acquiring Cymbal (now Patni Telecom), a U.S.-basedIT services company. We also have knowledge, experience and a growing presencein other industries including retail, energy and utilities, logistics andtransportation, and media and entertainment. Our technology practices offerresearch, design and development services for product engineering and toindependent software vendors, or ISVs. Through our dedicated sales andmanagement teams in each of our industry and technology practices, we believewe are able to provide better client service, effectively cross-sell servicesto our existing clients and develop new client relationships.

We have a track record of successfully developing andmanaging large, long-term client relationships with some of the world’s largestand best known companies. Our customer base has increased significantly 

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from 87 clients as ofDecember 31, 2002 to 199 clients as of December 31, 2005. Several ofour key executives are located in our client geographies to better develop andmaintain client relationships at senior levels. Repeat business accounted for90.3% in 2003, 88.8% in 2004 and 91.7% of our revenues in 2005.

Our revenues grew from $142.6 million in 2001 to$450.3 million in 2005, representing a compound annual growth rate of33.3%. Our net income grew from $22.1 million in 2001 to$60.9 million in 2005, representing a compound annual growth rate of28.9%. Our total number of employees was 4,900 as of December 31, 2001 and11,802 as of December 31, 2005. We are investing in new high-techfacilities, which we refer to as “knowledge parks”, designed for expanding ouroperations and training our employees. As of December 31, 2005 we had 194sales and marketing personnel supported by dedicated industry specialists in 23sales offices around the globe, including North America, Europe, Japan and therest of the Asia-Pacific region.

We have a highly qualifiedmanagement team with a broad range of experience in the IT industry. Our ChiefExecutive Officer is an entrepreneur and engineer who has been in this industryfor over 30 years and has led us from our inception in 1978. Most of oursenior management has worked as a team with us for over 20 years. We useour competitive recruitment program to select the best talent from India’spremier engineering institutions. We were ranked among the 10 Best Companies toWork For in India by a survey conducted jointly among Mercer, an internationalhuman resources consulting firm, TNS, a provider of market information andBusiness Today magazine.

**Industry Background**

Businesses areincreasingly relying on IT service providers to help manage the growingcomplexity, cost, and risk of today’s IT infrastructure. Client engagementshave evolved from simple staff augmentation and generic technology services tocustomized IT solutions requiring skilled IT professionals with in-depth industryknowledge. Further, the maturity of outsourced and offshore service deliveryhas generated client demand for more sophisticated engagement models combiningonsite and offshore IT management. We believe these trends will continue todrive growth generally in the worldwide market for IT services and specificallyin the Indian IT services industry.

***Expectation for accelerated global IT spending***

Changing market conditions, rapid technologicalinnovation, the impact of the internet and increasing globalization arecreating an increasingly competitive business environment requiring businessesto transform the manner in which they operate. Customers are increasinglydemanding improved service and accelerated delivery times at lower costs. Toadequately address these needs, businesses are using IT service providers tohelp create sustainable competitive advantages.

According to a 2005 Gartner report, worldwide spending on IT services isexpected to grow from $582.5 billion in 2003 to $759.8 billion in 2008. This representsa compound annual growth rate (CAGR) of 5.5%.

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Source :Forecast: IT Services, Worldwide, 2005-2009 (Update), Kathryn Hale,Robert De Souza, Twiggy Lo, Yuko Adachi

***Increased IT outsourcing as a means to optimize costs***

Businesses are outsourcing their IT requirements tobetter manage their IT spending and reduce costs. Outsourcing enablesbusinesses to optimize their IT cost structures by converting a portion oftheir fixed costs to variable costs. Consequently, we believe outsourcingpresents significant long-term growth 

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potential. The followingtable shows Gartner’s recent worldwide forecast for core outsourcing byvertical market for 2005 to 2009.

Source : Publication Date:14 December 2005 ID Number: G00131095, Gartner on Outsourcing, 2005 By LorrieScardino, Dane S. Anderson, Robert H. Brown, Claudio Da Rold, Cassio Dreyfuss,Frances Karamouzis, John-David Lovelock, William Maurer, Cynthia Moore, AllieYoung

***Trend towards offshore IT services***

Macroeconomictrends of globalization and industrialization, and a rapidly evolving economicand business environment have driven the trend towards offshoring of ITservices. To acquire high quality IT services more cost effectively, businessesare increasingly using offshore IT providers. It has become common for requestsfor proposals to require significant detail about the IT services providers’offshore capabilities. As a result, over the last few years a large number ofglobal technology and IT services companies have begun to incorporate offshoreoperations as part of their business models. According to a December 2004Gartner report,(1) by 2008 Gartner forecasts that the globally sourcedcomponent (external labor billed to the customer) of IT services spending willbe approximately $50.0 billion, representing about 7% of the$728 billion total. This represents a compound annual growth rate ofapproximately 29% from 2003 to 2008.

***Growing Indian IT services sector***

India is a premier source for offshore IT services.According to an IDC report published in 2004, 80% of businesses in a surveywith thirty respondents selected India as a preferred country for offshore ITservices*.*

We believe thatthere are several key factors favoring India:

·       Highquality delivery: The development centers at several of the IndianIT services providers have been assessed at SEI-CMM Level 5;

·       Significant cost benefits:The NASSCOM Strategic Review 2005 suggests that overseas companies couldrealize savings of 25% to 60% by utilizing offshore resources; and

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       (1) Source: “Gartner on Outsourcing 4Q04”, L. Scardino,R. Brown, B. Caldwell, S. Cournoyer, C. Dreyfuss,I. Marriott, W. Maurer, A. Young.

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·       Abundantskilled resources: India has an abundant, highly-skilled, English-speakinglabor pool. According to the NASSCOM Strategic Review 2005, India turns outapproximately 2.5 million graduates, including 284,000 engineeringgraduates, from its educational institutions annually.

According to NASSCOM, the top ten Indian IT servicesand software exporters by estimated export revenues (excluding U.S.-basedand other foreign companies that have significant offshore operations in India)for the year ended March 31, 2006 are:

***TOP 20 IT SOFTWARE &SERVICE EXPORTERS FROM INDIA (2005-06)***(excludes ITES-BPO)

1.                 Tata ConsultancyServices Ltd. 

2.                 InfosysTechnologies Ltd. 

3.                 WiproTechnologies Ltd.

4.                 Satyam ComputerServices Ltd.

5.                 HCL TechnologiesLtd.

6.                 Patni ComputerSystems Ltd.

7.                 I-flex SolutionsLtd.

8.                 Tech MahindraLtd. (formerly Mahindra-British Telecom Ltd.)

9.                 Perot Systems TSI(I) Ltd.

10.          L&T Infotech Ltd.

Source : NASSCOM PressRelease (Updated on June 27, 2006)

**Our Delivery Model**

We address our clients’needs with our global delivery model, through which we allocate resources in acost-efficient manner using a combination of onsite client locations in NorthAmerica, Europe and Asia and offshore locations in India. We believe anintegral part of our delivery is our industry knowledge, which we refer to asour domain expertise.

We refer to our own industry experts, businessanalysts and solutions architects who are located primarily onsite with theclient as our “domain wedge”. These experts are supported by additionalpersonnel who provide technical services onsite on a temporary basis, and byour trained professionals located normally at one or more of our eight offshorecenters in India. Typically, at the initial stage of a project, we provideservices through our onsite industry and technology experts and our transientonsite delivery personnel. By applying our domain wedge approach, we deliversolutions that can be structured to scale to suit our clients’ needs. Incertain cases we provide dedicated offshore development centers, set up for aparticular client. Through these offshore development centers we integrate ourclients’ processes and methodologies and believe we are better positioned toprovide comprehensive and long-term support. We maximize the cost efficiency ofour service offerings by increasing the offshore portion of the work as theclient relationship matures. To complement our domain wedge, we have aligned amajority of our sales and marketing teams to focus on specific industrysectors.

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**Our Competitive Strengths**

We believe our competitive strengths enable us todeliver high-quality, efficient and scalable services. These strengths include:

***Focused IndustryExpertise***

We concentrate on industries where we believe we cangenerate sustained revenue growth, such as insurance, manufacturing, financialservices and telecommunications. Through our extensive experience in theseindustries, we provide solutions that respond to technological challenges facedby our clients. To enhance our domain expertise in financial services andtelecommunications, we have made selective acquisitions such as TheReference Inc., which we acquired in 2003, and Cymbal, which we acquiredin 2004. We also focus on technology practices, specifically in productengineering and for ISVs.

***Successful ClientRelationships***

We have demonstrated the ability to build and managelarge client relationships. Our established, long-term relationships typicallydevelop from performing discrete projects to providing multiple serviceofferings spread across the client’s businesses. For example, we have afifteen-year relationship with our largest client who is also one of ourprincipal shareholders, General Electric, which has grown to $99.4 millionin revenues in 2005. Through our flexible approach, we believe we offerservices that respond to our clients’ needs irrespective of their size. Byleveraging our industry experience with our project management capabilities andbreadth of technical expertise, we solidify and expand our clientrelationships.

***Extensive Suite ofIT Services***

We provide a comprehensive range of IT services,including application development, application maintenance and support,packaged software implementation, infrastructure management services, productengineering, business process outsourcing and quality assurance services. Ourknowledge and experience spans multiple computing platforms and technologies,which enable us to address a range of business needs and to function as avirtual extension of our clients’ IT departments. We offer a broad spectrum ofservices in select industry sectors, which we leverage to capitalize onopportunities throughout our clients’ organizations.

***Delivery andOperational Excellence***

Through our mature global delivery model, we deliverhigh quality and cost-effective IT services from multiple locations in areduced timeframe. We vary the composition of our employee resource pool, interms of seniority and location, to maximize our productivity and efficiency.Our processes and methodologies have achieved Capability Maturity ModelIntegrated (CMMi) Level 5, the highest attainable certification. We use projectmanagement tools to deliver services to client specifications in a timely andreliable manner while maintaining a high level of client satisfaction.

***Highly-skilledProfessionals***

We have a highly qualified management team with abroad range of experience in the IT industry. Our Chief Executive Officer is anentrepreneur and engineer who has been in the IT industry for over30 years and has led us from our inception in 1978. Most of our seniormanagement team has worked as a team for over twenty years. We use ourcompetitive recruitment program to select the best talent from India’s premierengineering institutions. We were ranked among the 10 Best Companies to Work Forin India by a survey conducted jointly among Mercer, an international humanresources consulting firm, TNS, a provider of market information and BusinessToday magazine.

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**Our Strategy**

We seek to further enhance our position as a leadingIndian provider of integrated IT services and solutions through our globaldelivery model. To achieve this we intend to:

***Penetrate and GrowStrategic Client Accounts***

We have achieved strong revenue growth by focusing onselect, long-term customer relationships which we call strategicaccounts. We aim to expand the scope of our client relationships by leveragingour focused industry sector expertise with delivery excellence, responsiveengagement models and breadth of services. We intend to focus on adding newstrategic clients and further penetrating our existing customer relationships.We address the needs of our larger strategic relationships through dedicatedaccount managers who have responsibility for increasing the size and scope ofour service offerings to such clients. We aim to strengthen our sales andmarketing teams, a majority of whom are aligned to focus on specificindustries.

***Strengthen andBroaden our Industry Expertise***

We intend to strengthen our understanding of keyindustries by investing in a strong base of industry experts, business analystsand solutions architects as well as considering select, targeted acquisitions.We believe that we can add more value than a general service provider becausewe understand the specific industry requirements of our clients.

***Strengthen andBroaden our Service Lines***

We aim to deepen our existing client relationshipsthrough new and more comprehensive service lines. In recent years we have addednew capabilities in line with our growth and customer needs. We continuallyexplore new initiatives through our internal centers of excellence, which focuson innovation in specific technology platforms or services. For example, weadded quality assurance services as a new service line, and developed increasedcapabilities such as business intelligence, database administration and legacysystem modernization in other service lines.

***Optimize and ExpandDelivery Capability***

We are committed to enhancing our processes andmethodologies by investing in project management tools that improve ourefficiency. We aim to develop new productivity tools, refine our softwareengineering techniques and maximize reuse of our processes. For example, we useautomation testing to increase the efficiency of our project methodologies andfor process management, defect tracking, audit management and contractmanagement. We also apply this commitment to our infrastructure and we areconstructing new knowledge park campuses in India to provide world-classinfrastructure, high standards of quality and secure delivery.

***Build our BrandGlobally***

While our “Patni” brand is an established andrecognized brand in India, we intend to increase recognition of our brandelsewhere in our client markets. We seek to achieve this through targetedanalyst outreach programs, trade shows, white papers, sponsorships, workshops,road shows, speaking engagements and global public relations management. Webelieve that a stronger brand will facilitate our ability to gain new clientsand to attract and retain talented professionals.

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***Pursue StrategicAcquisitions***

We seek to pursue selective strategic acquisitions toaugment our capabilities and to address gaps in industry expertise, technicalexpertise, service lines and geographic coverage. We will continue to considerand seek acquisition opportunities such as The Reference Inc., whichfurther deepened our domain expertise in the financial services industry, andCymbal, which considerably increased our capabilities in the telecommunicationssector.

**Industry Practices, Technology Practices and ServiceLines**

We offer our services to customers through industrypractices in insurance, manufacturing, financial services andtelecommunications, as well as in other industries. We also have technologypractices that offer services in product engineering and for ISVs. Our industrypractices and technology practices are complemented by our service lines, whichwe develop in response to client requirements and technology life cycles. Ourservice lines include application development, application maintenance andsupport, packaged software implementation, infrastructure management services,product engineering, business process outsourcing and quality assuranceservices.

**Industry Practices**

***Insurance***

Weoffer a range of integrated services to global insurance companies. Ourindustry experts employ their knowledge in all stages of the insurance businesscycle, from underwriting to compliance. Our offerings include a broad spectrumof services to insurance carriers including life and health, property and casualtyand reinsurance companies. The IT services we provide span several functions,including sales and marketing, distribution, policy services, claims,compliance, accounting and reinsurance. Our core services include:

·       systemsconsolidation and integration of mergers and acquisitions;

·       policyadministration conversions;

·       developmentof frameworks that reduce the cycle time and cost for policy issue and claimhandling;

·       newproduct (life and retirement) introductions;

·       batchsystem optimization;

·       datamining;

·       developmentof business intelligence applications; and

·       legacysupport of several applications.

We are a member of global insurance industryorganizations such as Life Office Management Association, or LOMA, theAssociation for Cooperative Research and Development, or ACORD, and theInsurance and Accounting Systems Association. Several of our business analystsare LOMA certified and certified by the American Institute for CharteredProperty and Casualty Underwriters.

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***Manufacturing***

Ourmanufacturing practice offers IT and business process outsourcing services thatsupport the purchase, sales, production, engineering, finance, human resourcesand legal functions of a manufacturing company. Within the manufacturingindustry, the sectors we service include consumer goods and durables,electronics, engineering, food and beverages, personal care products, paper andrubber products. To businesses in these sectors, we provide services in thefollowing areas:

·       supplychain management;

·       demandchain management;

·       manufacturingapplications and core manufacturing systems (including package implementation);

·       datawarehousing; and

·       businessintelligence.

Our newer initiatives in this sector includeapplication development using radio frequency identification, or RFID,technologies and business process monitoring solutions.

***Financial Services***

Ourfinancial services practice focuses on clients in the banking, financialservices and securities industries. In April 2003, we acquired TheReference Inc., a Massachusetts corporation, particularly to enhance ourfinancial services industry practice. We provide consulting and softwareservices for consumer and corporate banking, treasury and risk management,mutual funds and investment management and securities. Our software services tothese areas include:

·       architecturedesign;

·       applicationintegration and development;

·       informationsecurity assessments;

·       legacysystem maintenance;

·       businessintelligence;

·       customerrelationship management;

·       mutualfunds and capital markets solutions;

·       stockexchange and brokerage house solutions; and

·       businessprocess outsourcing.

***Telecommunications***

Ourtelecommunications practice provides domain expertise in a wide spectrum of IToperations and business support systems used by telecommunications serviceproviders across various segments including mobile, wireline, cable, broadbandand media. We have expertise particularly in the newer business models that areemerging in these markets such as mobile virtual network operations orintegrated voice/data/entertainment content services over broadband and 3Gnetworks. Our telecommunications experts provide solutions that combine a widevariety of services including:

·       ITstrategy;

·       systemconsulting and design;

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·       applicationdevelopment;

·       implementationand maintenance;

·       qualityassurance;

·       newproduct development and launch;

·       infrastructuremanagement services; and

·       businessprocess outsourcing.

***Other Industries***

In addition, we offer services to clients in thefollowing industries:

*Retail*

Our experience in the retail practice includesspecialty and national chains, and catalogue and internet retailing. We alsooffer standard services such as global trade item number assessment andredemption.

*Energy &Utilities*

Our experience in the energy and utilities industryincludes product development support, concept to implementation projectexpertise and geographic information systems and related services.

*Logistics &Transportation*

We provide services to logistics and transportation companiescovering operational applications such as fleet management, repairs and sparesmanagement, vendor management, reservations, flight operations, inventorymanagement, passenger check-in applications, tracking, logistic applicationssuch as warehouse management, business applications such as human resources andpayroll and revenue, sales and financial management.

*Media &Entertainment*

The services we provide within the media andentertainment industry and television broadcasting include broadcast stationmanagement and automation applications, and traffic and billing systems. Ourservices for publishing companies cover content layout software and searchsystems. Our services for online gaming and casinos primarily involve accountsmanagement.

**Technology Practices**

***ISV***

OurISV technology practice offers outsourcing services that focus on design anddevelopment of software products. Our key engagements are with packagedsoftware and engineering software vendors. We help ISVs shorten upgrade releasecycles and reduce the time for a new product to be launched while maintainingcost efficiencies. We leverage the latest tools and technologies to assist inre-engineering and migrations to newer technology programs. These servicesinclude:

·       prototyping;

·       designand development for new software products;

·       testing,maintenance and sustenance engineering support; and

·       deploymentsupport.

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***Product Engineering***

Ourproduct engineering technology practice offers our clients complex design anddevelopment services in a wide range of industry sectors such as electronics,industrial automation, information storage, mobile and wireless andsemiconductors. These services include:

·       industrialdesign;

·       electronicsystem design (chip design, hardware board design and real time embeddedsoftware design and development);

·       multilingualization;

·       technicalhelp desks;

·       productprototyping; and

·       regulatorycompliance.

**Service Lines**

***ApplicationDevelopment***

We custom design, develop and implement softwaresolutions for a variety of client needs. We offer services across the softwaredevelopment lifecycle, including requirements analysis, design, implementation,integration and testing for our projects. We typically perform applicationdesign, implementation and testing primarily in our offshore delivery centerslocated in India, while requirements analysis, transition planning, usertraining and deployment are performed at our clients’ sites. In specificsituations, we may work jointly with our clients’ teams. Our projects range fromsingle-platform, single-site systems to multi-platform,multiple-site systems and typically include new development and/or significantfunctional enhancements to existing software applications. We have developedexpertise in mainframe, client-server and internet technologies and onemerging platforms such as .NET and J2EE.

***ApplicationMaintenance and Support***

Our application maintenance and support servicesinclude performance optimization and system modification, product and systemsupport, preventive maintenance and migration to newer technologies andplatforms. We perform most of our maintenance and re-engineering assignments atour offshore delivery centers located in India. In addition, we maintain smallteams at our clients’ premises to coordinate support functions. We performdiagnostics to assess offshore outsourcing potential and prepare a customizedoffshore road-map. We share the benefits of our continuous improvementinitiatives to reduce recurring maintenance costs for our clients. Our applicationmaintenance projects are typically long-term in nature.

***Packaged SoftwareImplementation***

Weassess, evaluate, implement and maintain packaged software developed by globalvendors in the areas of enterprise resource planning, customer relationshipmanagement or CRM, supply chain management, business intelligence andenterprise application integration. Our offerings comprise:

·       consultingservices, which include functional and technical assessment, architecture andtechnology consulting and training;

·       implementationservices, which include product implementation and rollout;

·       applicationcare services, which include post-implementation support, productcustomization, interface development and version upgrade; and

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·  functional extensions and integration ofdiverse enterprise applications.

***InfrastructureManagement Services***

We offer full support services of the ITinfrastructure and remote managed services of applications, network andhardware infrastructure for our clients. These services are delivered both atcustomer locations and from our offshore facilities located in India. Wespecialize in mainframe and client-server operating systems, a wide range ofdata and voice networks, enterprise management systems, infrastructure productsfrom well-known vendors, web-server products, network security products,disaster recovery and business continuity management. From our networkoperations center in India we have the facility, hardware and technology todeliver remote managed services to our customers. Our service offerings addressseveral managed services configurations such as traditional, integrated andautomated remote monitoring, and management and reporting for enterprise-wideinfrastructure environments including hardware, communications and softwareenvironments.

***Product EngineeringServices***

Our product engineering services support the variousindustry requirements of multiple disciplines such as utilities, manufacturing,insurance, banking and finance. Our primary product engineering servicesinclude engineering design and modeling, electronic design, embedded softwaredevelopment, product lifecycle management which includes re-engineering,maintenance and sustenance of legacy products, testing and migrations to newtechnologies. We offer these services to clients in industry sectors such asconsumer electronics, automotive, medical electronics, industrial automation,office automation, handheld/mobile device manufacturing and semiconductormanufacturing. Our technology expertise spans multiple computing languagesincluding assembly language for various micro-controllers and processors,real-time operating systems, various computer aided design and manufacturingplatforms, GIS platforms, communication protocols and digital signalprocessing. We also offer document conversion services and GIS servicesespecially to our customers in the utilities industry.

***Business ProcessOutsourcing***

We started offering business process outsourcingservices in 2002. Since then we have been enhancing our expertise andconcentrating on transaction processing for our insurance, financial servicesand telecommunication clients and administrative processes in the areas offinance and accounting, payment processing, human resource management andtechnical help-desks.

***Quality AssuranceServices***

Our quality assurance services include functionaltesting, test automation, performance testing, remote testing and test processconsultancy. Apart from testing custom-built applications, we have experiencein testing operating systems, utilities, specialized application servers andmiddleware products. With respect to automation, we have partnerships withleading vendors and expertise in leading commercial and open source tools.

**Quality and Project Management**

While quality always hasbeen an integral part of our operations at Patni, we became formally certifiedand assessed for quality models in 1995. We started with ISO 9000-1994,underwent SEI-CMM level 4 and 5 assessments and as of today areISO 9001-2000 certified and are assessed for P-CMMLevel 3 and SEI-CMMi Level 5. ISO 9001 is an internationalstandard for quality management systems maintained by the InternationalOrganization of Standardization. The Capability Maturity Model (CMM) is amethod for evaluating the quality of a company’s management and softwareengineering practices, with Level 5 being 

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the highest attainablecertification. The CMM was developed by the Software Engineering Institute(SEI) at Carnegie Mellon University. The Software Engineering Institutesubsequently released a revised version known as the Capability Maturity ModelIntegration (CMMi). We have been using the Six Sigma Program to implementprocess changes including the above. We continuously strive to better ourquality management system with the help of industry best practices and researchfindings. Our quality management system involves the review and continuousimprovement of software development and related processes, testing of workproducts and regular internal and external quality audits. We applysophisticated project management and solution deployment methodologies that wehave developed to help ensure timely, consistent and accurate delivery of ITsolutions to our clients. In 2003 we received the Award for Excellence inElectronics from India’s Ministry of Communications & InformationTechnology.

*Centersof Excellence.*   We have developed internal“centers of excellence” to create expertise in emerging technologies. Wecurrently have centers of excellence that focus on middleware integration,legacy systems modernization, business intelligence, RFID, process consultingand service oriented architectures based on technologies such as J2EE and .NET.For example, we use our center of excellence on legacy systems modernization todevelop solutions for our clients who want to maintain their current business-criticalsystems but at the same time want to utilize the latest technologies for newsystems. We partner with leading technology vendors such as IBM and Microsoftto implement technology solutions soon after they are made available in themarket.

**Sales and Marketing**

Our sales teams use a multi-pronged approach tomarket our services. They target certain industries and service lines throughfocused sales executives, geographies through regional sales executives andlarge clients through dedicated account managers. We have aligned a majority ofour sales and marketing teams to focus on specific industries. In addition toour sales executives, we have industry experts and solution architects whocomplement our sales efforts by providing specific industry and service lineexpertise. Our sales efforts are also supported by our marketing professionals,who assist in brand-building and tracking our expertise. Our seniormanagement and dedicated account managers are actively involved in managingclient relationships and business development through targeted interaction withmultiple contacts throughout our clients’ organizations. We aim to develop ourclient relationships into partnerships by working closely with our clients’managers and senior executives to formulate and execute an offshore outsourcingstrategy, implement engagement models that suit their particular challenges andexplore new service lines.

We undertake detailed periodic reviews to identifyexisting and prospective clients that we believe can develop into large,strategic clients. We intend to focus on adding more strategic accounts, whichwe define as those who provide $4.0 million or more in annual revenues orthose with whom we believe we have the potential to achieve such annual revenueamounts over a 24 to 30 month period. For each strategic client, a seniorexecutive is identified and charged with managing the overall clientrelationship and leading periodic reviews with the client. The number ofstrategic clients has grown from 17 as of December 31, 2002 to 31 as of December 31,2005.

We have 23 sales offices across North America, Europeand the Asia-Pacific region. As of December 31, 2005 we had 194 sales andmarketing personnel who are supported by dedicated industry specialists. We settargets for our sales personnel at the beginning of each year, which aresubject to periodic reviews. In addition to a base salary, our compensationpackage for sales personnel includes an incentive-based compensation plandriven by achievement of the prescribed targets.

Our sales and marketingprofessionals help promote the “Patni” brand through targeted analyst outreachprograms, trade shows, white papers, sponsorships, workshops, road shows,speaking 

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engagementsand global public relations management. We believe that a stronger brand willfacilitate our ability to gain new clients and to attract and retain talentedprofessionals.

**Clients**

Wemarket our services to clients located in the United States, Europe, India,Japan, the rest of the Asia-Pacific region (excluding Japan) and the rest ofthe world. A significant proportion of our revenues is derived from clientslocated in the United States, as illustrated in the table below:

| ** **                      | ** ** | **Fiscal year ended   December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------------------------|------------|
| ** **                      | ** ** | **2003**                                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| United States                   |       | 88.8                                                     | %          | 87.8 | % | 84.8 | % |
| Europe                          |       | 7.2                                                      | %          | 7.9 | % | 9.1 | % |
| India                           |       | 0.2                                                      | %          | 0.2 | % | 0.3 | % |
| Japan                           |       | 2.9                                                      | %          | 3.3 | % | 4.3 | % |
| Asia-Pacific  (excluding Japan) |       | 0.5                                                      | %          | 0.4 | % | 0.4 | % |
| Rest of the World               |       | 0.4                                                      | %          | 0.4 | % | 1.1 | % |
| Total                           |       | 100.0                                                    | %          | 100.0 | % | 100.0 | % |

 

Further,a significant proportion of our revenues has been derived historically from theinsurance, manufacturing and financial services industries, as illustrated inthe table below. Since our acquisition of Cymbal, we have considerablyincreased our revenues from the telecommunications industry. We also derive asmall proportion of our revenues from clients in other industries, whichinclude retail, energy and utilities, logistics and transportation, media andentertainment and from our technology practices, ISV and product engineering.

| ** **           | ** ** | **Fiscal year ended   December 31,** | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|
| ** **           | ** ** | **2003**                                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| Insurance            |       | 33.2                                                     | %          | 32.8 | % | 27.7 | % |
| Manufacturing        |       | 34.0                                                     | %          | 28.3 | % | 21.9 | % |
| Financial  Services  |       | 18.6                                                     | %          | 19.2 | % | 16.0 | % |
| Telecommunications   |       | 0.1                                                      | %          | 2.6 | % | 15.3 | % |
| Others               |       | 5.1                                                      | %          | 6.6 | % | 6.5 | % |
| ISV                  |       | 6.8                                                      | %          | 5.9 | % | 5.0 | % |
| Product  Engineering |       | 2.2                                                      | %          | 4.6 | % | 7.5 | % |
| Total                |       | 100.0                                                    | %          | 100.0 | % | 100.0 | % |

 

Asignificant proportion of our revenues is derived from a small number ofclients, as illustrated in the table below, although we believe we havesuccessfully diversified our client base over the past three years:

| ** **            | ** ** | **Fiscal year ended   December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **2003**                                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| General Electric      |       | 41.2                                                     | %          | 31.7 | % | 22.1 | % |
| State Farm  Insurance |       | 17.4                                                     | %          | 14.9 | % | 11.5 | % |
| Top 5 Clients         |       | 69.0                                                     | %          | 57.6 | % | 46.8 | % |
| Top 10 Clients        |       | 79.6                                                     | %          | 69.0 | % | 59.3 | % |

 

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The following tableillustrates a breakdown of our largest clients by revenue categories on acumulative basis:

| ** **                         | ** ** | **Fiscal year ended   December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **2003**                                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| No. of $1  million + clients  |       |                                                     | 26         |   |   |   | 46 |   |   |   | 61 |   |   |
| No. of $5  million + clients  |       |                                                     | 8          |   |   |   | 12 |   |   |   | 19 |   |   |
| No. of $10  million + clients |       |                                                     | 2          |   |   |   | 4 |   |   |   | 9 |   |   |
| No. of $25  million + clients |       |                                                     | 2          |   |   |   | 2 |   |   |   | 2 |   |   |
| No. of $50 million  + clients |       |                                                     | 1          |   |   |   | 1 |   |   |   | 2 |   |   |

 

***The General Electric Association***

Our association with General Electric commenced in1990. During the initial phase of our engagement, from 1990 to 1994, weexecuted application support and development primarily on IBM mainframesystems. During this initial period, most of the engagements were priced on atime and materials basis. In 1995, we entered the next phase of our associationthrough the establishment of a dedicated offshore development center forGeneral Electric in Mumbai. We also increased work done on a fixed-pricebasis. Starting in 2001, most of the work that we delivered to General Electrichas been executed using a fixed-price SLA based engagement model.

We provide services for a number of entities withinthe General Electric group of companies. Some of our key engagements are withGE Commercial Finance America, GE Consumer Finance, GE Consumer &Industrials, GE Corporate Information Systems, Genworth (formerly GeneralElectric’s life and mortgage insurance businesses), GE Infrastructure, GETransportation, GE Employer Reinsurance and NBC. For these businesses, weprovide services in the areas of multi-year application support, new programdevelopment, infrastructure management, business intelligence solutions andsoftware package implementation. We deliver these services in most of thetechnology areas deployed at various businesses of General Electric. Ourlargest General Electric engagement is with GE Consumer Finance, for which weact as the preferred IT services supplier for application development and maintenanceto its credit card processing business. We service more than 20 ITapplications through approximately 300 software professionals for thisengagement, which was begun in 2002 and is renewable by the customer annually.We serviced approximately 170 individual projects for GE Consumer Finance in2004, and approximately 145 projects in 2005.

Our engagement model withGeneral Electric includes a dedicated development center, integratedtelecommunications networks, quality program targets and highly integratedprogram management and reporting. Most projects are on the basis of fixed-priceSLAs, with our responsibilities likewise fixed, and are bid on a competitivebasis against other third-party IT service providers. Accordingly, ourpricing for these projects is based on our cost and margin expectations forcompleting the project, which is the same basis that we bid for fixed priceprojects with other customers. Individual projects under the agreement areseparately bid and negotiated by us. On November 12, 2003, we entered intoa new master Information Technology Services Agreement with General Electric,with a term from January 1, 2004 to December 31, 2006. The terms ofthis agreement generally reflect the provisions described below under “ContractualArrangements.” In addition, the agreement provides that we will support GeneralElectric’s aim to have (i) at least 90% of all task orders under theagreement on a “fixed price” basis; (ii) no fewer than 85% of personnelassigned to work on a specific project to remain on such project; and (iii) atleast 70% of work under the agreement undertaken at our offshore developmentcenters. General Electric became a shareholder in 2000. See “Item 7. Majorshareholders and  Related PartyTransactions—General Electric.”

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***State Farm Insurance***

We are party to a MasterAlliance Agreement with State Farm Insurance. Typical of MSAs with most of ourcustomers, the agreement acts as a framework to govern our overall relationshipwith State Farm Insurance, does not stipulate that we are the preferredsupplier to the customer and does not provide that we are entitled to anyminimum amount of work or revenues. The Master Alliance Agreement commenced on January 1,2002 for an initial term of three years, is subject to annual renewal by thecustomer for two additional years beyond the initial term, and is terminable bythe customer at any time on 90 days’ notice.**The MasterAlliance Agreement has been renewed until December 2006. Each workassignment is separately bid on and negotiated by us, with the terms of eachassignment specified in an individual work order governing the assignment. Thework orders provide for the services to be performed by us for the project, thedeliverables (including software, source code and specifications) and otherproducts or materials to be produced by us and the estimated labor hours orprice for completion of the relevant project. The agreement enumerates a widerange of services that may be provided by us, including administrativeservices, consulting, call center services, system access and securityadministration, product technology support, education and training services,requirements analysis, software design, software development, softwareintegration and testing, operations and maintenance, application support andequipment operations and technical support.

***Contractual Arrangements***

We enter into non-exclusive MSAs with clients thattypically have a specified term and contain general rights and obligationsgoverning our relationship with the client. The MSAs specify the broad scope ofwork and typically do not include any commitment by the client to give us aspecific volume of business or future work. For each work assignment, theclient and we enter into separate work orders that specify the types ofservices we are required to provide to the client, the performance levels andthe price terms. Although some of our MSAs contain the billing rates for timeand materials work orders, for most of the services we provide, whether on atime and materials basis or on a fixed-price basis, the separately agreed workorder contains the specific pricing and other commercial terms.

Most of our MSAs,including the MSAs with our two largest customers, can be terminated with orwithout cause, with 0 to 90 days notice and without termination-relatedpenalties. The MSAs typically contain terms that:

·       requireus to provide various representations and warranties, including those relatingto the services we perform;

·       requireus to maintain confidentiality relating to the client and the contract;

·       requireus to protect the intellectual property of our clients;

·       requireus to comply with certain security obligations, including maintaining networksecurity and back-up data, ensuring our network is virus free and verifying theintegrity of employees that work with our clients by conducting backgroundchecks;

·       requireus to indemnify the client, including for third party intellectual propertyinfringement;

·       limitthe liabilities of both parties under the contract; and

·       providefor reciprocal non-solicitation of employees by our clients and us.

The MSAs typically do notstipulate that we are the preferred supplier for the customer and do notprovide that we are entitled to any minimum amount of work or revenues from thecustomer.

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**Competition**

The market for ITservices is rapidly evolving and highly competitive. We expect that competitionwill continue to intensify. We face competition or competitive pressure from:

·       IndianIT services companies, such as HCL Technologies Limited, Infosys TechnologiesLimited, Satyam Computer Services Limited, Tata Consultancy Services Limitedand Wipro Limited;

·       internationalIT services companies, such as Accenture, Cognizant, Computer SciencesCorporation, Sapient Corporation and Electronic Data Systems;

·       divisionsof large multinational technology firms such as IBM and Hewlett-Packard;

·       in-houseIT departments of large corporations;

·       otherinternational, national, regional and local firms from a variety of marketsegments, including major international accounting firms, systems consultingand implementation firms, applications software firms, service groups ofcomputer equipment companies, general management consulting firms, programmingcompanies and temporary staffing firms;

·       offshoreservice providers in other countries with low wage costs such as China, thePhilippines, and Eastern Europe; and

·       involvementof third party intermediaries who negotiate IT services and outsourcingcontracts on behalf of their clients.

A number of ourinternational competitors are setting up operations in India. Further, a numberof our international competitors with existing operations in India are rampingup their presence in India as offshore operations in India have become animportant element of their delivery strategy. This has resulted in increasedemployee attrition among Indian vendors and increased wage pressure to retainsoftware professionals. We believe that price alone is not a sustainablecompetitive advantage in an environment where IT solutions are becomingincreasingly critical to clients’ core corporate strategy. We have thereforebuilt our competitive position on our ability to leverage our industry specificknowledge and experience in a broad range of IT services, to manage and maintainlarge client relationships, to continually monitor and improve our deliveryexcellence and to attract and retain highly-skilled softwareprofessionals.

**Innovation**

We believe innovationshould be institutionalized so as to ensure our ability to help clients meetemerging challenges. We have two groups involved in our research anddevelopment activity initiatives, the product and technology initiatives groupand the delivery innovation group. We also have a business analysis group thatserves as a channel between our clients and our innovation groups to provideanalysis on the trends in client requirements and evolving needs.

***Service and Technology Initiatives***

The product and technologyinitiatives group is focused on applied research and development initiativesand employs emerging technologies to create new technology service offerings.The group has established systems to harness talent among our employees byproviding a shared framework for idea generation. The group is responsible foridentifying, evaluating and incubating new technology service offerings andlater converting relevant technology offerings into centers of excellence. Thecurrent focus areas of the group include service oriented architectures andtheir usage in building next generation applications, mobile computing and itsapplications, usage of RFID technologies and legacy systems modernization.

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***Delivery Innovation***

Our delivery innovationgroup is focused on providing operational excellence and serving our customersin the most efficient manner. This group’s activities include developing bestpractices and refining our methodologies, tools and techniques used in thesoftware engineering and project management activities, improving estimationprocesses and adopting new technologies for improving productivity. Thedelivery innovation group consists of professionals who are experts in processimprovement and automation and who also act as a resource center for ournascent service lines such as our quality assurance services.

**Human Resources**

We employed 7,091, 9,661and 11,802 employees as of December 31, 2003, 2004 and 2005, respectively.As of December 31, 2005, we had 10,667 software professionals. Of thesesoftware professionals, 2,229 employees were categorized as onsite and 8,438 asoffshore. The geographic breakdown for our employees as of December 31,2005 is as follows:

| **Location**  | ** ** | ** ** | ** ** | **Number of Employees** | ** ** |
|---------------|------------|------------|------------|-----------------------------------|------------|
| India         |       |       | 9,352      |                              |       |
| North America |       |       | 2,079      |                              |       |
| Rest of World |       |       | 371        |                              |       |

 

We believe that ourability to maintain and continue our growth depends to a large extent on ourstrength in attracting, training, motivating and retaining our employees. Weoperate in eight major cities in India, which enables us to recruit technologyprofessionals from different parts of the country. The key elements of ourhuman resource management strategy include recruitment, training anddevelopment, compensation and retention.

***Recruitment***

We have developed processes to evaluate and recruitlarge numbers of talented employees. Our hiring is driven by an annual budgetingprocess, which is monitored and adjusted on a monthly basis based on businessvisibility. We recruit talent from premier universities, colleges andinstitutes in India, including the Indian Institutes of Technology, known asIITs, regional engineering colleges, or RECs, and Indian Institutes ofManagement, or IIMs. For our offshore facilities located in India, ourcampus recruiting team visited over 50 campuses in 2005. Our rigorous selectionprocess involves a series of activities including case interviews and technicaland psychometric tests. We have a similarly competitive recruitment program forour lateral hires. All new hires are inducted into our organization through astructured program, which involves extensive training as well as mentoring.

Our software employees arehighly-skilled and have diverse educational backgrounds. As of December 31,2005, graduate engineers comprised 63.1%, post graduate engineers comprised4.2%, employees with masters degrees in computer applications or computer managementcomprised 15.9% and employees with a masters in business administration andequivalent qualifications comprised 6.9% of our software professionals. Otherdegrees comprised 9.9% of our software professionals. We believe that we have abalanced mix of experience with approximately 46.7%, 22.8% and 30.5% of oursoftware professionals with work experience of under 3 years, 3 to6 years and over 6 years, respectively, as of December 31, 2005.

***Training and Development***

We are committed toinvesting in training programs to continually enhance the capabilities of ouremployees. We have a transparent evaluation system for tracking performance andidentifying potential 

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thatresults in individual development plans that help build capabilities andrecognize preferences of our employees. We offer our employees multiple avenuesand choices for personal and professional growth, including several distinctcareer paths. In addition, our innovative program, “Leadership Excellence atPatni”, communicates leadership attributes and helps us identify and developfuture leaders necessary for our growth. Our training plans are personalizedand address both technical and soft-skill requirements. For each softwareprofessional, we plan a minimum of 10 working days of training per year.As of December 31, 2005, we had 26 faculty members in our trainingdivision, 11 dedicated classrooms and 7 computer labs.

***Compensation***

Our software professionalscurrently receive salaries and benefits which we believe are competitive in theindustry. We adjust our compensation packages annually based on industry salarycorrection, compensation surveys and individual performance. Compensation alsoincludes a variable component which is linked to our performance as a company.Senior employees are eligible for variable compensation depending uponattainment of pre-defined quarterly objectives. Our employees are also eligiblefor stock option grants. For more information on the terms of our stock optionplan, see “Item 6. Directors, Senior Management and Employees—Employee StockOption Plan.”

***Retention***

We endeavor to provide a challenging andentrepreneurial work environment and multiple growth opportunities for ouremployees. To respond to competition from our competitors and to align ouroffshore compensation levels with the international market, we have implementedcertain measures to limit our level of attrition, which was 20.1% for  the year ended December 31, 2005. Theseinclude an annual salary review, the implementation of the “LeadershipExcellence At Patni” program, the introduction of skill-related bonuses, thecreation of an online grievance redressal mechanism, and the adoption of anemployee stock option plan in June 2003. Through the various programsdescribed above, we seek to identify and develop high-performers early in theircareers. In November 2004, we were ranked among the 10 Best Companies toWork For in India by a survey conducted jointly among Mercer, an internationalhuman resources consulting firm, TNS, a provider of market information andBusiness Today magazine.**We are also inthe process of building the first phase of a scalable knowledge park, ahigh-tech business facility which will be fitted with lifestyle amenities forour employees.

In line with the Indian IT industry, none of ouremployees are represented by a union. We believe we have positive relationswith our employees.

We are currentlycooperating with the US Department of Labor with respect tocompliance matters related to our past and present labor practices. We estimatethe liability to be up to $2 million. Any adverse finding from thisreview could adversely impact  our earnings. See note 27.1.2 to ourconsolidated financial statements for 2005.

**Seasonality**

Our IT services businessis not affected by seasonality.

**GovernmentRegulation**

Regulation of our business by the Indian governmentaffects our business in several ways. Currently, we benefit from tax holidaysgiven by the Government of India for the export of IT services fromspecially designated software technology parks, or STPIs, and special economiczones, or SEZs, in India. These tax incentives currently include a ten-yearholiday from the payment of Indian corporate income tax for the operations ofmost of our Indian facilities and a partial taxable income deduction forprofits derived from 

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exported IT services.As a result of these two tax incentives, a substantial portion of our pre-taxincome has not been subject to significant tax in recent years. The aggregatebenefit of these tax holidays and deductions with respect to our net income was$15.0 million, $20.6 million and $19.0 million for 2003, 2004 and 2005,respectively. Our current tax holidays for STPI units expire in stages by 2009and our partial taxable income deduction for profits derived from exported ITservices expired in March 2005. The tax benefits available for some of ourfacilities have expired and certain others will expire by March 2009.Consequently, we expect our effective tax rate to increase.

We have also benefited from the liberalization andderegulation of the Indian economy by the successive Indian governments since1991. Further, there are restrictive parts of Indian law that effect ourbusiness, including the fact that we are generally required to obtain approvalfrom the Reserve Bank of India and/or the Ministry of Finance of the Governmentof India to acquire companies organized outside India, and we are generallyrequired, subject to some exceptions, to obtain approval from relevantgovernment authorities in India in order to raise capital outside India.Finally, the conversion of our equity shares into ADSs is governed byguidelines issued by the Reserve Bank of India.

Please see “Item 10.Additional Information”, as well as “Item 3. Key Information—Risk Factors”for additional information on the effects of governmental regulation of ourbusiness.

**IntellectualProperty**

We rely on a combination of copyright, trademark anddesign laws, confidentiality procedures and contractual provisions to protectour intellectual property, including our brand identity. We currently do nothave any patents. We have registered our trademark and servicemark “Patni” inthe U.S., U.K., Germany, Sweden, Japan, Singapore, Korea, Australia, theNetherlands and in Class 9 and 16 in India and have applied to registerour trademark and/or service mark in India (in other classes) and Canada.However, we cannot guarantee that our applications will be successful or thatour efforts to protect our intellectual property will be adequate.

We require our employees and subcontractors to enterinto non-disclosure arrangements to limit access to and distribution of ourclients’ proprietary and confidential information as well as our own. Generallywe are responsible to our clients for complying with certain security obligationsincluding maintaining network security, backing-up data, ensuring our networkis virus free and verifying the integrity of those employees that work with ourclients by conducting background checks. We cannot assure you that we will beable to comply with all such obligations without incurring any liability.

In addition, the terms of our client contracts oftenimpose particular confidentiality and security standards. We have independentlyestablished a system of security measures to protect our computer systems fromsecurity breaches and computer viruses that may attempt to gain access to ourcommunications network. We have deployed advanced technology and process-basedmethods to ensure a high level of security and we continually monitor suchtechnologies to ensure that we maintain such levels consistently. Some of thesecomponents include clustered and multilevel firewalls, intrusion detectionmechanisms, vulnerability assessments, content filtering, antivirus softwareand access control mechanisms. We use encryption techniques as required. Wecontrol and limit access to client-specific project areas.

Although we believe thatour intellectual property rights do not infringe on the intellectual propertyrights of any other party, infringement claims may be asserted against us inthe future. There are currently no material pending or threatened intellectualproperty claims against us.

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**4.C. Organizationalstructure**

Wehave the following direct and indirect subsidiaries as of December 31,2005, all of which are wholly-owned:

| **Name**                                                                                             | ** ** | ** ** | ** ** | **Country of Incorporation** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Patni Computer  Systems, Inc.                                                                   |       |       | USA        |                                   |       |
| Patni Computer  Systems (UK) Limited                                                                 |       |       | UK         |                                   |       |
| Patni Computer  Systems GmbH                                                                         |       |       | Germany    |                                   |       |
| The Reference  Inc.(1)                                                                               |       |       | USA        |                                   |       |
| Patni Telecom  Solutions Inc. (formerly, Cymbal Corporation)(1)                                      |       |       | USA        |                                   |       |
| Patni Telecom  Solutions Private Limited (formerly, Cymbal Information Services Private  Limited)(2) |       |       | India      |                                   |       |
| Patni Telecom  Solutions (UK) Limited (formerly, Cymbal Corporation Limited)(2)                      |       |       | UK         |                                   |       |
| Cymbal Information  Services (Thailand) Limited(2)                                                   |       |       | Thailand   |                                   |       |

----

       (1) Owned through PatniComputer Systems, Inc.

       (2) Wholly-owned subsidiary of Patni TelecomSolutions Inc.

**4.D. Property,plant and equipment**

A key component of our global delivery model is thetelecommunication linkages between client sites and our sites and between ourdistributed sites in India. We have designed a global network architecturewhich provides client connectivity, offshore development center connectivityand internet connectivity. This network provides seamless access and uses highavailability networks and advanced routing protocols for redundancy andavailability. Although we rely on third parties, such as telecommunicationsproviders and internet service providers to provide such services, we ensurethat we have multiple service providers using multiple routes and media toattain high levels of redundancy, availability and performance. We havededicated teams to monitor the operations of our network operations24 hours a day and seven days a week. We use encryption techniques forconfidentiality of data as required.

Our principal executive offices are located at Mumbai,India. Our North American headquarters are located in Cambridge, Massachusetts.These facilities are used primarily for management functions and supportfunctions such as sales, marketing and general administration.

We have state-of-the-art facilities in eight locationsin India where our technical staff is located and which serve as our primarydelivery centers. We also have imaging centers and distribution centers in theUnited States and in the United Kingdom for handling the digital processing ofdocuments.

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Ourlocations in India are as follows:

| No.    | ** ** | **Property** | ** ** | **Square Feet** | ** **    | **Industry/Technology Practices Covered/Services Provided** | ** ** |
|--------|------------|--------------|------------|----------------------|---------------|----------------------------------------------------------------------------|------------|
| 1.     |       | Mumbai       |       |                 |          |                                                                       |       |   |   |
|   |       | Owned        |       |                 | 130,474       |                                                                       |       |   |   |
|        |       | Leased       |       |                 | 53,174        |                                                                       |       |   |   |
|   |       | Total Mumbai |       |                 | 183,648       |                                                                       |       | Manufacturing,  Financial Services, ISV, Other, Product |   |
|   |       |         |       |                 |          |                                                                       |       | Engineering  Services |   |
| 2.     |       | Pune         |       |                 |          |                                                                       |       |   |   |
|   |       | Owned        |       |                 | 75,477        |                                                                       |       |   |   |
|        |       | Leased       |       |                 | 192,678       |                                                                       |       |   |   |
|   |       | Total Pune   |       |                 | 268,155       |                                                                       |       | Insurance,  Manufacturing, Telecommunications, ISV, |   |
|   |       |         |       |                 |          |                                                                       |       | Other,  Enterprise Application Systems, Enterprise Systems Development |   |
| 3.     |       | Gandhi Nagar |       |                 |          |                                                                       |       |   |   |
|   |       | Owned        |       |                 | 37,014        |                                                                       |       | Insurance,  ISV, Other |   |
| 4.     |       | Chennai      |       |                 |          |                                                                       |       |   |   |
|   |       | Owned        |       |                 | 133,000       |                                                                       |       | Financial  Services, Manufacturing |   |
| 5.     |       | Noida        |       |                 |          |                                                                       |       |   |   |
|   |       | Leased       |       |                 | 83,528        |                                                                       |       | Financial  Services, BPO |   |
| 6.     |       | Hyderabad    |       |                 |          |                                                                       |       |   |   |
|   |       | Leased       |       |                 | 48,516        |                                                                       |       | Telecommunications |   |
| 7.     |       | Bangalore    |       |                 |          |                                                                       |       |   |   |
|   |       | Leased       |       |                 | 114,330       |                                                                       |       | Manufacturing,  Product Engineering Services |   |
| 8.     |       | Thane        |       |                 |          |                                                                       |       |   |   |
|   |       | Owned        |       |                 | 91,159        |                                                                       |       |   |   |
|        |       | Leased       |       |                 | 276,229       |                                                                       |       |   |   |
|   |       | Total Thane  |       |                 | 367,388       |                                                                       |       | Insurance,  Manufacturing, Financial Services, Enterprise |   |
|   |       |         |       |                 |          |                                                                       |       | Application  Systems |   |
|        | ** ** | **Total**    | ** ** | ** **           | **1,235,579** |                                                                       |       |   |   |

 

We currently have capacity for approximately 15,500professionals at these facilities. As of December 31, 2005, we usedapproximately 76% of our existing office space in our operations.

Most of our global branch offices located outside ofIndia are used for sales and marketing.

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We have 23 salesand marketing offices located in the following locations:

In keeping with ourplans for expansion, we have begun construction of new facilities in India,including in particular two knowledge parks in Navi Mumbai and Chennai. Weanticipate that expenditures for our expansion plans will total approximately$250.0 million to $300.0 million through 2008. We intend theseknowledge parks to have state-of-the-art resources with extensive workspace andtraining facilities and a modular design for ease of segregation of dedicatedprojects. These campuses will have secure, redundant infrastructure with theability to provide scale and service to clients from one location. The initialphase of the construction has already begun at each site. The Navi Mumbai andChennai facilities are expected to accommodate up to 14,000 and 10,000 people,respectively, when completed. We estimate that we may spend an aggregate ofapproximately $140 million to complete these two projects. The phase I of theNavi Mumbai facility is expected to be operational in the last quarter of 2006and is expected to accommodate approximately 4,500 people. Phase I of Chennaifacility, having a capacity of 1,200 seats, is complete and under partialoccupation. As of December 31, 2005, we have spentapproximately $37.5 million on the knowledge parks.

We currently plan to spend an additional approximately$100 million for other facilities throughout India, including an additional220,000 square feet in Bangalore and Hyderabad and improved facilities atseveral of our other facilities in India. As we grow, we believe thatadditional space can be obtained on commercially reasonable terms to meet ourfuture requirements.

For the Chennai facility, we have entered into a leasedated September 30, 2004 with the State Industrial Promotion Corporationof Tamil Nadu, or SIPCOT. We have acquired 18.75 acres of land near Chennai fora lease term of 99 years to establish a project in connection withsoftware development and support services. According to the terms of theagreement, we require SIPCOT’s prior approval for any change in the compositionof our board of directors that causes a change in ownership or management.

Further, for the Mumbaifacility we have entered into license agreements dated February 10, 2005,with the Maharashtra Industrial Development Corporation, or MIDC. We have beengranted licenses to construct facilities over 50 acres of land in a phasedmanner in Navi Mumbai. Our occupation of the land is subject to entering into alease agreement with a term of 95 years. We have currently entered into  lease agreements for 15 acres. This land mayonly be used for activities related to the information technology industry.

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**ITEM 4A. UNRESOLVEDSTAFF COMMENTS**

Not applicable

**ITEM 5. OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

The following discussionof the financial condition and results of operations of our company should beread in conjunction with the financial statements and the related notesincluded elsewhere in this document. This discussion contains forward-lookingstatements that involve risks and uncertainties. For additional informationregarding these risks and uncertainties, please see “Item 3. KeyInformation—Risk Factors.”

