** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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**FORM 20-F**

** **

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**(Mark One)**

 

| **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, 2007**                                                                                                                                                      |
| ** ** | ** **                                                                                                                                                                                                 |
| ** ** | **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** |

 

**CommissionFile Number: 001-32692**

 

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**Patni Computer Systems Limited**

**(Exactname of registrant as specified in its charter)**

** **

**Notapplicable**

(Translationof registrant’s name into English)

 

**Republic of India**

(Jurisdictionof incorporation or organization)

 

**Akruti Softech Park, MIDC Cross Road No.21**

**Andheri (E), Mumbai 400 093, India**

**+91 22 6693 0500**

(Address ofprincipal executive offices)

 

**Surjeet Singh, Chief Financial Officer, +91 22 66930500, surjeet.singh@patni.com**

**Akruti Softech Park, MIDC, Cross Road No. 21,Andheri (E), Mumbai 400 093, India**

(Name, telephone, e-mail and/or facsimile numberand address of company contact person)

 

**Securities registered or to be registeredpursuant to Section 12(b) of the Act:**

 

| **Title of  each class:**                                                                                                              | ** ** | **Name of  each exchange  on which registered:** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| American Depositary  Shares, each representing two equity shares, par value Rs.2 per share. Equity  shares, par value Rs. 2 per share* | ** ** | New York Stock Exchange                          |

 

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***Not for trading but only in connection with Registration of the ADSs**

** **

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**None**

** **

**Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:**

**Notapplicable**

 

**Thenumber of outstanding shares of each of the issuer’s classes of capital or**

**common**stock as of December 31, 2007 was:

**Equityshares:   139,009,409**

** **

**Indicateby check mark if the 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 annual or transitionreport, indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934.**

YES   o        NO   x.

 

Note—Checkingthe box above will not relieve any registrant required to file reports pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 fromtheir obligations under those Sections.

 

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

Yes   x        No   o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

 

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

** **

**Indicate by check mark which financial statementitem the registrant has elected to follow.**

Item17   o        Item18   x

 

**Indicate by check mark which basis of accountingthe registrant has used to prepare the financial statements in this filing**

**USGAAP  **x. International Financial Reporting Standards  o Others o

** **

**If this is an annual report, indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).**

YES   o        NO   x.

 

 

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** **

**TABLEOF CONTENTS**

 
| **PART -  I** |                                                                          |   |
|--------------------|-------------------------------------------------------------------------------|--------|
| ITEM  1.           | IDENTITY  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 5      |
| ITEM  2.           | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      | 5      |
| ITEM 3.            | KEY INFORMATION                                                               | 5      |
| ITEM 4.            | INFORMATION ON  THE COMPANY                                                   | 23     |
| ITEM 4A.           | UNRESOLVED  STAFF COMMENTS                                                    | 45     |
| ITEM 5.            | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 | 46     |
| ITEM 6.            | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   | 67     |
| ITEM 7.            | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 77     |
| ITEM 8.            | FINANCIAL INFORMATION                                                         | 81     |
| ITEM 9.            | THE OFFER AND  LISTING                                                        | 81     |
| ITEM 10.           | ADDITIONAL  INFORMATION                                                       | 86     |
| ITEM 11.           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 114    |
| ITEM 12.           | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 115    |
|               |                                                                          |   |
| **PART II**   |                                                                          |   |
| ITEM 13.           | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              | 115    |
| ITEM 14.           | MATERIAL MODIFICATIONS  TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 115    |
| ITEM 15.           | CONTROLS AND  PROCEDURES                                                      | 116    |
| ITEM 16A.          | AUDIT  COMMITTEE FINANCIAL EXPERT                                             | 119    |
| ITEM 16B.          | CODE OF ETHICS                                                                | 119    |
| ITEM 16C.          | PRINCIPAL ACCOUNTANT  FEES AND SERVICES                                       | 119    |
| ITEM 16D.          | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 120    |
| ITEM 16E.          | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES        | 120    |
|               |                                                                          |   |
| **PART III**  |                                                                          |   |
| ITEM 17.           | FINANCIAL  STATEMENTS                                                         | 120    |
| ITEM 18.           | FINANCIAL  STATEMENTS                                                         | 120    |
| **ITEM 19.**       | **EXHIBITS**                                                                  | 121    |

 

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**CURRENCY OF PRESENTATIONAND CERTAIN DEFINED TERMS**

** **

Unlessotherwise stated in this Annual Report or unless the context otherwiserequires, references in this Annual Report on Form 20-F, or “Annual Report”to:

 
| · |   | “we,” “us,”, “our”,  “our company” and “Patni” are to Patni Computer Systems Limited and its  consolidated subsidiaries;                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                |
| · |   | “India” are to the  Republic of India;                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                |
| · |   | “Japanese Yen” and  “JPY” are to the legal currency of Japan and all references to “Euro” are to  the legal currency to the European Union.                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                |
| · |   | “Indian rupees,” “rupees”  and “Rs.” are to the legal currency of India and all references to  “U.S. dollars,” “dollars” or “US $” or “$” are to the legal  currency of the United States; and |
|   |   |                                                                                                                                                                                                                                                                                |
| · |   | a particular “fiscal”  year are to our fiscal year ended December 31 of such year.                                                                                                                                                                                   |

 

The financial statementshave been prepared using U.S. dollars as the reporting currency. In addition,for your convenience, this Annual Report contains translations of certainIndian rupee amounts into U.S. dollars amounts which should not be construed asa representation that those Indian rupee or U.S. dollar amounts could havebeen, or could be, converted into U.S.dollars or Indian rupees, as the case maybe, at any particular rate, the rate stated below, or at all.

 

Except as otherwisestated in this Annual Report, all translations from Indian rupees to U.S.dollars contained in this Annual Report have been based on the noon buying ratein the City of New York on December 31, 2007 for cable transfers in Indianrupees as certified for customs purposes by the Federal Reserve Bank of NewYork. The noon buying rate on December 31, 2007 was Rs. 39.41 per $1.00.

 

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

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

** **

ThisAnnual Report contains forward-looking statements. The forward-lookingstatements are contained principally in the sections entitled “KeyInformation—Risk Factors,” “Information on the Company,” and “Operating andFinancial Review and Prospects”. These statements involve known and unknownrisks, uncertainties and other factors which may cause our actual results,performance or achievements to be materially different from any future results,performance or achievements expressed or implied by the forward-lookingstatements. Forward-looking statements include statements about:

 
| · |   | our ability to attract  and retain clients;                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                              |
| · |   | the anticipated  benefits and risks associated with our business strategy, including those  relating to our current and future service offerings; |
|   |   |                                                                                                                                              |
| · |   | our future operating  results;                                                                                                                    |
|   |   |                                                                                                                                              |
| · |   | the anticipated  benefits and risks of our strategic customer relationships and acquisitions;                                                     |
|   |   |                                                                                                                                              |
| · |   | the anticipated size  or trends of the market segments in which we compete and the anticipated  competition in those markets;                     |
|   |   |                                                                                                                                              |
| · |   | government regulation  and the outcome of any tax, legal or regulatory review, action or litigation;  and                                         |
|   |   |                                                                                                                                              |
| · |   | our future capital  requirements and our ability to satisfy our capital needs.                                                                    |

 

In some cases, you canidentify forward-looking statements 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 comparableterminology. These statements are only predictions. Actual events or resultsmay differ materially. In evaluating these statements, you should specificallyconsider various factors, including the risks outlined in “Item 3.D. KeyInformation—Risk Factors”. These factors may 

 

4

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cause our actual resultsto differ materially from any forward-looking statement. Although we believethat the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievement.

 

Forward-lookingstatements speak only as of the date they are made. Other than required by law,we do not undertake any obligation to update them in light of new informationor future developments.

 

This Annual Reportincludes statistical data about the IT industry that comes from informationpublished by sources including Forrester Research,Inc., or Forrester, aprovider of market information and strategic information for the IT industryand the National Association of Software and Service Companies, or NASSCOM, anindustry trade group. This type of data represents only the estimates ofGartner, NASSCOM, Forrester and other sources of industry data. In addition,although we believe that data from these sources is generally reliable, thistype of data is inherently imprecise. We caution you not to place unduereliance on this data.

 

**PART I**

** **

**ITEM1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**

** **

Not applicable.

 

**ITEM2. OFFER STATISTICS AND EXPECTED TIMETABLE**

** **

Not applicable.

 

**ITEM3. KEY INFORMATION**

** **

**3.A. Selected financialdata**

** **

*The selected consolidatedhistorical financial data set forth below should be read in conjunction withour consolidated financial statements, the notes to those statements and “Item5. Operating and Financial Review and Prospects” included elsewhere in thisAnnual Report. The selected data presented below under the captions “Statementof Income Data”, “Balance Sheet Data” and “Cash Flow Data” for, and as of theend of, each of the years in the five-year period ended December 31, 2007,are derived from our audited consolidated financial statements (except for cashdividend per equity share) and have been prepared and presented in accordancewith U.S. GAAP.  The consolidatedfinancial statements as of December 31, 2007 and 2006, and for each of theyears in the three-year period ended December 31, 2007, and the auditreport thereon, are included elsewhere in this Annual Report. Historicalresults are not necessarily indicative of the results to be expected for anyfuture period.*

 

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| ** **                                                                                          | ** ** | **Fiscal Year ended December 31,**                                 | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2003**                                                                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except share data and per share)** | ** ** |
| **Statement  of Income Data**                                                                       |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                            |       | $                                                                                      | 251,043    |   | $ | 326,582 |   | $ | 450,332 |   | $ | 578,851 |   | $ | 662,912 |   |
| Cost of revenues                                                                                    |       | 159,543                                                                                |       | 205,439 |   | 292,456 |   | 373,966 |   | 450,085 |   |
|                                                                                                |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Gross  Profit**                                                                                   | ** ** | **$**                                                                                  | **91,500** | ** ** | **$** | **121,143** | ** ** | **$** | **157,876** | ** ** | **$** | **204,885** | ** ** | **$** | **212,827** | ** ** |
| Selling, general  and administrative                                                                |       | 47,995                                                                                 |       | 58,218 |   | 85,754 |   | 107,663 |   | 117,442 |   |
| Foreign exchange  (gain) loss, net                                                                  |       | (172                                                                                   | )          | 2,082 |   | 1,693 |   | 2,748 |   | (23,351 | ) |
|                                                                                                |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Operating  Income**                                                                               | ** ** | **$**                                                                                  | **43,677** | ** ** | **$** | **60,843** | ** ** | **$** | **70,429** | ** ** | **$** | **94,474** | ** ** | **$** | **118,736** | ** ** |
| ** **                                                                                          | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Income / (Expense)******                                                                    |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest and  dividend income                                                                       |       | 1,574                                                                                  |       | 4,223 |   | 4,190 |   | 10,088 |   | 12,540 |   |
| Interest  expenses                                                                                  |       | (2,146                                                                                 | )          | (2,083 | ) | (2,044 | ) | (2,840 | ) | (3,592 | ) |
| Gain on sale of  investments, net                                                                   |       | 1,278                                                                                  |       | 144 |   | 1,128 |   | 1,679 |   | 6,370 |   |
| Other income  (expenses), net                                                                       |       | (2,025                                                                                 | )          | (3,693 | ) | 966 |   | 3,541 |   | 1,706 |   |
| Change in fair  value of put option                                                                 |       | 1,186                                                                                  |       | — |   | — |   | — |   | — |   |
|                                                                                                |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Income  before income taxes**                                                                     | ** ** | **$**                                                                                  | **43,544** | ** ** | **$** | **59,434** | ** ** | **$** | **74,669** | ** ** | **$** | **106,942** | ** ** | **$** | **135,760** | ** ** |
| ** **                                                                                          | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income taxes                                                                                        |       | 10,240                                                                                 |       | 12,886 |   | 13,802 |   | 47,692 |   | 21,784 |   |
| Cumulative  effect due to change in accounting principle due to adoption of  SFAS No. 150 |       | 3,274                                                                                  |       | — |   | — |   | — |   | — |   |
|                                                                                                |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| **Net  income**                                                                                     | ** ** | **$**                                                                                  | **36,578** | ** ** | **$** | **46,548** | ** ** | **$** | **60,867** | ** ** | **$** | **59,250** | ** ** | **$** | **113,976** | ** ** |
| **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**                                                                             | ** ** | **$**                                                                                  | **0.33**   | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** | **$** | **0.43** | ** ** | **$** | **0.82** | ** ** |
| **Diluted**                                                                                         | ** ** | **$**                                                                                  | **0.33**   | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** | **$** | **0.43** | ** ** | **$** | **0.82** | ** ** |
| Weighted average  number of common shares used in computing earnings per share                      |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| —Basic                                                                                         |       | 111,420,849                                                                            |       | 123,066,042 |   | 125,736,592 |   | 137,957,477 |   | 138,660,785 |   |
| —Diluted                                                                                       |       | 111,420,849                                                                            |       | 124,084,992 |   | 127,457,632 |   | 138,904,860 |   | 139,569,933 |   |
| Cash dividend  per equity share                                                                     |       | $                                                                                      | 0.009      |   | $ | 0.025 |   | $ | 0.046 |   | $ | 0.057 |   | $ | 0.086 |   |

 
| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(in thousands)**       | ** ** |
| **Balance  Sheet Data**          |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents       |       | $                             | 47,940     |   | $ | 77,143 |   | $ | 148,820 |   | $ | 46,510 |   | $ | 32,626 |   |
| Investments in  securities       |       | 49,245                        |       | 85,623 |   | 141,776 |   | 246,016 |   | 301,152 |   |
| Total assets                     |       | 226,084                       |       | 373,063 |   | 553,886 |   | 640,341 |   | 848,755 |   |
| Capital lease  obligations       |       | 540                           |       | 657 |   | 706 |   | 692 |   | 604 |   |
| Total  shareholders’ equity |       | 154,832                       |       | 273,227 |   | 439,029 |   | 508,593 |   | 680,964 |   |
|                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Fiscal Year ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **2003**                                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(in thousands)**                                | ** ** |
| **Cash  Flow Data**              |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net cash  provided by (used in): |       |                                                   |       |   |   |   |   |   |   |   |   |
| Operating  activities            |       | $                                                      | 41,382     |   | $ | 47,792 |   | $ | 73,058 |   | $ | 59,091 |   | $ | 111,272 |   |
| Investing  activities            |       | (27,816                                                | )          | (85,484 | ) | (111,750 | ) | (155,426 | ) | (130,036 | ) |
| Financing  activities            |       | (1,165                                                 | )          | 61,423 |   | 111,875 |   | (7,106 | ) | (8,682 | ) |
| Capital  expenditures            |       | (13,742                                                | )          | (21,591 | ) | (53,282 | ) | (48,620 | ) | (61,891 | ) |
|                                  |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Exchange rates**

** **

Fluctuations in theexchange rate between the Indian rupee and the U.S. dollar will affect the U.S.dollar equivalent of the Indian rupee price of our equity shares on the IndianStock Exchanges and, as a result, will likely affect the market price ofthe  American Depository Shares, or ADSs,in the United States, and vice versa. Such fluctuations will also affect theU.S. dollar conversion by the depositary of any cash dividends paid in Indianrupees on our equity shares 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** | ** ** |
|------------------------------------|------------|----------------|------------|-----------|------------|-----------|------------|----------------|------------|
| 2003                               |       | Rs. 46.59      |       | Rs. 48.10 |       | Rs. 45.29 |       | Rs. 45.55      |       |
| 2004                               |       | 45.26          |       | 46.45     |       | 43.27     |       | 43.27          |       |
| 2005                               |       | 44.00          |       | 46.26     |       | 43.05     |       | 44.95          |       |
| 2006                               |       | 45.19          |       | 46.83     |       | 43.89     |       | 44.11          |       |
| 2007                               |       | 41.19          |       | 44.49     |       | 38.48     |       | 39.41          |       |
| 2008 (through  June 23, 2008) |       | 40.55          |       | 42.97     |       | 39.12     |       | 42.97          |       |

 

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  (1) Represents theaverage of the noon buying rate on the last day of each month during theperiod.

 

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** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| December 2007                            |       | 39.55    |       | 39.29   |       |
| January 2008                             |       | 39.55    |       | 39.13   |       |
| February 2008                            |       | 40.11    |       | 39.12   |       |
| March 2008                               |       | 40.46    |       | 39.76   |       |
| April 2008                               |       | 40.45    |       | 39.73   |       |
| May 2008                                 |       | 42.93    |       | 40.45   |       |
| June 2008  (through June  23, 2008) |       | 42.97    |       | 42.38   |       |

 

On  June 23, 2008 the noon buying rate inthe city of New York was Rs. 42.97  per$1.

 

**3.B.Capitalization and indebtedness**

** **

Not applicable.

 

**3.C. Reasons for theoffer and use of proceeds**

** **

Not applicable.

 

**3.D. Risk factors**

** **

*Investorsshould carefully consider all of the information set forth in this AnnualReport and the following risk factors that affect us and our industry. Therisks below are not the only ones we face. Additional risks not currently knownto us or that we presently deem immaterial may also affect our businessoperations. Our business, financial condition or results of operations could bematerially or adversely affected by any of these risks. This Annual Report alsocontains forward-looking statements that involve risks and uncertainties. Our resultscould materially differ from those anticipated in these forward-lookingstatements as a result of certain  factors, including the risks we face asdescribed below and elsewhere. See “Special Note Regarding Forward-LookingStatements.”*

 

7

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**RisksRelated to our Operations**

** **

***Our revenues are highly dependent on a limitednumber of clients and the loss of any one of our major clients could adverselyaffect our revenues.***

*** ***

We derive a significantportion of our revenues from a limited number of clients in a few selectindustries. In 2005, 2006 and 2007 our largest client, General Electric,accounted for 22.1%, 14.6% and 11.8% of our revenues and our second largestclient accounted for 11.5%, 9.6% and 9.1% of our revenues. In 2005, 2006 and2007, our top ten clients accounted for 59.3%, 53.1% and 47.6%  of ourrevenues. As a result of our reliance on a limited number of clients, we mayface pricing and other competitive pressures. The volume of work performed forspecific clients is likely to vary from year to year, especially since we arenot the exclusive external service provider for our clients. In addition, thereare a number of factors, other than our performance, that could cause the lossof a client and that may not be predictable. For example, our clients maydecide to reduce spending on IT services or sourcing from us due to achallenging economic environment and other factors, both internal and external,relating to their business such as restructuring or supplier rationalizations.The loss of any one of our major clients, a decrease in the volume of work theyoutsource to us or a decrease in the price at which we sell our services tothem could adversely affect our revenues.

 

***Our client contracts, including those with ourtwo largest customers, typically can be terminated without cause and withlittle or no notice or penalty, which could negatively impact our revenues andprofitability.***

*** ***

Our clients typicallyretain us through non-exclusive master services agreements, or MSAs. Most ofour client project contracts, including those that are on a fixed-price andfixed-price service level agreement, or SLA, basis, can be terminated with orwithout 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, which 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 their existing software with packaged software supportedby licensors. Any of these decisions or actions could adversely affect ourrevenues and profitability.

 

***Our revenues are highly dependent on clientslocated in the United States. Economic slowdowns or factors that affect theeconomic health of the United States may adversely affect our business.***

*** ***

In  2005, 2006 and 2007, approximately 84.8%,80.8% and 77.9% of our revenues were derived from clients located in the UnitedStates. Any economic slowdown in the United States may result in our clientsreducing or postponing their technology spending significantly, which may inturn lower the demand for our services.

 

***Our clients operate in a limited number ofindustries. Factors that adversely affect these industries or IT spending bycompanies within these industries may adversely affect our business.***

*** ***

We derive a largeproportion of our revenues from clients which operate in a limited number ofindustries. In 2005, 2006 and 2007, we derived 27.7%, 23.2% and 23.6% of our revenues from the insurance industry,21.9%, 21.7% and 23.8% of our revenues from the manufacturing industry,15.3%,18.9% and 13.4% of our revenues from the communications, media andentertainment industry, and 16.0%, 15.3% and 14.1% of our revenues from the financial services industry. Anysignificant decrease in IT services spending by clients in these industries orother industries from which we derive significant revenues in the future mayreduce the demand for our services. Further, any significant decrease in thegrowth of the insurance, manufacturing, financial services or communications,media and entertainment industries, or significant consolidation in thoseindustries, or any decrease in growth or consolidation in other industrysegments in which we operate, may reduce the demand for our services.

 

8

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*** ***

***We face intense competition for employees in our market. Our successdepends in large part upon our highly skilled software professionals and ourability to attract and retain these personnel.***

*** ***

Our ability to executeprojects and to obtain new clients depends largely on our ability to attract,train, motivate and retain highly-skilled software professionals, particularlyproject managers and other mid-level professionals. Our attrition rates havebeen high due to a highly competitive labor market in India. Our attritionrates were 20.1%, 28.5% and 26.5% in 2005, 2006 and 2007. We define our attrition rate as the ratio of the numberof employees that have left us during a defined period to the average number ofemployees that are on our payroll during such period.

 

We invest in trainingthe professionals 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 businesseffectively. We believe that there is significant worldwide competition forsoftware professionals with the skills necessary to perform the services weoffer, including from non-Indian, international service providers such asAccenture Limited, or Accenture, and International Business MachinesCorporation, or IBM. Additionally, we may not be able to redeploy and retrainour software professionals to keep pace with continuing changes in technology,evolving standards and changing client preferences.

 

***Our revenues, expenses and profits are difficultto predict and can vary significantly from quarter to quarter. This could causethe market value of our equity shares and the ADSs to decline.***

*** ***

Our quarterly operatingresults may vary significantly from quarter to quarter. Therefore, we believethat period-to-period comparisons of our results of operations are not necessarilymeaningful and should not be relied upon as an indication of our futureperformance. It is possible that in the future some of our quarterly results ofoperations may be below the expectations of market analysts and our investors,which could lead to a significant decline of the market value of our equityshares and the ADSs.

 

 As a large part of any quarter’s revenues arederived from existing customers, revenue growth can vary due to project startand stops and customer-specific situations. Operating income variation is dueto various factors such as changes in compensation, which are typicallyeffected in the second quarter and reduce our operating margin in such quarter;changes in 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.

 

Factorswhich affect the fluctuation of our revenues, expenses and profits include:

 
| · |   | variations, expected  or unexpected, in the duration, size, timing and scope of our projects,  particularly with our major clients;                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| · |   | changes in our pricing  policies or those of our clients or competitors;                                                                                                          |
|   |   |                                                                                                                                                                              |
| · |   | the proportion of  services that we perform in our development centers in India as opposed to  outside India;                                                                     |
|   |   |                                                                                                                                                                              |
| · |   | the effect of seasonal  hiring patterns, unanticipated attrition and the time required to train and  productively utilize our new employees, particularly software professionals; |
|   |   |                                                                                                                                                                              |
| · |   | annual increases in  compensation of our employees;                                                                                                                               |
|   |   |                                                                                                                                                                              |
| · |   | the size and timing of  expansion of our facilities;                                                                                                                              |
|   |   |                                                                                                                                                                              |
| · |   | unanticipated  cancellations, non-renewal of our contracts by our clients, contract  terminations or deferrals of projects; and                                                   |
|   |   |                                                                                                                                                                              |
| · |   | changes in our  employee utilization rate, which is affected by various factors.                                                                                                  |

 

9

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Asignificant part of our expenses, particularly those related to personnel andfacilities, are fixed in advance of any particular quarter. As a result,unanticipated variations in the number and timing of our projects or employeeutilization rates may cause significant variations in our operating results inany particular 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:

 
| · |   | the duration of tax  holidays or exemptions and the availability of other Government of India  incentives;                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |
| · |   | the outcome of any  tax, legal or regulatory review, action or litigation;                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                              |
| · |   | currency exchange rate  fluctuations, particularly when the rupee appreciates in value against the  U.S. dollar since the majority of our revenues are in U.S. dollars and a  significant part of our expenses are in rupees; and |
|   |   |                                                                                                                                                                                                                              |
| · |   | other general economic  factors.                                                                                                                                                                                                  |

 

***Our earnings may be adversely affected if wereceive an adverse determination resulting from a pending U.S. InternalRevenue Service tax review of our U.S. operations.***

*** ***

We facechallenges from domestic and foreign tax authorities regarding the amount ofcurrent taxes due. These challenges include questions regarding the timing andamount of deductions and the allocation of income among various taxjurisdictions. To the extent we are able to prevail in matters for whichaccruals have been established or are required to pay amounts in excess of suchaccruals, our effective tax rate in a given financial statement period may bematerially affected. During2006, we reached a settlement with the U.S. Internal Revenue Service, or IRS, relating to our tax returns for our U.S.operations for 2001 and 2002.The IRS has also commenced, but not yet completed,a tax review of our U.S. operations for 2003 through 2005. Pursuant to thesettlement, we revised our tax provisions for 2001 and 2002 and recomputed ourtax provision for 2003, 2004 and 2005. This revision, representingchanges in estimates, has resulted in an additional charge of approximately$14.1 million in our financial statements for the year ended December 31,2006. Additionally, a consequential interest and deferred tax charge in anamount of $6.0 million has been accrued in our financial statements for theyear ended December 31, 2006. Our total income tax liability for the yearended December 31, 2006 was $47.7 million, of which $30.3 million resultedfrom provisioning due to reassessment of our payroll and corporate taxobligations for our international operations. For the year ended December 31,2007, we have accrued additional interest amounting to $2.9 million on the IRS liability and a deferred taxbenefit of $1.2 million in our financial statements. As the IRS reviewfor 2003 through 2005 is still in progress, we cannot currently assess whetherthis review may result in increase or decrease in tax liability.

 

***We operate in a highly competitive environmentand this competitive pressure on our business is likely to continue.***

*** ***

***We operate in a highly competitiveenvironment and this competitive pressure on our business is likely tocontinue. The market for IT services is rapidly evolving and highlycompetitive. We expect that competition will continue to intensify. We facecompetition or competitive pressure from:***

*** ***
| · |   | Indian IT services  companies, such as Tata Consultancy Services Limited, Infosys Technologies  Limited, Wipro Limited, Satyam Computer Services Limited, and HCL  Technologies Limited;                                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | international IT  services companies, such as Accenture, Cognizant Technology Solutions,  Computer Sciences Corporation, Sapient Corporation and Electronic Data  Systems;                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | divisions of large  multinational technology firms such as IBM, and Hewlett-Packard Company, or  Hewlett-Packard;                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | in-house IT  departments of large corporations;                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | other international,  national, regional and local firms from a variety of market segments,  including major international accounting firms, systems consulting and  implementation firms, applications software firms, service groups of computer  equipment companies, general management consulting firms, programming  companies and temporary staffing firms; |

 

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| · |   | offshore service  providers in other countries with low wage costs such as China and the  Philippines, and countries in Eastern Europe and Latin America; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| · |   | involvement of third  party intermediaries who negotiate IT services and outsourcing contracts 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 as offshore operations in India have become an importantelement of their delivery strategy. This has resulted in increased employeeattrition among Indian vendors and increased wage pressure to retain softwareprofessionals and reduce such attrition.

 

Manyof our competitors have significantly greater financial, technical andmarketing resources and generate greater revenues than we do. Clients mayprefer vendors that have delivery centers located globally or are based incountries that are more cost-competitive than India. Therefore, we cannotassure you that we will be able to retain our clients while competing againstsuch competitors. We believe that our ability to compete also depends in parton a number of factors beyond our control, including the ability of ourcompetitors to attract, train, motivate and retain highly skilled technicalemployees, the price at which our competitors offer comparable services and theextent of our competitors’ responsiveness to client needs.

 

***Any inability to manage our growth could disruptour business and reduce our profitability.***

*** ***

We have experiencedsignificant growth in recent years. Our revenues have grown at a compoundannual growth rate, or CAGR, of 21.4% from $251 million in 2003 to$662.9 million in 2007. The total number of our employees has grown from7,096 as of December 31, 2003 to 14,945 as of December 31, 2007.

 

Ouroperations have also expanded in recent years through the development,enhancement and acquisition of new service offerings and industry expertise,and the broadening of our geographic presence. Specifically, we:

 
| · |   | augmented our  offerings in our service lines in business process outsourcing, product  engineering, infrastructure management services and quality assurance;                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                    |
| · |   | gained expertise and  operations in the provision of services to clients in the communications,  media and entertainment industry through our acquisition of Patni Telecom  Solutions, Inc, or Patni Telecom (formerly Cymbal Corporation, or Cymbal) and  Logan Orviss International, or Logan Orviss; |
|   |   |                                                                                                                                                                                                                                                                                                    |
| · |   | expanded our expertise  and market specific services in the life sciences practice through our  acquisition of Patni Life Sciences Inc. (formerly Taratec Development  Corporation, or Taratec);                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| · |   | expanded our expertise  and operations in our product engineering technology practices;                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                    |
| · |   | enhanced our  operations in Europe and Asia; and                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| · |   | expanded our  facilities in India.                                                                                                                                                                                                                                                                      |

 

Weexpect our future growth to place significant demands on both our managementand our resources. 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 management personnel; |
|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                              |
| · |   | adhering to our high  quality and process execution standards;                                    |
|   |   |                                                                                              |
| · |   | maintaining high  levels of client satisfaction;                                                  |
|   |   |                                                                                              |
| · |   | creating and managing  economies of scale;                                                        |
|   |   |                                                                                              |
| · |   | managing a larger  number of clients in a greater number of industry sectors;                     |

 

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| · |   | integrating expanded  operations while preserving our culture, values and entrepreneurial  environment; and                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| · |   | developing and  improving our internal administrative infrastructure, particularly our  financial, operational, communications and other internal systems. |

 

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

 

***We may face difficulties in providing serviceswithin our industry and technology practices, offering new and existing servicelines and managing increasingly large and complex projects, which could lead toclients discontinuing their work with us.***

*** ***

We have been expandingthe nature and scope of our engagements by extending the breadth of ourpractices and the services we offer. The success of our new practices andservice offerings is dependent, in part, upon demand for such services by ourexisting and new clients and our ability to meet this demand in acost-competitive and effective manner. We cannot be certain that we will beable to attract existing and new clients for such new services or effectivelymeet 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 thoroughunderstanding of their operations. Our ability to establish such relationshipswill depend on the proficiency of our management personnel, softwareprofessionals and, if necessary subcontractors, as well as other competitivefactors such as our performance and delivery capability. Larger and morecomplex projects may involve multiple engagements or stages, and there is arisk that a client may choose not to retain us for additional stages or maycancel or delay additional planned engagements. Such cancellations or delaysmake it difficult to plan for project resource requirements, and failure toplan appropriately may have a negative impact on our business, results ofoperations and financial condition.

 

***Our business will suffer if we fail to keep pacewith the rapid changes in technology in the industries on which we focus. Weneed to anticipate and develop new services and enhance existing services inorder to keep our clients satisfied.***

*** ***

The IT services marketis characterized 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 undertaken and may continue to undertakestrategic acquisitions, which may prove to be difficult to integrate and manageor may not be successful, and may result in increased expenses or write-offs.***

*** ***

We have pursued and maycontinue to pursue strategic acquisition opportunities to enhance ourcapabilities and address gaps in industry expertise, technical expertise andgeographic coverage. It is possible that we may not identify suitableacquisition or investment candidates or joint venture partners, or if we doidentify suitable candidates or partners, we may not complete thosetransactions on terms commercially acceptable to us or at all. The inability toidentify suitable acquisition targets or investments or joint ventures or theinability to complete such transactions may adversely affect ourcompetitiveness and our growth prospects.

 

In  2007 we completed the acquisitions of  Taratec Development, a life sciences companyand Logan Orviss, a telecommunication consulting service company, which are nowintegrated with our operations.

 

If we acquire anothercompany, we could have difficulty in assimilating such 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 suchacquisition, merger or joint venture that we attempt, whether or not completed,or any media reports or rumors with respect to any such transactions, mayadversely affect the value of our equity shares and the ADSs.

 

12

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***We are investing substantial cash assets in newfacilities and physical infrastructure, and our profitability could be reducedif our business does not grow proportionately.***

*** ***

We expect to investapproximately $80 million to $120 millionin capital expenditures in 2008, which is a significant increase fromour past capital expenditures. Most of the new spending will be forconstruction of new facilities and physical infrastructure. However, we may notreceive the benefits that we expect from our investment in these facilities.Further, we may encounter cost overruns or project delays in connection withnew facilities. These expansions will increase our fixed costs. If we areunable to grow our business and revenues proportionately, our profitabilitywill be reduced.

 

***We are subject to risks arising from exchangerate fluctuations.***

*** ***

Although our functionalcurrency is the Indian rupee, we transact a significant portion of our businessin several other currencies, particularly the U.S. dollar. Our exchange raterisk primarily arises from our foreign currency revenues, receivables, payablesand other foreign currency assets and liabilities. We expect that a majority ofour revenues will continue to be generated in U.S. dollars for the foreseeablefuture. In 2005, 2006 and 2007,  ourdollar denominated revenues represented 90.3%, 87.1%  and 82.9% of our total revenues respectively.

 

A significant portion ofour expenses, comprising the cost of revenues and selling, marketing andgeneral administrative expenses, are and will continue to be denominated andincurred in Indian rupees. In 2005, 2006 and 2007,  rupee costs represented 39.1%, 37.0% and 42%of these cost of revenues and selling, marketing and general administrativeexpenses. Therefore, changes in the exchange rate between the rupee and othercurrencies, especially with respect to the U.S. dollar, may have a materialadverse effect on our revenues, other income, cost of services, operating costsand net income, which may in turn have a negative impact on our business,operating results and financial condition. On December 31, 2007, theexchange rate per U.S. dollar was Rs. 39.41 compared to Rs. 44.11 on December 31,2006 and Rs. 44.95 on December 31, 2005. On June  23, 2008, theexchange rate per US$ was Rs. 42.97. The exchange rate between the rupee andthe 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, purchasedoptions and net written options to cover a portion of outstanding accountsreceivables. As of December 31, 2007, we had outstanding forward contractsin the amount of $165.2 million, JPY 481.6 million ($4.3 million) and Euro 4million ($5.6 million), outstanding written options of Euro 5 million ($7million), outstanding currency purchased options in the amount of $81.5 millionand outstanding currency written options in the amount of $2.5 million. We haveincreased our foreign currency hedging activity given the recent volatility inthe value of the Indian rupee against the U.S. dollar. However, we may not beable to purchase contracts to insulate ourselves adequately from foreigncurrency exchange risks. In addition, any such contracts may not performeffectively as a hedging mechanism. See “Item 11.Quantitative and QualitativeDisclosures about Market Risk – Exchange Rate Risk”.

 

***Our success depends in large part upon oursenior management and key personnel and our ability to attract and retain them.***

*** ***

We are highly dependenton our senior management, including Mr. Narendra K. Patni, our Chairmanand Chief 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 key personnel may adversely affect our business.

 

13

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***Our revenues could be significantly affected ifthe governments in the United States or other countries in which our customersare based restrict companies from outsourcing work to non-domesticcorporations.***

*** ***

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 themselves 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 to complete fixed-price contractswithin budget and at the required level of performance could reduce ourrevenues and profitability.***

*** ***

We derived 35.2% and32.4% of our revenues from fixed-price contracts in 2006 and 2007. 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 are conditionedupon our meeting predetermined performance levels. Any failure to meet suchperformance levels could result in a reduction in our revenues. Any failure toaccurately estimate the resources and time required for a project or anyfailure to complete our contractual obligations at the committed performancelevel could adversely affect our revenues and profitability.

 

***Our ability to expand our business and procurenew contracts or enter into beneficial business arrangements may be affected bynon-competition clauses in our agreements with existing clients or businesspartners.***

*** ***

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 to our clients for damagescaused by system failures or breaches of security obligations.***

*** ***

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 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.

 

14

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***Our clients’ proprietary rights may bemisappropriated by our employees or subcontractors in violation of applicableconfidentiality 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 subject to third party claims ofintellectual property infringement.***

*** ***

Although there arecurrently no material pending or threatened intellectual property claimsagainst us, infringement claims may be asserted against us in the future. Ourcontracts contain broad indemnity clauses, and under most of our contracts, weare required to provide specific indemnity relating to third party intellectualproperty rights infringement. In some instances, the amount of theseindemnities may be greater than the revenues we receive from the client. If webecome liable to third parties for infringing their intellectual propertyrights, we could be required to pay a substantial damage award and be forced todevelop non-infringing technology, obtain a license or cease selling theapplications or products that contain the infringing technology. We may beunable to develop non-infringing technology or to obtain a license oncommercially reasonable terms, or at all. We may also be required to change ourmethodologies so as not to use the infringed intellectual property, which maynot be technically or commercially feasible and may cause us to expendsignificant resources. Any claims or litigation in this area, irrespective ofthe outcome, could be time-consuming and costly and/or injure our reputation.

 

As the number ofpatents, copyrights and other intellectual property rights in our industryincreases, we believe that companies in our industry will face more frequentinfringement claims. Defending against these claims, even if not meritorious,could be expensive and divert our attention and resources from operating ourcompany.

 

***We have a limited ability to protect ourintellectual property rights, and unauthorized parties may infringe upon ormisappropriate our intellectual property.***

*** ***

We rely on a combinationof copyright, trademark and design laws, confidentiality procedures andcontractual provisions to protect our intellectual property, including ourbrand identity. However, the laws of India may not protect intellectualproperty rights to the same extent as laws in the United States. Therefore, ourefforts to protect our intellectual property may not be adequate and we may notbe able to detect unauthorized use or take appropriate and timely steps toenforce our intellectual property rights. Our competitors may independentlydevelop proprietary 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 ourmanagement and employees, reduce our revenues and increase our expenses. We mayneed to litigate to enforce our intellectual property rights or to determinethe validity 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.B. Information on the Company – Business Overview - IntellectualProperty.”

 

***An economic downturn may impair our growth andoperating results.***

*** ***

Discretionary spendingon IT 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.

 

15

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**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.

 

***Immigration restrictions could limit our abilityto expand our operations in the United States. We derive a high proportion ofour revenues from clients located in the United States which may be affectedmaterially by such restrictions.***

*** ***

Most of our employeesare Indian nationals. The ability of our software professionals to work in theUnited States, Europe and in other countries depends on our ability to obtainnecessary visas and work permits. As of December 31, 2007, a majority ofour software professionals in the United States held H-1B visas, a temporaryvisa which allows the employee to remain in the United States while he or sheremains an employee of the sponsoring firm, and L-1 visas, an intra companytransfer visa allowing managers and executives or employees with specializedknowledge to stay in the United States only temporarily. An H-1B visa may begranted to certain categories of persons in several “specialty occupations”including software professionals such as our employees, so long as theircompensation meets annually adjusted minimums. Those adjustments may forceincreases in the salaries we pay to our employees with H-1B visas, resulting inlower profit 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 be approvedby the United States government in any fiscal year. Such annual limit is fixedat 65,000 and has already been reached for the year 2008 (October 1, 2007to September 30, 2008). We believe that the demand for H-1B visas willcontinue to be high. Further, the United States government has increased thelevel of scrutiny in granting visas. This may lead to limits on the number ofL-1 visas granted. The U.S. immigration laws also require us to comply withother legal requirements including those relating to displacement and secondarydisplacement of U.S. workers and recruiting and hiring of U.S. workers, as acondition to obtaining or maintaining work visas for our software professionalsworking 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 in India may prevent us fromsustaining our competitive advantage and may reduce our 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,particularly project managers and other mid-level professionals. We may need tocontinue to increase the levels of our employee compensation to remaincompetitive and manage attrition.

 

***Clients may seek to reduce their dependence onIndia for outsourced IT services or take advantage of the services provided in countrieswith labor costs similar to or lower than India.***

*** ***

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 

 

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similar to or lower thanIndia, such as China, the Philippines and countries in Eastern Europe. Sincewage costs in our industry in India are increasing, our ability to competeeffectively will become increasingly dependent on our reputation, the qualityof our services and our expertise in specific industries.

 

***Our net income would decrease if the Government of India reduces orwithdraws tax benefits and other incentives it currently provides to us orotherwise increases our effective tax rate.***

 

Presently, we benefitfrom the tax holidays given by the Government of India for the export of ITservices from specially designated software technology parks and specialeconomic zones in India. As a result of these incentives, which include a 10year tax holiday from Indian corporate income taxes for the operation of mostof our Indian facilities, our operations have been subject to relatively lowtax liabilities.

 

       In December 2006, we received ademand notice from the Indian Income Tax department of approximately Rs 630.17million, including an interest demand of approximately Rs 186.85 million($15.99 million including an interest demand of approximately $4.73 million)for the assessment year 2004-05. The tax demand was mainly on account ofdisallowance of deduction claimed by us under Section 10A of the IncomeTax Act, 1961, or Income Tax Act, in respect of profits earned by our variouseligible undertakings.  Section 10Aof Income Tax Act exempts the profits earned by an undertaking for the exportof computer software upon the fulfillment of certain conditions. One of theconditions is that the unit should not have been formed by the splitting up ofan existing business. We expanded our software development business whereas theIndian Income Tax department contends that the business of the new units iscomprised of business transferred from existing units by splitting them. Inconsultation with our tax advisers, we filed an appeal in January 2007challenging the disallowance.

 

       One of the requirements under the Indian Income Tax Rules toproceed with an appeal is to deposit, either immediately or through monthlyinstallments, a sum equivalent to 50% of the amount that is under appeal. As ofFebruary 2008, we have deposited a sum of Rs. 310.28 million ($7.73million). Considering the facts and nature of disallowances and based on theadvice given by our legal counsel, we believe that the disallowance is nottenable and we are confident of a favorable outcome inappeal proceedings and hence no provisionfor such income tax demand is considered necessary.

 

Subsequently, in February 2008we received an order from the Commissioner of Income Tax (CIT) (Appeals) infavour of the Company by allowing the deduction claimed under Section 10A.We received the refund of the taxes paid after adjustment of the new demand forthe assessment year 2002-03.

 

In December 2007,we received another demand, of Rs. 261.70 million including interest ofapproximately Rs 139.88 million ($6.64 million including an interest ofapproximately $3.54 million) for the assessment year (AY) 2002-03.  The new demand concerns the same issue ofdisallowance of tax benefits under Section 10A.  In our opinion, and based on advice received,the demand is not tenable against us and we already filed an appeal with theappellate authority.

 

Subsequently, in March 2008we have received an order from the CIT (Appeals) in our favor allowing thededuction claimed under Section 10A for the assessment year (AY) 2002-03.The entire tax paid is refundable.

 

Further, provisions ofthe Income Tax Act of India are amended on an annual basis by enactment of theFinance Act. The Finance Act, 2008 has extended the scope of service tax tocover software developement. This change, if implemented in its current form,will not increase our operating expenses, since the same will be recovered fromthe customers.

 

In addition, we may alsobe subject to changes in taxation resulting from the actions of applicableincome tax authorities in India or from Indian tax laws that may be enacted.For example, we may incur increased tax liability as a result of adetermination by applicable income tax authorities that the transfer priceapplied to transactions involving our subsidiaries and us was not appropriate.

 

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***Any increases in our effective tax rateas a result of the expiration of tax benefits we currently enjoy, changes inapplicable tax laws or the actions of applicable income tax or other regulatoryauthorities could materially reduce our profitability. For more information,see “Item 5.A. Operating and Financial Review and Prospects—Operating Results –Taxes”.***

*** ***

***Any disruption in the supply of power, ITinfrastructure and telecommunications lines to our facilities could disrupt ourbusiness process or subject us to additional costs.***

*** ***

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 our clients’business. We do not maintain business interruption insurance and may not becovered for any claims or damages if the supply of power, IT infrastructure ortelecommunications lines is disrupted. This could disrupt our business processor subject us to additional costs.

 

***Anti-takeover provisions under Indian law couldprevent or deter an entity from acquiring control 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. B.Additional Information—Takeover Code.”

 

***There are certain differences in shareholderrights and protections between the laws of India and the United States andbetween governance standards for a U.S. public company and a foreign privateissuer such as us.***

*** ***

We are incorporated inIndia and investors should be aware that there are certain differences in shareholderrights and protections between the laws of India and the United States. Thereare also certain differences in the governance standards for a U.S. company andthose applicable to a foreign private issuer such as us. A U.S. investor shouldconsider such differences in shareholder rights and governance.

*** ***

***In certain circumstances, our ability to acquirecompanies organized outside India may require the approval of the Government ofIndia and/or the Reserve Bank of India and we may fail to obtain such approvalsin a timely manner or at all.***

*** ***

As part of our strategy,we intend to acquire companies, in India or abroad, which have a synergisticfit with our operations.

 

Subjectto compliance with certain Indian laws and regulations, including Indianexchange control laws and regulations, we are permitted:

 
| · |   | to make overseas  direct investments in a joint venture or wholly-owned subsidiary outside  India of up to 400% of our net worth as of the date of our last audited  balance sheet;                                                                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | to make overseas  direct investments, without limits on net worth, in any foreign security from  the proceeds of an international offering of ADRs or Global Depository  Receipts, or GDRs, or from the account balances held in our exchange earner’s  foreign currency bank accounts; and                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | subject to certain  conditions, to acquire shares of a foreign company engaged in a *bona fide* business activity in exchange  for our ADRs or GDRs, provided that such an investment, taken together with  all our overseas direct investments, does not exceed an amount equivalent to  ten times our export earnings during the preceding financial year as  reflected in our audited balance sheet. |

 

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In certain other cases,we are required to obtain the approval of the Reserve Bank of India to acquireshares of a foreign company for cash consideration.

 

Additionally, if we areto invest in a foreign company through a share swap transaction, other than byway of an exchange of our ADRs or GDRs, we are required to obtain the approvalof the Government of India and/or the Reserve Bank of India.

 

In certaincircumstances, we may not be able to meet the Indian regulatory requirementswith respect to certain acquisitions of foreign companies and may require theprior approval of the Reserve Bank of India and/or the Government of India toconsummate acquisitions of such foreign companies. We may not be able to obtainsome or all of these approvals in a timely manner or at all, and thereby may beimpeded in our efforts to acquire companies organized outside India. Thisinability may limit our growth, render us uncompetitive relative to ourcompetitors and adversely affect our business, revenues and profitability.

 

***You may have difficulty enforcing any judgmentobtained in the United States against us or our directors or executive officersin India.***

*** ***

Weare incorporated under the laws of India and many of our directors andexecutive officers reside outside the United States. Furthermore, most of ourassets and the assets of our directors and executive officers are locatedoutside the United States. As a 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 andIndia do not currently have a treaty providing for reciprocal recognition andenforcement of judgments (other than arbitration awards) in civil andcommercial matters.