**Overview**

We are a leading Indian provider of informationtechnology services. We deliver a comprehensive range of IT services throughglobally integrated onsite and offshore delivery locations primarily in India,which we call our global delivery model. We offer our services to customersthrough industry-focused practices, including insurance, manufacturing,financial services and telecommunications, and through technology-focusedpractices. Within these practices, our service lines include applicationdevelopment, application maintenance and support, packaged softwareimplementation, infrastructure management services, product engineeringservices, business process outsourcing and quality assurance services.

Our revenues grew from $142.6 million in 2001 to$450.3 million in 2005, representing a compound annual growth rate of33.3%. Our net income grew from $22.1 million in 2001 to$60.9 million in 2005, representing a compound annual growth rate of 28.9%. Our total number of employees was 4,900 as of December 31, 2001 and11,802 as of December 31, 2005. In light of this growth, we are investingin new high-tech facilities, which we refer to as “knowledge parks,” designedfor expanding our operations and training our employees. As of December 31,2005, we had 194 sales and marketing personnel supported by dedicated industryspecialists in 23 sales offices around the globe, including North America,Europe, Japan and the rest of the Asia-Pacific region.

Our Industry segments comprise of financial services,insurance services, manufacturing companies, telecommunications, technologyservices (comprising Independent Software Vendors and Product Engineering) andothers such as energy and utilities, retail, logistics and transportation andmedia and entertainment. We evaluate segment performance and allocate resourcesbased on revenue growth. We categorize revenue in relation to segments iscategorized based on items that are individually identifiable to that segment.Costs are not specifically allocable to individual segment as the underlyingresources and services are used interchangeably. Fixed assets used in the ourbusiness or liabilities contracted have not been identified to any of thereportable segments, as the fixed assets and services are used interchangeablybetween segments.

Our management evaluates our results of operations byexamining financial and operating data in a variety of categories, includingour industry and technology practices, onsite and offshore revenues, type ofcontract, type of customer and geographic region. We manage and market ourbusiness according to our industry and technology practices. Our industrypractices consist of insurance, manufacturing, financial services andtelecommunications, and a group of other industries (including  retail, energy and utilities, logistics andtransportation, and media and entertainment).

We have also developed technology practices that offerresearch, design and development services for product engineering and toindependent software vendors, or ISVs. Our service lines support both ourindustry and technology practices. We do not, however, treat our service linesas separate components of our business for financial reporting purposes.

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**5.A. Operatingresults**

**Revenues**

We discuss below thecomponents of our IT service revenues by onsite and offshore revenues, industryand technology practice, contract type, customer type and customer geography.

***Onsiteand Offshore Revenues***

We derive revenues from the provision of servicesoffshore and onsite. Offshore revenues consist of revenues from IT serviceswork conducted in India. Onsite revenues consist of revenues from IT serviceswork conducted at clients’ premises outside India or from our limited number ofpremises outside India. Although a substantial portion of our softwarepersonnel are located at our offshore locations, our customers generally payhigher charges for onsite work, which is consistent with our industry. As aresult, our onsite revenues are proportionally higher than our offshorerevenues.

We have not experienced significant changes in ourprices since 2002, whether onsite or offshore, principally due to the growth indemand for IT outsourcing services. Some of our larger customers receivereduced pricing through volume discounts. In order to provide competitivepricing to our customers, we have endeavored to shift the delivery of ourservices from onsite locations to lower cost offshore delivery centres.

As of December 31, 2004, approximately 7,464 outof 9,661 total employees were located in India and as of December 31,2005, 9,352 of 11,802 total employees were located in India. Our overallemployee numbers will increase as we add employees for both onsite and offshorework. We measure our service efforts that can be billed to clients in units ofbilled person-months. The number of offshore billed person-months hasincreased as a percentage of total billed person-months from 63.4% in2004 to 64.6% in 2005.

Tosome extent, the onsite/offshore breakdown by billed person-month varies byindustry and technology practices as is illustrated in the table below. Forexample, insurance and telecommunications employ a higher level of onsitepersonnel than other industry and technology practices. Within our industry andtechnology practices, our offshore and onsite breakdown by billed person-monthis as follows:

| ** **           | ** ** | **Year ended December 31, 2004** | ** ** | ** **                          | ** ** | **Year ended December 31, 2005** | ** ** | ** **                        | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **Onsite  Billed  Person-months**                    | ** ** | **Offshore  Billed  Person-months** | ** ** | **Total**                                            | ** ** | **Onsite  Billed  Person-months** | ** ** | **Offshore  Billed  Person-months** | ** ** | **Total** | ** ** |
| Financial  Services  |       |                                                 | 4,381      |                                |       |                                                 | 8,726      |                              |       | 13,107 |   |   | 4,711 |   |   |   | 11,123 |   |   | 15,834 |   |
| Insurance            |       |                                                 | 8,372      |                                |       |                                                 | 8,523      |                              |       | 16,895 |   |   | 8,953 |   |   |   | 11,417 |   |   | 20,369 |   |
| Manufacturing        |       |                                                 | 6,163      |                                |       |                                                 | 11,802     |                              |       | 17,965 |   |   | 6,225 |   |   |   | 13,060 |   |   | 19,285 |   |
| Telecommunications   |       |                                                 | 375        |                                |       |                                                 | 353        |                              |       | 728 |   |   | 3,977 |   |   |   | 4,206 |   |   | 8,203 |   |
| ISV                  |       |                                                 | 747        |                                |       |                                                 | 4,499      |                              |       | 5,246 |   |   | 1,025 |   |   |   | 4,227 |   |   | 5,253 |   |
| Product  Engineering |       |                                                 | 797        |                                |       |                                                 | 2,515      |                              |       | 3,312 |   |   | 1,804 |   |   |   | 5,041 |   |   | 6,845 |   |
| Other                |       |                                                 | 1,528      |                                |       |                                                 | 2,382      |                              |       | 3,910 |   |   | 2,076 |   |   |   | 3,556 |   |   | 5,642 |   |
| Total                |       |                                                 | 22,363     |                                |       |                                                 | 38,800     |                              |       | 61,163 |   |   | 28,791 |   |   |   | 52,639 |   |   | 81,430 |   |

 

Certain of our service lines, such as productengineering services and business process outsourcing, employ a greater levelof offshore personnel, whereas our packaged software implementation serviceline utilizes a larger portion of onsite work compared to most of our otherservice lines.

Since 2004, we have seen a trend towards greater useof offshore services, which has positively affected our profitability. Servicesperformed at a client site or our premises located outside India typicallygenerate higher revenues per employee, but at a lower gross margin, than thesame services performed at 

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our facilities in India.These differences are attributable to the higher average cost of labor, higherbilling rates and compensation expenses in the United States and othercountries in which work is performed as compared to India. Accordingly,although offshore work (measured by billed person-months) is expected toincrease, we do not expect that the mix of our onsite and offshore revenueswill change significantly in the near future.

The above measurement ofwork does not reflect the actual revenues derived by us during the relevantperiod and you are cautioned not to estimate revenues in a particular period onthe basis of these offshore and onsite billed person-months during suchperiod.

***Revenues by Industry Segments***

Our operations pertains to provision of IT servicesand solutions to customers belonging to various industries such as insurance,manufacturing and financial services. and also to technology practices.Accordingly, revenues represented along industry classes comprise the principalbasis of segmental information.

We derive a significantproportion of our revenues from clients in the insurance, manufacturing andfinancial services industries. With the acquisition of Cymbal in November 2004,we added expertise in the telecommunications industry. We also provide servicesto clients in other industries, including retail, energy and utilities,logistics and transportation, and media and entertainment. In addition, wemarket our services to clients through our technology practices, comprising ourproduct engineering and ISV practices. The following table indicates the breakdownof our revenues by our industry and technology practices:

| **Industry Segments** | ** **   | ** **   | *** *** | **Year ended December 31,** | ** **   |
|----------------------------|--------------|--------------|--------------|--------------------------------------------|--------------|
| ** **                 | ** **   | **2003**     | ** **   | **2004**                                   | ** **   | **2005** | ** ** |
| ***Industry  Practice***   | *** *** | *** *** | *** *** | *** ***                               | *** *** | *** *** | *** *** |
| Financial  Services        |         | 18.6         | %            | 19.2                                       | %            | 16.0 | % |
| Insurance                  |         | 33.2         | %            | 32.8                                       | %            | 27.7 | % |
| Manufacturing              |         | 34.0         | %            | 28.3                                       | %            | 21.9 | % |
| Telecommunications         |         | 0.1          | %            | 2.6                                        | %            | 15.3 | % |
| Other                      |         | 5.1          | %            | 6.6                                        | %            | 6.5 | % |
| ***Technology  Practice*** |         |         |         |                                       |         |   |   |
| ISV Practice               |         | 6.8          | %            | 5.9                                        | %            | 5.0 | % |
| Product  Engineering       |         | 2.2          | %            | 4.6                                        | %            | 7.5 | % |
| Total                      |         | 100.0        | %            | 100.0                                      | %            | 100.0 | % |

 

***Revenues by Contract Type***

Our revenues are recordedeither on a time-and-material, or T&M, basis or a fixed-price basis.The following table shows our revenues by contract type:

| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Time-and-Material |       | 51.9                                       | %          | 57.4 | % | 59.5 | % |
| Fixed Price       |       | 48.1                                       | %          | 42.6 | % | 40.5 | % |
| Total             |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

Although we seek to use our software engineeringprocesses and past project experience to reduce the risks associated withestimating, planning and performing fixed-price projects, we bear therisk of cost overruns and completion delays in connection with fixed-pricedcontracts. Accordingly, we believe that we bear a greater amount of risk fromour fixed-price contracts than from our T&M contracts.

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A large proportion of our revenues from fixed-pricecontracts are from fixed-price SLAs. A large proportion of our fixed-priceSLAs are application maintenance and support projects, as to which work andcost estimates have been fairly predictable. In 2004, 26.8% of our revenueswere from fixed-price SLAs and in 2005, 27.9% were from fixed-priceSLAs.

Revenues from T&M contracts as a percentage of ouroverall revenues increased in each of the past three years because a largeportion of our new business is billed on a T&M basis and the proportion ofour revenues generated from services provided to General Electric has declined.Most of our business with General Electric is on the basis of fixed-pricecontracts.

Revenue with respect toT&M contracts is recognized in the period that the services are performed.Revenue with respect to fixed-price SLA contracts is recognized on astraight line basis. Revenue with respect to other fixed-price contractsis recognized on a percentage of completion basis, measured by the percentageof costs incurred to date compared to the estimated total costs for eachcontract. See “Critical Accounting Policies—Revenue Recognition” below.

***Revenues by Top Customers***

As illustrated in thetable below, a significant proportion of our revenues is derived from a smallnumber of clients. In recent years, however, we have diversified our clientrevenues as a result of various initiatives, including our addition of newstrategic clients, our focus on additional industry practices, our developmentof technology practices and our expansion of the range of service lines weoffer. As of December 31, 2005 we had 61 clients, each of whom generatedrevenues of $1.0 million or more, compared to 46 in 2004 and 26 in 2003.We expect that this trend toward greater client diversification will continue.

| ** **            | ** ** | **Year ended   December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| General Electric      |       | 41.2                                         | %          | 31.7 | % | 22.1 | % |
| State Farm  Insurance |       | 17.4                                         | %          | 14.9 | % | 11.5 | % |
| Top 5 Clients         |       | 69.0                                         | %          | 57.6 | % | 46.8 | % |
| Top 10 Clients        |       | 79.6                                         | %          | 69.0 | % | 59.3 | % |

 

Although revenues fromGeneral Electric have declined from 2002 to 2004 as a percentage of our totalrevenues, in absolute terms they have remained approximately the same. Wecannot guarantee that this trend will continue.

***Revenues by New and Existing Customers***

Repeat business accounted for 90.3%, 88.8% and 91.7%of our revenues in 2003, 2004 and 2005. Each customer is treated as a newcustomer for the quarter that it first starts business with us and continues toremain as a new customer for the four succeeding quarters. The revenues in anyquarter from customers other than new customers are termed as repeat business.We provide services to our largest client, General Electric, in a number ofindustries, including financial services, insurance and manufacturing. GeneralElectric is also one of our principal shareholders.

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Thefollowing table indicates the breakdown of revenues we derive from newcustomers and existing customers.

| ** **              | ** ** | **Year ended December 31, 2005** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Existing  Customers**                              | ** ** | **New  Customers** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(in millions)**                               | ** ** |
| **Industry Practice**   | ** ** |                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Insurance               |       |                                                 | 120.6      | ** ** |   |   | 43 | ** ** |   | 124.9 |   |
| Manufacturing           |       |                                                 | 90.4       | ** ** |   |   | 8.3 | ** ** |   | 98.7 |   |
| Financial  Services     |       |                                                 | 67.5       | ** ** |   |   | 4.7 | ** ** |   | 72.2 |   |
| Telecommunications      |       |                                                 | 58.5       | ** ** |   |   | 10.3 | ** ** |   | 68.8 |   |
| Other Industries        |       |                                                 | 27.1       | ** ** |   |   | 2.2 | ** ** |   | 29.3 |   |
| **Technology Practice** | ** ** |                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| ISV                     |       |                                                 | 18.1       | ** ** |   |   | 4.4 | ** ** |   | 22.5 |   |
| Product Engineering     |       |                                                 | 30.9       | ** ** |   |   | 3.0 | ** ** |   | 33.9 |   |
| Total                   | ** ** |                                                 | **$**      | **413.1** | ** ** |   |   | **$** | **37.2** | ** ** |   | **$** | **450.3** | ** ** |
|                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

Although we engage inone-time projects in some service lines, the majority of our projects arerecurring in nature. Work done in product engineering services and packagedsoftware implementation services, however, tends to be more for non-recurringprojects.

***Revenues by Geography***

Werecord our revenue based on the location of our clients rather than accordingto the location where our services are provided. We classify our revenues intofive geographic segments: the United States, Europe, India, Japan and Others.As the table below illustrates, a significant proportion of our revenues isderived from clients located in the United States. We expect that a substantialmajority of our revenues will continue to be derived from clients located inthe United States. We categorize revenues geographically based on the locationof the specific client entity for which the project has been executed,irrespective of the location at which the invoice is rendered or whether thework for a specific client entity is performed onsite or from our offshoredelivery centers in India.

| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| United States                  |       | 88.8                                       | %          | 87.8 | % | 84.8 | % |
| Europe                         |       | 7.2                                        | %          | 7.9 | % | 9.1 | % |
| India                          |       | 0.2                                        | %          | 0.2 | % | 0.3 | % |
| Japan                          |       | 2.9                                        | %          | 3.3 | % | 4.3 | % |
| Others                         |       |                                       |       |   |   |   |   |
| Asia-Pacific (excluding Japan) |       | 0.5                                        | %          | 0.4 | % | 0.4 | % |
| Rest of the World              |       | 0.4                                        | %          | 0.4 | % | 1.1 | % |
| Total                          |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

We have experiencedrevenue growth in the European market. Revenues in Europe have increased from$18.2 million in 2003 to $25.7 million in 2004 and were $41.0 millionin 2005.

**Expenses**

***Cost of Revenues***

Cost of revenues represented 62.7%, 62.0% and 64.1% ofour revenues in 2003, 2004 and 2005. Our cost of revenues largely consists ofcosts relating to our software professionals, including salary and other 

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compensation and benefitsexpenses, travel expenses, immigration expenses, data communications expenses,computer and software expenses and depreciation. Cost of revenues also includesthe cost of subcontractors.

The principal component of our cost of revenues is thesalary cost of our software professionals. A majority of our softwareprofessionals are located in India. However, because labor costs in the ITservices industry in India have historically been significantly lower than inthe United States and other countries where our customers are located, amajority of our compensation costs relate to salaries of software professionalslocated in the United States and those other countries. As wages in Indiaincrease at a faster rate than in the United States, we may experienceincreases in our costs of personnel, particularly project managers and othermid-level professionals. We seek to maintain salary levels in accordance withprevailing trends in our industry.

We hire subcontractors on a limited basis from time totime. We use subcontractors across our industry practices and service lines.The use of subcontractors is more prevalent in service lines that have a largeronsite element, such as packaged software implementation and infrastructuremanagement services. We reduced our expenses associated with subcontractors in2004 by developing in-house expertise in new areas of growth and improvingoperational management of the sub-contractor hiring process. However, we expectto continue to incur subcontractor costs principally to service specifictechnical requirements of some of our clients in a timely manner.

The utilization rates of our software professionalsalso affect our gross profits. We define employee utilization as the proportionof total billed person-months to total available person-months, includingemployees in training and holiday and vacation time, and excluding supportpersonnel. We manage utilization by monitoring project requirements andtimetables. The number of software professionals assigned to a project variesaccording to the size, complexity, duration, and demands of the project. Ourutilization rates for the year ended December 31, 2003, 2004 and 2005 were69.0%, 69.2% and 67.2%. We try to minimize the cost impact of unutilizedcapacity by ensuring that a majority of our unutilized capacity is attributableto software professionals based in India.

We incur immigration costs due to the onsite componentof work performed on projects. We expect immigration expenses to increase dueto increases in visa filing costs generally commensurate with our growth andincreases in visa filing fees in the United States. We expense costs related toimmigration as incurred.

We do not expect to incurborrowing costs to finance the addition of planned new facilities and physicalinfrastructure, including our knowledge parks in Navi Mumbai and Chennai andother facilities in India. These new facilities will increase our depreciationexpenses. However, we expect that the increased depreciation will largely beoffset by reduced rental costs resulting from a shift from existing rentalfacilities to the new facilities. These new facilities will provide aconsolidated location for our existing employees and new employees as we expandour service offerings.

***Selling, General and Administrative Expenses***

Selling, general and administrative expenses consistprimarily of costs relating to personnel other than software professionals,including salary and other compensation and benefits expense, depreciation,sales and marketing expenses, telecommunications expenses, office expenses andtraveling expenses. Selling, general and administrative expenses also includeslegal and other professional fees and other miscellaneous administrative costs.

Selling, general andadministrative expenses represented 19.9%,18.7% and 19.9% of our revenues in2003, 2004 and 2005. These expenses comprise an important element of our salesstrategy, as we seek to ensure that senior management personnel are based inclient locations and continue to invest in 

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developingour sales and marketing presence in key markets. We expect selling, general andadministrative expenses to continue at current levels as a proportion of revenues.We continue to invest in sales and marketing and in building brand awareness,leading to a slight increase in sales and marketing expenses as a proportion ofrevenues. We have started to transfer a larger part of our general andadministrative expenses offshore to India as the scale of our operationsincreases. We expect to achieve improved efficiencies in general andadministrative expenses as a result of this transfer and economies of scaleresulting from our recent growth. Accordingly, we expect our increased sellingexpenses to be partially offset by a decrease in our general and administrativeexpenses.

**Foreign CurrencyTranslation and Foreign Exchange Regulations**

Our consolidated financial statements are reported inU.S. dollars. Our functional currency is the rupee, though the functionalcurrency of our subsidiaries is the currency of the country in which thesubsidiary is located. A substantial portion of our revenues is generated indollars while a portion of our expenses are incurred in rupees and we expectthat this will continue for the foreseeable future. Consequently, our resultsof operations will be affected to the extent the rupee fluctuates against thedollar.

We seek to mitigate the effect of exchange ratefluctuation on our operating results by purchasing foreign exchange forwardcontracts. However, these activities do not entirely mitigate the effects ofexchange rate fluctuations. Effective May 2004, we designated certainforward contracts as cash flow hedges in accordance with SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*. We defer changes in fair value of designated cash flowhedges and record them as a component of accumulated other comprehensive incomeuntil the transactions close, at which time we recognize the hedges in ourconsolidated statements of income. The conversion of the rupee, U.K. pound andEuro into U.S. dollars is performed for balance sheet accounts using theexchange rate in effect at the balance sheet date and for revenues and expense accountsusing an appropriate monthly weighted average exchange rate for the respectiveperiods.

Under the Foreign ExchangeManagement Act, 1999 or FEMA, as amended, an Indian company is required to takeall reasonable steps to realize and repatriate into India all foreign exchangeearned by the company outside India, in accordance with the rules specifiedby the Reserve Bank of India, or RBI. FEMA also imposes certain restrictions oncapital account transactions by Indian companies. These regulations do notsignificantly affect our operations at present.

**Inflation**

India has experiencedrelatively high rates of inflation in the past. However, such inflation has nothad a significant effect on our results of operations and financial conditionto date.

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**Accounts Receivable**

Ouraccounts receivable as of December 31, 2003, 2004 and 2005 were$56.6 million,  $72.0 millionand $74.4 million, respectively. Our days of sales outstanding in  2003, 2004 and 2005 were 82, 80 and 62days, respectively. We define our days of sales outstanding as the ratio ofaccounts receivable at year-end to revenues in a year, multiplied by 365. Weare increasing our focus on collections, and we expect the days of salesoutstanding to decline further. The following table presents a profile of ouraccounts receivable in terms of days for which accounts receivable have beenoutstanding:

| ** **         | ** ** | **As of December 31,** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **         | ** ** | **($ in millions)**         | ** ** |
| **Period in days** |       |                                  |       |   |   |   |   |
| 0-90               |       | 50.5                                  |       | 64.0 |   | 68.9 |   |
| 91-180             |       | 4.8                                   |       | 6.9 |   | 4.4 |   |
| More than 180      |       | 1.3                                   |       | 1.1 |   | 1.1 |   |
| Total              |       | 56.6                                  |       | 72.0 |   | 74.4 |   |

 

In 2003, 2004 and 2005,the provision made for doubtful debts and advances was $0.3 million,$0.5 million and reversal of  $0.2million, respectively. We expect to continue to have low levels of provisions fordoubtful debts.

**Taxes**

As an Indian company, we are a tax resident of Indiaand are therefore subject to Indian income taxes on our global income. Our netincome earned from providing services outside India is subject to tax in thecountry where we perform the work. Most of our tax paid in countries other thanIndia can be applied as a credit against our Indian tax liability to the extentthat the same income is subject to tax in India.

Currently, we benefit from tax holidays given by theGovernment of India for the export of IT services from speciallydesignated software technology parks, or STPIs, and special economic zones, orSEZs, in India. These tax incentives currently include a ten-year holiday fromthe payment of Indian corporate income tax for the operations of most of ourIndian facilities and a partial taxable income deduction for profits derivedfrom exported IT services. As a result of these two tax incentives, asubstantial portion of our pre-tax income has not been subject to significanttax in recent years. The aggregate benefit of these tax holidays and deductionswith respect to our net income was $15.0 million, $20.6 million and $19.0million for 2003, 2004 and 2005, respectively. Our current tax holidays forSTPI units expire in stages by 2009 and our partial taxable income deductionfor profits derived from exported IT services expired in March 2005. Thetax benefits available for some of our facilities have expired and certainothers will expire by March 2009. Consequently, we expect our effectivetax rate to increase. In addition, the 10-year tax holidays are given fornew software units, and the determination of whether or not certain of ourunits are new units and eligible for the tax exemption is being reviewed andcould be challenged by income tax authorities.

The provisions of theIncome Tax Act of India are amended on an annual basis by enactment of theFinance Act. The Finance Act, 2005 has reduced the corporate income tax ratefrom an effective rate of 36.6% to 33.7%. The Act has also introduced a newfringe benefit tax, which has increased our operating expenses. This new tax ispayable on fringe benefits given collectively and not individually to ouremployees, such as entertainment expenses, travel expenses, expenses relatingto organizing or attending conferences, gifts and provision of food andbeverages in some situations. Accordingly the tax is accounted for as anexpense under Cost of Revenues or Sales, General and Administrative Expenses.The tax is to be paid by employers at the rate of 33.7%, including surchargeand education surcharge, on the prescribed 

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value offringe benefits provided by employers even where the employees may not have topay any income tax.

**Cymbal Acquisition**

In November 2004, weacquired Cymbal to establish expertise and operations in the provision of ITservices to the telecommunications industry. We paid an initial purchase priceof approximately $36.1 million, including expenses, of which $25.4 millionhas been accounted for as goodwill and $10.3 million has been accountedfor as customer related intangibles. We agreed to pay contingent considerationin cash of up to $33.0 million to the sellers over a three-year period endingon October 31, 2007 based on the achievement of revenue and margintargets. This contingent consideration includes the payment of up to$3.4 million as special incentives to specified employees of Cymbal. Thecontingent consideration for the year July 2004 to June 2005 has beenaccrued in our financial statements for the year ended December 31, 2005in the amount of $4.8 million and recorded as goodwill and an amount of $0.8million has been accrued as special incentive and recorded as compensationcost. Also as part of the purchase price adjustment in accordance with thestock purchase agreement and amendments thereof, an additional amount of  $0.7 million was paid and  has been recorded as goodwill. See also “CriticalAccounting Policies—Income Taxes” and Note 10 to our consolidatedfinancial statements. Revenue from Cymbal for 2005 were $ 60.6 million. Cymbalhas been renamed as Patni Telecom.

**Recent Developments**

***Treatment of Stock Options***

Until December 31,2005, we have elected to adopt the intrinsic value method for accounting forstock option grants as prescribed in APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and its related guidance, and have not deducted any expense based on suchgrants in determining our net income. We have adopted the pro forma disclosureprovisions of SFAS 123, *Accounting forStock Based Compensation, the Fair Value Method.* The unamortizedcompensation cost under SFAS 123 as of December 31, 2005 was $5.3 million. Recently, the FinancialAccounting Standards Board issued SFAS 123 (revised 2004), *Share-Based Payment*. This statement is arevision of SFAS 123 and supersedes APB Opinion No. 25 and itsrelated interpretive guidance. SFAS 123R now requires us, in determiningnet income, to record the cost of employee services received in exchange forstock compensation based on the fair value of the stock options on the date ofgrant. We have adopted SFAS 123R from January 1, 2006. This mandatorychange in accounting standards for employee stock options will negativelyaffect our earnings. We expect compensation cost to be recognized in accordancewith SFAS No. 123R to be significantly higher than that would have beenrecognized under APB 25. Please also see ‘Recently Adopted AccountingPronouncements under U.S. GAAP.

***Expansion Plans***

We operate through our facilities located in variousparts of India. In the recent past we have acquired facilities to support ourgrowth. In keeping with our plans for expansion, we have begun construction ofnew facilities in India, including two knowledge parks in Navi Mumbai andChennai. These knowledge parks will have state-of-the-art resources withextensive workspace and training facilities and a modular design for ease ofsegregation of dedicated projects. These campuses will have secure, redundantinfrastructure with the ability to provide scale and service to clients fromone location. The initial phase of the construction has already begun at eachsite. The Navi Mumbai and Chennai facilities are expected to accommodate up to14,000 and 10,000 people, respectively, when completed.

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The phase 1 of the Navi Mumbai facility is expected tobe operational in the last quarter of 2006 and is expected to accommodateapproximately 4,500 people. Phase I of Chennai facility having a capacity of1,200 seats, is complete and under partial occupation.

See “Item 4.D. Informationon the Company—Property, plants andequipment.”

***Payroll and Related Taxes relating to InternationalOperations and reassessment of Corporate Taxes***

In connection with a review of various tax aspectsrelating to our international operations, which is in progress, we havereassessed our obligations for payroll and related taxes and corporate taxesfor 2001 to 2004. This reassessment related primarily to certain wages paid,and short-term fringe benefits given, to our employees when working outside ofIndia, for which appropriate withholding taxes were not provided andreassessment of corporate taxes attributable to the filing of the US branch taxreturns for 2001 and 2002. Accordingly, we have restated our financialstatements for the years ended December 31, 2003 and 2004 and the BalanceSheet as of December 31, 2005. See Notes 3.1.1 and 3.1.2 to ourconsolidated financial statements for the year 2005. Based on informationgained from this reassessment, we have estimated our probable payroll andrelated tax obligations and corporate taxes for these items in accordance with *SFAS No. 5, “Accounting for Contingencies”*.

The determination of ourtax liabilities relating to payroll, corporate taxes and the consequentialinterest and related expenses for fiscal years 2001 and 2002 have beenfinalized by the IRS. As a result, we have restated our financial statementsfor the years ended December 31, 2003 and 2004 and the balance sheet as ofDecember 31, 2005 for the additional liability arising on account of thisfinal determination which for accounting purposes constitutes the correction ofan error. We have also reassessed our obligations for corporate taxes, payrolland related taxes, interest and related expenses for  the years ended December 31, 2001 to2005. This revision, representing changes in estimates, is expected to resultin an additional charge of approximately $13.1 million in our financialstatements for the year ending December 31, 2006. Additionally, theconsequential interest and deferred tax charge in an amount of $4.5 millionwould be accrued and will be accounted in our financial statements for the yearending December 31, 2006. As the IRS review for 2003 and 2004 is still inprogress, we cannot currently assess whether this review may result inincreased tax liability. See Notes  3.1.2 and 27.1.1 to our consolidatedfinancial statements for the year ended December 31, 2005.

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**Results ofOperations**

The following table setsforth certain financial information as a percentage of revenues, calculatedfrom our consolidated financial statements under U.S. GAAP:

| ** **                                                               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(restated)(1)**                          | ** ** | **(restated)(1)** | ** ** | ** ** | ** ** |
| Revenues                                                                 |       |                                       | 58.8       | % |   |   | 68.3 | % |   | 77.9 | % |
| Revenue from a  significant shareholder                                  |       |                                       | 41.2       | % |   |   | 31.7 | % |   | 22.1 | % |
| Cost of revenues                                                         |       |                                       | 62.7       | % |   |   | 62.0 | % |   | 64.1 | % |
| **Gross  profit**                                                        | ** ** | ** **                                 | **37.3**   | **%** | ** ** | ** ** | **38.0** | **%** | ** ** | **35.9** | **%** |
| Selling, general  and administrative expenses                            |       |                                       | 19.9       | % |   |   | 18.8 | % |   | 19.9 | % |
| Foreign exchange  gain (loss), net                                       |       |                                       | (0.0       | )% |   |   | 0.6 | % |   | 0.4 | % |
| **Operating  income**                                                    | ** ** | ** **                                 | **17.4**   | **%** | ** ** | ** ** | **18.6** | **%** | ** ** | **15.6** | **%** |
| Interest and  dividend income                                            |       |                                       | 0.6        | % |   |   | 1.3 | % |   | 0.9 | % |
| Interest expense                                                         |       |                                       | (0.9       | )% |   |   | (0.6 | )% |   | (0.5 | )% |
| Gain on sale of  investments, net                                        |       |                                       | 0.5        | % |   |   | 0.0 | % |   | 0.3 | % |
| Other income  (expense), net                                             |       |                                       | (0.8       | )% |   |   | (1.1 | )% |   | 0.2 | % |
| Change in fair  value of put option                                      |       |                                       | 0.5        | % |   |   | 0.0 | % |   | 0.0 | % |
| **Income  before income taxes**                                          | ** ** | ** **                                 | **17.3**   | **%** | ** ** | ** ** | **18.2** | **%** | ** ** | **16.6** | **%** |
| Income taxes                                                             |       |                                       | 4.1        | % |   |   | 3.9 | % |   | 3.1 | % |
| Cumulative effect  due to change in accounting principle (SFAS 150) |       |                                       | 1.3        | % |   |   | 0.0 | % |   | 0.0 | % |
| **Net income**                                                           | ** ** | ** **                                 | **14.6**   | **%** | ** ** | ** ** | **14.3** | **%** | ** ** | **13.5** | **%** |

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       (1) See Note 3 to our consolidated financialstatements included elsewhere in this annual report, for a discussion on therestatement of our financial statements for fiscal years 2003 and 2004 relatingto the effects of recognition of additional payroll and related taxes for  our international operations primarily onaccount of certain wages paid, and short-term fringe benefits given, toour employees when working outside of India, for which appropriate withholdingtaxes were not provided and reassessment of corporate taxes.

**Year Ended December 31,2005 Compared to Year Ended December 30, 2004**

***Revenues:******  ***Our revenueswere $450.3 million in 2005, representing an increase of 37.9% from revenues of$326.6 million in 2004. Out of this increase, $60.6 million (representing 49.0%of the increase in revenues) was due to revenues from Patni Telecom (formerlyCymbal). Patni Telecom (formerly Cymbal) was acquired in November 2004 andtherefore revenues only for November and December 2004 were reflectedin our income statement for the year ended December 31, 2004. Other thanPatni Telecom (formerly Cymbal), revenues from existing customers contributed$354.4 million and new customers contributed $27.0 million to our revenues. This represented an increase of 25.8% in revenuesfrom existing customers and decrease of 26.0% in revenues from new customerscompared to 2004. Excluding Patni Telecom (formerly Cymbal) revenues,the growth from our existing operations would have been 19.8% in 2005. Growthin revenues from our existing operations was attributable to an increase of21.2% in the total billed person-months from work performed at both ouroffshore and onsite locations. Onsite work measured in billed-person monthsincreased 12.7% in 2005 compared to 2004, while offshore work increased 26.0%over the same period. Due to this higher growth in offshore efforts than onsiteefforts, our revenue growth was less than our growth in total billedperson-months. We increased our client relationships to 199 as of December 31,2005 from 170 as of December 31, 2004. In addition, the total number ofclients that individually accounted for over $1.0 million in annual revenuesincreased to 61 as of December 31, 2005 from 46 as of December 31,2004.

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During  2005,our revenues from T&M projects increased by 42.9% over revenues in 2004,while revenues from fixed price contracts increased by 31.1% over the sameperiod in 2004. T&M projects accounted for 59.5% of our revenues in 2005,compared to 57.4% in 2004 mainly because 62.7%of our new business was billed on a T&M basis.

Our client concentration, as measured by theproportion of revenue generated from our top ten clients, decreased to 59.3% in2005 from 69.0% in 2004. General Electric, our largest client and one of ourprincipal shareholders, contributed 22.1% of our revenues in 2005, compared to31.7% in 2004. While revenues from General Electric declined by 4.0% in 2005 ascompared to 2004, revenues from other clients grew by 57.3%.

During 2005, clients in the insurance, manufacturingand financial services industries continued to contribute a large proportion ofour revenues. Revenues from clients in these industries in 2005 increased by16.7%, 6.8% and 15.1% compared to 2004 and contributed 27.7%, 21.9% and 16.0%to overall revenues as compared to 32.8%, 28.3% and 19.2% in 2004 respectively.Our telecommunications industry practice grew by $60.4 million mainly due tobusiness from Patni Telecom (formerly Cymbal) and contributed 15.3% to ouroverall revenues in 2005. Our other industries practice contributed 6.5% and6.6% of our revenues in 2005 and 2004. Our ISV practice contributed 5.0% and5.9% of our revenues in 2005 and 2004 and our product engineering practicecontributed 7.5% and 4.6% of our revenues in 2005 and 2004.

During 2005, we continued to derive a significantproportion of our revenues from clients located in the United States. In 2005and 2004, we derived 84.8% and 87.8% of our revenues from clients located inthe United States. Revenues from these clients grew by 33.2% in 2005, whilerevenues from clients in other regions grew by 71.2% in the same period.

***Cost of revenues:******  ***The cost ofrevenues was $288.5 million in 2005, representing an increase of 42.5% from$202.5 million in 2004. Cost of revenues represented 64.1% and 62% of ourrevenues in 2005 and 2004. Out of the increase of $86.0 million in cost ofrevenues, $36.2 million increase was due to the cost of revenues of PatniTelecom (formerly Cymbal). Patni Telecom (formerly Cymbal) was acquired in November 2004and therefore cost only for November and December 2004 was reflectedin our income statement for the year ended December 31, 2004. Of theremaining increase of $49.8million in cost of revenues, $32.6million was attributable to wage costs, $2.2 million to sub-contractor cost,$2.5 million to travel costs, $2.6 million to immigration costs, $4.6 millionto rental and repairs, $1.1 million to data-link charges, $2.8 million to othergeneral administration costs and $1.4 million to depreciation charged onassets. Wage costs increased by $32.6million due to an increase in headcount of software professionals by 2,084, annualsalary revisions and recognitionof additional payroll and related taxes for our international operationsarising on reassessment of certain wages paid, and short-term benefits given toour employees when working outside India. Our immigration costs were higher dueto increased costs of applications as well as an increase in the number ofapplications processed. Expansion of our facilities led to increased rentalcosts and other related expenses. Depreciation charged on assets increased by$1.4 million in 2005 as compared to 2004. Patni Telecom (formerly Cymbal) costof revenues of $36.2 million consisted of wage costs of $21.2 million,sub-contractor costs of $11.9 million, travel costs of $2.6 million and othercosts of $0.5 million.

***Gross profit:******  ***Our grossprofit for 2005 was $161.9 million, representing an increase of 30.4% from$124.1 million in 2004. Gross profit as a percentage of our revenues dropped to35.9% from 38% during 2004 reflecting the increase in cost of revenues.

***Selling, generaland administrative expenses:******  ***During 2005,our selling, general and administrative expenses were $89.7 million,representing an increase of 46.6% from $61.2 million in 2004. During 2005 ourselling, general and administrative expenses as a percentage of revenuesincreased to 19.9% from 18.7% in 2004. Out of the total increase of $28.5million, $10.3 million was due to selling, general and administrative expensesof Patni Telecom (formerly Cymbal). Patni Telecom (formerly Cymbal) was 

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acquired in November 2004and therefore cost only for November and December 2004 was reflectedin our income statement for the year ended December 31, 2004.

During 2005, our sales and marketing expenses were$36.0 million, representing an increase of 55.6% from $23.2 million in 2004.Apart from the Patni Telecom (formerly Cymbal) costs, personnel costs increasedby $5.0 million due to the addition of 35 sales and marketing personnel andhigher compensation costs resulting from salary increases. Other selling andmarketing costs increased by $2.0 million. Selling and marketing costsassociated with Patni Telecom (formerly Cymbal) increased by $5.8 million. Webelieve that our investment in selling and marketing expenses has contributedto the growth and diversification of our client revenues.

Our general and administrative expenses were $53.7million, representing an increase of 60.9% from $37.5 million in 2004. Apartfrom Patni Telecom (formerly Cymbal), personnel costs increased by $1.7 milliondue to the addition of general and administrative personnel and annual salaryrevisions. Establishment costs increased by $1.4 million due to an increase inthe number of facilities. Professional and consultancy charges increased by$3.8 million, recruitment expenses increased by $1.6 million and other generalexpenses increased by $1.1 million. General and administrative expensesassociated with Patni Telecom (formerly Cymbal) increased by $4.3 million.Depreciation expense increased by $1.8 million.

***Foreign exchangegain/loss:******  ***In 2005, we had a foreign exchangeloss of US$1.7 million as against a loss of US$2.1 million in 2004, as ourdollar-denominated receivables continued to be hedged to a significant level.Our receivables are marked to market.

***Operating income:******  ***Our operatingincome was $70.4 million in 2005, representing an increase of 15.8% from $60.8million in 2004. As a percentage of revenues, operating income dropped to 15.6%from 18.6% in 2004 reflecting increase in cost of revenues and selling, generaland administration expenditures at an increasing rate compared to revenues.

***Other income(expense), net:****  *Other income (expense), net reflectsinterest and dividend income, interest expense, net gain on sale of investmentsand other income or expense. Our other income (expense), net was income of $4.2million in 2005, increasing 401% from expense of  $1.4 million in 2004resulting in net increase of $5.6 million represented by following. In 2005, wehad recorded gain on sale of asset of $3.2 million and loss of revaluation ofADR proceeds $2.0 million. In 2004, we incurred expenses of approximately $1.0million in relation to our initial public offering. In 2005, our gain on saleof investments were $1.1 million as compared to $0.1 million in 2004. Onaccount of reassessment of our payroll and corporate tax obligations for ourinternational operations, we have provided for interest and other relatedexpenses with respect to delayed payments amounting $1.7 million in 2005 and$4.3 million in 2004

***Income taxes:******  ***We made aprovision of $13.8 million for income taxes in 2005, representing an increaseof 7.1% from $12.9 million in 2004. Our effective tax rate decreased to 18.5%in 2005 from 21.7% in 2004. The 2005 tax provisioning included an amountof  approximately $1.0 million relatingto an adjustment for an earlier year’s income tax assessment. The 2004 taxprovisioning included $5.2 million for taxes arising on account of reassessmentof the corporate taxes for our international operations. Also, the taxprovision for Patni Telecom (formerly Cymbal) was for the whole year of 2005 ascompared to two months of 2004. While significant portion of income is derivedfrom India operations is exempt from income tax, income from Patni Telecom(formerly Cymbal) operations is taxed at the enacted tax rate of approximately40%.

***Net income:****  *Our netincome was $60.9 million in 2005, representing an increase of 30.8% from $46.5 millionin 2004. As a percentage of our revenues, net income decreased to 13.5% in 2005from 14.3% in 2004. The reduction inthe Net Income is mainly on account of reasons explained above.

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**Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

***Revenues:***   Ourrevenues were $326.6 million in 2004, representing an increase of 30.1%from revenues of $251.0 million in 2003. Business from existing customersincreased by $55.1 million and business from new customers (excludingPatni Telecom (formerly Cymbal)) increased by $12.2 million compared to2003. From the acquisition of Patni telecom (formerly Cymbal), revenues fromexisting customers contributed $8.1 million (a 3.2% increase) to ourrevenues in 2004. Growth in revenues from our existing operations was attributableto an increase of 32.1% in the total billed person-months from workperformed at both our offshore and onsite locations from 2003 to 2004. Onsitework measured in billed-person hours increased 20.3% in 2004 compared to2003, while offshore work increased 40.0% over the same period.

We increased our client relationships to 170 as of December 31,2004 from 115 as of December 31, 2003. In addition, the total number ofclients that individually accounted for over $1.0 million in annualrevenues increased to 46 as of December 31, 2004 from 26 as of December 31,2003. In 2004, we provided services to new clients in the following servicelines: application development, application maintenance and support, productengineering services and packaged software implementation. Among our servicelines, we expanded work from existing customers in 2004 through the provisionof infrastructure management, business process outsourcing and qualityassurance services.

During 2004, our revenues from T&M projectsincreased by 44.0% over 2003 revenues while revenues from fixed-pricecontracts increased by 15.2% over 2003. T&M projects accounted for 57.4% ofour revenues in 2004, compared to 51.9% in 2003, principally because 71.0% ofour new business was billed on a T&M basis.

Our client concentration, as measured by theproportion of revenue generated from our top ten clients, decreased to 69.0% in2004 from 79.6% in 2003. General Electric, our largest client and one of ourprincipal shareholders, contributed 31.7% of our revenues in 2004, compared to41.2% in 2003. While revenues from General Electric remained approximately thesame in 2004 as in 2003, revenues from other clients grew by 51.1%.

During 2004, clients in the insurance, manufacturingand financial services industries continued to contribute a large proportion ofour revenues. Revenues from clients in the insurance, manufacturing andfinancial services industries in 2004 increased by 28.4%, 8.2% and 34.6%compared to 2003 and contributed 32.8%, 28.3% and 19.2% to overall revenues ascompared to 33.2%, 34.0% and 18.6% in 2003 respectively. We also significantlyexpanded our operations in our telecommunications industry practice with thecompletion of our acquisition of Cymbal. We expect clients from our telecommunicationsindustry practice to contribute significantly to our revenues in the future.Our other industries practice contributed 6.6% and 5.1% of our revenues in 2004and 2003. Our ISV practice contributed 5.9% and 6.8% of our revenues in 2004and 2003 and our product engineering practice contributed 4.6% and 2.2% of ourrevenues in 2004 and 2003.

During 2004, we continued to derive a significantproportion of our revenues from clients located in the United States. In 2004and 2003, we derived 87.8% and 88.8% of our revenues from clients located inthe United States. Revenues from these clients grew by 28.6% in 2004, whilerevenues from clients in other regions grew by 41.9% in the same period.

***Cost of revenues:***   In2004, our cost of revenues was $202.5 million, representing an increase of28.6% from $157.5 million in 2003. Cost of revenues represented 62.0% and62.7% of our revenues in 2004 and 2003.

During 2004, the increase in wage costs of$28.2 million was mainly due to the net addition of 2,505 employees, theimplementation of annual salary revisions in April 2004 and recognition ofadditional payroll and related taxes for our international operations arisingon reassessment of certain wages paid, 

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and short-term fringebenefits given, to our employees when working outside India. Travel, insuranceand employee transportation costs increased by $2.9 million,$2.5 million and $0.6 million, respectively, during 2004, while theexpansion of our facilities led to increased rental costs and related expensesof $3.6 million. Cost of revenues also increased by $5.5 million dueto costs associated with our operation of Cymbal. Depreciation charged onassets increased by $2.2 million in 2004 compared to 2003.

The increase in our cost of revenues resulting fromthe addition of employees was partially offset by the fact that a largerproportion of our employees were located in India during 2004. We alsodecreased our use of subcontractors and external consultants outside India andthereby lowered subcontractor expenses (excluding Patni Telecom (formerlyCymbal ) subcontractor cost) by $2.1 million, a decrease of 17.2% in 2004from $12.1 million in 2003.

***Gross profit:***   Ourgross profit during 2004 was $124.1 million, representing an increase of32.6% from $93.6 million in 2003. Gross profit as a percentage of ourrevenues increased to 38.0% in 2004 from 37.3% in 2003, as cost efficienciesand higher contribution from offshore delivery enabled us to improve ourmargins.

***Selling, generaland administrative expenses:***   During 2004,our selling, general and administrative expenses were $61.2 million,representing an increase of 22.2% from $50.0 million in 2003. In 2004, ourselling, general and administrative expenses as a percentage of our revenuesdecreased to 18.7% from 19.9% in 2003.

During 2004, our sales and marketing expenses were$23.2 million, representing an increase of 12.4% from $20.7 millionin 2003. Personnel costs increased by $0.6 million mainly due to the additionof 29 sales and marketing personnel in 2004 and higher compensation costs onaccount of salary revisions. Selling and marketing costs associated with PatniTelecom (formerly Cymbal ) were $0.6 million. Other selling and marketingcosts increased by $1.3 million. We believe that our investment in sellingand marketing expenses has contributed to the growth and diversification of ourclient revenues.

Our general and administrative expenses were$37.5 million in 2004, representing an increase of 28.6% from$29.1 million in 2003. Personnel costs increased by $2.1 millionmainly due to an increase of 36 general and administrative personnel andannual salary revisions. Rentals increased by $1.1 million and repairs by$0.6 million, mainly due to an increase in the number of facilities andlease arrangements. The increase in professional and consultancy charges were$1.1 million and travel expenses were $0.6 million. General andadministrative expenses associated with Patni Telecom (formerly Cymbal ) were$1.0 million.

***Foreign exchangegain/loss:***   During 2004, we incurred foreignexchange losses of $2.1 million, as compared to foreign exchange gains of$0.2 million in 2003. Our foreign exchange losses in 2004 were due to thecontinued depreciation of the dollar relative to the rupee. Foreign exchangelosses were partially offset by gains from forward foreign exchange contracts.In the fourth quarter of 2004, anticipating further weakness in the value ofthe dollar relative to the rupee, we significantly increased our forwardforeign exchange contracts coverage to mitigate the effects of furtherdepreciation.

***Operating income:***   Ouroperating income was $60.8 million in 2004, representing an increase of39.3% from $43.7 million in 2003. As a percentage of revenues, operatingincome increased to 18.6% in 2004 from 17.4% in 2003. Our operating income hasbeen adversely affected by the appreciation of the rupee. The rupee appreciatedagainst the dollar from Rs. 45.6 as of December 31, 2003 to Rs. 43.3 as ofDecember 31, 2004, as a result of which rupee costs represented 37.6% ofour cost of revenues and selling, general and administrative expenses in 2004compared to 36.9% in 2003. A substantial portion of our revenues is in dollars,which was not affected by the appreciation of the rupee. The increases in costof revenues and selling, general and administrative expenses were partiallyoffset by our income from forward foreign exchange contracts.

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***Other income(expense), net:***   Other income (expense) netreflects interest and dividend income, interest expense, net gain on sale ofinvestments and other income or expense. Our other income (expense) net wasexpense of $1.4 million in 2004, increasing 6.8% from $1.3 million in2003.

***Change in fairvalue of put option:***   Arrangements enteredinto with two investors in our equity shares gave such investors the right tosell their shares to us if we did not publicly list our shares within aspecified period. A change in accounting principle (SFAS 150) characterizedthis right as a put right which requires separate accounting for changes invalue to be accounted through the income statement. This change was$1.2 million in 2003, which reflects the movement in fair value of the putoption between July 1, 2003 (the adoption date of FASB 150) and December 31,2003. The value of the put option has been determined using the binomial modeland taking into account factors such as volatility, expected life of the optionand discount rate. Upon completion of our initial public offering in India in February 2004,the fair value of the put option was reduced to zero.

***Income taxes:***   Wemade a provision of $12.9 million for income taxes in 2004, representingan increase of 25.8% from $10.2 million in 2003. Our effective tax ratedecreased to 21.7% in 2004 from 23.5% in 2003. This reduction was primarily dueto the increase in the percentage of work performed offshore, resulting in anincrease in the percentage of our profits generated from our Indian operations.We pay less tax on profits generated from our Indian operations than from ouroperations in other countries due to certain tax benefits.

***Cumulative effectdue to adoption of new accounting principle:***   Asrequired by the new accounting principle (SFAS 150) discussed above, thecumulative effect of movement in value of the put option from the date of issueof the put option to the date of adoption of the accounting principle in theamount of $3.3 million has been recognized as a cumulative change inaccounting principle through our statement of income for the year ended December 31,2003.

***Net income:***   Our netincome was $46.5 million in 2004, representing an increase of 27.3% from$36.6 million in 2003. As a percentage of our revenues, income beforecumulative effect of change in accounting principle increased to 14.3% in 2004from 13.3% in 2003. Net income as a percentage of our revenues decreased to14.3% in 2004 from 14.6% in 2003.

**5.B. Liquidity andcapital resources**

Our operations and our growth have been financed bycash generated from operations and from the proceeds of sales of equity shares.We received net proceeds of $117.0 million from our ADSs issue in 2005. Wereceived net proceeds of $64.3 million from our initial public offering inIndia in 2004. Prior to 2004, we received net proceeds of $61.5 million fromour sale of equity shares to General Electric and General Atlantic.

As of December 31, 2004, we had $77.1 million incash and cash equivalents, $55.4 million invested in units of liquid mutualfunds in India (which typically are mutual funds with investments in short termdebt instruments), and $30.2 million invested primarily in units of other debtmutual funds. As of December 31, 2005, we had $148.8 million in cash andcash equivalents, $42.2 million invested in units of liquid mutual funds, and$99.6 million invested primarily in units of other debt mutual funds.

Our working capital (comprising of  current assets excluding cash and cashequivalents and investments less current liabilities) at December 31, 2004and at December 31, 2005 was $26.7 million and  $20.5 million, respectively. We had nooutstanding bank borrowings or long-term debt as of such date. Net cashprovided by operating activities was $75.2 million, $48.7 million and $41.4million in the year ended December 31, 2005, 2004 and 2003 respectively.The non-cash adjustments for the year ended December 31, 2005, toreconcile the $60.8 million net income to net cash provided by operatingactivities consisted primarily of depreciation expense of $16.0 million, gainfrom sale of property, plant and 

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equipment of $3.2 millionand gain from sale of investments of $ 1.1 million. The non-cash adjustmentsfor 2004 to reconcile the $46.5 million net income to net cash provided byoperating activities consisted primarily of depreciation expense of $11.5million, loss from sale of property, plant and equipment of $0.6 million andgain from sale of investments of $0.1 million. The increase in depreciation wasdue to an increase in investment in property, plant and equipment to developand expand our existing, as well as new facilities. The net asset base was$92.0 million, $55.1 million and $41.5 million in the year ended December 31,2005, 2004 and 2003 respectively. The non-cash adjustments to net income in2003 included reduction of the cumulative effect of a change in accountingprinciple amounting to $3.3 million and the change in fair value of put optionamounting to $1.2 million. Non-cash adjustments in 2003 also includeddepreciation of $9.1 million and gain from sale of investments of $1.3 million.Provision for bad debts was $0.5 million and $0.3 million in  the year ended December 31, 2004 and 2003respectively. There was a reversal of provision for bad debts of $0.2 millionfor the year ended December 31, 2005.

Days of sales outstanding decreased to 62 in the yearended December 31, 2005 from 80 in 2004 and from 82 in 2003. Net accountsreceivable and cost and estimated earnings in excess of billings on uncompletedcontracts increased by $14.7 million for the year ended December 31, 2005,$15.4 million in 2004 and $12.1 million in 2003 primarily as a result ofincreases in revenues.

Current assets and other assets decreased by $3.3million, for the year ended December 31, 2005, however it increased $6.2million and $4.1 million for the year ended December 31, 2004 and 2003,respectively. Cash outflows for the year ended December 31, 2005 were $0.7million in advances to vendors, $0.3 million in other receivables, $0.8 millionin prepaid expenses and $0.4 million in prepaid gratuities. Cash inflows forthe year ended December 31, 2005 were $1.0 million in deposits and$4.7 in premium receivables on forward contracts. Cash outflows in 2004 were$0.4 million in advances to vendors, $4.0 million in rental deposits (mainly onaccount of new properties leased in India), $1.3 million in premium receivableson forward contracts and $0.7 million in prepaid gratuities. Cash outflows in2003 were $0.3 million in advances to vendors, $0.8 million in rental deposits,$0.6 million in premium receivables on forward contracts, $0.3 million inprepaid gratuity, $0.6 million in prepaid expenses and $0.5 million in otherexpenses which were not expensed.

Accounts payable and accrued expenses increased by$8.0 million for the year ended December 31, 2005, compared to a decreaseof $0.6 million in 2004 and an increase of $2.8 million in 2003. The increasein 2005 is mainly due to an increase in employee related expenses includingrelocation allowance and travel leave allowance.

Our billings in excess of costs and estimated earningson uncompleted contracts, which represent billings in excess of revenues that are recognized decreased by $0.5million in the year ended December 31, 2005, increased by $0.6 million in2004 and increased by $0.7 million in 2003.

Taxes paid were $15.3 million as against a taxprovision of $15.7 million for the year ended December 31, 2005. Taxes paidwere $12.5 million and $9.7 million as against a tax provision of $14.8 millionand $13.5 million for the years ended December 31, 2004 and 2003,respectively.

Other current liabilities and other liabilitiesincreased by $8.9 million during the year ended December 31, 2005. Theincrease in the year ended December 31, 2005 resulted from a $1.0 millionleave encashment provision, a $0.3 million pension benefit,  a $1.6 million capital expenditure payable, a$3.6 million payroll and related tax liability and corporate taxliability, a $1.3 million advances from customers and $0.7 million VAT payable.The increase in 2004 of  $10.7 millionresulted from a $1.3 million leave encashment provision, a $1.0 million pensionbenefit, a $8.2 million payroll and related tax liability and corporate taxliability and $0.2 million of warranty costs. The increase in 2003 of $13.4million resulted from a $2.5 million leave encashment provision, a $1.7 millionpension benefit, $0.2 million of warranty costs, a 7.9 million payroll andrelated tax liability and corporate tax liability and a $0.8 million provisionfor deferred revenue.

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Net cash used in investing activities was $113.9million for the year ended December 31, 2005, $86.4 million for 2004 and$27.8 million for 2003. Net cash used in the acquisition of property, plant andequipment for the year ended December 31, 2005, 2004 and 2003 was $51.1million, $21.9 million and $13.7 million respectively. In 2005 cash outflow ishigher mainly on account of the purchases of new facilities and expansion ofour existing facilities. Net purchases of investment securities were $67.7million for the year ended December 31, 2005. Net proceeds frominvestments in liquid mutual funds and units of other debt mutual funds were$10.5 million for the year ended December 31, 2005. Additional purchaseconsideration to Cymbal shareholders for the year ended December 31, 2005amounted to $5.6 million. Net cash used in investing activities in 2004included $32.5 million for the acquisition of Cymbal Corporation, net of cashacquired and in 2003 included $3.0 million for acquisition of The ReferenceInc., net of cash acquired. Net cash used in the acquisition of property, plantand equipment for 2004 and 2003 were $21.9 million and $13.7 million, respectively,mainly on account of the purchase of new facilities or expansion of ourexisting facilities. Net purchase of investment securities was $1.4 million in2004 and net proceeds from investment securities were $11.0 million in 2003.Net purchases of investments in liquid mutual funds and units of other debtmutual funds were $30.6 million and $22.1 million in 2004 and 2003,respectively.

Net cash provided by financing activities was $111.9million for the year ended December 2005. Net cash provided by financingactivities was $61.4 million for 2004 compared to net cash used in financingactivities of $1.2 million for 2003. We paid $6.5 million in dividends,including dividend tax on our equity shares in the year ended December 31,2005. We received net proceeds of $118.7 million from our initial offering ofADSs issue and our employee stock option plan during the year ended December 31,2005. We received net proceeds of $64.8 million from our initial publicoffering in India and our employee stock option plan during 2004. We also paid$3.1 million and $1.0 million towards dividend payouts on our equity shares in2004 and 2003.

We anticipate capitalexpenditures of between approximately $250 million to $300 million from 2005through 2008, principally to finance the construction of our new knowledge parkfacilities in Navi Mumbai and Chennai and other facilities and physicalinfrastructure in India. See ‘‘Item 4. Information on the Company—Property,plant and equipment.’’ We believe that existing cash and cash equivalents andfunds generated from operations will be sufficient to meet these requirements.However, we may significantly alter our proposed capital expenditures plansand, accordingly, may require additional financing to meet our requirements. Webelieve that a sustained reduction in IT spending, a longer sales cycle or aneconomic downturn in any of the various industry segments in which we operate,or a combination of these events, could result in a decline in our revenues andadversely affect our liquidity and capital resources.

**5.C. Research anddevelopment, patents and licenses, etc.**

Research and developmentexpenditures for the years ended December 31, 2003, 2004 and 2005 were$1.8 million, $2.1 million and $2.2 million, respectively. For a description ofour research and development initiatives, see “Item 4. Information on theCompany—Innovation.”

**5.D. Trendinformation**

Other than as described in“Item 3. Key information—Risk Factors”, “Item 4. Information on the Company”and “Item 5. Operating and Financial Review and Prospects” and elsewhere inthis Annual Report, to our knowledge there are no known trends or uncertaintiesthat have or had or are expected to have a material adverse impact on ourrevenues or income from continuing operations or profitability or liquidity orcapital resources, or that could cause reported financial information notnecessarily indicative of future operating results or financial condition.

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**5.E. Off-balancesheet arrangements**

We currently do not engagein any off-balance sheet arrangements.

**5.F. Tabulardisclosure of contractual obligations**

Thefollowing table sets forth our contractual obligations and commercialcommitments to make future payments as of December 31, 2005. The followingtable excludes our accounts payable, accrued operating expenses and othercurrent liabilities which are payable in the normal course of operations.

| ** **                           | ** ** | **Payments due as of December 31, 2005** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Total**                                                              | ** ** | **Within  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                           | ** ** | **(in millions)**                                                 | ** ** |
| Capital (Finance)  Leases            |       | $                                                                      | 0.7        |   |   | $ | 0.3 |   |   |   | $ | 0.4 |   |   |   | $ | 0.0 |   |   |   |   |   |   |
| Operating Leases                     |       | $                                                                      | 16.3       |   |   | $ | 6.9 |   |   |   | $ | 6.7 |   |   |   | $ | 2.4 |   |   |   | $ | 0.3 |   |   |
| Capital  Commitment                  |       | $                                                                      | 22.4       |   |   | $ | 22.4 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Contractual Obligations(1)** | ** ** | **$**                                                                  | **39.4**   |   | ** ** | **$** | **29.6** |   | ** ** | ** ** | **$** | **7.1** |   | ** ** | ** ** | **$** | **2.4** |   | ** ** | ** ** | **$** | **0.3** |   |   |

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       (1) In addition, pursuant to our agreement withCymbal, we agreed to pay up to $33.0 million as contingent considerationover a three year period ending on October 31, 2007. Of this, as of December 31,2005 contingent consideration of up to $27.4 million may be payable to thesellers of Cymbal.

**Recently AdoptedAccounting Pronouncements under U.S. GAAP**

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires allcompanies to measure compensation cost for all share-based payments (includingemployee stock option) at fair value. SFAS 123R provides two alternative adoption methods. The first method is amodified prospective transition method whereby a company would recognize sharebased employee costs from the beginning of the fiscal period in which therecognition provisions are first applied as if the fair value-based accountingmethod had been used to account for all employee awards granted, modified, orsettled after the effective date and to any awards that were not fully vestedas of the effective date. Measurement and attribution of compensation cost forawards that are unvested as of the effective date of SFAS 123R would be basedon the same estimate of the grant-date fair value and the same attribution  method used previously under SFAS No.123, “Acountingfor Stock-Based Compensation”  (“SFAS 123”).

The second adoption method is a modified retrospectivetransition method whereby a Company would recognize employee compensation costfor periods presented prior to the adoption of SFAS 123R in accordance with the original provisions of SFAS No. 123;that is, an entity would recognize employee compensation costs in the amountsreported in the pro forma disclosures provided in accordance  with SFAS No. 123; a company would notbe permitted to make any changes to those amounts upon adoption of SFAS 123Runless those changes represent a correction of an error. For periods after thedate of adoption of  SFAS 123R, themodified prospective transition method described above would be applied.

SFAS 123R does not change the accounting guidance forshare-based payment transaction with parties other than than employees providedin SFAS No. 123 as originally issued and EITF Issue No 96-18, “Accountingfor Equity Instuments That Are Issued to Other Than Employees for Acquiring, orin Conjunction with Selling Goods or Services”.

SFAS 123R is effective for public entities that do notfile as small business issuers as of the beginning of the first annualreporting period that begins after June 15, 2005. Accordingly, the Companyis required to adopt SFAS 123R on January 1, 2006.

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We have adopted SFAS 123Rin the quarter ended March 31, 2006 using the modified prospective method.At December 31, 2005, unamortized costs determined based on the fair valueapproach described in SFAS No. 123 amounted to $5.34 million which will beamortized over a weighted average period of approximately five years. Futurecompensation expense will be impacted by various factors, including the numberof awards granted and their related fair value at the date of the grant.

**Critical AccountingPolicies**

We consider the policiesdiscussed below to be critical to an understanding of our financial statementsas their application places the most significant demands on management’sjudgment, with financial reporting results relying on estimates about theeffect of matters that are inherently uncertain. Specific risks for thesecritical accounting policies are described in the following paragraphs. Forthese policies, future events may not develop as forecast, and estimates mayrequire revision.

***Estimates***

We prepare financial statements in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent assets andliabilities on the date of the financial statements and the reported amounts ofrevenues and expenses during the financial reporting period. We primarily makeestimates related to contract costs expected to be incurred to completedevelopment of software, allowances for doubtful accounts receivable, ourfuture obligations under employee retirement and benefit plans, useful lives ofproperty, plant and equipment, deferred tax assets and liabilities and provisionsfor contingencies and litigation.

We continually evaluatethese estimates and assumptions based on the most recently availableinformation, our own historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from those estimates.

***Revenue Recognition***

We recognize revenues by following specific andapplicable accounting guidelines in measuring revenue. These guidelines requireus to make certain judgments that affect recognized and unrecognized revenue.Judgments involve the method of recognizing revenue, costs and time required tocomplete projects for our clients. Revenue results are difficult to predict,and any shortfall in revenue or delay in recognizing revenue could cause ouroperating results to vary significantly from quarter to quarter.

We currently are inthe software services business and, to a lesser extent, in business processoutsourcing. Our revenues from software services are derived by providing thefollowing services:

·       customapplication development;

·       applicationmaintenance and support;

·       packagedsoftware implementation;

·       infrastructuremanagement services;

·       productengineering;

·       businessprocess outsourcing; and

·       qualityassurance services.

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*Software Services*

We derive our revenues primarily from softwareservices. Revenue is recognized when there is persuasive evidence of acontractual arrangement with customers, the sales price is fixed ordeterminable and collectibility is reasonably assured. Our software servicescontracts are either on a fixed-price or on a time and material basis.Currently a majority of revenues are derived on time and material basis.Revenues earned from services performed on a time and material basis arerecognized as the services are performed. Our fixed-price contractsinclude application maintenance and support services, on which revenue isrecognized on a straight line basis over the term of maintenance. Our otherfixed-price contracts are recognized on a percentage of completion basis.

Guidance has been drawn from paragraph 95 of Statementof Position (‘‘SOP’’) 97-2, ‘‘Software Revenue Recognition’’ to accountfor revenue from fixed price arrangements for software development and relatedservices in conformity with *SOP-81-1(“Accounting for Performance of Construction—Type and  Certain Production—Type Contracts”)*.The input method has been used because management considers this to be the bestavailable measure of progress on these contracts as there is a direct relationshipbetween input and productivity.

We review the estimated revenues and estimated costson each project at the end of each reporting period. Any revisions to existingestimates are made when required by management having the relevant authority.As part of the review process, management regularly compares and analyzes theactual costs and the estimate of costs to complete the projects to the originalestimated costs and the total contract price with revisions to estimatesreflected in the period in which changes become known. To date, we have notincurred a material loss on any contracts executed on a fixed-pricebasis. However, as a policy, provisions for estimated losses on suchengagements will be made during the period in which a loss becomes probable andcan be reasonably estimated.

We charge direct and incremental contract originationand set up costs incurred in connection with application maintenance andsupport services to expense as incurred. We defer these costs only insituations where there is a contractual arrangement establishing a customerrelationship for a specific period. The costs to be deferred are limited to theextent of future contractual revenues. Further, we defer and recognize revenueattributable to set up activities over the periods that the related fees areearned, as services performed during such periods do not result in separateearnings process.

We generally provide our clients with a one- tothree-month warranty as post-sale support. Costs associated with suchservices are accrued based on management’s estimates and historical data at thetime related revenues are recorded. We use our past experience relating toactual warranty costs incurred on similar kinds of projects in order toestimate future warranty costs.

We grant volume discounts to certain customers, whichare computed based on a pre-determined percentage of the total revenues fromthose customers during a specified period, pursuant to the terms of thecontract. These discounts are earned only after the customer has generated aspecified cumulative level of revenues in the specified period. The discountscan be utilized by the customer in the form of free services i.e., the customercan get the service without paying up to the discount amount.

We estimate the total number of customers that willultimately earn these discounts, based on which a portion of the revenue on therelated transactions is allocated to the free services that will be deliveredin the future. The amount of revenue to be allocated to the free services isbased on the relative fair value of the free services.

Historically, changes in estimates of warranty costsand volume discounts have not had a material impact on our financialstatements.

We include reimbursementof out-of-pocket expenses received from customers as part ofrevenues.

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***Business Process Outsourcing***

Revenue from businessprocess outsourcing is recognized on the proportionate performance method.

***Business Combinations, Goodwill and Intangible Assets***

We account for business combinations in accordancewith SFAS 141, *Business Combinations*,which requires that the purchase method of accounting be used for all businesscombinations. SFAS 141 requires intangible assets acquired in a businesscombination to be recognized and reported separately from goodwill. Accountingfor contingent consideration based on earnings or other performance measures isa matter of judgment that depends on the relevant facts and circumstances. Ifthe substance of the contingent consideration is to provide compensation forservices, use of property, or profit sharing, we account for the additionalconsideration as an expense of the appropriate period. Otherwise, theadditional consideration paid is recorded as an additional cost of the acquiredbusiness.

Goodwill represents the cost of the acquiredbusinesses in excess of the fair value of identifiable tangible and intangiblenet assets purchased. We generally seek the assistance of independent valuationexperts in determining the fair value of the identifiable tangible andintangible net assets of the acquired business. We assign all the assets andliabilities of the acquired business, including goodwill, to reporting units inaccordance with SFAS 142, *Goodwill andOther Intangible Assets*.

We test goodwill for impairment atleast on an annualbasis. In this process, we rely on a number of factors including operatingresults, business plans and future cash flows. Recoverability of goodwill isevaluated using a two-step process. The first step involves a comparison of thefair value of a reporting unit with its carrying value.The fair value of areporting unit is detemined using the income approach If the carrying value ofthe reporting unit exceeds its fair value, the second step of the processinvolves a comparison of the implied fair value and carrying value of thegoodwill of that reporting unit. The implied fair value of goodwill isdeteremined in the same manner as the amount of goodwill recognised in abusiness combination. If the carrying value of the goodwill of a reporting unitexceeds the fair value of that goodwill, an impairment loss is recognized in anamount equal to the excess. Goodwill of a reporting unit will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould more likely than not reduce the fair value of the reporting unit belowits carrying amount.

We amortize intangible assets over their respectiveindividual estimated useful lives in proportion to the economic benefitsconsumed in each period. Our estimates of the useful lives of identifiedintangible assets are based on a number of factors including the effects ofobsolescence, demand, competition, and other economic factors (such as thestability of the industry, and known technological advances), and the level ofmaintenance expenditures required to obtain the expected future cash flows fromthe asset.

We evaluate intangible assets for recoverabilitywhenever events or changes in circumstances indicate that their carryingamounts may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying value of the assets exceeds thefair value of the assets.

In evaluating goodwill andintangible assets for impairment, we may seek the assistance of independentvaluation experts, perform internal valuation analyses and consider otherinformation that is publicly available. The results of our evaluation may bedependent on a number of factors including estimates of future market growthand trends, forecasted revenue and costs, discount rates and other variables.While we use assumptions which we believe are fair and reasonable, futureresults may differ from the estimates arrived at using the assumptions.

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***Income Taxes***

As part of our financial reporting process, we arerequired to estimate our liability for income taxes in each of the taxjurisdictions in which we operate. This process requires us to estimate ouractual current tax exposure together with an assessment of temporarydifferences resulting from differing treatment of items, such as depreciation onproperty, plant and equipment, for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedwithin our balance sheet.

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss carry forwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities ofchanges in tax rates is recognized in results of operations in the period thatincludes the enactment date. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or increase thisallowance in a period, we must include an expense within the tax provision inthe statement of operations.

Our deferred tax liabilities mainly arise from taxablebasis differences in intangible assets and undistributed earnings of branch,property, plant and equipment, unrecognized gain in available for salesecurities and costs and estimated earnings in excess of billings on completedcontracts. Our deferred tax assets comprise assets arising from our accruedexpenses, provisions for doubtful accounts receivable and from ultimaterealization of the tax asset that may be dependent on the availability offuture capital gains. We assess the likelihood that our deferred tax assetswill be recovered from future taxable income. This assessment takes intoconsideration tax planning strategies, including levels of historical taxableincome and assumptions regarding the availability and character of futuretaxable income over the periods in which the deferred tax assets aredeductible. We believe it is more likely than not that we will realize thebenefits of those deductible differences in the future, net of the existingvaluation allowance at December 31, 2005. The ultimate amount of deferredtax assets realized may be materially different from those recorded, asinfluenced by potential changes in income tax laws in the tax jurisdictionswhere we operate, or future changes in operating results.

To the extent we believe that realization of adeferred tax asset is not likely, we establish a valuation allowance orincrease this allowance in an accounting period and include an expense withinthe tax provision in our statements of income. Upon our acquisition of Cymbal,we were entitled to utilize tax benefits on carry forward business losses ofCymbal. Based on preliminary projections of future taxable income and taxplanning strategies, we believed that there existed significant uncertaintyregarding realization of tax benefits on the carry forward losses.Consequently, we recorded a valuation allowance for the carry forward businesslosses of Cymbal. In 2005, we evaluated the expected realisation of such carryforward losses and available tax planning strategies and believed that the wewould make sufficient profits in future years to set off the carry forwardlosses. Accordingly, the valuation allowance has been reversed and adjustedagainst goodwill.

We face challenges fromdomestic and foreign tax authorities regarding the amount of current taxes due.These challenges include questions regarding the timing and amount ofdeductions and the allocation of income among various tax jurisdictions. Basedon our evaluation of our tax position and the information presently availableto us, we have reassessed our liability and have restated our financialstatements for 2003 and 2004 and the balance sheet as of December 31, 2005. Liabilityrepresenting changes in estimates shall be accounted for in our financialstatements for the year ending December 31, 2006. To the extent we areable to prevail in matters for which accruals have been established or arerequired to pay amounts in 

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excessof our reserves related to future events, our effective tax rate in a givenfinancial statement period may be materially affected.

***Derivatives and Hedge Accounting***

We enter into forward foreign exchange contracts tomitigate the risk of changes in foreign exchange rates on intercompanytransactions and forecasted transactions denominated in certain foreigncurrencies. We designate the forward contracts in respect of forecastedtransactions, which meet the hedging criteria, as cash flows hedges. Changes inthe derivative fair values that are designated, effective and qualify as cashflow hedges, under SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, are deferred andrecorded as a component of accumulated other comprehensive income until thehedged transactions occur and are then recognized in the consolidated statementsof income. Changes in fair value for derivatives not designated as hedginginstruments and ineffective portion of the hedging instruments are recognizedin consolidated statements of income in the current period.We assess the hedgeeffectiveness at the end of each reporting period and recognize the ineffectiveportion in the consolidated statements of income.

In respect of derivatives designated as hedges, weformally document all relationships between hedging instruments and hedgeditems, as well as its risk management objective and strategy for undertakingvarious hedge transactions. We also formally assesses, both at the inception ofthe hedge and on an ongoing basis, whether each derivative is highly effectivein offsetting changes in fair values or cash flows of the hedged item. If it isdetermined that a derivative is not highly effective as a hedge, or if aderivative ceases to be a highly effective hedge, we will, prospectively,discontinue hedge accounting with respect to that derivative.

Hedge ineffectiveness could result from forecastedtransactions not happening in the same amounts or in the same periods asforecasted or changes in the counterparty credit rating. Further, change in thebasis of designating forward contracts as hedges of forecasted transactionscould alter the proportion of forward contracts which are ineffective ashedges. Hedge ineffectiveness increases volatility of the consolidatedstatements of income since the changes in fair value of an ineffective portionof forward contracts is immediately recognized in the consolidated statementsof income.

During 2004, we re-evaluated our risk managementprogram and hedging strategies in respect of forecasted transactions, and, uponcompletion of the formal documentation and testing for effectiveness, we have designatedcertain forward contracts in respect of forecasted transactions, which meet thehedging criteria, as cash flow hedges.

As of December 31,2005, there were no gains or losses on derivative transactions or portionsthereof that were either ineffective as hedges, excluded from the assessment ofhedge effectiveness, or associated with an underlying exposure that did notoccur.

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**ITEM6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

**6.A. Directors and senior management**

Thefollowing table sets forth details regarding our board of directors andexecutive officers:

| **Name**                                | ** ** | ** ** | ** ** | **Age**                                                                               | ** ** | **Position** |
|-----------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------|------------|--------------|
| Mr. Narendra K.  Patni(1)(3)(5)(7) |       | 64         |       | Director (Chairman) and  Chief Executive Officer                                      |
| Mr. Gajendra K.  Patni(1)(8)       |       | 65         |       | Executive Director                                                                    |
| Mr. Ashok K.  Patni(1)(9)          |       | 54         |       | Executive Director                                                                    |
| Mr. Michael A.  Cusumano(3)        |       | 51         |       | Director                                                                              |
| Mr. Arun  Duggal(2)(5)             |       | 59         |       | Director                                                                              |
| Mr. William O.  Grabe(4)(5)(6)(10) |       | 68         |       | Director                                                                              |
| Mr. Arun Maira(11)                 |       | 62         |       | Director                                                                              |
| Mr. Pradip Shah(2)                 |       | 54         |       | Director                                                                              |
| Mr. Louis T. van  den Boog(2)      |       | 52         |       | Director                                                                              |
| Mr. Ramesh  Venkateswaran(3)(4)    |       | 54         |       | Director                                                                              |
| Mr. Anupam P.  Puri(3)(4)(12)      |       | 60         |       | Director                                                                              |
| Mr. Satish M. Joshi                |       | 50         |       | Executive Vice President  and Chief Technology Officer                                |
| Mr. Vijay P. Khare                 |       | 48         |       | Executive Vice President  and Chief Delivery Officer and Chief Administrative Officer |
| Mr. Mrinal R.  Sattawala(13)       |       | 51         |       | Chief Operating Officer                                                               |
| Mr. Russel  Boekenkroeger(14)           |       | 60         |       | Executive Vice President                                                              |
| Mr. Neeraj  Gupta(15)              |       | 38         |       | Executive Vice President                                                              |
| Mr. Deepak Sogani(16)              |       | 40         |       | Chief Financial Officer                                                               |

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       (1) Mr. Narendra K. Patni, Mr. GajendraK. Patni and Mr. Ashok K. Patni are brothers.

       (2) Member of the audit committee.

       (3) Member of the compensation committee.

       (4) Member of the remuneration committee.

       (5) Member of the shareholder and investorgrievances committee.

       (6) Our Articles of Association provide that theboard can appoint an alternate director pursuant to the provisions of theIndian Companies Act. Mr. Abhay Havaldar is presently the alternatedirector to Mr. William O. Grabe.

       (7) Mr. Narendra K. Patni is the nominee ofthe NKP Group.

       (8) Mr. Gajendra Patni is the nominee of theGKP Group.

       (9) Mr. Ashok Patni is the nominee of the AKPGroup.

(10) Mr. Grabe is the nominee for GeneralAtlantic.

(11) Appointed as a Director with effect from June 21,2006.

(12) Resigned as a Director with effect from April 25,2006.

(13) Appointed as Chief Operating Officer witheffect from May 4, 2006.

(14) Appointed as Executive Vice President witheffect from April 1, 2006.

(15) Appointed as Executive Vice President witheffect from May 4, 2006.

(16) Mr. Sogani has announced his intention toleave his employment with us. He is currently expected to continue his presentresponsibilities until August 2006. Mr. Surjeet Singh has beenappointed as the new Chief Financial Officer. His appointment is effective August 14,2006.

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**Board of Directorsand Executive Officers**

***Mr. NarendraK. Patni,*** Chairman and CEO, is one of the foundersof our company. Mr. Patni has a Master’s degree in Electrical Engineeringfrom the Massachusetts Institute of Technology, or MIT, and a Master’s degreein Management from the Sloan School of Management at MIT. He also has aBachelor’s degree in Electrical Engineering from IIT, Roorkee. As an entrepreneur,he has played an integral role in the development of the Indian IT industrythrough his various ventures. Mr. Patni was instrumental in initiating theoffshore outsourcing business model for the software industry. Prior tofounding his first company, Data Conversion Inc. (now our U.S. subsidiaryPatni Computer Systems, Inc.) in 1972, he was President and Director ofthe Forrester Consulting Group and was previously with the U.S. Trust Companyof New York and was a consultant to Arthur D. Little, Inc. Mr. Patnias a nominee of the NKP Group, is not required to retire by rotation.

***Mr. GajendraK. Patni,*** Executive Director, is one of thefounders of our company. Mr. Patni has a Chemical Engineering backgroundand has over 35 years of experience in finance, banking, legal andpersonnel functions. He has contributed significantly in the past to the growthof the computer rental business of our company, which led to the formation ofPCS Data Products (PCSDP) in 1981, and PCS Data General (PCSDG) in 1987. Thesecompanies were merged to form what is now PCS Technology Limited in 1994. Mr. Patniis a Joint Managing Director of PCS Technology Limited. Previously he was theManaging Director of Industrial Oxygen Company Limited. Mr. Patni as anominee of the GKP Group, is not required to retire by rotation.

***Mr. Ashok K.Patni,*** Executive Director, is one of the foundersof our company. Mr. Patni is a Mechanical Engineer from IIT, Mumbai. Mr. Patnihas over 22 years of experience in computer hardware and systems software.Mr. Patni has contributed significantly in the past to the growth of thehardware business of our company which led to the formation of PCSDP in 1981,and PCSDG in 1987. These companies were merged to form what is now PCSTechnology Limited in 1994. He is a Joint Managing Director of PCS TechnologyLimited. Mr. Patni as a nominee of the AKP Group, is not required toretire by rotation.

***Mr. Michael A.Cusumano*** has been a director since April, 2004. Mr. Cusumanohas a B.A. degree from Princeton University and a PhD from Harvard University. Mr. Cusumanocompleted a postdoctoral fellowship in Production and Operations Management atthe Harvard Business School. Dr. Cusumano is the Sloan Management ReviewDistinguished Professor at MIT’s Sloan School of Management. He has publishedeight books and is a director of Coral Networks. Mr. Cusumano’s term ofoffice expires in 2007, but he is eligible for reappointment.

***Mr. ArunDuggal*** has been a director since November, 2003. Mr. Duggalhas a Bachelor’s degree in Mechanical Engineering from IIT, Delhi, and a postgraduate diploma in management from IIM, Ahmedabad. Mr. Duggal has over25 years experience with Bank of America, in positions including ManagingDirector of Bank of America in India and Chief Executive Officer of Bank ofAmerica Asia, Hong Kong. He was most recently Chief Financial Officer of HCLTechnologies Limited. Mr. Duggal is currently a director of a number ofother companies including Blackstone Investment Company Private Limited,Transparency International, Fidelity Fund Management Private Limited, FourSServices, Punjab Tractors Ltd, Petronet LNG Ltd, Jubiliant Energy Limited,Canada, Bellwhether Microfinance Company Ltd, Matrix Laboratories Limited andInfo Edge (India) Pvt. Ltd.. In addition, Mr. Duggal is a special advisorto General Atlantic. See “ Relationship with General Atlantic” below. Mr. Duggal’sterm of office expires in 2008, but he is eligible for reappointment.

***Mr. William O.Grabe*** has been a director since September, 2002. Mr. Grabehas a BS degree in Engineering from New York University and an MBA from theUniversity of California, Los Angeles. Since 1992, Mr. Grabe has been amanaging director at General Atlantic LLC, a worldwide private equity firm.Prior to that, he was a Vice President of IBM and held various positions, thelast of which was head, North 

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America Sales andMarketing. He is a director of various companies in which General Atlantic hasinvestments, including Ai Metrix, Bottomline Technologies, Digital ChinaHoldings, Lifecare and LHS GmbH, and is also a director of CompuwareCorporation and Gartner, Inc. General Atlantic is one of our principalshareholders, with a shareholding of 16.62%. See “Item 7. Major Shareholdersand Related Party Transactions” and “Relationship with General Atlantic” below.Mr. Grabe’s term of office expires in 2008, but he is eligible forreappointment.

**Mr. ArunMaira** has been a director since June 2006. Mr. Mairareceived his bachelors and masters degrees in Physics from St. Stephen’s College,Delhi University. He worked for 25 years in several senior positions in theTata Group, India’s premier industrial conglomerate. Prior to joining BostonConsulting Group in India, he worked in the USA with Arthur D. Little, theinternational consulting company, for 10 years where he served as Leader of itsGlobal Organisation Practice and Managing Director of Innovation Associates,its subsidiary. Mr Maira’s term of office expires in 2009, but he is eligiblefor re-appointment.

***Mr. Anupam P.Puri*** has been a director since November, 2003. Mr. Purihas an M. Phil. and a Master of Arts in Economics from Oxford University and aBachelor of Arts in Economics from Delhi University. Mr. Puri waspreviously a director and elected member of the board of directors of McKinsey &Company. During his 30-year tenure, he served in a number of positions atglobal companies and governments and led the development of McKinsey’s Indiapractice and oversaw their Asian and Latin American offices. Mr. Puri is aspecial advisor to General Atlantic. See “Relationship with General Atlantic”below. Mr. Puri has resigned as a director with effect from April 25,2006

***Mr. PradipShah*** has been a director since November, 2003. Mr. Shahis a Chartered Accountant, has an MBA from the Harvard Graduate School ofBusiness and a degree from The Institute of Cost and Works Accountants ofIndia. Mr. Shah was responsible for introducing credit ratings in Indiaand is a founder of CRISIL Limited. Mr. Shah is currently the Chairman ofthe Board at IndAsia Fund Advisors Private Limited. His directorships in othercompanies include AMP IndAsia Fund Advisors (Mauritius) Limited, AssetReconstruction Company (India) Limited, BASF India Limited, Bombay StockExchange Limited, Godrej & Boyce Mfg Limited, Gokaldas ExportsLimited, Hardy Oil & Gas Limited, IndAsia Fund Advisors PrivateLimited, Matsushita Lakhanpal Battery India Limited, Pfizer Limited, Shah FoodsLimited, Sonata Software Limited, Supra Advisors (BVI) Limited (British VirginIslands), The Shipping Corporation of India Limited, Taib Bank EC, WartsilaIndia Limited, Grindwell Norton Limited and Vakrangee Softwares Limited. Mr. Shah’sterm of office expires in 2009, but he is eligible for reappointment.

***Mr. Louis T.van den Boog*** has been a director since March,2005. Mr. van den Boog has a Master’s degree in Business Economics and inPublic Accounting from the Free University in Amsterdam. Mr. van den Boogis an IT industry veteran with approximately 20 years experience in thesoftware industry, as well as extensive experience in mergers and acquisitions,public offerings and private equity and venture capital fundings. Mr. vanden Boog has supported a series of European and U.S. portfolio companies, inparticular as a director of Metapath Software International, GWI AG, abaXXTechnology AG and other software and services companies looking to expandinternationally. Mr. van den Boog was previously with Oracle Corporationwhere he helped to build the European operations of the company. Mr. vanden Boog is a former special advisor to General Atlantic. See “ Relationshipwith General Atlantic” below. Mr. van den Boog’s term of office expires in2007, but he is eligible for reappointment.

***Mr. RameshVenkateswaran*** has been a director since November,2003. Mr. Venkateswaran has a Bachelor’s degree in Mechanical Engineeringfrom IIT, Mumbai and a post graduate diploma in management from IIM, Bangalore.Mr. Venkateswaran is a Management Consultant and is currently the ManagingDirector of Almak Management Services Private Limited. He is a visitingprofessor of Marketing at the Indian Institute of Management, Bangalore. He isalso a founder member of a non profit 

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organization, “Vishwas.” Mr. Venkateswaran’sterm of office expires in 2010, but he is eligible for reappointment.

For more information on our Board of Directors, pleasesee “Item 10. Additional Information—Board of Directors.”

***Mr. Mrinal R.Sattawala*** was appointed as our Chief OperatingOfficer with effect from May 4, 2006. Prior to this he was designated asExecutive Vice-President and Global Sales and Marketing Coordinator and hasbeen with Patni for 20 years. He is also directly responsible for theSales and Operations of the Europe and APAC regions, besides overseeing GlobalSales & Marketing, and the Insurance and Financial Services businessunits. Mr. Sattawala is an electrical engineer from IIT, Mumbai, and healso received his MBA in 1979 from MacMaster University, Canada. Mr. Sattawalahas over 26 years of experience in the IT industry. Prior to Patni, Mr. Sattawalaworked with Computer Maintenance Corporation and the ICI group of companies inIndia.

***Mr. Russell Boekenkroeger*******is our Executive Vice-President and has been with Patni forfour years. Mr. Boekenkroeger has a Bachelor’s degree in Government fromFranklin & Marshall College, a Master’s degree in Urban and RegionalPlanning and a Master’s degree in Civil Engineering from the University ofPittsburgh. He is responsible for the Regional Operations of the U.S. and forMerger & Acquisition activities. Additionally, he oversees the ProductEngineering Services and the Independent Software Vendors business units,besides the Engineering Services center of excellence. He has over 25 years ofexperience in managing large global product development organizations, sharedservices operations, international business and product marketing while servingin a variety of executive management positions at Computervision, PrimeComputer and PTC. He has also served as an advisor to companies from a widerange of industries around the world, on business and technology matters.

***Mr. NeerajGupta,*******is ourExecutive Vice-President and has been with Patni since November 2004. Mr. Guptahas a Bachelor’s degree in Electronics & Communications Engineeringfrom Punjab Engineering College, India and a Master’s degree in ElectricalEngineering from University of Alabama, USA. His responsibilities includesoverseeing Telecom and Growth Industry business units. Mr. Gupta has hadover fifteen years of proven leadership experience, including managing productmanagement, professional services and engineering teams at various leadingtechnology companies including Octel Communications, Lucent Technologies,Genesys Telecom, and Alcatel. Previously, he was Chief Executive Officer ofPatni Telecom (formerly Cymbal), US based IT services Company , which he ledfrom start-up to successful exit.

***Mr. Satish M.Joshi*** is our Executive Vice President and ChiefTechnology Officer and he has been at Patni for 23 years. Mr. Joshihas a Bachelor’s degree in Electrical Engineering and a Master’s degree inComputer Science from IIT, Mumbai. His responsibilities include supervision ofthe Manufacturing business unit and all horizontal business units, namely BPO,Enterprise Application Solutions and Infrastructure Management Services. Healso oversees several corporate shared services departments, namely Productsand Technology Initiatives, Quality Processes & Delivery Innovation,and IT Infrastructure Management, besides the IT Governance center of excellence.Prior to Patni, Mr. Joshi worked with the Tata Institute of FundamentalResearch in areas including concurrent programming languages, storagetechniques for large databases, compiler optimization and data communicationnetworks.

***Mr. Vijay P.Khare*** is our Executive Vice President and andPatni’s Chief Administrative Officer (CAO) and Chief Delivery Officer (CDO) andhe has been employed with Patni for 25 years. Mr. Khare has aBachelor’s degree in Engineering from the Regional Engineering College, Nagpurand a Masters degree in Computer Science from IIT, Mumbai His responsibilitiesinclude top level control of key operation metrics across the organization andglobal delivery coordination. He additionally has responsibility for Centers ofExcellence namely Verification & Validation, Business Intelligence and

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Database Administration;besides that for Quality Assurance; Human Resources; CIO; Patni Academy forCompetency Enhancement; and the Global Resource Pool. Mr. Khare began hiscareer with Patni in 1980. During his initial years, he worked on severalprojects in areas like distribution, manufacturing, and office automation intechnologies ranging from Data General to Unix and IBM. He was later involvedin the customer relationship management of several accounts including DataGeneral, Waterland BV, and RBS. He managed the General Electric relationshipfrom 1995 to 2000.

***Mr. Deepak Sogani*** isour Chief Financial Officer and has been with Patni since 1998. Mr. Soganihas a Bachelor’s degree in Electrical Engineering from IIT, Delhi and a postgraduate diploma in management from IIM Ahmedabad. He is also a CFAcharterholder (AIMR, VA, USA). His responsibilities include managing globalfinancial operations, corporate finance, treasury, global reporting andinternational taxation, financial and business planning, and enterprise-widerisk management. Mr. Sogani started his career at SBI Capital Markets andhas worked in areas including money markets, structured finance, cross-borderfinance and investment banking. His subsequent assignments were in thefinancial and management consultancy areas, with a focus on reengineering formid-size corporates. Mr. Sogani announced his resignation as our ChiefFinancial Officer on May 23, 2006. However, he is currently expected tocontinue his present responsibilities until August 2006.

**6.B. Compensation**

During fiscal 2005, the aggregate annual compensationpaid or payable by us and our subsidiaries to our executive directors andexecutive officers was approximately $2,391,704; (including Mr. N. K. Patni—$803,692;G. K. Patni—Rs. 19,987,836 ($453,313); A. K. Patni—Rs. 19,937,201($452,165); S. M. Joshi—Rs. 4,256,746 ($96,541); V. P. Khare—Rs. 3,960,835($89,830); Mr. Sattawala—$411,642 and D. Sogani—Rs. 3,726,784 ($84,521)).In addition to receiving annual base compensation, some members of ourexecutive management, under Indian laws and regulations, are eligible forgrants under the Employee Stock Option Plan (described below).

Our independent directorson the board are each entitled to $40,000 annually in addition to actualboarding and lodging expenses and sitting fees for attending board andcommittee meetings.

**Service Agreements**

Mr. Narendra K. Patni is our Chairman and ChiefExecutive Officer. He is also the President and Chief Executive Officer ofPatni Computer Systems, Inc, our U.S. subsidiary, pursuant to an employmentagreement with Patni Computer Systems, Inc. dated December 1, 2000,as amended on August 29, 2003. The employment agreement has an initialterm until December 31, 2008. Mr. Patni’s annual base salary underthe agreement is $500,000 for the first year of the initial term, after whichtime it is increased by 10% of the then current annual base salary per year. Mr. Patnidoes not receive a separate fee for attending board meetings. The agreement maybe extended after the initial term at Mr. Patni’s option, on terms andconditions at least as favorable or as are otherwise mutually agreed between Mr. Patniand the board of directors. The agreement can be terminated by the board ofdirectors only after the initial term expires. In the event of termination, Mr. Patniis entitled to a lump sum severance payment equal to five times his then mostrecent annual base salary.

We have entered into a consultancy agreement withPatni Computer Systems, Inc. dated October 24, 2000 as amended on August 19,2003, pursuant to which Mr. Narendra K. Patni has been seconded to us toact as our Chairman and CEO. Our Articles provide that as long as ourconsultancy agreement with Patni Computer Systems, Inc. is in effect, Mr. NarendraK. Patni shall continue to be the CEO of the Company. In addition, our Articlesof Association also provide that so long as Mr. Narendra K. Patni is theCEO, he has the right to appoint and remove all of our key senior personnel andsenior management following 

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consultation with GeneralAtlantic. Our board of directors has approved the extension of the consultancyagreement to December 31, 2010.

We have entered intoemployment agreements with each of Mr. Gajendra K. Patni and Mr. Ashok K.Patni to be appointed as executive director on similar terms. Each agreementhad an initial term which expired on October 23, 2005. Our board ofdirectors had resolved that, in accordance with our Articles and subject to theprovisions of the Indian Companies Act and approval of our shareholders, toreappoint each of Messrs. Gajendra K. Patni and Ashok K. Patnias our executive directors for a further period of five years commencing October 24,2005. Our shareholders at the Annual General Meeting held on June 21, 2006approved these re-appointments for a further period of five years beginning October 24,2005. Under the terms of the extended agreements, the executive directors areentitled to an annual base compensation of Rs. 9,663,060 ($215,021) perannum from October 2005, which amount is subject to an upward adjustmentof 10% of the previous year’s salary. The executive directors are also entitledto medical insurance, allowances for housing, travel and leave and pension andretirement benefits. They do not receive any separate fees for attending boardmeetings. Subject to our Articles and the provisions of the Indian CompaniesAct, in the event of termination, each agreement provides that the executivedirector shall receive, as a lump sum severance payment, equal to five timesthe annual salary plus house rent allowance.

**Relationship withGeneral Atlantic**

Our largest shareholder is General Atlantic MauritiusLimited, a Mauritius company formed by General Atlantic LLC, or GeneralAtlantic, for purposes of this section. General Atlantic is a private equityfirm that focuses on the information technology, process outsourcing andcommunications industries.

One of our directors, Mr. William O. Grabe,has been a managing director of General Atlantic since 1992. In addition, twoof our other directors, Mr. Arun Duggal and Mr. Anupam Puri, are “specialadvisors” to General Atlantic and one of our directors, Mr. Louis T.van den Boog, is a former special advisor to General Atlantic. Mr. Puriresigned as a Director with effect from April 25, 2006.

Special advisors are persons with industry and/orgeographic expertise that provide, on a part-time basis, a range of advisoryservices to General Atlantic in different parts of the world. These servicesrange from identifying new investment opportunities to assisting in thepreparation of investment proposals, serving on the boards of portfoliocompanies and providing strategic advice to such portfolio companies. Specialadvisors are not directors, managing directors, general partners, executiveofficers or employees of General Atlantic or any of its affiliates, and do nothave any other formal association with General Atlantic, except that they enterinto consulting agreements with General Atlantic under which they receive acash retainer and/or are granted the right to co-invest in one or more of theGeneral Atlantic investment vehicles.

Mr. Duggal has served as a special advisor since2004. He receives an annual cash retainer of $150,000 and has the right toinvest as a limited partner in various General Atlantic investment vehicles,none of which have invested in our shares.

Mr. Puri has served as a special advisor since2001. He is not paid a cash retainer, but has the right to invest in variousGeneral Atlantic investment vehicles. General Atlantic has loaned certainamounts to Mr. Puri for purposes of such investments, of whichapproximately $562,500 is outstanding. Mr. Puri has an approximate 0.1%indirect ownership interest in General Atlantic Mauritius Limited.

Mr. van den Boog served as a special advisor from1996 to 2004. Pursuant to past co-investment rights, Mr. van den Booginvested in various General Atlantic investment vehicles, including one that isan investor in General Atlantic Mauritius Limited, as a result of which he hasan approximate 0.2% ownership 

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interest in GeneralAtlantic Mauritius Limited. General Atlantic loaned certain amounts to Mr. vanden Boog for purposes of such investments, of which approximately $355,127 isoutstanding.

We have no financial orother obligations in respect of the status of Messrs. Duggal, Puri or vanden Boog as current or former special advisors, and General Atlantic hasinformed us that no compensation, loans or investment opportunities provided tothese individuals are related in any way to our operating or financialperformance or the value of our equity shares or ADSs.

**Benefits**

In 2005, we providedapproximately $1.4 million for pension, retirement or similar benefits to ourdirectors and executive officers.

**Options**

Setforth below is information concerning options granted to directors andexecutive officers. The term of stock options granted to our directors andexecutive officers will expire on completion of five years from the date ofvesting. As of May 31, 2006, our directors and executive officers as agroup (directly and indirectly) were granted options under our Employee StockOption Plan to exercise 1,341,200 of our equity shares, representing less than1% of our share capital on the following terms:

| **Name**                   | ** ** | ** **      | ** ** | **Exercise Price Per Share** | ** ** | **Number of Shares under Option** | ** ** | **Expiration Date** | ** ** |
|----------------------------|------------|-----------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| Mr. M. Cusumano       |       | Rs. 254/381/458 |       | 20,000/5,000/5000                           | (1)        | 2010/2011/2012                                        | (1)        |
| Mr. A. Duggal         |       | Rs. 254/381458  |       | 20,000/5,000/5000                           | (1)        | 2010/2011/2012                                        | (1)        |
| Mr. A. Puri           |       | Rs. 254/381     |       | 20,000/5,000                                | (1)        | 2010/2011                                             |       |
| Mr. P. Shah           |       | Rs. 254/381/458 |       | 20,000/5,000/5000                           | (1)        | 2010/2011/2012                                        | (1)        |
| Mr. L. van den Boog   |       | Rs. 381/ 458    |       | 20,000/5000                                 | (2)        | 2011/2012                                             | (1)        |
| Mr. R.  Venkateswaran |       | Rs. 254/381/458 |       | 20,000/5,000/5000                           | (1)        | 2010/2011/2012                                        | (1)        |
| Mr. S. Joshi          |       | Rs. 145/338     |       | 62,000/100,000                              | (3)        | 2009/2010                                             |       |
| Mr. V. Khare          |       | Rs. 145/338     |       | 63,300/100,000                              | (3)        | 2009/2010                                             |       |
| Mr. M. Sattawala      |       | Rs. 145/338/376 |       | 58,300/100,000(3)/350,000                   | (4)        | 2009/2010/2012                                        | (4)        |
| Mr. R. Boekenkroeger       |       | Rs. 145/458     |       | 50,000/100,000                              | (5)        | 2009/2012                                             | (5)        |
| Mr. N. Gupta          |       | Rs. 451/493     |       | 24,000/11,000                               | (6)        | 2011/2012                                             | (6)        |
| Mr. D. Sogani         |       | Rs. 145/338     |       | 52,600/100,000                              | (3)        | 2009/2010                                             |       |

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       (1) Options will vest in four equal instalments,i.e. 25% each year, and expiry date in respect of the three grants will be from2010 to 2013, 2011 to 2014 and 2012 to 2015, respectively.

       (2) Options will vest in four equal instalments,i.e. 25% each year, and expiry date in respect of two grants will be from 2011to 2014 and 2012 to 2015, respectively.

       (3) Options will vest in four equal instalments,i.e. 25% each year, and expiry date in respect of the two grants will be from2009 to 2012 and 2010 to 2013, respectively.

       (4) Out of 350,000 options granted, 150,000 optionswill vest in four equal installments i.e. 25% each year, and expiry date willbe 2012 to 2015. The balance 200,000 options granted in May 2006 will vestin four years depending upon the performance of the Company for which Mr. Sattawalais responsible as Chief Operating Officer (COO) of the business units of theCompany. These options will expire at the end of five years from the date ofvesting.

       (5) Options will vest in four equal instalments,i.e. 25% each year, and expiry date in respect of two grants will be from 2009to 2012 and 2012 to 2015 respectively.

       (6) Options will vest in four equal instalments,i.e. 25% each year, and expiry date in respect of two grants will be from 2011to 2014 and 2012 to 2015 respectively.

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**6.C. BoardPractices**

**Board Composition**

Our Articles ofAssociation provide that our board of directors shall be comprised of not lessthan three directors and not more than 10 directors. We currently have 10directors. Our Articles require two-thirds of our directors to retire byrotation, but they are eligible for re-election. One-third of the directors whoare subject to retirement by rotation must retire at each annual generalmeeting but can be re-appointed at such annual general meeting. Mr. Narendra K.Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni as therespective nominees of the NKP Group, GKP Group and AKP Groupare permanent directors according to our Articles in that capacity they are notrequired to retire by rotation like our other directors. Mr. Michael A. Cusumano’s term of officeexpires in 2007, but he is eligible for reappointment. Mr. Arun Duggal’sterm of office expires in 2008, but he is eligible for reappointment. Mr. WilliamO. Grabe’s term of office expires in 2008, but he is eligible forreappointment. Mr. Anupam Puri has resigned as a Director with effect fromApril 25, 2006. Mr. Pradip Shah’s term of office expires in 2009, buthe is eligible for reappointment. Mr. Louis T. van den Boog’s term ofoffice expires in 2007, but he is eligible for reappointment. Mr. RameshVenkateswaran’s term of office expires in 2010, but he is eligible forreappointment. Mr. Arun Maira was appointed as a Director with effect fromJune 21, 2006 and his term of office expires in 2009, but he is eligible for reappointment. For information regarding our boardsee “Item 10. Additional Information—Board of Directors.”

**Board Committees**

***Audit Committee***

The primary objective ofthe Audit Committee is to monitor and provide effective supervision of ourfinancial reporting process with a view towards ensuring accurate, timely andproper disclosures and the transparency, integrity and quality of financialreporting. Our Audit Committee oversees the work carried out in the financialreporting process by our management, including the internal auditors and reviewsthe processes and safeguards employed by each. In addition our Audit Committeehas the responsibility of oversight and supervision over our system of internalcontrol over financial reporting, audit process, and process for monitoring thecompliance with related laws and regulations. The Audit Committee recommends toour Board of Directors the appointment of our independent auditors and approvesthe scope of both audit and non-audit services.

***Remuneration Committee***

The RemunerationCommittee is comprised of non-executive directors, with the Chairman being anindependent director. During the year under review, the Committee comprised of Mr. WilliamO. Grabe (alternate director, Mr. Abhay Havaldar), Mr. RameshVenkateswaran and Mr. Anupam Puri*. The Committee determines the policy onspecific remuneration packages for executive directors.

*                    Mr. AnupamPuri resigned as a director with effect from April 25, 2006.

***Compensation Committee***

During the yearunder review, the Compensation Committee comprised of Mr. Michael A.Cusumano, Mr. Ramesh Venkateswaran, Mr. Narendra K. Patni and Mr. AnupamP. Puri*. The Committee was formed primarily to administer the employeestock option plan. The Committee also reviews other programs and policies aimedat attracting, motivating and retaining personnel.

*                    Mr. AnupamPuri resigned as a director with effect from April 25, 2006

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***Shareholder and Investor Grievances Committee***

The Shareholder andInvestor Grievances Committee comprised of Mr. Arun Duggal as theChairman, Mr. Narendra K. Patni and Mr. William O. Grabe (alternatedirector, Mr. Abhay Havaldar). The Shareholder and Investor GrievancesCommittee looks into redressal of shareholder and investor complaints, isresponsible for the issue of duplicate/split/consolidated share certificates,the allotment and listing of shares and for communications with statutory andregulatory authorities.

**Employee StockOption Plan**

On June 30, 2003, our shareholders approved anemployee stock option plan, which was later ratified after our initial publicoffering in India by our shareholders at the annual general meeting on June 29,2004. Under the plan, we may issue up to 11,142,085 equity shares of Rs.2 eachto our eligible employees and directors and those of our subsidiaries. The planis administered by the Compensation Committee of our board of directors. As of December 31,2005, options to purchase 5,185,267 equity shares were outstanding.

Pursuant to the plan, on September 1, 2003, aninitial grant of stock options representing an aggregate of 2,743,400 equityshares was made to certain of our and our subsidiaries’ employees. Of theoptions granted on September 1, 2003, half vested after one year from dateof grant, and 719,464 equity shares have been allotted as of June 23,2006.We made a second grant of options on July 1, 2004 to certain of ourdirectors, representing an aggregate of 100,000 shares, a third grant ofoptions on October 1, 2004 to certain of our employees, representing anaggregate of 2,750,632 equity shares, a fourth grant on April 1, 2005 toemployees and directors, representing an aggregate of 190,000 equity shares, afifth grant on October 1, 2005 to employees, representing an aggregate of670,710 equity shares, a sixth grant on January 2, 2006 to employees,representing an aggregate of 288,000 equity shares, a seventh grant on April 1,2006 to employees and directors, representing 345,000 equity shares and aeighth grant on May 4, 2006 to Mr. Sattawala, Chief Operating Officerof the Company representing 350,000 equity shares. One quarter of the optionsgranted on July 1, 2004, one quarter of the options granted on October 1,2004 and one quarter of options granted on April 1, 2005 have vested andoptions to purchase 44,840 equity shares have been allotted as of June 23,2006 out of the October 1, 2004 grant.

On April 25, 2006, our Board, subject to theapproval of our shareholders, recommended the amendment of our plan to providean option to the Company to grant ADR-linked stock options to enable certainemployees outside India to acquire ADSs upon exercise of the option. Theshareholders of the Company at the Annual General Meeting held on June 21,2006 have approved the said amendment to thePatni ESOP 2003 to enable the Company to issue ADR linked options to employeesof the Company as well as its subsidiaries.

All options have beengranted with an exercise price equal to the fair market value of the equityshares on the date of grant of the option. All of the options we have grantedvest in four equal annual installments beginning one year from the date ofgrant. The options have a term of five years from the date of vesting duringwhich they can be exercised.