 

***Incidents such as terrorist attacks and otheracts of violence or war involving India, the United States, and other countriescould adversely affect the financial markets, result in loss of clientconfidence, and adversely affect our business, results of operations andfinancial condition.***

*** ***

Incidents such as theterrorist attacks that occurred in the United States, India and other countriesand other acts of violence or war, including those involving India, the UnitedStates or other countries, may adversely affect global equity markets andeconomic growth. These acts may also result in a loss of business confidenceand have other consequences that could adversely affect our business, resultsof operations and financial condition. Travel advisories, reluctance to traveland increased visa scrutiny for travelers as a result of such attacks may havean adverse impact on our ability to operate effectively. Any of these eventscould adversely affect client confidence in India as an outsourcing base.

 

***Regional conflicts in South Asia could adverselyaffect the Indian economy, disrupt our operations and cause our business tosuffer.***

*** ***

South Asia has, fromtime to time, experienced instances of civil unrest and hostilities among neighboringcountries, such as between India and Pakistan. In recent years there have beenmilitary confrontations along the India-Pakistan border. The potential forhostilities between the two countries is high due to past terrorist incidentsin India and troop mobilizations along the border, and the geopoliticalsituation in the region. Military activity or terrorist attacks in the futurecould influence the Indian economy by disrupting communications and makingtravel more difficult. Political tensions could increase the perception thatinvestments in Indian companies involve a higher degree of risk than companiesin other countries such as the United States. This, in turn, could have amaterial adverse effect on the market for securities of Indian companies,including our equity shares and our ADSs, and on the market for our services.

 

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***Our performance is linked to the stability ofpolicies and the political situation in India.***

*** ***

The role of the Indiancentral and state governments in the Indian economy and their effect onproducers, consumers and regulators has remained significant over the years.Since 1991, successive governments of India have pursued policies of economicliberalization, including significantly relaxing restrictions on the privatesector. The present Government of India, which was formed in May 2004, hasannounced policies and taken initiatives that continue to support the economicliberalization policies pursued by previous governments. We cannot assure youthat these liberalization policies will continue in the future. The rate ofeconomic liberalization could change, and specific laws and policies affectingtechnology companies, foreign investment, currency exchange rates and othermatters affecting investment in our securities could change as well. Asignificant change in India’s economic liberalization and deregulation policiescould adversely affect business and economic conditions in India generally, andour business in particular.

 

Since 1996, theGovernment of India has changed several times. The current Indian government isa coalition of many parties, some of which are communist and other far leftparties. The withdrawal of one or more of these parties or any dispute betweengroups of those parties could result in political instability. Any politicalinstability could delay or otherwise adversely affect the reform of the Indianeconomy and could have a material adverse effect on the market for our equityshares and our ADSs and on the market for our services.

 

***We are vulnerable to natural disasters thatcould severely disrupt the normal operation of our business and adverselyaffect 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 including Mumbai, which has also experienced heavy flooding inrecent years. If our facilities are damaged by a tsunami, flood, earthquake orother natural disaster, our global delivery capability could be interrupted ordelayed 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.

 

***Compliance with new and changing corporategovernance and public disclosure requirements adds uncertainty to ourcompliance policies and increases our costs of compliance.***

*** ***

Laws, regulations andstandards relating to accounting, corporate governance and public disclosure,new SEC regulations, NYSE rules, Securities and Exchange Board of India rules,and Indian stock exchanges listing regulations are subject to change and cancreate uncertainty for companies like ours. New or changed laws, regulationsand standards could lack specificity or be subject to varying interpretations.Their application in practice may evolve over time as new guidance is providedby regulatory and governing bodies. This could result in continuing uncertaintyregarding compliance matters and higher costs of compliance as a result ofongoing revisions to such governance standards.

 

In particular,continuing compliance with section 404 of the Sarbanes-Oxley Act of 2002and the related regulations regarding our required assessment of our internalcontrols over financial reporting requires the commitment of significantfinancial and managerial resources and our external auditors’ independentassessment of the 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.

 

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** **

**Risks Relating to OurADSs and our Trading Market**

** **

***Sales and issuances of our equity shares or ADSsmay adversely affect the market price of the ADSs and 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 controlling shareholders who have theability to exercise significant control over us, and whose interests mayconflict with the interests of our other shareholders.***

*** ***

Mr.  NarendraK. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, together withtheir families and entities controlled by them, and General Atlantic MauritiusLimited, or General Atlantic, own 14.64%, 14.38%, 14.82% and 16.48% of ouroutstanding equity shares, respectively.

 

Our Articles ofAssociation confer certain rights on our controlling shareholders relating toour governance, including representation on our Board of Directors and anability to adjourn a shareholder or Board of Directors meeting for lack ofquorum if their representative is not present at the first such meeting. Inaddition, our Articles of Association can only be amended if members holdingnot less than 75% of our equity shares (and who are entitled to vote) castvotes in favor of such amendments and such votes include the favorable votes ofeach of the controlling shareholders, so long as the respective groups hold atleast 10% of our equity shares and vote on such amendment. Pursuant to theterms of our Articles of Association, Mr. Narendra K. Patni is thepermanent Chairman of our Board, with a casting vote in the event of a tie.

 

Pursuant to anemployment agreement with our U.S. subsidiary, Patni Americas Inc., (formerlyPatni Computer Systems, Inc.,) and a consultancy agreement between ourU.S. subsidiary and us, Mr. Narendra K. Patni serves as our Chairman andChief Executive Officer and as the Chief Executive Officer of our U.S.subsidiary. So long as our consultancy agreement is in effect, Mr. NarendraK. Patni will act as our Chairman and Chief Executive Officer and, pursuant toour Articles of Association, so long as he remains our Chief Executive Officer,he will have the right to appoint and remove all key senior personnel andsenior management, following consultation with General Atlantic. The employmentagreement with Mr. Narendra K. Patni has an initial term expiring on December 31,2008, which can be extended at Mr. Patni’s option for an additional fiveyear term. In addition, our Board of Directors has approved the extension ofthe consultancy agreement to December 31, 2010. However, the agreementwith Mr. Narendra K. Patni can be terminated only upon payment ofadditional compensation.

 

We had entered intoemployment agreements with each of Mr. Gajendra K. Patni and Mr. AshokK. Patni pursuant to which each served as executive director. Each of Mr. GajendraK. Patni and Mr. Ashok K. Patni were reappointed as our executivedirectors for a further period of five years beginning from October 24,2005 with the approval of our shareholders at the Annual General Meeting heldon June 21, 2006. In 2007, Mr. Gajendra K. Patni and Mr. AshokK. Patni ceased to be Executive Directors with effect on October 2, 2007,although they remain as directors of the Company in a non executive capacity.

 

Our Articles ofAssociation required that each of Mr. Narendra K. Patni, Mr.Gajendra K.Patni and Mr.Ashok K. Patni not compete against us; however, these non-competeprovisions expired in February 2005. None of Mr. Narendra K. Patni,Mr.Gajendra K. Patni or Mr.Ashok K. Patni has entered into a standardnon-solicitation and non-compete agreement that all of our other employees arerequired to sign as a condition of employment.. In addition, Mr. GajendraK. Patni and Mr. Ashok K. Patni, together with their family members, havemanagement 

 

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control of certaincompanies, which include PCS Technology Limited, PCS International Limited, PCSCullinet Private Limited, PCS Finance Private Limited and Ashoka ComputerSystems 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 fourcontrolling shareholders has the right to appoint one director to our Board ofDirectors so long as such controlling shareholder holds 5% or more of ourequity shares. In addition, Mr Arun Duggal and Mr Louis T. van den Boog, two of our directors, formerly served as specialadvisors to General Atlantic.

 

Accordingly, ourcontrolling shareholders have the ability to exercise significant influenceover our management, including over matters requiring shareholder approval orapproval by our Board of Directors. This could delay, defer or prevent a changein control, impede a merger, consolidation, take-over or other businesscombination involving us, or discourage a potential acquirer from making atender offer or otherwise attempting to obtain 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.”

 

***Trading suspensions and closures at the Indianstock exchanges may adversely affect the trading price of ADSs.***

*** ***

Our equity shares arelisted and traded in India on the Indian stock exchanges. The regulation andmonitoring of Indian securities markets and the activities of investors,brokers and other participants differ, in some cases significantly, from thosein the United States. Indian stock exchanges have in the past experiencedproblems, including temporary exchange closures, broker defaults, settlementdelays and strikes by brokerage firm employees, which, if continuing orrecurring, could affect the market price and liquidity of the securities ofIndian companies, including our equity shares and ADSs, in both domestic andinternational 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 rate fluctuations between the dollarand the rupee will affect the value of the ADSs.***

*** ***

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 imposes certain restrictions thatlimit a holder’s ability to transfer the shares obtained upon surrender of ADSsand repatriate the proceeds of such transfer, which may cause our ADSs to tradeat a premium or a discount to the market price 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. The ReserveBank of India has given general permission to effect sales of existing sharesor convertible debentures of an Indian company by a resident to a non-resident,subject to certain conditions, including the price at which the shares may besold. Additionally, except under certain limited circumstances, 

 

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if an investor seeks toconvert the rupee proceeds from a sale of equity shares in India into foreigncurrency, approval from the Reserve Bank of India will have to be obtained foreach such transaction. Required approval from the Reserve Bank of India or anyother government agency may not be obtained on terms favorable to anon-resident investor or at all.

 

***An investor in our ADSs may not be able toexercise preemptive rights for additional equity shares and may thereby sufferdilution of its equity interest in us.***

*** ***

Under the IndianCompanies Act, 1956, or Indian Companies Act, a company incorporated in Indiamust offer its holders of equity shares preemptive rights to subscribe and payfor a proportionate number of shares to maintain their existing ownershippercentages prior to the issuance of any new shares, unless such preemptiverights have been waived by holders of three-fourths of the shares voting on theresolution to waive such rights. A holder of ADSs may be unable to exercisepreemptive rights for equity shares underlying ADSs unless a registrationstatement under the Securities Act is effective with respect to such rights oran exemption from the registration requirements of the Securities Act isavailable. We are not obligated to prepare and file such a registrationstatement and our decision to do so will depend on the costs and potentialliabilities associated with any such registration statement, as well as theperceived benefits of enabling the holders of ADSs to exercise their preemptiverights, and any other factors we consider appropriate at the time. We cannotassure you that we would file a registration statement under thesecircumstances. If we issue any such securities in the future, such securitiesmay be issued to the depositary, which may sell such securities for the benefitof the holders of the ADSs. There can be no assurance as to the value, if any,the depositary would receive upon the sale of such securities. To the extentthat a holder of ADS is unable to exercise preemptive rights granted in respectof the equity shares represented by the ADSs, his proportional interest in uswould be reduced.

 

***ADS holders may be restricted in their abilityto 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 intime to 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 liquid trading market for our ADSsis not assured.***

*** ***

An active, liquidtrading market for our ADSs may not be maintained in the long term. We cannot predict the extent to which an active, liquid public trading marketfor our ADSs will exist.  If there is no longer any active trading marketfor our ADSs, or if we fail to meet eligibility requirements, we may berequired to delist from the NYSE, which could adversely affect the price of ourADSs and, potentially, our equity shares.  Although ADSs holders areentitled to withdraw the equity shares underlying our ADSs from our Depositaryat any time, there is no public market for our equity shares in the UnitedStates.

 

** ****ITEM 4. INFORMATION ON THE COMPANY**

** **

**4.A.History and development of the Company**

** **

We were incorporated asPatni Computer Systems Private Limited on February 10, 1978 under theIndian Companies Act. We are registered with the Registrar of Companies, Pune,Maharashtra, India. Our company registration number is 11-020127 (CINU72200MH1978PLC020127). In 1988, since our turnover exceeded prescribed limitsunder the then-applicable Section 43A of the Indian Companies Act, webecame a deemed public 

 

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company and subsequentlyon April 15, 1991 we were converted into a private limited company. In1995 we once again became a deemed public company and upon the deletion of Section 43Afrom the Indian Companies Act, we were converted to a private limited companyon June 27, 2002. We were again converted to a public limited company on September 18,2003 and changed our name to Patni Computer Systems Limited. Our registeredoffice is located at S-1A Irani Market Compound, Yerawada, Pune 411 006,Maharashtra, India and the telephone number of our registered office is +91 202669 3457.

 

The original activitiesof the Company were computer time rental, the resale of imported computerhardware, and software exports. In 1981, we promoted PCS Data Products(Private) Limited, or PCSDP, for the sale and marketing of computer equipmentand hardware maintenance. In 1987, we formed PCS Data General India, or PCSDG,a joint venture with The Data General Corporation, USA, for the manufacture andmaintenance of computer hardware. In 1994, the name of PCSDP was changed to PCSIndustries Limited, or PCSIL, and PCSDG was merged into PCSIL. Since 1994, wehave been entirely focused on software exports. In 1999, the shares of PCSILheld by us and other non-operating assets were de-merged into other groupcompanies and our Company emerged as a focused IT services company.

 

Our corporateheadquarters are located at Akruti Softech Park, MIDC Cross Road No. 21,Andheri East, Mumbai 400 093, India, and our North American headquarters arelocated at One Broadway Cambridge, MA 02142. General Atlantic made asignificant investment in our company in 2002. To enhance our domain expertise in financial services andcommunications, media and entertainment, we made selective acquisitions such asPatni Telecom (formerly  Cymbal), whichwe acquired in November 2004. We completed our initial publicoffering of equity shares in India in February 2004 and our initialoffering of ADSs listed on the New York Stock Exchange in December 2005.In 2007 we acquired Logan Orviss International a European based telcommuniationconsulting company and Patni Lifesciences (formerly Taratec DevelopmentCorporation) a US based lifesciences consulting company to widen ourtelecommunications and lifesciences expertise respectively. In addition weacquired from one of our major customers the world wide rights for a software propriety intellectual propertyright that enables communication service providers to offer customermanagement, retail point-of- sales and billing services for variety of productand services.

 

In February 2008,the Board of Directors approved the proposal to buy back fully paid equityshares to the extent of  up to 10% of thepaid up capital and free reserves, at a maximum price of Rs. 325 per equityshare, for an aggregate amount upto Rs. 2,370 million ($ 60.1 million)  in accordance with the provisions of Section 77A,77AA, 77B and other applicable provisions  of the Companies Act, 1956and the provisions of Securities and Exchange Board of India (Buy-Back ofSecurities) Regulations, 1998 (“Buy Back Regulations”), for which necessarypublic announcements have been made in April 2008. The Company plans toannounce the date  of buyback at a futuredate.

 

Our capital expendituresfor 2005, 2006 and 2007 were $55.4 million, $53.4million and $59.8 million respectively. These capital expenditures wereprimarily to finance the expansion of our existing facilities  as well as the construction / purchase of new facilities in India. Weanticipate capital expenditures of between approximately $80 million to $120million in 2008, principally to finance the construction of our new facilitiesin Noida, Pune Hinjewadi, Airoli - Navi Mumbai Gandhinagar and other facilities and physical infrastructure in India*.*We are obliged under a number ofcontracts relating to capital expenditure. Estimated amounts remaining to beexecuted on such contracts (net of advances), aggregated approximately $33.4million at December 31, 2007. We currently intend tofinance our planned capital expenditure entirely from the proceeds of our ADSoffering and funds generated from operations.

 

**4.B. Business overview**

** **

We are a leading Indianprovider of information technology services. We deliver a comprehensive rangeof IT services through globally integrated onsite and offshore deliverylocations primarily in India, which we call our global delivery model. We offerour services to customers through industry-focused practices, includinginsurance, manufacturing, financial services and communications, media andentertainment, and through technology-focused practices. Within thesepractices, our service lines include application development, applicationmaintenance and support, packaged software implementation, infrastructure managementservices, product engineering services, business process outsourcing andquality assurance services.

 

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We have in-depthknowledge in our industry and technology practices. Insurance, manufacturing, communications,media and entertainment and financial services accounted for 23.2%, 21.7%,18.9% and 15.3% of our revenues in, 2006 and 23.6%, 23.8%, 13.4% and 14.1% in2007, respectively. We also have knowledge, experience and a growing presencein other industries including retail, energy and utilities, logistics andtransportation and life sciences. Our technology practices offer research,design and development services for product engineering. Through our dedicatedsales and management teams in each of our industry and technology practices, webelieve we are able to provide better client service, effectively cross-sellservices to our existing clients and develop new client relationships.

 

We have a track recordof successfully developing and managing large, long-term client relationshipswith some of the world’s largest and best known companies. Our customer basehas increased significantly from 115 clients as of December 31, 2003 to318 clients as of December 31, 2007. Several of our key executives arelocated in our client geographies to better develop and maintain clientrelationships at senior levels. Repeat business accounted for  91.7% of our revenues in 2005, 91.5% in 2006and  92.4% in 2007.

 

Our revenues grew from$251.0 million in 2003 to $662.9 million in 2007, representing a CAGR of21.4%. Our net income grew from $36.5 million in 2003 to$113.9 million in 2007, representing a CAGR of 25.5%. Our total number ofemployees was 7,096 as of December 31, 2003 and 14,945 as of December 31,2007. We are investing in new high-tech facilities, which we refer to as “knowledgeparks”, designed for expanding our operations and training our employees. As ofDecember 31, 2007,  we had 223 sales and marketing personnel supportedby dedicated industry specialists in 23sales offices around the globe, including North America, Europe, Japan and therest of the Asia-Pacific region.

 

We have a highlyqualified management team with a broad range of experience in the IT industry.Our Chief Executive Officer is an entrepreneur and engineer who has been inthis industry for over 30 years and has led us from our inception in 1978.Most of our senior management has worked as a team with us for over20 years. We use our competitive recruitment program to select the best talentfrom India’s premier engineering institutions.

 

***GlobalIT Industry Overview***

 

Enterprise adaption oftechnology applications continues to grow with an increasing emphasis onstandardization, process efficiency and automation. Today, the electronic mediumhas become indispensable to most forms of business communication and forintegrating the expanding global supply chain.

 

The year 2007 was a testof pliability for the Indian IT industry. The sector successfully countered thefresh wave of a slowing economy and financial crisis in the U.S. and steepappreciation of the Indian rupee against the U.S. dollar in addition to thesupple side constraints and maintained double digit revenue growth.

 

The strength in theoverall performance of the IT industry, despite concerns of a cutback intechnology budgets in the U.S., was also supported by gradual shifts inregional spending patterns. While growth in U.S. technology spending in 2007was similar to that observed in 2006, the relatively faster growth in Europe,Middle East, Africa (EMEA) and Asia-Pacific (APAC) ensured a healthy growth ofthe worldwide aggregate, despite the decline in the share of America.

 

The global outsourcingmarket continued to become more broad based in 2007. India continues to remainthe nerve-centre for major global outsourcing strategy, exhibiting sustainedglobal growth for indigenous players.

*** ***

*** ITspending experiences gradual geographical shift***

*** ***

Apart from the coredrivers, there are a number of environmental factors, namely, economic growth,technology related spending and propensity to outsource IT & businessprocesses, that influence impetus of global sourcing. Global IT spending ontechnology goods, 

 

25

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services, and staff isestimated to be $2.4 trillion in 2008, up 8% from $2.2 trillion in 2007. Thegrowth rates for regional IT spending, the U.S. and Western Europe clearly areon a low-growth track, with annual growth rates for 2007 to 2008 in the 4% to6% range. In contrast, EMEA and APAC markets are on a high-growth track, withannual growth rates above 12% in 2007 and 2008. Latin America and Canada showsmoderate growth of 6% to 8% in 2006, 2007, and 2008*.( Source: February 11,2008 Global IT 2008 Market Outlook by Andrew Bartel for Vendor StrategyProfessionals ).*Though the short term U.S. outlook seems muted,global technology spending forecasts remain relatively on track, as supportedby momentum in EMEA and APAC regions.

 

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

*** ***

The global outsourcingindustry is fundamentally driven by three factors: access to newer talentpools, reduction in costs and business improvements. The future outlook forthese factors favor strong growth for global outsourcing. Cost pressures arelikely to continue unabated on businesses as customers continue to demand morefor less in an ever increasing competitive environment. Developed countrieslike the U.S., UK, France and Japan are facing skilled workforce shortage, incontrast to the developing nations like India, Philippines, Brazil andMexico.This imbalance in the available pool of talent is likely to continuedriving the global outsourcing demand. Buyers utilize global out sourcingeffectively to achieve other business improvements such as improved quality,productivity, customer satisfaction and profitability. Global outsourcing hasbecome an effective tool for global companies to expand their businesses withoptimized cost.

 

With significantpotential still untapped, it is expected that the global outsourcing phenomenonwill continue to expand in scope, scale and geographic coverage. As globaldelivery matures, multi-location strategies will become the norm and mostsourcing destinations, including emerging locations, will grow in size.Building on its existing strengths, India will remain the leading destinationand will continue to play an important role in most global outsourcingstrategies. The Indian technology and related services sector is expected toreach $ 64 billion in fiscal year 2008 (Source: NASSCOM Strategic Review 2008).

 

***IndianIT Industry Outlook***

 

Strong fundamentals of alarge talent pool, sustained cost competitiveness and an enabling businessenvironment have helped establish India as the preferred outsourcingdestination. Superior delivery model has ensured India remains the distinctleader in the global sourcing arena.

 

The industry’s verticalmarket exposure is well diversified across several mature and emerging sectors.Banking, Financial Services and Insurance (BFSI) remains the largest verticalmarket for Indian IT exports, followed by high technology and telecom. Thesesectors together accounted for nearly 60% of the Indian Information technology –business process outsourcing exports in 2007, with manufacturing and retailsectors contributing to 23% to the aggregate. Other key segments include media,healthcare, airlines, transportation and utilities.

 

26

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***(***Source: NASSCOM Strategic Review 2008)

*** ***

Technologyadoption in the domestic market also reported steady gains in 2007. Thissegment is expected to exceed $23 billion in fiscal year 2008, reportinghealthy growth across all key segments. Domestic IT services spending isestimated to grow at about 43% in fiscal year 2008. Software services andbusiness process outsourcing spending growth in the domestic market is beingsupported by increasing adoption, and is expected to grow by over 42% and 45%,respectively.

 

 There are several key factors favoring thegrowth of the Indian IT industry:

 
| · |   | Importance on delivery  quality and security: The Indian IT sector has built an excellent reputation  for its high standards of service quality and information security which has  been acknowledged globally. The development centers at several of the Indian  IT services providers have been assessed at SEI-CMM Level 5; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | Sustained cost  competitiveness: India continues to deliver a significant cost advantage,  driven by a wide differential in wages and other lower factor costs, and  enhanced through productivity gains; and                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| · |   | Growing talent pool:  India’s young demographic profile complemented by a vast and growing academic  system continues to add to its pool of educated talent. There is no other  country that offers a similar mix and scale of human resources.                                                                                |

 

**OurDelivery 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 an integral part of ourdelivery is our industry knowledge, which we refer to as our domain expertise.

 

We refer to our ownindustry experts, business analysts and solutions architects who are locatedprimarily onsite with the client as our “domain wedge”. These experts aresupported by additional personnel who provide technical services onsite on atemporary basis, and by our trained professionals located normally at one ormore of our nine offshore centers in India. Typically, at the initial stage ofa project, we provide services through our onsite industry and technologyexperts and our transient onsite delivery personnel. By applying our domainwedge approach, we deliver solutions that can be structured to scale to suitour clients’ needs. In certain cases we provide dedicated offshore developmentcenters, set up for a particular client. Through these offshore developmentcenters we integrate our clients’ processes and 

 

27

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methodologies andbelieve we are better positioned to provide comprehensive and long-termsupport. We maximize the cost efficiency of our service offerings by increasingthe offshore portion of the work as the client relationship matures. Tocomplement our domain wedge, we have aligned a majority of our sales andmarketing teams to focus on specific industry sectors.

 

**OurCompetitive Strengths**

** **

We believe our competitive strengthsenable us to deliver high-quality, efficient and scalable services. Thesestrengths include:

 

***Focused IndustryExpertise***

*** ***

We concentrate onindustries where we believe we can generate sustained revenue growth, such asinsurance, manufacturing, financial services and communications, media andentertainment. Through our extensive experience in these industries, we providesolutions that respond to technological challenges faced by our clients. Forexample, to enhance our domain expertise in life sciences, we acquired Taratecduring the year. We also focus on technology practices, specifically in productengineering services.

 

***Successful ClientRelationships***

*** ***

We have demonstrated theability to build and manage large client relationships. Our long-termrelationships typically develop from performing discrete projects to providingmultiple service offerings spread across the client’s businesses. Through ourflexible approach, we believe we offer services that respond to our clients’needs irrespective of their size. By leveraging our industry experience withour project management capabilities and breadth of technical expertise, wesolidify and expand our client relationships.

 

***Extensive Suite ofIT Services***

*** ***

We provide acomprehensive range of IT services, including application development,application maintenance and support, packaged software implementation,infrastructure management services, product engineering, business processoutsourcing and quality assurance services. Our knowledge and experience spanmultiple computing platforms and technologies, which enable us to address arange of business needs and to function as a virtual extension of our clients’IT departments. We offer a broad spectrum of services in select industrysectors, which we leverage to capitalize on opportunities throughout ourclients’ organizations.

 

***Delivery and OperationalExcellence***

*** ***

Through our matureglobal delivery model, we deliver high quality and cost-effective IT servicesfrom multiple locations in a reduced timeframe. We vary the composition of ouremployee resource pool, in terms of seniority and location, to maximize ourproductivity and efficiency. Our processes and methodologies have achievedCapability Maturity Model Integrated (CMMi) Level 5, the highest attainablecertification. We use project management tools to deliver services to clientspecifications in a timely and reliable manner while maintaining a high levelof client satisfaction.

 

***Highly-skilledProfessionals***

*** ***

We have a highlyqualified management team with a broad range of experience in the IT industry.Our Chief Executive Officer is an entrepreneur and engineer who has been in theIT industry for over 30 years and has led us from our inception in 1978.Most of our senior management team has worked as a team for over 20 years. Weuse our competitive recruitment program to select the best talent from India’spremier engineering institutions.

** **

**OurStrategy**

** **

We seek to furtherenhance our position as a leading Indian provider of integrated IT services andsolutions through our global delivery model. To achieve this we intend to:

 

***Penetrate and Grow StrategicClient Accounts***

*** ***

We have achieved strongrevenue growth by focusing on select, long-term customer relationships which wecall strategic accounts. We aim to expand the scope of our client 

 

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relationships byleveraging our focused industry sector expertise with delivery excellence,responsive engagement models and breadth of services. We intend to focus onadding new strategic clients and further penetrating our existing customerrelationships. We address the needs of our larger strategic relationshipsthrough dedicated account managers who have responsibility for increasing thesize and scope of our service offerings to such clients. We aim to strengthenour sales and marketing teams, a majority of whom are aligned to focus onspecific industries.

 

***Strengthen and Broadenour Industry Expertise***

*** ***

We intend to strengthenour understanding of key industries by investing in a strong base of industryexperts, business analysts and solutions architects as well as consideringselect, targeted acquisitions. We believe that we can add more value than ageneral service provider because we understand the specific industryrequirements of our clients.

 

***Strengthen and Broadenour Service Lines***

*** ***

We aim to deepen our existingclient relationships through new and more comprehensive service lines. Inrecent years we have added new capabilities in line with our growth andcustomer needs. We continually explore new initiatives through our internalcenters of excellence, which focus on innovation in specific technologyplatforms or services. For example, we added quality assurance services as anew service line, and developed increased capabilities such as businessintelligence, database administration and legacy system modernization in otherservice lines.

 

***Optimize and ExpandDelivery Capability***

*** ***

We are committed toenhancing our processes and methodologies by investing in project managementtools that improve our efficiency. We aim to develop new productivity tools,refine our software engineering techniques and maximize reuse of our processes.For example, we use automation testing to increase the efficiency of ourproject methodologies and for process management, defect tracking, auditmanagement and contract management. We also apply this commitment to ourinfrastructure and we are constructing new knowledge park campuses in India toprovide world-class infrastructure, high standards of quality and securedelivery.

 

***Build our Brand Globally***

*** ***

While our “Patni” brandis an established and recognized brand in India, we intend to increaserecognition of our brand elsewhere in our client markets. We seek to achievethis through targeted analyst outreach programs, trade shows, white papers,sponsorships, workshops, road shows, speaking engagements and global publicrelations management. We believe that a stronger brand will facilitate ourability to gain new clients and to attract and retain talented professionals.

 

***Pursue StrategicAcquisitions***

*** ***

Weseek to pursue selective strategic acquisitions to augment our capabilities andto address gaps in industry expertise, technical expertise, service lines andgeographic coverage. We will continue to consider and seek acquisitionopportunities such as Logan Orvis and Taratec, which considerably widen ourtelecommunications and life sciences expertise respectively. Logan Orviss hasenhanced our strategic consulting domain and Taratec has given us opportunityin the pharmaceutical sector.

 

**IndustryPractices, Technology Practices and Service Lines**

** **

We offer our services tocustomers through industry practices in insurance, manufacturing, financialservices and communications, media and entertainment, as well as in otherindustries. We also have technology practices that offer services in productengineering and for  Independent SoftwareVendors, or ISVs. Our industry practices and technology practices arecomplemented by our service lines, which we develop in response to clientrequirements and technology life cycles. Our service lines include application development,application maintenance and support, packaged software implementation,infrastructure management services, product engineering, business processoutsourcing and quality assurance services.

 

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**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 andcasualty and reinsurance companies. The IT services we provide span severalfunctions, including sales and marketing, distribution, policy services,claims, compliance, accounting and reinsurance. Our core services include:

 
| · |   | systems consolidation  and integration of mergers and acquisitions;                                  |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                 |
| · |   | policy administration  conversions;                                                                  |
|   |   |                                                                                                 |
| · |   | development of  frameworks that reduce the cycle time and cost for policy issue and claim  handling; |
|   |   |                                                                                                 |
| · |   | new product (life and  retirement) introductions;                                                    |
|   |   |                                                                                                 |
| · |   | batch system  optimization;                                                                          |
|   |   |                                                                                                 |
| · |   | data mining;                                                                                         |
|   |   |                                                                                                 |
| · |   | development of  business intelligence applications; and                                              |
|   |   |                                                                                                 |
| · |   | legacy support of  several applications.                                                             |

 

We are a member ofglobal insurance industry organizations such as Life Office ManagementAssociation, or LOMA, the Association for Cooperative Research and Development,or ACORD, and the Insurance and Accounting Systems Association. Several of ourbusiness analysts are LOMA certified and certified by the American Institutefor Chartered Property and Casualty Underwriters.

 

***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,rubber products, life sciences and pharmaceuticals. To businesses in thesesectors, we provide IT services in the following areas;

 
| · | supply chain  management;                                                                       |
|--------|-------------------------------------------------------------------------------------------------|
|   |                                                                                            |
| · | demand chain  management;                                                                       |
|   |                                                                                            |
| · | manufacturing  applications and core manufacturing systems (including package  implementation); |
|   |                                                                                            |
| · | data warehousing; and                                                                           |
|   |                                                                                            |
| · | business intelligence.                                                                          |

 

A significant portion of the services weprovide to our customers in our manufacturing practice include implementation,customization and support of ERP platforms used by our customers

 

***Financial Services***

 

Our financial servicesbusiness unit focuses on customers in the banking, diversified financialservices and securities business segments. We provide consulting and softwareservices including BPO (business process outsourcing) for consumer andcorporate banking, treasury and risk management, mutual funds, investmentmanagement and securities. Our services to these business areas include:

 
| · |   | architecture design; |
|--------|--------|----------------------|

 

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| · |         | application integration and development;          |
|--------|--------------|---------------------------------------------------|
|   |         |                                              |
| · |         | information security assessments;                 |
|   |         |                                              |
| · |         | legacy system maintenance;                        |
|   |         |                                              |
| · |         | business intelligence;                            |
|   |         |                                              |
| · |         | customer relationship management;                 |
|   |         |                                              |
| · |         | mutual funds and benefits administration;         |
|   |         |                                              |
| · |         | portfolio accounting and reporting;               |
|   |         |                                              |
| · |         | stock exchange and brokerage house solutions; and |
|   |         |                                              |
| · | *** *** | ***business  process outsourcing.***              |

*** ***

***Communications, Mediaand Entertainment***

*** ***

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:

 
| · |   | IT strategy;                         |
|--------|--------|--------------------------------------|
|   |   |                                 |
| · |   | system consulting and  design;       |
|   |   |                                 |
| · |   | application  development;            |
|   |   |                                 |
| · |   | implementation and  maintenance;     |
|   |   |                                 |
| · |   | quality assurance;                   |
|   |   |                                 |
| · |   | new product  development and launch; |
|   |   |                                 |
| · |   | infrastructure  management services; |
|   |   |                                 |
| · |   | business process  outsourcing; and   |
|   |   |                                 |
| · |   | IT outsourcing                       |

 

The services we providewithin the media and entertainment industry and television broadcasting includebroadcast station management and automation applications, and traffic andbilling systems. Our services for publishing companies cover content layoutsoftware and search systems. Our services for online gaming and casinosprimarily involve accounts management.

 

In 2007, we renamed ourtelecommunications practice as communications, media and entertainment.

 

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* *

***Other Industries***

*** ***

In addition, we offerservices to clients in the following industries:

* *

*Retail*

* *

*Our experience in the retailpractice includes development, support and testing of applications forspecialty and hi- tech retailers and grocery chains. We also offer servicessuch as PCI compliance, development of multi-channel retail solutions andsolutions around point of sale systems.*

* *

*Energy &Utilities*

* *

*Ourexperience in the energy and utilities industry includes development,integration and testing of customer billing, meter process automation and smartmeter programs for electric and water utility customers. In addition, we also offer geographic informationsystems and related services.*

* *

*Logistics &Transportation*

* *

**Weprovide services to road, air and rail transportation companies covering operational applications such as fleetmanagement, revenue accounting, reservations and flight operations. Apart from these, we also providesolutions to the logistic companies in areas such as warehouse management applications,supply chain and route optimization.**

** **

**TechnologyPractices**

*** ***

***Product Engineering***

*** ***

***Our product engineering services practiceprovides services for product engineering, product life cycle support andresearch and development outsourcing space, with a specialized team of over2600 engineers focused to service a variety of technology sectors ,such asmedical electronics and life sciences, storage networks and computing,industrial automation, automotive, consumer electronics, mobile, wireless and telecom,enterprise platform software (ISV) and semiconductors.***

*** ***

Our product engineeringpractice services all the segments from application software, embeddedhardware, embedded software engineering to computer aided engineering(Electro-mechanical) areas. Our product engineering services assist severalfortune 500 product companies to bring new product quickly to the market byproviding high quality, robust, domain backed complex software/hardwaredevelopment services from offshore/nearshore.

 

Ourservices cover the following areas:

 

·     *Software*

* *

·            Shrink wrapped and platform vendors

 

·            System software

 

·            Application framework vendors

 

·            ASP, Vertical ISV

 

·     *Electronics*

* *

·            Embedded software

 

·            Hardware design

 

·            Very large scale integration (VLSI)/ Field programmable gate arrays (FPGA) design

 

·            Packaging (Computer AidedDesign  / Computer Aided Manaufacturing)

 

·     *Mechanical/Electro-Mechanical*

* *

·            Product life cycle management /Product data management

 

·            Computer aided engineering/ Computeraided design / Computer aided manufacturing

 

From January 1,2007, we combined our ISV and product engineering technology practices into asingle segment.

 

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**ServiceLines**

** **

***Application Development***

*** ***

We custom design, developand implement software solutions for a variety of client needs. We offerservices across the software development lifecycle, including requirementsanalysis, design, implementation, integration and testing for our projects. Wetypically perform application design, implementation and testing primarily inour offshore delivery centers located in India, while requirements analysis,transition planning, user training and deployment are performed at our clients’sites. In specific situations, we may work jointly with our clients’ teams. Ourprojects range from single-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 on emergingplatforms such as .NET and J2EE.

 

***Application Maintenanceand Support***

*** ***

Our applicationmaintenance and support services include performance optimization and system modification,product and system support, preventive maintenance and migration to newertechnologies and platforms. We perform most of our maintenance andre-engineering assignments at our offshore delivery centers located in India.In addition, we maintain small teams at our clients’ premises to coordinatesupport functions. We perform diagnostics to assess offshore outsourcingpotential and prepare a customized offshore road-map. We share the benefits ofour continuous improvement initiatives to reduce recurring maintenance costsfor our clients. Our application maintenance projects are typically long-termin 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:

 
| · |   | consulting services,  which include functional and technical assessment, architecture and  technology consulting and training;                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| · |   | implementation  services, which include product implementation and rollout;                                                                   |
|   |   |                                                                                                                                          |
| · |   | application care  services, which include post-implementation support, product customization,  interface development and version upgrade; and |
|   |   |                                                                                                                                          |
| · |   | functional extensions  and integration of diverse enterprise applications.                                                                    |

 

***InfrastructureManagement Services***

*** ***

We offer full supportservices of the IT infrastructure and remote managed services of applications,network and hardware infrastructure for our clients. These services aredelivered both at customer locations and from our offshore facilities locatedin India. We specialize in mainframe and client-server operating systems, awide range of data and voice networks, enterprise management systems,infrastructure products from well-known vendors, web-server products, networksecurity products, disaster recovery and business continuity management. Fromour network operations center in India we have the facility, hardware andtechnology to deliver remote managed services to our customers. Our serviceofferings address several managed services configurations such as traditional,integrated and automated remote monitoring, and management and reporting forenterprise-wide infrastructure environments including hardware, communicationsand software environments.

 

***Product EngineeringServices***

*** ***

Our product engineeringservices support the various industry requirements of multiple disciplines suchas utilities, manufacturing, insurance, banking and finance. Our primaryproduct engineering services include engineering design and modeling,electronic design, embedded software development, product lifecycle managementwhich includes re-engineering, maintenance and sustenance of legacy products,testing and migrations to new technologies. We offer these services to clientsin industry sectors such as consumer electronics, automotive, medicalelectronics, industrial automation, office automation, 

 

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handheld/mobile devicemanufacturing and semiconductor manufacturing. Our technology expertise spansmultiple computing languages including assembly language for variousmicro-controllers and processors, real-time operating systems, various computeraided design and manufacturing platforms, GIS platforms, communicationprotocols and digital signal processing. We also offer document conversionservices and GIS services especially to our customers in the utilitiesindustry.

 

***Business Process Outsourcing***

*** ***

We started offeringbusiness process outsourcing services in 2002. Since then we have beenenhancing our expertise and concentrating on transaction processing for ourinsurance, financial services and telecommunication clients and administrativeprocesses in the areas of finance and accounting, payment processing, humanresource management and technical help-desks.

 

***Quality AssuranceServices***

*** ***

Our quality assuranceservices include functional testing, test automation, performance testing,remote testing and test process consultancy. Apart from testing custom-builtapplications, we have experience in testing operating systems, utilities,specialized application servers and middleware products. With respect toautomation, we have partnerships with leading vendors and expertise in leadingcommercial and open source tools.

 

**Qualityand 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-CMM Level 3 andSEI-CMMi Level 5. ISO 9001 is an international standard for qualitymanagement systems maintained by the International Organization ofStandardization. The Capability Maturity Model (CMM) is a method for evaluatingthe quality of a company’s management and software engineering practices, withLevel 5 being the highest attainable certification. The CMM was developed bythe Software Engineering Institute (SEI) at Carnegie Mellon University. TheSoftware Engineering Institute subsequently released a revised version known asthe Capability Maturity Model Integration (CMMi). We have been using the SixSigma Program to implement process changes including the above. We continuouslystrive to better our quality management system with the help of industry bestpractices and research findings. Our quality management system involves thereview and continuous improvement of software development and relatedprocesses, testing of work products and regular internal and external qualityaudits. We apply sophisticated project management and solution deploymentmethodologies that we have developed to help ensure timely, consistent andaccurate delivery of IT solutions to our clients. We were ranked highest amongIndian offshore supply chain solution providers in a customer satisfactionsurvey conducted by Forrester Research Inc. In 2006, we were also recognized asone of ‘The Giant 100’ companies at the first CIO 100 awards in India fordemonstrating excellence in deploying technology solutions to deliver optimumbusiness value.

 

*Centers of Excellence.* We havedeveloped internal “centers of excellence” to create expertise in emergingtechnologies. We currently have centers of excellence that focus on middlewareintegration, legacy systems modernization, business intelligence, RFID, processconsulting and service oriented architectures based on technologies such asJ2EE and .NET. For example, we use our center of excellence on legacy systemsmodernization to develop solutions for our clients who want to maintain theircurrent business-critical systems but at the same time want to utilize thelatest technologies for new systems. We partner with leading technology vendorssuch as IBM and Microsoft to implement technology solutions soon after they aremade available in the market.

 

**Sales and Marketing**

** **

Our sales teams use amulti-pronged approach to market our services. They target certain industriesand service lines through focused sales executives, geographies throughregional sales executives and large clients through dedicated account managers.We have aligned a majority of our sales and marketing teams to focus onspecific industries. In addition to our sales executives, we have industryexperts and solution architects who complement our sales 

 

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efforts by providingspecific industry and service line expertise. Our sales efforts are alsosupported by our marketing professionals, who assist in brand-building andtracking our expertise. Our senior management and dedicated account managersare actively involved in managing client relationships and business developmentthrough targeted interaction with multiple contacts throughout our clients’organizations. We aim to develop our client relationships into partnerships byworking closely with our clients’ managers and senior executives to formulateand execute an offshore outsourcing strategy, implement engagement models thatsuit their particular challenges and explore new service lines.

 

We undertake detailedperiodic reviews to identify existing and prospective clients that we believecan develop into large, strategic clients. We intend to focus on adding morestrategic accounts, which we define as those who provide $5.0 million ormore in annual revenues or those with whom we believe we have the potential toachieve such annual revenue amounts over a 24 to 30 month period. For eachstrategic client, a senior executive is identified and charged with managingthe overall client relationship and leading periodic reviews with the client.

 

We have 23 sales offices across North America, Europe,Japan and rest of  the Asia-Pacificregion as of December 31, 2007, and 223 sales and marketing personnel whoare supported by dedicated industry specialists. We set targets for our salespersonnel at the beginning of each year, which are subject to periodic reviews.In addition to a base salary, our compensation package for sales personnelincludes an incentive-based compensation plan driven by achievement of theprescribed sales targets.

 

Our sales and marketingprofessionals help promote the “Patni” brand through targeted analyst outreachprograms, trade shows, white papers, sponsorships, workshops, road shows,speaking engagements and global public relations management. We believe that astronger brand will facilitate our ability to gain new clients and to attractand retain talented professionals.

 

**Clients**

** **

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

 
| ** **                                | ** ** | **Fiscal year ended  December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| United States                             |       | 84.8                                               | %          | 80.8 | % | 77.9 | % |
| Europe                                    |       | 9.1                                                | %          | 11.6 | % | 14.7 | % |
| India                                     |       | 0.3                                                | %          | 0.4 | % | 0.8 | % |
| Japan                                     |       | 4.3                                                | %          | 3.8 | % | 3.0 | % |
| Asia-Pacific  (excluding Japan and India) |       | 0.4                                                | %          | 1.9 | % | 1.9 | % |
| Rest of the  World                        |       | 1.1                                                | %          | 1.5 | % | 1.7 | % |
| 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. We also derive a small proportion of our revenues from clientsin other industries, which include retail, energy and utilities, logistics andtransportation and from our technology practices, product engineering.

 
| ** **                                 | ** ** | **Fiscal year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Insurance                                  |       | 27.7                                               | %          | 23.2 | % | 23.6 | % |
| Manufacturing                              |       | 21.9                                               | %          | 21.7 | % | 23.8 | % |
| Financial  Services                        |       | 16.0                                               | %          | 15.3 | % | 14.1 | % |
| Communications,  Media and Entertaiment(2) |       | 15.3                                               | %          | 18.9 | % | 13.4 | % |
| Product  Engineering(1)                    |       | 12.5                                               | %          | 14.2 | % | 16.7 | % |
| Others                                     |       | 6.6                                                | %          | 6.7 | % | 8.4 | % |
| Total                                      |       | 100.0                                              | %          | 100.0 | % | 100.0 | % |

 

35

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----

(1)  InJanuary 2007, we combined our ISV and Product Engineering technologypractices. Data for previous periods have been reclassified to conform tocurrent period presentation.

(2)  In 2007, we renamed ourtelecomunications practice as communications, media and entertainment.

 

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,** | ** ** |
|-----------------------|------------|----------------------------------------------------|------------|
| ** **            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| General Electric      |       | 22.1                                               | %          | 14.6 | % | 11.8 | % |
| State Farm  Insurance |       | 11.5                                               | %          | 9.6 | % | 9.1 | % |
| Top 5 Clients         |       | 46.8                                               | %          | 37.1 | % | 34.8 | % |
| Top 10 Clients        |       | 59.3                                               | %          | 53.1 | % | 47.6 | % |

 

The following table illustrates abreakdown of our largest clients by revenue categories on a cumulative basis:

 
| ** **                         | ** ** | **Fiscal year ended  December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| No. of $1 million  + clients  |       | 61                                                 |       | 74 |   | 84 |   |
| No. of $5  million + clients  |       | 19                                                 |       | 26 |   | 31 |   |
| No. of $10  million + clients |       | 9                                                  |       | 13 |   | 14 |   |
| No. of $25  million + clients |       | 2                                                  |       | 3 |   | 5 |   |
| No. of $50  million + clients |       | 2                                                  |       | 2 |   | 2 |   |

 

***The General Electric Association***

*** ***

Ourassociation with General Electric commenced in 1990. We provide services toa number of entities within the General Electric group of companies. For thesebusinesses, we provide services in the areas of multi-year application support,new program development, infrastructure management, business intelligencesolutions and software package implementation. Our largest General Electric engagement is with GE Consumer Finance, forwhich we act as the preferred IT services supplier for application developmentand maintenance to its credit card processing business.

 

Our engagement model withGeneral Electric includes a dedicated development center, integratedtelecommunications networks, quality program targets and highly integratedprogram management and reporting.  Mostprojects are on the basis of fixed-price SLAs, with our responsibilitieslikewise fixed, and are bid on a competitive basis against other third-party ITservice 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 August 3, 2006,we entered into a new master Information Technology Services Agreement withGeneral Electric, with a term from January 1, 2007 to December 31,2009. The terms of this agreement generally reflect the provisions describedbelow under “Contractual Arrangements.” In addition, the agreement providesthat we will support General Electric’s aim to have (i) at least 90% ofall task orders under the agreement on a “fixed price” basis; (ii) nofewer than 85% of personnel assigned to work on a specific project to remain onsuch project; and (iii) at least 70% of work under the agreementundertaken at our offshore development centers.

 

General Electric becamea shareholder in 2000, and its shareholding has declined from 9.99% as of December 31,2000 to 1.9% as of March 31, 2007 to nil as of December 31, 2007.