**Provident Fund**

All of our eligible employees receive provident fundbenefits through a defined contribution plan in which both the employee andemployer make monthly contributions to the plan of 12% each of the coveredemployee’s defined portion of salary. We have no further obligations under theplan beyond the monthly contribution. We contribute to the Provident Fund Planmaintained by the Government of India. We contributed $1,682,111, $1,765,281and $2,613,644 to the Provident Fund Plan in 2003, 2004 and 2005.

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**6.D. Employees**

For a description of ouremployees, see “Item 4. Information on the Company—Human Resources.”

**6.E. Share ownership**

***For the total number of equity shares, ADSs and options topurchase equity shares and ADSs for each director and executive officer as ofMay 26, 2006, see “Item 7. Major Shareholders and Related PartyTransactions” and “Item 6.B. Compensation—Options” above.***

**ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS**

**7.A. Major shareholders**

Thefollowing table provides information relating to the beneficial ownership ofour equity shares (directly or in the form of ADSs) as of June 16, 2006by:

·       eachof our directors and executive officers;

·       allof our directors and executive officers as a group; and

·       eachperson or group of affiliated persons who is known by us to own beneficially 5%or more of our equity shares.

Beneficial ownership isdetermined in accordance with the rules of the Securities and ExchangeCommission. In computing the number of shares beneficially owned by a personand the percentage ownership of that person, equity shares subject to optionsor warrants held by that person that are currently exercisable or will becomeexercisable within 60 days are deemed outstanding, while the shares arenot deemed outstanding for purposed of computing percentage ownership of anyother person. Unless otherwise indicated in the footnotes below, the personsand entities named in the table have sole voting or investment power withrespect to all shares beneficially owned, subject to community property lawswhere applicable.

Thenumber and percentage of shares beneficially owned are based on 137,912,853equity shares outstanding as of June 16, 2006:

| **Name**                                             | ** ** | ** ** | ** **     | **Number of  Equity Shares  Beneficially   Owned** | ** ** | **Percentage of   Shares   Beneficially   Owned** | ** ** |
|------------------------------------------------------|------------|------------|----------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Directors and Executive  Officers**                |       |       |           |                                                              |       |                                                                  |       |   |   |
| Mr. Narendra  K. Patni(1)                       |       |       | 20,364,198     |                                                              |       |                                                                  | 14.77      |   |   |
| Mr. Gajendra  K. Patni(2)                       |       |       | 20,614,302     |                                                              |       |                                                                  | 14.95      |   |   |
| Mr. Ashok K.  Patni(3)                          |       |       | 20,614,302     |                                                              |       |                                                                  | 14.95      |   |   |
| Mr. William  O. Grabe(4)                        |       |       | 22,913,949     |                                                              |       |                                                                  | 16.61      |   |   |
| Mr. Louis T.  Van den Boog(5)                   |       |       | 48,002         |                                                              |       |                                                                  | *          |   |   |
| Mr. Satish  M. Joshi                            |       |       | 15,700         |                                                              |       |                                                                  | *          |   |   |
| Mr. Deepak  Sogani                              |       |       | 15,000         |                                                              |       |                                                                  | *          |   |   |
| Mr. Mrinal  R. Sattawala                        |       |       | 50             |                                                              |       |                                                                  | *          |   |   |
| **All  Directors and Executive Officers as a Group** | ** ** | ** ** | **61,623,552** |                                                              | ** ** | ** **                                                            | **44.68**  |   |   |
| **5% Shareholders**                                  |       |       |           |                                                              |       |                                                                  |       |   |   |
| General Atlantic  Mauritius Limited(4)               |       |       | 22,913,949     |                                                              |       |                                                                  | 16.61      |   |   |
| HSBC(6)                                              |       |       | 11,102,508     |                                                              |       |                                                                  | 8.05       |   |   |
| **Total**                                            | ** ** | ** ** | **95,640,009** |                                                              | ** ** | ** **                                                            | **69.35**  |   |   |

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                 * Indicates less than 1% of the shares

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       (1) Includes equity shares held by Mr. Narendra K. Patni and hisrelatives and entities controlled by them including iSolutions Inc., aMassachusetts corporation wholly-owned by Mrs. Poonam Patni, Mr. NarendraK. Patni’s wife, and Mr. Anirudh Patni, Mr. Narendra K. Patni’s son.

       (2) Includes equity shares held by Mr. Gajendra K. Patni and hisfamily members and entities controlled by them.

       (3) Includes equity shares held by Mr. Ashok K. Patni and hisfamily members and entities controlled by them.

       (4) Includes 20,161,868 ADSs representing 20,161,868 equity shares heldby The Bank of New York as depositary. General Atlantic Mauritius Limited, orGeneral Atlantic, owns 2,752,081 of our equity shares directly (after the ADSoffering) and 20,161,868 ADSs, each one of which represents one equity share. GeneralAtlantic GenPar (Mauritius) Limited, or GenPar, controls the management ofGeneral Atlantic by virtue of ownership of a majority of its voting shares.General Atlantic LLC owns all the shares of GenPar. Mr. William O. Grabeis a managing director of General Atlantic LLC. Mr. Grabe disclaimsbeneficial ownership of such securities except to the extent of his pecuniaryinterest therein.

       (5) Mr. van den Boog’s shareholding was acquired through previousco-investment rights in which Mr. van den Boog invested in variousGeneral Atlantic LLC investment vehicles, including one that is an investor inGeneral Atlantic Mauritius Limited, as a result of which he has an approximate0.2% ownership interest in General Atlantic Mauritius Limited.

       (6) Includes  81,31,001 equityshares owned by HSBC Global Investment Funds A/C HSBC GlobalInvest, 1,497,568equity shares owned by The Master Trust Bank of Japan, Ltd. A/C HSBC IndiaEquity Mother Fund and 311,400 equity shares owned by HSBC Investments(Taiwan) Limited A/C HSBC Bric FU 99,539 equity shares owned by HSBC FinancialServices (Middle East) Limited and 1,063,000 equity shares owned by HSBC globalinvestment funds a/c HSBC global invest.

As otherwise stated above and to the best of ourknowledge, we are not owned or controlled directly or indirectly by anygovernment or by any other corporation or by any other natural or legalpersons. We are not aware of any arrangement, the consummation of which may ata subsequent date result in a change in our control.

As of July 7, 2006,approximately 98.1% of our equity shares were held in the names of 32,706record holders with registered addresses in India. As of July 7, 2006,there were 8 U.S. holders of record, who accounted for less than 1% of ourequity shares. As of December 31, 2005, we had issued 7,906,250 ADSs(representing 15,812,500 equity shares) and which represent 11.5% of ouroutstanding equity shares. As of April 20, 2006, we had 3,824 ADS recordholders in the United States.

**Significant Changesin Shareholdings**

The following are significant changes in thepercentage ownership held by our major shareholders during the fiscal year:

In August 2005, Mr. Gajendra K. Patni and Mr. AshokK. Patni and their family members and entities controlled by them each sold1,200,000 shares in open market transactions for an average price per share ofRs. 362, decreasing their respective shareholdings to 16.48%. In addition, GECapital Mauritius Equity Investment sold 1,580,000 equity shares to the publicin that offering, decreasing its shareholding from 5.08% to 3.27%. In April 2005,GE Capital Mauritius Equity Investment sold 168,727 equity shares inordinary course, open market transactions, decreasing its then shareholding to3.13%.

In September 2005, General Atlantic sold4,962,000 equity shares in open market transactions in India, decreasing itsshareholding to 21.0%.

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General Atlanticparticipated in the Indian invitation to offer and sold 3,395,749 of its equityshares as a selling shareholder.

**Preferential Rights**

Our principal shareholdershave certain preferential rights pursuant to special provisions in our Articlesand a registration rights agreement with us. Please see “Item 7.B. RelatedParty Transactions—Registration Rights Agreement.”

**7.B. Related partytransactions**

**Patni FamilyCompanies**

We enter intovarious transactions from time to time in the ordinary course of our businesswith several companies in which certain of our directors, Mr. Narendra K.Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, are directorsand in which they and members of their families have substantial shareholdings.Mr. Narendra K. Patni does not have any management responsibilities in anyof these companies. These companies are:

·       PCSTechnology Limited, or PCSTL, which manufactures computer hardware products andalso offers hardware maintenance services.

·       PCSCullinet Private Limited, which owns and manages listed and unlisted shares andunits and real estate.

·       PCSFinance Private Limited, which owns and manages listed and unlisted shares andunits and real estate.

·       AshokaComputer Systems Private Limited, which owns and manages listed and unlistedshares and units and real estate.

These transactionshave comprised the following:

·       saleof hardware from Patni Computer Systems, Inc. to PCSTL, amounting to$37,729, $8,974, Nil and Nil for the years ended December 31, 2003, 2004,2005 and quarter ended March 31, 2006;

·       operatingleases for residential and commercial property from these companies and therelatives of our founders, amounting to $259,138, $289,964, $266,325 and$22,492 for the years ended December 31, 2003, 2004, 2005 and quarterended March 31, 2006; and

·       securitydeposits for operating leases, with amounts outstanding totaling $284,651,$297,510, $251,569 and $39,645 for the years ended December 31, 2003, 2004,2005 and quarter ended March 31, 2006.

We do not believe that any of these transactions,individually or in the aggregate, have a material effect on our business as awhole.

Pursuant to a resolution of our board of directors on August 26,2005, we have determined that we will no longer enter into any transactions forthe purchase and sale of hardware with any of Mr. Narendra K. Patni,Mr. Gajendra K. Patni, Mr. Ashok K. Patni ortheir respective relatives or any affiliate of any of Mr. Narendra K. Patni,Mr. Gajendra K. Patni, Mr. Ashok K. Patni ortheir respective relatives, which are together referred to as the “Patni Family”,or any company or entity owned or controlled by any member of the Patni Family.

In addition, our AuditCommittee will, on an ongoing basis, review the terms of all operating leasesentered into between us and any member of the Patni Family or with any companyor entity owned or controlled by any member of the Patni Family, and willinform management whether or not all such 

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operatingleases and related arrangements, including payment of security deposits, arefor bona fide business purposes and at prevailing market rates; and managementwill take all steps to ensure that such operating leases are for bona fidebusiness purposes and at prevailing market rates.

***License Agreements***

We had entered intonon-exclusive, perpetual, royalty-free license agreements with PCSTL andPCS International Limited granting a license for use of the “PCS”trademark. These agreements were of unlimited duration and were to continueuntil revoked by mutual consent. By letter agreements dated November 10,2005, we and each of PCSTL and PCS International Limited have terminated thelicense agreements relating to the “PCS” trademark. By a deed of assignment andtransfer dated November 10, 2005, we have assigned and transferred allrights to the “PCS” trademark to PCSTL.

***Consultancy Agreement***

We have entered into aconsultancy agreement with Patni Computer Systems, Inc., our U.S.subsidiary, for, among other things, the secondment of Mr. Narendra K.Patni. See “Item 6. Directors, Senior Management and Employees—ServiceAgreements.”

***Guarantee***

We have issued a counter guarantee on behalf of PCSTLfor Rs. 150 million ($3,328,156). This guarantee was issued on August 30,1997 for the benefit of ANZ Grindlays Bank plc (now Standard Chartered Bank)and the amount under this guarantee is payable on demand. The guarantee wasissued in connection with financial facilities Standard Chartered Bank providedto PCSTL. The amount outstanding has not changed since it was issued.

By an agreement dated September 10,2005 between PCSTL and the Company, PCSTL has agreed that it will repay theloan and/or provide the bank with satisfactory alternate collateral, as soon aspracticable and no later than the March 31, 2006. Accordingly, we havebeen released and discharged in full from our obligation under the saidguarantee.

***Donations***

We have given donations tothe Ravindra Patni Charitable Trust, in which our director Mr. Gajendra K.Patni is one of the trustees, totaling $165,610 for the three years ended December 31,2005. However, pursuant to a resolution of our board of directors on August 26,2005, we have determined that we will not make any future donations to theRavindra Patni Charitable Trust or any other trust or similar entity owned orcontrolled by any member of the Patni Family or any trust or similar entity inwhich a member of the Patni Family is a trustee. The restriction will not applyto any trust set up by us, the majority of whose trustees are independenttrustees, including independent of any member of the Patni Family, and theinvestments in, and activities of, any such trust are reviewed on an on-goingbasis by our board of directors.

**General Electric**

General Electric is ourlargest customer. Revenues for software services by Patni Computer Systems, Inc.and Patni Computer Systems (UK) Limited to various entities within GeneralElectric amounted to approximately $99.4 million in the year ended December 31,2005. In addition, General Electric charges Patni USA for data linkconnections. Data link charges paid to General Electric for the three yearsended December 31, 2005 amounted to $2,714,672. In January 2005 weentered into a finance lease for the use of commercial vehicles in an amount ofRs. 7.5 million ($171,939) with GE Capital Transportation FinancialServices Limited. General Electric became an investor in 2000. For a more 

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detaileddescription of our relationship with General Electric, please see “Item 4.Information on the Company-—The General Electric Association.”

**Deposit Agreement**

We have entered into adeposit agreement with The Bank of New York, or the depositary, and the ownersof and beneficial owners of ADSs dated July 15, 2002, pursuant to which wehave deposited 20,161,868 equity shares with the depositary. The depositary hasexecuted and delivered to General Atlantic 20,161,868 ADSs representing suchequity shares. The holders of ADSs can, at any time, convert their ADSs intoequity shares. Under the deposit agreement, we have agreed to pay the fees,reasonable expenses and out-of-pocket charges of the depositary in accordancewith agreements entered into in writing between us and the depositary from timeto time. ADSs issued under this deposit agreement may, when General Atlanticwishes to sell ADSs, be exchanged, subject to applicable laws, for ADSs underthe deposit agreement, which ADSs may be sold subject to applicable securitieslaws.

**Registration RightsAgreement**

We have entered into a registration rights agreementwith General Atlantic, certain General Electric entities, Mr. Ashok K.Patni, Mr. Gajendra K. Patni and certain of their relatives, Mr. NarendraK. Patni and iSolutions Inc. dated July 15, 2002. This agreementgrants rights with respect to registration of our equity shares under theSecurities Act, certain provisions of which are summarized below. Subject tolimitations provided in the registration rights agreement and in lock-upagreements that certain of these shareholders have signed, these shareholdershave demand registration rights and may also require us to file an unlimitednumber of registration statements on Form F-3 (or the equivalent)under the Securities Act when such form is available for our use.

If we propose to registerour securities under the Securities Act, these shareholders will be entitled tonotice of the registration and to include their shares in the registrationprovided that the underwriters of that offering will have the right to limitthe number of their shares included in the registration. We are required to payall expenses arising from or incident to our performance of, or compliancewith, the registration rights agreement, other than any underwriters’ discountsand commissions. In addition, we are required to bear the fees, disbursementsand other charges of one counsel to these shareholders in connection with anyregistration in an amount not exceeding $50,000 for the first such registrationand $15,000 for any subsequent registration.

**Loans**

We grant personal loans toemployees who are not executive officers. These loans are repayable in equalinstallments over periods ranging from six to 60 months. Interest on theseloans is charged at 7.5% to 9.0%. Loans outstanding as of December 31,2003, 2004 and 2005 were $101,904, $86,453 and $56,662. There are nooutstanding loans to any of our directors or executive officers.

**7.C. Interests ofexperts and counsel**

Not applicable.

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**ITEM 8. FINANCIALINFORMATION**

**8.A. ConsolidatedStatements And Other Financial Information**

The followingfinancial statements and auditors’ report for fiscal 2005 appear under Item 18in this Annual Report:

·       Reportof Independent Registered Public Accounting Firm

·       ConsolidatedBalance sheets as of December 31, 2004 and 2005

·       ConsolidatedStatements of Income for the years ended December 31, 2003, 2004 and 2005

·       ConsolidatedStatements of Stockholders’ Equity and Comprehensive Income for the years endedDecember 31, 2003, 2004 and 2005

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2003, 2004 and2005

·       Notes to the Consolidatedfinancial statements

**Amount of ExportSales**

For the  yearended  December 31, 2005, we generated $ 449.22 million, or99.75% of our total revenues of $ 450.33 million, from the export ofour products and rendering of services out of India.

**Legal Proceedings**

Certain income tax relatedlegal proceedings  are pending against us. We are currentlycooperating with the US Department of Labor with respect tocompliance matters related to our past and present labor practices. Additionally,we are also involved in lawsuits and claims which arise in ordinary course ofbusiness. Other than as disclosed herein, there are no such matters pendingthat we expect to be material in relation to our business.

**Dividends**

We do not have a stated dividend policy and determinethe amount of dividends to be recommended for approval by the shareholders on ayear-by-year basis by reference to our earnings, cash flow, financial conditionand other factors prevailing at the time. We have paid dividends in the past.Although we have no current intention to discontinue dividend payments, wecannot assure you that any future dividends will be declared or paid or thatthe amount thereof will not be decreased.

Owners of ADSs will be entitled to receive dividendpayable in respect of the equity shares represented by such ADSs. Cashdividends in respect of the equity shares represented by the ADSs will be paidto the depositary in rupees and, will generally be converted by the depositaryinto U.S. dollars and distributed, net of depositary fees and expenses, to theholders of such ADSs.

Our Board of Directors at its meeting held on February 1,2006 recommended a dividend of 125% of par value for fiscal 2005, subject toapproval of our shareholders. Our shareholders approved a final dividend ofRs.2.50 ($0.05) per equity share at its Annual General Meeting held on June 21,2006. We paid $6.5 million in dividends, including dividend tax on our equityshares in the year ended December 31, 2005. We also paid $3.1 millionand $1.0 million towards dividend payouts on our equity shares in 2004 and2003.

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**8.B. SignificantChanges**

In connection with theongoing review of our tax liabilities relating to our international operations,which is in progress., we have reassessed our obligations for payroll andrelated taxes for 2001 to 2004. The determination of our tax liabilitiesrelating to payroll, corporate taxes and the consequential interest and relatedexpenses for fiscal years 2001 and 2002 have been finalized by the IRS. As aresult, we have restated our financial statements for the years ended December31, 2003 and 2004 and the balance sheet as of December 31, 2005  for the additional liability arising onaccount of this final determination which for accounting purposes constitutesthe correction of an error. We have also reassessed our obligations for corporatetaxes, payroll and related taxes, interest and related expenses for  the year ended December 31, 2001 to 2005.This revision, representing changes in estimates, is expected to result in anadditional charge of approximately $13.1 million in our financial statementsfor the year ending December 31, 2006. Additionally, consequential interest anddeferred tax charge in an amount of $4.5 million would be accrued and shall beaccounted in our financial statements for the year ending December 31, 2006.See Notes  3.1.2 and 27.1.1 to ourconsolidated financial statements for the year ended December 31, 2005.

**ITEM 9. THE OFFERAND LISTING**

**9.A. Offer andlisting details**

Our equity shares have been listed and traded on theBombay Stock Exchange Limited, or BSE, and the National Stock Exchange of IndiaLimited, or NSE,  since February 25,2004. The prices for equity shares as quoted in the official list of each ofthe Indian Stock Exchanges are expressed in rupees. Our ADSs evidenced byAmerican Depositary Receipts, or ADRs, are traded in the United States on theNew York Stock Exchange, or NYSE. Our ADSs commenced trading on the NY SE on December 8,2005. Each ADS represents two equity shares. The number of our outstandingequity shares (including the underlying shares for ADSs) as of December, 31,2005 was 137,798,399. As of December 31, 2005, there were 7,906,250 ADSsoutstanding (representing 15,812,500 equity shares).

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Thetable below sets forth, for the periods indicated, the reported high and lowquoted prices of our shares on the BSE, NSE and the NYSE: *(source*www.bseindia.com, www.nse-india.com www.ny.frb.org/markets/fxrates/noon/cfm,www.nyse.com)

| ** **                                                 | ** ** | **BSE**         | ** ** | **NSE**        | ** ** | **NYSE**        | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|----------------|------------|-----------------|------------|
| ** **                                                 | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** |
| **2006**                                                   |       |            |       |           |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                                              |       |            | 11.13      |           |       | 9.99            |       |   | 11.12 |   |   | 10.00 |   |   | 25.10 |   |   | 20.59 |   |
| Second Quarter                                             |       |            | 10.00      |           |       | 6.39            |       |   | 9.95 |   |   | 6.36 |   |   | 20.87 |   |   | 13.94 |   |
| **2005**                                                   | ** ** | ** **      | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                              |       |            | 9.08       |           |       | 8.16            |       |   | 9.08 |   |   | 8.11 |   |   | — |   |   | — |   |
| Second Quarter                                             |       |            | 8.72       |           |       | 7.49            |       |   | 8.73 |   |   | 7.55 |   |   | — |   |   | — |   |
| Third Quarter                                              |       |            | 10.43      |           |       | 7.93            |       |   | 10.42 |   |   | 7.92 |   |   | — |   |   | — |   |
| Fourth Quarter  (NYSE beginning on December 8, 2005)  |       |            | 11.02      |           |       | 9.27            |       |   | 10.97 |   |   | 9.25 |   |   | 23.56 |   |   | 21.90 |   |
| Full Year                                                  |       |            | 11.02      |           |       | 7.25            |       |   | 10.97 |   |   | 7.30 |   |   | — |   |   | — |   |
| **2004**                                                   | ** ** | ** **      | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  (BSE and NSE beginning on February 25) |       |            | 5.77       |           |       | 4.63            |       |   | 5.78 |   |   | 4.63 |   |   | — |   |   | — |   |
| Second Quarter                                             |       |            | 5.64       |           |       | 4.58            |       |   | 5.65 |   |   | 4.58 |   |   | — |   |   | — |   |
| Third Quarter                                              |       |            | 7.25       |           |       | 5.19            |       |   | 7.28 |   |   | 5.19 |   |   | — |   |   | — |   |
| Fourth Quarter                                             |       |            | 9.37       |           |       | 7.82            |       |   | 9.38 |   |   | 7.81 |   |   | — |   |   | — |   |
| **Month ended**                                            |       |            |       |           |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| July 2006  (through July 13, 2006)               |       |            | 7.25       |           |       | 6.38            |       |   | 7.27 |   |   | 6.39 |   |   | 14.55 |   |   | 13.85 |   |
| June 2006                                             |       |            | 7.66       |           |       | 6.39            |       |   | 7.65 |   |   | 6.36 |   |   | 15.70 |   |   | 13.94 |   |
| May 2006                                              |       |            | 8.56       |           |       | 7.21            |       |   | 9.08 |   |   | 8.11 |   |   | 16.95 |   |   | 15.00 |   |
| April 2006                                            |       |            | 10.23      |           |       | 8.36            |       |   | 10.17 |   |   | 8.36 |   |   | 20.87 |   |   | 16.14 |   |
| March 2006                                            |       |            | 11.16      |           |       | 10.08           |       |   | 11.15 |   |   | 10.11 |   |   | 25.00 |   |   | 20.59 |   |
| February 2006                                         |       |            | 11.06      |           |       | 10.50           |       |   | 11.08 |   |   | 10.49 |   |   | 25.10 |   |   | 23.10 |   |
| January 2006                                          |       |            | 11.26      |           |       | 10.13           |       |   | 11.26 |   |   | 10.14 |   |   | 24.30 |   |   | 22.24 |   |

 

**9.B. Plan ofdistribution**

Not applicable.

**9.C. Markets**

*Trading Practicesand Procedures on the Indian Stock Exchanges*

*Stock Exchange Regulation*

The stock exchanges in India are regulated by theSecurities and Exchange Board of India, or SEBI, and the Ministry of Finance,Stock Exchange Division, the Government of India under the Securities Contracts(Regulation) Act, 1956, as amended, or the SCRA, and the Securities Contracts(Regulation) Rules, 1957, as amended, or the SCRR. The SCRR, together with therules, bye-laws and regulations of the respective stock exchanges, regulate therecognition of stock exchanges, the qualifications for membership thereof andthe manner in which contracts are entered into and enforced between members ofsuch stock exchanges.

The Securities and Exchange Board of India Act, 1992,as amended, or the SEBI Act, granted SEBI powers to regulate the business ofIndian securities markets, including stock exchanges and other financialintermediaries, promote and monitor self-regulatory organizations, prohibitfraudulent and unfair trade practices and insider trading, and regulatesubstantial acquisitions of shares and takeovers of companies. 

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SEBI has also issuedguidelines concerning minimum disclosure requirements by public companies, rules andregulations concerning investor protection, buybacks of securities, employeestock option schemes, stockbrokers, merchant bankers, underwriters, mutualfunds, foreign institutional investors, credit rating agencies and othercapital market participants.

The SCRA has been amended to include derivatives ofsecurities and units and any other instruments issued by any collectiveinvestment scheme to the investor in such scheme, in the definition of “securities”.Trading in index-linked futures, index-linked options, options on individualsecurities and futures on individual securities takes place on the Indian StockExchanges. SEBI has also set up a committee for the review of Indian securitieslaws, which has proposed a draft Securities Bill. The draft Securities Bill, ifenacted in its present form may result in a substantial revision in the lawsrelating to securities of India.

The Companies (Amendment) Act of 2000 amended theIndian Companies Act and incorporated significant provisions relating tosecurities, options in securities and equity shares with differential rights. Further,the Indian Companies Act, as amended, has empowered SEBI to administerprovisions in so far as they relate to the issue and transfer of securities,non payment of dividends in the case of listed public companies proposing toget their securities listed and to conduct inspection of a company’s records inrespect of matters relating to the issue and transfer of securities. The powerto prosecute the defaulting companies in compliance with the said matter hasalso been vested with SEBI. The Indian Companies Act has been amended tointroduce significant changes such as allowing book building for publicofferings of securities, buy back of securities, compulsory dematerializationof shares in an initial public offering of securities for a sum of Rs.100million, issuance of sweat equity shares, provisions relating to corporategovernance, making accounting standards issued by the Institute of CharteredAccountant in India mandatory and relaxing restrictions on inter-corporateinvestment and loans.

SEBI promulgated theSecurities and Exchange Board of India (Central Listing Authority) Regulations,2003 in February 2003 under which it established an independentself-regulatory authority called the Central Listing Authority. The CentralListing Authority has not commenced functioning as yet. The Central ListingAuthority may, on application, grant letters of recommendations to companies,mutual funds or collective investment schemes for listing on any stock exchangeand no stock exchange may consider a listing application unless it isaccompanied by a letter of recommendation from the Central Listing Authority.The Central Listing Authority is also empowered to make recommendations to SEBIfor amendments to listing requirements under the SCRA and the listingagreements. Further,the Central Listing Authority may provide suggestions to SEBI with respect toinvestor protection development, regulations of the securities market anddisclosures to be made in the offer documents.

*Public Issuance of Securities andListing*

Under the Indian Companies Act, a public offering ofsecurities in India must be made by means of a prospectus, which must containinformation specified in the Companies Act and the SEBI (Disclosure andInvestor Protection) Guidelines, 2000, as amended, or the SEBI Guidelines, andbe filed with the Registrar of Companies having jurisdiction over the placewhere a company’s registered office is situated. A company’s directors andpromoters are subject to civil and criminal liability for misstatements in aprospectus. The Indian Companies Act also sets forth procedures for theacceptance of subscriptions and the allotment of securities among subscribersand establishes maximum commission rates for the sale of securities.

SEBI has issued detailed guidelinesconcerning disclosures andinvestor protection by public companies making a public offering of securities.The SEBI Guidelines permit companies to price freely their issues ofsecurities.

The listing of securities on recognized Indian stockexchanges is regulated by the SCRR and the listing agreement of the respectivestock exchange. Under the standard terms of stock exchange listing 

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agreements, the governingbody of each stock exchange is empowered to suspend trading of or dealing in alisted security for breach of an issuer’s obligations under such agreement,subject to such issuer receiving prior notice of the intent of the exchange. Alisted company can be delisted under the provisions of SEBI (Delisting ofSecurities) Guidelines, 2003, which govern voluntary and compulsory delistingsof shares of Indian companies from the stock exchanges. SEBI has the power toamend listing agreements and bye-laws of stock exchanges in India.

Pursuant to recent SEBI amendments to the listingagreements, with effect from May 1, 2006, listed Indian companies arerequired to ensure that the minimum level of public shareholding is 25% of thetotal issued shares of a particular class. However, companies which (i) haveoffered less than 25% (but at least 10%) of the total number of issued sharesof a particular class at the time of their initial public offering under Rule 19(2)(b) ofthe SCRR, or (ii) have at least 20 million shares of a particular classlisted and a market capitalization of Rs.10,000 million, are permitted tomaintain their minimum public shareholding at 10%. Where the publicshareholding in a company is less than 25% or 10%, as the case may be, thecompany is only permitted to dilute its public shareholding pursuant to certainextraordinary events with the prior approval of the concerned stock exchanges,as specified in the SEBI circular dated April 13, 2006. “Publicshareholding” excludes shares held by promoters and the promoter group as wellas shares held by custodians against which depository receipts have been issuedoverseas.

The standard listing agreements require an acquirer ofa listed company’s shares to comply with the disclosure and tender offerrequirements under the SEBI (Substantial Acquisition of Shares and Takeovers)Regulations, 1997, as amended, or the Takeover Code. For a brief discussion onthe disclosure and tender offer requirements under the Takeover Code, see  “Item10. Additional Information-Takeover Code” below. In addition, a listed companyis subject to continuing disclosure requirements pursuant to the terms of itslisting agreement with the relevant stock exchange, including the requirementto publish unaudited financial statements on a quarterly basis and to informstock exchanges immediately of any price sensitive information.

The shareholders of alisted company and the company itself are also subject to certain disclosurerequirements pursuant to the terms of the Securities and Exchange Board ofIndia (Prohibition of Insider Trading) Regulations, 1992, as amended. Pursuantto such requirements, any person holding more than 5% equity shares or votingrights in any listed company must disclose to the company the number of equityshares or voting rights held by such person within four working days of (a) thereceipt of intimation of allotment of equity shares or (b) the acquisitionof equity shares or voting rights. Additionally, any change in suchshareholding or voting rights in excess of 2% (even if such change results inthe shareholding or voting rights falling below 5%) is required to be disclosedto the company within four working days of (a) the receipt of intimationof allotment of equity shares or (b) the acquisition or sale of equityshares or voting rights, as the case may be. The company is also required todisclose such information received from its shareholders within five days ofthe receipt of such information, to the stock exchanges on which the company’sequity shares are listed.

*Indian Stock Exchanges*

There are now 22 recognized stock exchanges in India,the majority of which has their own governing board for self-regulation. Themajor stock exchanges in India are the BSE and the NSE, which together accountfor a majority of trading volumes of securities in India. The BSE and NSEtogether dominate the stock exchanges in India in terms of number of listedcompanies, market capitalization and trading.

Beginning April 1, 2003, the stock exchanges inIndia operate on a trading day plus two, or T+2, rolling settlement system. Atthe end of the T+2 period, obligations are settled with buyers of securitiespaying for and receiving securities, while sellers transfer and receive paymentfor securities. For example, trades executed on a Monday would typically besettled on a Wednesday. SEBI proposes to move to a T+1 

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settlement system. Inorder to contain the risk arising out of the transactions entered into by themembers of various stock exchanges either on their own account or on behalf oftheir clients, the stock exchanges have designed risk management procedures,which include compulsory prescribed margins on the individual broker members,based on their outstanding exposure in the market, as well as stock-specificmargins from the members.

To restrict abnormal price volatility, SEBI hasinstructed stock exchanges to apply the following price bands calculated at theprevious day’s closing price (there are no restrictions on price movements ofindex stocks):

*MarketWide Circuit Breakers:**  *Marketwide circuit breakers are applied to the market for movement by 10%, 15% and 20%for two prescribed market indices: the BSE Sensex for the BSE and the Nifty forthe NSE. If any of these circuit breaker thresholds are reached, trading in allequity and equity derivatives markets nationwide is halted.

*Price Bands:**  *Price bands are circuit filters of5% to 20% movements either up or down, and are applied to most securitiestraded in the markets, excluding securities included in the BSE Sensex and theNSE Nifty and derivatives products.

*The National Stock Exchange of IndiaLimited*

The NSE was established byfinancial institutions and banks to provide nationwide on-line satellite linkedscreen-based trading facilities with market makers and electronicclearing and settlement for securities, including Government of Indiasecurities, debentures, public sector notes and units. Deliveries for tradesexecuted “on-market” are exchanged through the National Securities ClearingCorporation Limited. Screen-based paperless trading and settlement ispossible through the NSE from 303 cities in India as of May 31, 2006. TheNSE commenced operations in the wholesale debt market and capital markets in1994 and derivatives in 2000. The average daily traded value of the capitalmarket segment rose to approximately Rs. 91.55 billion in May 2006.The NSE had 957 trading members as of June 30, 2006 and11,564 registered sub-brokers in the capital market segment and thewholesale debt market segment as of June 30, 2006. As of June 30,2006, 1,417 securities were available for trading on the capital markets(equities) segment of the NSE. The market capitalization of the NSE wasapproximately Rs. 26,126.39 billion as of May 2006.

*The Bombay Stock Exchange Limited*

The BSE, established in 1875, is the oldest stockexchange in India and has evolved over the years into its present status as thepremier stock exchange of India. The BSE switched over to an on-line tradingnetwork in May 1995 and has expanded this network to over 421 cities inIndia. Derivatives trading commenced on the BSE in 2000. Retail trading ingovernment securities commenced in June 2003. As of April 2006, theBSE had 883 members, comprising 180 individual members, 683 Indian companiesand 20 Foreign Institutional Investors, or FIIs. On August 19, 2005the BSE was incorporated as a company under the Indian Companies Act as TheBombay Stock Exchange Limited. Only a member of the BSE has the right to tradein the stocks listed on the BSE. As of April 2006, there were 4,796 listedcompanies trading on the BSE with an estimated total market capitalization ofRs. 32555.65 billion. The average daily turnover on the BSE wasRs. 48.60 billion in April 2006.

Trading on both the NSEand the BSE occurs Monday through Friday between 9:55 a.m. and 3:30 p.m.

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*Derivatives(Future and Options)*

Trading in derivatives isgoverned by the SCRA and the SEBI Act. The SCRA was amended in February 2000and derivative contracts were included within the term “securities”, as definedby the Securities Contracts Act. Trading in derivatives in India takes placeeither on separate and independent derivatives exchanges or a separate segmentof an existing stock exchange. The derivative exchange or a derivative segmentof a stock exchange functions as a self regulatory organization under thesupervision of SEBI. Derivative products have been introduced a phased mannerin India, started with futures contracts in June 2000 and index options,stock options and stock futures in June 2000 and July 2001,respectively. 

*Depositories*

The National SecuritiesDepository Limited and Central Depository Services (India) Limited are the twodepositories that provide electronic depositories facilities for trading inequity and debt securities in India. SEBI mandates a company making a public orrights issue or an offer for sale to enter into an agreement with a depositaryfor dematerialization of securities already issued or proposed to be issued tothe public or existing shareholders. SEBI has also provided that the issue andallotment of shares in initial public offerings and/or the trading of shares shallonly be in electronic form.

*SecuritiesTransaction Tax*

Pursuantto the Finance (No. 2) Act, 2004 and as amended by the Finance Act, 2005,a securities transaction tax is levied on taxable securities transactions, asspecified below:

| **Taxable Securities Transaction**                                                                                                                                                                                                                                                                                    | ** ** | ** ** | ** ** | **Rate**  | ** ** | **Payable by** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|---------------------|------------|
| Purchase of an  equity share in a company or a unit of an equity oriented fund, where:  (i) the transaction of such purchase is entered into in a recognized  stock exchange: and (ii) the contract for the purchase of  such share or unit is settled by the actual delivery or transfer of such  share or unit |       | 0.01       | %          | Purchaser |       |
| Sale of an equity  share in a company or a unit of an equity oriented fund, where: (i) the  transaction of such sale is entered into in a recognized stock exchange; and  (ii) the contract for the sale of such share or unit is settled by the  actual delivery or transfer of such share or unit                   |       | 0.01       | %          | Seller    |       |
| Sale of an equity  share in a company or a unit of an equity oriented fund, where; (i) the  transaction of such sale is entered into in a recognized stock exchange; and  (ii) the contract for the sale of such share or unit is settled  otherwise than by the actual delivery or transfer of such share or unit    |       | 0.02       | %          | Seller    |       |
| Sale of derivatives  where the transaction of such sale is entered into on a recognized stock  exchange                                                                                                                                                                                                                         |       | 0.0133     | %          | Seller    |       |

 

The responsibility forcollection of the securities transaction tax lies with the stock exchange wherethe purchase of securities takes place.

**9.D. Selling Shareholders**

Not applicable.

**9.E. Dilution**

Not applicable.

**9.F. Expenses ofthe Issue**

Not applicable.

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**ITEM 10. ADDITIONALINFORMATION**

**GovernanceStandards for Listed Companies**

Many of the corporate governance standards set out inthe NYSE Listed Company Manual do not apply to us as a “foreign private issuer.”Under the NYSE corporate governance standards, we need only (i) establishan independent audit committee that satisfies the requirements of Rule 303A.06of the NYSE Listed Company Manual described in the following table; (ii) provideprompt certification by our chief executive officer of any materialnon-compliance with any corporate governance rules of the NYSE; (iii) provideannual written affirmations to the NYSE with respect to our corporategovernance practices (and provide interim written affirmations ****each time a change occurs to the board or any of our committees)****;and (iv) provide a brief description of significant differences betweenour corporate governance practices and those followed by U.S. companies listedon the NYSE as required by Rule 303A.11 of the NYSE Listed Company Manual.

Indiancorporate governance requirements for listed companies are contained in Clause49 of the listing agreement that companies enter into with Indian stockexchanges. The following table sets out a brief, general summary of thesignificant differences between the corporate governance standards applicableto us under our listing agreements with the Indian Stock Exchanges and therequirements of standards relating to U.S. domestic companies listed on theNYSE.
| Standard for NYSE-Listed   Companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Requirements   under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Director  Independence**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| A majority of the  board must consist of independent directors. Independence is defined by  various criteria including the absence of a material relationship between the  director and the listed company. For example, directors who are employees,  are immediate family of an executive officer of the company or receive over  $100,000 per year in direct compensation from the listed company are not  independent. Directors who are employees of or otherwise affiliated through  immediate family with the listed company’s independent auditor are also not  independent. Determinations of independence are made by the board. |       | If the Chairman of the  Board is an executive director then not less than 50 per cent of the board of  directors should comprise of independent directors. If the Chairman of the  board is a non-executive director, then at least one third of the board  should comprise of independent directors.

Clause 49 of the listing  agreement defines an ‘‘independent director’’ to mean a non-executive  director who (i) apart from receiving director’s remuneration, does not  have any material pecuniary relationship or transaction with the company, its  promoters, its senior management, its holding company, its subsidiaries or  its associates, which may affect the independence of the director;  (ii) is not related to the promoters or does not occupy any management  position at the board level or at one level below the board; (iii) has  not been an executive of the company in the immediately preceding three  financial years; (iv) is not a partner or an executive and has not been  a partner or executive during the preceding 3 financial years, of the  statutory audit firm or the internal audit firm that is associated with the  company, or of the legal firm or consulting firm that has material  association with the company; (v) is not a material supplier, service  provider, customer, lessee, or lessor of the company and (vi) is not a  substantial shareholder owning two per cent or more of the voting shares of  the company. |

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| The non-management directors  must meet at regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | There is no comparable requirement under Indian law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Audit  Committee******                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·  The audit committee must (i) be  comprised entirely of independent directors; (ii) be directly  responsible for the appointment, compensation, retention and oversight of any  registered public accounting firm engaged (including resolution of  disagreements between management and the auditor regarding financial  reporting) for the purpose of preparing or issuing an audit report or  performing other audit, review or attest services for the listed issuer, and  each such registered public accounting firm must report directly to the audit  committee; (iii) establish procedures for the receipt, retention and  treatment of complaints with respect to accounting and auditing issues;  (iv) establish procedures for the confidential, anonymous submission by  employees of the listed issuer of concerns regarding questionable accounting  or auditing matters (v) be authorized to engage independent counsel and  other advisers it deems necessary in performing its duties; and (vi) be  given sufficient funding by the board of directors to compensate the  independent auditors and other advisors as well as for the payment of  ordinary administrative expenses incurred by the committee that are necessary  or appropriate in carrying out its duties. |   | The listing agreement requires that the role of the  audit committee should include the following: 

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

2.      To  recommend the appointment and removal of the external auditor to the board of  directors, fix the audit fee and also approve of payment for any other  services. 

3.      To  review with management the annual financial statements before submission to  the Board, focusing primarily on any changes in accounting policies and  practices, any major accounting entries involving estimates based on exercise  of judgment by management, any qualifications in the draft audit report, any  significant adjustments in the financial statements arising out of the audit,  compliance with stock exchange and legal requirements concerning financial  statements and any related party transactions. 

4.      To  review with the management the quarterly financial statements before  submission to the board for approval. 

5.      To  review with the management, external and internal auditors, and the adequacy  of internal control systems. 

6.      To  review the adequacy of the internal audit function, including the structure  of the internal audit department, staffing and seniority of the official  heading the department, reporting structure coverage and frequency of  internal audit.

7.      To  discuss with internal auditors any significant findings and follow-up  thereon.

8.      To  review the findings of any internal investigations by the internal auditors  into matters where there is suspected fraud or irregularity or a failure of  internal control systems of a material nature and report the matter to the  Board. |

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|                                                                                                                                                                                                                                                        |   | 9.      To discuss with external auditors before  the audit commences, the nature and scope of audit as well as to conduct  post-audit discussions to ascertain any area of concern.

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

11.   To review the functioning of the whistle  blower mechanism, if the same is in existence. 

12.   To review the company’s financial and risk  management policies. 

In addition the audit  committee is required to, *inter alia*,  mandatorily review the following information: 

1.      Management’s discussion and analysis of  financial condition and results of operation; 

2.      Statement of significant related party  transactions, submitted by the management; 

3.      Management letters or letters of  internal control weaknesses issued by the statutory auditors; 

4.      Internal audit reports relating to  internal control weaknesses; and 

5.      The appointment, removal and terms of  remuneration of the chief internal auditor. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The audit  committee must consist of at least three members, and each member must be  independent within the meaning established by the NYSE and Rule 10A-3  under the Securities Exchange Act of 1934.                                           |   | Clause 49 requires that  a qualified and independent audit committee should be set up, which has a  minimum of three members. Two-thirds of its members should be independent  directors and the chairman of the audit committee should be an independent  director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ·  The  audit committee members must be financially literate or become financially  literate within a reasonable period of their appointment to the audit  committee.                                                                        |   | The listing agreements  require that all members of the audit committee should be financially  literate and at least one member should have accounting or related financial  management expertise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·  Each  listed company must have disclosed whether their board of directors has  identified an audit committee financial expert (as defined under applicable  rules of the SEC), and if not the reasons why the board has not done so. |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

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| ·  The audit committee must have a written  charter that addresses the committee’s purpose and responsibilities. 

·  At a  minimum, the committee’s purpose must be to assist the board in the oversight  of the integrity of the company’s financial statements, the company’s  compliance with legal and regulatory requirements, the independent auditor’s  qualifications and independence and the performance of the company’s internal  audit function and independent auditors. 

·  The  duties and responsibilities of the audit committee include conducting a  review of the independent auditing firm’s annual report describing the firm’s  internal quality control procedures, any material issues raised by the most  recent internal quality control review or peer review of the firm and any  steps taken to address such issues. 

The audit  committee is also to assess the auditor’s independence by reviewing all  relationships between the company and its auditor. It must establish the  company’s hiring guidelines for employees and former employees of the  independent auditor. 

The committee  must also discuss the company’s annual audited financial statements and  quarterly financial statements with management and the independent auditors,  the company’s earnings press releases, as well as financial information and  earnings guidance provided to analysts and rating agencies, and policies with  respect to risk assessment and risk management. |   | ·  In  addition to the role of the audit committee described above, the audit  committee is required to have powers that include being able to investigate  any activity within their terms of reference, seek information from any  employee, obtain outside legal or other professional advice and secure  attendance of outsiders with relevant expertise, if this is considered  necessary.               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Each listed  company must have an internal audit function.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | An Indian listed company  should have an internal audit function.                                                                                                                                                                                                                                                                                                                                                       |
| ·  The  committee must also meet separately, periodically, with management, with  internal auditors (or other personnel responsible for the internal audit  function) and with independent auditors and review with the independent  auditor any audit problems or difficulties and management’s response. 

·  The committee must report regularly to the  board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | ·  Clause  49 requires that the audit committee should meet at least four times in a  year and not more than four months should lapse between two meetings. The  audit committee may invite such executives as it considers appropriate, such  as the head of the company’s finance function, to be present at its meetings  but it may also meet without the presence of any executives of the company. |

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| **Compensation Committee******                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·  Listed  companies must have a compensation committee composed entirely of independent  board members as defined by the NYSE listing standards. 

·  The  committee must have a written charter that addresses its purpose and  responsibilities. 

·  These  responsibilities include (i) reviewing and approving corporate goals and  objectives relevant to CEO compensation; (ii) evaluating CEO performance  and compensation in light of such goals and objectives for the CEO;  (iii) based on such evaluation, reviewing and approving CEO compensation  levels; (iv) recommending to the board non-CEO compensation, incentive  compensation plans and equity-based plans; and (v) producing a report on  executive compensation as required by the Securities and Exchange Commission  to be included in the company’s annual proxy statement or annual report. The  committee must also conduct an annual performance self-evaluation. |   | The listing agreement  states that a company may set up a remuneration committee, which should  comprise of at least three directors, all of whom should be non-executive  directors, the chairman of this committee being an independent director. 

The Securities and  Exchange Board of India (Employee Stock Option Scheme and Employee Stock  Purchase Scheme) Guidelines, 1999, as amended, require that no employee stock  options shall be offered unless the listed company constitutes a compensation  committee consisting of a majority of independent directors. These guidelines  define an “independent director” as a director of the company who is not a  whole-time director and who is neither a promoter nor belongs to the promoter  group. |
| **Nominating/Corporate Governance  Committee******

·  Listed  companies must have a nominating/ corporate governance committee composed  entirely of independent board members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | There is no  comparable provision under Indian law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ·  The  committee must have a written charter that addresses its purpose and  responsibilities, which include (i) identifying individuals qualified to  become board members; (ii) selecting, or recommending that the board  select, the director nominees for the next annual meeting of shareholders;  (iii) developing and recommending to the board a set of corporate  governance principles applicable to the company; (iv) overseeing the  evaluation of the board and management; and (v) conducting an annual  performance evaluation of the committee.                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

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| **Equity-Compensation Plans******                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Shareholders must  be given the opportunity to vote on all equity-compensation plans and  material revisions thereto, with certain limited exceptions.                                                          |   | Section 79A of the  Indian Companies Act requires that a company may issue sweat equity shares of  a class of shares already issued if such issue is authorized by a special  resolution passed by the company in general meeting. 

The Securities and  Exchange Board of India (Employee Stock Option Scheme and Employee Stock  Purchase Scheme) Guidelines, 1999, as amended, also require that a special  resolution be passed by the shareholders of a company in general meeting to  approve an employee stock option or stock purchase scheme. |
| **Corporate  Governance Guidelines******                                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Listed companies  must adopt and disclose corporate governance guidelines.                                                                                                                                      |   | Corporate governance  requirements for listed companies in India are included in Clause 49 of the  Indian listing agreements required to be entered into with the stock  exchanges.                                                                                                                                                                                                                                                                                                                                                                         |
| **Code of  Business Conduct and Ethics******                                                                                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| All listed  companies must adopt and disclose a code of business conduct and ethics for  directors, officers and employees, and promptly disclose any waivers of the  code for directors or executive officers. |   | Clause 49 requires that  the board shall lay down a code of conduct for all board members and senior  management of a listed company. This code of conduct is required to be posted  on the website of the company. Further, all board members and senior  management personnel are required to affirm compliance with the code on an  annual basis and the company’s annual report must contain a declaration to  this effect signed by its chief executive officer.                                                                                  |

 

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**10.A. Share Capital**

Not applicable.

**10.B. Memorandum and articles of association**

**General**

The following description of our equity shares and thematerial provisions of our Articles of Association, or Articles, is only asummary and is qualified in its entirety by our Articles and Memorandum and bythe provisions of the Indian Companies Act which governs our affairs, and otherapplicable provisions of Indian law.

Our authorized share capital consists of 250,000,000equity shares with a par value of Rs. 2 each. As of June 16, 2006,137,912,853 equity shares were issued and outstanding and fully paid. On August 30,2003 we effected a one for two stock split in the form of a stock dividend. Theequity shares are our only class of share capital. We currently have noconvertible debentures or warrants outstanding. Substantially all of our equityshares are in non-physical form.

We use thefollowing terms in our Articles:

·       NKPGroup means Mr. Narendra K. Patni, certain of his family members,iSolutions Inc. and certain of their named entities and their respectivepermitted transferees and the depository bank;

·       GKPGroup means Mr. Gajendra K. Patni and certain of his family members andtheir respective permitted transferees and the depository bank;

·       AKPGroup means Mr. Ashok K. Patni and certain of his family members and theirrespective permitted transferees and the depository bank;

·       GeneralAtlantic means General Atlantic Mauritius Limited its successors and permittedassigns and General Atlantic Group means General Atlantic and its permittedtransferees and the depositary bank; and

·       For the purposes of thisdocument, Significant Shareholder means each of these groups.

**Registration number and the objects of the Company**

Our companyregistration number is 11-020127. Under our Memorandum of Association, ourmain objects include, but are not limited to the following:

1.                To manufacture, purchase, sell orotherwise transfer, lease, import, export, hire, license, use, dispose off,operate, fabricate, construct, distribute, assemble, design, charter, acquire,market, recondition, work upon or otherwise, generally deal in any electronic,electrical, mechanical and electromechanical product, machine, apparatus,appliance, custom products, merchandise, systems, software procedures,peripheral products, computers, tabulators, data processing machines andsystems and components thereof, electronic calculators, electric andelectromechanical accounting systems, terminal products and systems, machinesfor registering data preparation, recording, perforating, tabulating, sorting,printing, typewriting products which possess an internal intelligence forrecognizing and co-relating any type of data or information to be processedrecognition and memory systems, optical scanning machine transmission lines,transmission equipment, terminals, copying, reproducing and distributingmachines, check signing, protecting and disbursing equipment machines forfacsimile reproduction, facsimile transmission and word processions facilitiesand accessories and devices of all kinds, and for all purposes and any productsand component parts thereof or materials or articles used in connectiontherewith, and any-all other machinery, appliance, apparatus, devices,materials, 

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substances, business firms and supplies, articles or things of acharacter similar or analogous to the foregoing, or any of them or connectedtherewith.

2.                To establish, maintain and conducttraining schools, courses and programmes in connection with the use, purchase,sale, import, export, license, distribution, design, manufacture or rental ofthe aforesaid types of machines, apparatus, appliances, systems and merchandiseand of the articles required in the use thereof or used in connectiontherewith.

3.                To carry on the business of developing,improving, designing, marketing, selling and licensing software andprogram-products of any and all description.

4.                To carry on the business ofelectricians, electrical, electronic engineers and manufacturers of and dealersin electrical, mechanical, chemical, optical and electronic machines,appliances and apparatus of every description.

5.                To carry on the business of consultantsin computers, computer-oriented systems all branches of computer science,civil, electrical, electronic, mechanical, chemical, optical, metallurgical andall other branches of engineering.

6.                To carry on the business of consultancyservices related to the preparation and maintenance of accounting, statistical,scientific or mathematical, information and reports, data conversion, dataprocessing, programming, collecting, storing, processing and transmittinginformation and data of every kind and description, systems analysis andmachine services for solving or aiding commercial, industrial, scientific andresearch problems and for all other related business.

7.                To carry on the business of advisers andconsultants and collaborators on all matters and problems relating to theadministration, organization, finance management, personnel, commencement orexpansion of industry and business (including construction of plants andbuildings production, purchases, sales marketing, advertisement, publicity,personnel export and import) and of institutions, concerns, bodies,associations (incorporated and unincorporated), departments and services of thegovernment, public or local authorities, trusts, scientific research anddevelopment centres.

8.                To supply and provide, maintain andoperate, design any engineering consultancy services applicable over the wholerange of industry, trade, commerce and agriculture.

**Board of Directors**

*Election*

The Articles of Association provide that our board of directors shallbe comprised of not less than three directors and not more than ten directors.Eight directors on the Board shall be appointed as follows:

·       three permanent directors nominated by each of the AKP Group, the GKPGroup and the NKP Group so long as the relevant Group holds 5% or more of theequity shares;

·       one rotating director nominated by General Atlantic, so long as GeneralAtlantic holds 5% or more of the equity shares; and

·       four non-permanent independent directors who will be appointed inaccordance with our Articles for a term of three years and eligible forre-election by the shareholders at the annual general meeting.

Each director nominatedby a Significant Shareholder shall hold office and may only be removed by thatSignificant Shareholder. Except in the event of the removal of a director for abreach of duty, fraud, bankruptcy or unless contrary to law, all theSignificant Shareholders have agreed in the Articles that the 

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independent directors shall not be removed except at a general meetingby the votes of shareholders (present and voting) holding not less than 51% ofthe equity shares, which includes the votes of at least three SignificantShareholders in a general meeting and except by a majority of the directors,which includes at least three nominee directors appointed by the SignificantShareholders.

General Atlantic is also entitled to nominate one of the members toeach committee of the board of directors, including the Audit Committee, theCompensation Committee and such other committees, so long as General Atlanticholds 5% or more of the equity shares.

*Notice and Quorum*

Under the Articles,subject to Section 287 of the Indian Companies Act, the quorum for ameeting of the board of directors shall be the presence of at least fourdirectors which must include at least one nominee director (or his or heralternate) of each of the AKP Group, the GKP Group, the NKP Group, and GeneralAtlantic (unless the absent nominee director consents in writing to a quorumrequirement being satisfied despite his or her absence). Provided that where atany time the number of interested directors exceeds or is equal to two-thirdsof the total strength, the number of remaining directors, that is to say, thenumber of directors who are not interested, present at the meeting being notless than two, shall be the quorum during such time.

If a quorum is notpresent on the date the board meeting is convened, it shall automatically standadjourned to a date 7 days after the original board meeting. The adjournedboard meeting may be held on such other date and such other place as may beunanimously agreed by a nominee director of each of the AKP Group, the GKPGroup, the NKP Group and General Atlantic. In the event of a quorum once againnot being available at such an adjourned board meeting, the directors presentshall constitute the quorum.

The Articles requirethat at least 15 clear days notice be provided for any board meeting unless ashorter notice period is agreed by a majority of the directors.

Under our Articles, Mr. Narendra K. Patni shall be the permanentChairman of the Board. The Chairman shall preside at all board and shareholdermeetings. In the absence of Mr. Narendra K. Patni at any meeting of theboard, a General Atlantic nominee shall preside as Chairman. The Chairman has acasting vote in case of a tie. If for any reason Mr. Narendra K. Patni isunable to continue as the Chairman, the board shall appoint the Chairman.

*Interested Directors*

Interested directorsare not allowed to take part in the discussion of, or vote on, any arrangementif the director is in any way, directly or indirectly, interested in thearrangement. In addition, a director is required to disclose the nature of hisinterest under Section 299 of the Indian Companies Act.

Under Section 297 of the Indian Companies Act, the consent of theboard of directors is required where a director of the company or his relative,a firm in which such a director or relative is a partner, any other partner insuch a firm, or a private company of which the directors is a member ordirector, for certain contracts with the company.

*Qualifying Shares*

Our directors are not required to hold any of our equity shares to bequalified to serve on the board of directors.

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*Borrowing Powers*

Our directors shall not, except with the consent of the shareholders ina general meeting, borrow moneys, where the moneys to be borrowed together withthe moneys already borrowed by the company (apart from temporary loans obtainedfrom the company’s bankers in the ordinary course of business) will exceed theaggregate of our paid up capital and the aggregate of all free reserves.

*Director Compensation*

The board of directors is entitled to set its remuneration subject tomaximum limits prescribed by Indian law and our Articles. If the number ofinterested directors exceeds the quorum requirement for board meetings, thenthe resolution to be passed would be subject to the approval of theshareholders at a general meeting. Normally any resolution of the boardregarding an increase in director’s fees is subject to shareholder approval ina general meeting.

*Rotation and Retirement*

There is no age limit for retirement of our directors. Our Articlesrequire two-thirds of our directors to retire by rotation, but they areeligible for re-election. One-third of the directors who aresubject to retirement by rotation must retire at each annual general meetingbut can be re -appointed at such annual general meeting. Mr. NarendraK. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni as therespective nominees of the NKP Group, GKP Group and AKP Group are permanentdirectors according to our Articles in that capacity they are not required toretire by rotation like our other directors.

**Dividends**

Under the Indian Companies Act, the board of directorsfirst recommends the payment of a dividend which is then declared byshareholders in a general meeting. However, the board of directors is notobligated to recommend a dividend. Under our Articles and the Indian CompaniesAct, our shareholders may, at the annual general meeting, declare a dividend inan amount less than that recommended by the board of directors, but they cannotincrease the amount of the dividend.

In India, dividends generally are declared as apercentage of the par value of the company’s equity shares. The dividendrecommended by the directors, if any, and subject to the limitations describedabove, is required to be distributed and paid to shareholders in proportion tothe paid up value of their shares as on the record date that such dividend ispayable within 30 days of the approval by the shareholders at the annualgeneral meeting. Pursuant to the Articles, the directors have discretion todeclare and pay interim dividends without shareholder approval. Under theIndian Companies Act, dividends can only be paid in cash to the registeredshareholder at a record date fixed on or prior to the annual general meeting orto his order or his banker’s order. No shareholder is entitled to a dividendwhile any lien in respect of unpaid calls on any of such shareholder’s sharesis outstanding.

The Indian Companies Act provides that any dividendsthat remain unpaid or unclaimed after the 30-day period referred to abovemust be transferred to a special bank account. We transfer any dividends thatremain unclaimed for seven years from the date of such transfer to an InvestorEducation and Protection Fund created by the Indian Government. The proceeds ofsuch funds are utilized to promote investor’s awareness and protection ofinvestors’ interests. Following such transfer, such unclaimed dividends cannotbe claimed. Neither we nor such fund shall be liable in respect of amountstransferred to such fund.

Under the IndianCompanies Act, dividends may be paid out of profits of a company in the year inwhich the dividend is declared or out of the undistributed profits of theprevious fiscal years after providing for depreciation. Before declaring adividend on its shares, a company is required under the Indian 

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CompaniesAct to transfer to its reserves, a minimum percentage of its profits for thatyear, ranging from 2.5% to 10% depending upon the dividend percentage to bedeclared in such year. The Indian Companies Act further provides that, in theevent of an inadequacy or absence of profits in any year, a dividend may bedeclared for such year out of the company’s accumulated profits, subject to thefollowing conditions:

·       therate of dividend to be declared may not exceed 10% of the company’s paid upcapital or the average of the rate at which dividends were declared by thecompany in the prior five years, whichever is less;

·       thetotal amount to be drawn from the accumulated profits earned in the previousyears and transferred to the reserves may not exceed an amount equivalent to10% of its paid up capital or its free reserve, and the amount so drawn is tobe used first to set off the losses incurred in the fiscal year before anydividends in respect of preference or equity shares are declared; and

·       the balance of the reservesafter withdrawal shall not fall below 15% of its paid up capital.

**Bonus Shares**

In addition to permitting dividends to be paid out ofcurrent or retained earnings as described above, the Indian Companies Act andour Articles permit us to distribute an amount transferred from the generalreserve or surplus in our profit and loss account to shareholders in the formof bonus shares, which are similar to a stock dividend. The Indian CompaniesAct also permits the issue of bonus shares from a securities premium account.Bonus shares are distributed to shareholders in the proportion recommended bythe board of directors. Shareholders of record on a fixed record date areentitled to receive such bonus shares. Any issue of bonus shares is subject toguidelines issued by the SEBI.

The SEBI guidelinesprescribe that no company shall, pending conversion of convertible securities,issue any shares by way of bonus unless a similar benefit is extended to theholders of such convertible securities, through reservation of shares inproportion to such conversion. The bonus issue shall be made out of freereserves built out of the genuine profits or share premium collected in cashonly. The bonus issue cannot be made unless partly paid-up shares, if any, aremade fully paid-up. Further, for the issuance of such bonus shares a companyshould not have defaulted in the payment of interest or principal in respect offixed deposits and interest on existing debentures or principal on redemptionof such debentures. Further, a company should have sufficient reason to believethat it has no outstanding dues in respect of the payment of statutory dues ofthe employees such as contribution to a provident fund, gratuity and bonus. Theissuance of bonus shares must be implemented within six months from the date ofapproval by the board of directors.

**Consolidation andSubdivision of Shares**

The Indian Companies Actand our Articles permit us to split or combine the par value of our shares,provided such split or combination is not made in fractions. Shareholders ofrecord on a fixed record date are entitled to receive a split or combination.

**Pre-emptive Rightsand Issue of Additional Shares**

The Indian Companies Actand our Articles give shareholders the pre-emptive right to subscribe for newshares in proportion to their respective existing shareholdings unlessotherwise determined by a special resolution passed by a general meeting of theshareholders. This special resolution must be approved by a number of voteswhich is not less than three times the number of votes against the specialresolution. The offer must include: (a) the right, exercisable by theshareholders of record, to renounce the shares offered in favor of any person;and (b) the number of shares offered and the period of the offer, whichmay not be less than 15 days from the date of offer. If the offer is notaccepted it is deemed to have 

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beendeclined. The board of directors is authorized to distribute any new shares notpurchased by the pre-emptive rights holders in the manner that it deems mostbeneficial to the company.

**Annual GeneralMeeting of Shareholders**

We must convene an annual general meeting ofshareholders within 15 months of the previous annual general meeting orsix months after the end of each fiscal year, whichever is earlier, and mayconvene an extraordinary general meeting of shareholders when necessary or atthe request of a shareholder or shareholders holding at least 10% of our paidup capital carrying voting rights. Written notice setting out the agenda ofmeeting must be given at least 21 clear days prior to the date of generalmeeting to the shareholders of record. A general meeting may be called afterproviding a shorter notice if consent is received from all shareholdersentitled to vote, in the case of an annual general meeting, and fromshareholders holding not less than 95% of the paid-up capital of the company incase of any other general meeting. Shareholders who are registered as such onthe date of the general meeting are entitled to attend and vote at the meeting.

The annual general meetingof shareholders must be held at our registered office or at another placewithin the city in which our registered office is situated. Meetings other thanannual general meetings may be held at any other place if so determined by theboard of directors.

**Quorum**

Our Articles provide thata quorum of a general meeting is at least five shareholders present in personor by proxy, who shall include at least one of the duly authorizedrepresentatives of General Atlantic, the NKP Group, the GKP Group and the AKPGroup. If a quorum is not present on the date the general meeting is convened,it shall be adjourned to a date 15 days after the original meeting and theshareholders who are present at the adjourned meeting shall constitute thequorum.

**Voting Rights**

At any general meeting, voting is by show of handsunless a poll is demanded by a shareholder or shareholders present in person orby proxy holding at least 10% of the total shares entitled to vote on theresolution or by those holding shares with an aggregate paid up capital of atleast Rs. 50,000. Upon a show of hands, every shareholder entitled to vote andpresent in person has one vote and, on a poll, every shareholder entitled tovote and present in person or by proxy has voting rights in proportion to thepaid up capital held by such shareholders.

Any shareholder may appoint a proxy. The instrumentappointing a proxy must be delivered to us at least 48 hours prior to themeeting. A proxy may not vote except on a poll. A corporate shareholder mayappoint an authorized representative who can vote on behalf of the shareholder,both upon a show of hands and upon a poll.

Ordinary resolutions may be passed by a simplemajority of those present and voting at any general meeting for which therequired period of notice has been given. However, specified resolutions suchas amendments to the Articles and the Memorandum, commencement of a new line ofbusiness, the waiver of the pre-emptive rights for the issue of any new sharesand a reduction of share capital, require that votes cast in favor of theresolution, whether by show of hands or poll, are not less than three times thenumber of votes, if any, cast against the resolution by members so entitled andvoting.

Further, the IndianCompanies Act requires certain resolutions such as those listed below to bevoted on only by a postal ballot:

·       amendmentsof the memorandum of association to alter the objects of the company and tochange the registered office of the company under section 146 of theIndian Companies Act;

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·       theissuance of shares with deferential rights with respect to voting, dividend orother provisions of the Indian Companies Act;

·       thesale of the whole or substantially the whole of an undertaking or facilities ofthe company;

·       providingloans, extending guarantees or providing a security in excess of the limitsallowed under section 372A of the Indian Companies Act;

·       varyingthe rights of the holders of any class of shares or debentures;

·       theelection of a director by a minority shareholder; and

·       thebuy-back of shares.

While the IndianCompanies Act permits a company to issue shares with differential rights as todividend, voting or otherwise, it may do so subject to certain conditions andother regulations, some of which are:

·       thecompany should have distributable profits (as specified under the IndianCompanies Act) for a period of three financial years;

·       theshares with differential voting rights shall not be in excess of 25% of theentire paid-up share capital; and

·       thevoting rights of existing shares cannot be altered.

Our Articles permit the issuance of shares withdifferential voting rights.

Our Articles require thatcertain shareholders ensure that they do not vote for any resolution to vary ormodify the terms of appointment of Mr. Ashok K. Patni and Mr. GajendraK. Patni. The shareholders referred to in this provision are limited to GeneralAtlantic, the AKP Group, the GKP Group and the NKP Group and anyof their permitted transferees, permitted assigns or affiliates (as such termsare defined in the Articles).

**Register ofShareholders; Record Dates; Transfer of Shares**

We are required to maintain a register of shareholdersat our registered office. The register and index of beneficial ownersmaintained by a depositary under the Depositories Act, 1996 is deemed to be anindex of members and register and index of debenture holders. We recognize asshareholders only those persons who appear on our register of shareholders anddo not recognize any person holding any share or part of it upon any trust,express, implied or constructive, except as permitted by law. In the case ofshares held in physical form, we register transfer of shares on the register ofshareholders upon receiving the share transfer form duly complete in allrespects accompanied by a share certificate or if there is no certificate, theletter of allotment in respect of shares to be transferred together with dulystamped transfer forms. In respect of electronic transfers, the depositarytransfers shares by entering the name of the purchaser in its books as thebeneficial owner of the shares. We then enter the name of the depositary in ourrecords as the registered owner of the shares. The beneficial owner is entitledto all the rights and benefits as well as the liabilities with respect to theshares that are held by the depositary.

For the purposes ofdetermining the shareholders, the register may be closed for periods notexceeding 45 days in any one year or 30 days at any one time. Underthe listing agreements of the Indian Stock Exchanges, we may, upon at least15 days’ advance notice to such stock exchanges, set a record date and/orclose the register of shareholders.

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**Transfer of Shares**

Shares held through depositories are transferred inthe form of book entries or in electronic form in accordance with regulationsspecified by SEBI. These regulations provide the regime for the functioning ofthe depositories and the participants and set forth the manner in which therecords are to be kept and maintained and the safeguards to be followed in thissystem. Transfers of beneficial ownerships of shares held through a depositaryare exempt from stamp duty. We have entered into an agreement for suchdepositary services with National Securities Depository Limited and the CentralDepository Services ‘India’ Limited.

The shares of an Indian public company are freelytransferable, subject to the provision of the Indian Companies Act pursuant towhich if a transfer of shares contravenes SEBI’s rules or regulations orthe Sick Industrial Companies (Special Provisions) Act, 1985 or any othersimilar law, the Company Law Board (which is expected to be replaced by theNational Company Law Tribunal) may, on an application made by the company, thedepositary participant, a depositary incorporated in India, an investor orSEBI, direct a rectification of the register of records. If a company withoutsufficient cause refused to register a transfer of shares within two monthsfrom the date on which the instrument of transfer is delivered to the company,the transferee may appeal to the Company Law Board seeking to register thetransfer of shares.

Pursuant to listing agreements with the Indian StockExchanges, in the event a company has not effected the transfer of shareswithin one month or where the company has failed to communicate to thetransferee any valid objection to the transfer within the stipulated timeperiod of one month, the company is required to compensate the aggrieved partyfor the opportunity losses caused during the period of delay.

Our Articles provide forcertain restrictions on the transfer of shares, including granting power to theboard of directors to refuse to register or acknowledge transfer of shares orother securities issued by the company. However, to the extent that theprovisions of the Articles are in conflict with any of the provisions of theIndian Companies Act, the Indian Companies Act shall prevail.

**Disclosure ofOwnership Interest**

Section 187C of the Indian Companies Act requiresbeneficial owners of shares of Indian companies who are not holders of recordto declare to the company details of the holder of record and the holder ofrecord to declare details of the beneficial owner. Any lien, promissory note orother collateral agreement created, executed or entered into with respect toany equity share by its registered owner or any hypothecation by the registeredowner of any equity share shall not be enforceable by the beneficial owner orany person claiming through the beneficial owner if such declaration is notmade. Failure by a person to comply with section 187C will not affect thecompany’s obligation to register a transfer of shares or to pay any dividendsto the registered holder of any shares in respect of which the declaration hasnot been made. While it is unclear under Indian law whether section 187Capplies to holders of ADSs, investors who exchange ADSs for underlying equityshares will be subject to the requirements of section 187C. Additionally,holders of ADSs may be required to comply with the notification and disclosureobligations pursuant to the provisions of the deposit agreement entered into bysuch holders, the company and the depositary.

Any investor who fails tocomply with these requirements may be liable for a fine up to Rs. 1,000for each day such failure continues. Additionally, if we fail to comply withthe provisions of section 187C, then we may be liable for a fine of up toRs. 100 for each day the default continues.

**Audit and AnnualReport**

A public limited company’s audited financialstatements, the directors’ report and the auditors’ report must be approved atthe annual general meeting, These documents also include certain otherfinancial 

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information, a report oncorporate governance and a section on management’s discussion and analysis.These documents need to be made available for inspection at the company’sregistered office during normal working hours for 21 days prior to theannual general meeting.

Under the Indian CompaniesAct, a company must file the above documents with the Registrar of Companieswithin 30 days after the date of the annual general meeting. Under thelisting agreement, copies of the statutory and director’s annual reports,balance sheets and profit and loss accounts and other special reports arerequired to be sent to the stock exchanges as soon as they are issued. Acompany is also required to file with the stock exchanges its shareholdingpattern on a quarterly basis, within 15 days from the end of the quarter.The listing agreement also requires companies to furnish to the stock exchangeunaudited quarterly and semi-annual financial results of operations and publishsuch information in at least one English language newspaper.

**Liquidation Rights**

Subject to the rights ofcreditors, employees and the holders of any shares entitled by their terms topreferential repayment over the equity shares, if any, in the event of ourwinding-up, the holders of the equity shares are entitled to be repaidthe amount of paid up capital or credited as paid up on those equity shares.All surplus assets after payments to the employees, statutory creditors,secured and unsecured creditors and holders of any preference shares shall bepaid to holders of equity shares in proportion to the amount paid up on suchshares at the commencement of the winding-up.

**Buy-back**

Under the Indian Companies Act and the SEBI (Buybackof Securities) Regulations, 1998, as amended, a company may buy its equityshares out of its distributable reserves or securities premium account or theproceeds of any equity shares or other specified securities. No buy-backof any kind of shares or other specified securities can be made out of theproceeds of an earlier issue of the same kind of securities. If such buy-backconstitutes more than 10% of the total paid-up equity capital and free reservesof the company, it shall require the approval of at least 75% of theshareholders present and voting at a general meeting of shareholders of suchcompany. A board resolution will constitute sufficient corporate authorizationfor a buy-back within the above limit. A company cannot buy-back sharesrepresenting more than 25% of its paid-up equity capital in a single financialyear. Further, the total consideration for the buy-back cannot exceed 25%of the paid-up capital and free reserves of a company.

A company is not permitted to make any further issue(including a rights issue) of the same kind of equity shares within a period ofsix months of such buy-back, except by way of a bonus issue or in discharge ofits existing obligations such as conversion of warrants, stock option schemes,sweat equity or conversion of preference shares or debentures into equity.

The buy-back may be (a) from the existingsecurity holders on a proportionate basis through a tender offer; (b) fromthe open market through (i) a book-building process or (ii) the stockexchange; (c) from odd-lot holders or (d) by purchasing thesecurities issued to the employees pursuant to a stock option plan or similarscheme. Buy-backs through negotiated deals, whether on a stock exchange orthrough spot transactions or through any other private arrangements, are notpermitted.

Any ADS holder mayparticipate in a company’s purchase of its own shares by withdrawing its ADSsfrom the depositary facility, acquiring equity shares upon the withdrawal andselling such shares back to the company. We cannot guarantee that equity sharesoffered by an ADS investor in any buy-back of shares by us will be accepted byus. The regulatory approvals required for ADS holders to participate in a buy-backare not entirely clear, and ADS investors are advised to consult their legaladvisors for advise prior to participating in any buy-back of share by us,including advice related to any related regulatory approvals and tax issues.

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**Alteration ofShareholder Rights**

Under the Indian Companies Act, and subject to theprovisions of the articles of association of a company and the relevant rules asissued by the Department of Company Affairs, the rights of any class ofshareholders can be altered or varied (i) with the consent in writing ofthe holders of not less than three-fourths of the issued shares of thatclass; or (ii) by the special resolution passed at a separate meeting ofthe holders of the issued shares of that class. In the absence of any suchprovision in the articles, such alteration or variation is permitted as long asit is not prohibited by the agreement governing the issuance of the shares ofthat class. Under the Indian Companies Act, the articles may be amended by aspecial resolution of the shareholders.

Our Articles can beamended if shareholders holding not less than 75% of the equity shares (who areentitled to vote) cast votes in favor of each such amendment of the Articlesand which shall include the favorable votes of each of the AKP Group, the GKPGroup, the NKP Group and General Atlantic, so long as each of the respectivegroups hold at least 10% of the equity shares and vote on each amendment(s).

**Limitation on theRights to Own Securities**

The limitation on therights to own securities of Indian companies, including the rights ofnon-resident or foreign shareholders to hold securities, are discussed below in“Item 10. Additional Information—Exchange Controls”.

**Takeover Code**

Upon conversion of ADSsinto equity shares, a holder of such shares will be subject to the mandatorybid obligations under the SEBI (Substantial Acquisition of Shares andTakeovers) Regulations, 1997, as amended, or the Takeover Code, whichprescribes certain thresholds or trigger points that give rise to theseobligations.

Certain important provisions of the Takeover Code are as follows:

·       Any acquirer (meaning a person who, directly or indirectly, acquires oragrees to acquire equity shares or voting rights in a company, either byhimself or with any person acting in concert) who acquires equity shares orvoting rights that would entitle him to more than 5%, 10%, 14%, 54% or 74% ofthe equity shares or voting rights in a company (together with the company’sequity shares or voting rights, if any, already held by him) is required todisclose the aggregate of his equity shareholding or voting rights in thatcompany to the company (which in turn is required to disclose the same to eachof the stock exchanges on which the company’s equity shares are listed) and toeach of the stock exchanges on which the company’s equity shares are listedwithin two days of (a) the receipt of allotment information; or (b) theacquisition of equity shares or voting rights, as the case may be.

·       A person who holds 15% or more of the equity shares or voting rights inany company is required to disclose any purchase or sale representing 2% ormore of the equity shares or voting rights of that company to that company andthe stock exchanges on which the company’s equity shares are listed within twodays of the purchase or sale. In addition, every person who holds more than 15%shares or voting rights in any company is also required to make annualdisclosure of his holdings to that company (which in turn is required todisclose the same to each of the stock exchanges on which the company’s equityshares are listed).

·       Promoters or persons in control of a company are also required to makeannual disclosure of their holding in the same manner. The company is alsorequired to make annual disclosure of holdings of its promoters or persons incontrol to each of the stock exchanges on which its equity shares are listed.

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·       An acquirer cannot acquire equity shares or voting rights which (takentogether with existing equity shares or voting rights, if any, held by him orby persons acting in concert with him) would entitle such acquirer to exercise15% or more of the voting rights in a company, unless such acquirer makes apublic announcement offering to acquire a further minimum of 20% of the votingcapital of the company at a price not lower than the price determined inaccordance with the Takeover Code. A copy of the public announcement isrequired to be delivered, on the date on which such announcement is published,to SEBI, the company and the stock exchanges on which the company’s equityshares are listed.

·       No acquirer who, together with persons acting in concert with him, hasacquired, in accordance with law, 15% or more but less than 55% of the sharesor voting rights in a company, shall acquire, either by himself or through orwith persons acting in concert with him, additional shares or voting rightsthat would entitle him to exercise more than 5% of the voting rights in anyfinancial year ending March 31, unless such acquirer makes a publicannouncement offering to acquire a further minimum of 20% of the voting capitalof the company at a price not lower than the price determined in accordancewith the Takeover Code.

·       No acquirer who, together with persons acting in concert with himholds, 55% or more but less than 75% (or less than 90% in the case of companiesthat listed their shares by making an offer in terms of Rule 19(2)(b) ofthe SCRR) of the shares or voting rights in a target company shall acquire,either by himself or through persons acting in concert with him, any additionalshares or voting rights unless such acquirer makes a public announcementoffering to acquire a minimum of 20% of the voting capital of the company at aprice not lower than the price determined in accordance with the Takeover Code.

·       Where an acquirer, who together with persons acting in concert withhim, has acquired, in accordance with law, 55% or more but less than 75% (orless than 90% in the case of companies that listed their shares by making anoffer in terms of Rule 19(2)(b) of the SCRR) of the shares or votingrights in a target company, wishes to consolidate his holding while ensuringthat the public shareholding in the target company does not fall below theminimum level permitted by the listing agreement, he may do so only by making apublic announcement offering to acquire (a) 20% of the company’s votingcapital, or (b) such other lesser percentage of voting capital of thecompany as would, assuming full subscription to the offer, enable the acquirer,together with persons acting in concert with him, to increase his holding tothe maximum level possible that is consistent with the company meeting theminimum public shareholding requirements set forth in the listing agreementbetween the company and the applicable stock exchange.

·       If the acquisition made in pursuance of a public offer results in thepublic shareholding in the target company being reduced to a level below thelimits specified in the listing agreement between the company and theapplicable stock exchange, the acquirer shall take necessary steps tofacilitate compliance of the company with the relevant provisions of thelisting agreement, within the time period mentioned therein,

·       In addition, regardless of whether there has been any acquisition ofequity shares or voting rights in a company, an acquirer cannot directly orindirectly acquire control over a company (for example, by way of acquiring theright to appoint a majority of the directors or to control the management orthe policy decisions of the company) unless such acquirer makes a publicannouncement offering to acquire a minimum of 20% of the voting capital of thecompany. In addition, the Takeover Code introduces the “chain principle” bywhich the acquisition of a holding company will obligate the acquirer to make apublic offer to the shareholders of each subsidiary company which is listed.

The Takeover Code setsout the contents of the required public announcements as well as the minimumoffer price.

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The Takeover Codepermits conditional offers as well as the acquisition and subsequent delistingof all shares of a company and provides specific guidelines for the gradualacquisition of shares or voting rights. Specific obligations of the acquirerand the board of directors of the target company in the offer process have alsobeen set out. Acquirers making a public offer are also required to deposit inan escrow account a percentage of the total consideration which amount will beforfeited in the event that the acquirer does not fulfill his obligations.

Subject to certain conditions, the Takeover Code exempts certainspecified acquisitions from the requirement of making a public offer,including, among others, the acquisition of equity shares (1) by allotmentin a public issue or a rights issue, (2) by underwriters pursuant to anunderwriting agreement and (3) by registered stockbrokers in the ordinarycourse of business on behalf of clients.

**Provisions onChanges in Capital**

Our authorized capital canbe altered by an ordinary resolution of the shareholders in a general meeting.The additional issue of equity shares is subject to the pre-emptiverights of the shareholders. In addition, a company may increase its sharecapital, consolidate its share capital into shares of larger face value thanits existing shares or sub-divided its shares by reducing their par value,subject to an ordinary resolution of the shareholders in a general meeting.

**DiscriminatoryProvisions in the Articles**

There are no provisions inour Articles discriminating against any existing or prospective shareholder asa result of such shareholder owning a substantial number of shares.

**10.C. Material Contracts**

Other than describedelsewhere in the document herein, we have not entered into any materialcontracts in the two years preceding the date of this Annual Report, other thancontracts entered into in the ordinary course of business.

**10.D. Exchange Controls**

The subscription, purchase and sale of shares of an Indian company aregoverned by various Indian laws restricting the issuance of shares by thecompany to non-residents or subsequent transfer of shares by or tonon-residents. These restrictions have been relaxed in recent years. Set forthbelow is a summary of various forms of investment, and the restrictionsapplicable to each, including the requirements under Indian law applicable tothis issuance of ADSs.

**Foreign Direct Investment**

*Issuances by the Company*

Over a period of time, the Government of India has relaxed therestrictions on foreign investment. Subject to certain conditions, undercurrent regulations, foreign direct investment in most industry sectors doesnot require prior approval of the Foreign Investment Promotion Board or theReserve Bank of India, if the percentage of equity holding by all foreigninvestors does not exceed specified industry-specific thresholds. Theseconditions include certain minimum pricing requirements and ownershiprestrictions based on the nature of the foreign investor. Purchases by foreigninvestors of ADSs are treated as direct foreign investment in the equity issuedby Indian companies for such offerings. Foreign investment of up to 100% of ourshare capital is currently permitted in the IT industry.

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*Subsequent Transfers*

Restrictions forsubsequent transfers of shares of Indian companies between residents andnon-residents were relaxed significantly as of October 2004. As a result,for a transfer between a resident and a non-resident of securities of an Indiancompany in the IT sector, such as ours, no prior approval of either the RBI orthe Government of India is required, as long as certain conditions are met.These conditions include compliance, as applicable, with pricing guidelines,the Takeover Code, and the ownership restrictions based on the nature of theforeign investor. If a sale or purchase is conducted on a stock exchange atprevailing market prices, the pricing guidelines will be deemed satisfied. Foroff-market, negotiated transactions, the guidelines require a transaction pricebased on the prevailing market price.

Transfers between two non-residents by way of sale or gifts are notsubject to RBI approvals or pricing restrictions.

**Portfolio Investment by Non-Resident Indians**

Investments by personsof Indian nationality or origin residing outside of India, or Non ResidentIndians (NRIs), or registered Foreign Institutional Investors, or FIIs, madethrough a stock exchange are known as portfolio investments, or PortfolioInvestments.

NRIs are permitted tomake Portfolio Investments on favorable tax and other terms under India’sPortfolio Investment Scheme. Under the scheme, an NRI can purchase up to 5% ofthe paid up value of the shares issued by a company, subject to the conditionthat the aggregate paid up value of shares purchased by all NRIs does notexceed 10% of the paid up capital of the company. In addition to PortfolioInvestments in Indian companies, NRIs may also make foreign direct investmentsin Indian companies pursuant to the foreign direct investment route discussedabove.

This limit may beincreased up to 24% by an Indian company by passing a special resolution of itsmembers. We have not obtained shareholder approval for our equity shares to beowned by the NRIs beyond the aforesaid 10% limit.

Overseas corporate bodies (OCBs) controlled by NRIs, or OCBs, werepreviously permitted to invest on favorable terms under the PortfolioInvestment Scheme. The RBI no longer recognizes OCBs as an eligible class ofinvestment vehicle under various routes and schemes under the foreign exchangeregulations.

**Investment by Foreign Institutional Investors**

Currently, FIIs such aspension funds, investment trusts, and asset management companies, are eligibleto make Portfolio Investments on favorable terms in all the securities tradedon the primary and secondary markets in India. Investment by FIIs in certainsectors is prohibited.

SEBI regulationsprovide that no single FII may hold more than 10% of a company’s total equityshares.

In most cases, underSEBI and the RBI regulations, unless stockholder approval has been obtained,FIIs in aggregate may hold no more than 24% of an Indian company’s equityshares. We have not obtained shareholder approval for our equity shares to beowned by FIIs beyond the aforesaid 24% limit.

There is uncertainty under Indian law about the tax regime applicableto FIIs that hold and trade ADSs. FIIs are urged to consult with their Indianlegal and tax advisers about the relationship between the FII guidelines andthe ADSs and any equity shares withdrawn upon surrender of the ADSs.

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**ADSs**

*Issue of ADSs*

Subject to the fulfillment of certain conditions, including compliancewith the Issue of Foreign Currency Convertible Bonds and Ordinary Shares(Through Depository Receipt Mechanism) Scheme, 1993, or the 1993 Regulations,as amended from time to time, Indian companies issuing ADSs are not required toobtain the prior approval of the Ministry of Finance or the Reserve Bank ofIndia. The 1993 Regulations are distinct from other policies described in thissection relating to investments in Indian companies by foreign investors.

*Fungibility of ADSs and Sponsored ADR Schemes*

In March 2001, theRBI amended the Foreign Exchange Management (Transfer or Issue of Securities bya Person Resident Outside India) Regulations, 2000 and established twoalternative methods to allow equity shares to be converted into and sold asADSs.

First, a registered broker in India can purchase shares of an Indiancompany that has issued ADSs on behalf of a person resident outside India, forthe purposes of converting the shares into ADSs. However, such conversion ofequity shares into ADSs is possible only if the following conditions aresatisfied:

·       the shares are purchased on a recognized stock exchange;

·       the shares are purchased with the permission of the custodian to theADS offering of the Indian company and are deposited with the custodian;

·       the shares so purchased for conversion into ADSs do not exceed thenumber of shares that have been released by the custodian pursuant toconversions of ADSs into equity shares under the deposit agreement; and

·       the non-resident investor, broker, the custodian and the overseasdepositary comply with the provisions of the 1993 Regulations and any relatedguidelines issued thereunder from time to time.

Further, the RBI requires the domestic custodian to ensure compliancewith the RBI guidelines, to file reports with the RBI from time to time and toperform the following functions:

·       monitor the reissuance of ADSs and provide a certificate to the RBI andthe SEBI stating that the sectoral caps for foreign investment in the relevantcompany have not been breached;

·       monitor the total number of ADSs that have been converted intounderlying shares by non-resident investors;

·       liaise with the company to ensure that the sectoral cap on foreigninvestment in the relevant company, if any, is not being breached; and

·       file a monthly report about the ADS transactions under the two-wayfungibility arrangement with the RBI and the SEBI.

By notification dated November 23, 2002, the RBI has permittedIndian companies to sponsor the issuance of ADSs through an overseas depositaryagainst underlying shares accepted from holders of its shares in India foroffering outside of India. The sponsored issue of ADSs is possible only if thefollowing conditions are satisfied:

·       the facility to sell the shares should be available *pari passu* to all categories ofshareholders;

·       the sponsoring company whose shareholders propose to divest existingshares in the overseas market through the issue of ADSs should give an optionto all its shareholders indicating the number of shares to be divested and themechanism of determining the price under the ADS norms. 

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If the shares offered for divestment are more than the pre-specifiednumber to be divested, the shares would be accepted from the existingshareholders in proportion to their existing shareholdings;

·       the offering may require the approval of FIPB for foreign equityinduction through offer of existing shares under the ADS route;

·       the proposal for divestment of the shares be approved by a specialresolution of the shareholders of the Indian company in a general meeting;

·       the proceeds of the ADR issue raised outside India shall be repatriatedinto India within a period of one month from the closure of the issue; and

·       the issue-related expenses in relation to the public issue of ADSsunder this scheme is subject to a ceiling of 7% of the issue size in the caseof public issues and 2% of the issue size in the case of private placements.The issue related expenses include underwriting commissions, lead managers’charges, legal expenses and reimbursable expenses. The issue expenses shall bepassed on to the shareholders participating in the sponsored issue on a *pro rata* basis.

The issuer is also required to furnish a report to the RBI specifyingthe details of the offering, including the amount raised through the offering,the number of ADSs issued, the underlying shares offered, the percentage offoreign equity in the issuer represented by the ADSs, details of issueparameters and details of repatriation within 30 days of such issue.

*Transfer of ADSs and Surrender of ADSs*

A person resident outside India may transfer the ADSs held in Indiancompanies to another person resident outside India without any permission.Other than mutual funds that may purchase ADSs subject to terms and conditionsspecified by the RBI, a person resident in India is not permitted to hold ADSsof an Indian company, except in connection with the exercise of stock options.An ADS holder is permitted to surrender the ADSs held by him in an Indiancompany and to receive the underlying equity shares under the terms of thedeposit agreement.

*Recent Development on ADS Issues*

On August 31, 2005 the Government of India amended the ForeignCurrency Convertible Bonds and Ordinary Shares (Through Depositary ReceiptMechanism) Scheme to provide a pricing floor for Global Depositary Receipt(which includes ADSs) and Foreign Currency Convertible Bond issues. Under thenew regulations, the offer price of the GDSs/ADSs cannot be less than thehigher of the average of the weekly high and low of the closing prices of theshares as quoted on the BSE or the NSE during (a) the six months and (b) thetwo weeks immediately preceding the date that is 30 days prior to the date onwhich the shareholder meeting was held to consider the proposed issue.

**10.E. Taxation**

**Indian Taxation**

*General*

The following summaryis not intended to constitute a complete analysis of the individual taxconsequences to non-resident holders or employees under Indian law for theacquisition, ownership and sale of ADSs and equity shares. This summary isbased on the law and practice of the Indian Income-Tax Act, 1961, as amended orthe Income-Tax Act, including the special tax regime contained in Sections115AC and 115ACA of the Income-Tax Act read with the 1993 Regulations. TheIncome-tax Act is 

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amended every year by the Finance Act of the relevant year. Some or allof the tax consequences of Sections 115AC and 115ACA may be amended or changedby future amendments to the Income-tax Act.

**EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER ORITS OWN TAX ADVISORS WITH RESPECT TO INDIAN AND LOCAL TAX CONSEQUENCES OFACQUIRING, OWNING OR DISPOSING OF EQUITY SHARES OR ADSs.**

***Levy of Income Tax***

In India, tax is chargedon the basis of the residential status of a person (under terms of theprovisions of the Indian Income Tax Act) on his/her total income in theprevious year, at the rates as specified in the Finance Act as applicable inthe relevant assessment year. A period of 12 months commencing on the first dayof April every year is referred to as an Assessment Year. Generally, thePrevious Year means the financial year immediately preceding the AssessmentYear. Tax is paid in the Assessment Year on income earned in the Previous Year.In general, in the case of a person who is “resident” in India in a previousyear, his/her global income is subject to tax in India. In the case of a personwho is “non-resident” in India, only the income that is received or deemed tobe received in India or the income that accrues or arises or is deemed toaccrue or arise to such person in India is subject to tax in India. In the caseof a person who is “not ordinarily resident” in India, the income chargeable totax is the same as persons who are resident and ordinarily resident except thatthe income which accrues or arises outside India is not included in his totalincome unless it is derived from a business controlled from India.

***Residence***

For purposes of the Income-tax Act, an individual isconsidered to be a resident of India during any fiscal year if he or she is inIndia in that year for:

182 days or more in a fiscal year

OR

60 days or more in that fiscal year if the person hasbeen present in India for 365 days or more in the preceding four years.

However, where the person concerned is a person ofIndian origin, or a person who has left India for employment outside India, theperson will be considered a resident of India only when present in India for aperiod of 182 days in the previous year, even though the person has beenpresent in India for 365 days or more in the preceding four years. An Individual would be considered “not ordinarily resident” if he / she isresident in India in a particular Previous Year but has been a non-resident inIndia for a period of 9 out of 10 years before that year, OR has been presentin India for 729 days or less in the 7 years previous to that year.

A company is a resident ofIndia if it is incorporated in India or the control and the management of itsaffairs is situated wholly in India. Individuals and companies that are notresidents of India would be treated as non-residents for purposes of theIncome-tax Act.

***Taxation of Distributions***

Currently dividend income is exempt from tax for allshareholders (whether resident in India or not). However, the companydeclaring/distributing dividends is required to pay, in addition to corporatetax, a tax on dividends distributed, called dividend distribution tax at therate of 14.025% including a surcharge of 10% on the total amounts distributedas dividend and an education surcharge at the rate of 2% of such tax andsurcharge.

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Any distributions ofadditional ADSs or equity shares to resident or non-resident holders will notbe subject to Indian tax.

***Taxation of Capital Gains***

The following is a brief summary of capital gainstaxation of non-resident holders and resident employees relating to the sale ofADSs and equity shares received upon conversion of ADSs. The relevantprovisions are contained mainly in sections 45, 47(vii)(a), 115AC and 115ACA,of the Income-tax Act, in conjunction with the provisions of the 1993Regulations.

Under the Income-tax Act, capital gains can be of twotypes, “long term capital gain” or “short term capital gain”. Normally, gainsarising on the sale of capital assets held for more than 36 months areconsidered long term capital gains and gains arising on the sale of capitalassets held for 36 months or less, are considered short term capital gains.However, gains arising from the sale of a capital asset, being shares held in acompany for more than 12 months (measured from the date of advice by adepositary to a Custodian of the delivery of the shares in exchange for ADS)are considered long term capital gains. Gains arising from the sale of sharesheld for a period of twelve months or less are considered as short term capitalgains.

Capital gains aretaxed as follows: 

·       Gainsfrom a sale of ADSs outside India, by a non-resident to another non-residentare not taxable in India.

·       Conversionof the ADS into the underlying shares is not taxable in India.

Pursuant to Section 115AC of the Income-tax Actread with the provisions of the 1993 Regulations, long term capital gainsrealized on sale of ADSs (not covered above) will be subject to tax at the rateof 10% excluding the applicable general surcharge and education surcharge.Where the beneficial holder of the ADS is an individual the tax shall beincreased by a 10 % general surcharge (if the total income is in excess of Rs.1,000,000 during the previous year) and education surcharge of 2% on tax andgeneral surcharge. Where the beneficial holder is a non-resident company, theabove amount of tax shall be increased by a 2.5% general surcharge andeducation cess of 2 %. This tax is levied in India by withholding the tax atthe above rates.

Any income arising from the transfer of equity sharesheld as long term capital asset that is subject to securities transaction tax,which is effective from October 1, 2004, shall be exempt from long termcapital gains tax. Any income arising from the transfer of equity shares heldas a short term capital asset, that is subject to securities transaction tax(effective from October 1, 2004), shall be taxed at a rate of 10% plus ageneral surcharge of 10% for individuals having total income in excess of Rs.1,000,000 during the previous year or 2.5% in case of foreign companies, and anadditional education surcharge of 2% on tax and general surcharge.

The aforesaid tax rates with respect to capital gainsmay be reduced as per the provisions of the double tax avoidance agreementsthat India has signed with the home jurisdictions of the non-resident holders.

Pursuant to the changesintroduced by the Finance Act, 2006, the corporate shareholders may be subjectto a Minimum Alternate Tax (“MAT”). As per the Income-tax Act, if the taxpayable by any company (including a foreign company) is less than 10 % of itsbook profits, it will be required to pay MAT which will be deemed to be 10.455%of such book profits, in case of a foreign company. Long term capital gains onthe sale of listed securities are included in the definition of “book profits”for the purposes of calculating MAT.

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**Taxation ofBusiness Income**

The income from the transfer of shares held in anIndian company may be characterized as trading income, on the basis of variousfactors, including the purpose of the holding by the investor, period ofholding, the manner and method of investment and transfer, etc. Where sharesare held under an employee stock option scheme, it is unlikely that the incomefrom transfer of these shares will be characterized as trading income.

Where the income is classifiedas trading or business income, and is found liable to tax in India,non-resident companies will be taxed in India on the net income at the rate of40% increased by 2.5% surcharge and 2% education cess. Further, MAT will applyin such cases. Non-residents other than companies or residents will be taxed at30% increased by 10% surcharge and 2% education cess, on trading or businessincome.

***Securities Transaction Tax***

The exemption for longterm capital gains and the reduction of the rate on short term capital gainsare applicable only if the sale or transfer of the equity shares takes place ona recognized stock exchange in India and the securities transaction tax or STT,is collected by the respective stock exchanges at the applicable rates on the transactionvalue. If a purchase or sale of equity shares which is settled by way of actualdelivery or transfer of the equity share, STT will be levied at 0.125% on boththe buyer and the seller of the equity share. For sales of equity shares whichare otherwise settled than by way of delivery or transfer, STT will be leviedat 0.025% on the seller of the equity share. The STT can be set-off againstbusiness income tax, in accordance with the provisions of the Income-tax Act,provided the gains on the transactions are taxed as business income and not ascapital gains.

***Mode of Computation of Capital Gain***

Capital gains tax is computed by applying the appropriate tax rate on the difference betweenthe sale price and the purchase price of the capital asset. For the purpose ofdetermining the amount of capital gains arising from the sale of shares,converted on surrender of the ADS, the cost of acquisition of such shares shallbe prevailing price of shares at the Indian Stock Exchanges, on the date onwhich the depositary advises the Custodian of the release of such shares onsuch surrender of the ADS and not the acquisition cost of the ADS beingexchanged*.* According to the 1993Regulations, a non-resident holder’s holding period for the purpose ofdetermining the applicable Indian capital gains tax rate relating to equityshares received in exchange for ADSs commences on the date of the notice of theredemption by the Depositary to the custodian. However, the 1993 Regulationsdoes not address this issue in the case of resident employees, and it istherefore unclear as to when the holding period for the purposes of determiningcapital gains tax commences for such a resident employee.

The 1993 Regulationsprovides that if the equity shares are sold on a recognized stock exchange inIndia against payment in Indian rupees, they will no longer be eligible forpreferential tax treatment. It is unclear as to whether section 115AC and the1993 Regulations are applicable to a non-resident who acquires equity sharesoutside India from a non-resident holder of equity shares after receipt of theequity shares upon conversion of the ADSs. It is unclear as to whether capitalgains derived from the sale of subscription rights or other rights by anon-resident holder not entitled to an exemption under a tax treaty will besubject to Indian capital gains tax. If such subscription rights or otherrights are deemed by the Indian tax authorities to be situated within India,the gains realized on the sale of such subscription rights or other rights willbe subject to Indian taxation. The capital gains realized on the sale of suchsubscription rights or other rights, which will generally be in the nature ofshort term capital gains, will be subject to tax at variable rates with amaximum rate of 40% excluding the applicable general surcharge of 2.5% andeducation surcharge of 2% in case of a foreign company, and 30%, excluding theapplicable general 

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surchargeand education surcharge, in case of resident and non-resident employees at theapplicable slab rate (10%, 20% or 30%, as the case may be) and increased by ageneral surcharge of 10% for individuals having total income in excess of Rs.1,000,000 plus additional education surcharge of 2% on tax and generalsurcharge. In case of persons other than individuals and companies, the rate oftax would be 30% increased by a 10% surcharge, and a 2% education cess.

***Withholding tax on capital gains***

Any taxable gain realizedby a non-resident on the sale of ADSs or equity shares is to be withheld at thesource by the buyer. However, as per the provisions of section 196D(2) ofthe Income-tax Act, no withholding tax is required to be deducted from anyincome by way of capital gains arising to Foreign Institutional Investors asdefined in section 115AD of the Income-tax Act on the transfer of securitiesdefined therein, where the investment is made under the FII regime.

***Buy-back of securities***

Indian companies are notsubject to any tax on the buy-back of their shares from its shareholders inaccordance with the provisions of Section 77A of the Companies Act, 1956.However, the shareholders will be taxed on any resulting gains. We would berequired to deduct tax at source according to the capital gains tax liabilityof a non-resident shareholder.

***Stamp Duty and Transfer Tax***

Upon issuance of theequity shares underlying our ADSs, we will be required to pay a stamp duty of0.1% per share of the issue price of the underlying equity shares. A transferof ADSs is not subject to Indian stamp duty. However, in the event that aholder of ADS wishes to enforce its rights under the ADS, and bring theinstrument into India for this purpose, the holder of ADS may be required topay stamp duty on the ADS at the applicable rate. Shares must be traded indematerialized form and the transfer of shares in dematerialized form iscurrently not subject to stamp duty.

***Wealth Tax***

The holding of the ADSsand the holding of underlying equity shares by resident and non-residentholders is not subject to Indian wealth tax. Non-resident holders are advisedto consult their own tax advisors regarding this issue.

***Gift Tax and Estate Duty***

Currently, there are nogift taxes or estate duties applicable to the gifting or inheritance of ADSs orequity shares. However, these taxes and duties could be restored in the future.Non-resident holders are advised to consult their own tax advisors regardingthis issue.

***Service tax***

Brokerage or commissionpaid to stock brokers in connection with the sale or purchase of shares issubject to a service tax of 12%, excluding education cess of 2% on tax. Thestock broker is responsible for collecting the service tax from the shareholderand paying it to the government account.

**U.S. Federal Income Tax Considerations**

The following is adiscussion of certain material U.S. Federal income tax consequences ofpurchasing, owning and disposing of equity shares and ADSs. This discussiondoes not purport to be a comprehensive description of all of the U.S. taxconsiderations that may be relevant to a particular person’s decision to 

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acquire the equity shares or ADSs including any state, local ornon-U.S. tax consequences of the ownership of the equity shares or ADSs.

**EACH HOLDER OF ADSs SHOULD CONSULT HIS OR HER OWN TAX ADVISORCONCERNING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OFPURCHASING, OWNING AND DISPOSING OF EQUITY SHARES AND ADSs IN HIS OR HERPARTICULAR SITUATION.**

This discussion applies to only to those investors that hold equityshares or ADSs as capital assets for U.S. tax purposes (generally, forinvestment). This section does not apply to holders that may be subject tospecial tax rules, including but not limited to:

·       a dealer in securities or currencies;

·       a trader in securities that elects to use a mark-to-market method ofaccounting for your securities holdings;

·       a bank, insurance company or other financial institution;

·       a tax-exempt organization;

·       a holder liable for alternative minimum tax;

·       a holder that actually or constructively owns 10% or more by votingpower or value of our stock;

·       a holder that holds equity shares or ADSs as part of a straddle,hedging or conversion transaction; or

·       a U.S. holder whose functional currency is not the U.S. Dollar.

This section is basedon the U.S. Internal Revenue Code of 1986, as amended, or the Code, itslegislative history, existing and proposed U.S. Treasury regulations, publishedrulings and other administrative guidance of the U.S. Internal Revenue Serviceand court decisions, all as in effect on the date hereof. These laws aresubject to change or different interpretation by the U.S. Internal RevenueService or a court, possibly on a retroactive basis.

You are a “U.S. holder” if you are a beneficial owner of equity sharesor ADSs and you are:

·       a citizen or resident individual of the United States;

·  aU.S. domestic corporation, or other entity treated as a domestic corporationfor U.S. federal income tax purposes;

·  anestate whose income is subject to U.S. Federal income tax regardless of itssource; or

·  atrust if a U.S. court can exercise primary supervision over the trust’sadministration and one or more U.S. persons are authorized to control allsubstantial decisions of the trust.

In addition, thisdiscussion is limited to U.S. holders who are not resident in India forpurposes of the DTAT between the United States and India.

If a partnership(including for this purpose any entity treated as a partnership for U.S. taxpurposes) is a beneficial owner of the equity shares or ADSs, the U.S. taxtreatment of a partner in the partnership generally will depend on the statusof the partner and the activities of the partnership. A holder of the equityshares or ADSs that is a partnership and partners in such a partnership shouldconsult their own tax advisors about the U.S. federal income tax consequencesof holding and disposing of the equity shares or ADSs.

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A “non-U.S. holder” isa beneficial owner of equity shares or ADSs that is not a U.S. person for U.S.Federal income tax purposes.

For U.S. Federal incometax purposes, holders of ADSs will be treated as the owners of equity sharesrepresented by such ADSs.

We believe that we will not be a passive foreign investment company, orPFIC, for U.S. Federal income tax purposes for the current taxable year.However, we cannot assure you that we will not be considered a PFIC in thecurrent or future years. The determination whether or not we are a PFIC is afactual determination that is based on the types of income we earn and thevalue of our assets and cannot be made until the close of the applicable taxyear. If we were currently or were to become a PFIC, U.S. holders of equityshares or ADSs would be subject to special rules and a variety ofpotentially adverse tax consequences under the Code.

*Taxation of Dividends*

*U.S. Holders.**  *Subject to the PFIC rules referredto below, under the U.S. Federal income tax laws, if you are a U.S. holder, youmust include in your gross income the gross amount of any dividend paid by usout of our current or accumulated earnings and profits (as determined for U.S.Federal income tax purposes). You must include the amount of any Indian taxwithheld from the dividend payment in this gross amount even though you do notin fact receive it. The dividend is ordinary income that you must include inincome when you receive the dividend, actually or constructively. Dividendsreceived by an individual taxpayer during taxable years beginning before January 1,2009 will be taxed at a maximum rate of 15%, where certain holding period andother requirements are satisfied, if such dividends constitute qualifieddividend income. Qualified dividend income includes dividends paid by aQualified Foreign Corporation, and we believe that we are, and will continue tobe, a Qualified Foreign Corporation. The U.S. Treasury has announced itsintention to promulgate rules pursuant to which holder of ADSs andintermediaries through whom such securities are held will be permitted to relyon certificates from issuers to establish that dividends are treated asqualified dividends. Because such procedures have not yet been issued, it isnot clear whether we will be able to comply with them. Holders of ADSs andequity shares should consult their own tax advisors regarding the availabilityof the reduced dividend tax rate in light of their own particular circumstances.Dividends will not be eligible for the dividends-received deduction generallyallowed to U.S. corporations in respect of dividends received from other U.S.corporations.

The amount of thedividend distribution that you must include in your income as a U.S. holderwill be the U.S. Dollar value of the Indian rupee payments made, determined atthe spot Indian rupee/U.S. Dollar exchange rate on the date the dividenddistribution is includible in your income, regardless of whether the payment isin fact converted into U.S. Dollars. If the foreign currency received as adividend is not converted into U.S. dollars on the date of receipt, a U.S.Holder will have a basis in the foreign currency equal to its U.S. dollar valueon the date of receipt. Generally, any gain or loss resulting from currencyexchange fluctuations during the period from the date you include the dividendpayment in income to the date you convert the payment into U.S. Dollars will betreated as ordinary income or loss. The gain or loss generally will be incomeor loss from sources within the United States for foreign tax credit limitationpurposes. If we distribute non-cash property as a dividend, you generally willinclude in income an amount equal to the fair market value of the property, inU.S. Dollars, on the date that it is distributed. Subject to certainlimitations, a U.S. holder may be entitled to a credit or deduction against itsU.S. Federal income taxes for the amount of any Indian taxes that are withheldfrom dividend distributions made to such U.S. holders. The decision to claimeither a credit or deduction must be made annually, and will apply to allforeign taxes paid by the U.S. holder to any foreign country or U.S. possessionwith respect to the applicable tax year.