 

36

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***Contractual Arrangements***

*** ***

We enter intonon-exclusive MSAs with clients that typically have a specified term andcontain general rights and obligations governing our relationship with theclient. The MSAs specify the broad scope of work and typically do not includeany commitment by the client to give us a specific volume of business or futurework. For each work assignment, the client and we enter into separate workorders that specify the types of services we are required to provide to theclient, the performance levels and the price terms. Although some of our MSAscontain the billing rates for time and materials work orders, for most of theservices we provide, whether on a time and materials basis or on a fixed-pricebasis, the separately agreed work order contains the specific pricing and othercommercial terms.

 

Mostof our MSAs, including the MSAs with our two largest customers, can beterminated with or without cause, with 0 to 90 days notice and withouttermination-related penalties. The MSAs typically contain terms that:

 
| ·     |       | require us to provide  various representations and warranties, including those relating to the  services we perform;                                                                                                                                      |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                      |
| ·     |       | require us to maintain  confidentiality relating to the client and the contract, ****including compliance  with various laws relating to privacy and data protection****;                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                |
| ·     |       | require us to protect  the intellectual property of our clients;                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                      |
| ·     |       | require us to comply  with certain security obligations, including maintaining network security and  back-up data, ensuring our network is virus free and verifying the integrity  of employees whowork with our clients by conducting background checks; |
|       |       |                                                                                                                                                                                                                                                      |
| ·     |       | require us to  indemnify the client, including for third party intellectual property  infringement;                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                      |
| ·     |       | limit the liabilities  of both parties under the contract; and                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                      |
| ·     |       | provide for reciprocal  non-solicitation of employees by our clients and us.                                                                                                                                                                              |

 

TheMSAs typically do not stipulate that we are the preferred supplier for thecustomer and do not provide that we are entitled to any minimum amount of workor revenues from the customer.

 

**Competition**

** **

***The market for IT services is rapidlyevolving and highly competitive. We expect that competition will continue tointensify. We face competition or competitive pressure from:***

*** ***
| · |   | Indian IT services  companies, such as, Tata Consultancy Services Limited, Infosys Technologies  Limited, Wipro Limited, Satyam Computer Services Limited, and HCL  Technologies Limited;                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | international IT  services companies, such as Accenture, Cognizant Technology Solutions,  Computer Sciences Corporation, Sapient Corporation and Electronic Data  Systems;                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | divisions of large  multinational technology firms such as IBM, and Hewlett-Packard Company, or  Hewlett-Packard;                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | in-house IT departments  of large corporations;                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | other international,  national, regional and local firms from a variety of market segments,  including major international accounting firms, systems consulting and  implementation firms, applications software firms, service groups of computer  equipment companies, general management consulting firms, programming  companies and temporary staffing firms; |
|   |   |                                                                                                                                                                                                                                                                                                                                                               |
| · |   | offshore service  providers in other countries with low wage costs such as China and the  Philippines, and countries in Eastern Europe and Latin America; and                                                                                                                                                                                                      |

 

37

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| · |   | involvement of third  party intermediaries who negotiate IT services and outsourcing contracts 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 as offshore operations in India have become an importantelement of their delivery strategy. This has resulted in increased employeeattrition among Indian vendors and increased wage pressure to retain softwareprofessionals. We believe that price alone is not a sustainable competitiveadvantage in an environment where IT solutions are becoming increasinglycritical to clients’ core corporate strategy. We have therefore built ourcompetitive position on our ability to leverage our industry specific knowledgeand experience in a broad range of IT services, to manage and maintain largeclient relationships, to continually monitor and improve our deliveryexcellence and to attract and retain highly-skilled software professionals.

 

**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 andtechnology initiatives group is focused on applied research and developmentinitiatives and employs emerging technologies to create new technology serviceofferings. The group has established systems to harness talent among ouremployees by providing a shared framework for idea generation. The group isresponsible for identifying, evaluating and incubating new technology serviceofferings and later converting relevant technology offerings into centers ofexcellence. The current focus areas of the group include service orientedarchitectures and their usage in building next generation applications, mobilecomputing and its applications, usage of RFID technologies and legacy systemsmodernization.

 

***Delivery Innovation***

*** ***

Ourdelivery innovation group is focused on providing operational excellence andserving our customers in the most efficient manner. This group’s activitiesinclude developing best practices and refining our methodologies, tools andtechniques used in the software engineering and project management activities,improving estimation processes and adopting new technologies for improvingproductivity. The delivery innovation group consists of professionals who areexperts in process improvement and automation and who also act as a resourcecenter for our nascent service lines such as our quality assurance services.

 

***Human Resources***

*** ***

Weemployed 11,802, 12,804 and 14,945 employees as of December 31, 2005, 2006and 2007, respectively.  As of December 31,2007, we had 11,624 software professionals, of these software professionals,2,673 employees were categorized as onsite and 8,951 as offshore. Thegeographic breakdown for our employees as of December 31, 2007 is asfollows:

 
| **Location**   | ** ** | **Number of Employees** | ** ** |
|----------------|------------|-----------------------------------|------------|
| India          |       | 12,011                            |       |
| North  America |       | 2,332                             |       |
| Rest  of World |       | 602                               |       |

 

We believe that ourability to maintain and continue our growth depends to a large extent on our strengthin attracting, training, motivating and retaining our employees. We operate innine 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.

 

38

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***Recruitment***

*** ***

We have developedprocesses to evaluate and recruit large numbers of talented employees. Ourhiring is driven by an annual budgeting process, which is monitored andadjusted on a monthly basis based on business visibility. We recruit talentfrom premier universities, colleges and institutes in India, including theIndian Institutes of Technology, known as IITs, regional engineering colleges,or RECs, and Indian Institutes of Management, or IIMs. For our offshorefacilities located in India, our campus recruiting team visited over 158campuses in 2007. Our rigorous selection process involves a series of activitiesincluding case interviews and technical and psychometric tests. We have asimilarly competitive recruitment program for our lateral hires. All new hiresare inducted into our organization through a structured program, which involvesextensive training as well as mentoring.

 

Our software employeesare highly-skilled and have diverse educational backgrounds. As of December 31,2007, graduate engineers comprised 67.04%, post graduate engineers comprised5.84%, employees with master’s degrees in computer applications or computermanagement comprised 13.49% and employees with a masters in businessadministration and equivalent qualifications comprised 4.15% of our softwareprofessionals. Other degrees comprised 9.49% of our software professionals. Webelieve that we have a balanced mix of experience with approximately 44.60%,27.66% and 27.74% of our software professionals with work experience of under3 years, 3 to 6 years and over 6 years, respectively, as of December 31,2007.

 

***Trainingand 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 that results in individual development plans that helpbuild capabilities and recognize preferences of our employees. We offer ouremployees multiple avenues and choices for personal and professional growth,including several distinct career paths. In addition, our innovative program, “LeadershipExcellence at Patni”, communicates leadership attributes and helps us toidentify and develop future leaders necessary for our growth. Our trainingplans are personalized and address both technical and soft-skill requirements.For each software professional, we plan a minimum of 10 working days oftraining per year. As of December 31, 2007, we had 19 dedicated full timefaculty members in our training division. Our focus on using eLearning tocreate Self-Learning Modules (SLM) helped us increase our training delivery by37% without any corresponding increase in the staffing. During the year, wemoved into our new campus at Airoli at Navi Mumbai. The training infrastructureat Airoli consists of 10 fully equipped class rooms that are enabled to deliverthe programs not only in the traditional face-to-face Instructor Led Training(ILT) mode but also Virtual Classroom mode. In addition, the center has twoclassrooms that are designed for the delivery of behavioural training programs.The total training capacity allows us to train around 650 employeesconcurrently.

 

We won the prestigiousGolden Peacock National Training Award during 2007.

 

***Compensation***

*** ***

Considering thedemand-supply gap in the talent/resource pool, it is critical to know and alignall aspects of compensation to market. We have a developed robust model to mapour compensation to market benchmarks to systematically arrive at a competitivepay and benefit structure.  We provide toour software professionals salaries and benefits which we believe arecompetitive in the industry. We adjust our compensation packages annually basedon industry salary correction, compensation benchmarks and individualperformance and have  made compensationmore attractive by introducing special project incentives / skill / performancebased incentives in addition to the regular salaries. Senior employees areoffered variable compensation depending upon attainment of pre-definedquarterly objectives. We also grant stock options to our employees to nurturethe spirit of ownership and commitment towards the company. For moreinformation on the terms of the stock option plan, see item “Item 6.E.Director, Senior Management and Employees – Share Ownership – Employee StockOption Plan.”

 

39

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***Retention***

*** ***

It is imperative toretain talent and critical resources to stay competitive in our business. Thecurrent average attrition rate in the IT sector in India is very high. Weendeavor to provide a challenging and entrepreneurial work environment and  multiple growth opportunities coupled withcareer grooming learning and development programmes covering both technical andmanagerial aspects.  Some of thesignificant initiatives taken by company on this direction in order to attractand retain the talent are “Leadership excellence at Patni”, E-Care,introduction of skill related bonuses, identification of “Fast Track Employees”for future leadership roles, transparent communication while hiring, top downcommunication meetings with the senior management, constant realignment ofhuman resources practices and policies to make it more employee friendly andmarket driven.

 

None of our employeesare represented by a union. We believe we have positive relations with ouremployees.

 

**Seasonality**

** **

Our IT services businessis not affected by seasonality.

 

**Government Regulation**

** **

Regulation of ourbusiness by the Indian government affects our business in several ways.Currently, we benefit from tax holidays given by the Government of India forthe export of IT services from specially designated software technology parks,or STPIs, and special economic zones, or SEZs, in India. These tax incentivescurrently include a 10-year holiday from the payment of Indian corporate incometax for the operations of most of our Indian facilities. As a result of thistax incentive, a substantial portion of our pre-tax income has not been subjectto significant tax in recent years.

 

In December 2006,we received a demand notice from the Indian Income Tax department ofapproximately Rs 630.17 million, including an interest demand of approximatelyRs 186.85 million ($15.99 million including an interest demand of approximately$4.73 million) for the assessment year 2004-05. The tax demand was mainly onaccount of disallowance of deduction claimed by us under Section 10A ofthe Income Tax Act, in respect of profits earned by our various eligibleundertakings.  Section 10A of IncomeTax Act exempts the profits earned by an undertaking for the export of computersoftware upon the fulfillment of certain conditions. One of the conditions isthat the unit should not have been formed by the splitting up of an existingbusiness. We only expanded our software development business whereas the IndianIncome Tax department contends that the business of the new units is comprisedof business transferred from existing units by splitting them. In consultationwith our tax advisers, we filed an appeal in January 2007 challenging thedisallowance.

 

One of the requirementsunder the Indian Income Tax Rules to proceed with an appeal is to deposit,either immediately or through monthly installments, a sum equivalent to 50% ofthe amount that is under appeal. As of  February 2008,we have deposited a sum of Rs 310.28 million ($7.73 million). Considering thefacts and nature of disallowances and based on the advice given by our legalcounsel, we believe that the disallowance is not tenable and we are confidentof a favorable outcome inappeal proceedings and hence no provision for such incometax demand is considered necessary.

 

Subsequently, in February 2008we received an order from the Commissioner of Income Tax (CIT) (Appeals) infavour of the Company by allowing the deduction claimed under Section 10A.We received the refund of the taxes paid after adjustment of the new demand forthe assessment year 2002-03.

 

In December 2007,we received another demand, of Rs. 261.70 million  inclusive an interest demand of approximatelyRs 139.88 million ($6.64 million including an interest demand of approximately$3.54 million)  for the assessment year(AY) 2002-03.  The new demand concernsthe same issue of disallowance of tax benefits under Section 10A.  In our opinion, and based on advice received,the demand is not tenable against us and we have already filed an appeal withthe appellate authority.

 

40

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Subsequently, in March 2008we received a order from the CIT (Appeals) in favor of us allowing thededuction claimed under Section 10A for the assessment year 2002-03. Theentire tax paid is refundable.

 

The aggregate benefit ofthese tax holidays and deductions with respect to our net income was $19.0million, $25.3 million and $28.9 million for 2005, 2006 and 2007 respectively. Our current tax holidays for STPI unitsexpire in stages by 2009 and our partial taxable income deduction for profitsderived from exported IT services expired in March 2005. The tax benefitsavailable for some of our facilities have expired and certain others willexpire upon completion of 10 years, however the tax holiday for the export ofIT service will expire on March 31, 2009. Consequently, we expect oureffective tax rate to increase.

 

On May 10, 2008,the Finance Minister of India announced that the Government of India hasextended the availability of the 10-year tax holiday by a period of one yearsuch that the tax holiday will be available until the earlier of fiscal year2010 or 10 years after the commencement of a Company’s undertaking.

 

We are also subject toother government regulations, including those relating to acquisition offoreign securities, raising capital outside India and conversion of our equityshares into ADSs.

 

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

 

**Intellectual Property**

** **

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,  Canada, the Netherlands and in Class 9 ,16 and42 in India and have applied to register our trademark and/or service mark inChina . However, we cannot guarantee that our applications will besuccessful or that our efforts to protect our intellectual property will beadequate.

 

We require our employeesand subcontractors to enter into non-disclosure arrangements to limit access toand distribution of our clients’ proprietary and confidential information aswell as our own. Generally we are responsible to our clients for complying withcertain security obligations including maintaining network security, backing-updata, ensuring our network is virus free and verifying the integrity of thoseemployees that work with our clients by conducting background checks. We cannotassure you that we will be able to comply with all such obligations withoutincurring any liability.

 

In addition, the termsof our client contracts often impose particular confidentiality and securitystandards. We have independently established a system of security measures toprotect our computer systems from security breaches and computer viruses thatmay attempt to gain access to our communications network. We have deployedadvanced technology and process-based methods to ensure a high level ofsecurity and we continually monitor such technologies to ensure that wemaintain such levels consistently. Some of these components include clusteredand multilevel firewalls, intrusion detection mechanisms, vulnerabilityassessments, content filtering, antivirus software and access controlmechanisms. We use encryption techniques as required. We control and limitaccess 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.

 

41

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**4.C. Organizationalstructure**

** **

Wehave the following direct and indirect subsidiaries as of December 31,2007, all of which are wholly-owned:

 
| **Name**                                                        | ** ** | **Country of Incorporation** |
|-----------------------------------------------------------------|------------|----------------------------------------|
| Patni  Americas, Inc (formerly Patni Computer Systems Inc) |       | USA                                    |
| Patni Computer Systems (UK) Limited                             |       | UK                                     |
| Patni Computer Systems  GmbH                                    |       | Germany                                |
| Patni Telecom  Solutions Inc. (1)                               |       | USA                                    |
| Patni Telecom  Solutions Private Limited (2)                    |       | India                                  |
| Patni Telecom  Solutions (UK) Limited (2)                  |       | UK                                |
| Patni Life Sciences.Inc (1)                                |       | USA                                    |
| Patni Computer Systems Brasil Ltda                              |       | Brazil                                 |
| Patni Computer Systems  (Czech) s.r.o (3)                       |       | Czech  Republic                        |

 

----

| (1) | Owned through Patni  Americas Inc (formerly Patni Computer  Systems, Inc).                      |
|-----|------------------------------------------------------------------------------------------------------|
| (2) | Wholly-owned subsidiary of Patni Telecom  Solutions Inc.                                             |
| (3) | Wholly owned subsidiary of Patni Computer  Systems (UK) Limited, incorporated on March 3, 2008. |

 

**4.D. Property, plant andequipment**

** **

A key component of ourglobal delivery model is the telecommunication linkages between client sitesand our sites and between our distributed sites in India. We have designed aglobal network architecture which provides client connectivity, offshoredevelopment center connectivity and internet connectivity. This networkprovides seamless access and uses high availability networks and advancedrouting protocols for redundancy and availability. Although we rely on thirdparties, such as telecommunications providers and internet service providers toprovide such services, we ensure that we have multiple service providers usingmultiple routes and media to attain high levels of redundancy, availability andperformance. We have dedicated teams to monitor the operations of our networkoperations 24 hours a day and seven days a week. We use encryptiontechniques for confidentiality of data as required.

 

Our principal executiveoffices are located at Mumbai, India. Our North American headquarters arelocated in Cambridge, Massachusetts. These facilities are used primarily formanagement functions and support functions such as sales, marketing and generaladministration.

 

We have state-of-the-artfacilities in nine locations in India where our technical staff is located andwhich serve as our primary delivery centers. We also have imaging centers anddistribution centers in the United States and in the United Kingdom forhandling the digital processing of documents.

 

42

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Ourlocations in India are as follows (as at December 31, 2007):

 
| **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          |       | 232,473              |       |                                                                                      |
|    |       | Total Pune      |       | 307,950              |       | Insurance,  Manufacturing, Communications, media and                                      |
|    |       |            |       |                 |       | entertainment,  ISV,                                                                      |
|    |       |            |       |                 |       | Other,  Enterprise Application Systems, Enterprise Systems Development                    |
| 3.      |       | Gandhi Nagar    |       |                 |       |                                                                                      |
|    |       | Owned           |       | 37,014               |       | Insurance,  ISV, Other                                                                    |
| 4.      |       | Chennai         |       |                 |       |                                                                                      |
|    |       | Owned           |       | 148,000              |       | Financial  Services, Manufacturing                                                        |
| 5.      |       | Noida           |       |                 |       |                                                                                      |
|    |       | Leased          |       | 143,000              |       | Financial  Services, BPO                                                                  |
| 6.      |       | Hyderabad       |       |                 |       |                                                                                      |
|    |       | Owned           |       | 8,497                |       |                                                                                      |
|    |       | Leased          |       | 106,988              |       |                                                                                      |
|    |       | Total Hyderabad |       | 115,485              |       | Communications,  media and entertainment                                                  |
| 7.      |       | Bangalore       |       |                 |       |                                                                                      |
|    |       | Leased          |       | 114,330              |       | Manufacturing,  Product Engineering Services                                              |
| 8.      |       | Thane           |       |                 |       |                                                                                      |
|    |       | Owned           |       | 91,159               |       |                                                                                      |
|    |       | Leased          |       | 176,252              |       |                                                                                      |
|    |       | Total Thane     |       | 267,411              |       | Insurance,  Manufacturing, Financial Services, Enterprise                                 |
|    |       |            |       |                 |       | Application  Systems                                                                      |
| 9.      |       | Airoli          |       |                 |       |                                                                                      |
|    |       | Owned           |       | 462,845              |       | Enterprise  Application Systems, Product Engineering Services, Financial Services, Others |
|    | ** ** | ** **      | ** ** | ** **           |       |                                                                                      |
|    | ** ** | **Total**       | ** ** | **1,779,683**        |       |                                                                                      |

 

We currently havecapacity for approximately 17,500 professionalsat these facilities. As of December 31, 2007, we used approximately 70 %of our existing office space in our operations.

 

Most of our globalbranch offices located outside of India are used for sales and marketing.

 

43

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Wehave 23 sales and marketing officeslocated in the following locations:

 

Inkeeping with our plans for expansion, we have constructed  new facilities in India, including inparticular two knowledge parks in Navi Mumbai and Chennai. We anticipate thatexpenditures for our expansion plans will total approximately $80 million to $120 million in 2008.We intend these knowledge parks to 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 Navi Mumbai and Chennai facilities are expected toaccommodate up to 14,000 and 10,000 people, respectively, when completed. Weestimate that we may spend an aggregate of approximately $140 million tocomplete these two projects. Phase I of the NaviMumbai facility, having a capacity of 5000 seats, is complete and occupied.Phase I of the Chennai facility, having a capacity of 1,200 seats, is complete and partially occupied.Asof December 31, 2007, we had spent approximately $133.7 million on the knowledge parks.

 

In continuation of ourpolicy to have our own campus operations, land has been acquired at Pune,Hyderabad, Kolkata and Noida in addition to our campuses in Mumbai and Chennai.These facilities when fully constructed, will have a sitting capacity forapproximately 28,000 professionals.

 

For the Chennaifacility, we have entered into a lease dated September 30, 2004 with theState Industrial Promotion Corporation of Tamil Nadu, or SIPCOT. We haveacquired 18.75 acres of land near Chennai for a lease term of 99 years toestablish a project in connection with software development and supportservices. According to the terms of the agreement, we require SIPCOT’s priorapproval for any change in the composition of our Board of Directors thatcauses 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 leaseagreements for 15 acres and will soon be entering into lease agreement for 25acres. This land may only be used for activities related to the information technologyindustry.

 

44

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**ITEM4A. UNRESOLVED STAFF COMMENTS**

** **

None

 

**ITEM5. OPERATING AND 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.D.  Key Information—Risk Factors.”

 

**Overview**

** **

We are a leading Indianprovider of information technology services. We deliver a comprehensive rangeof IT services through globally integrated onsite and offshore deliverylocations primarily in India, which we call our global delivery model. We offerour services to customers through industry-focused practices, includinginsurance, manufacturing, communications, media and entertainment and financialservices, and through technology-focused practices. Within these practices, ourservice lines include application development, application maintenance andsupport, packaged software implementation, infrastructure management services,product engineering services, business process outsourcing and qualityassurance services.

 

Our revenues grew from$251.0 million in 2003 to $662.9 million in 2007, representing a CAGRof 21.4%. Our net income grew from $36.5 million in 2003 to$113.9 million in 2007, representing a CAGR of 25.5 %. Our total number ofemployees was 7,096 as of December 31, 2003 and 14,945 as of December 31,2007. We are investing in new high-tech facilities, which we refer to as “knowledgeparks,” designed for expanding our operations and training our employees. As ofDecember 31, 2007, we had 223 salesand marketing personnel supported by dedicated industry specialists in 23 sales offices around the globe, includingNorth America, Europe, Japan and the rest of the Asia-Pacific region.

 

Our industry segments compriseof  financial services, insuranceservices, manufacturing companies, communications, media and entertainment,technology services and others such as energy and utilities, retail,andlogistics and transportation. We evaluate segment performance and allocateresources based on revenue growth. We categorize revenue in relation tosegments based on items that are individually identifiable with that segment.Costs are not specifically allocable to individual segments as the underlyingresources and services are used interchangeably. Fixed assets used in ourbusiness or liabilities contracted have not been identified with any of thereportable segments, as the fixed assets and services are used interchangeablybetween segments.

 

Our management evaluatesour results of operations by examining financial and operating data in avariety of categories, including our industry and technology practices, onsiteand offshore revenues, type of contract, type of customer and geographicregion. We manage and market our business according to our industry andtechnology practices.

 

We have also developedtechnology practices that offers research, design and development services forproduct engineering and to ISVs. Our service lines support both our industryand technology practices. We do not, however, treat our service lines asseparate components of our business for financial reporting purposes.

 

**5.A. Operating results**

** **

**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.

 

***Onsite and Offshore Revenues***

** **

We derive revenues fromthe provision of services offshore and onsite. Offshore revenues consist ofrevenues from IT services work conducted in India. Onsite revenues consist ofrevenues from IT services work conducted at clients’ premises outside India orfrom our limited number of premises outside India. Although a substantialportion of our software personnel are located at our 

 

45

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offshore locations, ourcustomers generally pay higher charges for onsite work, which is consistentwith our industry practice. As a result, the margins with respect to our onsiterevenues are proportionally higher than our offshore revenues.

 

We have not experiencedsignificant changes in our prices since 2002, whether onsite or offshore,principally due to increased competition for IT outsourcing services. Some ofour larger customers receive reduced pricing through volume discounts. In orderto provide competitive pricing to our customers, we have endeavored to shiftthe delivery of our services from onsite locations to low costing offshoredelivery centres.

 

Asof December 31, 2006, 10,009 of 12,804 total employees were located in India and as of December 31, 2007,12,011 of 14,945 total employees were located in India. Our overall employeenumbers will increase as we add employees for both onsite and offshore work. Wemeasure our service efforts that can be billed to clients in units of billedperson-months. The number of offshore billed person-months has increased as apercentage of total billed person-months from 66.7% in 2006 to 69.6% in 2007

 

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 communications, media and entertainment employ a higherlevel of onsite personnel than other industry and technology practices. Withinour industry and technology practices, our offshore and onsite breakdown bybilled person-month is as follows:

 
| ** **                                  | ** ** | **Year ended December 31, 2006** | ** ** | ** **                            | ** ** | **Year ended December 31, 2007** | ** ** | ** **                          | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **Onsite  Billed  Person-  months**                  | ** ** | **Offshore  Billed  Person-  months** | ** ** | **Total**                                            | ** ** | **Onsite  Billed  Person-  months** | ** ** | **Offshore  Billed  Person-  months** | ** ** | **Total** | ** ** |
| Financial  Services                         |       | 5,006                                                |       |                                  | 12,389     |                                                 |       | 17,395                              |       |   | 4,790 |   |   | 16,379 |   | 21,169 |   |
| Insurance                                   |       | 8,382                                                |       |                                  | 13,238     |                                                 |       | 21,620                              |       |   | 9,170 |   |   | 16,530 |   | 25,700 |   |
| Manufacturing                               |       | 7,116                                                |       |                                  | 15,661     |                                                 |       | 22,777                              |       |   | 8,334 |   |   | 18,640 |   | 26,974 |   |
| Communications,  Media and Entertainment(2) |       | 5,484                                                |       |                                  | 6,347      |                                                 |       | 11,831                              |       |   | 4,176 |   |   | 3,646 |   | 7,822 |   |
| Product  Engineering(1)                     |       | 3,616                                                |       |                                  | 12,537     |                                                 |       | 16,153                              |       |   | 4,787 |   |   | 18,498 |   | 23,285 |   |
| Other                                       |       | 2,452                                                |       |                                  | 3,909      |                                                 |       | 6,361                               |       |   | 3,268 |   |   | 5,294 |   | 8,562 |   |
| Total                                       |       | 32,056                                               |       |                                  | 64,081     |                                                 |       | 96,137                              |       |   | 34,525 |   |   | 78,987 |   | 113,512 |   |

 

----

| (1) In January 2007, we combined our ISV  and Product Engineering technology practices. Data for previous periods have  been reclassified to conform to current period presentation. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) In 2007, we renamed the telecommunications  practice as communication, media and entertainment.                                                                                       |

 

Certain of our servicelines, such as product engineering services and business process outsourcing,employ a greater level of offshore personnel, whereas our packaged softwareimplementation service line utilizes a larger portion of onsite work comparedto most of our other service lines.

 

Since 2004, we have seena trend towards greater use of offshore services, which has positively affectedour profitability. Services performed at a client site or our premises locatedoutside India typically generate higher revenues per employee, but at a lowergross margin, than the same services performed at our facilities in India.These differences are attributable to the higher billing rates gettingcompensated by higher average cost of labor 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 such period.

 

***Revenues by Industry Segments***

*** ***

Our operations pertainto provision of IT services and solutions to customers belonging to variousindustries such as insurance, manufacturing and financial services and also to technologypractices. Accordingly, revenues represented along industry classes comprisethe principal basis of segmental information.

 

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We derive a significantproportion of our revenues from clients in the insurance, manufacturing,communications, media and entertainment and financial services industries. Wealso provide services to clients in other industries, including retail, energyand utilities and logistics and transportation. In addition, we market ourservices to clients through our technology practices, comprising our productengineering practice. The following table indicates the breakdown of ourrevenues by our industry and technology practices:

 
| ** **                                  | ** ** | **Year  ended  December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|
| **Industry Segments**                  | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2007** | ** ** |
| ***Industry  Practice***                    |       |                                                   |       |   |   |   |   |
| Insurance                                   |       | 27.7                                                   | %          | 23.2 | % | 23.6 | % |
| Manufacturing                               |       | 21.9                                                   | %          | 21.7 | % | 23.8 | % |
| Financial  Services                         |       | 16.0                                                   | %          | 15.3 | % | 14.1 | % |
| Communications,  Media and Entertainment(2) |       | 15.3                                                   | %          | 18.9 | % | 13.4 | % |
| Other                                       |       | 6.6                                                    | %          | 6.7 | % | 8.4 | % |
| ***Technology  Practice***                  |       |                                                   |       |   |   |   |   |
| Product  Engineering(1)                     |       | 12.5                                                   | %          | 14.2 | % | 16.7 | % |
| Total                                       |       | 100.0                                                  | %          | 100.0 | % | 100.0 | % |

 

----

| (1)   In January 2007, we have combined  our ISV and Product Engineering technology practices.Data for previous  periods have been reclasified to conform to current period presentation. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   In 2007, we renamed the  telecommunications practice as communication, media and entertainment.                                                                                          |

 

***Revenues by Contract Type***

*** ***

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

 
| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| Time-and-Material |       | 59.5                                       | %          | 64.8 | % | 67.6 | % |
| Fixed Price       |       | 40.5                                       | %          | 35.2 | % | 32.4 | % |
| Total             |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

Although we seek to useour software engineering processes and past project experience to reduce therisks associated with estimating, planning and performing fixed-price projects,we bear the risk of cost overruns and completion delays in connection withfixed-priced contracts. Accordingly, we believe that we bear a greater amountof risk from our fixed-price contracts than from our T&M contracts.

 

A large proportion ofour revenues from fixed-price contracts are from fixed-price SLAs. A largeproportion of our fixed-price SLAs are application maintenance and supportprojects, as to which work and cost estimates have been fairly predictable. Ourrevenues from fixed-price SLAs were 27.9%, 24.4% and 22.2% in 2005, 2006 and 2007respectively.

 

Revenues from T&Mcontracts as a percentage of our overall revenues increased in each of the pastthree years because a large portion of our new business is billed on a T&Mbasis and the proportion of our revenues generated from services provided toGeneral Electric has declined. Most of our business with General Electric is onthe basis of fixed-price contracts.

 

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 ratably overthe term of maintenance. Revenue with respect to other fixed-price contracts isrecognized on a percentage of completion basis, measured by the percentage ofcosts incurred to date compared to the estimated total costs for each contract.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 

 

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result of variousinitiatives, including our addition of new strategic clients, our focus onadditional industry practices, our development of technology practices and ourexpansion of the range of service lines we offer. As of December 31, 2007,we had 84 clients, each of whom generated revenues of $1.0 million ormore, compared to 74 in 2006 and 61 in 2005. We expect that this trend towardgreater client diversification will continue.

 
| ** **            | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2007** | ** ** |
| General Electric      |       | 22.1                                   | %          | 14.6 | % | 11.8 | % |
| State Farm  Insurance |       | 11.5                                   | %          | 9.6 | % | 9.1 | % |
| Top 5 Clients         |       | 46.8                                   | %          | 37.1 | % | 34.8 | % |
| Top 10 Clients        |       | 59.3                                   | %          | 53.1 | % | 47.6 | % |

 

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

*** ***

Repeat businessaccounted for 91.7% ,91.5% and 92.4% of our revenues in, 2005, 2006 and 2007.Each customer is treated as a new customer for the quarter that it first startsbusiness with us and continues to remain as a new customer for the foursucceeding quarters. The revenues in any quarter from customers other than newcustomers are termed as repeat business. We provide services to our largestclient, General Electric, in a number of industries, including financial services,insurance and manufacturing.

 

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

 
| ** **                                  | ** ** | **Year ended December 31, 2007** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **Existing  Customers**                              | ** ** | **New  Customers** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **($ in millions)**                        | ** ** |
| **Industry  Practice**                      | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Insurance                                   |       | 151.7                                                |       | 4.9 |   | 156.6 |   |
| Manufacturing                               |       | 150.3                                                |       | 7.1 |   | 157.4 |   |
| Financial  Services                         |       | 92.0                                                 |       | 1.7 |   | 93.7 |   |
| Communications,  Media and Entertainment(2) |       | 72.0                                                 |       | 17.4 |   | 89.4 |   |
| Other Industries                            |       | 47.6                                                 |       | 7.1 |   | 54.7 |   |
| **Technology  Practice**                    | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product  Engineering(1)                     |       | 99.0                                                 |       | 12.0 |   | 111.0 |   |
| Total                                       | ** ** | **$**                                                | **612.6**  | ** ** | **$** | **50.2** | ** ** | **$** | **662.8** | ** ** |
|                                             |            |                                                      |            |  |  |  |  |  |  |  |

 

----

| (1) In  January 2007, we combined our ISV and Product Engineering technology  practices. Data for previous periods have been reclassified to conform to  current period presentation. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) In 2007, we renamed the telecommunication  practice as communications, media and entertainment                                                                                         |

 

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***

*** ***

We record ourrevenue based on the location of our clients rather than according to thelocation where our services are provided. We classify our revenues into fivegeographic segments: the United States, Europe, India, Japan and Others. As thetable below illustrates, a significant proportion of our revenues is derivedfrom 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, irrespectiveof the location at which the invoice is rendered or whether the work for aspecific client entity is performed onsite or from our offshore deliverycenters in India.

 

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| ** **                                | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| United States                             |       | 84.8                                      | %          | 80.8 | % | 77.9 | % |
| Europe                                    |       | 9.1                                       | %          | 11.6 | % | 14.7 | % |
| India                                     |       | 0.3                                       | %          | 0.4 | % | 0.8 | % |
| Japan                                     |       | 4.3                                       | %          | 3.8 | % | 3.0 | % |
| Asia-Pacific  (excluding Japan and India) |       | 0.4                                       | %          | 1.9 | % | 1.9 | % |
| Rest of the  World                        |       | 1.1                                       | %          | 1.5 | % | 1.7 | % |
| Total                                     |       | 100.0                                     | %          | 100.0 | % | 100.0 | % |

 

We have experiencedrevenue growth in the European market. Revenues in Europe have increased from$41.1 million in 2005 to $67.3 million in 2006 and were at $97.7 millionin 2007.

 

**Expenses**

** **

***Cost of Revenues***

*** ***

Cost of revenuesrepresented 64.9%, 64.6% and 67.9% of our revenues in 2005, 2006 and 2007. Ourcost of revenues largely consists of costs relating to our softwareprofessionals, including salary and other compensation and benefits expenses,travel expenses, immigration expenses, data communications expenses, computerand software expenses and depreciation. Cost of revenues also includes the costof subcontractors.

 

The principal componentof our cost of revenues is the salary cost of our software professionals. Amajority of our software professionals are located in India. However, becauselabor costs in the IT services industry in India have historically beensignificantly lower than in the United States and other countries where ourcustomers are located, a majority of our compensation costs relate to salariesof software professionals located in the United States and those othercountries. As wages in India increase at a faster rate than in the UnitedStates, we may experience increases in our costs of personnel, particularlyproject managers and other mid-level professionals. We seek to maintain salarylevels in accordance with prevailing trends in our industry.

 

We hire subcontractorson a limited basis from time to time. We use subcontractors across our industrypractices and service lines. The use of subcontractors is more prevalent inservice lines that have a larger onsite element, such as packaged softwareimplementation and infrastructure management services. We expect to continue toincur subcontractor costs principally to service specific technicalrequirements of some of our clients in a timely manner.

 

The utilization rates ofour software professionals also affect our gross profits. We define employeeutilization as the proportion of total billed person-months to total availableperson-months, including employees in training and holiday and vacation time,and excluding support personnel. We manage utilization by monitoring projectrequirements and timetables. The number of software professionals assigned to aproject varies according to the size, complexity, duration, and demands of theproject. Our utilization rates for the years ended December 31, 2005, 2006and 2007 were 67.2%, 71.4% and 72.4%. We try to minimize the cost impact ofunutilized capacity by ensuring that a majority of our unutilized capacity isattributable to software professionals based in India.

 

We incur immigrationcosts due to the onsite component of work performed on projects. We expectimmigration expenses to increase due to increases in visa filing costsgenerally commensurate with our growth and increases in visa filing fees in theUnited States. We expense costs related to immigration as incurred.

 

We do not expect toincur borrowing costs to finance the addition of planned new facilities andphysical infrastructure, including our knowledge parks in India. These newfacilities will increase our depreciation expenses. However, we expect that theincreased depreciation will largely be offset by reduced rental costs resultingfrom a shift from existing rental facilities to the new facilities. These newfacilities will provide a consolidated location for our existing employees andnew employees as we expand our service offerings.

 

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

*** ***

Selling, general andadministrative expenses consist primarily of costs relating to personnel otherthan software professionals, including salary and other compensation andbenefits expense, depreciation, sales and marketing expenses, telecommunicationexpenses, office expenses and traveling expenses. Selling, general andadministrative expenses also includes legal and other professional fees andother miscellaneous administrative costs.

 

Selling, general andadministrative expenses represented 19.1%,18.4% and 17.5% of our revenues in2005, 2006 and 2007 respectively. These expenses comprise an important elementof our sales strategy, as we seek to ensure that senior management personnelare based in client locations and continue to invest in developing our salesand marketing presence in key markets. We expect selling, general andadministrative expenses to continue at current levels as a proportion ofrevenues. We continue to invest in sales and marketing and in building brandawareness, leading to a slight increase in sales and marketing expenses as aproportion of revenues. We have started to transfer a larger part of ourgeneral and administrative expenses offshore to India as the scale of ouroperations increases. 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 consolidatedfinancial statements are reported in U.S. dollars. Our functional currency isthe rupee, though the functional currency of our subsidiaries is the currencyof the country in which the subsidiary is located. A substantial portion of ourrevenues is generated in dollars while a portion of our expenses are incurredin rupees and we expect that this will continue for the foreseeable future.Consequently, our results of operations will be affected to the extent therupee fluctuates against the dollar.

 

We seek to mitigate theeffect of exchange rate fluctuation on our operating results by purchasingforeign exchange forward and option contracts. However, these activities do notentirely mitigate the effects of exchange rate fluctuations. Effective May 2004,we designated certain forward contracts as cash flow hedges in accordance withSFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*. We defer changes in fair valueof designated cash flow hedges and record them as a component of accumulatedother comprehensive income until the transactions close, at which time werecognize the gain/loss in our consolidated statements of income.

 

The translation of therupee, U.K. pound and Euro into U.S. dollars is performed for balance sheetaccounts using the exchange rate in effect at the balance sheet date and forrevenues and expense accounts using an appropriate monthly weighted averageexchange rate for the respective periods.

 

Under the ForeignExchange Management Act, 1999 or FEMA, as amended, an Indian company isrequired to take all reasonable steps to realize and repatriate into India allforeign exchange earned 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.

 

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**AccountsReceivable**

** **

Ouraccounts receivable as of December 31, 2005, 2006 and 2007 were$74.4 million, $115.6 million and $136.4 million, respectively. Ourdays of sales outstanding in 2005, 2006 and 2007 were 62, 75 and 73 days,respectively. We define our days of sales outstanding as the ratio of accountsreceivable at year-end to revenues in a year, multiplied by 365. We areincreasing 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:

 
| ** **          | ** ** | **2005**                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------|------------|-------------------------------|------------|----------|------------|----------|------------|
| ** **          | ** ** | **($ in millions)** | ** ** |
| **Period  in days** |       |                          |       |     |       |     |       |
| 0-90                |       | 68.9                          |       | 105.9    |       | 116.1    |       |
| 91-180              |       | 4.4                           |       | 8.6      |       | 17.2     |       |
| More than 180       |       | 1.1                           |       | 1.1      |       | 3.1      |       |
| Total               |       | 74.4                          |       | 115.6    |       | 136.4    |       |

 

In 2005, reversalof  doubtful debts and advances was $0.2million whereas in 2006 and 2007, provision was $1.2 million and $1.2 millionrespectively. We expect to continue to have low levels of provisions fordoubtful debts.

 

**Taxes**

** **

As an Indian company, weare a tax resident of India and are therefore subject to Indian income taxes onour global income. Our net income earned from providing services outside Indiais subject to tax in the country where we perform the work. Most of our taxpaid in countries other than India can be applied as a credit against ourIndian tax liability to the extent that the same income is subject to tax inIndia.

 

Currently, we benefitfrom tax holidays given by the Government of India for the export of ITservices from specially designated software technology parks, or STPIs, andspecial economic zones, or SEZs, in India. The tax incentive currently includea 10-year holiday from the payment of Indian corporate income tax for theoperations of most of our Indian facilities. As a result of this taxincentives, a substantial portion of our pre-tax income has not been subject tosignificant tax in recent years. The aggregate benefit of this tax holiday withrespect to our net income was $19.0 million, $25.3 million and $28.9 millionfor  2005, 2006 and 2007 respectively.The tax benefits available for some of our facilities on account of taxholidays have expired and certain others will expire upon completion of 10years, however the tax holiday for the export of IT service will expire on March 31,2009. Consequently, we expect our effective tax rate to increase.

 

On May 10, 2008,the Finance Minister of India announced that the Government of India has extendedthe availability of the 10-year income tax holiday by a period of one year suchthat the tax holiday will be available until the earlier of fiscal year ending March 31,2010 or 10 years after the commencement of a Company’s undertaking.

 

In December 2006,we received a demand notice from the Indian Income Tax department ofapproximately Rs 630.17 million, including an interest demand of approximatelyRs 186.85 million ($15.99million including an interest demand of approximately$4.73 million) for the assessment year 2004-05. The tax demand was mainly onaccount of disallowance of deduction claimed by us under Section 10A ofthe Income Tax Act, in respect of profits earned by our various eligibleundertakings.  Section 10A of IncomeTax Act exempts the profits earned by an undertaking for the export of computersoftware upon the fulfillment of certain conditions. One of the conditions isthat the unit should not have been formed by the splitting up of an existingbusiness. We only expanded our software development business whereas the IncomeTax department contends that the business of the new units is comprised ofbusiness transferred from existing units by splitting them. In consultationwith our tax advisers, we filed an appeal in January 2007 challenging thedisallowance.

 

One of the requirementsunder the Indian Income Tax Rules to proceed with an appeal is to deposit,either immediately or through monthly installments, a sum equivalent to 50% ofthe amount that is under appeal. As of February 2008, we have deposited asum of Rs 310.28 million ($7.73 million). Considering the facts and nature ofdisallowances and based on the 

 

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advice given by ourlegal counsel, we believe that the disallowance is not tenable and we areconfident of a favorable outcome inappeal proceedings and hence no provision for such incometax demand is considered necessary.

 

Subsequently, in February 2008we received an order from the Commissioner of Income Tax (CIT) (Appeals) infavour of the Company by allowing the deduction claimed under Section 10A.We received the refund of the taxes paid after adjustment of the new demand forthe assessment year 2002-03.

 

In December 2007,we received another demand, of Rs. 261.70 million  inclusive an interest demand of approximatelyRs 139.88 million ($ 6.64 million including an interest demand of approximately$ 3.54 million)  for the assessment year(AY) 2002-03.  The new demand concernsthe same issue of disallowance of tax benefits under Section 10A.  In our opinion, and based on advice received,the demand is not tenable against us and we have already filed an appeal withthe appellate authority.

 

Subsequently, in March 2008we received a order from the CIT (Appeals) in favor of us allowing thededuction claimed under Section 10A for the assessment year 2002-03. Theentire tax paid is refundable.

 

The provisions of theIncome Tax Act of India are amended on an annual basis by enactment of theFinance Act. The Finance Act, 2008 has not changed the effective tax rate of33.99%.  The Finance Act, 2008 hasincreased the short term Capital Gain tax from 10% to 15%.  The Finance Act, 2008 has also extended thescope of service tax to cover asset management services, Services provided bystock/commodity exchanges and clearing houses, right to use goods anddevelopment of customised software. These changes have no impact on ouroperating expenses.

 

In addition, we may alsobe subject to changes in taxation resulting from the actions of applicableincome tax authorities in India or from Indian tax laws that may be enacted .For example, we may incur increased tax liability as a result of adetermination by applicable income tax authorities that the transfer priceapplied to transactions involving our subsidiaries and us was not appropriate.

 

Anyincreases in our effective tax rate, as a result of the expiration of taxbenefits we currently enjoy, changes in applicable tax laws or the actions ofapplicable income tax or other regulatory authorities could materially reduceour profitability.

 

In connection with areview of various tax aspects relating to our international operations, during2006, we reached a settlement with the IRS, relating to our tax returns for ourUS operations for 2001 and 2002. The IRS has also commenced, but not yetcompleted, a tax review of our U.S. operations for the years 2003 through 2005.Pursuant to the settlement, we revised our tax provisions for 2001 and 2002 andrecomputed our tax provision for 2003, 2004 and 2005. This revision,representing changes in estimates, has resulted in an additional charge ofapproximately $14.1 million in our financial statements for the year ended December 31,2006. Additionally, a consequential interest and deferred tax charge in anamount of $6.0 million  has been accruedin our financial statements for the year ended December 31, 2006 and $1.7million for the year ended  December 31,2007. As the IRS review for 2003 through 2005 is still in progress, we cannotcurrently assess whether this review may result in increase or decrease in taxliability.

 

Ourtotal income tax liability for the year ended December 31, 2006 was $47.7million, of which $30.3 million resulted from provisioning due to reassessmentof our payroll and corporate tax obligations for our international operations.

 

**Cymbal Acquisition**

** **

In November 2004,we acquired 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 included the payment of up to$3.4 million as special incentives to specified employees of Cymbal. Thecontingent consideration for the period 

 

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July 2004 to June 2007has been  paid as of  December 31, 2007 in the amount of $29.6million and recorded as goodwill and an amount of $2.6 million has been paid asspecial incentive and recorded as compensation cost. Also as part of thepurchase price adjustment in accordance with the stock purchase agreement andamendments thereof, an additional amount of $0.7 million was paid and has been recorded as goodwill. See also “CriticalAccounting Policies—Income Taxes” and Note 3 to our consolidated financialstatements.. Cymbal has been renamed as Patni Telecom Solutions Inc.

 

**TaratecAquisition**

 

On July 23, 2007,we acquired a 100% equity interest in Taratec which has been named as PatniLife Sciences Inc. Taratec is a leading consulting company in the life sciencesindustry providing integrated business, information technology, and regulatorycompliance products and services. We paid an initial purchase price ofapproximately $15.7 million, including expenses, of which $8.3 million has beenaccounted for as goodwill and $1.7 million has been accounted for ascustomer related intangibles.The terms of the purchase also provide for paymentof contingent consideration to all of the selling shareholders, payable overthree years, and calculated based on the achievement of specified revenue andmargin targets. The contingent consideration is payable in cash and cannotexceed $13.2 million. Further, as a part of the acquisition, we initiated anincentive plan linked to revenues and margins, for certain specific employeesof Taratec and Patni. The incentive payments under this plan will not exceed$3.5 million over the next three years. Since the incentive payments are linkedto continuing employment, the payments under the plan are recognized ascompensation for post acquisition services. Accordingly, $156,974 and $ 17,867have been recorded as cost of revenues and selling, general and administrativeexpenses, respectively for the year ended December 31, 2007.