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A portion of dividendsreceived may be income from United States sources, and the remainder will beincome from non-United States sources, for U.S. foreign tax credit purposesunder special U.S. Federal income tax rules, subject to various classificationsand other limitations. The rules relating to computing foreign tax creditsare complex. You should consult your own tax advisor to determine the foreigntax credit implications of owning equity shares or ADSs.

Distributions in excessof current and accumulated earnings and profits, as determined for U.S. federalincome tax purposes, will be treated as a non-taxable return of capital to theextent of your basis in the equity shares and ADSs and thereafter as capitalgain.

*Non-U.S. Holders.**  *Dividends paid to non-U.S. holders generally will not be subject toU.S. income tax unless the dividends are “effectively connected” with yourconduct of a trade or business within the United States, and the dividends areattributable to a permanent establishment (or in the case of an individual, afixed place of business) that you maintain in the United States if that isrequired by an applicable income tax treaty as a condition for subjecting youto U.S. taxation on a net income basis. In such cases you generally will betaxed in the same manner as a U.S. holder, and will not be subject to U.S.Federal withholding tax. If you are a corporate non-U.S. holder, “effectivelyconnected” dividends may, under certain circumstances, be subject to anadditional “branch profits tax” at a 30% rate or a lower rate if you areeligible for the benefits of an income tax treaty that provides for a lowerrate.

*Taxation of Capital Gains*

*U.S. Holders.**  *Subject to the PFIC rules referredto below, if you are a U.S. holder and you sell or otherwise dispose of yourequity shares or ADSs, you will recognize capital gain or loss for U.S. Federalincome tax purposes equal to the difference between the U.S. Dollar value ofthe amount that you realize and your tax basis, determined in U.S. Dollars, inyour equity shares or ADSs. Prior to January 1, 2009, capital gains of anon-corporate U.S. holder are generally taxed at a maximum rate of 15% wherethe property is held for more than one year. The gain or loss will generally beincome or loss from sources within the United States for foreign tax creditlimitation purposes, unless it is attributable to an office or other fixedplace of business outside the United States and certain other conditions aremet. Your ability to deduct capital losses is subject to limitations.

Pursuant torecently-enacted legislation, a penalty in the amount of $10,000 in the case ofa natural person and $50,000 in any other case is imposed on any taxpayer thatfails to timely disclose its participation in a “reportable transaction” (asdefined in Section 6011 of the Code). A taxpayer that has participated ina “reportable transaction” during the tax year must attach a disclosurestatement to its U.S. Federal income tax return. A “reportable transaction”includes a transaction generating a loss under Code Section 165 in excessof certain specified amounts (which amounts vary depending on several factors,including the status of the taxpayer as an individual, trust, partnership orcorporation). Investment in equity shares or ADSs could be treated as a “reportabletransaction” that must be disclosed on a U.S. holder’s U.S. Federal income taxreturn if the investment results in the taxpayer claiming a foreign currencyloss on such tax return equal to or greater than the specified amount (*e.g.*, $50,000 in the case of a taxpayerthat is an individual or trust). Prospective purchasers are urged to consulttheir own tax advisors regarding the circumstances in which an investment inequity shares may result in a “reportable transaction” that is required to bedisclosed to the IRS.

*Non-U.S. Holders.**  *If you are a non-U.S. holder, you will not be subject to U.S. federalincome tax on gain recognized on the sale or other disposition of your equityshares or ADSs unless:

·       the gain is “effectively connected” with your conduct of a trade orbusiness in the United States, and the gain is attributable to a permanentestablishment (or in the case of an individual, a fixed place of business) thatyou maintain in the United States if that is required by an applicable incometax treaty as a condition for subjecting you to U.S. taxation on a net incomebasis; or

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·       you are an individual, you are present in the United States for 183 ormore days in the taxable year of the sale and certain other conditions exist.

In the first case, thenon-U.S. holder will be taxed in the same manner as a U.S. holder. In thesecond case, the non-U.S. holder will be subject to U.S. Federal income tax ata rate of 30% on the amount by which such the non-U.S. holder’s U.S.-sourcecapital gains exceed such non-U.S. holder’s U.S.-source capital losses.

If you are a corporate non-U.S. holder, “effectively connected” gainsthat you recognize may also, under certain circumstances, be subject to anadditional “branch profits tax” at a 30% rate or at a lower rate if you areeligible for the benefits of an income tax treaty that provides for a lowerrate.

*PFIC Rules*

We believe that ourequity shares and ADSs will not be treated as stock of a PFIC for U.S. federalincome tax purposes for the current tax year. The determination of whether ornot we are a PFIC is a factual determination that cannot be made until theclose of the applicable tax year and that is based on the types of income weearn and the value of our assets (including goodwill), both of which aresubject to change. In calculating goodwill for this purpose, we will value ourtotal assets based on the total market value, determined with reference to thethen market price of the equity shares and ADSs, and will make determinationsregarding the amount of this value allocable to goodwill. Because thedetermination of goodwill will be based on the market price of the equityshares and ADSs, it is subject to change. It is possible that the U.S. InternalRevenue Service may challenge our valuation of our assets (including goodwill),which may result in our being classified as a PFIC. Thus, it is possible thatwe may be or become a PFIC in the current or any future taxable year and wecannot assure you that we will not be considered a PFIC in any such tax year.

In general, if you are a U.S. holder, we will be a PFIC with respect toyou if for any taxable year in which you held the equity shares or ADSs:

·       at least 75% of our gross income for the taxable year is passive income;or

·       at least 50% of the value, determined on the basis of a quarterlyaverage, of our assets is attributable to assets that produce or are held forthe production of passive income.

Passive incomegenerally includes dividends, interest, royalties, rents (other than certainrents and royalties derived in the active conduct of a trade or business), theexcess of gains over losses from certain types of transactions in commodities,annuities and gains from assets that produce passive income. If a foreigncorporation owns at least 25% by value of the stock of another corporation, theforeign corporation is treated for purposes of the PFIC tests as owning itsproportionate share of the assets of the other corporation, as receivingdirectly its proportionate share of the other corporation’s income.

If we are treated as a PFIC, and you are a U.S. holder that did notmake a mark-to-market election, as described below, you will be subject tospecial rules with respect to:

·       any gain you realize on the sale or other disposition of your equityshares or ADSs; and

·       any excess distribution that we make to you (generally, anydistributions to you during a single taxable year that are greater than 125% ofthe average annual distributions received by you in respect of the equityshares or ADSs during the three preceding taxable years or, if shorter, yourholding period for the equity shares or ADSs).

Under these rules:

·       the gain or excess distribution will be allocated ratably over yourholding period for the equity shares and ADSs;

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·       the amount allocated to the taxable year in which you realized the gainor excess distribution will be taxed as ordinary income;

·       the amount allocated to each prior year, with certain exceptions, willbe taxed at the highest tax rate in effect for that year; and

·       the interest charge generally applicable to underpayments of tax willbe imposed in respect of the tax attributable to each such year.

Special rules applyfor calculating the amount of the foreign tax credit with respect to excessdistributions by a PFIC.

If you own shares in aPFIC that are treated as marketable stock, you may make a mark-to-marketelection. If you make this election in a timely fashion, you will not besubject to the PFIC rules described above. Instead, in general, you willinclude as ordinary income each year the excess, if any, of the fair marketvalue of your equity shares and ADSs at the end of the taxable year over youradjusted basis in your equity shares and ADSs. You will also be allowed to takean ordinary loss in respect of the excess, if any, of the adjusted basis ofyour equity shares and ADSs over the fair market value at the end of thetaxable year (but only to the extent of the net amount of previously includedincome as a result of the mark-to-market election). Your basis in the equityshares and ADSs will be adjusted to reflect any such income or loss amounts.

We do not intend tofurnish you with the information that you would need in order to make a “qualifiedelecting fund” election to include your share of its income on a current basis.

If you own equity shares or ADSs during any year that we are a PFIC,you must file U.S. Internal Revenue Service Form 8621 that describes thedistribution received on the equity shares or ADSs and the gain realized on thedisposition of the equity shares or ADSs. The reduced tax rate for dividendincome, discussed in “Taxation of Dividends,” is not applicable to dividendspaid by a PFIC.

*Information Reporting and Backup Withholding*

In general, informationreporting requirements will apply to dividends in respect of equity shares orADSs or the proceeds received on the sale, exchange or redemption of equityshares or ADSs paid within the United States (and, in certain cases, outsidethe United States) to U.S. holders other than certain exempt recipients, suchas corporations, and backup withholding tax at the rate of 28% may apply tosuch amounts if the U.S. holder fails to provide an accurate taxpayeridentification number (or otherwise establishes, in the manner provided by law,an exemption from backup withholding) or to report dividends required to beshown on the U.S. holder’s U.S. Federal income tax returns.

Backup withholding isnot an additional income tax, and the amount of any backup withholding from apayment to a U.S. holder will be allowed as credit against the U.S. holder’sU.S. Federal income tax liability provided that the appropriate returns arefiled.

A Non-U.S. holder generally may eliminate the requirement forinformation reporting and backup withholding by providing certification of itsforeign status to the payor, under penalties of perjury, on IRS Form W-8BEN.

**10.F. Dividends and paying agents**

**Not applicable**

**10.G. Statement by experts**

Not applicable

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**10.H. Documents on display**

This report and other informationfiled or to be filed by us can be inspected and copied at prescribed rates atthe public reference facilities maintained by the SEC at:

**JudiciaryPlaza100 F Street, N.E.Public Reference RoomWashington, D.C. 20459**

The SEC maintains awebsite at www.sec.gov that contains reports, proxy and information statements,and other information regarding registrants that make electronic filings withthe SEC using its EDGAR system.

Our periodic reportsand other information may also be inspected at the offices of the New YorkStock Exchange located at 20 Broad Street, New York, New York 10005.

Additionally, documents referred to in this Form 20-F may beinspected at our corporate office which is located at Akruti Softech Park, MIDCCross Road No. 21, Andheri (E), Mumbai-400 093, India.

**10.I. Subsidiary information**

Not applicable

**ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

***General***

Market risk is the loss of future earnings, orreduction in fair value or future cash flows, that may result from a change inthe price of a financial instrument. The value of a financial instrument maychange as a result of changes in interest rates, foreign currency exchangerates, equity prices and other market changes that affect market risk sensitiveinstruments. Market risk is attributable to all market sensitive financialinstruments including foreign currency receivables and payables.

Our exposure to marketrisk is a function of our revenue and expense generating activities in foreigncurrency, the activity of investment in securities and liquid mutual fund unitsand the results of our hedging strategies for foreign currency exposures. Theobjective of market risk management is to avoid excessive exposure of ourearnings and equity to loss.

***Risk Management Procedures***

We manage market riskthrough treasury operations. Our market risk objectives and policies areapproved by our senior management and board of directors. The activities oftreasury operations include management of cash resources and investment insecurities and liquid mutual fund units, implementing hedging strategies forforeign currency exposures, borrowing strategies, and ensuring compliance withmarket risk limits and policies.

***Components of Market Risk***

*ExchangeRate Risk.**  *Ourexposure to market risk arises principally from exchange rate risk. We transacta major portion of our business in foreign currencies, particularly the U.S.dollar. The exchange rate between the rupee and the dollar has changedsubstantially in recent years and may fluctuate substantially in the future.The results of our operations can be adversely affected as the rupee fluctuatesagainst the dollar. Our exchange rate risk primarily arises from our foreigncurrency revenues, receivables, payables and other foreign currency assets andliabilities.

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We have sought to reduce the effect of exchange ratefluctuations on our operating results by entering into foreign exchange forwardcontracts. As of December 31, 2004, we had outstanding forward contractsof $103.0 million. As of December 31, 2005, we had outstandingforward contracts of $77.0 million. These contracts typically maturewithin twelve months, must be settled on the day of maturity and may becancelled subject to the payment of any gains or losses in the differencebetween the contract exchange rate and the market exchange rate on the date ofcancellation. We use these instruments only for hedging purposes. We may notpurchase contracts adequate to insulate ourselves from all foreign exchange currencyrisks. The policies of the Reserve Bank of India may change from time to timewhich may limit our ability to hedge our foreign currency exposures adequately.In addition, any such contracts may not perform adequately as a hedgingmechanism. We may, in the future, adopt more active hedging policies.

*InterestRate Risk.**  *Oursurplus cash resources are typically invested in liquid mutual fund units,units in other debt mutual funds in India, U.S. municipal bonds and sweepfunds. These investments are exposed to interest rate risk whereby any increasein interest rates may decrease the fair value of the investments. We attempt toreduce this risk by investing in funds with shorter durations and by adequatelydiversifying our investments.

*Fair Value.**  *The fair value of our market raterisk sensitive instruments approximates their carrying value.

**ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

Not applicable

**PART II**

**ITEM 13. DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

Not applicable

**ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OFSECURITY HOLDERS AND USE OF PROCEEDS**

**Modification in therights of security holders**

None.

**Use of proceeds**

In our initial offering of our ADSs, completed on December 8,2005,  we issued 6,156,250 ADSs,representing 12,312,500 equity shares of Rs.2 each, to an underwritingsyndicate (including the underwriters’ over-allotment option of 1,031,250 ADSsrepresenting 2,062,500 equity shares) at an initial offering price of US$20.34per ADS pursuant to a registration statement filed on Form F-1 (FileNo.333-129771) with the SEC. The managing underwriters were Goldman Sachs(Asia) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and ABNAMRO Rothschild LLC. We received approximately US$117 million in net proceedsfrom the offering (after adjusting for direct expenses relating to the offeringof ADSs of approximately US$8.2 million).

The gross proceeds from our ADS offering were US$125.2million, out of which US$7.6 million was paid as underwriting and managementconsulting fees and US$0.6 million was paid for other expenses.

As of March 31, 2006,the entire US$117 million of the net proceeds of our ADS offering remained ascash and cash equivalents pending utilization.

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**ITEM 15. CONTROLSAND PROCEDURES**

**Disclosure controlsand procedures**

Based on their evaluation as of December 31,2005, our principal executive officer and principal financial officer haveconcluded that our disclosure controls and procedures as defined in Rules 13a-14(c) and15d-14(c) under the Securities Exchange Act of 1934 (the ExchangeAct) are effective to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission rules and forms. See the certifications regardingdisclosure controls and procedures set forth in Exhibits 12.1, 12.2, 13.1 and13.2.

Our disclosure controls and procedures, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance of achieving the objectives of the control system. As such,disclosure controls and procedures or internal control systems may not preventall error and all fraud. In addition, the design of a control system mustreflect the fact that there are resource constraints and the benefits ofcontrols must be considered relative to their costs and our managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, atour Company have been detected.

During 2005, in connection with an ongoing review ofcertain tax aspects relating to our international operations by the taxauthorities in the US, we have reassessed our obligations for payroll andrelated taxes for the years December 31, 2001, 2002 ,2003 and 2004. Thisreassessment related primarily to certain wages paid, and short-term fringe benefitsgiven, to our employees when working outside of India, for which appropriatewitholding taxes were not provided. Having evaluated the cause of the error, wehave modified our payroll tax  reviewprocess and the related controls by employing individuals knowledgeable in theapplicable tax laws to perform these functions.

During this evaluation and in the process of preparingour 2005 Annual Report on form 20- F, we also assessed that we had notrecognized income taxes, interest and related expenses attributable to our  income tax returns with respect to our USbranch tax returns for 2001 and 2002 for which we were unable to substantiateto the IRS that such returns were filed within 18 months from the respective duedates. In accordance with the regulations of the US Internal Revenue Service (“IRS”),this results in a disallowance of expenses claimed in the tax filings for therelated periods, and other statutory interest and related expenses.Accordingly, due to inadequate documentation to support tax return positions,we have restated our financial statements for the years 2003 and 2004 and thebalance sheet as of December 31, 2005. We see this event as one off ratherthan a failure in our internal controls structure as this documentation matterdoes not pertain to subsequent years. See Note 3.1.2 to our consolidated financialstatements for further details. Having evaluated the cause of the error, wehave further added a control process of review by our senior management to ensure that proper documentation ismaintained with respect to our income tax return filing.

The error discussed abovehas not changed our conclusion regarding the effectiveness of the design and operationof our disclosure controls and procedures, specially considering the fact thatreturns for the subsequent years were received timely by the IRS.

**Changes in internalcontrol over financial reporting**

During the period coveredby this Annual Report, there were no changes in our internal control overfinancial reporting, other than the items discussed above, that have materiallyaffected or are reasonably likely to materially affect our internal controlover financial reporting.

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**ITEM 16. [RESERVED]**

**ITEM 16A. AUDITCOMMITTEE FINANCIAL EXPERT**

Our Audit Committeemembers are Mr. Arun Duggal(Chairman),  Mr. Pradip Shah and Mr. Louis T.van den Boog, each of whom is an independent director pursuant to theapplicable rules of the Securities Exchange Commission and the NYSE. See “Item 6.Directors, Senior Management and Employees” for the experience andqualifications of the members of the Audit Committee. Our Board of Directors hasdetermined  Mr. Arun Duggal is anAudit Committee Financial Expert as defined in item 401(h) of RegulationS-K.

**ITEM 16B. CODE OFETHICS**

We have adopted a code ofbusiness ethics applicable to our executive officers, directors and all otheremployees. We will make available a copy of the code of ethics to any person,without charge, if a written request is made to our Company  Secretary at our corporate office at AkrutiSoftech Park, MIDC Cross Road No.21 Andheri (E), Mumbai 400 093, India. The codeis also available on our corporate website, www.patni.com.

**ITEM 16C. PRINCIPALACCOUNTANT FEES AND SERVICES**

Thefollowing table sets forth for the fiscal years ended December 31, 2004and December 31, 2005, the fees paid to our principal accountant and itsassociated entities for various services they provided us in these periods.

| **Fiscal Year Ended  December 31,** | ** ** | ** ** | ** ** | **Audit Fees**  | ** ** | **Audit-Related Fees** | ** ** | **Tax Fees** | ** ** | **All Other Fees** | ** ** | **Total Fees** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|---------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **(Amounts in US$)** | ** ** |
| 2004                                               |       |       | 225,931    |                 |       |                        | —     |              |       |                         | —     |                |       |   | 139,665 |   |   |   | 365,596 |   |   |
| 2005                                               |       |       | 261,022    |                 |       |                        | 4,825      |              |       |                         | 35,267     |                |       |   | 396,077 |   |   |   | 697,191 |   |   |

 

**Audit fees**

Audit fees represent feesfor professional services rendered for the audit of the standalone andconsolidated financial statements of the Company and its subsidiaries preparedin accordance with Indian GAAP, US GAAP.

**Audit-related fees**

Audit-related feesrepresent fees for professional services rendered in connection with Securitiesand Exchange Board of India requirements, requirements related to Indian StockExchanges and ESOP related matters.

**Tax fees**

Services providedprimarily consist of routine corporate tax advisory services.

**Others**

Services provided primarily consist of ADR supportfees, payroll related tax issues, transfer pricing study and quality review forISO 9001:2000, BS7799, CMMI/ISO..

Services provided primarily related to assistance withinformation security and quality reviews.

123

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We obtain prior approvalof our audit committee in conection with the nature of services that areprovided and the fees to be paid for the services. For services other thanthose specified, approval would need to be obtained from the audit committeeprior to the performance of such services

**ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

We have not sought anyexemption from the listing standards for audit committees applicable to us asforeign private issuer.

**ITEM 16E. PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES**

During fiscal 2005, therewere no purchases made by or on behalf of us or any affiliated purchaser ofshares of any class of our securities that are registered pursuant to Section 12of the Exchange Act.

**PART III**

**ITEM 17. FINANCIALSTATEMENTS**

See Item 18.

**ITEM18. FINANCIAL STATEMENTS**

The followingfinancial statement and auditors report for fiscal 2005 are incorporated hereinby reference and are included in this Item 18 of this report on Form 20-F:

·       Reportof Independent Registered Public Accounting Firm.

·       ConsolidatedBalance Sheets as of March 31, 2004 and 2005.

·       ConsolidatedStatements of Income for the years ended March 31, 2003, 2004 and 2005.

·       ConsolidatedStatements of Stockholders Equity and Comprehensive Income for the years ended March 31,2003, 2004 and 2005.

·       ConsolidatedStatements of Cash Flows for the years ended March 31, 2003, 2004 and2005.

·       Notesto the Consolidated Financial Statements.

124

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**ITEM 19. EXHIBITS**

| *1.1 |   | Articles of Association of Patni Computer Systems  Limited, as amended                                                                                  |   |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| *1.2 |   | Memorandum of Association of Patni Computer Systems  Limited, as amended                                                                                |   |
| *1.3 |   | Certificate of Incorporation of Patni Computer  Systems Limited, as amended                                                                             |   |
| *2.1 |   | Form of Deposit Agreement                                                                                                                          |   |
| *2.2 |   | Patni’s specimen certificate for equity shares                                                                                                     |   |
| *2.3 |   | Form of American Depositary Receipt                                                                                                                |   |
| *4.2 |   | Registration Rights Agreement                                                                                                                           |   |
| *4.3 |   | Purchase Agreement between Patni Computer Systems  Limited and Cymbal Corporation dated November 3, 2004                                           |   |
| *4.4 |   | Lease Deed entered into between the Company and  State Industrial Promotion Corporation of Tamil Nadu Limited (SIPCOT), dated  September 30, 2004  |   |
| *4.5 |   | Service Agreement between Patni Computer Systems  Inc. and Mr. Narendra K. Patni dated December 1, 2000, as amended                           |   |
| *4.6 |   | Consultancy Agreement between Patni Computer Systems  Limited and Patni Computer Systems Inc. (f/t/a Data Conversion Inc.) dated  October 27, 2000 |   |
| *4.7 |   | Terms of employment for Mr. Gajendra  K. Patni and Mr. Ashok K. Patni                                                               |   |
| *4.8 |   | Information Technology Services Agreement between  General Electric International Inc. and Patni Computer Systems Inc. dated November 12,  2003    |   |
| 8.1  |   | List of subsidiaries of the Registrant, see “Item 4.  Information on the Company—Organizational Structure”                               |   |
| 12.1 |   | Certification of Chief Executive Officer under  Section 302 of the Sarbanes Oxley Act                                                              |   |
| 12.2 |   | Certification of Chief Financial Officer under  Section 302 of the Sarbanes Oxley Act                                                              |   |
| 13.1 |   | Certification of Chief Executive Officer under  Section 906 of the Sarbanes Oxley Act                                                              |   |
| 13.2 |   | Certification of  Chief Financial Officer under Section 906 of the Sarbanes Oxley Act                                                              |   |

----

*                    Previouslyfiled on November 17, 2005 with the SEC on Form F-1 (File Number 333-129771)

125

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**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.

|                          | For Patni Computer Systems Limited  |
|--------------------------|-------------------------------------|
|                     | By:                                 | /s/ NARENDRA K. PATNI |   |
|                     |                                | Narendra K. Patni |
|                     |                                | *Chief Executive Officer* |
|                     | For Patni Computer  Systems Limited |
|                     | By:                                 | /s/ DEEPAK SOGANI |   |
|                     |                                | Deepak Sogani |
|                     |                                | *Chief Financial Officer* |
| Mumbai, India            |                                |   |
| Date: July 17, 2006 |                                |   |

 

126

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**Patni ComputerSystems Limited and subsidiariesConsolidated financial statementsContents**
| Report of Independent Registered Public Accounting  Firm                                                                                  |   | F-2         |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
| Consolidated Balance Sheets as of December 31,  2004 and 2005                                                                        |   | F-3         |   |
| Consolidated Statements of Income for the years ended  December 31, 2003, 2004 and 2005                                              |   | F-4         |   |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for the years ended December 31, 2003, 2004 and  2005 |   | F-5         |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2003, 2004 and 2005                                          |   | F-6 to F-7  |   |
| Notes to the Consolidated Financial Statements                                                                                            |   | F-8 to F-44 |   |

 

F-1

----

**Report of Independent Registered Public AccountingFirm**

**The Board ofDirectors and Shareholders**

Patni Computer Systems Limited

We have audited the accompanying consolidated balancesheets of Patni Computer Systems Limited and subsidiaries (‘the Company’) as ofDecember 31, 2005 and 2004, and the related consolidated statements ofincome, shareholders’ equity and comprehensive income, and cash flows for eachof the years in the three-year period ended December 31, 2005. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Patni Computer Systems Limited and subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

As discussed in note 3,the Company has restated its accompanying consolidated financial statements.

Mumbai, India3 February 2006, except as to note 3.1.2, which is as of 11 July 2006.

F-2

----

**Patni Computer Systems Limited and subsidiariesConsolidated Balance Sheets**

| ** **                                                                                                                                                                             | ** ** | **As of**        | ** **      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                                                             | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
| ** **                                                                                                                                                                             | ** ** | **2004**              | ** **      | **2005** | ** ** |
| ** **                                                                                                                                                                             | ** ** | **(Restated)**        | ** **      | **(Restated)** | ** ** |
| **Assets**                                                                                                                                                                             | ** ** | ** **            | ** **      | ** ** | ** ** |
| *Current assets*                                                                                                                                                                       | ** ** | ** **            | ** **      | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                              |       | $                     | 77,143,498      |   | $ | 148,819,600 |   |
| Investments in liquid mutual fund units                                                                                                                                                |       | 55,372,919            |            | 42,161,683 |   |
| Investment in securities                                                                                                                                                               |       | 30,249,800            |            | 99,614,252 |   |
| Accounts receivable, net                                                                                                                                                               |       | 45,721,964            |            | 58,747,671 |   |
| Accounts receivable, net from a significant  shareholder                                                                                                                               |       | 26,282,949            |            | 15,673,490 |   |
| Costs and estimated earnings in excess of billings on  uncompleted contracts                                                                                                           |       | 15,233,440            |            | 26,094,094 |   |
| Deferred income taxes                                                                                                                                                                  |       | 14,755,838            |            | 13,722,884 |   |
| Other current assets                                                                                                                                                                   |       | 10,575,425            |            | 9,549,036 |   |
| **Total current assets**                                                                                                                                                               | ** ** | **275,335,833**       | ** **      | **414,382,710** | ** ** |
| Deferred income taxes                                                                                                                                                                  |       | —                |            | 3,401,766 |   |
| Other assets                                                                                                                                                                           |       | 5,987,387             |            | 5,946,751 |   |
| Property, plant and equipment, net                                                                                                                                                     |       | 55,074,565            |            | 92,009,623 |   |
| Intangible assets, net                                                                                                                                                                 |       | 11,987,830            |            | 10,158,065 |   |
| Goodwill                                                                                                                                                                               |       | 24,677,771            |            | 27,987,198 |   |
| **Total assets**                                                                                                                                                                       | ** ** | **$**                 | **373,063,386** | ** ** | **$** | **553,886,113** | ** ** |
| **Liabilities  and shareholders’ equity**                                                                                                                                         |       |                  |            |   |   |
| *Current liabilities*                                                                                                                                                                  |       |                  |            |   |   |
| Capital lease obligation                                                                                                                                                               |       | 266,242               |            | 289,520 |   |
| Trade accounts payable                                                                                                                                                                 |       | 3,673,205             |            | 5,488,043 |   |
| Billings in excess of costs and estimated earnings on  uncompleted contracts                                                                                                           |       | 2,846,346             |            | 2,350,346 |   |
| Income taxes payable                                                                                                                                                                   |       | 16,240,717            |            | 15,758,804 |   |
| Deferred income taxes                                                                                                                                                                  |       | 115,659               |            | 193,807 |   |
| Accrued expenses                                                                                                                                                                       |       | 20,779,367            |            | 26,231,532 |   |
| Other current liabilities                                                                                                                                                              |       | 41,971,100            |            | 53,001,144 |   |
| **Total current liabilities**                                                                                                                                                          | ** ** | **85,892,636**        | ** **      | **103,313,196** | ** ** |
| Capital lease obligations excluding current  instalments                                                                                                                               |       | 390,586               |            | 416,342 |   |
| Other liabilities                                                                                                                                                                      |       | 6,210,119             |            | 6,368,544 |   |
| Deferred income taxes                                                                                                                                                                  |       | 7,343,266             |            | 4,758,961 |   |
| **Total liabilities**                                                                                                                                                                  | ** ** | **$**                 | **99,836,607**  | ** ** | **$** | **114,857,043** | ** ** |
| Commitments and  contingencies                                                                                                                                                         |       |                  |            |   |   |
| **Shareholders’ Equity**                                                                                                                                                          |       |                  |            |   |   |
| Common shares Rs. 2 par value; Authorized 250,000,000  shares (Issued and outstanding; 124,997,009 shares and 137,798,399 shares as  of December 31, 2004 and 2005 respectively). |       | 5,542,301             |            | 6,101,600 |   |
| Additional paid-in capital                                                                                                                                                             |       | 180,906,859           |            | 299,220,619 |   |
| Retained earnings                                                                                                                                                                      |       | 78,179,165            |            | 132,511,943 |   |
| Accumulated other comprehensive income                                                                                                                                                 |       | 8,598,454             |            | 1,194,908 |   |
| **Total shareholders’ equity**                                                                                                                                                    | ** ** | **$**                 | **273,226,779** | ** ** | **$** | **439,029,070** | ** ** |
| **Total  liabilities and shareholders’ equity**                                                                                                                                   | ** ** | **$**                 | **373,063,386** | ** ** | **$** | **553,886,113** | ** ** |

 

See accompanying notes to the consolidated financial statements.

F-3

----

**Patni Computer Systems Limited and subsidiariesConsolidated Statements of Income**

| ** **                                                                                                                                              | ** ** | **Year ended December 31,** | ** **     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                                                                                              | ** ** | **2003**                                   | ** **     | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                              | ** ** | **(Restated)**                             | ** **     | **(Restated)** | ** ** | ** ** | ** ** |
| Revenues                                                                                                                                                |       | $                                          | 147,641,306    |   | $ | 223,141,113 |   | $ | 350,972,760 |   |
| Revenue from a  significant shareholder                                                                                                                 |       | 103,402,102                                |           | 103,440,511 |   | 99,359,172 |   |
|                                                                                                                                                    |       | 251,043,408                                |           | 326,581,624 |   | 450,331,932 |   |
| Cost of revenues                                                                                                                                        |       | 157,472,727                                |           | 202,461,490 |   | 288,480,678 |   |
| **Gross  profit**                                                                                                                                       | ** ** | **93,570,681**                             | ** **     | **124,120,134** | ** ** | **161,851,254** | ** ** |
| Selling, general  and administrative expenses                                                                                                           |       | 50,065,154                                 |           | 61,195,519 |   | 89,728,951 |   |
| Foreign exchange  (gain)/loss, net                                                                                                                      |       | (171,574                                   | )              | 2,081,800 |   | 1,693,145 |   |
| **Operating  income**                                                                                                                                   | ** ** | **43,677,101**                             | ** **     | **60,842,815** | ** ** | **70,429,158** | ** ** |
| Other income/(expense)                                                                                                                                  |       |                                       |           |   |   |   |   |
| Interest and dividend income                                                                                                                            |       | 1,573,522                                  |           | 4,222,853 |   | 4,189,776 |   |
| Interest expense                                                                                                                                        |       | (2,145,559                                 | )              | (2,083,285 | ) | (2,044,366 | ) |
| Gain on sale of investments, net                                                                                                                        |       | 1,278,018                                  |           | 144,482 |   | 1,128,071 |   |
| Other (expense)/income, net                                                                                                                             |       | (2,025,418                                 | )              | (3,692,704 | ) | 966,620 |   |
| Change in fair  value of put option                                                                                                                     |       | 1,186,160                                  |           | — |   | — |   |
| **Income  before income taxes**                                                                                                                         | ** ** | **43,543,824**                             | ** **     | **59,434,161** | ** ** | **74,669,259** | ** ** |
| Income taxes                                                                                                                                            |       | 10,240,242                                 |           | 12,886,362 |   | 13,802,583 |   |
| **Income  before cumulative effect of change in accounting principle**                                                                                  | ** ** | **$**                                      | **33,303,582** | ** ** | **$** | **46,547,799** | ** ** | **$** | **60,866,676** | ** ** |
| Cumulative effect  on prior years (to June 30, 2003) of change in accounting principle due  to adoption of  SFAS 150 (net of income taxes of $Nil) |       | 3,273,960                                  |           | — |   | — |   |
| **Net  income**                                                                                                                                         | ** ** | **$**                                      | **36,577,542** | ** ** | **$** | **46,547,799** | ** ** | **$** | **60,866,676** | ** ** |
| **Earnings per share**                                                                                                                                  |       |                                       |           |   |   |   |   |
| Income before cumulative  effect of a change in accounting principle:                                                                                   | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                   |       | $                                          | 0.30           |   | $ | 0.38 |   | $ | 0.48 |   |
| Diluted                                                                                                                                                 |       | $                                          | 0.30           |   | $ | 0.38 |   | $ | 0.48 |   |
| Cumulative effect  of a change in accounting principle (basic and diluted)                                                                              |       | 0.03                                       |           | — |   | — |   |
| Net Income:                                                                                                                                             |       |                                       |           |   |   |   |   |
| Basic                                                                                                                                                   |       | $                                          | 0.33           |   | $ | 0.38 |   | $ | 0.48 |   |
| Diluted                                                                                                                                                 |       | $                                          | 0.33           |   | $ | 0.38 |   | $ | 0.48 |   |
| **Weighted average number of  common shares used in computing earnings per share**                                                                      | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                   |       | 111,420,849                                |           | 123,066,042 |   | 125,736,592 |   |
| Diluted                                                                                                                                                 |       | 111,420,849                                |           | 124,084,992 |   | 127,457,632 |   |

 

See accompanying notes to the consolidated financial statements.

F-4

----

**Patni Computer Systems Limited and subsidiariesConsolidated Statements of Shareholders’ Equity and Comprehensive Incomefor the years ended December 31, 2003, 2004 and 2005(Restated)**

| ** **                                                                                                      | ** ** | ** **                                       | ** ** | ** **         | ** **    | ** **     | ** ** | ** **        | ** ** | ** **        | ** **      | **Accumulated**  | ** ** | ** ** | ** **  |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------|---------------|----------------|------------|-------------------|------------|-------------------|-----------------|------------------|------------|------------|-------------|
| ** **                                                                                                      | ** ** | ** **                                       | ** ** | ** **         | ** **    | **Additional** | ** ** | ** **        | ** ** | ** **        | ** **      | **Other**        | ** ** | ** ** | ** **  |
| ** **                                                                                                      | ** ** | **Common shares**                           | ** ** | **Paid-In-**       | ** **    | **Retained**   | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** **      | **Shareholders** | ** ** |
| ** **                                                                                                      | ** ** | **Shares**                                       | ** ** | **Par value** | ** **    | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**        | ** **      | **Income**       | ** ** | **Equity** | ** **  |
| ** **                                                                                                      | ** ** | **(in $ except share data)** | ** ** |
| **Balance as of January 1, 2003**                                                                               | ** ** | **69,904,103**                                   | ** ** | **$**              | **2,256,636** | ** **     | **$**      | **6,505,213**     | ** ** | **$**             | **5,357,008**   | ** **       |       | ** ** | ** **  |   |   | **$** | **(7,118,132** | **)** |   |   | **$** | **7,000,725** | ** ** |   |
| Prior period adjustment (refer note 3.1.1)                                                                      | ** ** | ** **                                       | ** ** | ** **         | ** **    | ** **     |       | (6,243,011        | )          |              | ** **      |             |       |       |        |   |   |   | (6,243,011 | ) |   |
| **Balance as of January 1, 2003**                                                                               | ** ** | **69,904,103**                                   | ** ** | **$**              | **2,256,636** | ** **     | **$**      | **6,505,213**     | ** ** | **($886,003**     | **)**           |             | ** ** | ** ** |        |   | **$** | **(7,118,132** | **)** |   |   | **$** | **757,714** | ** ** |   |
| Cash dividend on common shares                                                                                  | ** ** | ** **                                       |       |               |          |           |       | (998,623          | )          |              |            |             |       |       |        |   |   |   | (998,623 | ) |   |
| Stock dividend                                                                                                  | ** ** | ** **                                       |       | 1,016,861          |          | (1,016,861     | )          |              |       |              |            | ** **       |       |       | ** **  | ** ** |   |   | ** ** | ** ** |   |
| Reclassification of redeemable common shares in  accordance with SFAS No. 150                              |       | 41,516,746                                       |       | 1,669,008          |          | 115,703,768    |       |              |       |              |            |             |       |       |        |   |   |   | 117,372,776 |   |   |
| Transition adjustment in accordance with SFAS No. 150  for net carrying amount of put option (Note 3) | ** ** | ** **                                       |       |               |          | (4,470,120     | )          |              |       |              |            |             |       |       |        |   |   |   | (4,470,120 | ) |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Net income                                                                                                      | ** ** | ** **                                       |       |               |          |           |       | 36,577,542        |       |              | 36,577,542      |             |       |       |        |   |   |   | 36,577,542 |   |   |
| Other  comprehensive income:                                                                                    | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Translation adjustment                                                                                          | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 6,456,104       |             |       |       |        |   |   |   | 6,456,104 |   |   |
| Unrealised loss on investments,net of tax of $204,656  :                                                        | ** ** | ** **                                       |       |               |          |           |       |              |       |              | (356,228        | )                |       |       |        |   |   |   | (356,228 | ) |   |
| Minimum pension liability, net of tax of $338,425                                                               | ** ** | ** **                                       |       |               |          |           |       |              |       |              | (507,088        | )                |       |       |        |   |   |   | (507,088 | ) |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 42,170,330      |             |       |       | 5,592,788   |   |   |   |   |   |   |
| **Balance as of December 31, 2003**                                                                             | ** ** | **111,420,849**                                  | ** ** | **$**              | **4,942,505** | ** **     | **$**      | **116,722,000**   | ** ** | **$**             | **34,692,917**  | ** **       |       | ** ** | ** **  |   |   | **$** | **(1,525,344** | **)** |   |   | **$** | **154,832,078** | ** ** |   |
| Common shares issued through an Initial Public  Offering, net of direct expenses                                |       | 13,415,200                                       |       | 592,675            |          | 63,675,676     |       |              |       |              |            |             |       |       |        |   |   |   | 64,268,351 |   |   |
| Issuance of equity shares on exercise of options                                                                |       | 160,960                                          |       | 7,121              |          | 509,183        |       |              |       |              |            |             |       |       |        |   |   |   | 516,304 |   |   |
| Cash dividend on common shares                                                                                  | ** ** | ** **                                       |       |               |          |           |       | (3,061,551        | )          |              |            |             |       |       |        |   |   |   | (3,061,551 | ) |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Net income                                                                                                      | ** ** | ** **                                       |       |               |          |           |       | 46,547,799        |       |              | 46,547,7989     |             |       |       |        |   |   |   | 46,547,799 |   |   |
| Other  comprehensive income:                                                                                    | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Translation adjustment                                                                                          | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 9,549,971       |             |       |       |        |   |   |   | 9,549,971 |   |   |
| Unrealised gain on investments, net of tax of  $142,362                                                         | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 241,535         |             |       |       |        |   |   |   | 241,535 |   |   |
| Minimum pension liability, net of tax of $153,253                                                               | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 332,292         |             |       |       |        |   |   |   | 332,292 |   |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 56,671,597      |             |       |       | 10,123,7998 |   |   |   |   |   |   |
| **Balance as of December 31, 2004**                                                                        | ** ** | **124,997,009**                                  | ** ** | **$**              | **5,542,301** | ** **     | **$**      | **180,906,859**   | ** ** | **$**             | **78,179,165**  | ** **       |       | ** ** | ** **  |   |   | **$** | **8,598,454** | ** ** |   |   | **$** | **273,226,779** | ** ** |   |
| Common shares issued, net of direct expenses                                                                    |       | 12,312,500                                       |       | 537,304            |          | 116,484,548    |       |              |       |              |            |             |       |       |        |   |   |   | 117,021,852 |   |   |
| Issuance of equity shares on exercise of options                                                                |       | 488,890                                          |       | 21,995             |          | 1,692,396      |       |              |       |              |            |             |       |       |        |   |   |   | 1,714,391 |   |   |
| Tax benefit arising on exercise of stock options                                                                | ** ** | ** **                                       |       |               |          | 136,816        |       |              |       |              |            |             |       |       |        |   |   |   | 136,816 |   |   |
| Cash dividend on common shares                                                                                  | ** ** | ** **                                       |       |               |          |           |       | (6,533,898        | )          |              |            |             |       |       |        |   |   |   | (6,533,898 | ) |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Net income                                                                                                      | ** ** | ** **                                       |       |               |          |           |       | 60,866,676        |       |              | 60,866,676      |             |       |       |        |   |   |   | 60,866,676 |   |   |
| Other  comprehensive income:                                                                                    | ** ** | ** **                                       |       |               |          |           |       |              |       |              |            |             |       |       |        |   |   |   |   |   |   |
| Translation adjustment                                                                                          | ** ** | ** **                                       |       |               |          |           |       |              |       |              | (7,278,016      | )                |       |       |        |   |   |   | (7,278,016 | ) |   |
| Unrealised gain on investments, net of tax of  $261,520                                                         | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 560,447         |             |       |       |        |   |   |   | 560,447 |   |   |
| Unrealised loss on cash flow hedging derivatives, net  of tax of $ Nil                                     | ** ** | ** **                                       |       |               |          |           |       |              |       |              | (1,026,624      | )                |       |       |        |   |   |   | (1,026,624 | ) |   |
| Minimum pension liability, net of tax of $194,848                                                               | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 340,647         |             |       |       |        |   |   |   | 340,647 |   |   |
| Comprehensive income                                                                                            | ** ** | ** **                                       |       |               |          |           |       |              |       |              | 53,463,130      |             |       |       | (7,403,546  | ) |   |   |   |   |   |
| **Balance  as of December 31, 2005**                                                                       | ** ** | **137,798,399**                                  | ** ** | **$**              | **6,101,600** | ** **     | **$**      | **299,220,619**   | ** ** | **$**             | **132,511,943** | ** **       |       | ** ** | ** **  |   |   | **$** | **1,194,908** | ** ** |   |   | **$** | **439,029,070** | ** ** |   |

 

See accompanying notes to the consolidated financial statements.

F-5

----

**Patni Computer Systems Limited and subsidiaries Consolidated Statements of Cash Flows**

| ** **                                                                        | ** ** | **Year ended December 31,** | ** **      |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|-----------------|
| ** **                                                                        | ** ** | **2003**                                   | ** **      | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(Restated)**                             | ** **      | **(Restated)** | ** ** | ** ** | ** ** |
| **Operating activities**                                                          |       |                                       |            |   |   |   |   |
| Net income                                                                        |       | $                                          | 36,577,542      |   | $ | 46,547,799 |   | $ | 60,866,676 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                       |            |   |   |   |   |
| Depreciation and amortization                                                     |       | 9,127,418                                  |            | 11,543,775 |   | 15,960,705 |   |
| Deferred taxes                                                                    |       | (3,309,187                                 | )               | (1,937,708 | ) | (1,889,293 | ) |
| Provision/(recovery) for doubtful debts and advances                              |       | 305,201                                    |            | 495,618 |   | (151,954 | ) |
| Cumulative effect of a change in accounting principle                             |       | (3,273,960                                 | )               | — |   | — |   |
| (Gain)/loss on sale of property, plant and  equipment, net                        |       | 6,175                                      |            | 597,678 |   | (3,176,152 | ) |
| (Gain) / loss on sale of investments                                              |       | (1,278,018                                 | )               | (144,482 | ) | (1,128,071 | ) |
| Change in the put option liability                                                |       | (10,000                                    | )               | — |   | — |   |
| Change in fair value of put option                                                |       | (1,186,160                                 | )               | — |   | — |   |
| Changes in assets and  liabilities                                                |       |                                       |            |   |   |   |   |
| Accounts receivable                                                               |       | (9,580,494                                 | )               | (10,400,590 | ) | (3,531,903 | ) |
| Costs and estimated earnings in excess of billings  on uncompleted contracts      |       | (2,558,554                                 | )               | (5,032,911 | ) | (11,162,155 | ) |
| Other current assets                                                              |       | (3,800,150                                 | )               | (3,445,375 | ) | 3,431,844 |   |
| Other assets                                                                      |       | (292,911                                   | )               | (2,714,988 | ) | (142,962 | ) |
| Trade accounts payable                                                            |       | 200,994                                    |            | 18,445 |   | 1,937,464 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts      |       | 692,262                                    |            | 634,645 |   | (456,143 | ) |
| Tax benefit arising on exercise of stock options                                  |       | —                                     |            | — |   | 136,816 |   |
| Taxes payable                                                                     |       | 3,697,485                                  |            | 2,377,631 |   | (463,113 | ) |
| Accrued expenses                                                                  |       | 2,638,374                                  |            | (569,178 | ) | 6,069,364 |   |
| Other current liabilities                                                         |       | 11,500,529                                 |            | 9,874,234 |   | 16,410,593 |   |
| Other liabilities                                                                 |       | 1,925,431                                  |            | 817,726 |   | (7,548,512 | ) |
| **Net cash provided by operating activities**                                     | ** ** | **$**                                      | **41,381,977**  | ** ** | **$** | **48,662,319** | ** ** | **$** | **75,163,204** | ** ** |
| **Investing  activities**                                                         |       |                                       |            |   |   |   |   |
| Purchase of property, plant and equipment                                         |       | (13,742,261                                | )               | (22,460,713 | ) | (55,387,224 | ) |
| Proceeds from sales of property, plant and equipment                              |       | 70,105                                     |            | 509,570 |   | 4,336,910 |   |
| Purchase of investment securities                                                 |       | (84,218,119                                | )               | (68,507,215 | ) | (284,249,359 | ) |
| Proceeds from sale of investment securities                                       |       | 95,256,878                                 |            | 67,149,337 |   | 216,499,740 |   |
| Purchase of investments in liquid mutual fund units                               |       | (69,622,903                                | )               | (187,094,707 | ) | (258,744,922 | ) |
| Proceeds from sale of investments in liquid mutual  fund units                    |       | 47,478,842                                 |            | 156,499,620 |   | 269,269,221 |   |
| Payments for acquisition, net of cash acquired                                    |       | (3,038,154                                 | )               | (32,450,060 | ) | — |   |
| Additional purchase consideration to Cymbal  shareholders                         |       | —                                     |            | — |   | (5,578,772 | ) |
| **Net cash used in investing activities**                                         | ** ** | **$**                                      | **(27,815,612** | **)** | **$** | **(86,354,168** | **)** | **$** | **(113,854,406** | **)** |

 

See accompanying notes to the consolidated financial statements.

F-6

----

**Patni Computer Systems Limited and subsidiaries Consolidated Statements of Cash Flows (Continued)**

 

| ** **                                                                            | ** ** | **Year ended December 31,** | ** **     |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                            | ** ** | **2003**                                   | ** **     | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **(Restated)**                             | ** **     | **(Restated)** | ** ** | ** ** | ** ** |
| **Financing activities:**                                                             | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| Payment of capital lease obligations                                                  |       | (166,479                                   | )              | (301,474 | ) | (329,168 | ) |
| Dividend on common shares                                                             |       | (998,623                                   | )              | (3,059,633 | ) | (6,531,628 | ) |
| Proceeds from common shares issued, net of expenses                                   |       | —                                     |           | 64,784,655 |   | 118,736,243 |   |
| **Net  cash provided by/(used in) financing activities**                              | ** ** | **$**                                      | **(1,165,102** | **)** | **$** | **61,423,548** | ** ** | **$** | **111,875,447** | ** ** |
| Effect of  exchange rates changes on cash and cash equivalents                        |       | 2,737,437                                  |           | 5,472,249 |   | (1,508,143 | ) |
| **Net  increase in cash and cash equivalents**                                        | ** ** | **12,401,263**                             | ** **     | **23,731,699** | ** ** | **73,184,245** | ** ** |
| Cash and cash  equivalents at the beginning of the year                               |       | 32,800,850                                 |           | 47,939,550 |   | 77,143,498 |   |
| Cash and cash  equivalents at end of the year                                         |       | $                                          | 47,939,550     |   | $ | 77,143,498 |   | $ | 148,819,600 |   |
| Supplemental  disclosure of cash flow information:                                    |       |                                       |           |   |   |   |   |
| Interest paid                                                                         |       | $                                          | 36,295         |   | $ | 35,152 |   | $ | 673,158 |   |
| Income taxes paid                                                                     |       | $                                          | 9,741,716      |   | $ | 12,536,145 |   | $ | 15,294,446 |   |
| Non cash investing and  financing activities:                                         |       |                                       |           |   |   |   |   |
| Additions to  property, plant and equipment, represented by capital lease obligations |       | $                                          | 275,080        |   | $ | 393,184 |   | $ | 471,644 |   |
| Stock dividend                                                                        |       | $                                          | 1,016,861      |   | — |   | — |   |

 

See accompanying notes to the consolidated financial statements.

F-7

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements**

**1****                                              Organizationand nature of business**

1.1.1                          PatniComputer Systems Limited (“Patni”) is a company incorporated in India under theIndian Companies Act, 1956. On September 18, 2003, Patni converted itselffrom a private limited company into a public limited company and changed itsname from Patni Computer Systems (P) Limited to Patni Computer SystemsLimited. In February 2004, Patni completed initial public offering of itsequity shares in India.

1.1.2                          PatniComputers Systems (UK) Limited (“Patni UK”), a company incorporated in UK,Patni Computer Systems GmbH (“Patni GmbH”), a company incorporated in Germanyand Patni Computer Systems, Inc. (“Patni USA”), a company incorporated inMassachusetts, USA are 100% subsidiaries of Patni. In April 2003, PatniUSA acquired 100% equity in The Reference Inc. (“TRI”), a company incorporatedin Massachusetts, USA for consideration in cash. On November 3, 2004,Patni USA, acquired 100% equity in Cymbal Corporation (“Cymbal”), a companyincorporated in California, USA, together with its subsidiaries in India, UK &Thailand, for consideration in cash. Further, Patni also has foreign branchoffices in USA, Japan, Sweden, Australia, Korea and Netherlands.

1.1.3                          Patnitogether with its subsidiaries (collectively, “Patni Group” or “the Company”)is engaged in IT consulting, software development and Business ProcessOutsourcing (“BPO”). The Company provides multiple service offerings to itsclients across various industries comprising financial services, insuranceservices, manufacturing, telecommunications services and technology services(comprising independent software vendors and product engineering) and otherindustries such as energy and utilities, retail, logistics and transportation,and media and entertainment. The various service offerings comprise applicationdevelopment, application maintenance and support, packaged softwareimplementation, infrastructure management services, product engineeringservices, quality assurance services and BPO services.

1.1.4                          Thesefinancial statements are prepared on a consolidated basis for all the yearspresented.

**2****                                              Summaryof significant accounting policies**

***Basis ofpreparation of financial statements***

2.1.1                          Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“USGAAP”).

***Principles ofconsolidation***

2.1.2                          Theconsolidated financial statements include the financial statements of Patni andall of its subsidiaries, which are more than 50% owned and controlled. Allinter-company accounts and transactions are eliminated on consolidation. The Companyaccounts for investments by the equity method where its investment in thevoting stock gives it the ability to exercise significant influence over theinvestee. In addition, the Company consolidates any Variable Interest Entity (“VIE”)if it is determined to be a primary beneficiary in accordance with *FASB interpretation 46(R), “Consolidation ofVariable Interest Entities”.* However, as of December 31, 2004and 2005, the Company does not have any interest in any VIE.

F-8

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

***Accountingestimates***

2.1.3                          Thepreparation of financial statements in conformity with US GAAP requires thatmanagement makes estimates and assumptions that affect the reported amount ofassets and liabilities and disclosures of contingent assets and liabilities asof the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Management believes that the estimatesused in the preparation of the consolidated financial statements are prudentand reasonable. The actual results could differ from these estimates.

***Revenue and costrecognition***

2.1.4                          TheCompany derives its revenues primarily from software services and to a lesserextent from BPO services. Revenue is recognized when there is persuasiveevidence of a contractual arrangement with customers, the sales price is fixedor determinable and collectibility is reasonably assured. Software services areprovided either on a fixed price, fixed time frame or on a time and materialbasis. The Company’s fixed price contracts include application maintenance andsupport services, on which revenue is recognized on a straight line basis overthe term of maintenance. Revenue with respect to other fixed price contracts isrecognized on a percentage of completion basis. Revenue with respect totime-and-material contracts is recognized as related services are performed.

Guidance has been drawnfrom paragraph 95 of Statement of Position (‘‘SOP’’) 97-2, ‘‘SoftwareRevenue Recognition’’ to account for revenue from fixed price arrangements forsoftware development and related services in conformity with *SOP-81-1 (“Accounting for Performance ofConstruction—Type and Certain Production—Type Contracts”)*. The inputmethod has been used because management considers this to be the best availablemeasure of progress on these contracts as there is a direct relationshipbetween input and productivity.

2.1.5                          Theasset, “Cost and estimated earnings in excess of billings on uncompletedcontracts”, represents revenues recognized in excess of amounts billed. Theseamounts are billed after the milestones specified in the agreement are achievedand the customer acceptance for the same is received. The liability, “Billingsin excess of costs and estimated earnings on uncompleted contracts”, representsbillings in excess of revenues recognized.

2.1.6                          Directand incremental contract origination and set up costs incurred in connectionwith support/maintenance service arrangements are charged to expense asincurred. These costs are deferred only in situations where there is acontractual arrangement establishing a customer relationship for a specifiedperiod. The costs to be deferred are limited to the extent of futurecontractual revenues. Further, revenue attributable to set up activities isdeferred and recognised systematically over the periods that the related feesare earned, as services performed during such period do not result in theculmination of a separate earnings process.

2.1.7                          Warrantycosts on sale of services are accrued based on managements’ estimates andhistorical data at the time related revenues are recorded.

2.1.8                          TheCompany grants volume discounts to certain customers, which are computed basedon a pre-determined percentage of the total revenues from those customersduring a specified period, as per the terms of the contract. These discountsare earned only after the customer has provided a 

F-9

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

specifiedcumulative level of revenues in the specified period. The discounts can beutilized by the customer in the form of free services.

The Company estimates thetotal number of customers that will ultimately earn these discounts, based onwhich a portion of the revenue on the related transactions is allocated to thefree services that will be delivered in the future. The amount of revenue to beallocated to the free services is based on the relative fair value of the freeservices.

The Company reportsrevenues net of discounts offered to customers. In accounting for the abovevolume discounts, guidance has been obtained from *Emerging Issues Task Force (“EITF”) 00-22 “Accounting for “Points”and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offersfor Free Products or Services to Be Delivered in the Future” and EITF 01-09,“Accounting for Consideration Given by a Vendor to a Customer (Including aReseller of the Vendor’s Products)”*. Accordingly, these volumediscounts have been recorded based on estimate of the total number of customersthat will ultimately earn these discounts as it is believed that, based onhistorical experience, reliable estimates can be made of the estimated amountof revenues from a particular customer in the specified period.

Reimbursement of out ofpocket expenses received from customers have been included as part of revenuesin accordance with *EITF 01-14 “IncomeStatement Characterization of Reimbursements Received for ‘Out of Pocket’Expenses Incurred”*.

2.1.9                          Revenuefrom BPO is recognised on proportionate performance method.

***Advertising cost***

2.1.10                   Advertisingcosts incurred during the year have been expensed. The total amount ofadvertising costs expensed was $0.7 million, $1 million and $1.5 million forthe years ended December, 31, 2003, 2004 and 2005.

***Cash and cashequivalents***

2.1.11                   TheCompany considers investments in highly liquid investments with an originalmaturity of three months or less to be cash equivalents. Cash and cashequivalents comprise cash and cash on deposit with banks.

***Investments***

2.1.12                   Managementdetermines the appropriate classification of investment securities at the timeof purchase and re-evaluates such designation at each balance sheet date. At December 31,2004 and 2005, all investment securities were classified as available-for-saleand consisted of units of mutual funds.

2.1.13                   Available-for-salesecurities are carried at fair market value with unrealized gains and losses,net of deferred income taxes, reported as a separate component of othercomprehensive income in the statement of shareholders’ equity and comprehensiveincome. Realized gains and losses, and decline in value judged to be other thantemporary on available-for-sale securities are included in the consolidatedstatements of income. The cost of securities sold or disposed is determined onaverage cost basis.

F-10

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

***Businesscombinations, goodwill and intangible assets***

2.1.14                   *Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations”*requires that the purchase method ofaccounting be used for all business combinations. SFAS No. 141 specifiescriteria that intangible assets acquired in a business combination must berecognized and reported separately from goodwill. In accordance with *SFAS No. 142, “Goodwill and Other IntangibleAssets”* all assets and liabilities of the acquired businessesincluding goodwill are assigned to reporting units.

2.1.15                   Goodwillrepresents the cost of the acquired businesses in excess of the fair value ofidentifiable tangible and intangible net assets purchased. Goodwill is notamortized but is tested for impairment atleast on an annual basis, relying on anumber of factors including operating results, business plans and future cashflows. Recoverability of goodwill is evaluated using a two-step process. Thefirst step involves a comparison of the fair value of a reporting unit with itscarrying value. If the carrying amount of the reporting unit exceeds its fairvalue, the second step of the process involves a comparison of the fair valueand carrying value of the goodwill of that reporting unit. If the carryingvalue of the goodwill of a reporting unit exceeds the fair value of thatgoodwill, an impairment loss is recognized in an amount equal to the excess.Goodwill of a reporting unit will be tested for impairment between annual testsif an event occurs or circumstances change that would more likely than notreduce the fair value of the reporting unit below its carrying amount.

2.1.16                   Intangibleassets are amortized over their respective individual estimated useful lives inproportion to the economic benefits consumed in each period. Intangible assetscomprise customer related intangibles and are being amortized over a period of10 years. The estimated useful life of an identifiable intangible asset isbased on a number of factors including the effects of obsolescence, demand,competition and other economic factors (such as the stability of the industry,and known technological advances) and the level of maintenance expendituresrequired to obtain the expected future cash flows from the asset.

2.1.17                   Intangibleassets are evaluated for recoverability whenever events or changes incircumstances indicate that their carrying amounts may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to future undiscounted net cash flows expected tobe generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingvalue of the assets exceeds the fair value of the assets.

***Property, plant andequipment***

2.1.18                   Property,plant and equipment are stated at cost less accumulated depreciation andamortization. Gains and losses on disposals are included in the consolidatedstatements of income at amounts equal to the difference between the net bookvalue of the disposed assets and the net proceeds received upon disposal. Expendituresfor replacements and improvements are capitalized, whereas the cost ofmaintenance and repairs is charged to income when incurred.

F-11

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

2.1.19                   Property,plant and equipment are depreciated over the estimated useful life of the assetusing the straight-line method, once the asset is ready for its intended use. Thecost of software obtained for internal use is capitalized and amortized overthe estimated useful life of the software. The estimated useful lives of assetsare as follows:

| Buildings                                                         |   | 40 years                                                                       |
|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
| Leasehold premises and improvements                               |   | Over the lease period or the useful lives of the  assets, whichever is shorter |
| Computer—Hardware and software and other service  equipments |   | 3 years                                                                        |
| Furniture and fixtures                                            |   | 3-8 years                                                                      |
| Other equipment                                                   |   | 3-8 years                                                                      |
| Vehicles                                                          |   | 4-5 years                                                                      |

 

***Impairment oflong-lived assets and long-lived assets to be disposed***

2.1.20                   Long-livedassets and certain identifiable intangibles are reviewed for impairmentwhenever an event or changes in circumstances indicate that the carrying amountof such assets may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to futurenet undiscounted cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of assets. Assets to be disposed of are reported at the lower of thecarrying amount or fair value less cost to sell.

***Functional andForeign currency translation***

2.1.21                   Thefunctional currency of Patni and its branches in the US, Japan, Sweden, Australia,Korea and Netherland is the Indian Rupee. The functional currencies of Patni’ssubsidiaries are the applicable local currencies.

2.1.22                   Theaccompanying consolidated financial statements are reported in US Dollars. Thetranslation is performed for balance sheet accounts using the exchange rate ineffect at the balance sheet date and for statements of income accounts using anappropriate monthly weighted average exchange rate for the respective periods.In respect of subsidiaries, the respective functional currencies are firsttranslated into Indian Rupees and then into US Dollars. The gains or lossesresulting from such translation are reported in other comprehensive income inthe statement of shareholders’ equity and comprehensive income.

***Foreign currencytransactions***

2.1.23                   Transactionsin foreign currencies are translated into the functional currency at the ratesof exchange prevailing at the date of the transaction. Resulting gains orlosses from settlement of such foreign currency transactions are included inthe consolidated statements of income. Unsettled monetary assets andliabilities denominated in foreign currencies are translated into 

F-12

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

the functional currency atthe rates of exchange prevailing at the balance sheet date. Transaction gain orloss arising from change in exchange rates between the date of transaction andperiod end exchange rates are included in the consolidated statements ofincome.

***Income taxes***

2.1.24                   Incometaxes are accounted for under the asset and liability method. Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss carry forwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of changes in tax rates is recognized inresults of operations in the period that includes the enactment date. Themeasurement of deferred tax assets is reduced, if necessary, by a valuationallowance if it is more likely than not that some portion or all of the assetswill not be realised.

***Concentration ofcredit risk***

2.1.25                   Financialinstruments that potentially subject the Company to concentration of creditrisks consist principally of cash, cash equivalents, investments and accountsreceivables. Cash and cash equivalents are invested with corporations,financial institutions and banks with investment grade credit ratings. Toreduce credit risk, investments are made in a diversified portfolio of mutualfunds, which are periodically reviewed. To reduce its credit risk on accountsreceivables, the Company performs ongoing credit evaluations of customers.

***Retirement benefitsto employees***

2.1.26                   Contributionsto defined contribution plans are charged to income in the period in which theyaccrue. Current services costs for defined benefit plans are accrued in theperiod to which they relate, based on actuarial valuation performed by anindependent actuary in accordance with *SFAS No. 87,“Employers’ Accounting for Pensions”*. Prior service costs, if any,resulting from amendments to the plans are recognized and amortized over theremaining period of service of the employees.

***Stock-based compensation***

2.1.27                   TheCompany uses the intrinsic value based method of accounting prescribed by APBOpinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretation including FASB interpretation 44, “Accounting for CertainTransactions involving Stock Compensation an interpretation of APB Opinion No. 25”,issued in March 2000, to account for its employee stock based compensationplans. Under this method, compensation expense is recorded on the date of thegrant, only if the current fair value of the underlying stock exceeds theexercise price. SFAS No. 123, “Accounting for Stock-Based Compensation”,established accounting and disclosure requirements using a fair value-basedemployee compensation plans. As allowed by SFAS No. 123, the Company haselected to continue to apply the intrinsic value-based method of accountingdescribed above, and has adopted the disclosure requirements of SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure”, anamendment of 

F-13

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

FASB Statement No. 123.All stock options issued to date have been accounted for as fixed awards.

2.1.28                   Hadcompensation cost been determined in a manner consistent with the fair valueapproach described in SFAS No. 123, the Company’s net income and earningsper share as reported would have been reduced to the pro forma amountsindicated below:

| **Year ended December 31,**                                                                     | ** ** | ** **     | ** ** | **2003**       | ** ** | **2004**   | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|----------|------------|
| ** **                                                                                                     | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Net income, as  reported                                                                                       |       | $              | 36,577,542 |           | $          | 46,547,798 |       | $        | 60,866,676 |   |
| Add: Stock based  employee compensation expense included in reported income                                    |       | —         |       | —         |       | —     |       |
| Less: Stock based  employee compensation expense determined under fair value based method, net  of tax effects |       | (158,232       | )          | (1,253,513     | )          | (3,501,531 | )          |
| Pro forma net  income                                                                                          |       | $              | 36,419,310 |           | $          | 45,294,285 |       | $        | 57,365,145 |   |
| Reported earnings  per share                                                                                   |       |           |       |           |       |       |       |
| Basic                                                                                                          |       | $              | 0.33       |           | $          | 0.38       |       | $        | 0.48       |   |
| Diluted                                                                                                        |       | $              | 0.33       |           | $          | 0.38       |       | $        | 0.48       |   |
| Pro forma earnings  per share                                                                                  |       |           |       |           |       |       |       |
| Basic                                                                                                          |       | $              | 0.33       |           | $          | 0.37       |       | $        | 0.46       |   |
| Diluted                                                                                                        |       | $              | 0.33       |           | $          | 0.37       |       | $        | 0.45       |   |

 

2.1.29                   Thefair value of each option is estimated on the date of grant using theBlack-Scholes model with the following assumptions.

| **Year ended December 31,** | ** ** | ** **  | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------|------------|--------------|------------|----------|------------|
| Dividend yield                             |       | 0.41        | %          | 0.34% - 0.72 | %          | 0.53% - 0.54 | %          |
| Expected life                              |       | 2-5 years   |       | 2-5 years    |       | 2-5 years    |       |
| Risk free  interest rates                  |       | 4.75% - 4.9 | %          | 5.16% - 6.46 | %          | 5.74% - 6.73 | %          |
| Volatility                                 |       | 0           |       | 43% - 65     | %          | 28% - 50     | %          |

 

2.1.30                   Forthe year ended December 31, 2003, since the Company was a non-publicentity, it has used the minimum value method in estimating the fair value ofoptions.

***Dividends***

2.1.31                   Dividendson common shares are recorded as a liability on the date of declaration by theshareholders at the Annual General Meeting.

***Derivatives andhedge accounting***

2.1.32                   Priorto 2004, although the Company believed its forward contracts were effective ashedges from an economic perspective, the Company had not previously designatedthese forward contracts as hedges of underlying transactions and accordinglydid not apply hedge accounting. The Company purchases forward foreign exchangecontracts to mitigate the risk of changes in foreign exchange rates oninter-company transactions and forecasted transactions denominated in foreigncurrencies.

F-14

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

During 2004, the Companyre-evaluated its risk management program and hedging strategies in respect offorecasted transactions, and, upon completion of the formal documentation andtesting for effectiveness, the Company has designated certain forward contractsin respect of forecasted transactions, which meet the hedging criteria, as cashflow hedges. Changes in fair values of designated cash flow hedges are deferredand recorded as a component of accumulated other comprehensive income until thehedged transactions occur and are then recognised in the consolidatedstatements of income. Changes in fair value for derivatives not designated ashedging instruments and ineffective portion of the hedging instruments are recognizedin consolidated statements of income in the current period.

2.1.33                   Inrespect of derivatives designated as hedges, the Company formally documents allrelationships between hedging instruments and hedged items, as well as its riskmanagement objective and strategy for undertaking various hedge transactions.The Company also formally assesses, both at the inception of the hedge and onan ongoing basis, whether each derivative is highly effective in offsettingchanges in fair values or cash flows of the hedged item. If it is determinedthat a derivative is not highly effective as a hedge, or if a derivative ceasesto be a highly effective hedge, the Company will, prospectively, discontinuehedge accounting with respect to that derivative.

***Earnings per share***

2.1.34                   Inaccordance with *SFAS No. 128, “Earningsper Share”*, basic earnings per share is computed using the weightedaverage number of common and redeemable common shares outstanding during theperiod. Diluted earnings per share is computed using the weighted averagenumber of common and redeemable common shares and dilutive common equivalentshares outstanding during the period using the treasury stock method foroptions except where the result would be anti-dilutive.

***Reclassifications***

2.1.35                   Certainreclassifications have been made in the financial statements of prior years toconform to classifications used in the current year.

***Commitments and Contingencies***

2.1.36                   Liabilitiesfor loss contingencies arising from claims, assessments, litigations, fines andpenalties and other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the assessment and/or remediation can bereasonably estimated.

***Recently IssuedAccounting Standards***

2.1.37                   TheCompany examined the recently issued accounting standards SFAS No.151 “InventoryCosts”, SFAS No.152 “Accounting for Real Estate Time-Sharing Transactions”,SFAS No 153 “Exchange of Non-monetary Assets”, SFAS No.154 “Accounting Changesand Error Corrections” and EITF 03-1 “The Meaning of Other-Than-TemporaryImpairment and Its Applications to Certain Investments” and believes that theadoption of these standards will not have a significant impact on the Company’sfinancial position or results of operations.

In December 2004, theFASB issued SFAS No.123 (revised 2004). “Share-Based Payment” (“SFAS 123R”),which requires all companies to measure compensation cost for all share-based 

F-15

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

payments (includingemployee stock option) at fair value. SFAS 123R provides two alternativeadoption methods. The first method is a modified prospective transition methodwhereby a company would recognize share based employee costs from the beginningof the fiscal period in which the recognition provisions are first applied asif the fair value-based accounting method had been used to account for allemployee awards granted, modified, or settled after the effective date and toany awards that were not fully vested as of the effective date. Measurement andattribution of compensation cost for awards that are unvested as of theeffective date of SFAS 123R would be based on the same estimate of thegrant-date fair value and the same attribution method used previously underSFAS No.123, “Acounting for Stock Based Compensation” (“SFAS 123”).

The second adoption methodis a modified retrospective transition method whereby a Company wouldrecongnize employee compensation cost for periods presented prior to theadoption of SFAS 123R in accordance with the original provisions of SFAS No. 123;that is, an entity would recognize employee compensation costs in the amountsreported in the pro forma disclosures provided in accordance with SFAS No. 123;a company would not be permitted to make any changes to those amounts uponadoption of SFAS 123R unless those changes represent a correction of an error.For periods after the date of adoption of SFAS 123R, the modified prospectivetransition method described above would be applied.

SFAS 123R does not changethe accounting guidance for share-based payment transaction with parties otherthan than employees provided in SFAS No. 123 as originally issed and EITFIssue No 96-18. “Accounting for Equity Instuments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling Goods orServices”.

SFAS 123R is effective forpublic entities that do not file as small business issuers as of the beginningof the first annual reporting period that begins after June 15, 2005.Accordingly, the Company is required to adopt SFAS 123R on January 1,2006.

The Company currentlyexpects to adopt SFAS 123R in the quarter ending March 31, 2006 using themodified prospective method. At December 31, 2005, unamortized costsdetermined based on the fair value approach described in SFAS No 123 amountedto $5,342,491, which will be amortised over a weighted average period ofapproximately five years. Future compensation expense will be impacted byvarious factors, including the number of awards granted and their related fairvalue at the date of the grant. The Company expects compensation cost to berecognised in accordance with SFAS No. 123R to be significantly higherthan that would have been recognised under APB 25.

**3****                                              Restatement**

3.1.1                          Inconnection with an ongoing review of certain tax aspects relating to itsinternational operations by the tax authorities in the US, the Companyreassessed its obligations for payroll and related taxes for the years ended December 31,2003 and December 31, 2004. This reassessment related primarily to certainwages paid, and short-term fringe benefits given, to the Company’s employeeswhen working outside of India, for which appropriate witholding taxes were notprovided..

Accordingly, the Companyestimated its liability for related tax consequences at amounts based onapplicable tax rules. As a result of the above, the Company restated itsfinancial statements for 

F-16

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

the years ended December 31,2003 and 2004 to include payroll and related taxes of $2,291,091 and $2,510,543(included under “cost of revenues”), interest expenses with respect to delayedpayments of $448,415 and $568,432 (included under ‘interest expense’), andother related expenses $209,201 and $121,435 (included under “otherincome/(expense) net”). As a result of the above adjustments, deferred taxbenefit (included under ‘income taxes’) of $1,095,802 and $1,231,590 were alsorecognized for the years ended December 31, 2003 and December 31,2004 respectively. The cumulative impact of similar adjustments on retainedearnings relating to prior periods amounting to $6,243,011 was recorded as a priorperiod adjustment in the statement of shareholders’ equity and comprehensiveincome.

3.1.2                          Subsequentto the issuance of its 2005 Annual Report, in which the financial statementsfor the periods set forth herein were included, the Company assessed that ithad not recognized income taxes, interest and related expenses attributable tothe Company’s returns with respect to the filing of its US branch tax returnsfor 2001 and 2002 for which the Company was unable to substantiate to the IRSthat such returns were filed within 18 months from the respective due dates. Inaccordance with the regulations of the US Internal Revenue Service (“IRS”),this results in a disallowance of expenses claimed in the tax filings for therelated periods, and other statutory interest and related expenses. Accordingly,the Company has restated its financial statements previously included in the2005 Annual Report to give effect to the appropriate taxes, related interestand related expenses.

For the years ended December 31,2003 and 2004, income taxes have been increased by $3,903,130 and $5,191,203(net of deferred tax benefits of $941,898 and $893,422, respectively), interestexpense has increased by $1,439,943 and $1,192,716 and other relatedexpense/(income) has increased by $1,722,869 and $1,752,423, respectively. The2004 and 2005 balance sheets have also been restated to give effect to theadjustments discussed above by increasing the current portion of deferredincome tax assets in the amount of $1,835,320 and increasing current incometaxes payable by $10,929,652, and increasing other current liabilities by$6,107,950 from the amounts previously reported in the 2005 Annual Report. Thecumulative adjustment to retained earnings as a result of these corrections is$15,202,283 at December 31, 2004 and 2005. The impact of the restatementon the amounts previously reported is shown below.

F-17

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

| ** **                                                                                                       | ** **   | **Year ended  December 31,2003** | ** **   | **Year ended   December 31,2004**  | ** **   | **Year ended  December 31,2005** | ** **   |
|------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------|--------------|---------------------------------------------------|--------------|--------------------------------------------|--------------|
| ** **                                                                                                       | ** **   | **As  previously  reported**               | ** **   | **As restated  in the  Annual  Report** | ** **   | **As  restated**                           | ** **   | **As  previously  reported** | ** ** | **As restated  in the  Annual  Report** | ** ** | **As  restated** | ** ** | **As   previously  reported** | ** ** | **As   restated** | ** ** |
| ***Consolidated statements of income***                                                                          | ** **   | ** **                                 | ** **   | ** **                                        | ** **   | ** **                                 | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenues                                                                                                 |         | $                                          | 155,181,636  |                                              | $            | 157,472,727                                |         |   |   | $ | 199,950,947 |   | $ | 202,461,490 |   |   |   |   |   |   |   |
| Gross profit                                                                                                     |         | 95,861,772                                 |         | 93,570,681                                        |         |                                       |         | 126,630,677 |   | 124,120,134 |   |   |   |   |   |   |   |
| Operating Income                                                                                                 |         | 45,968,192                                 |         | 43,677,101                                        |         |                                       |         | 63,353,358 |   | 60,842,815 |   |   |   |   |   |   |   |
| Interest expense                                                                                                 |         | (257,201                                   | )            | (705,616                                          | )            | (2,145,559                                 | )            | (322,137 | ) | (890,569 | ) | (2,083,285 | ) |   |   |   |   |
| Other (expense)/income, net                                                                                      |         | (93,348                                    | )            | (302,549                                          | )            | (2,025,418                                 | )            | (1,818,846 | ) | (1,940,281 | ) | (3,692,704 | ) |   |   |   |   |
| Income before income taxes                                                                                       |         | 49,655,343                                 |         | 46,706,636                                        |         | 43,543,824                                 |         | 65,579,710 |   | 62,379,300 |   | 59,434,161 |   |   |   |   |   |
| Income taxes                                                                                                     |         | 7,432,914                                  |         | 6,337,112                                         |         | 10,240,242                                 |         | 8,926,750 |   | 7,695,160 |   | 12,886,362 |   |   |   |   |   |
| Income before cumulative effect of change in accounting principle                                                |         | 42,222,429                                 |         | 40,369,524                                        |         | 33,303,582                                 |         | 56,652,960 |   | 54,684,140 |   | 46,547,799 |   |   |   |   |   |
| Net income                                                                                                       |         | 45,496,389                                 |         | 43,643,484                                        |         | 36,577,542                                 |         | 56,652,960 |   | 54,684,140 |   | 46,547,799 |   |   |   |   |   |
| Earnings per share—Income before cumulative effect of a change in  accounting principle (basic and diluted) |         | 0.38                                       |         | 0.36                                              |         | 0.30                                       |         | 0.46 |   | 0.44 |   | 0.38 |   |   |   |   |   |
| Earnings per share—Income after cumulative effect of a change in  accounting principle (basic and diluted)  |         | 0.41                                       |         | 0.39                                              |         | 0.33                                       |         | 0.46 |   | 0.44 |   | 0.38 |   |   |   |   |   |
| ***Consolidated balance sheet***                                                                                 | *** *** | *** ***                               | *** *** | *** ***                                      | *** *** | *** ***                               | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| ***Assets***                                                                                                     | *** *** | *** ***                               | *** *** | *** ***                                      |         |                                       |         |   |   |   |   |   |   |   |   |   |   |
| Deferred income taxes—current                                                                               |         |                                       |         |                                              |         |                                       |         | $ | 5,951,315 |   |   |   | $ | 14,755,838 |   | $ | 11,887,564 |   | $ | 13,722,884 |   |
| Total current Assets                                                                                             |         |                                       |         |                                              |         |                                       |         | 266,531,310 |   |   |   | 275,335,833 |   | 412,547,390 |   | 414,382,710 |   |
| Deferred income taxes—  non current                                                                         |         |                                       |         |                                              |         |                                       |         | — |   | 3,634,585 |   | — |   |   |   |   |   |
| Total assets                                                                                                     |         |                                       |         |                                              |         |                                       |         | 364,258,863 |   | 367,893,448 |   | 373,063,386 |   | 552,050,793 |   | 553,886,113 |   |
| ***Liabilities***                                                                                                |         |                                       |         |                                              |         |                                       |         |   |   |   |   |   |   |   |   |   |   |
| Other current liabilities                                                                                        |         |                                       |         |                                              |         |                                       |         | 16,531,146 |   |   |   | 41,971,100 |   | 46,893,194 |   | 53,001,144 |   |
| Income taxes payable                                                                                             |         |                                       |         |                                              |         |                                       |         | 2,501,065 |   | 5,311,065 |   | 16,240,717 |   | 4,829,152 |   | 15,758,804 |   |
| Total current liablities                                                                                         |         |                                       |         |                                              |         |                                       |         | 46,713,030 |   | 49,523,030 |   | 85,892,636 |   | 86,275,594 |   | 103,313,196 |   |
| Deferred income taxes—  non current                                                                         |         |                                       |         |                                              |         |                                       |         | 4,562,135 |   | 4,008,648 |   | 7,343,266 |   |   |   |   |   |
| Other liabilities                                                                                                |         |                                       |         |                                              |         |                                       |         | 14,099,315 |   | 25,542,123 |   | 6,210,119 |   |   |   |   |   |
| Total liabilities                                                                                                |         |                                       |         |                                              |         |                                       |         | 65,765,066 |   | 79,464,387 |   | 99,836,607 |   | 97,819,441 |   | 114,857,043 |   |
| ***Shareholders’ Equity***                                                                                  |         |                                       |         |                                              |         |                                       |         |   |   |   |   |   |   |   |   |   |   |
| Retained earnings                                                                                                |         |                                       |         |                                              |         |                                       |         | 103,446,183 |   | 93,381,447 |   | 78,179,165 |   | 147,714,225 |   | 132,511,942 |   |
| ***Total shareholders’ equity***                                                                            |         |                                       |         |                                              |         |                                       |         | 298,493,797 |   | 288,429,061 |   | 273,226,779 |   | 454,231,352 |   | 439,029,070 |   |
| ***Consolidated statements of cash flows***                                                                      |         |                                       |         |                                              |         |                                       |         |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                       |         | $                                          | 45,496,389   |                                              | $            | 43,643,484                                 |         | $ | 36,577,542 |   | $ | 56,652,960 |   | $ | 54,684,140 |   | $ | 46,547,799 |   |   |   |   |   |
| Deferred taxes                                                                                                   |         | (1,271,487                                 | )            | (2,367,289                                        | )            | (3,309,187                                 | )            | 187,304 |   | (1,044,286 | ) | (1,937,708 | ) |   |   |   |   |
| Taxes payable                                                                                                    |         | (1,147,543                                 | )            |                                              |         | 3,697,485                                  |         | (3,706,993 | ) |   |   | 2,377,631 |   |   |   |   |   |
| Other current liabilities                                                                                        |         | 3,602,235                                  |         |                                              |         | 11,500,529                                 |         | 1,645,226 |   |   |   | 9,874,234 |   |   |   |   |   |
| Other liabilities                                                                                                |         | 3,712,206                                  |         | 6,660,913                                         |         | 1,925,431                                  |         | 2,901,185 |   | 6,101,595 |   | 817,726 |   |   |   |   |   |
|                                                                                                                  |              |                                            |              |                                                   |              |                                            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-18

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**4****                                              Acquisitions**

***TRI***

4.1.1                          OnApril 17, 2003, Patni USA, acquired 100% equity interest in TRI which isengaged in providing IT services to clients in the financial services sector. Theconsolidated financial statements include the operating results of TRI from thedate of acquisition. The purchase price of $6,093,526 (including directexpenses of $113,516) has been paid in cash. 

4.1.2                          Thistransaction has been accounted for using the purchase method of accounting asrequired by SFAS No. 141. The purchase price has been allocated to theacquired assets and liabilities based on management’s estimates as follows:

| Cash and cash  equivalents    |       | $         | 3,055,332     |       |
|-------------------------------|------------|-----------|---------------|------------|
| Net tangible  liabilities     |       | (396,180  | )             |
| Customer related  intangibles |       | 840,000   |          |
| Goodwill                      |       | 2,594,374 |          |
| **Total**                     | ** ** | **$**     | **6,093,526** | ** ** |

 

TheCompany believes that the acquisition resulted in recognition of goodwillprimarily because of the acquired company’s market position in financialservices, skilled employees, management strength and potential to serve as aplatform for enhancing business opportunities in the financial services sector.

4.1.3                          Asof December 31, 2005, the Company has tested this goodwill for impairmentand has concluded that there is no impairment in its carrying value.

***Cymbal***

4.1.4                          OnNovember 3, 2004, Patni USA acquired 100% equity interest in Cymbal whichis engaged in providing IT services to clients in the telecom sector. Theprimary purpose for the acquisition was to establish presence in the Telecom ITservices sector. The consolidated financial statements include the operatingresults of Cymbal from the date of acquisition. The purchase price of$25,093,065 (including direct expenses of $1,311,150) was paid in cash.Additionally, in connection with the acquisition, the Company incurred$10,968,029 of costs relating to certain contract terminations / settlementsand acquisition costs of Cymbal. Such costs have been recognised by the Companyas liabilities assumed at the acquisition date resulting in additionalgoodwill.

The terms of the purchasealso provide for payment of contingent consideration to all the sellingshareholders, payable over three years, and calculated based on the achievementof specified revenue and margin targets. The contingent consideration ispayable in cash and cannot exceed $33,000,000, inclusive of payments under anincentive plan for certain employees as described below. The Company hasfollowed the consensus reached in *EITF 95-8,“Accounting for Contingent Consideration Paid to the Shareholders of anAcquired Enterprise in a Purchase Business Combination”* andaccordingly will record the contingent payments, other than payments to certainemployees under the incentive plan, as goodwill in the periods in which thecontingency is resolved. As per the Stock Purchase Agreement and amendmentsthereof, $5,578,772 was paid to 

F-19

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

the shareholders of Cymbalas contingent consideration based on achievement of certain revenue and margintargets during the year 2005 . This additional consideration has beenrecognised as Goodwill arising on acquisition of Cymbal. 

Further,as a part of the acquisition, the Company initiated an incentive plan linked torevenues and margins, for certain specific employees of Cymbal. The incentivepayments under this plan will not exceed $3,400,000 over the next three years.Since, the incentive payments are linked to continuing employment, the paymentsunder the plan are recognised as compensation for post acquisition services.Accordingly, $664,709 and $176,177 have been recorded as Cost of revenues andSelling, General and Administrative expenses respectively in fiscal 2005.

4.1.5                          Thistransaction has been accounted using the purchase method of accounting asrequired by SFAS No. 141. The purchase price has been allocated to theacquired assets and liabilities based on management’s estimates as summarisedbelow:

| Cash and cash  equivalents                                             |       | $           | 3,061,034      |       |
|------------------------------------------------------------------------|------------|-------------|----------------|------------|
| Property, plant  and equipment                                         |       | 935,159     |           |
| Other assets, net                                                      |       | 2,689,444   |           |
| Contract  termination / settlement and acquisition related liabilities |       | (10,968,029 | )              |
| Deferred taxes                                                         |       | (775,095    | )              |
| Customer related  intangibles                                          |       | 10,336,500  |           |
| Goodwill                                                               |       | 25,392,824  |           |
| **Total**                                                              | ** ** | **$**       | **30,671,837** | ** ** |

 

As of December 31,2005, the Company has tested this goodwill for impairment and concluded thatthere is no impairment in its carrying value.

**5****                                              Investments**

5.1.1                          Investmentsecurities consist of the following:

| ** **                                                       | ** **   | **As of December 31, 2004** | ** **   |
|------------------------------------------------------------------|--------------|-------------------------------------------------|--------------|
| ** **                                                       | ** **   | **Carrying   value**                       | ** **   | **Gross   unrealized   holding   gains** | ** ** | **Gross   unrealised   holding   losses** | ** ** | **Fair   value** | ** ** |
| **Available for sale:**                                          | *** *** | *** ***                                    | *** *** | *** *** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Mutual fund units                                                |         | $                                               | 85,147,272   |   | $ | 480,117 |   |   | ($4,670 | ) |   | $ | 85,622,719 |   |
|                                                             |         | $                                               | 85,147,272   |   | $ | 480,117 |   |   | ($4,670 | ) |   | $ | 85,622,719 |   |
| Less: Amount  reported as investment in liquid mutual fund units |         |                                            | ** **   | ** ** | ** ** |   | ** ** |   |   | (55,372,919 | ) |
| Amount reported as  investment securities                        |         |                                            | ** **   | ** ** | ** ** |   | ** ** | ** ** |   | **$** | **30,249,800** | ** ** |

 

F-20

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

| ** **                                                       | ** **   | **As of December 31, 2005** | ** **   |
|------------------------------------------------------------------|--------------|-------------------------------------------------|--------------|
| ** **                                                       | ** **   | **Carrying   value**                       | ** **   | **Gross   unrealized   holding   gains** | ** ** | **Gross   unrealised   holding   losses** | ** ** | **Fair   value** | ** ** |
| **Available for sale:**                                          | *** *** | *** ***                                    | *** *** | *** *** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Mutual fund units                                                |         | $                                               | 140,478,553  |   | $ | 1,299,249 |   |   | ($1,867 | ) |   | $ | 141,775,935 |   |
| ** **                                                       |         | $                                               | 140,478,553  |   | $ | 1,299,249 |   |   | ($1,867 | ) |   | $ | 141,775,935 |   |
| Less: Amount reported as investment in liquid mutual  fund units |         |                                            | ** **   | ** ** | ** ** |   | ** ** |   |   | (42,161,683 | ) |
| Amount reported as investment securities                         |         |                                            | ** **   | ** ** | ** ** |   | ** ** | ** ** |   | **$** | **99,614,252** | ** ** |

 

5.1.2                          Dividendsfrom securities available for sale, during the year ended December 31,2003, 2004 and 2005 were $1,268,498 , $3,460,351 and $2,488,691 respectively.Gross realized gains on sale of securities, available for sale was $1,488,087 ,$221,562 and $1,141,015 and gross realised losses on sale of securities,available for sale was $271,535 , $77,080 and $12,945 for the year ended December 31,2003, 2004 and 2005 respectively.

**6****                                              Accountsreceivable**

6.1.1                          Accountsreceivable consist of the following:

| **As of December 31,**                                                                                       | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Receivables                                                                                                                 |       | $          | 75,440,233     |       | $          | 76,916,380     |       |
| Less: Allowances  for doubtful accounts (including $80,000 (2004—$146,345) receivable from a  significant shareholder) |       | (3,435,320 | )              | (2,495,219 | )          |
|                                                                                                                        | ** ** | **$**      | **72,004,913** | ** ** | **$**      | **74,421,161** | ** ** |

 

6.1.2                          Theactivity in the allowance for doubtful accounts receivable for the years ended December 31,2004 and 2005 is as follows:

| **As of December 31,**                                                  | ** ** | ** ** | ** **    | **2004**   | ** ** | **2005**      | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|---------------|------------|
| Allowance for  doubtful accounts as at beginning of the year                           |       | $          | 3,224,494     |       | $          | 3,435,320     |       |
| Additions charged  (net of recoveries) to provision for doubtful debts during the year |       | 496,804    |          | (164,464   | )          |
| Write-downs  charged against the allowance during the year                             |       | (285,978   | )             | (775,637   | )          |
| Allowance for doubtful  accounts at end of the year                                    | ** ** | **$**      | **3,435,320** | ** ** | **$**      | **2,495,219** | ** ** |

 

F-21

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

**7****                                              Costsand estimated earnings in excess of billings and billings in excess of costsand estimated earnings on uncompleted contracts**

| **As of December 31,**                                        | ** ** | ** **  | ** **     | **2004**    | ** ** | **2005**       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Cost incurred on  uncompleted contracts                                      |       | $           | 20,109,850     |        | $          | 25,750,930     |       |
| Estimated  earnings                                                          |       | 18,665,927  |           | 24,028,742  |       |
|                                                                         |       | 38,775,777  |           | 49,779,672  |       |
| Less: Billings  till date                                                    |       | (26,388,683 | )              | (26,035,924 | )          |
|                                                                         |       | $           | 12,387,094     |        | $          | 23,743,748     |       |
| Included in the  accompanying balance sheet under the following captions:    |       |        |           |        |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       | 15,233,440  |           | 26,094,094  |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | (2,846,346  | )              | (2,350,346  | )          |
|                                                                         | ** ** | **$**       | **12,387,094** | ** **  | **$**      | **23,743,748** | ** ** |

 

**8****                                              Otherassets**

8.1.1                          Otherassets consist of the following:

| **As of December 31,**                | ** ** | ** **  | ** **     | **2004**   | ** ** | **2005**       | ** ** |
|------------------------------------------------------|------------|-------------|----------------|------------|------------|----------------|------------|
| Advances to  vendors                                 |       | $           | 1,143,792      |       | $          | 1,507,000      |       |
| Prepaid expenses  and gratuity costs                 |       | 2,424,912   |           | 3,493,563  |       |
| Deposits                                             |       | 7,143,512   |           | 6,447,290  |       |
| Deferral of cost  in respect of revenue arrangements |       | 1,624,507   |           | 1,574,252  |       |
| Due from  employees                                  |       | 1,245,840   |           | 1,309,344  |       |
| Others                                               |       | 2,980,249   |           | 1,164,338  |       |
|                                                 | ** ** | **$**       | **16,562,812** | ** ** | **$**      | **15,495,787** | ** ** |
| Less: ** **Current assets                       |       |        |           |       |       |
| Advances to vendors                                  |       | (1,143,792  | )              | (1,507,000 | )          |
| Prepaid expenses and gratuity costs                  |       | (2,424,912  | )              | (3,493,563 | )          |
| Deposits                                             |       | (1,594,379  | )              | (531,329   | )          |
| Deferral of cost in respect of revenue arrangements  |       | (1,624,507  | )              | (1,574,252 | )          |
| Due from employees                                   |       | (1,214,052  | )              | (1,278,554 | )          |
| Others                                               |       | (2,573,783  | )              | (1,164,338 | )          |
|                                                 |       | (10,575,425 | )              | (9,549,036 | )          |
| Other assets                                         | ** ** | **$**       | **5,987,387**  | ** ** | **$**      | **5,946,751**  | ** ** |

 

F-22

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

**9****                                              Property,plant and equipment**

9.1.1                          Property,plant and equipment consists of the following:

| **As of December 31,**               | ** ** | ** **  | ** **     | **2004**    | ** ** | **2005**       | ** ** |
|-----------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Land                                                |       | $           | 4,357,900      |        | $          | 3,789,129      |       |
| Building                                            |       | 17,289,733  |           | 22,645,127  |       |
| Leasehold improvements                              |       | 2,181,133   |           | 4,133,345   |       |
| Computer—Hardware and other  service equipment |       | 26,670,735  |           | 32,893,636  |       |
| Computer—Software                              |       | 14,122,711  |           | 19,021,359  |       |
| Furniture and fixtures                              |       | 9,847,027   |           | 14,613,120  |       |
| Other equipment                                     |       | 12,519,355  |           | 17,522,391  |       |
| Vehicles                                            |       | 2,067,660   |           | 2,244,283   |       |
| Capital work-in-progress                            |       | 4,534,364   |           | 18,359,453  |       |
| Capital advances                                    |       | 1,077,756   |           | 8,474,405   |       |
|                                                |       | 94,668,374  |           | 143,696,248 |       |
| Less: Accumulated  depreciation and amortization    |       | (39,593,809 | )              | (51,686,625 | )          |
|                                                | ** ** | **$**       | **55,074,565** | ** **  | **$**      | **92,009,623** | ** ** |

 

9.1.2                          Depreciationand amortization expense on property, plant and equipment was $9,067,917,$11,332,906 and $15,212,682 for the years ended December 31, 2003, 2004and 2005 respectively. This includes amortization for computer software of$1,955,588, $2,586,273 and $3,642,520 respectively. Additions to computer softwareamounted to $4,507,225 and $5,183,387 during the years ended December 31,2004 and 2005 respectively. Accumulated amortization on computer software as atDecember 31, 2004 and 2005 amounted to $8,428,763 and $11,628,243respectively.

**10****                                       Goodwilland intangible assets**

10.1.1                   Intangibleassets as at December 31, 2004 and 2005 consists of the following:

| **As of December 31,**                                           | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** |
|---------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Customer related  intangibles                                                   |       | $          | 12,258,200     |       | $          | 12,258,200     |       |
| Less: Adjustments  as per final purchase price allocation of Cymbal acquisition |       | —     |           | (1,081,700 | )          |
| Less: Accumulated  amortization                                                 |       | (270,370   | )              | (1,018,435 | )          |
|                                                                            | ** ** | **$**      | **11,987,830** | ** ** | **$**      | **10,158,065** | ** ** |

 

10.1.2                   Amortizationfor the years ended December 31, 2003, 2004 and 2005 amounted to $59,501,$210,869 and $748,023 respectively. The estimated amortization for theintangible assets, for the next five years would be as follows:

| ** **   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** |
|--------------|------------|----------|------------|----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Amortization |       | 910,497  |       | 993,147  |       | 1,084,062 |       | 1,131,684 |       | 1,131,684 |       |

 

F-23

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

10.1.3                   Themovement in goodwill balance is given below:

| ** **                                                                                      | ** ** | **2004**   | ** **     | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| Balance at beginning of  the year                                                               |       | $          | 2,594,374      |       | $          | 24,677,771 |   |
| Goodwill relating to  acquisition consumated during the year                                    |       | 22,083,397 |           | —     |       |
| Add: Additional goodwill  arising on account of contingent consideration for Cymbal acquisition |       | —     |           | 5,578,772  |       |
| Add: Addition to  goodwill as per final purchase price allocation of Cymbal acquisition    |       | —     |           | 649,022    |       |
| Less: Reduction of  valuation allowance on deferred tax assets recognised on Cymbal acquisition |       | —     |           | (2,918,367 | )          |
| Balance at end of the year                                                                      | ** ** | **$**      | **24,677,771** | ** ** | **$**      | **27,987,198** | ** ** |

 

10.1.4                   Goodwillas of December 31, 2004 and 2005 has been allocated to the followingreportable segments:

| **Segment**         | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** |
|---------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Financial  services |       | $          | 2,594,374      |       | $          | 2,594,374      |       |
| Telecom services    |       | 22,083,397 |           | 25,392,824 |       |
| **Total**           | ** ** | **$**      | **24,677,771** | ** ** | **$**      | **27,987,198** | ** ** |

 

**11****                                       Accruedexpenses**

11.1.1                   Accruedexpenses consist of the following:

| **As of December 31,** | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Employee costs                        |       | $          | 13,372,040     |       | $          | 14,105,923     |       |
| Subcontractor  accruals               |       | 1,845,419  |           | 3,996,007  |       |
| Professional fees  payable            |       | 564,430    |           | 1,260,231  |       |
| Others                                |       | 4,997,478  |           | 6,869,371  |       |
|                                  | ** ** | **$**      | **20,779,367** | ** ** | **$**      | **26,231,532** | ** ** |

 

 

F-24

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**12****                                       Otherliabilities**

12.1.1                   Otherliabilities consist of the following:

| **As of December 31,**                   | ** ** | ** **     | ** **     | **2004**    | ** ** | **2005**       | ** ** |
|---------------------------------------------------------|------------|----------------|----------------|-------------|------------|----------------|------------|
| ** **                                              | ** ** | **(Restated)** | ** **     | ** **  | ** ** |
| Taxes payable                                           |       | $              | 1,855,197      |        | $          | 2,236,132      |       |
| Deferred revenue                                        |       | 2,259,263      |           | 2,027,444   |       |
| Provision for leave  encashment                         |       | 9,326,509      |           | 10,092,730  |       |
| Provision for pension  benefits                         |       | 6,033,433      |           | 6,284,868   |       |
| Payroll tax liability                                   |       | 18,859,874     |           | 22,122,868  |       |
| Interest on corporate  taxes and other related expenses |       | 6,580,080      |           | 6,783,211   |       |
| Advance from customers                                  |       | 138,039        |           | 1,389,957   |       |
| Others                                                  |       | 3,128,824      |           | 8,432,478   |       |
|                                                    | ** ** | **$**          | **48,181,219** | ** **  | **$**      | **59,369,688** | ** ** |
| Less :** **Other Current liabilities               |       |           |           |        |       |
| Taxes payable                                           |       | (1,855,197     | )              | (2,236,132  | )          |
| Deferred revenue                                        |       | (2,259,263     | )              | (2,027,444  | )          |
| Provision for leave  encashment                         |       | (9,326,509     | )              | (10,092,730 | )          |
| Payroll tax liability                                   |       | (18,859,874    | )              | (22,122,868 | )          |
| Interest on corporate  taxes and other related expenses |       | (6,580,080     | )              | (6,783,211  | )          |
| Advance from customers                                  |       | (138,039       | )              | (1,389,957  | )          |
| Others                                                  |       | (2,952,138     | )              | (8,348,802  | )          |
|                                                    |       | (41,971,100    | )              | (53,001,144 | )          |
| Other liabilities                                       | ** ** | **$**          | **6,210,119**  | ** **  | **$**      | **6,368,544**  | ** ** |

 

**13****                                       Leases**

13.1.1      Patni acquired certain vehicles undercapital lease for a non-cancelable period of 4 years. The gross amountrecorded under such capital lease was $1,068,788 with accumulated depreciationof $449,855 as at December 31, 2004. The gross amount recorded under suchcapital lease is $1,143,504 with accumulated depreciation of $475,198 as at December 31,2005.The depreciation expense in respect of these assets aggregated $147,079,$254,201 and $321,127 for the years ended December 31, 2003, 2004 and 2005respectively.

13.1.2      Patni USA has operating lease agreements,primarily for leasing office space, that expire over the next 1-7 years. Theseleases generally require Patni USA to pay certain executory costs such as taxes,maintenance and insurance. 

13.1.3      Patni has operating lease agreements,primarily for leasing office and residential premises. These agreements providefor cancellation by either party with a notice period ranging from 30 daysto 120 days, after the initial lock-in period, if any. Some leases contain aclause for renewal of the lease agreements. Some leases provide for annualrenewal of the lease payments.

13.1.4      Cymbal and its subsidiaries have operatingleases for office space, that expire over the next 1-4 years. These agreementsprovide for cancellation by either party with a notice period ranging from30 days to 120 days, after the initial lock-in period, if any. 

F-25

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

13.1.5      Future minimum lease payments undernon-cancelable operating leases (with initial or remaining lease terms inexcess of one year) and future capital lease payments as of December 31,2005 are as follows:

| ** **                                                        | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| 2006                                                              |       | $                   | 310,363    |                  | $          | 6,853,421 |   |
| 2007                                                              |       | 243,748             |       | 5,164,529             |       |
| 2008                                                              |       | 150,896             |       | 1,564,815             |       |
| 2009                                                              |       | 36,968              |       | 1,200,427             |       |
| Beyond 2009                                                       |       | —              |       | 1,479,238             |       |
| Total minimum  lease payments                                     |       | 741,975             |       | $                     | 16,262,430 |   |
| Less: Amount  representing interest                               |       | (36,113             | )          |                  |       |
| Present value of  net minimum capital lease payments              |       | 705,862             |       |                  |       |
| Less: Current  installments of obligations under capital leases   |       | (289,520            | )          |                  |       |
| Obligations under  capital leases, excluding current installments |       | $                   | 416,342    |                  |       |   |

 

Therelated assets for capital leases are included under vehicles in property,plant and equipment in the consolidated balance sheets.

13.1.6                   Rentalexpense for all operating leases for the years ended December 31, 2003,2004 and 2005 was $3,827,294 , $6,801,506 and $10,228,316 respectively.

**14****                                       Derivativesfinancial instruments**

14.1.1                   TheCompany periodically enters into foreign currency forward exchange contracts tohedge inter company receivables, both anticipated and firm commitments,denominated in the United States dollar. These contracts reduce foreigncurrency risk caused by changes in exchange rates and are used to hedge theseinter company receivables, generally for periods up to 12 months. At December 31,2005, the Company’s forward contracts have expiration dates which range fromfive to twelve months. 

Since there is a directrelationship between the forward contracts and the currency denomination of theunderlying transaction, such forward contracts are highly effective in hedgingthe cash flows of the Company’s inter company receivables related totransactions denominated in the United States dollar. These forward contractsmeet the criteria for cash flow hedge accounting treatment and accordingly,gains or losses, are included in other comprehensive income (loss) and arerecognized in the consolidated statement of income based on occurance of theunderlying transaction.

For forward contractsdesignated as a cash flow hedge, the hedge effectiveness is evaluated on thebasis of changes in spot rate and accordingly, the changes in the fair value offorward premium/discount is recognised in a manner similiar to ineffectiveportion of a hedge. The gain/loss on the forward contracts arising from changesin underlying spot rates is recorded as a component of Accumulated OtherComprehensive Income, until the hedged transaction occur and are recognised inthe consolidated statements of income. Any ineffective portion of the 

F-26

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

hedge, as well as amountsnot included in the assessment of effectiveness, are recognized in consolidatedstatement of income. 

At December 31,2005, the Company had $1,026,624 of net losses related to cash flow hedgesdeferred in Accumulated Other Comprehensive Income. 

14.1.2                   Thefollowing table presents the aggregate contracted principal amounts of theCompany’s derivative contracts outstanding:

| ** **                | ** ** | **Currency** | ** ** | **2004** | ** ** | **2005** | ** **  |
|---------------------------|------------|--------------|------------|----------|------------|----------|-------------|
| Forward contracts  (sell) |       |         | USD        |     |       | $        | 103,000,000 |   | $ | 77,000,000 |   |
|                           |            |              |            |          |            |          |             |  |  |  |  |

 

**15****                                       Shareholders’equity**

***Common shares***

15.1.1                   TheCompany has only one class of equity shares. For all matters submitted to votein the shareholders’ meeting, every holder of equity shares (except holders ofAmerican Depository Shares—ADSs), as reflected in the records of the Company onthe date of the shareholders meeting shall have one vote in respect of eachshare held. In the event of liquidation of the affairs of the Company, allpreferential amounts, if any, shall be discharged by the Company. The remainingassets of the Company after such discharge shall be distributed to the holdersof equity shares in proportion to the number of shares held by them.

15.1.2                   InFebruary 2004, pursuant to an initial Public Offering in India (‘IPO’),the Company has issued 13,415,200 common shares for a net proceeds of$64,268,351 (after adjusting for direct expenses relating to IPO of$3,889,281).

15.1.3                   InDecember 2005, pursuant to an Initial Public Offering of AmericanDepositary Shares, the Company issued 6,156,250 ADSs (12,312,500 common shares)for a net proceeds of $117,021,852 (after adjusting for direct expensesrelating to ADSs of $8,196,274). The common shares represented by the ADSs aresimilar to other common shares except for voting rights. Under the depositoryagreement, the depository of ADSs shall vote as directed by the Board ofDirectors of the Company.

***Retainedearnings and dividends***

15.1.4                   Retainedearnings as of December 31, 2004 and 2005 include profits aggregating$5,214,971, which are not distributable as dividends under Indian CompaniesAct, 1956 (Companies Act).

15.1.5                   Theability of Patni to declare and pay dividend under the Companies Act, isdetermined by its distributable profits as shown by its statutory accounts. WhenPatni wishes to declare dividends, it is required as per the Companies Act, totransfer upto 10% of its net income (after the deduction of any accumulateddeficit) computed in accordance with local regulations to a general reservebefore a dividend can be declared. Also, Indian law on foreign exchange governsthe remittance of dividends outside India. 

F-27

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

***Stock Split***

15.1.6                   OnAugust 30, 2003, Patni has effected a one for two stock split in the formof a stock dividend. In line with legal requirements, the stock dividend hasbeen recorded by capitalizing $1,016,861 from additional paid-in-capitalrepresenting the par value of shares issued as stock dividend.

15.1.7                   Allreferences in the consolidated financial statements to the number of shares andper share amounts of Patni’s common shares have been retroactively restated toreflect the stock split.

**16****                                       Redeemablecommon shares**

16.1.1                   InOctober 2000, the Company issued 3,735,000 common shares to an investoraggregating $5,970,073. Further, the promoter shareholders of the Company alsosold 5,625,000 common shares to the same investor aggregating to $9,000,000. Pursuantto the then shareholders’ agreement dated September 2000, Patni was tobecome a publicly listed company on a recognised stock exchange within a periodof 18 months from the date of allotment of shares to the investor. In theevent the IPO did not occur within such period, the investor had a right to putthese shares back to the Company for a physical settlement as per the termsspecified in the agreement (2000 agreement). Other than the right to put theseshares back to the Company, these common shares are of the same class as theother equity shares of the Company. 