 

**Logan Orviss Aquisition**

 

On July 2, 2007, weacquired the business and assets of Logan Orviss, an Europeantelecommunications consulting services company. We paid an initial purchaseprice of approximately $8.6 million, including expenses, of which $6.5 millionhas been accounted for as goodwill and $2.1 million has been accounted foras customer related intangibles.Further, as a part of the acquisition, theCompany initiated an incentive plan linked to revenues for certain specific employees.Accordingly, $ 22,664 and $ 222,690 have been recorded as cost of revenues andselling, general and administrative expenses respectivelyfor the year ended December 31,2007. Management estimates that incentive payments under this plan will not exceed$13.08 million through June 2010.

 

**Recent Developments**

** **

***ExpansionPlans***

*** ***

We operate through ourfacilities located in various parts of India. In the recent past we haveacquired facilities to support our growth. In keeping with our plans forexpansion, we have been constructing new facilities in India, includingknowledge parks in Navi Mumbai and Chennai, Nodia. These knowledge parks willhave state-of-the-art resources with extensive workspace and trainingfacilities and a modular design for ease of segregation of dedicated projects.These campuses will have hi-tech infrastructure with the ability to providescale and service to clients from one location. The Navi Mumbai and Chennaifacilities are expected to accommodate up to14,000 and 10,000 people, respectively, when completed.

 

Phase 1 of the NaviMumbai facility having a capacity of 5,000 seats, is complete and occupied.Phase I of Chennai facility having a capacity of 1,200 seats, is completeand  partially occupied..

 

See “Item 4.D.Information on the Company—Property,plant and equipment.”

 

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** **

**Buyback of Shares**

 

In February 2008,our  Board of Directors  approved the proposal to buy- back fully paidequity shares to the extent upto 10% of the paid up capital and free reserves,at a maximum price of Rs. 325 per equity share, for an aggregate amount uptoRs. 2,370 million ($ 60.1million) in accordance with the provisions of Section 77A,77AA, 77B and other applicable provisions  of the Companies Act, 1956and the provisions of Securities and Exchange Board of India (Buy-Back ofSecurities) Regulations, 1998 (“Buy Back Regulations”), for which necessarypublic announcements have been made in April 2008. The Company plans toannounce the date  of buyback at a futuredate.

 

***Resultsof Operations***

 

***Thefollowing table sets forth certain financial information as a percentage ofrevenues, calculated from our consolidated financial statements :***

 
| *** ***                                        | *** *** | ***Year ended December 31*** | *** *** |
|-----------------------------------------------------|--------------|---------------------------------------------|--------------|
| *** ***                                        | *** *** | ***2005***                                  | *** *** | ***2006*** | *** *** | ***2007*** | *** *** |
| ***Revenues***                                      | *** *** | ***100***                                   | ***%***      | *** *** | ***100*** | ***%*** | *** *** | ***100*** | ***%*** | *** *** |
| ***Cost of revenues***                              | *** *** | ***64.9***                                  | ***%***      | *** *** | ***64.6*** | ***%*** | *** *** | ***67.9*** | ***%*** | *** *** |
| ***Gross  profit***                                 | *** *** | ***35.1***                                  | ***%***      | *** *** | ***35.4*** | ***%*** | *** *** | ***32.1*** | ***%*** | *** *** |
| ***Selling, general and administrative  expenses*** | *** *** | ***19.1***                                  | ***%***      | *** *** | ***18.6*** | ***%*** | *** *** | ***17.7*** | ***%*** | *** *** |
| ***Foreign exchange (gain)/loss, net***             | *** *** | ***0.4***                                   | ***%***      | *** *** | ***0.5*** | ***%*** | *** *** | ***(3.5*** | ***)%*** | *** *** |
| ***Operating  income***                             | *** *** | ***15.6***                                  | ***%***      | *** *** | ***16.3*** | ***%*** | *** *** | ***17.9*** | ***%*** | *** *** |
| ***Interest and dividend income***                  | *** *** | ***0.9***                                   | ***%***      | *** *** | ***1.7*** | ***%*** | *** *** | ***1.9*** | ***%*** | *** *** |
| ***Interest expense***                              | *** *** | ***(0.5***                                  | ***)%***     | *** *** | ***(0.5*** | ***)%*** | *** *** | ***(0.5*** | ***)%*** | *** *** |
| ***Gain on sale of investments, net***              | *** *** | ***0.3***                                   | ***%***      | *** *** | ***0.3*** | ***%*** | *** *** | ***1*** | ***%*** | *** *** |
| ***Other income (expense), net***                   | *** *** | ***0.2***                                   | ***%***      | *** *** | ***0.6*** | ***%*** | *** *** | ***0.3*** | ***%*** | *** *** |
| ***Income  before income taxes***                   | *** *** | ***16.5***                                  | ***%***      | *** *** | ***18.4*** | ***%*** | *** *** | ***20.6*** | ***%*** | *** *** |
| ***Income taxes***                                  | *** *** | ***3.1***                                   | ***%***      | *** *** | ***8.2*** | ***%*** | *** *** | ***3.3*** | ***%*** | *** *** |
| ***Net  income***                                   | *** *** | ***13.4***                                  | ***%***      | *** *** | ***10.2*** | ***%*** | *** *** | ***17.3*** | ***%*** | *** *** |

 

** *****Year Ended  December 31, 2007 Compared to Year EndedDecember 31, 2006***

 

***Revenues***

 

***Our revenues were $662.9 million in 2007, representing anincrease of 14.5% from revenues of $578.9 million in 2006. Revenues fromexisting customers contributed $612.6 million and new customerscontributed    $50.3 million to ourrevenues. This represented an increase of 15.6% in revenues from existingcustomers and increase of 2.6% in revenues from new customers compared to 2006.Growth in revenues from our existing operations was attributable to an increaseof 18.1 % in the total billed person-months from work performed at both ouroffshore and onsite locations. Onsite work measured in billed-person monthsincreased 7.7 % in 2007 compared to 2006, while offshore work increased 23.3% overthe same period. We increased our client relationships to 318 as of December 31,2007 from 239 as of December 31, 2006. In addition, the total number ofclients that individually accounted for over $1.0 million in annual revenuesincreased to 84 as of December 31, 2007 from 74 as of December 31,2006.***

 

***During 2007, our revenues from T&M projects increased by 19.6% overrevenues in 2006, while revenues from fixed price contracts increased by 5.2%over the same period.  T&M projectsaccounted for 67.6% of our revenues in 2007, compared to 64.8% in 2006, 65.4%of our new business was billed on a T&M basis.***

 

***Our client concentration, as measured by the proportion ofrevenue generated from our top ten clients, decreased to 47.3% in 2007 from53.1% in 2006. General Electric, our largest client, contributed 11.8% of ourrevenues in 2007, compared to 14.6% in 2006.***

 

***During 2007, clients in the insurance, manufacturing,product engineering services and financial services industries continued tocontribute a large proportion of our revenues. Revenues from clients in theseindustries in 2007 increased by 16.4%, 25.5%, 34.7% and 6.1%***

*** ***

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*** ***

***as compared to 2006 and contributed 23.6%, 23.8%, 16.7% and14.1% to overall revenues, respectively. Our other industry practices includingcommunications, media and entertainment contributed 21.7% and 25.6% of ourrevenues in 2007 and 2006. Until December 31, 2006, we reported productengineering services and ISV as separate industry segments. The productengineering services business is primarily related to embedded technologyservices for products and the ISV unit provided the user interface for theseproducts. Both these segements from part of technology services. Effective January 1,2007, we have integrated these two business segments with the primary focus onthe following synergies (i) demand for providing end-to-end solutions fromproduct engineering clients. (ii) leveraging the domain skills andplatform skills to provide end-to-end solutions.***

 

***During 2007, we continued to derive a significant proportionof our revenues from clients located in the United States. In 2007 and 2006, wederived 77.9% and 80.8% of our revenues from clients located in the UnitedStates. Revenues from these clients grew by 10.4% in 2007, while revenues fromclients in other regions grew by 32% in the same period.***

 

***Cost of revenues***

 

***Our cost of revenues was $450 million in 2007, representingan increase of 20.3% from $374 million in 2006. Cost of revenues represented67.9% and 64.6% of our revenues in 2007 and 2006. Out of increase of $76million in cost of revenues, $59 million was attributable to wage costs, $7.1million to travel costs, $1.2 million to data-link charges, $1.4 million toelectricity cost of Airoli, $ 1.4 million to rent charges, $0.5 million onaccount of amortization of purchased intangible asset, and $4 million todepreciation charged on assets. Wage costs increased by $59 million due to anincrease in headcount of software professionals, annual salary revisions andreversal of $9.0 million in 2006, payroll and related taxes for ourinternational operations arising on reassessment of certain wages paid, andshort-term benefits given to our employees when working outside India. Expansionof our facilities and capital expenditure incurred with respect to units suchas Airoli led to an increase in depreciation cost and other related cost. Rupeeappreciation also had an impact on the higher cost of revenues in 2007 ascompared to 2006 with the rupee appreciating by approximately 11% as comparedto 2006.***

 

***Gross profit***

 

***Our gross profit for 2007 was $212.8 million, representingan increase of 3.9% from $204.9 million in 2006. Gross profit as a percentageof our revenues decreased to 32.1% in 2007 from 35.4% in 2006 reflecting ahigher increase in cost of revenues as compared to increase in revenues mainlyon account of increase in wage cost and rupee appreciation.***

 

***Selling, general andadministrative expenses***

 

***During 2007, our selling, general andadministrative expenses were $116.3 million, representing an increase of 9.2%from $106.5 million in 2006. During 2007, our selling, general andadministrative expenses as a percentage of our revenues decreased to 17.5% from18.4% in 2006.***

 

***During 2007, our sales and marketingexpenses were $45.8 million, representing an increase of 6.3% from $43.1million in 2006. Personnel costs increased by $2.9 million due to the additionto sales and marketing personnel and higher compensation costs resulting fromsalary increases. Other selling and marketing costs increased by $0.2 million.We believe that our investment in selling and marketing expenses hascontributed to the growth and diversification of our client revenues.***

 

***Our general and administrative expenseswere $70.5 million in 2007, representing an increase of 10.5% from $63.8million in 2006. Personnel costs increased in 2007 by $4 million due tothe addition of general and administrative personnel and annual salaryrevisions, directors’ remuneration increased by $2.3 million on account oftermination payments to two of our executive directors, on their termination ofemployment with us. Other general and administrative charges increased by $0.4million.***

 

***Foreignexchange gain/loss:******In 2007, we had a foreign exchange gain of $ 23.4million as against a loss of US$2.7 million in 2006, as our dollar-denominatedreceivables continued to be hedged to a significant level.***Mark tomarket of foreign exchange contracts and revaluation of debtors resulted in a netforeign exchange gain.

 

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***Operatingincome:****** Our operatingincome was $118.7 million in 2007, representing an increase of 25.6% from $94.5million in 2006 which is mainly due to a forex gain of $23.4million on accountof rupee appreciation. As a percentage of revenues, operating income increasedto 17.9% in 2007 from 16.3% in 2006 .***

 

***Otherincome (expense), net******:******Other income (expense), net reflects interest anddividend income, interest expense, net gain on sale of investments and otherincome or expense. Our other income (expense), net was $17 million in 2007,increasing 36% from income of $12.5 million in 2006 resulting in netincrease of $4.5 million. In 2007, our gain on sale of investments was $6.4 millionas compared to $1.7 million in 2006. In 2007, our interest and dividend incomewere $12.5 million as compared to $10.1 million in 2006.***

 

***Incometaxes:******We made a provision of $21.8 million for incometaxes in 2007, representing a decrease of 54.3% from $47.7 million in 2006. Oureffective tax rate was 16.1% in 2007 compared to 16.2%***(excludingthe impact of change in estimates on account of the IRS settlement) ***in 2006. The 2006 income taxesincludes $30.3 million provision recognized as a result of  reassessment of our payroll and corporate taxobligations for our international operations.***

 

***Netincome:****** Our net incomewas $114 million in 2007, representing an increase of  92.2% from $59.3 million in 2006. As apercentage of our revenues, net income increased to 17.2% in 2007 from 10.2% in2006. The increase in the net income is mainly on account of reasons explainedabove.***

 

**Year Ended December 31,2006 Compared to Year Ended December 31, 2005**

** **

***Revenues:*********Our revenues were $578.9 million in 2006,representing an increase of 28.5% from revenues of $450.3 million in 2005.Revenues from existing customers contributed $529.8 million and new customerscontributed $49.1 million to our revenues. Thisrepresented an increase of 28.2% in revenues from existing customers andincrease of 32.0% in revenues from new customers compared to 2005. Growthin revenues was attributable to an increase of 18.1% in the total billedperson-months from work performed at both our offshore and onsite locations.Onsite work measured in billed-person months increased 11.3% in 2006 comparedto 2005, while offshore work increased 21.7% over the same period. We increasedour client relationships to 239 as of December 31, 2006 from 199 as of December 31,2005. In addition, the total number of clients that individually accounted forover $1.0 million in annual revenues increased to 74 as of December 31,2006 from 61 as of December 31, 2005.

 

During 2006, ourrevenues from T&M projects increased by 40.0% over revenues in 2005, whilerevenues from fixed price contracts increased by 11.8% over the sameperiod.  T&M projects accounted for64.8% of our revenues in 2006, compared to 59.5% in 2005 mainly because 75.4% of our new business was billed on a T&Mbasis.

 

Our client concentration, as measured bythe proportion of revenue generated from our top ten clients,decreased to 53.1% in 2006 from 59.3% in 2005. GeneralElectric, our largest client, contributed 14.6% of ourrevenues in 2006, compared to 22.1% in 2005.

 

During 2006, clients inthe insurance, manufacturing, telecommunications (now, communications, mediaand entertainment)  and financialservices industries continued to contribute a large proportion of our revenues.Revenues from clients in these industries in 2006 increased by 7.7%, 27.1%,58.6% and 22.4% compared to 2005 and contributed 23.2%, 21.7%, 18.9% and 15.3%to overall revenues as compared to 27.7%, 21.9%,15.3% and 16.0% in 2005. Ourother industries practice contributed 6.7% and 6.6% of our revenues in 2006 and2005. Our ISV practice contributed 4.1% and 5.0% of our revenues in 2006 and2005 and our product engineering practice contributed 10.1% and 7.5% of ourrevenues in 2006 and 2005.

 

During 2006, wecontinued to derive a significant proportion of our revenues from clients locatedin the United States. In 2006 and 2005, we derived 80.8% and 84.8% of ourrevenues from clients located in the United States. Revenues from these clientsgrew by 22.5% in 2006, while revenues from clients in other regions grew by62.1% in the same period.

 

***Costof revenues:*********The cost ofrevenues was $374.0 million in 2006, representing an increase of 27.9% from$292.5 million in 2005. Cost of revenues represented 64.6% and 64.9% of ourrevenues in 2006 and 2005. Out of the increase of $81.5 million in cost of revenues, $49.9 million was attributable to wage costs, $16.4 million tosub-contractor costs, $4.7 million 

 

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to travel costs, $4.2 million to rentaland repairs, $0.5 million to data-link charges, $1.2 million to deferred costs,$1.7 million to stock compensation costs, $2.1 million to other generaladministration costs and $2.8 million to depreciation charged on assets and areduction of $2.2 million in immigration costs. Wage costs increased by $49.9 million due to an increase inheadcount of software professionals and annual salary revisions which waspartly compensated due to a reversal of $9.0 million on payroll and relatedtaxes for our international operations arising on reassessment of certain wagespaid, and short-term benefits given, to our employees when working outsideIndia. Expansion of our facilities led to increased rental costs and otherrelated expenses. Our immigration costs were lower due to a decrease in thenumber of applications processed.

 

***Grossprofit:*********Our grossprofit for 2006 was $204.9 million, representing an increase of 29.8% from$155.9 million in 2005. Gross profit as a percentage of our revenues increasedto 35.4% from 35.1% during 2006 reflecting a lower increase in cost of revenuesas compared to increase in revenues.

 

***Selling,general and administrative expenses:*********During 2006, our selling, general andadministrative expenses were $106.5 million, representing an increase of 24.0%from $85.9 million in 2005. During 2006 our selling, general and administrativeexpenses as a percentage of revenues decreased to 18.4% from 19.1% in 2005.

 

During 2006, our salesand marketing expenses were $43.1 million, representing an increase of 19.6%from $36.0 million in 2005. Personnel costs increased by $6.2 million due tothe additions to****sales and marketing personnel andhigher compensation costs resulting from salary increases. Other selling andmarketing costs increased by $0.8 million. We believe that our investment inselling and marketing expenses has contributed to the growth anddiversification of our client revenues.

 

Our general andadministrative expenses in 2006 were $63.4 million, representing an increase of27.1% from $49.9 million in 2005. Personnel costs increased by $7.5 milliondue to the addition of general and administrative personnel and annual salaryrevisions. Establishment costs increased by $0.9 million due to an increase inthe number of facilities. Professional and consultancy charges increased by$0.9 million, bad debts provision increased by $1.3 million and other generalexpenses increased by $2.3 million. Depreciation expense increased by$0.6 million.

 

***Foreignexchange gain/loss:*********In 2006, we had a foreign exchange lossof $2.7 million as compared to a loss of $1.7 million in 2005.  Mark tomarket of foreign exchange contracts and revaluation of debtors resulted in theforeign exchange loss.

 

***Operatingincome:*********Ouroperating income was $94.5 million in 2006, representing an increase of 34.1%from $70.4 million in 2005. As a percentage of revenues, operating incomeincreased to 16.3% from 15.6% in 2005 reflecting a decrease in cost of revenuesand selling, general and administration expenditures as compared to increase inrevenues.

 

***Otherincome (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$12.5 million in 2006, increasing 194.1% from income of  $4.2 million in2005 resulting in a net increase of $8.3 million. In 2005, we had recorded again on sale of asset of $3.2 million and a loss of revaluation of ADR proceedsof $2.0 million. In 2006, our gain on sale of investments was $1.7 million ascompared to $1.1 million in 2005. In 2006, our interest and dividend incomewere $10.1 million as compared to $4.2 million in 2005. On account ofreassessment of our payroll and corporate tax obligations for our internationaloperations, we have recorded a reversal for interest and other related expenseswith respect to delayed payments amounting to $1.1 million in 2006 against aprovision of $1.7 million in 2005.

 

***Incometaxes:*********We made aprovision of $47.7 million for income taxes in 2006, representing an increase of245.5% from $13.8 million in 2005. Our effective tax rate (excluding the impactof change in estimates on account of the IRS settlement) decreased from 18.6%in 2005 to 16.2% in 2006. The 2006 income taxes include a $30.3 millionprovision due to the reassessment of our payroll and corporate tax obligationsfor our international operations. The 2005 tax provisioning included an amountof approximately $1.0 million relating to an adjustment for an earlier year’sincome tax assessment.

 

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***  Net income:*****Our net income was $59.3 million in 2006, representing a decrease of2.7% from $60.9 million in 2005. As a percentage of our revenues, netincome decreased to 10.2% in 2006 from 13.5% in 2005. The reduction in net income is mainly onaccount of the tax provision we made in 2006 and the other reasons explainedabove.

** **

**5.B. Liquidity andCapital Resources**

** **

Ouroperations and our growth have been financed by cash generated from operationsand from the proceeds of sales of equity shares. We received net proceeds of$117.0 million from our ADSs issue in 2005.

 

Weinvest in units of mutual funds either in ‘open ended’ schemes or in ‘fixedmaturity plans’. While the investments in ‘open ended’ mutual fund units can besold any time without exit fees, the investments in units of ‘fixed maturityplan’ can be sold subject to an exit fee of approximately 1%-2%. We havecategorized our investments in units of mutual fund schemes as ‘Liquid mutualfund units’ and ‘fixed maturity plans’classified as ‘available for sale’investments in our consolidated financial statements.

 

As of December 31, 2007, we had $32.6 million incash and cash equivalents, $138.4 million invested in units of liquid mutualfunds, $143.1 million invested in units of mutual fund (fixed maturity plan)and $ 16.3 million invested in other investments. As of December 31, 2006we had $46.5 million in cash and cash equivalents, $128.0 million invested inunits of liquid mutual funds, $105.8 million invested in units of mutual funds(fixed maturity plan), and $9.2 million invested in other investments. As of December 31, 2007 and 2006, we have not incurred any exit fees oninvestments in mutual fund units of fixed maturity plans.

 

Our working capital(comprising current assets excluding cash and cash equivalents and investmentsless current liabilities) at  December 31,2007 and at  December 31, 2006 was$90.7 million and $41.2 million, respectively. Our workingcapital is sufficient to meet our present requirements. We had no outstandingbank borrowings or long-term debt as of such date. Net cash provided byoperating activities was $111.3 million, $59.1 million and $73.1 million in theyears ended December 31, 2007, 2006 and 2005 respectively. The adjustmentsfor the year ended December 31, 2007, to reconcile the $114 million netincome to net cash provided by operating activities, consisted primarily ofdepreciation expense of $25.0 million and deferred tax credit of  $10.1 million and gain from sale of investmentsof $ 6.4 million. The adjustments for the year ended December 31, 2006, toreconcile the $59.3 million net income to net cash provided by operatingactivities, consisted primarily of depreciation expense of $19.6 million andgain from sale of investments of $1.7 million. The adjustments for the yearended December 31, 2005, to reconcile the $60.8 million net income to netcash provided by operating activities, consisted primarily of depreciationexpense of $16.0 million, gain from sale of property, plant and equipment of$3.2 million and gain from sale of investments of $1.1 million. The increase indepreciation was due to an increase in investment in property, plant andequipment to develop and expand our existing as well as new facilities. The netasset base was $188.3 million, $131.0 million and $92.0 in the years ended December 31,2007, 2006 and 2005 respectively. Provision for bad debts was $1.2 million and$1.2 million for the year ended December 31, 2007 and 2006 , respectively.There was a reversal of provision for bad debts of $0.2 million for the yearended December 31, 2005.

 

Days of salesoutstanding reduced to 73 days in the year ended December 31,2007 ascompared to 75 days in the year ended December 31, 2006  and it was 62 days  in the year ended Deccember 31, 2005. Netaccounts receivable and cost and estimated earnings in excess of billings onuncompleted contracts increased by $ 21.8 million for the year ended December 31,2007, $36.3 million in 2006 and $14.7 million in 2005 primarily as a result ofincrease in activity.

 

Current assets and otherassets increased by $20.4 million for the year ended December 31, 2007 and$1.3 million for the year ended December 31, 2006 , however it decreasedby $3.3 million for the year ended December 31, 2005. Cash outflows forthe year ended December 31,2007 were$ 6.8 million in respect of depositplaced with tax authorities in India, $10.2 million in derivative contracts.Cash inflows for the year ended December 31, 2007 was mainly on account ofthe $0.9 million in gratuity asset. Cash outflows for the year ended December 31,2006 were $1.4 million in leasehold land, $0.1 million in prepaid expenses, and$1.2 million in foreign exchange advances. Cash inflows for the year ended December 31, 2006were $1.2 million in deferred cost and revenue and $0.2 million in 

 

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advances to vendors.Cash outflows for the year ended December 31, 2005 were $0.7 million inadvances to vendors, $0.3 million in other receivables, $0.8 million in prepaidexpenses and $0.4 million in prepaid gratuities. Cash inflows for the yearended December 31, 2005 were $1.0 million in deposits and $4.7million on derivative contracts.

 

Accounts payable andaccrued expenses increased by $6.3 million for the year ended December 31,2007, compared to an increase of $20.3 million in 2006 and $7.5 million in2005. The increase in 2007 is due to an increase in accruals related toemployee related expenses of $5.9 million, $0.9 million in accrued expenses andreduction of $1.8 million in trade accounts payable.

 

Our billings in excessof costs and estimated earnings on uncompleted contracts, which representbillings in excess of revenues that are recognized, increased by $0.06 millionand  $0.9 million in the year ended December 31,2007 and 2006 respectively, and decreased by $0.5 million in 2005.

 

Taxes paid were $15.3million,$39.9 million and $29.5 million as against a tax provision of $15.7million, $43.3 million and $31.9 million for the years ended December 31, 2005, 2006 and2007 respectively.

 

Other currentliabilities and other liabilities increased by $8.2 million during the yearended December 31, 2007. The increase in the year ended December 31,2007 resulted from increase of $2.1 million in leave encashment provision, $2.2million increase in deferred revenue, $2.7 million increase in otherliabilities on account of advance received on sale of furniture at India(Vashi) location, $1.0 million increase in advance from customer and $1.9 milliondecrease in other current liabilities. Other current liabilities and otherliabilities decreased by $16.0 million during the year ended December 31,2006. The decrease in the year ended December 31, 2006 resulted from a$6.7 million in derivative contracts, $14.6 million payroll and related taxliability on account of payment and liability reversal and an increase of $2.0million leave encashment provision, $0.9 million increase in sales discount,$0.2 million increase in warranty provision, $1.7 million increase in pensionbenefit and $0.5 million increase in other current liabilities. Other currentliabilities and other liabilities increased by $7.3 million during the yearended December 31, 2005. The increase in the year ended December 31,2005 resulted from a $1.0 million leave encashment provision, a $0.3 millionpension benefit, a $3.6 million payroll and related tax liability andcorporate tax liability, $1.3 million in advances from customers and $0.7million VAT payable.

 

The changes in the operatingactivities is in line with the growth in our revenues and volume of operations.

 

Net cash used ininvesting activities was $130.0 million for the year ended December 31,2007, $155.4 million for 2006 and $111.7 million for 2005. Net cash used in theacquisition of property, plant and equipment for the years ended December 31,2007, 2006 and 2005 was $61.9 million, $48.5 million and $48.9 millionrespectively. In 2007, 2006 and 2005 cash outflow was higher mainly on accountof the purchases of new facilities and expansion of our existing facilities.Net purchases of investment securities were $14.8 million for the year ended December 31,2007. Additional purchase consideration to Cymbal shareholders for the yearended December 31, 2007 amounted to $12.4 million. Net cash used ininvesting activities in 2007 included $21.4 million for the acquisition ofLogan Orviss and Taratec, net of cash acquired.Paymentfor acquisition of technology related intangibles from one of our majorcustomers amounted to $20.4 million. Netpurchases of investment securities were $94.5 million for the year ended December 31,2006. Additional purchase consideration to Cymbal shareholders for the yearended December 31, 2006 amounted to $12.2 million. Net purchases ofinvestment securities were $57.2 million for the year ended December 31,2005. Additional purchase consideration to Cymbal shareholders for the yearended December 31, 2005 amounted to $5.6 million.

 

 Net cash used in financing activities was $8.7million and $7.1 million  for the yearsended December 31, 2007 and 2006, respectively. Net cash provided byfinancing activities was $112.0 million for the year ended December 2005.We paid $11.9 million as dividends, including dividend tax, on our equityshares in the year ended December 31, 2007. We received proceeds of $3.2million from our employee stock option plan during the year ended December 31,2007. We paid $8.6 million in dividends, including dividend tax, on our equityshares in the year ended December 31, 2006. We received proceeds of $1.8million from our employee stock option plan during the year ended December 31,2006. We paid $6.5 million in 

 

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dividends, includingdividend tax, on our equity shares in the year ended December 31, 2005. Wereceived net proceeds of $118.7 million from our initial offering of ADSs andour employee stock option plan during the year ended December 31, 2005.

 

We anticipate capitalexpenditures of between approximately $80 million to $120 million in 2008,principally to finance the construction of our new knowledge park facilities inNavi Mumbai and Chennai and other facilities and physical infrastructure inIndia. Estimated amounts remaining to beexecuted on such contracts (net of advances), aggregated  approximately to $33.4 million at December 31,2007. See ‘‘Item 4.D. Information on the Company—Property, plant andequipment.’’ We believe that existing cash and cash equivalents and fundsgenerated 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, 2007, 2006 and 2005 were$2.1 million, $2.1 million and $2.2 million, respectively . For a descriptionof our research and development initiatives, see “Item 4.B. Information onthe Company—Business Overview - Innovation.”

** **

**5.D. Trend information**

** **

Other than as describedin “Item 3.D. Key information—Risk Factors”, “Item 4. Information on theCompany” and “Item 5. Operating and Financial Review and Prospects” andelsewhere in this Annual Report, to our knowledge there are no known trends oruncertainties that have or had or are expected to have a material adverseimpact on our revenues or income from continuing operations or profitability orliquidity or capital resources, or that could cause reported financialinformation not necessarily indicative of future operating results or financialcondition.

 

**5.E. Off-balance sheetarrangements**

** **

We currently do notengage in any off-balance sheet arrangements.

 

**5.F. Tabular disclosureof contractual obligations**

** **

Thefollowing table sets forth our contractual obligations and commercialcommitments to make future payments as of December 31, 2007. 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, 2007** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Total**                                                              | ** ** | **Within  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                            | ** ** | **(in millions)**                                                 | ** ** |
| Capital  (Finance) Leases             |       | $                                                                      | 0.6        |   | $ | 0.3 |   | $ | 0.3 |   | $ | 0.0 |   | — |   |
| Operating Leases                      |       | $                                                                      | 20.5       |   | $ | 10.0 |   | $ | 10.2 |   | $ | 0.3 |   | $ | 0.0 |   |
| Capital  Commitment                   |       | $                                                                      | 33.4       |   | $ | 32.0 |   | $ | 1.4 |   | — |   | — |   |
| **Total  Contractual Obligations(1)** | ** ** | **$**                                                                  | **54.5**   | ** ** | **$** | **42.3** | ** ** | **$** | **11.9** | ** ** | **$** | **0.3** | ** ** | **$** | **0.0** | ** ** |

 

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   (1) In addition,pursuant to our agreement with Patni LifeSciences Inc. (formerly Taratec), we agreed to pay up to $13.2 millionas contingent consideration over a three year period ending on June 30,2010.

 

**5.G. Safe Harbor**

** **

This Annual Reportcontains forward-looking statements. See the section entitled “Special Noteregarding Forward Looking Statements.”

 

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

** **

Effective January 1,2007, we adopted provisions of FASB Interpretation No. 48 Accounting foruncertainty in Income Taxes. FIN 48 addresses the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements and prescribesa threshold of more-likely-than-not for recognition and derecognition of tax positionstaken or expected to be taken in a tax return. FIN 48 also provides relatedguidance on measurement and classification of interest and penalties, anddisclosure. As a result of the implementation of FIN 48, we recognized noincrease or decrease in the tax liability. A reconciliation of the beginningand ending amount of unrecognized tax benefits is set out below:

 
|                                                          |   | **$ in  millions** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|
|                                                          |   | ** **              |   |
| Balance at  January 1, 2007                              |   | 41.7                    |   |
| Additions based  on tax positions related to the current year |   | 7.6                     |   |
| Additions for  tax positions of prior years                   |   | —                  |   |
| Reductions for  tax positions of prior years                  |   | —                  |   |
| Settlements                                                   |   | —                  |   |
|                                                          |   |                    |   |
| Balance at  December 31, 2007                            |   | 49.3                    |   |

 

During the year ended December 31,2007, we recognized $3.5 million in interest and penalties in other (expense)/income. As of December 31, 2007, we had $9.3 million of accrued interest and penalties related to uncertaintax positions.

 

As of December 31,2007, we had $46.0 million of  netunrecognized tax benefits arising out of tax positions which would affect theeffective tax rate if recognized.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159 “The FairValue Option for Financial Assets and FinancialLiabilities – including an amendment of FASB Statement No. 115 (Statement159). Statement 159 gives us the irrevocable option to carry most financialassets and liabilities at fair value that are not currently required to bemeasured at fair value. If the fair value option is elected, changes in fairvalue would be recorded in earnings at each subsequent reporting date.Statement.159 is effective for  ourfiscal year 2008. Effective January 1, 2008, we adopted the provisions ofStatement No. 159. The Company has not made an election for fair valueoptions for any existing eligible instruments.

 

In September 2006,the FASB issued FASB Statement No. 157, Fair Value Measurement (Statement157). Statement 157 defines fair value, establishes a framework for themeasurement of fair value and enhances disclosures about fair value measurements.The Statement does not require any new fair value measures. The Statement iseffective for fair value measures already required or permitted by otherstandards for fiscal years beginning after November 15, 2007. We arerequired to adopt Statement 157 beginning on January 1, 2008. Statement157 is required to be applied prospectively, except for certain financialinstruments. Any transition adjustment is required to be recognized as anadjustment to opening retained earnings in the year of adoption. In November 2007,the FASB proposed a one-year deferral of Statement 157’s fair-value measurementrequirements for non financial assets and liabilities that are not required orpermitted to be measured at fair value on a recurring basis. The implementationof Statement 157 for financial assets and financial liabilities, effective January 1,2008, did not have a material impact on our consolidated financial position andresults of operations. We are currently assessing the impact of Statement 157for nonfinancial assets and nonfinancial liabilities on our consolidatedfinancial position and results of operations.

 

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**In December 2007, the FASB issued FASB Statement No. 141R,Business Combinations (Statement 141R) and FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment toARB No. 51 (Statement 160). Statements 141R and 160 require mostidentifiable assets, liabilities, noncontrolling interests and goodwill acquiredin a business combination to be recorded at “full fair value” and requirenoncontrolling interests (previously referred to as minority interests) to bereported as a component of equity, which changes the accounting fortransactions with noncontrolling interest holders. Both Statements areeffective for periods beginning on or after December 15, 2008, and earlieradoption is prohibited. Statement 141R will be applied to business combinationsoccurring after the effective date. Statement 160 will be applied prospectivelyto all noncontrolling interests, including any that arose before the effectivedate. We are currently evaluating the impact of adopting Statement 141R andStatement 160 on its results of operations and financial position.**

** **

**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 financialstatements in conformity with U.S. GAAP, which requires us to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities on the date of the financialstatements and the reported amounts of revenues and expenses during thefinancial reporting period. We primarily make estimates related to contractcosts expected to be incurred to complete development of software, allowancesfor doubtful accounts receivable, our future obligations under employeeretirement and benefit plans, useful lives of property, plant and equipment,deferred tax assets and liabilities and provisions for contingencies andlitigation.

 

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. Changes in estimates are reflected inthe financials statements in the period in which changes are made and, if material,their effects are disclosed in the notes to the consolidated financialstatements.

 

***Revenue Recognition***

*** ***

We recognize revenues byfollowing specific and applicable accounting guidelines for measuring revenue.These guidelines require us to make certain judgments that affect recognizedand unrecognized revenue. Judgments involve the method of recognizing revenue,costs and time required to complete projects for our clients etc.

 

Weare in the software services business and, to a lesser extent, in businessprocess outsourcing. Our revenues from software services are derived byproviding the following 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 revenuesprimarily from software services. Revenue is recognized when there ispersuasive evidence of a contractual arrangement with customers, the salesprice is fixed or determinable and collectibility is reasonably assured. Oursoftware services contracts are either on a fixed-price,fixed time frame or ona time and material basis. Currently a majority of revenues are derived on timeand material contracts. Revenues earned from services performed on a time andmaterial basis are recognized as the related services are performed. Ourfixed-price contracts include application maintenance and support services, onwhich revenue is recognized ratably over the term of maintenance. Our otherfixed-price contracts are recognized on a percentage of completion basis.

 

Guidance has been drawnfrom paragraph 95 of Statement of Position (‘‘SOP’’) 97-2, ‘‘Software RevenueRecognition’’ to account for revenue from fixed price arrangements for softwaredevelopment and related services 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 directrelationship between input and productivity.

 

We review the estimatedrevenues and estimated costs on each project at the end of each reportingperiod. Any revisions to existing estimates are made when required bymanagement having the relevant authority. As part of the review process,management regularly compares and analyzes the actual costs and the estimate ofcosts to complete the projects to the original estimated costs and the totalcontract price with revisions to estimates reflected in the period in whichchanges become known. 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 andincremental contract origination and set up costs incurred in connection withapplication maintenance and support services to expense as incurred. We deferthese costs only in situations where there is a contractual arrangementestablishing a customer relationship for a specific period. The costs to bedeferred are limited to the extent of future contractual revenues. Further, wedefer and recognize revenue attributable to set up activities over the periodsthat the related fees are earned, as services performed during such periods donot result in separate earnings process.

 

We generally provide ourclients with a one- to three-month warranty as post-sale support. Costsassociated with such services are accrued based on management’s estimates andhistorical data at the time related revenues are recorded. We use our pastexperience relating to actual warranty costs incurred on similar kinds of projectsin order to estimate future warranty costs.

 

We grant volumediscounts to certain customers, which are computed based on a pre-determinedpercentage of the total revenues from those customers during a specifiedperiod, pursuant to the terms of the contract. These discounts are earned onlyafter the customer has generated a specified cumulative level of revenues inthe specified period. The discounts can be utilized by the customer in the formof free services.

 

We estimate the totalnumber of customers that will ultimately earn these discounts, based on which aportion of the revenue on the related transactions is allocated to the freeservices that will be delivered in the future.

 

Historically, changes inestimates of warranty costs and volume discounts have not had a material impacton our financial statements.

 

We include reimbursementof out-of-pocket expenses received from customers as part of revenues inaccordance with EITF 01-14 “Income Statement Characterization of ReimbursementsReceived for ‘Out of Pocket’ Expenses Incurred”.

 

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***Business Process Outsourcing***

*** ***

***Revenues from business processoutsourcing services are derived from both time-based and transaction-pricedcontracts. Revenue is recognized as the related services are performed, inaccordance with the specific terms of the contracts with the customer.***

*** ***

***Business Combinations, Goodwill and IntangibleAssets***

*** ***

Weaccount for business combinations in accordance with SFAS 141, *Business Combinations*, which requires thatthe purchase method of accounting be used for all business combinations.SFAS 141 requires intangible assets acquired in a business combination tobe recognized and reported separately from goodwill. Accounting for contingentconsideration based on earnings or other performance measures is a matter ofjudgment that depends on the relevant facts and circumstances. If the substanceof the contingent consideration is to provide compensation for services, use ofproperty, or profit sharing, we account for the additional consideration as anexpense of the appropriate period. Otherwise, the additional consideration paidis recorded as an additional cost of the acquired business.

 

Goodwill represents thecost of the acquired businesses in excess of the fair value of identifiabletangible and intangible net assets purchased. We generally seek the assistanceof independent valuation experts in determining the fair value of theidentifiable tangible and intangible net assets of the acquired business. Weassign all the assets and liabilities of the acquired business, includinggoodwill, to reporting units in accordance with SFAS 142, *Goodwill and Other Intangible Assets*.

 

We test goodwill forimpairment at least on an annual basis. In this process, we rely on a number offactors including operating results, business plans and future cash flows.Recoverability of goodwill is evaluated using a two-step process. The firststep involves a comparison of the fair value of a reporting unit with its carryingvalue.  The fair value of a reportingunit is determined using the income approach. If the carrying value of thereporting unit exceeds its fair value, the second step of the process involvesa comparison of the implied fair value and carrying value of the goodwill ofthat reporting unit. The implied fair value of goodwill is determined in thesame manner as the amount of goodwill recognised in a business combination. Ifthe carrying value of the goodwill of a reporting unit exceeds the fair value ofthat goodwill, an impairment loss is recognized in an amount equal to theexcess. Goodwill of a reporting unit will be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of the reporting unit below its carrying amount.

 

We amortize intangibleassets over their respective individual estimated useful lives in proportion tothe economic benefits consumed in each period. Our estimates of the usefullives of identified intangible assets are based on a number of factorsincluding the effects of obsolescence, demand, competition, and other economicfactors (such as the stability of the industry, and known technologicaladvances), and the level of maintenance expenditures required to obtain theexpected future cash flows from the asset.

 

We evaluate intangibleassets for recoverability whenever events or changes in circumstances indicatethat their carrying amounts may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future undiscounted net cash flows expected to be generated by the asset. Ifsuch assets 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 goodwilland intangible 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.

 

***Income Taxes***

*** ***

As part of our financialreporting process, we are required to estimate our liability for income taxesin each of the tax jurisdictions in which we operate. This process requires usto estimate our actual current tax exposure together with an assessment oftemporary differences 

 

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resulting from differingtreatment of items, such as depreciation on property, plant and equipment, fortax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included within our balance sheet.

 

Income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of changes in tax rates is recognized in results ofoperations in the period that includes the enactment date. We must then assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent we establish a valuationallowance or increase this allowance in a period, we must include an expensewithin the tax provision in the statement of operations.

 

Our deferred taxliabilities mainly arise from taxable basis differences in intangible assetsand undistributed earnings of branch, property, plant and equipment,unrecognized gain in available for sale securities and costs and estimatedearnings in excess of billings on completed contracts. Our deferred tax assetscomprise assets arising from our accrued expenses, provisions for doubtfulaccounts receivable and from ultimate realization of the tax asset that may bedependent on the availability of future capital gains. We assess the likelihoodthat our deferred tax assets will be recovered from future taxable income. Thisassessment takes into consideration tax planning strategies, including levelsof historical taxable income and assumptions regarding the availability andcharacter of future taxable income over the periods in which the deferred taxassets are deductible. We believe it is more likely than not that we willrealize the benefits of those deductible differences in the future, net of theexisting valuation allowance at December 31, 2007. The ultimate amount ofdeferred tax assets realized may be materially different from those recorded,as influenced by potential changes in income tax laws in the tax jurisdictionswhere we operate, or future changes in operating results.

 

To the extent we believethat realization of a deferred tax asset is not likely, we establish avaluation allowance or increase this allowance in an accounting period andinclude an expense within the tax provision in our statements of income. Uponour acquisition of Cymbal, we were entitled to utilize tax benefits on carryforward business losses of Cymbal. Based on preliminary projections of futuretaxable income and tax planning strategies, we believed that there existedsignificant uncertainty regarding realization of tax benefits on the carryforward losses. Consequently, we recorded a valuation allowance for the carryforward business losses of Cymbal. In 2005, we evaluated the expectedrealisation of such carry forward losses and available tax planning strategiesand believed that the we would make sufficient profits in future years to setoff the carry forward losses. Accordingly, the valuation allowance has beenreversed and adjusted against goodwill. In the year 2007 and 2006, valuationallowance was recorded on the business loss of our Australia branch and Japanbranch respectively.

 

We account foruncertainty in income taxes in the financial statements in accordance with FIN48, Accounting for Uncertainty in IncomeTaxes - an interpretation of FASBStatement No. 109, Accounting for Income Taxes. The accounting anddisclosures of tax positions taken or expected to be taken on a tax return arebased on the recognition threshold and measurement attribute as prescribed byFIN 48. We recognize interest and penalties related to uncertain tax positionsin other (expense) / income.

 

***Stock-based compensation***

 

We adopted SFAS 123R, “Share-BasedPayment” (SFAS 123R) effective January 1, 2006. This statement requirescompensation expense relating to share-based payments to be recognized in netincome using  a fair value measurementmethod. Under the fair value method, the estimated fair value of  awards is charged to income on an acceleratedbasis over the requisite service period, which is generally the vesting period.We elected the modified prospective method as prescribed in SFAS 123R and,therefore, prior periods were not restated. Under the modified  prospective method, SFAS 123R was applied tonew awards granted after the time of adoption, as well as to the unvestedportion of previously granted equity-based

 

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awards for which therequisite service had not been rendered as of January 1, 2006. We grantedstock options under the ‘Patni ESOP 2003’ -Revised 2006.

 

The fair value of eachoption is estimated on the date of grant using the Black-Scholes model.

 

Prior to the adoption ofSFAS 123R, we were required to record benefits associated with the taxdeductions in excess of recognized compensation cost as an operating cash flow.However SFAS 123R requires that such benefits be recorded as a financing cashinflow.

 

Effective April 1,2007, an amendment has been made to Income Tax Act  subjecting specified securities allotted ortransferred by an employer to its employees to Fringe Benefit Tax (FBT). Theliability to pay FBT by the employer arises at the time of allotment of thesecurities, consequent to exercise of option by the employees and is calculatedon the difference between the fair value of the underlying share on the date ofvesting and the exercise price paid by the employee based on the corporate taxrate. The FBT arising from such allotment of specified option is collectiblefrom employees, which is considered as akin to a reset in the terms of the ESOPPlan as it would reduce the ultimate benefit to the employee, by way ofincrease in exercise price and hence is recognized as additionalpaid-in-capital.

 

***Derivatives and Hedge Accounting***

*** ***

We enter into forwardforeign exchange contracts/option contracts (derivatives) to mitigate therisk of changes in foreign exchange rates on inter company and end customeraccounts receivable and forecasted sales transactons denominated in foreigncurrencies and, upon completion of the formal documentation and testing foreffectiveness,we designate the forward and option contracts which meet thehedging criteria, as cash flows hedges. Changes in the derivative fair valuesthat are designated, effective and qualify as cash flow hedges, are deferredand recorded as a component of accumulated other comprehensive income until thehedged transactions occur and are then recognized in the consolidatedstatements of income. Changes in fair value for derivatives not designated ashedging instruments and ineffective portion of the hedging instruments arerecognized in consolidated statements of income in the current period.

 

In respect ofderivatives designated as hedges, we formally document all relationshipsbetween hedging instruments and hedged items, as well as its risk managementobjective and strategy for undertaking various hedge transactions. We alsoformally assesses, both at the inception of the hedge and on an ongoing basis,whether each derivative is highly effective in offsetting changes in fairvalues or cash flows of the hedged item. If it is determined that a derivativeis not highly effective as a hedge, or if a derivative ceases to be a highlyeffective hedge, we will, prospectively, discontinue hedge accounting withrespect to that derivative. The derivatives, which do not qualify for hedgeaccounting, are accordingly, recognised at fair value with gains or losses includedin foreign exchange (gain)/loss in the consolidated statements of income.

 

Hedge ineffectivenesscould result from forecasted transactions not happening in the same amounts orin the same periods as forecasted or changes in the counterparty credit rating.Further, change in the basis of designating forward contracts as hedges offorecasted transactions could alter the proportion of forward contracts whichare ineffective as hedges. Hedge ineffectiveness increases volatility of theconsolidated statements of income since the changes in fair value of anineffective portion of forward contracts is immediately recognized in theconsolidated statements of income.

 

As of December 31,2007, there were no gains or losses on derivative transactions or portions thereofthat were either ineffective as hedges, excluded from the assessment of hedgeeffectiveness, or associated with an underlying exposure that did not occur.

 

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***Commitments and Contingencies***

*** ***

Liabilities for losscontingencies 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.

*** ***

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

** **

**6.A. Directors andsenior management**

** **

Thefollowing table sets forth details regarding our Board of Directors andexecutive officers:

 
| **Name**                                    | ** ** | **Age** | ** ** | **Position**                                                                          |
|---------------------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------|
| Mr. Narendra  K. Patni(1)(4)(7)        |       | 66      |       | Director  (Chairman) and Chief Executive Officer                                      |
| Mr. Louis  T. van den Boog (5)(12)     |       | 54      |       | Executive  Director                                                                   |
| Mr. Gajendra  K. Patni(1)(8)(13)       |       | 67      |       | Director                                                                              |
| Mr. Ashok  K. Patni(1)(9)(13)          |       | 56      |       | Director                                                                              |
| Dr. Michael  A. Cusumano(3)(11)        |       | 53      |       | Director                                                                              |
| Mr. Arun  Duggal(2)                    |       | 61      |       | Director                                                                              |
| Mr. William  O. Grabe(5)(6)(10)        |       | 70      |       | Director                                                                              |
| Mr. Arun  Maira (3)(5)(11)             |       | 64      |       | Director                                                                              |
| Mr. Pradip  Shah(2)                    |       | 55      |       | Director                                                                              |
| Mr. Ramesh  Venkateswaran(2)(3)(5)(11) |       | 55      |       | Director                                                                              |
| Mr. Mrinal  R. Sattawala (14)          |       | 53      |       | Advisor                                                                               |
| Mr. Surjeet  Singh                     |       | 40      |       | Chief  Financial Officer                                                              |
| Mr. Neeraj  Gupta                      |       | 39      |       | Executive  Vice President and Global Head of Sales and Marketing                      |
| Mr. Satish  M. Joshi                   |       | 52      |       | Executive  Vice President and Chief Technology Officer                                |
| Mr. Vijay  P. Khare                    |       | 50      |       | Executive  Vice President and Chief Delivery Officer and Chief Administrative Officer |
| Mr. Rajesh  Padmanabhan                |       | 46      |       | Executive Vice  President and Global Head of Human Resources                          |
| Mr. Brian Stones                       |       | 56      |       | Executive Vice President                                                              |
| Mr. Russel  Boekenkroeger              |       | 61      |       | Executive Vice  President                                                             |

 

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|       | (1)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Mr. Narendra  K. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni are  brothers.                                                                                                                                         |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (2)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Member  of the Audit committee.                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (3)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Member  of the Compensation and Remuneration committee.                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (4)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Permanent  invitee of the Compensation and Remuneration committee.                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (5)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Member  of the Shareholder and Investor Grievances committee.                                                                                                                                                                              |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (6)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Our  Articles of Association provide that the board can appoint an alternate  director pursuant to the provisions of the Indian Companies Act.  Mr. Abhay Havaldar is presently the alternate director to  Mr. William O. Grabe. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (7)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Mr. Narendra  K. Patni is the nominee of the NKP Group.                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (8)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Mr. Gajendra  K. Patni is the nominee of the GKP Group.                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (9)                                                                                                                                                                                                                                                                                                                                                                                                             |       | Mr. Ashok  K. Patni is the nominee of the AKP Group.                                                                                                                                                                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
|       | (10)                                                                                                                                                                                                                                                                                                                                                                                                            |       | Mr. Grabe  is the nominee for General Atlantic.                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                       |
| ** ** | **(11)**                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Member of the Nomination  and Corporate Governance committee.**                                                                                                                                                                          |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                 |
| ** ** | **(12)  Mr.  Louis T. van den Boog was  appointed as an executive director with effect from  April 29, 2008. The appointment is  further subject to the approval of Members at the Annual General Meeting and  also subject to approvals of the statutory authorities including Central  Government under Section 269 of the Indian Companies Act, and other  applicable provisions.** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                 |
| ** ** | **(13) Mr. Gajendra K.  Patni and Mr. Ashok K. Patni ceased to be executive directors with  effect from October 2, 2007 however, they remain as directors on our  Board of Directors.**                                                                                                                                                                                                          |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                 |
| ** ** | **(14) Mr. Mrinal  Sattawala has taken the role of an advisor with effect from June 2008  and will no longer continue as our Chief Operating Officer of the company.**                                                                                                                                                                                                                                |

 

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**Board of Directors andExecutive 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 anentrepreneur, he has played an integral role in the development of the IndianIT industry through his various ventures. Mr. Patni was instrumental ininitiating the offshore outsourcing business model for the software industry.Prior to founding his first company, Data Conversion Inc. (now our U.S.subsidiary Patni Americas, 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. Louis T. van den Boog,***has been a director since March, 2005.  Mr. vanden Boog was appointed as an Executive Director with effect from  April 29, 2008. The appointment issubject to the approval of our shareholders at the annual general meeting andalso subject to approvals of the statutory authorities including the CentralGovernment under Section 269 of the Indian Companies Act,and otherapplicable provisions. His duties and responsibilities will include fullaccountability for strategic, operational and financial results of the Companyand such other duties as may be specified by the Board from time to time.  He will be reporting directly to the Board. Mr. vanden Boog has a Master’s degree in Business Economics and in Public Accountingfrom the Free University in Amsterdam. Mr. van den Boog is an IT industryveteran with approximately 20 years experience in the software industry,as well as extensive experience in mergers and acquisitions, public offeringsand private equity and venture capital fundings. Mr. van den Boog hassupported a series of European and U.S. portfolio companies, in particular as adirector of Global Collect B. V., Human inference B. V. and Purple Labs S. A. .Mr. van den Boog was previously with Oracle Corporation where he helped tobuild the European operations of the company. Mr. van den Boog is a formerspecial advisor to General Atlantic. See “Relationship with General Atlantic”below. Mr. van den Boog will be an Executive Director of the Company untilMarch 31, 2013 unless extended by the Board with the consent of Mr. vanden Boog.

 

***Mr. GajendraK. Patni,*** Director, is one of the founders of ourcompany. Mr. Patni has a Chemical Engineering background and has over35 years of experience in finance, banking, legal and personnel functions.He has contributed significantly in the past to the growth of the computerrental business of our company, which led to the formation of PCS Data Products(PCSDP) in 1981, and PCS Data General (PCSDG) in 1987. These companies weremerged to form what is now PCS Technology Limited in 1994. Mr. Patni is aJoint Managing Director of PCS Technology Limited. Previously he was the ManagingDirector of Industrial Oxygen Company Limited. Mr. Patni as a nominee ofthe GKP Group, is not required to retire by rotation.

 

***Mr. AshokK. Patni,*** Director, is one of the founders of our company. Mr. Patni is aMechanical Engineer from IIT, Mumbai. Mr. Patni has over 22 years ofexperience in computer hardware and systems software. Mr. Patni hascontributed significantly in the past to the growth of the hardware business ofour company which led to the formation of PCSDP in 1981, and PCSDG in 1987. Thesecompanies were merged to form what is now PCS Technology Limited in 1994. He isa Joint Managing Director of PCS Technology Limited. Mr. Patni as anominee of the AKP Group, is not required to retire by rotation.

 

***Dr. MichaelA. Cusumano*** has been a director since April, 2004. Dr. Cusumanohas a B.A. degree from Princeton University and a PhD from Harvard University. Dr. Cusumanocompleted a postdoctoral fellowship in Production and Operations Management atthe Harvard Business School. He has twice been a Fulbright Fellow as well as aJapan Foundation Fellow at the University of Tokyo, and is a recent recipientof the Clarendon Lectures in Management award at Oxford University. Dr. Cusumanois the Sloan Management Review Distinguished Professor at MIT’s Sloan School ofManagement. He is also a director of Eliza Corporation, a specialist in speechrecognition software applications, focused on healthcare. He serves on the 

 

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advisory boards of FixStars Corp. , aJapanese developer of high-performance computing applications, and H-5Technologies, a specialist in digital search technology. He has consulted formore than 50 major companies around the world and advises several other startupsoftware companies. He is the author or co-author of eight books. Dr. Cusumano’sterm of office expires in 2010 but he is eligible for reappointment.

 

***Mr. ArunDuggal*** has been a director since November,2003. Mr. Duggal has a Bachelor’s degree in Mechanical Engineering from IIT,Delhi, and a post graduate diploma in management from IIM, Ahmedabad. Mr. Duggalis an experienced international Banker advising Corporations on FinancialStrategy, M&A and Capital Raising areas. He has been an International Advisor to a number of Corporations, majorFinancial Institutions and Private Equity firms.

 

He is Chairman of Board of Directors ofShriram Transport Finance Company, Shriram Properties Ltd, Shriram City UnionFinance Ltd., and Shriram EPC Limited. He is a Chairman and CEO of TanglewoodFinancial Advisors (P) Limited and Balckstone Investment Company (P) Limited.He is the Vice Chairman of International Asset Reconstruction Company.

 

He is on the Board of Directors ofJubilant Energy Limited, Fidelity Fund Management, Petronet LNG (NomineeDirector of Asian Development Bank), Manipal Acunova Limited, Zuari Industries,Info Edge (India), Dish TV India Limited., Mundra Port & SEZ Limited,The Bellwether Microfinance Fund, and Hertz (India).  In addition, Mr. Duggal is a formerspecial advisor to General Atlantic. See “Relationship with General Atlantic”below. Mr. Duggal’s term of office expires in 2008, but he is eligible forreappointment.

 

***Mr. WilliamO. Grabe*** has been a director since September,2002. Mr. Grabe has a BS degree in Engineering from New York Universityand an MBA from the University of California, Los Angeles. Since 1992, Mr. Grabehas been a managing director at General Atlantic LLC, a worldwide privateequity firm. Prior to that, he was a Vice President of IBM and held variouspositions, the last of which was head, North America Sales and Marketing. He isa Director of various companies including Compuware Corporation, Gartner,Infotech Enterprises Limited and Lenovo Group Company. General Atlantic is oneof our principal shareholders, with a shareholding of 16.48%. See “Item 7.Major Shareholders and Related Party Transactions” and “Relationship withGeneral Atlantic” below. Mr. Grabe’s term of office expires in 2008, buthe is eligible for reappointment.

 

***Mr. Arun Maira*** has been adirector since June, 2006. Mr. Maira received his bachelors andmasters degrees in Physics from St. Stephen’s College, Delhi University. Heworked for 25 years in several senior positions in the Tata Group, India’spremier industrial conglomerate. Prior to joining Boston Consulting Group inIndia, he worked in the USA with Arthur D. Little, the international consultingcompany, for 10 years where he served as Leader of its Global OrganisationPractice and Managing Director of Innovation Associates, its subsidiary. Mr. Maira’sterm of office expires in 2009, but he is eligible for reappointment.

*** ***

***Mr. PradipShah*** has been a director since November,2003. Mr. Shah is a Chartered Accountant, has an MBA from the HarvardGraduate School of Business and a degree from The Institute of Cost andWorks Accountants of India. Mr. Shah was responsible for introducingcredit ratings in India and is a founder of CRISIL Limited. Mr. Shah iscurrently the Chairman of the Board at IndAsia Fund Advisors Private Limited.His directorships in other companies include AMP IndAsia Fund Advisors(Mauritius) Limited, Asset Reconstruction Company (India) Limited, BASF IndiaLimited,  Godrej & Boyce MfgLimited, Hardy Oil & Gas Limited, IndAsia Fund Advisors PrivateLimited, Kansai Nerolac Paints Limited, Mukand Limited, Panasonic Battery IndiaLimited Co. Limited, Pfizer Limited, Shah Foods Limited, Sonata SoftwareLimited, Supra Advisors (BVI) Limited (British Virgin Islands),  Wartsila India Limited, Grindwell NortonLimited and Vakrangee Softwares Limited, Wockhardt Hospitals Limited. Mr. Shah’sterm of office expires in 2009, 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 visiting professorof Marketing at the Indian Institute of 

 

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Management, Bangalore. He is also afounder member of a non profit organization, “Vishwas.” Mr. Venkateswaran’sterm of office expires in 2010, but he is eligible for reappointment.

 

For more information onour Board of Directors, please see “Item 10.B. Additional Information—Board ofDirectors.”

 

***Mr. RussellBoekenkroeger*******is ourExecutive Vice President and has been with Patni for four years. Mr. Boekenkroegerhas a Bachelor’s degree in Government from Franklin & MarshallCollege, a Master’s degree in Urban and Regional Planning and a Master’s degreein Civil Engineering from the University of Pittsburgh. He is responsible forthe Regional Operations of the U.S. and for merger & acquisitionactivities. Additionally, he oversees the Product Engineering Services businessunit besides the Engineering Services center of excellence. He has over 25years of experience in managing large global product development organizations,shared services operations, international business and product marketing whileserving in 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  with effectfrom June 2008 has been appointed as Global Head of Sales and Marketingand has been with Patni since November 2004. Mr. Gupta has a Bachelor’sdegree in Electronics & Communications Engineering from PunjabEngineering College, India and a Master’s degree in Electrical Engineering fromthe University of Alabama, USA. His responsibilities includes overseeing theSales and Marketing operations ,Telecom and Growth Industry business units. Mr. Guptahas had over 15 years of proven leadership experience, including managingproduct management, professional services and engineering teams at variousleading technology companies including Octel Communications, LucentTechnologies, Genesys Telecom, and Alcatel. Previously, he was Chief ExecutiveOfficer of Patni Telecom (formerly Cymbal), a US- based IT services Company,which he led from start-up to successful exit.

 

***Mr. SatishM. Joshi*** is our Executive Vice President andChief Technology Officer and he has been with Patni for 25 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 ofexcellence. Prior to Patni, Mr. Joshi worked with the Tata Institute ofFundamental Research in areas such as concurrent programming languages, storagetechniques for large databases, compiler optimization and data communicationnetworks.

 

***Mr. VijayP. Khare*** is our Executive Vice President andPatni’s Chief Administrative Officer (CAO) and Chief Delivery Officer (CDO) andhe has been employed with Patni for 27 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 andDatabase Administration; besides that for Quality Assurance; Human Resources;CIO; Patni Academy for Competency Enhancement; and the Global Resource Pool. Mr. Kharebegan his career with Patni in 1980. During his initial years, he worked onseveral projects in areas like distribution, manufacturing, and officeautomation in technologies ranging from Data General to Unix and IBM. He waslater involved in the customer relationship management of several accountsincluding Data General, Waterland BV, and RBS. He managed the General Electricrelationship from 1995 to 2000.

 

***Mr. MrinalR. Sattawala*** is our Advisor with effect from June 2008. Prior to this, he wasdesignated as our  Chief OperatingOfficer and Global Sales and Marketing Coordinator and has been with Patni for20 years. As the Chief Operating Officer, he was  directly responsible for the Sales andOperations of the Europe and APAC regions, besides overseeing Global Sales &Marketing, and the Insurance and Financial Services business units until May 2008.. Mr. Sattawala is an electrical engineer from IIT, Mumbai, and he alsoreceived his MBA in 1979 from MacMaster University, Canada. Mr. Sattawalahas over 26 years of experience in 

 

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the IT industry. Prior to Patni, Mr. Sattawalaworked with Computer Maintenance Corporation and the ICI group of companies inIndia.

 

*** Mr. Surjeet******Singh***is our Chief Financial Officer (CFO). Before his appointmentas CFO in 2006, he headed the “Mergers & Acquisitions” function andprior to this, he was the CFO at Cymbal which he co-founded and which has sincebeen acquired by Patni. His responsibilities include managing global financialoperations, corporate finance, treasury, global reporting and internationaltaxation, financial and business planning, and enterprise-wide risk management.Mr. Singh has around two decades of multi-industry global experience insenior management roles at leading finance, business planning and global supplychain functions. He has a successful track record of building finance as a keybusiness enabler, fostering collaboration in large and mid-sized culturallydiverse, global and matrixed organizations. Mr. Singh holds a B.S. in Finance and Accounting from theUniversity of Pune and is a fellow of the Institute of Costs and WorksAccountants, India and AICPA, USA.

 

***Mr. Brian Stones***is our Executive Vice President appointed during 2007. with responsibilitiesfor Patni’s operations in the European region. He has over 28 yearsinternational business experience and has held leadership positions inorganizations in the United States and Europe. Prior to joining Patni, Mr. Stones was responsible for ACSInc’s business operation in Europe, and was formerly a Senior Partner at Ernst &Young, most notably as the Leader of the Global Client Consulting business inEurope. Mr. Stones has a very successful track record in direct andindirect sales, global account management and general business management in ITservices, consulting and outsourcing. Mr. Stones has honours degrees inEconomics and Business Science.

 

***Mr. Rajesh Padmanabhan***is our Executive Vice-President appointed during the year2007 with theresponsibility of spearheading Patni’s human capital initiatives globallyincluding the strategic direction and focus for employee management. He  has over 22 years of diverse industryexperience in systems, finance, business and global human resources in IT,hospitality, financial services and manufacturing. He is well-versed withglobal HR operations and has managed multi-cultural work forces in a fewcountries. Prior to joining Patni, Mr. Padmanabhan was the ExecutiveVice-President with the Oberoi group responsible for group human resources andthe Oberoi Centre for learning and development. He has also worked as GlobalHead of Human Capital for Essel Propack and with the ICICI group in differentroles in systems, corporate banking, leasing and human resources. With hisMaster’s degrees in management specializing in human resources and finance, hebrings a fine mix of business and human resources background, which is criticaland strategic in maximizing human capital output.

 

**6.B. Compensation**

** **

During fiscal 2007, theaggregate annual compensation paid or payable by us and our subsidiaries to ourexecutive directors and executive officers was approximately $ 7,005,659  ; including Mr. N. K. Patni $912,841; Mr. G. K. Patni Rs. 57,387,560. ($ 1,388,490); Mr. A. K.Patni Rs. 56,523,220  ($ 1,367,578 ); Mr. Russel Boekenkroeger $457,417 ;  Mr. Neeraj Gupta—$456,750  ; Mr. S. M. Joshi  Rs.7,703,506 ($186,390 ); Mr. V. P. Khare Rs .8,767,102 ($212,124); Mr BrianStones - $ 467,825 ; Mr. Mrinal Sattawala $ 715,760, Mr Rajesh Padmanabhan- Rs.5,653,162 ($ 136,781)  and Mr. SurjeetSingh- $ 703,703. In addition to receiving annual base compensation, somemembers of our executive management, under Indian laws and regulations, areeligible for grants under the Employee Stock Option Plan (described below).

 

Our independentdirectors on the board are each entitled to $40,000 annually in addition toactual boarding and lodging expenses and sitting fees for attending board andcommittee meetings.

 

Inaddition to abovementioned commission, following are entitled for an annualcommission as under:

 

a)The Chairman of the Audit Committee: $10,000 per annum

b)Members of the Audit Committee: $5,000 per annum

c)The Chairman of Compensation & remuneration Committee: $ 5,000 perannum

 

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d)The Chairman of Shareholders’ and Investors’ Grievance Committee: $5,000 perannum.

 

Mr. van den Boog asan Executive Director with effect from April 29, 2008, subject toshareholders approval, is eligible for an annual consolidated salary in IndianRupees equivalent to $1,250,000 per annum payable  monthly. In addition, he will receive asign-on-bonus of Indian Rupees equivalent to $150,000 within 14 days from thedate of his effective appointment. He will also be entitled to a maximum of96,000 Restricted Stock Units, or RSUs (options issued at par value at Rs 2/-per share), under Patni ESOP 2003 (Revised 2006) at a purchase price equal tothe par value of per share of the company’s common stock. The options shallvest annually over a period of four years in equal installments of 25% everyyear from the grant date. The Compensation and Remuneration Committee may, in itsabsolute discretion, vest in him all the unvested options after expiration of12 months from the grant date and may allow him to exercise both vested andunvested options at any time after expiration of 12 months from the grant date.

 

**Service Agreements**

** **

Mr. Narendra K.Patni is our Chairman and Chief Executive Officer (CEO). He is also thePresident and Chief Executive Officer of Patni Americas Inc. (formerly PatniComputer Systems, Inc.), our U.S. subsidiary, pursuant to an employmentagreement with Patni Computer Systems, Inc. dated December 1, 2000,and 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 and conditionsat 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 had entered into aconsultancy agreement with Patni Americas Inc (formerly Patni Computer Systems, Inc.)dated October 24, 2000, and as amended on August 19, 2003, pursuantto which Mr. Narendra K. Patni has been seconded to us to act as ourChairman and CEO. Our Articles provide that as long as our consultancyagreement with Patni Americas Inc. is in effect, Mr. Narendra K. Patnishall continue to be the CEO of the Company. In addition, our Articles ofAssociation also provide that so long as Mr. Narendra K. Patni is the CEO,he has the right to appoint and remove all of our key senior personnel andsenior management following consultation with General Atlantic. Our Board ofDirectors has approved the extension of the consultancy agreement to December 31,2010.

 

We had entered intoemployment agreements with each of Mr. Gajendra K. Patni and Mr. Ashok K.Patni to be appointed as executive director on terms similar to those of Mr. NarendraK Patni. Each agreement had an initial term which expired on October 23,2005. Our Board of Directors had resolved that, in accordance with our Articlesand subject to the provisions of the Indian Companies Act and approval of ourshareholders, to reappoint each of Mr. Gajendra K. Patni and  Mr. Ashok K. Patni as our executivedirectors 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 a lump sum severance payment equal to five times theannual salary plus house rent allowance.

 

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During the year, ourBoard of Directors designated each of Mr.G. K. Patni and Mr.A K Patni as the “FounderDirector” of the Company to act in a non-executive capacity with effectfrom  October 2, 2007. Consequently,Mr. G. K. Patni & Mr. A. K. Patni ceased to be the executivedirectors of the Company with effect from October 2, 2007. Terminationbenefits payment as provided in the contract of employment, amounting to,$1,124,686 and $1,113,023, were paid to Mr. G. K. Patni and Mr. A. K.Patni, respectively

 

 Mr. Louis T. van den Boog was appointedas an Executive Director with effect from April 29, 2008. The appointment is subject to the approval of ourshareholders at the annual general meeting and also subject to approvals of thestatutory authorities including the Central Government under Section 269of the Indian Companies Act,and other applicable provisions.Mr. van denBoog will be an Executive Director of the Company until March 31, 2013unless extended by the Board with the consent of Mr. van den Boog. SeeItem 6B “Compensation”.

 

**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,Mr. Arun Duggal and Mr. Louis T. van den Boog were theformer special advisors  to General Atlantic. Special advisors are personswith industry and/or geographic expertise thatprovide, on a part-time basis, a range of advisory services to General Atlanticin different parts of the world. These services range from identifying newinvestment opportunities to assisting in the preparation of investmentproposals, serving on the boards of portfolio companies and providing strategicadvice to such portfolio companies. Special advisors are not directors,managing directors, general partners, executive officers or employees ofGeneral Atlantic or any of its affiliates, and do not have any other formalassociation with General Atlantic, except that they enter into consultingagreements with General Atlantic under which they receive a cash retainerand/or are granted the right to co-invest in one or more of the GeneralAtlantic investment vehicles.

 

Mr. Arun Duggal served as a special advisor from October 2003to December 2005. He received an annual cash retainer of $150,000 and hadthe right to invest as a limited partner in various General Atlantic investmentvehicles.

 

Mr. Louis T. van den Boog served as aspecial advisor from 1996 to 2004. Pursuant to past co-investment rights, MrLouis T. van den Boog invested in various General Atlantic investment vehicles,including one that is an investor in General Atlantic Mauritius Limited, as aresult of which he has an approximate 0.2% ownership interest in GeneralAtlantic Mauritius Limited. General Atlantic loaned certain amounts to Mr LouisT. van den Boog for purposes of such investments, of which the amountoutstanding was repaid in 2007.

 

We have no financial or other obligations in respectof the status of Mr. Duggal or Mr. van den Boog, former specialadvisors, and General Atlantic has informed us that no compensation, loans orinvestment opportunities provided to these individuals are related in any wayto our operating or financial performance or the value of our equity shares orADSs.

 

**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 at the rate of 12% each of thecovered employee’s defined portion of salary. We have no further obligationsunder the plan beyond the monthly contribution. We contribute to the ProvidentFund Plan maintained by the Government of India. We contributed  $2,613,644 , $3,895,116 and $ 4,145,932  to theProvident Fund Plan in 2005, 2006 and 2007.

 

**Benefits**

** **

In 2007, we provided approximately $0.8 million forpension, retirement or similar benefits to our directors and executive officers.

 

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**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 March 31, 2008, our directors and executive officers as agroup (directly and indirectly) were granted options under our Employee StockOption Plan to exercise 1,535,600 equity linked options and 25,000 ADR linkedoptions  representing less than 1% of ourshare capital on the following terms:

 
| **Name**                   | ** ** | **Exercise Price Per Share** | ** ** | **Number of Shares under Option** | ** ** | **Expiration Date** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| Dr. M.  Cusumano      |       | Rs.  254/381/458/455                        |       | 20,000/5,000/5,000/5,000                              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. A.  Duggal        |       | Rs.  254/381/458/455                        |       | 20,000/5,000/5,000/5,000                              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. P.  Shah          |       | Rs.  254/381/458/455                        |       | 20,000/5,000/5,000/5,000                              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. L. van den Boog   |       | Rs.  381/ 458/455                           |       | 20,000/5,000/5,000                                    | (2)        | 2011/2012/2013           | (1)        |
| Mr. R.  Venkateswaran |       | Rs.  254/381/458/455                        |       | 20,000/5,000/5,000/5,000                              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. S.  Joshi         |       | Rs.  145/338                                |       | 62,000/100,000                                        | (3)        | 2009/2010                | (3)        |
| Mr. V.  Khare         |       | Rs.  145/338                                |       | 63,300/100,000                                        | (3)        | 2009/2010                | (3)        |
| Mr. M.  Sattawala     |       | Rs.  145/338/376                            |       | 58,300(3)/100,000(3)/350,000                          | (4)        | 2009(3)/2010(3)/2012     | (4)        |
| Mr. R.  Boekenkroeger |       | Rs.  145/458                                |       | 50,000/100,000                                        | (5)        | 2009/2012                | (5)        |
| Mr. N.  Gupta         |       | Rs.  451/493/385                            |       | 24,000/11,000/150,000                                 | (6)        | 2011/2012/2012           | (6)        |
| Mr. S.  Singh         |       | Rs.  451/493/336                            |       | 11,000/11,000/1,50,000                                | (7)        | 2011/2012/2012           | (7)        |
| Mr. Arun  Maira       |       | Rs.  336/455                                |       | 20,000/5,000                                          | (7)        | 2011/2013                | (8)        |
| Mr  Brian Stones           |       | $ 15.09                                |       | 25,000                                                |       | 2013                     | (9)        |

 

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|   | (1)    |   | Options  will vest in four equal instalments, i.e. 25% each year, and expiry date in  respect of the four grants will be from 2010 to 2013, 2011 to 2014, 2012 to  2015 and 2013 to 2016, 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 2011 to 2014, 2012 to 2015 and 2013 to  2016, 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 from 2009 to 2012 and 2010 to 2013,  respectively.                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (4)    |   | Out  of 350,000 options granted in May 2006, 150,000 options will vest in  four equal installments i.e. 25% each year, and expiry date will be 2012 to  2015. The balance 200,000 options granted in May 2006 will vest in four  years depending upon the performance. Out of these, 70,000 options have been  vested as on May 31, 2008. These options will expire at the end of five  years from the date of vesting. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (5)    |   | Options  will vest in four equal instalments, i.e. 25% each year, and expiry date in  respect of two grants will be from 2009 to 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 the first grant will be from 2011 to 2014 and for the balance two  grants expiry date will be from 2012 to 2015.                                                                                                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (7)    |   | Options  will vest in four equal instalments, i.e. 25% each year, and expiry date in  respect of the first grant will be from 2011 to 2014 and for the balance two  grants will be from 2012 to 2015.                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (8)    |   | Options  will vest in four equal instalments, i.e. 25% each year, and expiry date in  respect of two grants will be from 2012 to 2015 and 2013 to 2016,  respectively.                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (9)    |   | Options  will vest in four equal instalments, i.e. 25% each year, and expiry date in  respect of the grants will be from 2013 to 2016.                                                                                                                                                                                                                                                                                                 |

** **

**6.C. Board Practices**

** **

**Board Composition**

** **

As per the provisions ofthe Articles of Association of the Company, our Board shall be comprised of notless than three directors and not more than ten directors. Accordingly, ourcurrent strength of the Board is ten directors. Further our Articles ofAssociation also provides that Mr. Narendra K. Patni, Mr. Gajendra K.Patni and Mr. Ashok K. Patni, being nominees of 

 

74

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the NKP Group, GKP Groupand AKP Group respectively, are permanent directors of the Company.

 

Pursuant to theprovisions of the Articles of Association, two third of our  total Board of Directors of the Company willretire by rotation but they are eligible for reappointment. Out of this two-third,one-third will be retiring at every Annual General Meeting but being eligiblefor re-election can be reappointed at such AGM. Accordingly, Dr. MichaelA. Cusumano’s term of office expires in 2010, but he is eligible forreappointment. Mr. Arun Duggal’s term of office expires in 2008, but he iseligible for reappointment. Mr. William O. Grabe’s term of office expiresin 2008, but he is eligible for reappointment. Mr. Pradip Shah’s term ofoffice expires in 2009, but he is eligible for reappointment. Mr. RameshVenkateswaran’s term of office expires in 2010, but he is eligible forreappointment. Mr. Arun Maira’s term of office expires in 2009, but he iseligible for reappointment. Mr. Louis T. van den Boog will be an ExecutiveDirector with us until March 31, 2013 unless extended by the Board withthe consent of Mr. Louis T. van den Boog. For information regarding ourboard, see Item 6.B.– Compensation -  “ServiceAgreements” above and “Item 10.B. Additional Information—Board of Directors.”

 

**Board Committees**

** **

***Audit Committee***

*** ***

The Audit committeecomprises Mr. Arun Duggal (Chairman), Mr. Pradip Shah and Mr. RameshVenkateswaran. Mr. Louis T. van den Boog ceased to be Audit CommitteeMember with effect from April 29, 2008 and the Board appointed Mr. RameshVenkateswaran as a member of the Audit Committee. The primary objective of theAudit 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 andreviews the processes and safeguards employed by each. In addition our AuditCommittee has the responsibility of oversight and supervision over our systemof internal control over financial reporting, audit process, and process formonitoring the compliance with related laws and regulations. The Audit Committeerecommends to our Board of Directors the appointment, reappointment and ifrequired the replacement or removal of our independent auditors and fixation ofaudit and non-audit fees.

 

***Compensation and Remuneration Committee***

*** ***

 The Compensation and Remuneration Committeecomprises Mr. Ramesh Venkateswaran (Chairman), Dr. Michael Cusumano(Member), Mr. Arun Maira (Member) and Mr. Narendra K. Patni(Permanent invitee). TheCommittee has overall responsibility for approving and evaluating compensationplans, policies and programs of the CEO and senior management of the company.The committee shall make recommendations to the Board on Stock Option plans forall employees. The committee shall also facilitate the recommendation ofcompensation for Board members.

 

***Shareholder and Investor Grievances Committee***

*** ***

The Shareholder andInvestor Grievances Committee comprises Mr. Ramesh Venkateswaran  (Chairman), Mr. Arun Maira, Mr. LouisT. van den Boog and Mr. William O. Grabe (Mr. Abhay Havaldar beingthe Alternate Director to him ). The Shareholder and Investor GrievancesCommittee looks into redressal of shareholder and investor complaints, issue ofduplicate/split/consolidated share certificates, if any.

 

***Nominating & GovernanceCommittee***

*** ***

The Nominating & Governance Committeecomprises  Mr. Ramesh Venkateswaran,Dr. Michael Cusumano and Mr. Arun Maira.  The Committee was constituted, inter alia, todevelop and recommend to the Board a set of corporate governance guidelinesapplicable to the Company and to facilitate the evaluation of the Board and itscommittees..

 

75

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**6.D. Employees**

** **

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

 

**6.E. Share ownership**

** **

***For the total number of equity shares,ADSs and options to purchase equity shares and ADSs for each director andexecutive officer as of May 9, 2008, see “Item 7. Major Shareholders andRelated Party Transactions” and “Item 6.B. Directors, Senior Management andEmployess - Compensation—Options”.***

*** ***

**Employee Stock OptionPlan**

** **

On June 30, 2003,our shareholders approved an employee stock option plan, which was laterratified after our initial public offering in India by our shareholders at theannual general meeting on June 29, 2004. Under the plan, we may issue upto 11,142,085 equity shares of Rs.2 each to our eligible employees anddirectors and those of our subsidiaries. The plan is administered by theCompensation and Remuneration Committee of our Board of Directors. As of May 31,2008, options to purchase **** ****5,721,538 equity shares wereoutstanding.

 

Details regarding various grants to employees and directors are mentionedin the below table.

 
| **Description of Grant**                                   | ** ** | **No. of  options   granted   (including ADR)** | ** ** | **No. of  options   Vested** | ** ** | **Shares allotted   pursuant to   exercise up to   May 31 2008** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------|
| Grant as on September 1, 2003 to  employees           |       | 2,743,400                                            |       | 2,743,400                         |       | 1,671,699                                                             |
| Grant as on July 1, 2004 to  certain of our directors |       | 100,000                                              |       | 75,000                            |       | 10,000                                                                |
| Grant as on October 1, 2004 to  employees             |       | 2,750,632                                            |       | 2,062,974                         |       | 221,999                                                               |
| Grant as on  April 1, 2005 to employees and directors |       | 190,000                                              |       | 142,500                           |       | 500                                                                   |
| Grant as on October 1, 2005 to  employees             |       | 670,710                                              |       | 335,355                           |       | 2,942                                                                 |
| Grant as on January 2, 2006 to  employees             |       | 288,000                                              |       | 144,000                           |       | —                                                                |
| Grant as on  April 1, 2006 to employees and directors |       | 345,000                                              |       | 172,500                           |       | —                                                                |
| Grant as on May 5, 2006 to  employee                  |       | 350,000 (1)                                          |       | 145,000                           |       | —                                                                |
| Grant as on  Ju1y 1, 2006 to employees and directors       |       | 170,000                                              |       | 42,500                            |       | 5,000                                                                 |
| Grant as on October 3, 2006 to  employees             |       | 840,750                                              |       | 210,188                           |       | —                                                                |
| Grant as on April 2, 2007 to  employees               |       | 356,000(2)                                           |       | 89,000                            |       | —                                                                |
| Grant as on April 24, 2007 to  directors              |       | 30,000                                               |       | 7,500                             |       | —                                                                |
| Grant as on November 26, 2007 to  employees           |       | 25,000(3)                                            |       | —                            |       | —                                                                |
| Grant as on January 3, 2008 to  employees             |       | 686,400                                              |       | —                            |       | —                                                                |
| Grant as on January 3, 2008 to  employees             |       | 181,550(3)                                           |       | —                            |       | —                                                                |

 

----

| (1) | Includes 200,000  performance linked options granted to Mr. Mrinal Sattawala.70,000  performance linked options were vested as of December 31, 2007 |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes 129,000 ADR  Linked Options                                                                                                                          |

 

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(3)  ADRLinked Options

 

On April 25, 2006,our Board, subject to the approval of our shareholders, recommended theamendment of our plan to provide an option to the Company to grant ADR-linked stockoptions to enable certain employees outside India to acquire ADSs upon exerciseof the option. The shareholders of the Company at the annual general meetingheld on June 21, 2006 have approved the said amendment to the Patni ESOP 2003 to enable the Company to issue up to2,000,000 ADR linked options to the employees of the Company as well as itssubsidiaries. Accordingly, the amended plan, i.e., “Patni ESOP 2003- Revised2006” has come into force with effect from June 21, 2006.

 

All options have been grantedwith an exercise price equal to the fair market value of the equity shares onthe date of grant of the option. All of the options we have granted vest infour equal annual installments beginning one year from the date of grant. Theoptions have a term of five years from the date of vesting during which theycan be exercised.

 

As the abovementionedoptions were issued on market prices, the recent fall in the market prices ingeneral and the information technology companies shares in particular, the optionsgranted to the employees have become less beneficial to our employees. In orderto motivate the employees of the company (including executive and non-executivedirectors of the company and its subsidiaries but excluding the promoterdirectors of the company and its subsidiaries) to perform better, it isproposed by our Board of Directors to modify the option terms by reducing the number of options granted and reducingthe exercise price to Rs. 2/- per share. This proposal requires the approval ofthe shareholders through a special resolution in the ensuing Annual GeneralMeeting to be held on June 26, 2008.

 

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

** **

**7.A.Major shareholders**

** **

The following tableprovides information relating to the beneficial ownership of our equity shares(directly or in the form of ADSs) as of  May 31,2008 by:

 

·     each of our directors and executiveofficers;

 

·     all of our directors and executive officersas a group; and

 

·     each person or group of affiliated personswho is known by us to own beneficially 5% or more of our equity shares.

 

Beneficial ownership isdetermined in accordance with the rules of the U.S. Securities andExchange Commission. In computing the number of shares beneficially owned by aperson and the percentage ownership of that person, equity shares subject tooptions or warrants held by that person that are currently exercisable, or willbecome exercisable 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.

 

The number andpercentage of shares beneficially owned are based on  139,060,689 equity shares outstanding asof  May 31, 2008

 

 

77

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| **Directors and Executive Officers** | ** ** | **Number of  Equity  Shares** | ** ** | **% of  outstanding  equity shares** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|------------------------------------------------|------------|
| Mr. Narendra  K. Patni(1)                      |       | 20,364,198                         |       | 14.64                                          |       |   |
| Mr. Gajendra  K. Patni(2)                      |       | 19,994,302                         |       | 14. 38                                         |       |   |
| Mr. Ashok  K. Patni(3)                         |       | 20,614,302                         |       | 14. 82                                         |       |   |
| Mr. Louis  T. van den Boog(5)                  |       | 48,002                             |       | 0.04                                           |       |   |
| Mr. Mrinal  R. Sattawala(6)                    |       | 58,350                             |       | 0.04                                           |       |   |
| Mr  Surjeet Singh (8)                               |       | 10,000                             |       | 0.01                                           |       |   |
| Mr. Satish  M. Joshi                           |       | 17,800                             |       | 0.01                                           |       |   |
| **All Directors and Executive Officers as a Group** | ** ** | **61,106,954**                     | ** ** | **43.94**                                      | ** ** | ** ** |
| **5% Shareholders**                                 |       |                               |       |                                           |       |   |
| General  Atlantic Mauritius Limited(4)              |       | 22,913,949                         |       | 16.48                                          |       |   |
| HSBC(7)                                             |       | 10,848,996                         |       | 7.80                                           |       |   |
| **Total**                                           | ** ** | **94,869,,899**                    | ** ** | **68.22**                                      | ** ** | ** ** |

 

----

(1)   Includesequity shares held by Mr. Narendra K. Patni and his relatives and entitiescontrolled by them including iSolutions Inc., a Massachusetts corporationwholly-owned by Mrs. Poonam Patni, Mr. Narendra K. Patni’s wife, and Mr. AnirudhPatni, Mr. Narendra K. Patni’s son.

 

(2)   Includesequity shares held by Mr. Gajendra K. Patni and his family members andentities controlled by them.

 

(3)   Includesequity shares held by Mr. Ashok K. Patni and his family members andentities controlled by them.

 

(4)   Includes20,161,868 ADSs representing 20,161,868 equity shares held by The Bank of NewYork as depositary. General Atlantic Mauritius Limited, or General Atlantic,owns 2,752,081 our equity shares directly (after the ADS offering) and20,161,868 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.

 

(5)   Mr. vanden Boog’s shareholding was acquired through previous co-investment rights inwhich Mr. van den Boog invested in various General Atlantic LLC investmentvehicles, including one that is an investor in General Atlantic MauritiusLimited, as a result of which he has an approximate 0.2% ownership interest inGeneral Atlantic Mauritius Limited.

 

(6)   Includes58,300 underlying shares represented by 29,150 ADRs held by Mr. MrinalSattawala.

 

(7)   Includes8,288,428 equity shares held by HSBC Global Investment Fund A/c HSBC GlobalInvestment Funds Mauritius Limited, 1,497,568 equity shares held by The MasterTrust Bank of Japan, Ltd. A/c HSBC Indian Equity Mother Fund, 1,063,000 equityshares held by HSBC Global Investment Funds A/c HSBC Global Investment FundsBric Freestyle.

 

(8)   Includes 10,000underlying shares represented by 5,000 ADRs held by Mr. Surjeet Singh.

 

Asotherwise stated above and to the best of our knowledge, we are not owned orcontrolled directly or indirectly by any government or by any other corporationor by any other natural or legal persons. We are not aware of any arrangement,the consummation of which may at a subsequent date, result in a change in ourcontrol.

 

Asof May 31, 2008, approximately 99.73% of our equity shares were held inthe names of 43,799 record holders with registered addresses in India. As of May 31,2008, there were 10 U.S. holders of record with registered addresses in theU.S. who accounted for less than 0.02% of our equity shares.

 

78

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**7.B. Related partytransactions**

** **

**Patni Family Companies**

** **

We enter into varioustransactions from time to time in the ordinary course of our business withseveral companies in which certain of our directors, Mr. Narendra K. Patni, Mr. GajendraK. Patni and Mr. Ashok K. Patni, are directors and in which they andmembers of their families have substantial shareholdings. Such transactionswere consummated on terms we believe are equivalent to those that prevail inarm’s-length transactions.  Mr. NarendraK. Patni does not have any management responsibilities in any of thesecompanies. These companies are:

 

·  PCS Technology Limited, or PCSTL, whichmanufactures computer hardware products and also offers hardware maintenanceservices.

 

·  PCS Cullinet Private Limited, which ownsand manages listed and unlisted shares and units and real estate.

 

·  PCS Finance Private Limited, which ownsand manages listed and unlisted shares and units and real estate.

 

·  Ashoka Computer Systems Private Limited,which owns and manages listed and unlisted shares and units and real estate.

 

These transactions havecomprised the following:

 

·  operatinglease payments for residential and commercial property from these companies andthe relatives of our founders, amounting to $266,325, $127,748 and $ 93,725 for the years ended December 31,2005, 2006 and 2007; and

 

·  securitydeposits paid by us for operating leases, with amounts outstanding totaling$251,569, $107,203 and $ 120,478 for the years ended December 31, 2005,2006 and 2007.

 

We do not believe thatany of these transactions, individually or in the aggregate, have a materialeffect on our business as a whole.

 

Pursuantto a resolution of our Board of Directors on August 26, 2005, we havedetermined that we will no longer enter into any transactions for the purchaseand sale of hardware with any of Mr. Narendra K. Patni, Mr. Gajendra K. Patni,Mr. Ashok K. Patni or their respective relatives or anyaffiliate of any of Mr. Narendra K. Patni, Mr. Gajendra K. Patni,Mr. Ashok K. Patni or their respective relatives, who aretogether referred to as the “Patni Family”, or any company or entity owned orcontrolled 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 operating leases and relatedarrangements, including payment of security deposits, are for bona fidebusiness purposes and at prevailing market rates; and management will take allsteps to ensure that such operating leases are for bona fide business purposesand at prevailing market rates.

 

***ConsultancyAgreement***

*** ***

We have entered into aconsultancy agreement with Patni Americas Inc. (formerly known as Patni ComputerSystems, Inc)., our U.S. subsidiary, for, among other things, thesecondment of Mr. Narendra K. Patni. See “Item 6. B. Directors,Senior Management and Employees—Service Agreements.”

 

***Donations***

*** ***

We have given donationsto the Ravindra Patni Charitable Trust, in which our director Mr. GajendraK. Patni is one of the trustees, totaling $56,699 for the year 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 

 

79

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independent trustees, including independent of any member of the PatniFamily, and the investments in, and activities of, any such trust are reviewedon an on-going basis by our Board of Directors.

** **

**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.

 

We have also enteredinto a deposit agreement with The Bank of New York, or the depositary, and theowners and holders of ADRs dated December 7, 2005 for deposit of equityshares of the Company from time to time with the depositary orwith the Custodian as agent of the depositary for the purposes set forth in thisDeposit Agreement, for the creation of ADSs representing the equity shares sodeposited and for the execution and delivery of ADRs evidencing the ADSs.  Each ADS represents two (2) equityshares.

 

**Registration RightsAgreement**

** **

We have entered into aregistration rights agreement with General Atlantic, certain General Electricentities, Mr. Ashok K. Patni, Mr. Gajendra K. Patni and certain oftheir relatives, Mr. Narendra K. Patni and iSolutions Inc. dated July 15,2002. This agreement grants rights with respect to registration of our equityshares under the Securities Act, certain provisions of which are summarizedbelow. Subject to limitations provided in the registration rights agreement andin lock-up agreements that certain of these shareholders have signed, theseshareholders have demand registration rights and may also require us to file anunlimited number of registration statements on Form F-3 (or theequivalent) 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 loansto employees 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 0% to 7.5%. Loans outstanding as of December 31, 2005,2006 and 2007 were $56,662 ,$267,328 and $620,271. There are no outstandingloans to any of our directors or executive officers.

 

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

** **

Not applicable.

 

80

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**ITEM 8. FINANCIAL INFORMATION**

** **

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

** **

The following financialstatements and auditors’ report for fiscal 2007 appear under Item 18 in thisAnnual Report:

 
| · | Report of Independent  Registered Public Accounting Firm                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                      |
| · | Consolidated Balance  sheets as of December 31, 2006 and 2007                                                                        |
|   |                                                                                                                                      |
| · | Consolidated  Statements of Income for the years ended December 31, 2005, 2006 and  2007                                             |
|   |                                                                                                                                      |
| · | Consolidated  Statements of Shareholders’ Equity and Comprehensive Income for the years  ended December 31, 2005, 2006 and 2007 |
|   |                                                                                                                                      |
| · | Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2006 and  2007                                         |
|   |                                                                                                                                      |
| · | Notes to the  Consolidated financial statements                                                                                           |

 

**Amount of Export Sales**

** **

Forthe year ended December 31, 2007, we generated $ 658.8million, or 99.39% of our total revenues of $662.9 million, from theexport of services out of India.

 

**Legal Proceedings**

** **

Certain income taxrelated legal proceedings  are pending against us. We are alsoinvolved in lawsuits and claims which arise in ordinary course of business.Please see the description of various tax proceedings in the U.S. and Indiaunder the section entitled “Taxes” under Item 5. of this Annual Report.Other than as disclosed herein, there are no such matters pending that weexpect to be material in relation to our business.

 

**Dividends**

** **

We do not have a stateddividend policy and determine the amount of dividends to be recommended forapproval by the shareholders on a year-by-year basis by reference to ourearnings, cash flow, financial condition and other factors prevailing at thetime. We have paid dividends in the past. Although we have no current intentionto discontinue dividend payments, we cannot assure you that any futuredividends will be declared or paid or that the amount thereof will not bedecreased.

 

Owners of ADSs will beentitled to receive dividend payable in respect of the equity sharesrepresented by such ADSs. Cash dividends in respect of the equity sharesrepresented by the ADSs will be paid to the depositary in rupees and, willgenerally be converted by the depositary into U.S. dollars and distributed, netof depositary fees and expenses, to the holders of such ADSs.