TheCompany determined that this provision in the 2000 agreement constituted a writtenput option on the Company’s own shares that was subject to the provisions of *EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”*.The Company determined that the written put option met the criteria for equityclassification in EITF 00-19; however, exercise of the put option would requirethe Company to deliver cash as part of physical settlement. Accordingly, anamount equal to the cash redemption amount for shares held by this investor wastransferred to temporary equity. 

16.1.2                   Theterms of 2000 agreement contained the method of ascertaining the redemptionamount with a floor amount, to guarantee a minimum return to the investor ifthe Company was not a publicly listed company within 18 months. As a result,the Company accreted the minimum amount on these shares with a correspondingcharge to the retained earnings and increased the carrying value of theredeemable common shares. Subsequently in September 2002, Patni issued20,161,868 common shares to a new investor for $57,000,000. At the same time,the promoter shareholders sold 14,103,680 common shares to this new investorfor an amount of $39,872,776. In addition, the promoter shareholders boughtback 2,108,802 common shares from the investor who acquired redeemable commonshares in September 2000 to the extent of 9,360,000 common shares. 

As aresult of this buy back of shares by the promoter shareholders, shares to thatextent are no longer redeemable and the Company reclassified accreted amountpertaining to these shares into the shareholders’ equity.

16.1.3                   Atthe time of investment by the new investor the Company entered into a newshareholders agreement (“2002 agreement”) with the two investors and thepromoter shareholders. In accordance with the 2002 agreement, the Company wasrequired to be publicly listed within a period of 36 months from the date ofissue of shares to the new investor. In the event an IPO did not occur withinsuch period, the two investors had a right to put all the shares (whetheracquired 

F-28

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

from the Company orthe promoter shareholders) back to the Company for a physical settlement at anamount which would be determined by the Board of Directors of the Company atthe time of redemption, but would not be less than the amount paid by the newinvestor. The Company determined that this provision in the 2002 agreementconstituted a written put option on the Company’s own shares that was subjectto the provisions of EITF 00-19. The Company determined that the written putoption met the criteria for equity classification in EITF 00-19; however,exercise of the put option would require the Company to deliver cash as part ofphysical settlement.

Accordingly, an amountequal to the cash redemption amount for shares held by these two investors wastransferred to temporary equity. The amount reported in temporary equity wasnot subsequently re-measured because the minimum redemption amount was fixed atthe per share amount paid by the new investor. Other than the fact that theamount shall not be less than the amount that was paid by the new investor, the2002 agreement did not contain any defined measurement method for calculatingthe amount of buy back, should that be necessitated.

The activity in redeemable common shares for the yearended December 31, 2002 is as follows:

| ** **                                                                                            | ** ** | **Shares**    | ** ** | **Value**  | ** **     |
|-------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|----------------|
| **Balance  as of January 1, 2002**                                                               | ** ** | **9,360,000** | ** ** | **$**      | **18,174,078** | ** ** |
| Redeemable common  shares issued                                                                      |       | 20,161,868    |       | 57,000,000 |           |
| Accretion of  redeemable common shares                                                                |       | —        |       | 8,287,756  |           |
| Reclassification  of redeemable common shares sold by promoter shareholders subject to a put          |       | 14,103,680    |       | 39,872,776 |           |
| Reclassification  of redeemable common shares acquired by promoter shareholders not subject to  a put |       | (2,108,802    | )          | (5,961,834 | )              |
| **Balance as of December 31,  2002**                                                             |       | 41,516,746    |       | $          | 117,372,776    |   |

 

On July 1, 2003, theCompany adopted the provisions of SFAS No. 150. The Company determinedthat the put option held by the two investors was required to be classified asa liability upon adoption of that Statement. Pursuant to the guidance in SFAS No. 150,the put option liability is recorded at its fair value at each reporting periodwith changes in fair value reported in earnings. Upon adoption, the$117,372,776 amount presented in temporary equity (representing the cashredemption amount payable upon exercise of the put option held by the twoinvestors) was reclassified to permanent equity, a $1,196,160 liability wasrecorded for the put option based on its fair value at July 1, 2003, a$4,470,120 reduction of permanent equity was recorded based on the fair valueof the put option upon its issuance in September 2002, and the $3,273,960difference between the put option’s fair value upon adoption of SFAS No. 150and its fair value at issuance was recorded in the restated consolidatedstatement of income as the cumulative effect of a change in accountingprinciple.

At December 31, 2003,the put option liability has been recorded at its fair value of $10,000 and thereduction in the liability balance from July 1, 2003 through December 31,2003 of $1,186,160 is classified in the 2003 restated consolidated statement ofincome.

The Company completed itsIPO in February 2004. Accordingly, the put option was terminated and itsvalue was reduced to zero.

F-29

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**17****                                       Employeestock compensation plans**

17.1.1                   OnJune 30 2003, Patni established the ‘Patni ESOP 2003’ plan (‘the plan’).Under the plan, the Company is authorized to issue up to 11,142,085 equityshares to eligible employees. Employees covered by the Plan are granted anoption to purchase shares of the Company subject to the requirements ofvesting. The options vest in a graded manner over four years with 25% of theoptions vesting at the end of each year. The options can be exercised withinfive years from the date of vesting. A compensation committee constituted bythe Board of Directors of the Company administers the plan.

17.1.2                   Patnihas applied *APB No. 25, “Accounting forStock issued to Employees”*, to account for the employee stock basedcompensation plan. Accordingly, since the exercise price approximated the fairvalue of the underlying equity shares at the date of grant, no compensationcost has been recorded in these financial statements.

17.1.3                   Theweighted average grant date fair values of options granted on July 1, 2004and October 1, 2004 were $2.61 and $2.67 respectively. The weightedaverage grant date fair values of options granted on April 1, 2005 andOctober 1, 2005 were $2.36 and $3.31 respectively.

17.1.4                   Stockoptions activity under the plan is as follows:

| ** **                                  | ** ** | **Year ended December 31, 2004** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **Shares  arising out   of options**  | ** ** | **Exercise  price** | ** ** | **Weighted  average   remaining   contractual   life (months)** | ** ** |
| Outstanding at  the beginning of the period |       | 2,733,700                                            |       | 3.16 |   |   | 86 |   |   |
| Granted during  the period                  |       | 2,850,632                                            |       | 5.51-7.37 |   |   | 84-87 |   |   |
| Forfeited during  the period                |       | (192,875                                             | )          | 3.16 |   |   | — |   |   |
| Exercised during  the period                |       | (188,810                                             | )          | 3.16 |   |   | — |   |   |
| Outstanding at  the end of the period       |       | 5,202,647                                            |       | 3.16-7.37 |   |   | 75-87 |   |   |
| Exercisable at the end  of the period       |       | 446,396                                              |       | 3.16 |   |   | 56 |   |   |

 

| ** **                                  | ** ** | **Year ended December 31, 2005** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **Shares  arising out  of options**        | ** ** | **Exercise  price** | ** ** | **Weighted  average   remaining   contractual   life (months)** | ** ** |
| Outstanding at  the beginning of the period |       | 5,202,647                                            |       | 3.16-7.37 |   |   | 75-87 |   |   |
| Granted during  the period                  |       | 860,710                                              |       | 8.71-10.25 |   |   | 81-87 |   |   |
| Forfeited during  the period                |       | (417,025                                             | )          | 3.16-8.71 |   |   | — |   |   |
| Exercised during  the period                |       | (461,065                                             | )          | 3.16-7.37 |   |   | — |   |   |
| Outstanding at  the end of the period       |       | 5,185,267                                            |       | 3.16-10.25 |   |   | 67-87 |   |   |
| Exercisable at the end  of the period       |       | 1,285,744                                            |       | 3.16-7.37 |   |   | 53-57 |   |   |

 

F-30

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

17.1.5                   Duringthe year ended December 31, 2005, the Company granted 190,000 and 670,710stock options at an exercise price of $8.71 and $10.25 respectively. Theexercise price and weighted average remaining contractual life of stock optionsoutstanding at the end of the period are as follows:

| **Year ended December 31, 2005**    | ** ** |
|---------------------------------------------------------|------------|
| **Shares arising   out of options** | ** ** | ** ** | **Exercise   Price** | ** ** | ** ** | **Weighted average   remaining contractual   life (months)** | ** ** |
|                                                    | 1,759,550  |   |   | ** **3.16 |   |   | 67 |   |   |
|                                                    | 100,000    |   |   | ** **5.51 |   |   | 72 |   |   |
|                                                    | 2,474,007  |   |   | ** **7.37 |   |   | 75 |   |   |
|                                                    | 181,000    |   |   | ** **8.71 |   |   | 81 |   |   |
|                                                    | 670,710    |   |   | 10.25 |   |   | 87 |   |   |
|                                                    | 5,185,267  |   |   |   |   |   |   |   |   |

 

**18****                                       IncomeTax**

18.1.1                   Totalincome tax for the year ended December 2003, 2004 and 2005 were allocatedas follows:

| **For the years ended December 31,** | ** ** | ** **     | ** **    | **2003**       | ** ** | **2004**       | ** ** | **2005** | ** **     |
|---------------------------------------------------------------|------------|----------------|---------------|----------------|------------|----------------|------------|----------|----------------|
| ** **                                                    | ** ** | **(Restated)** | ** **    | **(Restated)** | ** ** | ** **     | ** ** |
| Income from  continuing operations                            |       | $              | 10,240,242    |           | $          | 12,886,363     |       | $        | 13,802,583     |   |
| Shareholders’ equity,  for                               |       |           |          |           |       |           |       |
| —unrealized  holding gain/loss on investment securities  |       | (204,656       | )             | 142,362        |       | 261,520        |       |
| —minimum pension  liability                              |       | (338,425       | )             | 153,253        |       | 194,848        |       |
| —tax benefit  arising on exercise of stock options       |       | —         |          | —         |       | (136,816       | )          |
| Goodwill and  intangible assets                               |       | —         |          | —         |       | (3,351,045     | )          |
| **Total**                                                     | ** ** | **$**          | **9,697,161** | ** **     | **$**      | **13,181,978** | ** ** | **$**    | **10,771,090** | ** ** |

 

18.1.2                   Incometax expense attributable to income from continuing operations consists of thefollowing:

| **For the years ended December 31,** | ** ** | ** **     | ** **     | **2003**       | ** ** | **2004**       | ** ** | **2005**   | ** **     |
|---------------------------------------------------------------|------------|----------------|----------------|----------------|------------|----------------|------------|------------|----------------|
| ** **                                                    | ** ** | **(Restated)** | ** **     | **(Restated)** | ** ** | ** **     | ** ** |
| Current taxes                                                 | ** ** | ** **     | ** **     | ** **     | ** ** | ** **     | ** ** |
| Domestic                                                      |       | $              | 457,022        |           | $          | 148,501        |       | $          | 1,787,316      |   |
| Foreign                                                       |       | 13,092,407     |           | 14,675,569     |       | 13,904,560     |       |
|                                                          |       | $              | 13,549,429     |           | $          | 14,824,070     |       | 15,691,876 |           |
| Deferred taxes                                                |       |           |           |           |       |           |       |
| Domestic                                                      |       | 344,747        |           | (303,711       | )          | (91,396        | )          |
| Foreign                                                       |       | (3,653,934     | )              | (1,633,997     | )          | (1,797,897     | )          |
|                                                          |       | (3,309,187     | )              | (1,937,708     | )          | (1,889,293     | )          |
| **Total**                                                     | ** ** | **$**          | **10,240,242** | ** **     | **$**      | **12,886,362** | ** ** | **$**      | **13,802,583** | ** ** |

 

F-31

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

18.1.3                   Thetax effect of temporary differences that give rise to significant portion ofdeferred tax assets and liabilities are presented below:

| ** **                                                                   | ** ** | **2004**       | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|
| ** **                                                                   | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Deferred tax assets:**                                                     | ** ** | ** **     | ** ** | ** ** | ** ** |
| Accrued expenses and  provisions                                             |       | $              | 6,235,305  |       | $          | 6,812,271 |   |
| Accounts receivable                                                          |       | 1,013,919      |       | 662,329    |       |
| Deferred revenue                                                             |       | 484,727        |       | 489,119    |       |
| Carry forward business  losses                                               |       | 3,342,260      |       | 2,797,346  |       |
| Minimum pension  liability                                                   |       | 194,840        |       | —     |       |
| Payroll taxes and  interest on payroll and corporate taxes                   |       | 8,615,673      |       | 9,843,043  |       |
| Others                                                                       |       | 23,633         |       | 57,104     |       |
| Gross deferred assets                                                        |       | 19,910,357     |       | 20,661,212 |       |
| Less: Valuation  allowance                                                   |       | (2,985,990     | )          | —     |       |
| Total deferred tax  assets                                                   |       | $              | 16,924,367 |       | $          | 20,661,212 |   |
| Deferred tax liabilities:                                                    |       |           |       |       |       |
| Costs and estimated  earnings in excess of billings on uncompleted contracts |       | $              | (327,705   | )          | (1,000,371 | ) |
| Property, plant and  equipment                                               |       | (1,305,569     | )          | (1,078,576 | )          |
| Undistributed earnings  of US branch                                         |       | (2,449,793     | )          | (1,718,140 | )          |
| Unrealised gain on  available for sale securities                            |       | (175,211       | )          | (436,730   | )          |
| Intangible assets                                                            |       | (4,792,416     | )          | (4,063,260 | )          |
| Others                                                                       |       | (576,760       | )          | (192,253   | )          |
| Total deferred tax  liabilities                                              |       | $              | (9,627,454 | )          | $          | (8,489,330 | ) |
| **Classified as**                                                            |       |           |       |       |       |
| **Deferred tax assets**                                                      |       |           |       |       |       |
| Current                                                                      |       | $              | 14,755,838 |       | $          | 13,722,884 |   |
| Non current                                                                  |       | —         |       | 3,401,766  |       |
| **Deferred tax liabilities**                                                 |       |           |       |       |       |
| Current                                                                      |       | 115,659        |       | 193,807    |       |
| Non current                                                                  |       | $              | 7,323,266  |       | $          | 4,758,961 |   |

 

18.1.4                   Inassessing the realisability of deferred tax assets, management considerswhether it is more likely than not, that some portion, or all, of the deferredtax assets will not be realised. The ultimate realisation of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which the temporary differences and loss carryforwards aredeductible. Management considers the reversal of taxable temporary differences,the projected future taxable income, tax planning strategies and impact of taxexemptions curently available to the company, in making this assessment. Basedon the level of historical taxable incomes over the periods in which thedeferred tax assets are deductible, management believes that it is more likelythan not, the Company will realise the benefits of those deductibledifferences, net of existing valuation allowances. Taxable income for the years2003, 2004 and 2005 aggregated $12,897,633, $8,031,173 and $16,336,603 respectively.Deferred tax assets arising on account of carry forward 

F-32

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

business losses areexpected to be realised through generation of taxable business income by asubsidiary in fiscal 2006 and 2007.

18.1.5                   Deferredtax liability in respect of undistributed earnings of Patni’s foreignsubsidiaries as of 2004 and 2005 aggregating $1,462,261 and $4,236,903respectively has not been recognised in the financial statements, as suchearnings are considered to be indefinitely re-invested. As of December 31,2005, the undistributed earnings of these subsidiaries were approximately$19,258,650.

18.1.6                   Thenet change in valuation allowance during the year 2003 is attributable toadditional valuation allowance on business losses aggregating $81,765, whichhas been partly offset by the tax benefits of losses utilised aggregating$12,909. The net change in the year 2004 is attibutable to valuation allowanceon carry forward losses of Cymbal (which was acquired during the year 2004)aggregating $2,924,898. This has been partly offset by tax benefits of lossesutilised during the year aggregating $81,765. The net change in the year 2005is attributable to reversal of valuation allowance on carry forward losses ofCymbal (which was acquired during the year 2004) aggregating $2,918,367 andreversal of valuation allowance of $67,623 on impairment of leasehold land.

18.1.7                   Thereported income tax expense attributable to income from continuing operationsdiffered from amounts computed by applying the enacted tax rate to income fromcontinuing operations before income-taxes as a result of the following:

| ** **                                                        | ** ** | **2003**       | ** **     | **2004**       | ** ** | **2005**       | ** ** |
|-------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|----------------|------------|
| ** **                                                        | ** ** | **(Restated)** | ** **     | **(Restated)** | ** ** | ** **     | ** ** |
| Income before  income taxes                                       |       | $              | 43,543,824     |           | $          | 59,434,161     |       | $ | 74,669,259 |   |
| Weighted average  enacted tax rate in India                       |       | 36.10          | %              | 36.41          | %          | 34.39          | %          |
| Computed expected  income tax expense                             |       | $              | 15,719,320     |           | $          | 21,639,978     |       | $ | 25,680,625 |   |
| Effect of:                                                        |       |           |           |           |       |           |       |
| Income exempt  from tax                                           |       | (14,605,462    | )              | (21,826,422    | )          | (21,756,426    | )          |
| Change in fair  value of put option not chargeable to tax         |       | (428,204       | )              | —         |       | —         |       |
| Changes in  valuation allowance                                   |       | 68,856         |           | (81,765        | )          | (67,623        | )          |
| Non deductible  expenses                                          |       | 863,616        |           | 1,187,196      |       | 1,866,968      |       |
| US State taxes,  net of federal tax benefit                       |       | (208,111       | )              | (302,726       | )          | 787,336        |       |
| Branch taxes                                                      |       | 9,203,691      |           | 12,083,807     |       | 6,461,722      |       |
| Foreign income  taxed at different rates                          |       | (86,047        | )              | (78,857        | )          | (105,635       | )          |
| Change in  statutory tax rate on deferred taxes                   |       | 101            |           | 2,057          |       | (16,432        | )          |
| Profit on sale of  investments taxed at other than statutory rate |       | —-        |           | —         |       | (261,606       | )          |
| Others                                                            |       | (287,518       | )              | 263,094        |       | 1,213,654      |       |
| **Reported income tax expenses**                                  |       | **$**          | **10,240,242** |           | **$**      | **12,886,362** | ** ** | **$** | **13,802,583** | ** ** |

 

18.1.8                   Uponacquisition of Cymbal, the Company was entitled to utilize tax benefits oncarry forward business losses of Cymbal. Based on preliminary projections offuture taxable income and tax planning strategies, management believed thatthere existed sufficient uncertainty regarding realization of tax benefits onthe carry forward losses. Consequently, the Company recorded a 

F-33

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

valuation allowancefor the carry forward business losses of Cymbal. In 2005, the Company evaluatedthe expected realisation of such carry forward losses and available taxplanning strategies and believed that the Company would make sufficient profitsin future years to set off the carry forward losses. Accordingly, the valuationallowance has been reversed and adjusted against goodwill.

18.1.9                   Asubstantial portion of profits of the group’s India operations is exempt fromIndian income tax, being profit from undertakings situated at SoftwareTechnology Parks. Under the tax holiday, the tax payer can utilize exemption ofprofits from income taxes for a period of ten consecutive years. The Companyhas opted for this exemption for undertakings situated in Software TechnologyParks and these exemptions expire on various dates between years 2005 and 2010.The Company also avails benefit for Income tax for their export operations.This exemption relating to export operations expires in a phased manner over aperiod of five financial years commencing from April 1, 2000. Theaggregate effect on net income of the tax holiday and export incentive schemewere $15,012,027, $20,572,502 and $18,957,774 for 2003, 2004 and 2005respectively. Further, the per share effect was $0.14, $0.17 and $0.15 for2003, 2004 and 2005 respectively.

18.1.10            Duringthe year, the Company has sold leasehold land for a consideration of $3,768,186and recognised a gain on sale of $3,285,169. As required by the Indian IncomeTax law, the Company plans to reinvest proceeds from this sale in prescribedsecurities for a period of three years so as to realize the gain on sale in atax free manner.

**19****                                       Retirementbenefits to employees**

***Gratuity benefits***

19.1.1                   Inaccordance with the Payment of Gratuity Act, 1972, Patni provides for gratuity,a defined retirement plan covering all employees. The plan provides a lump sumpayment to vested employees at retirement or termination of employment based onthe respective employee’s defined portion of last salary and the years ofemployment with the Company.

19.1.2                   Patnicontributes each year to a gratuity fund based upon actuarial valuationsperformed by an actuary. The fund is administered by Patni through a trust setup for the purpose. All assets of the plan are owned by the trust and compriseof approved debt and other securities and deposits with banks. By statute, thetrust is required to invest a minimum of 25% of its corpus in CentralGovernment securities, 15% in State Government securities and 30% in PublicSector / Financial Institutions / Bank bonds. The trust can invest theremaining 30% of its corpus in any of the above specified categories. Further,10% of its corpus can be invested in private sector / bond securities which arerated investment grade from atleast two rating agencies.

F-34

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

19.1.3                   Withregard to Patni India’s Gratuity Plan, the following table sets forth the plan’sfunded status and amounts recognized in the Company’s consolidated balancesheets. Measurement dates used to make up fair value of plan assets and benefitobligation is December 31.

| **At December 31,**                                        | ** ** | ** ** | ** ** | **2004**  | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| **Change in benefit obligation**                                     |       |       |       |      |       |
| Projected benefit  obligation (“PBO”) at January 1,   |       | $          | 2,804,669  |      | $          | 4,240,028  |       |
| Service cost                                                         |       | 633,771    |       | 919,286   |       |
| Interest cost                                                        |       | 190,714    |       | 302,722   |       |
| Translation  loss/(gain)                                             |       | 181,474    |       | (164,522  | )          |
| Actuarial loss                                                       |       | 615,648    |       | (612,287  | )          |
| Benefits paid                                                        |       | (186,248   | )          | (377,256  | )          |
| PBO at  December 31,                                            |       | 4,240,028  |       | 4,307,971 |       |
| Fair value of  plan assets as at January 1,                     |       | 2,402,751  |       | 3,629,830 |       |
| Actual return on  plan assets                                        |       | (115,265   | )          | 257,210   |       |
| Employer  contributions                                              |       | 1,371,623  |       | 1,428,962 |       |
| Benefits paid                                                        |       | (186,248   | )          | (377,256  | )          |
| Translation gain                                                     |       | 156,969    |       | (148,656  | )          |
| Plan assets at  December 31,                                    |       | 3,629,830  |       | 4,790,090 |       |
| Funded status                                                        |       | (610,198   | )          | 482,119   |       |
| Unrecognized  actuarial loss                                         |       | 1,711,850  |       | 960,409   |       |
| Net amount  recognized                                               |       | 1,101,652  |       | 1,442,528 |       |
| Accumulated  benefit obligation                                      |       | 2,062,867  |       | 2,259,265 |       |
| Amounts recognized in  the consolidated balance sheets consists of:  |       |       |       |      |       |
| Prepaid benefit cost  (included in ‘other current assets”) |       | $          | (1,101,652 | )         | $          | (1,442,528 | )          |

 

19.1.4                   Keyweighted average assumptions used to determine the benefit obligation were asfollows:

| ** **    | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount rate |       |     | 7.5        | %        |       |   | 8.0 | % |   |
|               |            |          |            |          |            |  |  |  |  |

 

For the actuarialvaluation at December 31, 2005, compensation levels have been assumed toincrease at 15% per annum for the first year, 12.5% per annum for the nextyear, 10% per annum for next five years and 7% per annum thereafter. For theactuarial valuation at December 31, 2004, compensation levels have beenassumed to increase at 20% per annum for the first year, 15% per annum for thenext year, 10% per annum for next three years and 7% per annum thereafter. 

The expected rate ofreturn on assets in future is considered to be 7.5%. This is based on theexpectation of the average long-term rate of return to prevail over the next 15to 20 years on the type of investments prescribed as per the statutory patternof investments.

F-35

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

9.1.5                          Thecomposition of plan assets is detailed below:

| **As of December 31,**                | ** ** | ** ** | ** **    | **2004**   | ** ** | **%**      | ** ** | **2005**      | ** ** | **%**   | ** ** |
|------------------------------------------------------|------------|------------|---------------|------------|------------|------------|------------|---------------|------------|---------|------------|
| Central Government Securities                        |       | $          | 156,499       |       | 4.3        |       | $          | 148,186       |       | 3.1     |       |
| Investment in Government Securities based funds      |       | 2,248,545  |          | 61.9       |       | 3,478,625  |       | 72.6          |       |
| State Government Securities                          |       | 49,733     |          | 1.4        |       | 42,325     |       | 0.9           |       |
| Public Sector / Financials Institutions / Bank bonds |       | 1,023,234  |          | 28.2       |       | 971,670    |       | 20.3          |       |
| Others                                               |       | 151,819    |          | 4.2        |       | 149,284    |       | 3.1           |       |
| **Total**                                            | ** ** | **$**      | **3,629,830** | ** ** | **100**    | ** ** | **$**      | **4,790,090** | ** ** | **100** | ** ** |

 

19.1.6                   Netperiodic gratuity cost included the following components:

| **Year ended December 31,** | ** ** | ** ** | ** **  | **2003**   | ** ** | **2004**    | ** ** | **2005** | ** **    |
|--------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|----------|---------------|
| Service cost                               |       | $          | 395,880     |       | $          | 633,771     |       | $        | 919,286       |   |
| Interest cost                              |       | 122,193    |        | 190,714    |       | 302,722     |       |
| Expected return on  assets                 |       | (100,778   | )           | (179,505   | )          | (276,826    | )          |
| Amortization                               |       | 26,641     |        | 49,607     |       | 99,371      |       |
| **Net gratuity cost**                      | ** ** | **$**      | **443,936** | ** ** | **$**      | **694,587** | ** ** | **$**    | **1,044,553** | ** ** |

 

19.1.7                   Keyweighted average assumptions used to determine the net periodic gratuity costwere as follows: 

| ** **                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate             |       |     | 7.5        | %        |       |     | 7.0        | % |   |   | 7.5 | % |   |
| Expected return on assets |       |     | 7.0        | %        |       |     | 6.5        | % |   |   | 7.5 | % |   |

 

Forthe actuarial valuation at December 31, 2005, compensation levels havebeen assumed to increase at 15% per annum for the first year, 12.5% per annumfor the next year, 10% per annum for next five years and 7% per annumthereafter. For determining the net periodic cost for the year endedDecember 31, 2004, compensation levels have been assumed to increase at15% per annum for first two years, 10% per annum for next three years and 7%per annum thereafter. For the year ended December 2003, compensationlevels have been assumed to increase at 15% per annum for the first year, 10%per annum for next 2 years and 7% per annum thereafter. 

19.1.8                   Patni’sexpected contribution to gratuity fund for the calendar year 2006 is$1,109,385. The expected benefit payments for next ten years are as follows:

| ** **                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011-2015** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------|------------|
| Expected benefit  payments |       | $        | 457,954    |     | $          | 483,958  |       | $        | 602,818    |     | $          | 765,343       |       | $ | 981,318 |   | $ | 4,659,330 |   |
|                            |            |          |            |          |            |          |            |          |            |          |            |               |            |  |  |  |  |  |  |

 

***Pension benefits***

19.1.9                   Certaindirectors of Patni in employment with Patni in India and Patni USA are entitledto receive pension benefits upon retirement or on termination from employmentat the rate of 50% of their last drawn monthly salary. The pension is payablefrom the time the eligible director reaches the age of sixty five and ispayable to the directors or the surviving spouse. The liabilities for thesepension plans are actuarially determined and periodically recognised. Theseplans are not funded.

F-36

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

19.1.10            Withregard to Patni India pension plans, the following table sets forth the plan’sfunded status and amounts recognised in the Company’s consolidated balancesheet. Measurement dates used to make up benefit obligation is December 31for each fiscal year.

| **At December 31,**                                          | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
| **Change  in benefit obligation**                                      |       |       |       |       |       |
| Projected benefit  obligation (“PBO”) at January 1,     |       | $          | 1,628,521  |       | $          | 1,778,033 |       |
| Service cost                                                           |       | 63,594     |       | 52,950     |       |
| Interest cost                                                          |       | 115,255    |       | 131,830    |       |
| Translation  loss/(gain)                                               |       | 79,606     |       | (61,504    | )          |
| Actuarial  loss/(gain)                                                 |       | (108,943   | )          | (33,237    | )          |
| PBO at  December 31,                                              |       | 1,778,033  |       | 1,868,072  |       |
| Funded status                                                          |       | (1,778,033 | )          | (1,868,072 | )          |
| Unrecognized  transition obligation                                    |       | 129,351    |       | —     |       |
| Unrecognized  actuarial loss                                           |       | 185,352    |       | 137,098    |       |
| Net amount  recognized                                                 |       | (1,463,330 | )          | (1,730,974 | )          |
| Amount recognized  in the consolidated balance sheets are as follows:  |       |       |       |       |       |
| Accrued benefit liability  (included in ‘Other liabilities’) |       | 1,645,930  |       | 1,730,974  |       |
| Intangible assets  (included in ‘Other assets’)              |       | (129,351   | )          | —     |       |
| Other  comprehensive income                                            |       | (53,249    | )          | —     |       |
| Net amount  recognized                                                 |       | 1,463,330  |       | 1,730,974  |       |
| Accumulated benefit  obligation                                        |       | $          | 1,645,930  |       | $          | 1,181,118 |       |

 

19.1.11            Keyweighted average assumptions used to determine benefit obligation for PatniIndia pension plan were as follows: 

| ** **                       | ** ** | **2004**       | ** ** | **2005**      | ** ** |
|----------------------------------|------------|----------------|------------|---------------|------------|
| Discount rate                    |       | 7.5% per annum |       | 8% per annum  |       |
| Increase in compensation  levels |       | 10% per annum  |       | 10% per annum |       |

 

19.1.12            Netperiodic pension cost of Patni India pension plan included the followingcomponents:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                               |       | $          | 48,534     |     | $          | 63,594   |       | $        | 52,950     |   |
| Interest cost                              |       | 90,623     |       | 115,255  |       | 131,830  |       |
| Amortization                               |       | 176,390    |       | 304,885  |       | 137,066  |       |
| Net pension cost                           |       | $          | 315,547    |     | $          | 483,734  |       | $        | 321,846    |   |

 

19.1.13            Keyweighted average assumptions used to determine net periodic pension cost forthe Patni India pension plan were as follows:

| **Year ended December 31,** | ** ** | ** **     | ** ** | **2003**       | ** ** | **2004**       | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------|------------|
| Discount rate                              |       | 7.5% per annum |       | 7.0% per annum |       | 7.5% per annum |       |
| Rate of compensation  increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum  |       |

 

F-37

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

19.1.14            Withregard to Patni USA pension plan, the following table sets forth the plan’s fundedstatus and amounts recognised in the Company’s consolidated balance sheet.Measurement dates used to make up benefit obligation is December 31 foreach fiscal year.

| **At December 31,**                                          | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
| **Change  in benefit obligation**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected benefit  obligation (“PBO”) at January 1,     |       | $          | 4,302,962  |       | $          | 4,739,647 |       |
| Service cost                                                           |       | 139,182    |       | 117,766    |       |
| Interest cost                                                          |       | 217,259    |       | 234,240    |       |
| Translation  loss/(gain)                                               |       | 206,843    |       | (187,253   | )          |
| Actuarial loss                                                         |       | (126,599   | )          | 812,130    |       |
| PBO at  December 31,                                              |       | 4,739,647  |       | 5,716,530  |       |
| Funded status                                                          |       | (4,739,647 | )          | (5,716,530 | )          |
| Unrecognized  transition obligation                                    |       | 277,115    |       | —     |       |
| Unrecognized  actuarial loss                                           |       | 834,396    |       | 1,162,636  |       |
| Net amount  recognized                                                 |       | (3,628,136 | )          | (4,553,894 | )          |
| Amount recognized  in the consolidated balance sheets are as follows:  |       |       |       |       |       |
| Accrued benefit  liability (included in ‘Other liabilities’) |       | 4,387,503  |       | 4,553,894  |       |
| Intangible assets  (included in ‘Other assets’)              |       | (277,115   | )          | —     |       |
| Other  comprehensive income                                            |       | (482,252   | )          | —     |       |
| Net amount  recognized                                                 |       | 3,628,136  |       | 4,553,894  |       |
| Accumulated benefit  obligation                                        |       | $          | 4,387,503  |       | $          | 4,294,919 |       |

 

19.1.15            Keyweighted average assumptions used to determine benefit obligation for Patni USApension plan were as follows: 

| ** **                       | ** ** | **2004**      | ** ** | **2005**      | ** ** |
|----------------------------------|------------|---------------|------------|---------------|------------|
| Discount rate                    |       | 5% per annum  |       | 5% per annum  |       |
| Increase in compensation  levels |       | 10% per annum |       | 10% per annum |       |

 

19.1.16            Netperiodic pension cost of Patni USA pension plan included the followingcomponents:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **2003** | ** ** | **2004**  | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|----------|------------|
| Service cost                               |       | $          | 104,201    |     | $          | 139,182   |       | $        | 117,766    |   |
| Interest cost                              |       | 236,161    |       | 217,259  |       | 234,240   |       |
| Amortization                               |       | 555,468    |       | 948,731  |       | 713,714   |       |
| Net pension cost                           |       | $          | 895,830    |     | $          | 1,305,172 |       | $        | 1,065,720  |   |

 

19.1.17            Keyweighted average assumptions used to determine net periodic pension cost forthe Patni USA pension plan were as follows:

| **Year ended December 31,** | ** ** | ** **     | ** ** | **2003**       | ** ** | **2004**       | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------|------------|
| Discount rate                              |       | 7.5% per annum |       | 5.0% per annum |       | 5.0% per annum |       |
| Rate of compensation  increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum  |       |

 

F-38

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

19.1.18            Asthe assumed rates for the above defined benefit plans have a significant effecton the amounts reported, the management has assessed these rates as comparablewith prevalent industry standards and its projected long-term plans of growth.

***Provident fund***

19.1.19            Allemployees of Patni receive provident fund benefits through a definedcontribution plan in which both the employee and employer make monthlycontributions to the plan at 12% each of the covered employee’s defined portionof salary. The Company has no further obligations under the plan beyond monthlycontribution. Patni contributes to the Provident Fund Plan maintained by theGovernment of India.

19.1.20            Patnicontributed $1,682,111, $1,765,281 and $2,613,644 to the Provident Fund Plan in2003, 2004 and 2005 respectively.

**20****                                       SegmentInformation**

20.1.1                   *SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information”*, establishes standards for theway enterprises report information about operating segments and relateddisclosures about products and services, geographic areas and major customers. TheCompany’s operations relate to providing IT services and solutions, deliveredto customers operating in various industry segments. Accordingly, revenuesrepresented along industry classes comprise the principal basis of segmental informationset out in these consolidated financial statements. Secondary segmentalreporting is performed on the basis of the geographical location of thecustomers. The accounting policies consistently used in the preparation of theconsolidated financial statements are also consistently applied to individualsegment information, and are set out in the summary of significant accountingpolicies.

20.1.2                   Industrysegments of the Company comprise financial services, insurance services,manufacturing companies, telecommunications, technology services (comprisingIndependent Software Vendors and Product Engineering) and others such as energyand utilities, retail, logistics and transportation and media and entertainment.The Company evaluates segment performance and allocates resources based onrevenue growth. Revenue in relation to segments is categorized based on itemsthat are individually identifiable to that segment. Costs are not specificallyallocable to individual segment as the underlying resources and services areused interchangeably. Fixed assets used in the Company’s business orliabilities contracted have not been identified to any of the reportablesegments, as the fixed assets and services are used interchangeably betweensegments.

20.1.3                   Patni’sgeographic segmentation is based on location of customers and comprises UnitedStates of America (‘USA’), Europe, Japan, India and Others. Revenue in relationto geographic segments is categorized based on the location of the specificcustomer entity for which services are performed irrespective of the customerentity that is billed for the services and whether the services are deliveredonsite or offshore. Categorization of customer related assets and liabilitiesin relation to geographic segments is based on the location of the specificcustomer entity which is billed for the services. Substantial portion of Patni’slong lived assets are located in India.

F-39

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

***Industry segments***

| **Particulars**                                                             | ** ** | ** **            | ** ** | **Financial  services** | ** ** | **Insurance** | ** ** | **Manufacturing** | ** ** | **Telecom** | ** ** | **Independent  Software  Vendor** | ** ** | **Product  Engineering** | ** ** | **Others** | ** ** | **Total**      | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------|------------|-------------------|------------|-------------|------------|-----------------------------------|------------|--------------------------|------------|------------|------------|----------------|------------|
| ** **                                                                  | ** ** | **December 31, 2003** | ** ** |
| Revenues                                                                    |       | $                     | 46,593,044 |                    | $          | 83,354,549    |       |              | $          | 85,427,348  |       |                              | $          | 336,789                  |       | $          | 17,096,775 |           | $          | 5,622,316 |   | $ | 12,612,587 | ** ** | **$** | **251,043,408** | ** ** |
| Accounts receivables, net                                                   |       | 9,457,057             |       | 13,833,091              |       |          | 22,870,818 |              |       | 53,510      |       | 4,190,940                         |       | 1,470,574                |       | 4,738,726  | ** ** | **56,614,716** | ** ** |
| Billings in excess of cost  and estimated earnings on uncompleted contracts |       | (156,555              | )          | (457,802                | )          |          | (824,427   | )                 |       | —      |       | (181,759                          | )          | —                   |       | (480,439   | )          | **(2,100,982** | **)**      |
| Advance from customers                                                      |       | (246,356              | )          | —                  |       |          | (14,700    | )                 |       | —      |       | —                            |       | —                   |       | (5,439     | )          | **(266,495**   | **)**      |
| Cost and estimated earnings  in excess of billings on uncompleted contracts |       | 443,615               |       | 920,753                 |       |          | 1,948,642  |              |       |        |       | 1,627,590                         |       | 167,586                  |       | 719,159    | ** ** | **5,827,345**  | ** ** |
| ** **                                                                  | ** ** | **December 31, 2004** | ** ** |
| Revenues                                                                    |       | $                     | 62,707,961 |                    | $          | 107,001,559   |       |              | $          | 92,417,807  |       |                              | $          | 8,491,468                |       | $          | 19,344,147 |           | $          | 15,110,938 |   | $ | 21,507,744 | ** ** | **$** | **326,581,624** | ** ** |
| Accounts receivables, net                                                   |       | 8,689,913             |       | 19,223,898              |       |          | 24,818,665 |              |       | 6,198,845   |       | 3,662,373                         |       | 3,348,753                |       | 6,062,466  | ** ** | **72,004,913** | ** ** |
| Billings in excess of cost  and estimated earnings on uncompleted contracts |       | (55,182               | )          | (946,385                | )          |          | (831,123   | )                 |       | (99,408     | )          | (27,576                           | )          | (477,791                 | )          | (408,881   | )          | **(2,846,346** | **)**      |
| Advance from customers                                                      |       | —                |       | (66,734                 | )          |          | (21,605    | )                 |       | —      |       | (47,130                           | )          | —                   |       | (2,570     | )          | **(138,039**   | **)**      |
| Cost and estimated earnings  in excess of billings on uncompleted contracts |       | 2,014,083             |       | 1,202,844               |       |          | 4,553,774  |              |       | 1,992,678   |       | 2,062,245                         |       | 1,768,014                |       | 1,639,802  | ** ** | **15,233,440** | ** ** |
| ** **                                                                  | ** ** | **December 31, 2005** | ** ** |
| Revenues                                                                    |       | $                     | 72,185,157 |                    | $          | 124,885,014   |       |              | $          | 98,655,217  |       |                              | $          | 68,860,317               |       | $          | 22,514,511 |           | $          | 33,923,596 |   | $ | 29,308,120 | ** ** | **$** | **450,331,932** | ** ** |
| Accounts receivables, net                                                   |       | 13,627,715            |       | 16,468,689              |       |          | 17,230,008 |              |       | 9,089,355   |       | 3,739,578                         |       | 7,606,416                |       | 6,659,400  | ** ** | **74,421,161** | ** ** |
| Billings in excess of cost  and estimated earnings on uncompleted contracts |       | (188,409              | )          | (383,407                | )          |          | (758,503   | )                 |       | (451,553    | )          | (69,075                           | )          | (208,069                 | )          | (291,330   | )          | **(2,350,346** | **)**      |
| Advance from customers                                                      |       | (1,208,504            | )          | (94,910                 | )          |          | (71,927    | )                 |       | —      |       | (1,688                            | )          | —                   |       | (12,928    | )          | **(1,389,957** | **)**      |
| Cost and estimated earnings in excess of billings on uncompleted  contracts |       | 2,577,862             |       | 5,148,267               |       |          | 3,553,636  |              |       | 9,163,047   |       | 1,624,411                         |       | 3,007,721                |       | 1,019,150  | ** ** | **26,094,094** | ** ** |

 

F-40

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

***Geographic segments***

| **Particulars**                                                             | ** ** | ** **            | ** **  | **USA**    | ** ** | **Europe** | ** ** | **Japan** | ** ** | **India** | ** ** | **Others**     | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|-------------|------------|------------|------------|------------|-----------|------------|-----------|------------|----------------|------------|-----------|------------|
| ** **                                                                  | ** ** | **December 31, 2003** | ** **  |
| Revenues                                                                    |       | $                     | 222,948,060 |       | $          | 18,217,653 |       | $         | 7,209,171  |      | $          | 428,658        |       | $         | 2,239,866  | ** ** | **$** | **251,043,408** | ** ** |
| Accounts receivables, net                                                   |       | 48,301,639            |        | 7,058,362  |       | 38,487     |       | 248,441   |       | 967,787   | ** ** | **56,614,716** | ** ** |
| Billings in excess of cost and estimated earnings on uncompleted contracts  |       | (1,787,435            | )           | (142,014   | )          | (98,674    | )          | (49,320   | )          | (23,539   | )          | **(2,100,982** | **)**      |
| Advance from customers                                                      |       | (151,476              | )           | (83,873    | )          | —     |       | (5,948    | )          | (25,198   | )          | **(266,495**   | **)**      |
| Cost and estimated earnings in excess of billings on uncompleted  contracts |       | 3,369,320             |        | 941,398    |       | 1,380,961  |       | 63,496    |       | 72,170    | ** ** | **5,827,345**  | ** ** |
| ** **                                                                  | ** ** | **December 31, 2004** | ** **  |
| Revenues                                                                    |       | $                     | 286,720,168 |       | $          | 25,690,385 |       | $         | 11,029,442 |      | $          | 726,011        |       | $         | 2,415,618  | ** ** | **$** | **326,581,624** | ** ** |
| Accounts receivables, net                                                   |       | 62,053,958            |        | 8,433,786  |       | 366,978    |       | 132,587   |       | 1,017,604 | ** ** | **72,004,913** | ** ** |
| Billings in excess of cost and estimated earnings on uncompleted  contracts |       | (2,806,346            | )           | (28,339    | )          | (2,813     | )          | (8,848    | )          | —    | ** ** | **(2,846,346** | **)**      |
| Advance from customers                                                      |       | —                |        | (132,431   | )          | —     |       | (5,608    | )          | —    | ** ** | **(138,039**   | **)**      |
| Cost and estimated earnings in excess of billings on uncompleted contracts  |       | 10,463,077            |        | 2,245,047  |       | 2,205,617  |       | 84,647    |       | 235,052   | ** ** | **15,233,440** | ** ** |
| ** **                                                                  | ** ** | **December 31, 2005** | ** **  |
| Revenues                                                                    |       | $                     | 381,887,038 |       | $          | 41,055,863 |       | $         | 19,362,908 |      | $          | 1,442,292      |       | $         | 6,583,831  | ** ** | **$** | **450,331,932** | ** ** |
| Accounts receivables, net                                                   |       | 59,329,356            |        | 11,315,359 |       | 2,204,954  |       | 167,705   |       | 1,403,787 | ** ** | **74,421,161** | ** ** |
| Billings in excess of cost and estimated earnings on uncompleted  contracts |       | (1,456,655            | )           | (731,554   | )          | (162,137   | )          | —    |       | —    | ** ** | **(2,350,346** | **)**      |
| Advance from customers                                                      |       | (1,333,823            | )           | —     |       | —     |       | (2,021    | )          | (54,113   | )          | **(1,389,957** | **)**      |
| Cost and estimated earnings in excess of billings on uncompleted  contracts |       | 20,216,375            |        | 2,424,521  |       | 2,846,253  |       | 149,507   |       | 457,438   | ** ** | **26,094,094** | ** ** |

 

20.1.4                   Onecustomer accounted for 41%, 32% and 22% of the total revenues for the yearended December 31, 2003, 2004 and 2005 respectively. Net receivables fromthis customer as at December 31, 2004 and 2005 amounted to 37% and 21% ofthe total net receivables respectively. The revenues from this customer wereacross all the industry segments of the Company. Another customer in theInsurance industry segment accounted for 17%, 15% and 12% of the total revenuesfor the years ended December 31, 2003, 2004 and 2005 respectively. Netreceivables for this customer as at December 31, 2004 and 2005 amounted to6% and Nil of the total net receivables respectively.

**21****                                       Foreignexchange (gain)/loss**

Aggregate foreign exchange(gain)/loss for the years ended December 31, 2003, 2004 and 2005 amountedto ($171,574), $2,081,800 and $4,218,141 respectively. Foreign exchange lossamounting to $Nil, $Nil and $2,524,996 for the years ended December 31,2003, 2004 and 2005 respectively, have been included in “Other(expense)/income, net” in the consolidated statements of income.

F-41

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**22****                                       Earningsper share**

A reconciliation of the common shares used in the computationof basic and diluted earnings per share is set out below:

| **Years ended December 31,**                                          | ** ** | ** **  | ** ** | **2003**    | ** ** | **2004**    | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|
| **Common  shares**                                                                   |       |        |       |        |       |        |       |
| Weighted average  number of shares outstanding                                       |       | 111,420,849 |       | 123,066,042 |       | 125,736,592 |       |
| Effect of  dilutive equivalent shares-stock options outstanding                      |       | —      |       | 1,018,950   |       | 1,721,040   |       |
| Weighted average number  of equity shares and dilutive equivalent shares outstanding |       | 111,420,849 |       | 124,084,992 |       | 127,457,632 |       |

 

**23****                                       Relatedparty transactions**

23.1.1                   Patnihas various transactions with related parties, such as PCS Technology Ltd. (‘PCSTL’),formerly known as PCS Industries Ltd., PCS Cullinet, PCS Finance, AshokaComputers, (affiliates), various companies of the GE group (‘GE’) which is asignificant shareholder in Patni, directors of Patni and their relatives.

***Revenues***

23.1.2                   PatniUSA sells computer hardware to PCSTL. Such sales during the years ended December 31,2003, 2004 and 2005 amounted to $37,729 , $8,974 and $Nil respectively.

***Expenses***

23.1.3                   Patnihas taken certain residential properties under operating leases from certainaffiliates and the Patni family. The rentals and other incidental chargesincurred for the same were $259,138, $289,964 and $266,325 for the years ended December 31,2003, 2004 and 2005 respectively. Amounts outstanding as at December 31,2004 and 2005 is $39,708 and $18,150 respectively. Outstanding securitydeposits under the operating leases placed by Patni with affiliates and thePatni family at December 31, 2004 and 2005 were $297,510 and $251,569respectively.

23.1.4                   Patnihas given donations to a public charitable trusts, the trustees of whichinclude a director of the Company and his relatives. The donations paid duringthe years ended 2003, 2004 and 2005 were $53,712 , $55,199 and $56,699respectively.

***Due from employees***

23.1.5                   Patnigrants personal loans to eligible employees, either for housing or personalpurposes. Personal loans include loans for vehicle purchase and otherindividual employee needs. Such loans are repayable in equal installments overperiods ranging from 6 - 60 months. Interest on these loans is charged at 7.5%- 9%. Loans outstanding at December 31, 2004 and 2005 were $86,453 and$56,662 respectively.

23.1.6                   PatniUSA, Patni UK, Patni GmbH and Cymbal and its subsidiaries grant personal loansto employees as well as advances to meet initial conveyance and livingexpenses. Such loans and advances are repayable over periods ranging upto 60months and 6 months respectively. Interest 

F-42

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

charged on theseloans and advances ranged from 0% to 10%. Balance outstanding of such loans andadvances at December 31, 2004 and 2005 were $1,159,387 and $1,252,682respectively.

Employees execute promissory notes for the amountadvanced along with a guarantor’s agreement as collateral. In the case of long termhousing loan, the original house deed is sought to be deposited with theCompany as collateral, in addition to the guarantor’s agreement.

***Transactions with General Electric(“GE”)***

23.1.7                   PatniUSA, Patni UK and Patni GmbH sell software services to various companies of theGE group. Sales to GE during the years ended December 31, 2003, 2004 and2005 amounted to $103,402,102, $103,440,511 and $99,359,172 respectively. Thisamounts to 41%, 32% and 22% of the total revenue for the years ended December 31,2003, 2004 and 2005 respectively. Net receivables from various GE companies asat December 31, 2004 and 2005 amounted to $26,429,295 and $15,673,490respectively. This amounted to 37% and 21% of the total net receivables as at December 31,2004 and 2005 respectively.

23.1.8                   GEcharges Patni and Patni USA for data link connections. Data link charges forthe years ended December 31, 2003, 2004 and 2005 amounted to $615,587,$1,165,610 and $933,475 respectively. Amount payable to GE at December 31,2004 and 2005 on account of data link charges amounted to $247,165 and $229,728respectively.

***Transactions with secondaryshareholders***

23.1.9                   Duringthe year ended December 31, 2004, the Company incurred $1,021,096 as IPOrelated expenses on behalf of the secondary shareholders. During the year endedDecember 31,2005, the Company paid $491,965 for IPO related expenses onbehalf of the secondary shareholders. The secondary shareholders havereimbursed the Company for such amount subsequent to the year end.

***Guarantee***s

23.1.10            Patnihas issued a counter guarantee on behalf of PCSTL aggregating Rs. 150,000,000($3,328,156) to a bank as of December 31, 2005. The guarantee was issuedon August 30, 1997 and is a continuing guarantee for the credit limitsallowed by the bank to PCSTL. The amounts under this guarantee are payable ondemand. Further, the guarantee provides that until the bank has been repaid allamounts due therein, Patni will take no steps to enforce any right or claimagainst PCSTL for any reimbursement in respect of amounts paid by Patni to thebank.

**24****                                       Lineof Credit**

24.1.1                   TheCompany has a Line of Credit of Rs.140,000,000 ($3,106,279) as of December 31,2005 from its bankers for export credit requirements such as Packing Credit,Export Bill Discounting or Post Shipment Loan which have a maximum tenor of 180days which can be rolled forward. This includes an inner limit of Rs.40,000,000($887,508) for working capital requirements such as Overdraft or WorkingCapital Demand Loan, which has a repayment period of 365 days for loans and 1day for Overdraft. The Company also has a limit for issuance of Bonds andGuarantees of Rs.70,000,000 ($1,553,140) for financial guarantees favoring theGovernment of India and other authorities which have a repayment period of 36months (including claim period). This limit is 

F-43

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

interchangeable withLetters of Credit, which have a repayment period of 365 days. The line ofcredit bears interest as negotiated with the bank from time to time. Thefacilities are secured by accounts receivables of the company and containfinancial covenants and restrictions on indebtedness. The Company was incompliance with financial covenants and restrictions during the year.

**25****                                       Commitmentsand Contingencies**

25.1.1                   TheCompany is obliged under a number of contracts relating to capital expenditure.Estimated amounts remaining to be executed on such contracts (net of advances),aggregated $25,483,547 and $22,427,362 at December 31, 2004 and 2005respectively.

25.1.2                   Guaranteesgiven by a bank on behalf of Patni amounted $355,507 and $399,630 as at December 31,2004 and 2005 respectively and letter of credit issued by bank was $57,389 and$547,414 as at December 31, 2004 and 2005 respectively.

25.1.3                   Certainincome tax related legal proceedings are pending against the Company. Potentialliabilities, if any, have been adequately provided for, and the Company doesnot currently estimate any incremental liability in respect of theseproceedings. Additionally, the Company is also involved in lawsuits and claims whicharise in ordinary course of business. There are no such matters pending thatPatni expects to be material in relation to its business.

**26****                                       Fairvalue of financial instruments**

26.1.1                   Thefair value of Patni’s current assets and current liabilities approximate theircarrying values because of their short-term maturity. Such financialinstruments are classified as current and are expected to be liquidated withinthe next twelve months. The fair value of capital lease obligations has beenestimated by discounting cash flows based on current rate available to theCompany for similar types of borrowing arrangements. The fair value andcarrying value of capital lease obligations is set out below:

| **Capital lease obligations** | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Carrying value** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------|------------|-------------------------|------------|
| At December 31,  2004              |       | $          | 629,140    |                |       | $                       | 656,828    |   |   |
| At December 31,  2005              |       | $          | 668,283    |                |       | $                       | 705,863    |   |   |

 

**27****                                       SubsequentEvent (Unaudited)**

27.1.1                   Inconjunction with the IRS examination of the fiscal 2001 and 2002 which has beenfinalized, the Company expects to revise its previous tax estimates and take anadditional charge of approximately $13,060,000 in 2006.

27.1.2                   TheCompany is currently cooperating with the US Department of Labor with respectto compliance matters on past and present international labor practices. TheCompany estimates the liability to be up to $2 million.

27.1.3                   Theshareholders of the Company approved a final dividend of Rs. 2.50 ($0.05) perequity share at its Annual General Meeting held on June 21, 2006. Thedividend tax on the distribution amounted to Rs.50,733,000 ($1,105,294)

F-44

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