 

Our Board of Directorsat its meeting held on February 7, 2008 recommended a dividend of150% of par value, i.e. Rs. 3 per share (approximately $0.07) for fiscal 2007,subject to approval of our shareholders in the Annual General Meeting to beheld on June 26, 2008.

 

**ITEM 9. THE OFFER AND LISTING**

 

**9.A. Offer and listingdetails**

** **

Our equity shares have beenlisted and traded on the Bombay Stock Exchange Limited, or BSE, and theNational Stock Exchange of India Limited, or NSE, since February 25, 2004.The prices for equity shares as quoted in the official list of each of theIndian Stock Exchanges are expressed in rupees. Our ADSs evidenced by AmericanDepositary Receipts, or ADRs, are traded in the United States on the New YorkStock Exchange, or NYSE. Our ADSs commenced trading on the NYSE on December 8,2005. Each ADS represents two equity shares. The number of our outstandingequity shares (including the underlying shares for ADSs) as of May 31,2008 was 139,060,689. As of May 31, 2008, there were 20,161,868 

 

81

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privately placed ADSs (representing 20,161,868 equity shares) and  7,284,232 ADSs outstanding (representing  14,568,464 equity shares).

 

The table below setsforth, for the periods indicated, the reported high and low quoted prices ofour 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 $** | ** ** |
| **2007**                                |       |            |       |           |       |            |       |   |   |   |   |   |   |
| First Quarter                           |       | 11.62           |       | 8.41           |       | 11.63           |       | 8.39 |   | 24.89 |   | 19.72 |   |
| Second Quarter                          |       | 13.96           |       | 9.07           |       | 14.59           |       | 8.87 |   | 28.30 |   | 22.33 |   |
| Third Quarter.                          |       | 13.52           |       | 8.72           |       | 13.62           |       | 8.75 |   | 26.47 |   | 18.40 |   |
| Fourth Quarter.                         |       | 12.85           |       | 7.62           |       | 12.83           |       | 7.55 |   | 25.94 |   | 14.59 |   |
| Full Year                               |       | 13.96           |       | 7.62           |       | 14.59           |       | 7.55 |   | 28.30 |   | 14.59 |   |
| **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 |   |
| Third Quarter.                          |       | 9.24            |       | 5.92           |       | 9.22            |       | 5.90 |   | 19.31 |   | 11.81 |   |
| Fourth Quarter.                         |       | 10.24           |       | 8.66           |       | 10.23           |       | 8.69 |   | 22.15 |   | 18.61 |   |
| Full Year                               |       | 11.13           |       | 5.92           |       | 11.12           |       | 5.90 |   | 25.10 |   | 11.81 |   |
| **Month  ended**                        |       |            |       |           |       |            |       |   |   |   |   |   |   |
| December 2007                      |       | 8.82            |       | 7.74           |       | 9.06            |       | 7.69 |   | 18.50 |   | 15.62 |   |
| January 2008                       |       | 8.56            |       | 4.66           |       | 8.54            |       | 4.28 |   | 16.94 |   | 11.55 |   |
| February 2008                      |       | 7.55            |       | 6.05           |       | 7.19            |       | 6.02 |   | 12.80 |   | 12.62 |   |
| March 2008                         |       | 6.05            |       | 4.74           |       | 6.79            |       | 4.77 |   | 12.62 |   | 9.84 |   |
| April 2008                         |       | 7.26            |       | 5.61           |       | 7.25            |       | 5.63 |   | 14.12 |   | 11.0 |   |
| May 2008                           |       | 6.84            |       | 6.24           |       | 6.85            |       | 6.14 |   | 13.77 |   | 12.46 |   |
| June 2008  (through June 23, 2008) |       | 6.58            |       | 5.52           |       | 6.60            |       | 5.10 |   | 13.18 |   | 11.05 |   |

 

**9.B. Plan ofdistribution**

** **

Not applicable.

 

**9.C. Markets**

** **

*Trading Practices andProcedures on the Indian Stock Exchanges*

* *

*Stock Exchange Regulation*

* *

The stock exchanges inIndia are regulated by the Securities and Exchange Board of India, or SEBI, andthe Ministry of Finance, Capital Markets Division, the Government of Indiaunder 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 the rules, bye-laws and regulations of the respectivestock exchanges, regulate the recognition of stock exchanges, the qualificationsfor membership thereof and the manner in which contracts are entered into andenforced between members of such stock exchanges.

 

The main objective ofSEBI, pursuant to the Securities and Exchange Board of India Act, 1992, asamended, or the SEBI Act, is to promote the development of and regulate theIndian securities markets and protect the interests of investors.  The SEBI Act granted SEBI the powers toregulate the business of the Indian securities markets, including stockexchanges and other financial intermediaries, promote and monitorself-regulatory organizations, prohibit fraudulent and unfair trade practicesand insider trading, and regulate substantial acquisitions of shares andtakeovers of companies. SEBI has also issued guidelines concerning minimumdisclosure requirements by public companies, rules and regulationsconcerning investor protection, buybacks of securities, employee stock optionschemes, stockbrokers, merchant bankers, underwriters, mutual funds, foreigninstitutional investors, credit rating agencies and other capital marketparticipants.

 

The SCRA has beenamended to include derivatives of securities and units or any other instrumentsissued by any collective investment scheme to the investors in such schemes, inthe definition of “securities”. Trading in index-linked futures, index-linkedoptions, options on individual securities and futures on individual securitiestakes place on the Indian Stock Exchanges. SEBI has also set up a committee forthe review of Indian securities laws, which 

 

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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 in India.

 

The Companies(Amendment) Act of 2000 amended the Indian Companies Act and incorporatedsignificant provisions relating to securities, options in securities and equityshares with differential rights. Further, the Indian Companies Act, as amended,has empowered SEBI to administer provisions in so far as they relate to theissue and transfer of securities, non payment of dividends in the case oflisted public companies and public companies proposing to get their securitieslisted and to conduct inspection of a company’s records in respect of mattersrelating to the issue and transfer of securities. The power to prosecute thedefaulting companies in compliance with the said matter has also been vestedwith SEBI. The Indian Companies Act has been amended to introduce significantchanges such as allowing book building for public offerings of securities, buyback of securities, compulsory dematerialization of shares in an initial publicoffering of securities for a sum of Rs.100 million or more, issue of sweatequity shares, provisions relating to corporate governance, making accountingstandards issued by the Institute of Chartered Accountants of India mandatoryand relaxing restrictions on inter-corporate investment and loans.

 

*Public Issue of Securities and Listing*

* *

Under the IndianCompanies Act, a public offering of securities in India must be made by meansof a prospectus, which must contain information specified in the IndianCompanies Act and the SEBI (Disclosure and Investor Protection) Guidelines,2000, as amended, or the SEBI Guidelines, and be filed with the Registrar ofCompanies having jurisdiction over the place where a company’s registeredoffice is situated. A company’s directors and promoters are subject to civiland criminal liability for misstatements in a prospectus. The Indian CompaniesAct also sets forth procedures for the acceptance of subscriptions and theallotment of securities among subscribers and establishes maximum commissionrates for the sale of securities.

 

SEBI has issued detailedguidelines concerning disclosures by publiccompanies making a public offering of securities and investor protection.Previously, the Controller of Capital Issues of the Government of Indiaregulated the prices at which companies could issue securities. The SEBI Guidelinesnow permit companies to freely price their issues of securities.

 

The listing ofsecurities on recognized Indian stock exchanges is regulated by the IndianCompanies Act, the SCRA, the SCRR, the SEBI Act and the listing agreements ofthe respective stock exchanges. Under the standard terms of stock exchangelisting agreements, the governing body of each stock exchange is empowered tosuspend trading of or dealing in a listed security for breach of an issuer’sobligations under such agreement, subject to such issuer receiving prior noticeof the intent of the exchange. A listed company can be delisted under theprovisions of SEBI (Delisting of Securities) Guidelines, 2003, which governvoluntary and compulsory delistings of shares of Indian companies from thestock exchanges. SEBI has the power to amend listing agreements and bye-laws ofstock exchanges in India.

 

Pursuant to recentamendments by SEBI to the listing agreements, with effect from May 1,2006, listed Indian companies are required to ensure that the minimum level ofpublic shareholding, on a continuous basis, is 25% of the total issued sharesof a particular class, for every such class that is listed. However, companieswhich (i) have offered less than 25% (but at least 10%) of the total numberof issued shares of a particular class to the public 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. “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 listingagreements require an acquirer of a listed company’s shares to comply with thedisclosure and tender offer requirements under the SEBI (SubstantialAcquisition of Shares and Takeovers) Regulations, 1997, as amended, or theTakeover Code. For a brief discussion on the disclosure and tender offer requirementsunder the Takeover Code, see  “Item 10. Additional Information-TakeoverCode” below.

 

In addition, a listedcompany is subject to continuing disclosure requirements pursuant to the termsof its listing agreement with the relevant stock exchange, including therequirement to 

 

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publish unaudited financial statements on a quarterly basis and toinform stock 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, on becoming such a holder, withinfour working days of (a) the receipt of intimation of allotment of equityshares or (b) the acquisition or sale of equity shares or voting rights.Additionally, any change in such shareholding or voting rights in excess of 2%(even if such change results in the shareholding or voting rights falling below5%) is required to be disclosed to the company within four working days of (a) thereceipt of intimation of allotment of equity shares or (b) the acquisitionor sale of equity shares or voting rights, as the case may be. The company isalso required to disclose such information received from its shareholderswithin five days of the receipt of such information to the stock exchanges onwhich the company’s equity shares are listed.

 

*Indian Stock Exchanges*

 

The major stockexchanges in India are the BSE and the NSE, which together account for amajority of trading volumes of securities in India. The BSE and NSE togetherdominate the stock exchanges in India in terms of the number of listedcompanies, market capitalization and trading volumes of securities.

 

BeginningApril 1, 2003, the stock exchanges in India operate on a trading day plustwo, or T+2, rolling settlement system. At the end of the T+2 period,obligations are settled with buyers of securities paying for and receivingsecurities, while sellers transfer and receive payment for securities. Forexample, trades executed on a Monday would typically be settled on a Wednesday.SEBI proposes to move to a T+1 settlement system. In order to contain the riskarising out of the transactions entered into by the members of various stockexchanges either on their own account or on behalf of their clients, the stockexchanges have designed risk management procedures, which include compulsoryprescribed margins on the individual broker members, based on their outstandingexposure in the market, as well as stock-specific margins from the members.

 

To restrict abnormalprice volatility, SEBI has instructed stock exchanges to apply the followingprice bands calculated at the previous day’s closing price (there are norestrictions on price movements of index stocks):

 

*Market Wide Circuit Breakers:*Market widecircuit breakers are applied to the market for movement by 10%, 15% and 20% fortwo prescribed market indices, whichever is breached earlier: the BSE Sensexfor the BSE, or the BSE Sensex, and the Nifty for the NSE, or the NSE Nifty. Ifany of these circuit breaker thresholds are reached, trading in all equity andequity derivatives markets nationwide is halted.

 

*Price Bands:***Price bands are circuit filters of up to 20% movementseither up or down, and are applied to most securities traded in the markets,excluding securities included in the BSE Sensex and the NSE Nifty andderivatives products.

 

*The National Stock Exchange of India Limited*

* *

The NSE was establishedby financial institutions and banks to provide nationwide on-line satellitelinked screen-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. The NSE commenced operations in the wholesale debt marketand capital markets in 1994 and in derivatives in 2000. As of  May 30, 2008, there were1,398 listedcompanies trading on the capital markets (equities) segment of the NSE. Asof  May 30, 2008, the marketcapitalization of the NSE was approximately Rs. 50,989 billion.

 

*The Bombay Stock Exchange Limited*

 

The BSE, established in1875, is the oldest stock exchange in India and has evolved over the years intoits present status as the premier stock exchange of India. The BSE switchedover 

 

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to an on-line trading network in May 1995 and has expanded thisnetwork to over 411 cities in India. Derivatives trading commenced on the BSEin 2000. Retail trading in government securities commenced in June 2003.As of  April 30, 2008, the BSE had982 members, comprising 176 individual members, 783Indian companies and23 Foreign Institutional Investors, or FIIs. Pursuant to the BSE(Corporatization and Demutualization) Scheme 2005 of SEBI, on August 19,2005 the BSE was incorporated as a company under the Indian Companies Act. Onlya member of the BSE has the right to trade in the stocks listed on the BSE. Asof April 30, 2008 there were 4,895 listed companies trading on the BSEwith an estimated total market capitalization of Rs. 57,943 billion.

 

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

 

*Derivatives (Future and Options)*

 

Trading in derivativesis governed 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 SCRA. Trading in derivatives in India takes place either on separate andindependent derivatives exchanges or a separate segment of an existing stockexchange. The derivative exchange or a derivative segment of a stock exchangefunctions as a self regulatory organization under the supervision of SEBI.Derivatives products have been introduced in a phased manner in India, startingwith futures contracts in June 2000 and index options, stock options andstock futures in June 2000, July 2001 and November 2001,respectively.

 

*Depositories*

 

The Depositories Act,1996, as amended, provides the legal framework for the establishment ofdepositories to record ownership details and effectuate transfers in book-entryform. SEBI framed the Securities and Exchange Board of India (Depositories andParticipants) Regulations, 1996, which, among other things, provide for theformulation of such depositories and the regulation of participants, as well asthe *inter se* rights and obligations of thedepositories, participants, beneficial owners and issuers.

 

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, rights offerings or offers forsale shall only be in electronic form.

 

*Securities Transaction Tax*

 

The rates applicable ontaxable securities transactions are specified 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 on 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    |       | 0.125    | %          | 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 on 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                |       | 0.125    | %          | 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 on 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 |       | 0.025    | %          | Seller              |       |

 

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| **Taxable Securities Transaction**                                                            | ** ** | **Rate** | ** ** | **Payable by** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| Sale of  derivatives where the transaction of such sale is entered into on a  recognized stock exchange |       | 0.017    | %          | Seller              |       |
| Sale of a unit  of an equity oriented fund to the Mutual Fund                                           |       | 0.25     | %          | Seller              |       |

 

The responsibility forcollection of the securities transaction tax lies with the stock exchange wherethe purchase of securities takes place. The rates were applicable with effectfrom June 1, 2006.

 

From April 1, 2008,Securities Transaction Tax has been prescribed for following transactions:

 
| **Taxable Securities Transaction**                                 | ** ** | **Rate** | ** ** | **Payable by** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| Sale of an  option in Securities (payable on Option premium)                 |       | 0.017    | %          | Seller              |       |
| Sale of option  in securities ,where option is exercised on settlement price |       | 0.125    | %          | Purchaser           |       |
| Sale of futures  in securities                                               |       | 0.017    | %          | Seller              |       |

 

**9.D. SellingShareholders**

 

Not applicable.

 

**9.E. Dilution**

 

Not applicable.

 

**9.F. Expenses of theIssue**

 

Not applicable.

 

**ITEM 10. ADDITIONALINFORMATION**

 

**Governance Standards forListed Companies**

 

Many of the corporategovernance standards set out in the NYSE Listed Company Manual do not apply tous as a “foreign private issuer.” Under the NYSE corporate governancestandards, we need only (i) establish an independent audit committee thatsatisfies the requirements of Rule 303A.06 of the NYSE Listed CompanyManual described in the following table; (ii) provide prompt certificationby our chief executive officer of any material non-compliance with anycorporate governance rules of the NYSE; (iii) provide annual writtenaffirmations to the NYSE with respect to our corporate governance practices(and provide interim written affirmations ****each time a change occurs to the board or any of ourcommittees)****; and (iv) provide a briefdescription of significant differences between our corporate governancepractices and those followed by U.S. companies listed on the NYSE as requiredby Rule 303A.11 of the NYSE Listed Company Manual.

 

Indian corporategovernance requirements for listed companies are contained in Clause 49 of thelisting agreement that companies enter into with Indian stock exchanges. Thefollowing table sets out a brief, general summary of the significant differencesbetween the corporate governance standards applicable to us under our listingagreements with the Indian Stock Exchanges and the requirements of standardsrelating to U.S. domestic companies listed on the NYSE.

 

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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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| **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.If the  non-executive Chairman is a promoter or is related to the promoters or  persons occupying management positions at the Board or at one level below the  Board, at least one half of the Board should consist 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 relationships or  transactions with the company, its promoters, its directors, its senior  management or its holding company, its subsidiaries and associates, which may  affect the independence of the director; (ii) is not related to the  promoters or persons occupying management positions 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 an executive during  the preceding three financial years, of the statutory audit firm or the  internal audit firm that is associated with the company, or of the legal  firm(s) or consulting firm(s) that have a material association with  the company; (v) is not a material supplier, service provider, customer,  lessee, or lessor of the company, which may affect the independence of the  director and (vi) is not a substantial shareholder owning two per cent  or more of the block of voting shares of the company. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| The non-management  directors must meet at regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | There is no comparable  requirement under Indian law. The Board of Directors (as a whole) is required  to meet at least four times a year, with a maximum gap of four months between  any two meetings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **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, re-appointment and if required, the replacement or  removal of the external auditor, fix the audit fees and also approve payment  to the external auditors for any other services rendered by the external  auditors. 

 

3.     To review  with the management the annual financial statements before submission to the  board for approval, focusing primarily on matters required to be included in  the Director’s Responsibility Statement to be included in the board’s report,  any changes in accounting policies and practices and reasons therefor, 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 findings,  compliance with listing and other legal requirements concerning financial  statements and disclosure of 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, the performance of external and internal auditors, and  the adequacy of internal control systems. 

 

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

 

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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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                                                                                        | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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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 carry  out any other function as is mentioned in the terms of reference of the Audit  Committee. 

 

In  addition the audit committee is required to mandatorily review the following  information: 

 

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

 

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. |
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| 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 shall be set up, which has a  minimum of three members. Two-thirds of its members shall be independent  directors and the chairman of the audit committee shall be an independent  director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| ·      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 shall be financially literate  and at least one member shall have accounting or related financial management  expertise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| ·      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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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                           |
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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 its terms of reference, seek information from any  employee, obtain outside legal or other professional advice and secure  attendance of outsiders with relevant expertise, if it considers this  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 shall meet at least four times in a year  and not more than four months shall elapse 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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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **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 the board of a company may set up a remuneration committee, which  shall comprise of at least three directors, all of whom shall 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **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.                                                                                                                                                                                                                              |

 

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| **Standard for NYSE-Listed  Companies**                                                                                                                                                                         | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **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 shall affirm compliance with the code on an annual basis  and the company’s annual report shall contain a declaration to this effect  signed by its chief executive officer. |

 

**10.A. Share Capital**

** **

Not applicable.

 

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

** **

**General**

** **

The followingdescription of our equity shares and the material provisions of our Articles ofAssociation, or Articles, is only a summary and is qualified in its entirety byour Articles and Memorandum and by the provisions of the Indian Companies Actwhich governs our affairs, and other applicable provisions of Indian law.

 

Our authorized sharecapital consists of 250,000,000 equity shares with a par value of Rs. 2 each.As of May 31, 2008, 139,060,689 equity shares were issued and outstandingand fully paid. On August 30, 2003 we effected a one for two stock splitin the form of a stock dividend. The equity shares are our only class of sharecapital. We currently have no convertible debentures or warrants outstanding.Substantially all of our equity shares are in non-physical form.

 

Weuse the following terms in our Articles:

 

·  NKP Group means Mr. Narendra K.Patni, certain of his family members, iSolutions Inc. and certain of theirnamed entities and their respective permitted transferees and the depositorybank;

 

·  GKP Group means Mr. Gajendra K.Patni, certain of his family members and their respective permitted transfereesand the depository bank;

 

·  AKP Group means Mr. Ashok K. Patni,certain of his family members and their respective permitted transferees andthe depository bank;

 

·  General Atlantic means General AtlanticMauritius Limited, its successors and permitted assigns and General AtlanticGroup means General Atlantic and its permitted transferees and the depositarybank; and

 

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

 

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

** **

Our company registration number is 11-020127 (CINU72200MH1978PLC020127). Under our Memorandum of Association, our main objectsinclude, but are not limited to the following:

 

1.      Tomanufacture, purchase, sell or otherwise 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 electromechanicalproduct, machine, apparatus, 

 

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appliance,custom products, merchandise, systems, software procedures, peripheralproducts, computers, tabulators, data processing machines and systems andcomponents thereof, electronic calculators, electric and electromechanicalaccounting systems, terminal products and systems, machines for registeringdata preparation, recording, perforating, tabulating, sorting, printing,typewriting products which possess an internal intelligence for recognizing andco-relating any type of data or information to be processed recognition andmemory systems, optical scanning machine transmission lines, transmissionequipment, terminals, copying, reproducing and distributing machines, checksigning, protecting and disbursing equipment machines for facsimilereproduction, facsimile transmission and word processions facilities andaccessories and devices of all kinds, and for all purposes and any products andcomponent parts thereof or materials or articles used in connection therewith,and any-all other machinery, appliance, apparatus, devices, materials,substances, business firms and supplies, articles or things of a charactersimilar or analogous to the foregoing, or any of them or connected therewith.

 

2.      Toestablish, maintain and conduct training schools, courses and programmes inconnection with the use, purchase, sale, import, export, license, distribution,design, manufacture or rental of the aforesaid types of machines, apparatus,appliances, systems and merchandise and of the articles required in the usethereof or used in connection therewith.

 

3.      To carryon the business of developing, improving, designing, marketing, selling andlicensing software and program-products of any and all description.

 

4.      To carryon the business of electricians, electrical, electronic engineers andmanufacturers of and dealers in electrical, mechanical, chemical, optical andelectronic machines, appliances and apparatus of every description.

 

5.      To carryon the business of consultants in computers, computer-oriented systems allbranches of computer science, civil, electrical, electronic, mechanical,chemical, optical, metallurgical and all other branches of engineering.

 

6.      To carryon the business of consultancy services related to the preparation and maintenanceof accounting, statistical, scientific or mathematical, information andreports, data conversion, data processing, programming, collecting, storing,processing and transmitting information and data of every kind and description,systems analysis and machine services for solving or aiding commercial,industrial, scientific and research problems and for all other relatedbusiness.

 

7.      To carryon the business of advisers and consultants and collaborators on all mattersand problems relating to the administration, organization, finance management,personnel, commencement or expansion of industry and business (includingconstruction of plants and buildings production, purchases, sales marketing,advertisement, publicity, personnel export and import) and of institutions,concerns, bodies, associations (incorporated and unincorporated), departmentsand services of the government, public or local authorities, trusts, scientificresearch and development centres.

 

8.      To supplyand provide, maintain and operate, design any engineering consultancy servicesapplicable over the whole range of industry, trade, commerce and agriculture.

 

**Board of Directors**

** **

*Election*

* *

The Articles of Association provide that ourBoard of Directors shall be comprised of not less than three directors and notmore than ten directors. Eight directors on the Board shall be appointed asfollows:

 

·  threepermanent directors nominated by each of the AKP Group, the GKP Group and theNKP Group so long as the relevant Group holds 5% or more of the equity shares;

 

·  onerotating director nominated by General Atlantic, so long as General Atlanticholds 5% or more of the equity shares; and

 

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·  fournon-permanent independent directors who will be appointed in accordance withour Articles for a term of three years and eligible for re-election by theshareholders at the annual general meeting.

 

Each director nominated by a Significant Shareholder shall hold officeand may only be removed by that Significant Shareholder. Except in the event ofthe removal of a director for a breach of duty, fraud, bankruptcy or unlesscontrary to law, all the Significant Shareholders have agreed in the Articlesthat the 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 CompaniesAct, the quorum for a meeting of the Board of Directors shall be the presence ofat least four directors which must include at least one nominee director (orhis or her alternate) of each of the AKP Group, the GKP Group, the NKP Group,and General Atlantic (unless the absent nominee director consents in writing toa quorum requirement being satisfied despite his or her absence). Provided thatwhere at any time the number of interested directors exceeds or is equal totwo-thirds of the total strength, the number of remaining directors, that is tosay, the number of directors who are not interested, present at the meetingbeing not less than two, shall be the quorum during such time.

 

If a quorum is not present on the date the board meeting is convened,it shall automatically stand adjourned to a date 7 days after the originalboard meeting. The adjourned board meeting may be held on such other date andsuch other place as may be unanimously agreed by a nominee director of each ofthe AKP Group, the GKP Group, the NKP Group and General Atlantic. In the eventof a quorum once again not being available at such an adjourned board meeting,the directors present shall constitute the quorum.

 

The Articles require that at least 15 clear days notice be provided forany board meeting unless a shorter notice period is agreed by a majority of thedirectors.

 

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*

* *

Pursuant to Section 300 of the Indian Companies Act, interesteddirectors are not allowed to take part in the discussion of, or vote on, anycontract or arrangement entered into or to be entered into by or on behalf ofthe Company if the director is in any way, directly or indirectly, concernedwith or interested in the contract or arrangement. In addition, a director isrequired to disclose the nature of his concern or interest under Section 299of 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 director is a member ordirector, is entering into 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 are eligiblefor re-election. One-third of the directors who are subject to retirement byrotation must retire at each annual general meeting but can be re -appointed atsuch annual general meeting. Mr. Narendra K. Patni, Mr. Gajendra K.Patni and Mr. Ashok K. Patni as the respective nominees of the NKP Group,GKP Group and AKP Group are permanent directors according to our Articles inthat capacity they are not required to retire by rotation like our otherdirectors.

 

**Dividends**

** **

Under the IndianCompanies Act, the Board of Directors first recommends the payment of adividend which is then declared by shareholders in a general meeting. However,the Board of Directors is not obliged to recommend a dividend. Under ourArticles and the Indian Companies Act, our shareholders may, at the annualgeneral meeting, declare a dividend in an amount less than that recommended bythe Board of Directors, but they cannot increase the amount of the dividend.

 

In India, dividendsgenerally are declared as a percentage of the par value of the company’s equityshares. The dividend recommended by the directors, if any, and subject to thelimitations described above, is required to be distributed and paid toshareholders in proportion to the paid up value of their shares as on therecord date that such dividend is payable within 30 days of the approvalby the shareholders at the annual general meeting. Pursuant to the Articles,the directors have discretion to declare and pay interim dividends withoutshareholder approval. Under the Indian Companies Act, dividends can only bepaid in cash to the registered shareholder at a record date fixed on or priorto the annual general meeting or to his order or his banker’s order. Noshareholder is entitled to a dividend while any lien in respect of unpaid callson any of such shareholder’s shares is outstanding.

 

The Indian Companies Actprovides that any dividends that remain unpaid or unclaimed after the 30-dayperiod referred to above must be transferred to a special bank account. Wetransfer any dividends that remain unclaimed for seven years from the date ofsuch transfer to an Investor Education and Protection Fund created by theIndian Government. The proceeds of such funds are utilized to promote investor’sawareness and protection of investors’ interests. Following such transfer, suchunclaimed dividends cannot be claimed. Neither we nor such fund shall be liablein respect of amounts transferred to such fund.

 

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Underthe Indian Companies Act, dividends may be paid out of profits of a company inthe year in which the dividend is declared or out of the undistributed profitsof the previous fiscal years, in either case after providing for depreciation.Before declaring a dividend on its shares, a company is required under theIndian Companies Act to transfer to its reserves, a certain percentage of itsprofits for that year, ranging from 2.5% to 10% depending upon the dividendpercentage to be declared in such year. The Companies (Declaration of Dividendout of Reserves) Rules, 1975 provide that, in the event of inadequacy orabsence of profits in any year, a dividend may be declared for such year out ofthe company’s accumulated profits, subject to the following conditions:

 

·  the rate of dividend to be declared maynot exceed 10% of the company’s paid up capital or the average of the rate atwhich dividends were declared by the company in the prior five years, whicheveris less;

 

·  the total amount to be drawn from theaccumulated profits earned in the previous years and transferred to thereserves may not exceed an amount equivalent to one-tenth of the sum of itspaid up share capital and free reserves, and the amount so drawn is to be usedfirst to set off the losses incurred in the fiscal year before any dividends inrespect of preference or equity shares are declared; and

 

·  the balance of the reserves afterwithdrawal shall not fall below 15% of its paid up capital.

 

**Bonus Shares**

** **

In addition topermitting dividends to be paid out of current or retained earnings asdescribed above, the Indian Companies Act and our Articles permit us todistribute an amount transferred from the general reserve or surplus in ourprofit and loss account to shareholders in the form of bonus shares, which aresimilar to a stock dividend. The Indian Companies Act also permits the issue ofbonus shares from a securities premium account. Bonus shares are distributed toshareholders in the proportion recommended by the Board of Directors.Shareholders of record on a fixed record date are entitled to receive suchbonus shares. Any issue of bonus shares is subject to guidelines issued by theSEBI.

 

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 the convertible part of such convertible securities. The bonusissue shall be made out of free reserves built out of the genuine profits orshare premium collected in cash only. The bonus issue cannot be made unless partlypaid-up shares, if any, are made fully paid-up. Further, for the issue of suchbonus shares a company should not have defaulted in the payment of interest orprincipal in respect of fixed deposits and interest on existing debentures orprincipal on redemption of such debentures. Further, a company should havesufficient reason to believe that it has no outstanding dues in respect of thepayment of statutory dues of the employees such as contribution to a providentfund, gratuity and bonus. The issue of bonus shares must be implemented withinsix months from the date of approval 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 Rights andIssue 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 all the shares offered or any of them infavor of any person; and (b) the number of shares offered and the periodof the offer, which may not be less than 15 days from the date of offer.If the offer is not accepted within this period, it is deemed to have 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.

 

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**Annual General Meetingof Shareholders**

** **

We must convene anannual general meeting of shareholders within 15 months of the previousannual general meeting or six months after the end of each fiscal year,whichever is earlier, and may convene an extraordinary general meeting ofshareholders when necessary or at the request of a shareholder or shareholdersholding at least 10% of our paid up capital carrying voting rights. Writtennotice setting out the agenda of meeting must be given at least 21 cleardays prior to the date of general meeting to the shareholders of record. A generalmeeting may be called after providing a shorter notice if consent is receivedfrom all shareholders entitled to vote, in the case of an annual generalmeeting, and from shareholders holding not less than 95% of the paid-up capitalof the company in case of any other general meeting. Shareholders who areregistered as such on the date of the general meeting are entitled to attendand vote at the meeting.

 

The annual generalmeeting of shareholders must be held at our registered office or at anotherplace within the city in which our registered office is situated. Meetingsother than annual general meetings may be held at any other place if sodetermined by the Board of Directors.

 

**Quorum**

** **

Our Articles providethat a quorum of a general meeting is at least five shareholders present inperson or 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 hands unless a poll is demanded by a shareholder orshareholders present in person or by proxy holding at least 10% of the totalshares entitled to vote on the resolution or by those holding shares with anaggregate paid up capital of at least Rs. 50,000. Upon a show of hands, everyshareholder entitled to vote and present in person has one vote and, on a poll,every shareholder entitled to vote and present in person or by proxy has votingrights in proportion to the paid up capital held by such shareholders.

 

Any shareholder mayappoint a proxy. The instrument appointing a proxy must be delivered to us atleast 48 hours prior to the meeting. A proxy may not vote except on apoll. A corporate shareholder may appoint an authorized representative who canvote on behalf of the shareholder, both upon a show of hands and upon a poll.

 

Ordinary resolutions maybe passed by a simple majority of those present and voting at any generalmeeting for which the required period of notice has been given. However,specified resolutions such as amendments to the Articles and the Memorandum,commencement of a new line of business, the waiver of the pre-emptive rightsfor the issue of any new shares and a reduction of share capital, require thatvotes cast in favor of the resolution, whether by show of hands or poll, arenot less than three times the number of votes, if any, cast against theresolution by members so entitled and voting.

 

Further,the Indian Companies Act requires certain resolutions such as those listedbelow to be voted on only by a postal ballot:

 

·  amendments of the memorandum ofassociation to alter the objects of the company and to change the registeredoffice of the company under Section 146 of the Indian Companies Act;

 

·  alteration of the articles of associationin relation to deletion or insertion of provisions defining private company;

 

·  the issue of shares with differentialrights with respect to voting, dividend or otherwise;

 

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·  the sale of the whole or substantiallythe whole of an undertaking of the company;

 

·  providing loans, extending guarantees orproviding a security in excess of the limits prescribed under Section 372Aof the Indian Companies Act;

 

·  varying the rights of the holders of anyclass of shares or debentures or other securities;

 

·  power to compromise or make arrangementwith creditors and members;

 

·  the election of a director by minorityshareholders; and

 

·  the buy-back of shares.

 

While the Indian CompaniesAct permits a company to issue shares with differential rights as to dividend,voting or otherwise, it may do so subject to certain conditions specified underthe Companies (Issue of Share Capital with Differential Voting Rights) Rules,2001, some of which are:

 

·  the company should have distributableprofits (in terms of Section 205 of the Indian Companies Act) for a periodof three financial years immediately preceding the year in which it was decidedto issue such shares;

 

·  the shares with differential voting rightsshall not be in excess of 25% of the total issued share capital; and

 

·  the voting rights of existing sharescannot be altered.

 

Our Articles permit theissue of shares with differential voting rights.

 

Our Articles requirethat certain shareholders ensure that they do not vote for any resolution tovary or modify 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**

** **

We are required tomaintain a register of shareholders at our registered office. The register andindex of beneficial owners maintained by a depository under the DepositoriesAct, 1996 is deemed to be an index of members and register and index ofdebenture holders. We recognize as shareholders only those persons who appearon our register of shareholders and do not recognize any person holding anyshare or part of it upon any trust, express, implied or constructive, except aspermitted by law. In the case of shares held in physical form, we registertransfer of shares on the register of shareholders upon receiving the sharetransfer form duly complete in all respects accompanied by a share certificateor if there is no certificate, the letter of allotment in respect of shares tobe transferred together with duly stamped transfer forms. In respect ofelectronic transfers, the depositary transfers shares by entering the name ofthe purchaser in its books as the beneficial owner of the shares. We then enterthe name of the depositary in our records as the registered owner of theshares. The beneficial owner is entitled to all the rights and benefits as wellas the liabilities with respect to the shares 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.

 

**Transfer of Shares**

** **

Shares held throughdepositories are transferred in the form of book entries or in electronic formin accordance with the Securities and Exchange Board of India (Depositories andParticipants) Regulations, 1996. These regulations provide the regime for the functioningof the 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.

 

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The shares of an Indianpublic company are freely transferable, subject to the provisions of the IndianCompanies Act pursuant to which if a transfer of shares contravenes the SEBIAct, or regulations made thereunder, or the Sick Industrial Companies (SpecialProvisions) Act, 1985 or any other similar law, the Company Law Board (which isexpected to be replaced by the National Company Law Tribunal) may, on anapplication made by the company, a depositary, a participant, an investor orSEBI, direct a rectification of the register of records. If a company withoutsufficient cause refuses 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 listingagreements with the Indian Stock Exchanges, in the event a company has noteffected the transfer of shares within one month or where the company hasfailed to communicate to the transferee any valid objection to the transferwithin the stipulated time period of one month, the company is required tocompensate the aggrieved party for the opportunity losses caused during theperiod 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 of OwnershipInterest**

** **

Section 187C of theIndian Companies Act requires beneficial owners of shares of Indian companieswho are not holders of record to declare to the company details of the holderof record and the holder of record to declare details of the beneficial owner.Any charge, promissory note or other collateral agreement created, executed orentered into with respect to any equity share by its registered owner or anyhypothecation by the registered owner of any equity share shall not beenforceable by the beneficial owner or any person claiming through thebeneficial owner if such declaration is not made. Failure by a person to complywith Section 187C will not affect the company’s obligation to register atransfer of shares or to pay any dividends to the registered holder of anyshares in respect of which the declaration has not been made. While it isunclear under Indian law whether Section 187C applies to holders of ADSs,investors who exchange ADSs for underlying equity shares will be subject to therequirements of Section 187C. Additionally, holders of ADSs may berequired to comply with the notification and disclosure obligations pursuant tothe provisions of the deposit agreement entered into by such holders, thecompany and the depositary.

 

Any investor who failsto comply with the requirement to make a declaration under Section 187Cmay be liable for a fine up to Rs. 1,000 for each day such failure continues.Additionally, if we fail to comply with the provisions of Section 187C,then we may be liable for a fine of up to Rs. 100 for each day the defaultcontinues.

 

**Audit and Annual Report**

** **

A public limited company’saudited financial statements, the directors’ report and the auditors’ reportmust be approved at the annual general meeting. These documents also includecertain other financial information, a report on corporate governance and asection on management’s discussion and analysis. These documents need to bemade available for inspection at the company’s registered office during normalworking hours for 21 days prior to the annual general meeting.

 

Under the IndianCompanies Act, a company must file the above documents with the Registrar ofCompanies within 30 days after the date of the annual general meeting.Under the listing agreement, copies of the statutory and director’s annualreports, balance sheets and profit and loss accounts and other special reportsare required to be sent to the stock exchanges as soon as they are issued. Acompany is also required to file with the stock exchanges a compliance reporton a quarterly basis, within 15 days from the end of the quarterincorporating, *inter alia*, the shareholdingpattern. The listing agreement also requires companies to furnish to the stockexchange unaudited quarterly and semi-annual financial results of operationsand publish such information in at least one English language newspaper.

 

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**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 repaid theamount of paid up capital or credited as paid up on those equity shares. Allsurplus assets after payments to the employees, statutory creditors, securedand unsecured creditors and holders of any preference shares shall be paid toholders of equity shares in proportion to the amount paid up on such shares atthe commencement of the winding-up.

 

**Buy-back**

** **

Pursuant to Section 77Aof the Indian Companies Act and the SEBI (Buyback of Securities) Regulations,1998, as amended, a listed company may buy its equity shares out of its freereserves or securities premium account or the proceeds of any equity shares orother specified securities if so authorized by the articles of association. Nobuy-back of any kind of shares or other specified securities can be made out ofthe proceeds of an earlier issue of the same kind of securities. If suchbuy-back constitutes more than 10% of the total paid-up equity capital and freereserves of 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 may buy-back  up to 25% of its paid-up equity capital  and free reserves provided that the buy-backof equity shares in any financial year shall not  exceed 25% of thepaid-up equity capital of a company in that financial year.

 

A company is notpermitted to make any further issue (including a rights issue) of the same kindof shares or other specified securities within a period of six months of suchbuy-back, except by way of a bonus issue or in discharge of its existingobligations such as conversion of warrants, stock option schemes, sweat equityor conversion of preference shares or debentures into equity.

 

The buy-back may be (a) fromthe existing security 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 abuy-back are not entirely clear, and ADS investors are advised to consult theirlegal advisors prior to participating in any buy-back of shares by us,including advice related to any related regulatory approvals and tax issues.

 

**Alteration ofShareholder Rights**

** **

Under the IndianCompanies Act, and subject to the provisions of the articles of association ofa company and the relevant rules as issued by the Department of CompanyAffairs, the rights of any class of shareholders can be altered or varied (i) withthe consent in writing of the holders of not less than three-fourths of theissued shares of that class; or (ii) by the special resolution passed at aseparate meeting of the holders of the issued shares of that class. In theabsence of any such provision in the articles, such alteration or variation ispermitted as long as it is not prohibited by the agreement governing the issueof the shares of that class. Under the Indian Companies Act, the articles maybe amended by a special 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).

 

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**Limitation on the Rightsto 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.D. Additional Information—Exchange Controls”.

 

**Takeover Code**

** **

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,1997, as amended, or the Takeover Code, prescribes certain thresholds ofsecurities ownership or trigger points that give rise to certain obligationsthereunder. The Takeover Code requires disclosure of the aggregate shareholdingor voting rights in a listed company by any acquirer who acquires shares orvoting rights which (taken together with shares or voting rights, if any,already held by such acquirer) entitle him to more than 5%, 10%, 14%, 54% or74% of the shares or voting rights in that company. The Takeover Code alsorequires (unless specifically exempted) the making of an open offer to acquirean additional 20% of the voting capital of a company in the followingcircumstances:

 

(a)   any acquirer, who together with personsacting in concert with such acquirer, acquires or agrees to acquire 15% or moreof the equity shares or voting rights in the company;

 

(b)   any acquirer who, together with personsacting in concert with such acquirer, has acquired 15% or more, but less than55%, of the equity shares or voting rights in the shares of the company and whoacquires additional shares or voting rights entitling such acquirer to exercisemore than 5% of the voting rights in any financial year ending March 31;

 

(c)   any acquirer who, together with personsacting in concert with such acquirer, has acquired 55% or more, but less than75%, of the shares or voting rights in the shares of the company (or, where thecompany concerned had obtained the initial listing of its shares by making anoffer of at least 10% of the issue size to the public pursuant to Rule 19(2)(b) ofthe SCRR, less than 90% of the shares or voting rights in the company) and whoacquires any additional share or voting right;

 

(d)   any acquirer who, together with personsacting in concert with such acquirer, holds 55% or more, but less than 75%, ofthe shares or voting rights of the company (or, where the company concerned hadobtained the initial listing of its shares by making an offer of at least 10%of the issue size to the public pursuant to Rule 19(2)(b) of theSCRR, less than 90% of the shares or voting rights in the company), intends toconsolidate its holdings while ensuring that the public shareholding in thetarget company does not fall below the minimum level permitted by the listingagreement with the stock exchanges; or

 

(e)   any acquirer who acquires control overthe company (directly or indirectly), irrespective of whether there has beenany acquisition of shares or voting rights in the company.

 

However, in the event a public offer is madepursuant to paragraph (d) above, the minimum size of the public offer toacquire the voting capital of the target company is required to be the lesserof (i) 20% of the voting capital of the company; or (ii) such otherlesser percentage of the voting capital of the company as would, assuming fullsubscription of the offer, enable the acquirer, together with persons acting inconcert with him, to increase his holding to the maximum level possible, whichis consistent with the target company meeting the requirements of minimumpublic shareholding as set forth in the listing agreement.

 

Further, if the acquisition of voting capital of a target company madeby an acquirer pursuant to a public offer results in the public shareholding inthe target company being reduced below the minimum level required in thelisting agreements with the stock exchanges for the purpose of continuouslisting, the acquirer is required to take necessary steps to facilitatecompliance of the target company with the relevant provisions of the listingagreement within the time period mentioned in the listing agreements.

 

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The Takeover Code sets out the contents of the required publicannouncements as well as the minimum offer price. The minimum offer pricedepends on whether the shares of the company are “frequently” or “infrequently”traded (as defined in the Takeover Code). In case the shares of the company arefrequently traded, the offer price shall be the higher of:

 

·      the negotiated price under the agreementfor the acquisition of shares in the company;

 

·      the highest price paid by the acquireror persons acting in concert with him for any acquisitions, including throughan allotment in a public, preferential or rights issue, during the 26-weekperiod prior to the date of public announcement;

 

·      theaverage of the weekly high and low of the closing prices of the shares of thecompany quoted on the stock exchange where the shares of the company are mostfrequently traded during the 26-week period prior to the date of publicannouncement, or the average of the daily high and low of the prices of theshares as quoted on the stock exchange where the shares of the company are mostfrequently traded during the two weeks preceding the date of publicannouncement, whichever is higher.

 

Specific obligations of the acquirer and the Board of Directors of thetarget company in the offer process have also been specified. Acquirers makinga public offer also must deposit in an escrow account a percentage of the totalconsideration payable under the public offer, which will be forfeited in theevent that the acquirer does not fulfill its obligations.

 

The Takeover Code, subject to certain conditions specified in theTakeover Code, exempts certain specified acquisitions from the requirement ofmaking a public offer, including, among others, the acquisition of shares (1) byallotment in a public issue or a rights issue; (2) by underwriterspursuant to an underwriting agreement; (3) by registered stockbrokers inthe ordinary course of business on behalf of clients; (4) in unlistedcompanies; (5) pursuant to a scheme of reconstruction or amalgamation; (6) pursuantto a scheme under Section 18 of the Sick Industries Companies (SpecialProvisions) Act, 1985; (7) resulting from, inter se transfers betweencompanies belonging to the same group of companies as defined in the Monopoliesand Restrictive Trade Practices Act, 1969, as amended or between relatives orbetween “qualifying promoters” of a publicly listed company or betweenqualifying Indian promoters and foreign collaborators who are shareholders; (8) byway of transmission through inheritance or succession; (9) resulting fromtransfers by Indian venture capital funds or foreign venture capital investorsregistered with SEBI, to promoters of a venture capital undertaking or venturecapital undertaking pursuant to an agreement between such venture capital fundsor foreign venture capital investors with such promoters or venture capitalundertaking; (10) by the Government controlled companies, unless suchacquisition is made pursuant to a disinvestment process undertaken by theGovernment or a state government; (11) change in control bytakeover/restoration of the management of the borrower company by the securedcreditor in terms of the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002; (12) acquisition of shares by aperson in exchange of equity shares received under a public offer made under theTakeover Code; and (13) in terms of guidelines and regulations relating todelisting of securities as specified by SEBI. The Takeover Code does not applyto acquisitions in the ordinary course of business by public financialinstitutions either on their own account or as a pledgee. An application mayalso be filed with the takeover panel seeking exception from the open offerrequirements of the Takeover Code.

 

In addition, theprovisions of the Takeover Code relating to making of a public offer do not applyto the acquisition of American Depository Receipts or Global DepositoryReceipts so long as they are not converted into equity shares carrying votingrights.

 

**Provisions on Changes inCapital**

** **

Our authorized capitalcan be altered by an ordinary resolution of the shareholders in a generalmeeting. 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.

 

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**DiscriminatoryProvisions in the Articles**

** **

Other than as statedherein, there are no provisions in our Articles discriminating against anyexisting or prospective shareholder as a result of such shareholder owning asubstantial number of shares.

 

**10.C. Material Contracts**

** **

Other than described elsewherein the document herein, we have not entered into any material contracts in thetwo years preceding the date of this Annual Report, other than contractsentered 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 tothe issue of ADSs.

 

**Foreign Direct Investment**

** **

*Issues 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.

 

*Subsequent Transfers*

* *

Restrictions for subsequent transfers of shares of Indian companiesbetween residents and non-residents were relaxed significantly as of October 2004.The RBI has granted general permission to persons resident outside India totransfer shares and convertible debentures held by them to an Indian resident,subject to compliance with certain terms and conditions and reportingrequirements. As a result, for a transfer between a resident and a non-residentof securities of an Indian company in the IT sector, such as ours, no priorapproval of either the RBI or the Government of India is required, as long ascertain conditions are met. These conditions include compliance, as applicable,with pricing guidelines, the Takeover Code, and the ownership restrictionsbased on the nature of the foreign investor. If a sale or purchase is conductedon a stock exchange at prevailing market prices, the pricing guidelines will bedeemed satisfied. For off-market, negotiated transactions, the guidelinesrequire a transaction price based 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 persons of Indian nationality or origin residing outsideof India, or Non Resident Indians (NRIs), or registered Foreign InstitutionalInvestors, or FIIs, made through a stock exchange are known as portfolioinvestments, or Portfolio Investments.

 

NRIs are permitted to make Portfolio Investments on favorable tax andother terms under India’s Portfolio Investment Scheme. Under the scheme, an NRIcan purchase up to 5% of the paid up share capital of an Indian company,subject to the condition that the aggregate paid up share capital purchased byall NRIs through Portfolio Investments does not exceed 10% of the paid upcapital of the company. This limit may be increased up to 24% by passing aspecial resolution of its members. 

 

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We have not obtained shareholder approval for our equity shares to beowned by the NRIs beyond the aforesaid 10% limit. In addition to PortfolioInvestments in Indian companies, NRIs may also make foreign direct investmentsin Indian companies pursuant to the foreign direct investment route discussedabove.

 

Overseas corporate bodies, or OCBs, i.e., entities in which at least60% is owned by NRIs, were previously permitted to invest on favorable termsunder the Portfolio Investment Scheme. With effect from September 16,2003, OCBs are no longer recognized by the RBI as an eligible class ofinvestors in India.  Accordingly, OCBswill not be eligible to subscribe for ADSs.

 

**Investment by Foreign Institutional Investors**

** **

Currently, FIIs such as pension funds, investment trusts, insurance orreinsurance companies, international or multilateral organizations and assetmanagement companies, are eligible to make Portfolio Investments on favorableterms in all the securities traded on the primary and secondary markets inIndia. Investment by FIIs in certain sectors is prohibited.

 

The Securities and Exchange Board of India (Foreign InstitutionalInvestors) Regulations, 1995 provide that no single FII may hold more than 10%of a company’s total issued capital in its own name, and where an FII isinvesting on behalf of a sub-account, the investment on behalf of suchsub-account is not permitted to exceed 10% of the total issued capital of theCompany.

 

The total holding in anIndian company of all FIIs together with their sub-accounts is subject to a capof 24% of the total issued capital of the company, which may be increased up tothe percentage of sectoral cap on FDI in respect of the said company pursuantto a resolution of the Board of Directors of the company and the approval ofthe shareholders of the company by a special resolution. For arriving at theceiling on holdings of FIIs, investments made by FIIs through ADRs are notincluded. We have not obtainedshareholder approval for our equity shares to be owned by FIIs beyond theaforesaid 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.

** **

**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(RBI), except in certain cases. An Indian company issuing ADSs must complywith certain reporting requirements specified by the RBI.

 

On August 31, 2005 the Government of India amended the 1993Regulations to provide a pricing floor for Global Depositary Receipt (whichincludes ADSs) and Foreign Currency Convertible Bond issues. Under the revisedregulations, the offer price of the GDSs/ADSs cannot be less than the higher ofthe average of the weekly high and low of the closing prices of the shares asquoted 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.

 

*Fungibility of ADSs*

 

As per the directions issued by the RBI on the two-wayfungibility of ADSs, a person resident outside India is permitted to purchase,through a registered stock broker in India, shares of an Indian company for thepurposes of converting the same into ADSs, subject, *inter alia*,to the following conditions:

 

·      the shares of the Indiancompany are purchased on a recognized stock exchange in India;

 

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·      the shares of the Indiancompany are purchased on a recognized stock exchange with the permission of thedomestic custodian for the ADSs issued by the Indian company and such sharesare deposited with the custodian after purchase;

 

·      the Indian company hasauthorized the custodian to accept shares from non-resident investors forreissuance of ADSs;

 

·      the number of shares of theIndian company so purchased does not exceed the ADSs converted into underlyingshares and shall be subject to sectoral caps, as applicable; and

 

·      compliance with theprovisions of the 1993 Regulations.

 

*Sponsored ADS Facilities*

 

By notification dated November 23, 2002, the RBIhas permitted existing shareholders of Indian companies to sell their sharesthrough the issue of ADSs against the block of existing shares of an Indiancompany, subject to the following conditions:

 

·      the facility to sell theshares will be available *pari passu*toall categories of shareholders;

 

·      the sponsoring company whoseshareholders propose to divest existing shares in the overseas market throughthe issue of ADSs will give an option to all its shareholders indicating thenumber of shares to be divested and the mechanism of determining the priceunder the applicable ADS norms. If the shares offered for divestment are morethan the pre-specified number to be divested, shares would be accepted from theexisting shareholders in proportion to their existing shareholdings;

 

·      the proposal for divestmentof the shares will have to be approved by a special resolution of theshareholders of the Indian company in a general meeting;

 

·      the proceeds of the ADSissue raised abroad shall be repatriated to India within a period of one monthfrom the closing of the issue. However, the proceeds of the ADS offering canalso be retained abroad to meet the future foreign exchange requirements of thecompany; and

 

·      the issue-related expensesin relation to the public issue of ADSs under this scheme will be subject to aceiling for public issues and private placements of GDSs/ ADSs. Issue-relatedexpenses will include underwriting commissions and charges, legal expenses andreimbursable expenses. Issue-related expenses shall be passed on to shareholdersparticipating in the sponsored issue on a pro-rata basis. Issue-relatedexpenses beyond the ceiling will require the approval of the RBI.

 

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 personresident outside India may transfer the ADSs held in Indian companies toanother person resident outside India without prior approval of Government ofIndia or the RBI. Other than mutual funds that may purchase ADSs subject toterms and conditions specified by the RBI, a person resident in India is notpermitted to hold ADSs of an Indian company, except in connection with theexercise of stock options. An ADS holder is permitted to surrender the ADSs heldby him in an Indian company and to receive the underlying equity shares underthe terms of the deposit agreement.***

*** ***

**10.E. Taxation**

** **

**Indian Taxation**

** **

* General*

* *

The following summary is not intended to constitute a complete analysisof the individual tax consequences to non-resident holders or employees underIndian law for the acquisition, ownership and sale of ADSs and equity shares.This summary is based on the law and practice of the Indian Income-taxAct, 1961, or Income-Tax Act, including the special tax regime contained inSections 115AC and 115ACA of the Income-tax Act read with the Issue of 

 

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Foreign Currency Convertible Bonds and Ordinary Shares (throughDepositary Receipt Mechanism) Scheme, 1993, as amended on, January 19,2000, or the Issue of Foreign Currency Convertible bonds and Ordinary SharesScheme. TheIncome-tax Act is amended every year by the Finance Act of the relevant year.Some or all of the tax consequences of Sections 115AC and 115ACA may be amendedor changed by future amendments to the Income-tax Act.

 

**EACH PROSPECTIVE INVESTORSHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS WITH RESPECT TO INDIAN ANDLOCAL TAX CONSEQUENCES OF ACQUIRING, OWNING OR DISPOSING OF EQUITY SHARES ORADSs.**

** **

***Levyof 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 theIncome-tax Act, an individual is considered to be a resident of India duringany fiscal year if he or she is in India in that year for:

 

182 days or more in afiscal year

 

OR

 

60 days or more in thatfiscal year if the person has been present in India for 365 days or more in thepreceding four years.

 

However, where theperson concerned is a person of Indian origin, or a person who has left Indiafor employment outside India, the person will be considered a resident of Indiaonly when present in India for a period of 182 days in the previous year, eventhough the person has been present in India for 365 days or more in thepreceding four years.

 

An Individual would beconsidered “not ordinarily resident” if he / she is resident in India in aparticular Previous Year but has been a non-resident in India for a period of 9out of 10 years before that year, OR has been present in India for 729 days orless in the 7 years previous to that year.

 

A company is a residentof India if it is incorporated in India or the control and the management ofits affairs 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.

 

***Taxationof Distributions***

*** ***

Currently dividendincome is exempt from tax for all shareholders (whether resident in India ornot). However, the company declaring/distributing dividends is required to pay,in addition to corporate tax, a tax on dividends distributed, called dividenddistribution tax at the rate of 16.995% including a surcharge of 10% on thetotal amounts distributed as dividend and an education and a Higher educationcess at the rate of 2% and 1% respectively of such tax and surcharge.

 

Any distributions ofadditional ADSs or equity shares to resident or non-resident holders will notbe subject to Indian tax.

 

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***Taxationof Capital Gains***

*** ***

The following is a briefsummary of capital gains taxation of non-resident holders and residentemployees relating to the sale of ADSs and equity shares received uponconversion of ADSs. The relevant provisions are contained mainly in sections45, 47(vii)(a), 115AC and 115ACA, of the Income-tax Act, in conjunction withthe Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme.

 

Under the Income-taxAct, capital gains can be of two types, “long term capital gain” or “short termcapital gain”. Normally, gains arising on the sale of capital assets held formore than 36 months are considered long term capital gains and gains arising onthe sale of capital assets held for 36 months or less, are considered shortterm capital gains. However, gains arising from the sale of a capital asset,being shares held in a company for more than 12 months (measured from the dateof advice by a depositary to a Custodian of the delivery of the shares inexchange for ADS) are considered long term capital gains. Gains arising fromthe sale of shares held for a period of twelve months or less are considered asshort term capital gains.

 

Capital gains are taxedas follows:

 

·  Gains from a sale of ADSs outside India,by a non-resident to another non-resident are not taxable in India.

 

·  Conversion of the ADS into the underlyingshares is not taxable in India.

 

Pursuant to Section 115ACof the Income-tax Act read with the provisions of the 1993 Regulations, longterm capital gains realized on sale of ADSs (not covered above) will be subjectto tax at the rate of 10% excluding the applicable general surcharge andeducation surcharge. Where the beneficial holder of the ADS is an individualthe tax shall be increased by a 10 % general surcharge (if the total income isin excess of Rs. 1,000,000 during the previous year) and education cess of 2%and Higher education cess 1% on tax and general surcharge. Where the beneficialholder is a non-resident company, the above amount of tax shall be increased bya 2.5% general surcharge and 2% and 1% education cess and Higher education cessrespectively. This tax is levied in India by withholding the tax at the aboverates.

 

Any income arising fromthe transfer of equity shares held as long term capital asset that is subjectto securities transaction tax, which is effective from October 1, 2004,shall be exempt from long term capital gains tax. Any income arising from thetransfer of equity shares held as a short term capital asset, that is subjectto securities transaction tax (effective from October 1, 2004), shall betaxed at a rate of 15 % (effective 1st April 2008) 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 2% and 1% education cess and Higher education cess respectively ontax and surcharge amount.

 

The aforesaid tax rateswith respect to capital gains may be reduced as per the provisions of thedouble tax avoidance agreements that India has signed with the homejurisdictions of the non-resident holders.

** **

***Taxation of Business Income***

** **

The income from thetransfer of shares held in an Indian company may be characterized as tradingincome, on the basis of various factors, including the purpose of the holdingby the investor, period of holding, the manner and method of investment andtransfer, etc. Where shares are held under an employee stock option scheme, itis unlikely that the income from transfer of these shares will be characterizedas trading income.

 

Where the income isclassified as 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% and 1% education and Higher educationcess respectively. Further, MAT will apply in such cases. Non-residents otherthan companies or residents will be taxed at 30% increased by 10% surcharge and2% and 1% education and Higher education cess respectively, on trading orbusiness income.

 

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*Minimum Alternate Tax (MAT)*

 

Pursuant to the changesintroduced by the Finance Bill, 2007, 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 11.33%of such book profits, in case of a foreign company.

 

Further, the provisionsof MAT will also be applicable to corporates from the tax year beginning April 1,2007 claiming deduction under section 10A and 10B of the Indian Income Tax Act.(which mainly includes IT companies) and based on the provisions, corporateswill be liable to pay MAT at the rate of 11.33% (including a surcharge of 10%and an education cess and a Higher education cess at the rate of 2% and 1%respectively of such tax and surcharge) or tax computed as per normalprovisions, whichever is higher.

 

***SecuritiesTransaction Tax***

*** ***

The Finance Act, 2004has introduced certain new provisions with regard to taxes on the sale andpurchase of securities, including equity shares. On and after October 1,2004, in respect of a sale and purchase of equity shares entered into on arecognized stock exchange, (i) both the buyer and seller are required topay each a Securities Transaction Tax, or STT at the rate of 0.125% of thetransaction value of the securities, if a transaction is a delivery basedtransaction i.e. the transaction involves actual delivery or transfer ofshares; (ii) the seller of the shares is required to pay a STT at the rateof 0.025% of the transaction value of the securities, if the transaction is anon-delivery based transaction, i.e. a transaction settled without takingdelivery of the shares. The Finance Bill, 2008 proposes to impose STT,effective from April 1 2008, with respect to a sale and purchase of aderivative in a recognized stock exchange as follows: (i) in case of saleof an option in securities, the seller is required to pay an STT at the rate of0.017% of the option premium; (ii)in case of a sale of an option in securities,where the option is exercised, the buyer is required to pay a STT at the rateof 0.125% of the settlement price; and (iii) in case of sale of futures insecurities, the seller is required to pay STT at 0.017%.The STT can be set-offagainst business income tax, in accordance with the provisions of theIncome-tax Act, provided the gains on the transactions are taxed as businessincome and not as capital gains.

 

***Modeof Computation of Capital Gain***

*** ***

Capital gains taxis  computed by applying the appropriatetax rate on the difference between the sale price and the purchase price of thecapital asset. For the purpose of determining the amount of capital gainsarising from the sale of shares, converted on surrender of the ADS, the cost ofacquisition of such shares shall be prevailing price of shares at the IndianStock Exchanges, on the date on which the depositary advises the Custodian ofthe release of such shares on such surrender of the ADS and not the acquisitioncost of the ADS being exchanged*.*According to the 1993 Regulations, a non-resident holder’s holding period forthe purpose of determining the applicable Indian capital gains tax raterelating to equity shares received in exchange for ADSs commences on the dateof the notice of the redemption by the Depositary to the custodian. However,the 1993 Regulations does not address this issue in the case of residentemployees, and it is therefore unclear as to when the holding period for thepurposes of determining capital gains tax commences for such a residentemployee.

 

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 of 2% and Higher education cess of 1% in case of a foreign company,and 30%, excluding the applicable general surcharge and education and Highereducation cess, 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 2% and 1% education and Higher education cess respectively ontax and general surcharge.

 

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In case of persons other than individuals and companies, the rate oftax would be 30% increased by a 10% surcharge, and a 2% and 1% education andHigher education cess respectively.

 

***Withholdingtax on capital gains***

*** ***

Any taxable gainrealized by a non-resident on the sale of ADSs or equity shares is to bewithheld at the source by the buyer. However, as per the provisions of section196D(2) of the Income-tax Act, no withholding tax is required to bededucted from any income by way of capital gains arising to ForeignInstitutional Investors as defined in section 115AD of the Income-tax Act onthe transfer of securities defined therein, where the investment is made underthe FII regime.

 

***Buy-backof 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.

 

***StampDuty 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.

 

***WealthTax***

*** ***

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.

 

***GiftTax 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.

 

***Servicetax***

*** ***

Brokerage or commissionpaid to stock brokers in connection with the sale or purchase of shares issubject to a service tax of 12%, plus education cess of 2% and Higher educationcess of 1% on tax. The stock broker is responsible for collecting the servicetax from the shareholder and paying it to the government account.

 

**U.S. Federal Income Tax Considerations**

** **

The following is a discussion of certain material U.S. Federal incometax consequences of purchasing, owning and disposing of equity shares and ADSs.This discussion does not purport to be a comprehensive description of all ofthe U.S. tax considerations that may be relevant to a particular person’sdecision to acquire the equity shares or ADSs including any state, local ornon-U.S. tax consequences of the ownership of the equity shares or ADSs.

 

**EACHHOLDER OF ADSs SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE U.S.FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING ANDDISPOSING OF EQUITY SHARES AND ADSs IN HIS OR HER PARTICULAR SITUATION.**

 

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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 orcurrencies;

 

·  a trader in securities thatelects to use a mark-to-market method of accounting for your securitiesholdings;

 

·  a bank, insurance company orother financial institution;

 

·  a tax-exempt organization;

 

·  a holder liable for alternativeminimum tax;

 

·  a holder that actually orconstructively owns 10% or more by voting power or value of our stock;

 

·  a holder that holds equityshares or ADSs as part of a straddle, hedging or conversion transaction; or

 

·  a U.S. holder whose functionalcurrency is not the U.S. Dollar.

 

This section is based on the U.S. Internal Revenue Code of 1986, asamended, or the Code, its legislative history, existing and proposed U.S.Treasury regulations, published rulings and other administrative guidance ofthe U.S. Internal Revenue Service and court decisions, all as in effect on thedate hereof. These laws are subject to change or different interpretation bythe U.S. Internal Revenue Service 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 individualof the United States;

 

·  a U.S. domestic corporation, orother entity treated as a domestic corporation for U.S. federal income taxpurposes;

 

·  an estate whose income issubject to U.S. Federal income tax regardless of its source; or

 

·  a trust if a U.S. court canexercise primary supervision over the trust’s administration and one or moreU.S. persons are authorized to control all substantial decisions of the trust.

 

In addition, this discussion is limited to U.S. holders who are notresident in India for purposes of the DTAT between the United States and India.

 

If a partnership (including for this purpose any entity treated as a partnershipfor U.S. tax purposes) is a beneficial owner of the equity shares or ADSs, theU.S. tax treatment of a partner in the partnership generally will depend on thestatus of the partner and the activities of the partnership. A holder of theequity shares or ADSs that is a partnership and partners in such a partnershipshould consult their own tax advisors about the U.S. federal income taxconsequences of holding and disposing of the equity shares or ADSs.

 

A “non-U.S. holder” is a beneficial owner of equity shares or ADSs thatis not a U.S. person for U.S. Federal income tax purposes.

 

For U.S. Federal income tax purposes, holders of ADSs will be treatedas the owners of equity shares represented 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 a factualdetermination that is based on the types of income we earn and the value of ourassets and cannot be made until the close of the applicable tax year. If wewere currently or were to become a PFIC, U.S. holders of equity shares or ADSswould be subject to special rules and a variety of potentially adverse taxconsequences under the Code.

 

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*Taxation of Dividends*

* *

*U.S. Holders.***Subject to the PFIC rules referred to below, under the U.S.Federal income tax laws, if you are a U.S. holder, you must include in yourgross income the gross amount of any dividend paid by us out of our current oraccumulated earnings and profits (as determined for U.S. Federal income taxpurposes). You must include the amount of any Indian tax withheld from thedividend payment in this gross amount even though you do not in fact receiveit. The dividend is ordinary income that you must include in income when youreceive the dividend, actually or constructively. Dividends received by anindividual taxpayer during taxable years beginning before January 1,  2011 will be taxed at a maximum rate of 15%,where certain holding period and other requirements are satisfied, if suchdividends constitute qualified dividend income. Qualified dividend incomeincludes dividends paid by a Qualified Foreign Corporation, and we believe thatwe are, and will continue to be, a Qualified Foreign Corporation. The U.S.Treasury has announced its intention to promulgate rules pursuant to whichholders of ADSs and intermediaries through whom such securities are held willbe permitted to rely on certificates from issuers to establish that dividendsare treated as qualified dividends. Because such procedures have not yet beenissued, it is not clear whether we will be able to comply with them. Holders ofADSs and equity shares should consult their own tax advisors regarding theavailability of the reduced dividend tax rate in light of their own particularcircumstances. Dividends will not be eligible for the dividends-receiveddeduction generally allowed to U.S. corporations in respect of dividendsreceived from other U.S. corporations.

 

The amount of the dividend distribution that you must include in yourincome as a U.S. holder will be the U.S. Dollar value of the Indian rupeepayments made, determined at the spot Indian rupee/U.S. Dollar exchange rate onthe date the dividend distribution is includible in your income, regardless ofwhether the payment is in fact converted into U.S. Dollars. If the foreigncurrency received as a dividend is not converted into U.S. dollars on the dateof receipt, a U.S. Holder will have a basis in the foreign currency equal toits U.S. dollar value on the date of receipt. Generally, any gain or lossresulting from currency exchange fluctuations during the period from the dateyou include the dividend payment in income to the date you convert the paymentinto U.S. Dollars will be treated as ordinary income or loss. The gain or lossgenerally will be income or loss from sources within the United States forforeign tax credit limitation purposes. If we distribute non-cash property as adividend, you generally will include in income an amount equal to the fairmarket value of the property, in U.S. Dollars, on the date that it isdistributed. Subject to certain limitations, a U.S. holder may be entitled to acredit or deduction against its U.S. Federal income taxes for the amount of anyIndian taxes that are withheld from dividend distributions made to such U.S.holders. The decision to claim either a credit or deduction must be madeannually, and will apply to all foreign taxes paid by the U.S. holder to anyforeign country or U.S. possession with respect to the applicable tax year.

 

A portion of dividends received may be income from United Statessources, and the remainder will be income from non-United States sources, forU.S. foreign tax credit purposes under special U.S. Federal income tax rules,subject to various classifications and other limitations. The rules relatingto computing foreign tax credits are complex. You should consult your own taxadvisor to determine the foreign tax credit implications of owning equityshares or ADSs.

 

Distributions in excess of current and accumulated earnings andprofits, as determined for U.S. federal income tax purposes, will be treated asa non-taxable return of capital to the extent of your basis in the equityshares and ADSs and thereafter as capital gain.

 

*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 are eligiblefor the benefits of an income tax treaty that provides for a lower rate.

 

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*Taxation of Capital Gains*

* *

*U.S. Holders.***Subject to the PFIC rules referred to below, if you are a U.S.holder and you sell or otherwise dispose of your equity shares or ADSs, youwill recognize capital gain or loss for U.S. Federal income tax purposes equalto the difference between the U.S. Dollar value of the amount that you realizeand your tax basis, determined in U.S. Dollars, in your equity shares or ADSs.Prior to January 1,  2011, capitalgains of a non-corporate U.S. holder are generally taxed at a maximum rate of15% where the property is held for more than one year. The gain or loss willgenerally be income or loss from sources within the United States for foreigntax credit limitation purposes, unless it is attributable to an office or otherfixed place of business outside the United States and certain other conditionsare met. Your ability to deduct capital losses is subject to limitations.

 

Pursuant to recently-enacted legislation, a penalty in the amount of$10,000 in the case of a natural person and $50,000 in any other case isimposed on any taxpayer that fails to timely disclose its participation in a “reportabletransaction” (as defined in Section 6011 of the Code). A taxpayer that hasparticipated in a “reportable transaction” during the tax year must attach adisclosure statement to its U.S. Federal income tax return. A “reportabletransaction” includes a transaction generating a loss under Code Section 165in excess of certain specified amounts (which amounts vary depending on severalfactors, including the status of the taxpayer as an individual, trust,partnership or corporation). Investment in equity shares or ADSs could betreated as a “reportable transaction” that must be disclosed on a U.S. holder’sU.S. Federal income tax return if the investment results in the taxpayerclaiming a foreign currency loss on such tax return equal to or greater thanthe specified amount (*e.g.*,$50,000 in the case of a taxpayer that is an individual or trust). Prospectivepurchasers are urged to consult their own tax advisors regarding thecircumstances in which an investment in equity shares may result in a “reportabletransaction” that is required to be disclosed 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 “effectivelyconnected” with your conduct of a trade or business in the United States, andthe gain is attributable to a permanent establishment (or in the case of anindividual, a fixed place of business) that you maintain in the United Statesif that is required by an applicable income tax treaty as a condition forsubjecting you to U.S. taxation on a net income basis; or

 

·  you are an individual, you arepresent in the United States for 183 or more days in the taxable year of thesale and certain other conditions exist.

 

In the first case, the non-U.S. holder will be taxed in the same manneras a U.S. holder. In the second case, the non-U.S. holder will be subject toU.S. Federal income tax at a rate of 30% on the amount by which such the non-U.S.holder’s U.S.-source capital gains exceed such non-U.S. holder’s U.S.-sourcecapital 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 our equity shares and ADSs will not be treated as stockof a PFIC for U.S. federal income tax purposes for the current tax year. Thedetermination of whether or not we are a PFIC is a factual determination thatcannot be made until the close of the applicable tax year and that is based onthe types of income we earn and the value of our assets (including goodwill),both of which are subject to change. In calculating goodwill for this purpose,we will value our total assets based on the total market value, determined withreference to the then market price of the equity shares and ADSs, and will makedeterminations regarding the amount of this value allocable to goodwill.Because the determination of goodwill will be based on the market price of theequity shares and ADSs, it is subject to change. It is possible that the U.S.Internal Revenue Service may challenge our valuation of our assets (includinggoodwill), which may result in our being classified as a PFIC. 

 

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Thus, it is possible that we may be orbecome a PFIC in the current or any future taxable year and we cannot assureyou 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 incomefor the taxable year is passive income; or

 

·  at least 50% of the value,determined on the basis of a quarterly average, of our assets is attributableto assets that produce or are held for the production of passive income.

 

Passive income generally includes dividends, interest, royalties, rents(other than certain rents and royalties derived in the active conduct of atrade or business), the excess of gains over losses from certain types oftransactions in commodities, annuities and gains from assets that producepassive income. If a foreign corporation owns at least 25% by value of thestock of another corporation, the foreign corporation is treated for purposesof the PFIC tests as owning its proportionate share of the assets of the othercorporation, as receiving directly its proportionate share of the othercorporation’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 saleor other disposition of your equity shares or ADSs; and

 

·  any excess distribution that wemake to you (generally, any distributions to you during a single taxable yearthat are greater than 125% of the average annual distributions received by youin respect of the equity shares or ADSs during the three preceding taxableyears or, if shorter, your holding period for the equity shares or ADSs).

 

Under these rules:

 

·  the gain or excess distributionwill be allocated ratably over your holding period for the equity shares andADSs;

 

·  the amount allocated to thetaxable year in which you realized the gain or excess distribution will betaxed as ordinary income;

 

·  the amount allocated to eachprior year, with certain exceptions, will be taxed at the highest tax rate ineffect for that year; and

 

·  the interest charge generallyapplicable to underpayments of tax will be imposed in respect of the taxattributable to each such year.

 

Special rules apply for calculating the amount of the foreign taxcredit with respect to excess distributions by a PFIC.

 

If you own shares in a PFIC that are treated as marketable stock, youmay make a mark-to-market election. If you make this election in a timelyfashion, you will not be subject to the PFIC rules described above.Instead, in general, you will include as ordinary income each year the excess,if any, of the fair market value of your equity shares and ADSs at the end ofthe taxable year over your adjusted basis in your equity shares and ADSs. Youwill also be allowed to take an ordinary loss in respect of the excess, if any,of the adjusted basis of your equity shares and ADSs over the fair market valueat the end of the taxable year (but only to the extent of the net amount ofpreviously included income as a result of the mark-to-market election). Yourbasis in the equity shares and ADSs will be adjusted to reflect any such incomeor loss amounts.

 

We do not intend to furnish you with the information that you wouldneed in order to make a “qualified electing fund” election to include yourshare 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.

 

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*Information Reporting and Backup Withholding*

* *

In general, information reporting requirements will apply to dividendsin respect of equity shares or ADSs or the proceeds received on the sale,exchange or redemption of equity shares or ADSs paid within the United States(and, in certain cases, outside the United States) to U.S. holders other thancertain exempt recipients, such as corporations, and backup withholding tax atthe rate of 28% may apply to such amounts if the U.S. holder fails to providean accurate taxpayer identification number (or otherwise establishes, in themanner provided by law, an exemption from backup withholding) or to reportdividends required to be shown on the U.S. holder’s U.S. Federal income taxreturns.

 

Backup withholding is not an additional income tax, and the amount ofany backup withholding from a payment to a U.S. holder will be allowed ascredit against the U.S. holder’s U.S. Federal income tax liability providedthat the appropriate returns are filed.

 

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**

** **

**Notapplicable**

** **

**10.G. Statement by experts**

** **

Not applicable

 

**10.H. Documents on display**

** **

This report and otherinformation filed or to be filed by us can be inspected and copied atprescribed rates at the public reference facilities maintained by the SEC at:

 

**Judiciary Plaza100 F Street, N.E.Public Reference RoomWashington, D.C. 20459**

** **

The SEC maintains a website at www.sec.gov that contains reports, proxyand information statements, and other information regarding registrants thatmake electronic filings with the SEC using its EDGAR system.

 

Our periodic reports and other information may also be inspected at theoffices of the New York Stock Exchae located at 20 Broad Street, New York, NewYork 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. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

***General***

*** ***

Market risk is the lossof future earnings, or reduction in fair value or future cash flows, that mayresult from a change in the price of a financial instrument. The value of afinancial instrument may change as a result of changes in interest rates,foreign currency exchange rates, equity prices and other market changes thataffect market risk sensitive instruments. Market risk is attributable to allmarket sensitive financial instruments including foreign currency receivablesand payables.

 

Our exposure to market risk is a function of our revenue and expensegenerating activities in foreign currency, the activity of investment insecurities and liquid mutual fund units and the results of our hedgingstrategies for foreign currency exposures. The objective of market riskmanagement is to avoid excessive exposure of our earnings and equity to loss.

 

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***RiskManagement 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.

 

***Componentsof Market Risk***

*** ***

*Exchange Rate Risk.***Our exposure to market risk arises principally from exchangerate risk. We transact a major portion of our business in foreign currencies,particularly the U.S. dollar. The exchange rate between the rupee and thedollar has changed substantially in recent years and may fluctuatesubstantially in the future. The results of our operations can be adverselyaffected as the rupee fluctuates against the dollar. Our exchange rate riskprimarily arises from our foreign currency revenues, receivables, payables andother foreign currency assets and liabilities.

 

We have sought to reducethe effect of exchange rate fluctuations on our operating results by enteringinto foreign exchange forward and options contracts. As of December 31,2006, we had outstanding forward contracts of $182.6 million. As of December 31,2007, we had outstanding forward contracts in the amount of $165.2 million, JPY481.6 million ($4.3 million) and Euro 4 million ($5.6 million),outstanding  written options of Euro 5million ($7 million), outstanding currency purchased options in the amount of  $81.5 million and outstanding currency writtenoptions in the amount of $2.5 million These contracts typically mature within1-29 months, must be settled on the day of maturity and may be cancelledsubject to the payment of any gains or losses in the difference between thecontract 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 exchangecurrency risks. The policies of the Reserve Bank of India may change from timeto time which may limit our ability to hedge our foreign currency exposuresadequately. In addition, any such contracts may not perform adequately as ahedging mechanism. We may, in the future, adopt more active hedging policies.

 

*Interest Rate Risk.***Our surplus cash resources are typically invested in liquidmutual fund units, units in other debt mutual funds in India, U.S. municipalbonds and sweep funds. These investments are exposed to interest rate riskwhereby any increase in interest rates may decrease the fair value of theinvestments. We attempt to reduce this risk by investing in funds with shorterdurations and by adequately diversifying our investments.

 

*Fair Value.***The fair value of our market rate risk sensitiveinstruments, other than forward contracts and option contracts, closelyapproximates their carrying value.

 

**ITEM 12. DESCRIPTION OFSECURITIES OTHER THAN EQUITY SECURITIES**

** **

Not applicable

 

**PART II**

** **

**ITEM 13. DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

** **

None

 

**ITEM 14. MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

** **

**Modification in therights of security holders**

** **

On April 25, 2006,our Board, subject to the approval of our shareholders, recommended theamendment of our ESOP 2003 plan to provide an option to the Company to grantADR-linked stock options to enable certain employees outside India to acquireADSs upon exercise of options. The shareholders of the Company at the annualgeneral meeting held on June 21, 2006 approved the said amendment to thePatni ESOP 2003 plan to enable the Company to issue up to 2,000,000 ADR linkedstock options to the employees of the Company as well as its subsidiaries.

 

115

----

 

Accordingly, the amended plan, i.e., “Patni ESOP 2003- Revised 2006”has come into force with effect from June 21, 2006.

 

During 2007 there hasbeen no modifications to the right of security holders.

** **

**Use of proceeds**

** **

Inour initial offering of our ADSs, completed on December 8, 2005, we issued6,156,250 ADSs, representing 12,312,500 equity shares of Rs. 2 each, to anunderwriting syndicate (including the underwriters’ over-allotment option of1,031,250 ADSs representing 2,062,500 equity shares) at an initial offeringprice of $20.34 per ADS pursuant to a registration statement filed on Form F-1(File No.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 $117 million in net proceedsfrom the offering (after adjusting for direct expenses relating to the offeringof ADSs of approximately $8.2 million, out of which $7.6 million was paid asunderwriting and management consulting fees and $0.6 million was paid for otherexpenses).

 

As of December 31,2007, US$62 million had been utilized for capital expenditure for officefacilities and the balance $55 million remained as cash and cash equivalentspending utilization.

 

**ITEM 15. CONTROLSAND PROCEDURES**

** **

**Disclosure controls andprocedures**

** **

As of the end of theperiod covered by this Annual Report on Form 20-F, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended).Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective as of December 31, 2007,to provide reasonable assurance that the information required to be disclosedin filings and submissions under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported within the timeperiods specified by the SEC’s rules and forms, and that materialinformation related to us and our consolidated subsidiaries is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions about requireddisclosure.

 

**Management’s Report on Internal Controls over FinancialReporting**

 

***Internal controls over financial reporting***

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Internal control over financial reporting asdefined in Rule 13a-15(f) and 15d-15(f) under the US Securitiesand Exchange Act of 1934, as amended.

 

Theinternal control over financial reporting was designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles in the United States of America and includesthose policies and procedures that:

 
|   | · | Pertain to the  maintenance of records that in reasonable detail accurately and fairly  reflect the transactions and dispositions of the assets of the Company;                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
|   | · | Provide reasonable  assurance that transactions are recorded as necessary to permit preparation  of financial statements in accordance with generally accepted accounting  principles in the United States of America, and that receipts and  expenditures of the Company are being made only in accordance with  authorizations of management and directors of the Company; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
|   | · | Provide reasonable  assurance regarding prevention or timely detection of unauthorized acquisition,  use or disposition of the Company’s assets that could have a material effect  on the financial statements.                                                                                                                                                                  |

 

116

----

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Ourmanagement, including our Chief Executive Officer and Chief Financial Officerassessed the effectiveness of our internal control over financial reporting asof December 31.2007. In making this assessment, our management used thecriteria set forth by the Committee of Sponsoring Organizations (COSO)  ofthe Treadway Commission in “Internal Control-Integrated Framework”. Thisassessment included an evaluation of the design and operation of internalcontrols over financial reporting. Based on this assessment, the management concludedthat, as of December 31, 2007, the Company has maintained effectiveinternal controls over financial reporting.

 

Ourindependent registered public accounting firm, KPMG, has audited theconsolidated financial statements included in this annual report on Form 20-F,and as part of their audit, has issued their report, included herein, on theeffectiveness of our internal control over financial reporting as of December 31,2007.

 

117

----

 

**Report of Independent Registered Public AccountingFirm**

 

TheBoard of Directors and Shareholders

 

PatniComputer Systems Limited:

 

Wehave audited Patni Computer Systems Limited’s internal control over financialreporting as of December 31, 2007, based on criteria established inInternal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Patni Computer Systems Limited’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’sReport on Internal Controls over Financial Reporting. Our responsibility is toexpress an opinion on the Company’s internal control over financial reportingbased on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Patni Computer Systems Limited maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofPatni Computer Systems Limited and subsidiaries as of December 31, 2007and 2006, and the related consolidated statements of income, shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2007, and our report dated April 17,2008, except as to note 27.1.2, which is as of June 10, 2008 expressed anunqualified opinion on those consolidated financial statements.

 
| /s/  KPMG            |   |
|----------------------|--------|
|                 |   |
| Mumbai,  India       |   |
|                 |   |
| April 17,  2008 |   |

 

118

----

** **

**Changes in internalcontrol over financial reporting**

** **

Duringthe period covered by this Annual Report, there were no changes in ourinternal control over financial reporting that have materially affected or are reasonablylikely to materially affect our internal control over financial reporting.

 

**ITEM 16A. AUDITCOMMITTEE FINANCIAL EXPERT**

** **

Our Audit Committeemembers are Mr. Arun Duggal (Chairman), Mr. Pradip Shah and and Mr. Ramesh Venkateswaran, each of whomis an independent director pursuant to the applicable rules of theSecurities Exchange Commission and the NYSE. See “Item 6. Directors,Senior Management and Employees” for the experience and qualifications of themembers of the Audit Committee. Our Board of Directors has determined that Mr. ArunDuggal is an Audit Committee Financial Expert as defined in item 401(h) ofRegulation S-K.

 

**ITEM 16B. CODE OF ETHICS**

** **

We have adopted a codeof business ethics applicable to our executive officers, directors and allother employees. We will make available a copy of the code of ethics to anyperson, 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. Thecode is also available on our corporate website, www.patni.com.

 

**ITEM 16C. PRINCIPALACCOUNTANT FEES AND SERVICES**

** **

The following table setsforth the fees for professional audit services rendered by KPMG for the auditof the Company’s annual financial statements for 2007 and 2006, and fees billedfor other services rendered by KPMG.

 
| **Fiscal Year Ended  December 31,** | ** ** | **Audit Fees**                  | ** ** | **Audit-Related Fees** | ** ** | **Tax Fees** | ** ** | **All Other Fees** | ** ** | **Total Fees** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|---------------------|------------|
| ** **                                         | ** ** | **(Amounts in US$ )** | ** ** |
| 2006                                               |       | 632,886                              |       | 2,016                       |       | 580,000           |       | 259,932                      |       | 1,474,834           |       |
| 2007                                               |       | 795,747                              |       | —                      |       | 132,462           |       | 169,719                      |       | 1,097,928           |       |

 

**Audit fees**

** **

Audit fees representsfees for professional services in connection with the audit of Company’s annualconsolidated financial statements and reviews of interim financial statement inaccordance with US GAAP, report concerning internal control over financial reporting,as well as audits of standalone and consolidated financial statements of theCompany and its subsidiaries prepared in accordance with Indian GAAP.

 

**Audit-related fees**

** **

Audit-related feesrepresent fees for professional services rendered in connection with ESOPrelated matters.

 

**Tax fees**

** **

Services providedprimarily consist of tax compliance, assistance with tax examinations andcorporate tax advisory services.

 

119

----

 

**All other fees**

** **

Services provided primarilyconsist of payroll related tax issues, transfer pricing study and qualityreview in respect of  IT applications ofthe company.

 

We obtain prior approvalof our audit committee in connection with the nature of services that areprovided and the fees to be paid for the services.

** **

**ITEM16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

** **

We have not sought anyexemption from the listing standards for audit committees applicable to us as aforeign private issuer.

 

**ITEM 16E. PURCHASES OFEQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES**

** **

During fiscal 2007,there were no purchases made by or on behalf of us or any affiliated purchaserof shares of any class of our securities that are registered pursuant to Section 12of the US Securities and Exchange Act,1934, as amended.

 

In February 2008,our  Board of Directors  approved the proposal to buy- back fully paidequity shares to the extent upto 10% of the paid up capital and free reserves,at a maximum price of Rs. 325 per equity share, for an aggregate amount uptoRs. 2,370 million ($60.1 million) in accordance with the provisions of Section 77A,77AA, 77B and other applicable provisions  of the Companies Act, 1956and the provisions of Securities and Exchange Board of India (Buy-Back ofSecurities) Regulations, 1998 (“Buy Back Regulations”), for which necessarypublic announcements have been made in April 2008. The Company plans toannounce the date  of buyback at a futuredate.

 

**PART III**

 

**ITEM 17. FINANCIALSTATEMENTS**

** **

See Item 18.

 

**ITEM 18. FINANCIALSTATEMENTS**

** **

The following financialstatement and auditors report for fiscal 2007 are incorporated herein byreference and are included in this Item 18 of this report on Form 20-F:

 

·  Reportof Independent Registered Public Accounting Firm.

 

·  ConsolidatedBalance Sheets as of December 31, 2006 and 2007.

 

·  ConsolidatedStatements of Income for the years ended December 31,  2005, 2006 and 2007

 

·  ConsolidatedStatements of Stockholders Equity and Comprehensive Income for the years ended December 31,  2005, 2006 and 2007.

 

·  ConsolidatedStatements of Cash Flows for the years ended December 31, 2005, 2006 and2007.

 

·  Notesto the Consolidated Financial Statements.

 

120

----

** **

**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                                                                                                                       |
| *2.4   |   | Patni  ESOP 2003-Revised 2006 #                                                                                                                                 |
| *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            |
| ** 4.9 |   | Amendment  to Information Technology Services Agreement between General Electric  International Inc. and Patni Computer Systems Inc. dated August 03, 2006 |
| 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 Number333-129771)

#      Incorporatedby reference from Form S - 8 (file number 33-137306)

**   Previouslyfiled on March,5 2008 with the SEC on Form 20F/A (File Number  001-32692 08666713)

 

121

----

 

**SIGNATURES**

** **

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport 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/ SURJEET SINGH |
|                     |                               | Surjeet Singh |
|                     |                               | *Chief Financial Officer* |
|                     |                               | * * |
| Mumbai, India            |                               |   |
| Date:June 24,  2008 |                               |   |

 

122

----

 

**Patni Computer SystemsLimited and subsidiariesConsolidated financial statementsContents**

 
| Report of Independent Registered  Public Accounting Firm                                                                                  |   | F-2         |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
|                                                                                                                                      |   |        |
| Consolidated Balance Sheets as of December 31,  2006 and 2007                                                                        |   | F-3         |
|                                                                                                                                      |   |        |
| Consolidated  Statements of Income for the years ended December 31, 2005, 2006 and  2007                                             |   | F-4         |
|                                                                                                                                      |   |        |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for the years ended December 31, 2005, 2006 and  2007 |   | F-5 to F-6  |
|                                                                                                                                      |   |        |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2006 and 2007                                          |   | F-7 to F-8  |
|                                                                                                                                      |   |        |
| Notes to the Consolidated Financial Statements                                                                                            |   | F-9 to F-53 |

 

F-1

----

 

Report of Independent Registered Public AccountingFirm

 

The Board of Directorsand Shareholders

** **

PatniComputer Systems Limited:

 

We have audited theaccompanying consolidatedbalance sheets of PatniComputer Systems Limited andsubsidiaries (the ‘Company’) as of December 31, 2007 and 2006, andthe related consolidated statementsof income, shareholders’ equity and comprehensive income, and cash flows foreach of the years in the three-year period ended December 31, 2007. These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour 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 PatniComputer Systems Limited andsubsidiaries as of December 31, 2007 and 2006, and the resultsof  their operations and theircash flows for each of the years in the three-year period endedDecember 31, 2007, in conformity with U.S. generally accepted accountingprinciples.

 

Asdiscussed in Note 2.1.27 to the consolidated financial statements, effectiveJanuary 1, 2006, the Company adopted the fair value method of accountingfor stock-based compensation as required by Statement of Financial AccountingStandards No. 123(R), Share- Based Payment.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), PatniComputer Systems Limited’s internal control over financial reporting asof December 31, 2007, based on  criteria established in Internal Control -Integrated Framework**issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated April 17, 2008 expressed an**unqualified opinion onthe effectiveness of the Company’s internal control over financial reporting. 

 

 

/s/ KPMG

Mumbai,India 

 

April 17,2008,except as to note 27.1.2,which is as of June 10, 2008.

 

F-2

----

 

**Patni Computer Systems Limited and subsidiaries**

 

**Consolidated balance sheet**

 
| ** **                                                                                                                                                                              | ** ** | **As of**              | ** **      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-----------------|
| ** **                                                                                                                                                                              | ** ** | **December 31,  2006** | ** **      | **December 31,  2007** | ** ** |
| **Assets**                                                                                                                                                                              |       |                        |            |   |   |
| *Current  assets*                                                                                                                                                                       |       |                        |            |   |   |
| Cash and cash  equivalents                                                                                                                                                              |       | $                           | 46,510,009      |   | $ | 32,625,979 |   |
| Investments                                                                                                                                                                             |       | 242,968,048                 |            | 297,726,183 |   |
| Accounts  receivable, net                                                                                                                                                               |       | 115,618,504                 |            | 136,371,683 |   |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                                                                                                            |       | 22,834,345                  |            | 32,417,391 |   |
| Deferred income  taxes                                                                                                                                                                  |       | 10,240,528                  |            | 6,879,161 |   |
| Prepaid Expenses                                                                                                                                                                        |       | 2,155,676                   |            | 2,132,687 |   |
| Other current  assets                                                                                                                                                                   |       | 9,860,763                   |            | 30,600,531 |   |
| **Total  current assets**                                                                                                                                                               | ** ** | **450,187,873**             | ** **      | **538,753,615** | ** ** |
| Deferred income  taxes                                                                                                                                                                  |       | 370,529                     |            | 12,479,374 |   |
| Investments                                                                                                                                                                             |       | 3,048,092                   |            | 3,425,527 |   |
| Other assets                                                                                                                                                                            |       | 11,457,225                  |            | 24,475,694 |   |
| Property, plant  and equipment, net                                                                                                                                                     |       | 125,757,824                 |            | 171,026,782 |   |
| Intangible  assets, net                                                                                                                                                                 |       | 9,687,443                   |            | 31,881,136 |   |
| Goodwill                                                                                                                                                                                |       | 39,831,664                  |            | 66,713,170 |   |
| **Total  assets**                                                                                                                                                                       | ** ** | **$**                       | **640,340,650** | ** ** | **$** | **848,755,297** | ** ** |
| **Liabilities  and shareholders’ equity**                                                                                                                                          |       |                        |            |   |   |
| *Current  liabilities*                                                                                                                                                                  |       |                        |            |   |   |
| Capital lease  obligation                                                                                                                                                               |       | 301,138                     |            | 277,704 |   |
| Trade accounts  payable                                                                                                                                                                 |       | 11,010,564                  |            | 10,517,823 |   |
| Billings in  excess of costs and estimated earnings on uncompleted contracts                                                                                                            |       | 3,324,581                   |            | 3,555,245 |   |
| Income taxes  payable                                                                                                                                                                   |       | 23,213,916                  |            | 14,004,172 |   |
| Deferred income  taxes                                                                                                                                                                  |       | 108,637                     |            | — |   |
| Accrued expenses                                                                                                                                                                        |       | 43,307,501                  |            | 55,079,924 |   |
| Other current  liabilities                                                                                                                                                              |       | 38,221,746                  |            | 34,287,255 |   |
| **Total  current liabilities**                                                                                                                                                          | ** ** | **119,488,083**             | ** **      | **117,722,123** | ** ** |
| Capital lease  obligations excluding current instalments                                                                                                                                |       | 390,653                     |            | 325,853 |   |
| Other  liabilities                                                                                                                                                                      |       | 8,124,060                   |            | 25,362,959 |   |
| Income taxes  payable                                                                                                                                                                   |       | —                      |            | 22,574,083 |   |
| Deferred income  taxes                                                                                                                                                                  |       | 3,744,639                   |            | 1,806,178 |   |
| **Total  liabilities**                                                                                                                                                                  | ** ** | **$**                       | **131,747,435** | ** ** | **$** | **167,791,196** | ** ** |
|                                                                                                                                                                                    |       |                        |            |   |   |
| Commitments and  contingencies                                                                                                                                                          |       |                        |            |   |   |
| **Shareholders’  Equity**                                                                                                                                                          |       |                        |            |   |   |
| Common shares  Rs. 2 par value; Authorized 250,000,000 shares (Issued and outstanding;  138,281,853 shares and 139,009,409 shares as of December 31, 2006 and  2007 respectively). |       | 6,122,960                   |            | 6,158,044 |   |
| Additional  paid-in capital                                                                                                                                                             |       | 305,030,981                 |            | 313,350,315 |   |
| Retained  earnings                                                                                                                                                                      |       | 183,197,559                 |            | 285,238,586 |   |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 14,241,715                  |            | 76,217,156 |   |
| **Total  shareholders’ equity**                                                                                                                                                    | ** ** | **$**                       | **508,593,215** | ** ** | **$** | **680,964,101** | ** ** |
|                                                                                                                                                                                    |       |                        |            |   |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                    | ** ** | **$**                       | **640,340,650** | ** ** | **$** | **848,755,297** | ** ** |

 

See accompanying notes tothe consolidated financial statements

 

F-3

----

 

**Patni Computer Systems Limited and subsidiaries**

 

**Consolidated statements of income**

 
| ** **                                                                         | ** ** | **Year ended December 31,** | ** **     |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                         | ** ** | **2005**                                   | ** **     | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                                           |       | $                                          | 450,331,932    |   | $ | 578,850,882 |   | $ | 662,911,669 |   |
| Cost of revenues                                                                   |       | 292,455,690                                |           | 373,965,978 |   | 450,085,130 |   |
| **Gross  profit**                                                                  | ** ** | **157,876,242**                            | ** **     | **204,884,904** | ** ** | **212,826,539** | ** ** |
| Selling, general  and administrative expenses                                      |       | 85,905,893                                 |           | 106,471,937 |   | 116,260,200 |   |
| Provision for  doubtful debts and advances                                         |       | (151,954                                   | )              | 1,191,017 |   | 1,181,753 |   |
| Foreign exchange  (gain)/loss, net                                                 |       | 1,693,145                                  |           | 2,747,926 |   | (23,350,920 | ) |
| **Operating  Income**                                                              | ** ** | **70,429,158**                             | ** **     | **94,474,024** | ** ** | **118,735,506** | ** ** |
| Other  income/(expense)                                                            |       |                                       |           |   |   |   |   |
| Interest and  dividend income                                                      |       | 4,189,776                                  |           | 10,087,916 |   | 12,540,158 |   |
| Interest expense                                                                   |       | (2,044,366                                 | )              | (2,839,930 | ) | (3,592,436 | ) |
| Gain on sale of  investments, net                                                  |       | 1,128,071                                  |           | 1,679,097 |   | 6,370,002 |   |
| Other  (expense)/income, net                                                       |       | 966,620                                    |           | 3,541,426 |   | 1,706,227 |   |
| **Income  before income taxes**                                                    | ** ** | **74,669,259**                             | ** **     | **106,942,533** | ** ** | **135,759,457** | ** ** |
| Income taxes                                                                       |       | 13,802,583                                 |           | 47,691,763 |   | 21,783,963 |   |
| **Net  Income**                                                                    | ** ** | **$**                                      | **60,866,676** | ** ** | **$** | **59,250,770** | ** ** | **$** | **113,975,494** | ** ** |
| **Earnings  per share**                                                            |       |                                       |           |   |   |   |   |
| Basic                                                                              |       | $                                          | 0.48           |   | $ | 0.43 |   | $ | 0.82 |   |
| Diluted                                                                            |       | $                                          | 0.48           |   | $ | 0.43 |   | $ | 0.82 |   |
| **Weighted  average number of common shares used in computing earnings per share** |       |                                       |           |   |   |   |   |
| Basic                                                                              |       | 125,736,592                                |           | 137,957,477 |   | 138,660,785 |   |
| Diluted                                                                            |       | 127,457,632                                |           | 138,904,860 |   | 139,569,933 |   |

 

See accompanying notes tothe consolidated financial statements

 

F-4

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**ConsolidatedStatements of Shareholders’ Equity and Comprehensive Income forthe years ended December 31, 2005, 2006 and 2007**

 

*(in $except share data)*

 
| ** **                                                                         | ** ** | ** **        | ** ** | ** **         | ** **    | **Additional**  | ** ** | ** **        | ** ** | ** **        | ** **      | **Accumulated Other** | ** **    | ** **  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|---------------|-----------------|------------|-------------------|------------|-------------------|-----------------|----------------------------|---------------|-------------|------------|
| ** **                                                                         | ** ** | **Common shares** | ** ** | **Paid-In-**       | ** **    | **Retained**    | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** **      | **Shareholders**           | ** **    |
| ** **                                                                         | ** ** | **Shares**        | ** ** | **Par value** | ** **    | **Capital**     | ** ** | **Earnings**      | ** ** | **Income**        | ** **      | **Income**                 | ** **    | **Equity**  | ** ** |
| **Balance  as of January 1, 2005**                                            | ** ** | **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** | ** ** |
| Issuance of  equity shares on exercise of options                                  |       | 483,454           |       | 21,360             |          | 1,802,953       |       |              |       |              |            |                       |          | 1,824,313   |       |
| Tax benefit  arising on exercise of stock options                                  |       |              |       |               |          | 23,338          |       |              |       |              |            |                       |          | 23,338      |       |
| Compensation cost  related to employee stock option plan                           |       |              |       |               |          | 3,984,071       |       |              |       |              |            |                       |          | 3,984,071   |       |
| Cash dividend on  common shares                                                    |       |              |       |               |          |            |       | (8,565,154        | )          |              |            |                       |          | (8,565,154  | )          |
| Comprehensive  income                                                              |       |              |       |               |          |            |       |              |       |              |            |                       |          |        |       |
| Net income                                                                         |       |              |       |               |          |            |       | 59,250,770        |       | 59,250,770        |            |                       |          | 59,250,770  |       |
| Other  comprehensive income:                                                       |       |              |       |               |          |            |       |              |       |              |            |                       |          |        |       |
| Translation  adjustment                                                            |       |              |       |               |          |            |       |              |       | 9,256,054         |            |                       |          | 9,256,054   |       |
| Unrealised gain  on investments, net of tax of $1,076,106                          |       |              |       |               |          |            |       |              |       | 2,102,200         |            |                       |          | 2,102,200   |       |
| Unrealised gain  on cash flow hedging derivatives, net of tax of $ Nil        |       |              |       |               |          |            |       |              |       | 2,531,633         |            |                       |          | 2,531,633   |       |
| Comprehensive  income                                                              |       |              |       |               |          |            |       |              |       | 73,140,657        |            | 13,889,887                 |          |        |       |
| Adjustment to  initially apply FASB Statement No. 158, net of tax of $323,655 |       |              |       |               |          |            |       |              |       |              |            | (843,079                   | )             | (843,079    | )          |
| **Balance  as of December 31, 2006**                                          | ** ** | **138,281,853**   | ** ** | **$**              | **6,122,960** | ** **      | **$**      | **305,030,981**   | ** ** | **$**             | **183,197,559** | ** **                 | ** **    | ** **  | **$**      | **14,241,716** |   | **$** | **508,593,216** |   |

 

See accompanyingnotes to the consolidated financial statements

 

F-5

----

 

*(in $ exceptshare data)*

 
| ** **                                                                                            | ** ** | **Common shares** | ** ** | **Additional  Paid-In-** | ** **    | **Retained**    | ** ** | **Comprehensive** | ** ** | **Accumulated Other  Comprehensive** | ** **      | **Shareholders** | ** **     |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------|---------------|-----------------|------------|-------------------|------------|--------------------------------------|-----------------|------------------|----------------|
| ** **                                                                                            | ** ** | **Shares**             | ** ** | **Par value**       | ** **    | **Capital**     | ** ** | **Earnings**      | ** ** | **Income**                           | ** **      | **Income**       | ** **     | **Equity** | ** ** |
| **Balance  as of December 31, 2006**                                                             | ** ** | **138,281,853**        | ** ** | **6,122,960**            | ** **    | **305,030,981** | ** ** | **183,197,559**   |       |                                 | ** **      | **$**            | **14,241,716** | ** ** | **$** | **508,593,216** | ** ** |
| Issuance of  equity shares on exercise of options                                                     |       | 727,556                |       | 35,084                   |          | 3,203,887       |       |              |       |                                 |            |             |           | 3,238,971 |   |
| Tax benefit  arising on exercise of stock options                                                     |       |                   |       |                     |          | 442,165         |       |              |       |                                 |            |             |           | 442,165 |   |
| Compensation  cost related to employee stock option plan                                              |       |                   |       |                     |          | 4,673,281       |       |              |       |                                 |            |             |           | 4,673,281 |   |
| Cash dividend on  common shares                                                                       |       |                   |       |                     |          |            |       | (11,934,467       | )          |                                 |            |             |           | (11,934,467 | ) |
| Comprehensive  income                                                                                 |       |                   |       |                     |          |            |       |              |       |                                 |            |             |           |   |   |
| Net income                                                                                            |       |                   |       |                     |          |            |       | 113,975,494       |       | 113,975,494                          |            |             |           | 113,975,494 |   |
| Other  comprehensive income:                                                                          |       |                   |       |                     |          |            |       |              |       |                                 |            |             |           |   |   |
| Translation  adjustment                                                                               |       |                   |       |                     |          |            |       |              |       | 58,571,590                           |            |             |           | 58,571,590 |   |
| Unrealised gain  on investments, net of tax credit of ($424,845)                                      |       |                   |       |                     |          |            |       |              |       | 4,870,285                            |            |             |           | 4,870,285 |   |
| Unrealised losses  on derivative instruments:                                                         |       |                   |       |                     |          |            |       |              |       |                                 |            |             |           |   |   |
| Unrealised  holding gains (losses) arising during the year                                            |       |                   |       |                     |          |            |       |              |       | 10,750,148                           |            |             |           | 10,750,148 |   |
| Less:  Reclassification adjustment included in net income                                             |       |                   |       |                     |          |            |       |              |       | (11,792,707                          | )               |             |           | (11,792,707 | ) |
| Amortization of  losses related to pension and other post retirement benefits, net of tax of  $47,185 |       |                   |       |                     |          |            |       |              |       | (423,876                             | )               |             |           | (423,876 | ) |
| Comprehensive  income                                                                                 |       |                   |       |                     |          |            |       |              |       | 175,950,934                          |            | 61,975,440       |           | — |   |
|                                                                                                  |       |                   |       |                     |          |            |       |              |       |                                 |            |             |           |   |   |
| **Balance  as of December 31, 2007**                                                             | ** ** | **139,009,409**        | ** ** | **$**                    | **6,158,044** | ** **      | **$**      | **313,350,315**   | ** ** | **$**                                | **285,238,586** | ** **       | ** **     | ** ** | **$** | **76,217,156** | ** ** | **$** | **680,964,101** | ** ** |
|                                                                                                       |            |                        |            |                          |               |                 |            |                   |            |                                      |                 |                  |                |  |  |  |  |  |  |  |

 

See accompanying notes to the consolidated financial statements

 

F-6

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Consolidated Statements of cash flows**

 
| ** **                                                                        | ** ** | **Year ended December 31,** | ** **       |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------------|
| ** **                                                                        | ** ** | **2005**                         | ** **       | **2006** | ** ** | **2007** | ** ** |
| **Operating activities**                                                          | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                       |       | $                                | 60,866,676       |   | $ | 59,250,770 |   | $ | 113,975,494 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities |       |                             |             |   |   |   |   |
| Depreciation  and amortization                                                    |       | 15,960,705                       |             | 19,573,548 |   | 25,053,060 |   |
| Deferred  taxes                                                                   |       | (1,889,293                       | )                | 4,344,470 |   | (10,130,035 | ) |
| Provision/(recovery)  for doubtful debts and advances                             |       | (151,954                         | )                | 1,191,017 |   | 1,181,753 |   |
| (Gain)/loss  on sale of property, plant and equipment, net                        |       | (3,176,152                       | )                | (21,977 | ) | (265,426 | ) |
| (Gain)  / loss on sale of investments                                             |       | (1,128,071                       | )                | (1,679,097 | ) | (6,370,002 | ) |
| Compensation  cost related to employee stock option plan                          |       | —                           |             | 3,984,071 |   | 4,673,281 |   |
| Change  in assets and liabilities                                                 |       |                             |             |   |   |   |   |
| Accounts  receivable                                                              |       | (3,531,903                       | )                | (40,234,185 | ) | (13,492,304 | ) |
| Costs  and estimated earnings in excess of billings on uncompleted contracts      |       | (11,162,155                      | )                | 3,955,003 |   | (8,300,239 | ) |
| Other  current assets                                                             |       | 3,431,844                        |             | (735,650 | ) | (21,663,190 | ) |
| Other  assets                                                                     |       | (142,962                         | )                | (579,720 | ) | 1,252,142 |   |
| Trade  accounts payable - others                                                  |       | 1,428,007                        |             | 4,025,950 |   | (1,804,558 | ) |
| Billings  in excess of costs and estimated earnings on uncompleted contracts      |       | (456,143                         | )                | 859,218 |   | 59,255 |   |
| Taxes  payable                                                                    |       | (463,113                         | )                | 4,956,360 |   | 10,775,958 |   |
| Tax  benefit on exercise of stock options                                         |       | 136,816                          |             |   |   | 47,841 |   |
| Accrued  expenses                                                                 |       | 6,069,364                        |             | 16,246,514 |   | 8,104,178 |   |
| Other  current liabilities                                                        |       | 14,815,277                       |             | (17,063,525 | ) | 4,222,173 |   |
| Other  liabilities                                                                |       | (7,548,512                       | )                | 1,018,325 |   | 3,952,833 |   |
| **Net cash provided by operating activities**                                     | ** ** | **$**                            | **73,058,431**   | ** ** | **$** | **59,091,092** | ** ** | **$** | **111,272,214** | ** ** |
| **Investing activities**                                                          | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| Purchase  of property, plant and equipment                                        |       | (53,282,451                      | )                | (48,620,365 | ) | (61,891,010 | ) |
| Proceeds  from sales of property, plant and equipment                             |       | 4,336,910                        |             | 83,097 |   | 557,761 |   |
| Purchase  of investments                                                          |       | (542,994,281                     | )                | (781,204,843 | ) | (1,149,342,754 | ) |
| Proceeds  from sale of investments                                                |       | 485,768,961                      |             | 686,658,104 |   | 1,134,569,183 |   |
| Payments  for acquisition, net of cash acquired                                   |       | (5,578,772                       | )                | (12,184,832 | ) | (33,795,203 | ) |
| Payments  for acquisition of technology related intangibles                       |       | —                           |             | (497,879 | ) | (20,368,599 | ) |
| Tax  benefit on incentive stock option of Patni Telecom                           |       | —                           | ** **       | 340,366 |   | 235,057 |   |
| **Net cash used in investing activities**                                         | ** ** | **$**                            | **(111,749,633** | **)** | **$** | **(155,426,352** | **)** | **$** | **(130,035,565** | **)** |

 

Seeaccompanying notes to the consolidated financial statements

 

F-7

----

 
| ** **                                                                            | ** ** | **Year ended** | ** **      |
|---------------------------------------------------------------------------------------|------------|---------------------|-----------------|
| ** **                                                                            | ** ** | **2005**            | ** **      | **2006** | ** ** | **2007** | ** ** |
| **Financing  activities:**                                                            |       |                |            |   |   |   |   |
| Payment of  capital lease obligations                                                 |       | (329,168            | )               | (390,886 | ) | (429,987 | ) |
| Dividend on  common shares                                                            |       | (6,531,628          | )               | (8,562,666 | ) | (11,933,401 | ) |
| Proceeds from  common shares issued, net of expenses                                  |       | 118,736,243         |            | 1,824,313 |   | 3,238,971 |   |
| Tax benefit  arising on exercise of stock options                                     |       | —              |            | 23,338 |   | 442,165 |   |
| **Net  cash provided by/(used in) financing activities**                              | ** ** | **$**               | **111,875,447** | ** ** | **$** | **(7,105,901** | **)** | **$** | **(8,682,252** | **)** |
| Effect of  exchange rates changes on cash and cash equivalents                        |       | (1,508,142          | )               | 1,131,571 |   | 13,561,572 |   |
| **Net  increase/(decrease) in cash and cash equivalents**                             | ** ** | **73,184,245**      | ** **      | **(103,441,161** | **)** | **(27,445,603** | **)** |
| Cash and cash  equivalents at the beginning of the year                               |       | 77,143,498          |            | 148,819,600 |   | 46,510,010 |   |
| Cash and cash  equivalents at the end of the year                                     |       | $                   | 148,819,600     |   | $ | 46,510,010 |   | $ | 32,625,979 |   |
| Supplemental  disclosure of cash flow information:                                    |       |                |            |   |   |   |   |
| Interest paid                                                                         |       | $                   | 673,158         |   | $ | 4,905,069 |   | $ | 26,764 |   |
| Income taxes  paid                                                                    |       | $                   | 15,294,446      |   | $ | 39,945,075 |   | $ | 29,532,237 |   |
| Non cash  investing and financing activities:                                         |       |                |            |   |   |   |   |
| Additions to  property, plant and equipment, represented by capital lease obligations |       | $                   | 471,644         |   | $ | 361,133 |   | $ | 264,138 |   |
| Property, plant  and equipment acquired on credit                                     |       | $                   | 2,104,773       |   | $ | 4,814,076 |   | $ | 558,012 |   |

 

See accompanying notes to the consolidated financialstatements

 

F-8

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |
|                                                             |
| **1**                                                            | ** ** | **Organization and nature of business** |
|                                                             |   |   |
| 1.1.1                                                            |   | Patni  Computer Systems Limited (“Patni”) is a company incorporated in India under  the Indian Companies Act, 1956. In February 2004, Patni completed  initial public offering of its equity shares in India and in  December 2005, the Company completed initial public offering of American  Depositary Shares in the United states of America (USA). |
|                                                             |   |   |
| 1.1.2                                                            |   | Patni  Computers Systems (UK) Limited (“Patni UK”), a company incorporated in the  United Kingdom (UK), Patni Computer Systems GmbH (“Patni GmbH”), a company  incorporated in Germany and Patni Americas, Inc. (“Patni USA”) formerly  known as Patni Computer Systems, Inc., a company incorporated in  Massachusetts, USA are 100% owned subsidiaries of Patni. On November 3,  2004, Patni USA, acquired 100% equity in Patni Telecom (formerly known as  Cymbal Corporation), a company incorporated in California, USA, together with  its subsidiaries in India, UK & Thailand, for consideration in cash.  In July, 2007, Patni USA, acquired 100% equity in Patni Life Sciences Inc.  (formerly known as Taratec Development Corporation), a company incorporated  in New Jersey, USA, for consideration in cash. Further, Patni also has  foreign branch offices in the USA, Japan, Sweden, Australia, Korea,  Netherlands, Finland, UAE, South Africa and Canada. In 2007 the Company has  also set up a subsidiary in Brazil named Patni Computer Systems Brasil Ltda. |
|                                                             |   |   |
|                                                             |   | Cymbal  Information Services (Thailand) Ltd., subsidiary of Patni Telecom has been  dissolved and the liquidation has been completed in May, 2006. |
|                                                             |   |   |
| 1.1.3                                                            |   | Patni  together with its subsidiaries (collectively, “Patni Group” or “the Company”)  is engaged in IT consulting, software development and Business Process  Outsourcing (“BPO”). The Company provides multiple service offerings to its  clients across various industries comprising financial services, insurance  services, manufacturing, communications, media and entertainment and  technology services (comprising independent software vendors and product  engineering) and other industries  such as energy and utilities, retail, logistics and transportation. The  various service offerings comprise application development, application  maintenance and support, packaged software implementation, infrastructure  management services, product engineering services, quality assurance services  and BPO services. |
|                                                             |   |   |
| 1.1.4                                                            |   | These  financial statements are prepared  on a consolidated basis for all the years presented. |
|                                                             |   |   |
| **2**                                                            | ** ** | **Summary of significant accounting policies** |
|                                                             |   |   |
|                                                             |   | ***Basis of preparation of financial  statements*** |
|                                                             |   |   |
| 2.1.1                                                            |   | The  accompanying consolidated financial statements have been prepared in  accordance with accounting principles generally accepted in the United States  of America (“US GAAP”). |
|                                                             |   |   |
|                                                             |   | ***Principles of consolidation*** |
|                                                             |   | *** *** |
| 2.1.2                                                            |   | The consolidated financial statements include the  financial statements of Patni and all of its subsidiaries, which are more than  50% owned and controlled.  All inter-company accounts and transactions are eliminated on consolidation. |

 

F-9

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of significant accounting policies*****(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Accounting estimates***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.3  |       | The preparation of financial statements in conformity  with US GAAP requires that management makes estimates and assumptions that  affect the reported amount of assets and liabilities and disclosures of  contingent assets and liabilities as of the date of the financial statements  and the reported amounts of revenue and expenses during the reporting period.  Management believes that the estimates used in the preparation of the  consolidated financial statements are prudent and reasonable. The actual  results could differ from these estimates. Appropriate changes in estimates  are made as management become aware of changes in circumstances surrounding  the estimates. Changes in estimates are reflected in the financials  statements in the period in which changes are made and, if material, their  effects are disclosed in the notes to the consolidated financial statements. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Revenue and cost recognition***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.4  |       | The Company derives its revenues primarily from  software services and to a lesser extent from BPO services. Revenue is  recognized when there is persuasive evidence of a contractual arrangement  with customers, delivery has occurred, the sales price is fixed or  determinable and collectibility is probable. Software services are provided  either on a fixed price, fixed time frame or on a time and material basis.  The Company’s fixed price contracts include application maintenance and  support services, on which revenue is recognized ratably over the term of  maintenance. Revenue with respect to other fixed price contracts is  recognized on a percentage of completion basis. Revenue with respect to  time-and-material contracts is recognized as related services are performed.                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | Guidance  has been drawn from paragraph 95 of Statement of Position (‘‘SOP’’) 97-2,  ‘‘Software Revenue Recognition’’ to account for revenue from fixed price  arrangements for software development and related services in conformity with  SOP-81-1 (“Accounting for Performance of Construction - Type and Certain  Production - Type Contracts”). The input (cost expended) method has been used  because management considers this to be the best available measure of  progress on these contracts as there is a direct relationship between input  and productivity. Provisions for estimated losses, if any, on uncompleted  contracts are recorded in the period in which such losses become probable  based on the current contract estimates.                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.5  |       | The  asset, “Costs and estimated earnings in excess of billings on uncompleted  contracts”, represents revenues recognized in excess of amounts billed. These  amounts are billed after the milestones specified in the agreement are  achieved and the customer acceptance for the same is received. The liability,  “Billings in excess of costs and estimated earnings on uncompleted  contracts”, represents billings in excess of revenues recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.6  |       | Direct  and incremental contract origination and set up costs incurred in connection  with support/maintenance service arrangements are charged to expense as  incurred. These costs are deferred only in situations where there is a  contractual arrangement establishing a customer relationship for a specified  period. The costs to be deferred are limited to the extent of future  contractual revenues. Further, revenue attributable to set up activities is  deferred and recognised systematically over the periods that the related fees  are earned, as services performed during such period do not result in the  culmination of a separate earnings process.                                                                                                                                                                                                                                     |

 

F-10

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of significant accounting policies*******(Continued)***                                                                                                                                                                                                                                                                                                                                                                             |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | Costs  that are incurred for a specific anticipated contract and that will result in  no future benefits unless the contract is obtained, are not included in  contract costs before the receipt of the contract. However, such costs are  deferred, subject to the evaluation of their probable recoverability.                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.7  |       | Warranty  costs on sale of services are accrued based on managements’ estimates and  historical data at the time related revenues are recorded.                                                                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.8  |       | The  Company grants volume discounts to certain customers, which are computed  based on a pre-determined percentage of the total revenues from those  customers during a specified period, as per the terms of the contract. These  discounts are earned only after the customer has provided a specified  cumulative level of revenues in the specified period. The discounts can be  utilized by the customer in the form of free services. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | The  Company estimates the total number of customers that will ultimately earn  these discounts, based on which a portion of the revenue on the related  transactions is allocated to the free services that will be delivered in the  future.                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | Reimbursement  of out of pocket expenses received from customers have been included as part  of revenues in accordance with EITF 01-14 “Income Statement Characterization  of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred”.                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.9  |       | Revenues  from BPO Services are derived from both time-based and transaction-priced  contracts. Revenue is recognized as the related services are performed, in  accordance with the specific terms of the contracts with the customer.                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | ***Advertising cost***                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.10 |       | Advertising  costs incurred during the year  have been expensed. The total amount of advertising costs expensed was $1.5  million, $1.6 million and $0.9 million for the years ended December, 31,  2005, 2006 and 2007.                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | ***Cash and cash equivalents***                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.11 |       | The  Company considers investments in highly liquid investments with an original  maturity of three months or less to be cash equivalents.  Cash and cash equivalents comprise cash, deposits with banks and money market  accounts.                                                                                                                                                                                                          |

 

F-11

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary****of significant accounting policies*******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       | ***Investments***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1.12 |       | Management  determines the appropriate classification of investment securities at the  time of purchase and re-evaluates such designation at each balance sheet  date. At December 31, 2006 and 2007, investment securities were  classified as available-for-sale or held to maturity. The investment  securities classified as available-for-sale consists of units of mutual funds  and other securities. Other securities consists primarily of debt  instruments, that carry market interest rates and are stated at cost. Held to  maturity securities consist of investment in Government bonds made by the  Company pursuant to tax exemption scheme under the Indian Income Tax Act,  1961. These bonds mature in five years from the time of deposit.                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1.13 |       | Available-for-sale  securities are carried at fair market value with unrealized gains and losses,  net of deferred income taxes, reported as a separate component of other  comprehensive income in the statement of shareholders’ equity and  comprehensive income. The fair values represent either the quoted market  prices for the investments at balance sheet date where available or Net Asset  Value (“NAV”) as stated by the issuers of these mutual fund units in the  published statements. NAVs represents the price at which the issuer will  issue further units in the mutual fund and the price at which the issuer will  redeem such units from the investors. Accordingly, such NAV are analogous to  fair market value with respect to these investments as transactions of these  mutual funds are carried out at such prices between investors and the issuers  of these units of mutual funds. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       | Realized  gains and losses, and decline in value judged to be other than temporary on  available-for-sale securities are included in the consolidated statements of  income. The cost of securities sold or disposed is determined on average cost  basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       | ***Business combinations, goodwill and  intangible assets***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1.14 |       | Statement  of Financial Accounting Standards (“SFAS”) No. 141, “Business  Combinations” requires that the purchase method of accounting be used for all  business combinations. SFAS No. 141 specifies criteria that intangible  assets acquired in a business combination must be recognized and reported  separately from goodwill. In accordance with SFAS No. 142, “Goodwill and  Other Intangible Assets” all assets and liabilities of the acquired  businesses including goodwill are assigned to reporting units.                                                                                                                                                                                                                                                                                                                                                               |

 

F-12

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of****significant****accounting policies*******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       | ***Business combinations, goodwill and  intangible assets******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1.15 |       | Goodwill  represents the cost of the acquired businesses in excess of the fair value of  identifiable tangible and intangible net assets purchased. Goodwill is not  amortized but is tested for impairment at least on an annual basis at year  end, relying on a number of factors including operating results, business  plans and future cash flows. Recoverability of goodwill is evaluated using a  two-step process. The first step involves a comparison of the fair value of a  reporting unit with its carrying value. If the carrying amount of the  reporting unit exceeds its fair value, the second step of the process  involves a comparison of the fair value and carrying value of the goodwill of  that reporting unit. If the carrying value of the goodwill of a reporting  unit exceeds the fair value of that goodwill, an impairment loss is  recognized in an amount equal to the excess. Goodwill of a reporting unit  will be tested for impairment between annual tests if an event occurs or  circumstances change that would more likely than not reduce the fair value of  the reporting unit below its carrying amount. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1.16 |       | Intangible  assets acquired either through business combination or individually are  amortized over their respective individual estimated useful lives in  proportion to the economic benefits consumed in each period. Intangible  assets comprise customer and technology related intangibles and are being  amortized over a period of 5-10 years. The estimated useful life of an  identifiable intangible asset is based 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 expenditures required to obtain the expected future cash  flows from the asset.                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1.17 |       | Intangible  assets are evaluated for recoverability whenever events or changes in  circumstances indicate that their carrying amounts may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of  the carrying amount of an asset to future undiscounted net cash flows  expected to be generated by the asset. If such assets are considered to be  impaired, the impairment to be recognized is measured by the amount by which  the carrying value of the assets exceeds the fair value of the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       | ***Property, plant and equipment***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1.18 |       | Property,  plant and equipment are stated at cost less accumulated depreciation and  amortization. Gains and losses on disposals are included in the consolidated  statements of income at amounts equal to the difference between the net book  value of the disposed assets and the net proceeds received upon disposal.  Expenditures for replacements and improvements are capitalized, whereas the  cost of maintenance and repairs is charged to income when incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

F-13

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**2****             ****Summary ofsignificant****accounting****policies*)******(Continued)***

 

***Property, plant and equipment******(Continued)***

 

2.1.19      Property, plant and equipment are depreciated overthe estimated useful life of the asset using the straight-line method, once theasset is put to its intended use. The cost of software obtained for internaluse is capitalized and amortized over the estimated useful life of thesoftware. The estimated useful lives of assets are 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 of long-lived assets andlong-lived assets to be disposed***

 

2.1.20      Long-lived assets and certain identifiableintangibles are reviewed for impairment whenever an event or changes incircumstances indicate that the carrying amount of such assets may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net undiscounted cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of assets. Assets tobe disposed of are reported at the lower of the carrying amount or fair valueless cost to sell.

 

***Functional and Foreign currencytranslation***

 

2.1.21      The functional currency of Patni and its branches inthe USA, Japan, Sweden, Finland, UAE, South Africa, Canada, Australia, Koreaand Netherland is the Indian Rupee. The functional currencies of Patni’ssubsidiaries are the applicable local currencies.

 

2.1.22      The accompanying consolidated financial statementsare reported in US Dollars. The translation is performed for balance sheetaccounts using the exchange rate in effect at the balance sheet date and forstatements of income accounts using an appropriate monthly weighted averageexchange rate for the respective periods. In respect of subsidiaries, therespective functional currencies are first translated into Indian Rupees andthen into US Dollars. The gains or losses resulting from such translation arereported in other comprehensive income in the statement of shareholders’ equityand comprehensive income.

 

F-14

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of significant accounting policies*****(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Foreign currency transactions***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.23 |       | Transactions  in foreign currencies are translated into the functional currency at the rates  of exchange prevailing at the date of the transaction. Resulting gains or  losses from settlement of such foreign currency transactions are included in  the consolidated statements of income. Unsettled monetary assets and  liabilities denominated in foreign currencies are translated into the  functional currency at the rates of exchange prevailing at the balance sheet  date. Transaction gain or loss arising from change in exchange rates between  the date of transaction and year exchange rates are included in the  consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Income taxes***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.24 |       | Income  taxes are accounted for under the asset and liability method. Deferred tax  assets and liabilities are recognized for the future tax consequences  attributable to differences between the financial statement carrying amounts  of existing assets and liabilities and their respective tax bases and  operating loss carry forwards. Deferred tax assets and liabilities are  measured using enacted tax rates expected to apply to taxable income in the  years in which those temporary differences are expected to be recovered or  settled. The effect on deferred tax assets and liabilities of changes in tax  rates is recognized in results of operations in the period that includes the  enactment date. The measurement of deferred tax assets is reduced, if  necessary, by a valuation allowance if it is more likely than not that some  portion or all of the assets will not be realised. The Company recognizes  interest and penalties related to uncertain tax positions in Other  (expense)/income. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Concentration of credit risk***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.25 |       | Financial  instruments that potentially subject the Company to concentration of credit  risks consist principally of cash, cash equivalents, investments and accounts  receivables. Cash and cash equivalents are invested with corporations,  financial institutions and banks with investment grade credit ratings. To  reduce credit risk, investments are made in a diversified portfolio of mutual  funds, government bonds, which are periodically reviewed. To reduce its  credit risk on accounts receivables, the Company performs ongoing credit  evaluations of customers.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | ***Retirement benefits to employees***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.26 |       | Contributions  to defined contribution plans are charged to income in the period in which  they accrue. Current services costs for defined benefit plans are accrued in  the period to which they relate, based on actuarial valuation performed by an  independent actuary in accordance with SFAS No. 87, “Employers’  Accounting for Pensions”, SFAS No. 132R “Employers’ Disclosures about  Pensions and Other Postretirement Benefits”, both as amended by SFAS No. 158  “Employer’s Accounting for Defined Benefit Pension and Other Postretirement  Plans” . The Company adopted SFAS No. 158 as of December 31, 2006 which  requires the net funded position of the plans to be recognized as an asset or  liability in the employers’ balance sheet.                                                                                                                                                                                                         |

 

F-15

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*******(Continued)***

 

***Stock-based compensation***

 

2.1.27      The Company adopted SFAS No. 123R, “Share-BasedPayment” (SFAS No. 123R) effective January 1, 2006. This statementrequires compensation expense relating to share-based payments to be recognizedin net income using a fair value measurement method. Under the fair valuemethod, the estimated fair value of awards is charged to income on aaccelerated basis over the requisite service period, which is generally thevesting period. The Company elected the modified prospective method asprescribed in SFAS No. 123R and therefore, prior period was not restated.Under the modified prospective method, this statement was applied to new awardsgranted after the time of adoption, as well as to the unvested portion ofpreviously granted equity-based awards for which the requisite service had notbeen rendered as of January 1, 2006. The Company granted stockoptions under the ‘Patni ESOP 2003 Revised 2006’ plan (‘the plan’). See Note 17for further discussion.

 

2.1.28      Prior to January 1, 2006, the company accountedfor share-based employee compensation under the provisions of SFAS No. 123using the intrinsic value method prescribed by APB No. 25 and relatedinterpretations. Under the intrinsic value method, no compensation expense wasrecognized for stock options, as the exercise price of employee stock optionsequated the market value of the Company’s stock on the date of grant. Thefollowing pro forma net income and earnings per share information has beendetermined as if the Company had accounted for its share-based compensationawards issued using the fair value method in 2005.

 
| **Year ended December 31,**            | ** ** | **2005**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|
| Net income, as  reported                              |       | $          | 60,866,676 |   |
| Less: Stock  based employee compensation expense      |       |       |       |
| determined under  fair value based method, net of tax |       |       |       |
| Effects                                               |       | (3,501,531 | )          |
| Pro forma net  income                                 |       | $          | 57,365,145 |   |
| Reported  earnings per share                          |       |       |       |
| Basic                                                 |       | $          | 0.48       |   |
| Diluted                                               |       | $          | 0.48       |   |
| Pro forma  earnings per share                         |       |       |       |
| Basic                                                 |       | $          | 0.46       |   |
| Diluted                                               |       | $          | 0.45       |   |

 

2.1.29      The pro forma amounts and fair value of each optiongrant were estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions used for grantsin 2005:

 
| **Year ended December 31,** | ** ** | **2005**     | ** ** |
|--------------------------------------------|------------|--------------|------------|
| Dividend yield                             |       | 0.53% - 0.54 | %          |
| Expected life                              |       | 2-5 years    |       |
| Risk free  interest rates                  |       | 5.74% - 6.73 | %          |
| Volatility                                 |       | 28% - 50     | %          |

 

F-16

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of significant accounting policies*****(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       | ***Stock-based compensation******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       | The  Black-Scholes model is a trading pricing model that does not reflect either  the non-traded nature of employee stock options or the limited transferability of such options. This model also does  not consider restrictions on trading for all employees, including certain  restrictions imposed on senior management of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.30 |       | Prior  to the adoption of SFAS 123R, the Company was required to record benefits  associated with the tax deductions in excess of recognized compensation cost  as an operating cash flow. However SFAS 123R requires that such benefits be  recorded as a financing cash inflow. In the accompanying Consolidated  Statements of Cash Flows for year ended December 31, 2006 and 2007, tax  benefit of $23,338 and $442,165, respectively has been classified as  financing cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.31 |       | Effective April 1, 2007, an amendment has been made to Indian Income Tax  Act 1961 subjecting specified securities allotted or transferred by an  employer to its employees to Fringe Benefit Tax (FBT). The liability to pay  FBT by the employer arises at the time of allotment of the securities,  consequent to exercise of option by the employees and is calculated on the  difference between the fair value of the underlying share on the date of  vesting and the exercise price paid by the employee based on the corporate  tax rate. The FBT arising from such allotment of specified option is  collectible from employees, which is considered as akin to a reset in the  terms of the ESOP Plan as it would reduce the ultimate benefit to the  employee, by way of increase in exercise price and hence is recognized as  additional paid-in-capital.                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       | ***Dividends***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.32 |       | Dividends  on common shares are recorded as a liability on the date of declaration by  the shareholders at the Annual General Meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       | ***Derivatives and hedge Accounting***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.33 |       | The  Company enters into forward foreign exchange contracts/option contracts  (derivatives) to mitigate the risk of changes in foreign exchange rates  on inter company and end customer accounts receivable and forecasted sales  transactons denominated in foreign currencies and, upon completion of the  formal documentation and testing for effectiveness, the Company  designates forward and option contracts, which meet the hedging criteria, as  cash flow hedges. Changes in fair values of designated cash flow hedges are  deferred and recorded as a component of accumulated other comprehensive  income until the hedged transactions occur and are then recognised in the  consolidated statements of income. Changes in fair value for derivatives not  designated as hedging instruments and ineffective portion of the hedging  instruments are recognized in consolidated statements of income in the  current period. |

 

F-17

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| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
| **2**  | ** ** | **Summary of significant accounting policies*******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | ***Derivatives and hedge Accounting******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1.34 |       | In  respect of derivatives designated as hedges, the Company formally documents  all relationships between hedging instruments and hedged items, as well as  its risk management objective and strategy for undertaking various hedge  transactions. The Company also formally assesses, both at the inception of  the hedge and on an ongoing basis, whether each derivative is highly  effective in offsetting changes in fair values or cash flows of the hedged  item. If it is determined that a derivative is not highly effective as a  hedge, or if a derivative ceases to be a highly effective hedge, the Company  will, prospectively, discontinue hedge accounting with respect to that  derivative. The derivatives, which do not qualify for hedge accounting, are  accordingly, recognised at fair value with gains or losses included in  foreign exchange (gain)/loss in the consolidated statements of income. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | ***Earnings per share***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1.35 |       | In accordance  with SFAS No. 128, “Earnings per Share”, basic earnings per share is  computed using the weighted average number of common and redeemable common  shares outstanding during the year. Diluted earnings per share is computed  using the weighted average number of common and redeemable common shares and  dilutive common equivalent shares outstanding during the year using the  treasury stock method for options except where the result would be  anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | ***Commitments and Contingencies***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1.36 |       | Liabilities  for loss contingencies arising from claims, assessments, litigations, fines  and penalties and other sources are recorded when it is probable that a liability  has been incurred and the amount of the assessment and/or remediation can be  reasonably estimated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | ***Reclassifications***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1.37 |       | Certain  reclassifications have been made in the financial statements of prior years  to conform to classifications used in the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | ***Recently Issued Accounting Standards***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1.38 |       | In  February 2007,  the FASB issued Statement of Financial Accounting Standards No. 159, The  Fair Value Option for Financial Assets and Financial Liabilities – including  an amendment of FASB Statement No. 115 (Statement 159). Statement 159  gives the Company the irrevocable option to carry most financial assets and  liabilities at fair value that are not currently required to be measured at  fair value. If the fair value option is elected, changes in fair value would  be recorded in earnings at each subsequent reporting date. SFAS No. 159  is effective for the Company’s 2008 fiscal year. Effective January 1,  2008 the Company adopted the provisions of SFAS No. 159. The Company has  not made election for fair value options for any existing eligible  instruments.                                                                                    |

 

F-18

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 
|   |   | ***Recently Issued Accounting Standards******(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1.39 |   | In  September 2006, the FASB issued FASB Statement No. 157, Fair Value  Measurement (Statement 157). Statement 157 defines fair value, establishes a  framework for the measurement of fair value, and enhances disclosures about  fair value measurements. The Statement does not require any new fair value  measures. The Statement is effective for fair value measures already required  or permitted by other standards for fiscal years beginning after  November 15, 2007. The Company is required to adopt Statement 157  beginning on January 1, 2008. Statement 157 is required to be applied  prospectively, except for certain financial instruments. Any transition  adjustment will be recognized as an adjustment to opening retained earnings  in the year of adoption. In November 2007, the FASB proposed a one-year  deferral of Statement 157’s fair-value measurement requirements for non  financial assets and liabilities that are not required or permitted to be  measured at fair value on a recurring basis. The Company is currently  evaluating the impact of adopting Statement 157 on its results of operations  and financial position.      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1.40 |   | In  December 2007, the FASB issued FASB Statement No. 141R, Business  Combinations (Statement 141R) and FASB Statement No. 160, Noncontrolling  Interests in Consolidated Financial Statements – an amendment to ARB  No. 51 (Statement 160). Statements 141R and 160 require most  identifiable assets, liabilities, noncontrolling interests, and goodwill  acquired in a business combination to be recorded at “full fair value” and  require noncontrolling interests (previously referred to as minority  interests) to be reported as a component of equity, which changes the  accounting for transactions with noncontrolling interest holders. Both  Statements are effective for periods beginning on or after December 15,  2008, and earlier adoption is prohibited. Statement 141R will be applied to  business combinations occurring after the effective date. Statement 160 will  be applied prospectively to all noncontrolling interests, including any that  arose before the effective date. The Company is currently evaluating the  impact of adopting Statement 141R and Statement 160 on its results of  operations and financial position. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | ***Recently Adopted Accounting Standards***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1.41 |   | Effective  January 1, 2007, the Company adopted provisions of FIN 48. FIN 48  addresses the accounting for uncertainty in income taxes recognized in an  enterprise’s financial statements and prescribes a threshold of  more-likely-than-not for recognition and derecognition of tax positions taken  or expected to be taken in a tax return. FIN 48 also provides related  guidance on measurement, classification, interest and penalties, and  disclosure. See note 18.1.11 for the impact of adopting FIN 48 on the  Company’s results of operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

F-19

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**3****              ****Acquisitions**

 

***3.1.1******       ******Acquisition of Patni Telecom***

 

On November 3, 2004, Patni USA acquired 100% equity interest inPatni Telecom which is engaged in providing IT services to clients in thetelecom sector. The terms of the purchase provide for payment of contingentconsideration to all the selling shareholders, payable over three years, andcalculated based on the achievement of specified revenue and margin targets.The contingent consideration is payable in cash and cannot exceed $33,000,000,inclusive of payments under an incentive plan for certain employees asdescribed below. The Company has followed the consensus reached in EITF 95-8,“Accounting for Contingent Consideration Paid to the Shareholders of anAcquired Enterprise in a Purchase Business Combination” and accordingly willrecord the contingent payments, other than payments to certain employees underthe incentive plan, as goodwill in the periods in which the contingency isresolved.

 

As per the Stock Purchase Agreement and amendments thereof, $5,578,772,$12,184,832 and $12,402,039 was paid to the shareholders of Patni Telecom ascontingent consideration based on achievement of certain revenue and margintargets for the years ended June 30, 2005, 2006 and 2007,respectively. This additional consideration has been recognized as Goodwillarising on acquisition of Patni Telecom.

 

Further, as a part of the acquisition, the Company initiated anincentive plan linked to revenues and margins, for certain specific employeesof Cymbal. The incentive payments under this plan will not exceed $3,400,000till June 2007. Since, the incentive payments are linked to continuingemployment; the expenses under the plan are recognized as compensation for postacquisition services.Accordingly, the expenses for the years ended December 31, 2005,2006 and 2007 have been recorded as follows:

 
| **Year ended December,31**          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of Revenues                              |       | $        | 664,709    |     | $          | 587,001  |       | $ | 148,619 |   |
| Selling, General  and Administrative expenses |       | 176,177  |       | 756,841  |       | 297,237  |       |
|                                               |            |          |            |          |            |          |            |  |  |  |

 

Asof December 31, 2007, the Company has tested the related goodwill forimpairment and concluded that there is no impairment in its carrying value.

 

F-20

----

** **
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**3             Acquisitions*****(Continued)***

 

***3.1.2       Acquisition of business and assets of Logan-OrvissInternational Associates BV (‘LOI’)***

 

On July 2, 2007, the Company acquired the business and assets ofLOI, a European telecommunications consulting services Company. The Companybelieves that through this acquisition it will strengthen its presence incommunication and media practice through consultancy services on ITinitiatives. The consolidated financial statements include the operatingresults of this business combination from the date of acquisition. The purchaseprice of $8,613,938 (including direct acquisition related expenses of $863,938)was paid in cash.

 

This transaction has been accounted using the purchase method asrequired by SFAS No. 141 “Business Combinations”. The purchase price hasbeen allocated to the acquired assets as per management’s estimates andindependent valuation of fair values as summarized below:

 
| Intangible  assets                                               |       |       |      |      |          |
|------------------------------------------------------------------|------------|------------|-----------|-----------|---------------|
| - Customer  contracts and non contractual customer relationships |       | $          | 1,370,000 |      |          |   |
| - Intellectual  property rights                                  |       | 790,000    |      | 2,160,000 |          |
| Goodwill                                                         |       |       |      | 6,453,938 |          |
| **Total  purchase price**                                        | ** ** | ** ** |      | **$**     | **8,613,938** |   |
|                                                                  |            |            |           |           |               |  |  |

 

Goodwillgenerated from the above acquisition was allocated to “Communications, Mediaand Entertainment” segment.

 

Further,as a part of the business acquisition, the Company initiated an incentive planlinked to revenues for certain specific employees. Management estimates thatincentive payments under this plan will not exceed $13,080,000 tillJune 2010. Since, the incentive payments are linked to continuingemployment, the payments under the plan are recognized as compensation for postacquisition services. Accordingly, $22,664 and $222,690 have been recorded asCost of revenues and Selling, General and Administrative expenses respectivelyfor the year ended December 31, 2007.

 

***3.1.3       Acquisition of Taratec Development Corporation (Taratec)***

 

OnJuly 23, 2007, Patni USA acquired 100% equity interest in TaratecDevelopment Corporation(subsequently named as Patni Life Sciences), which is aleading consulting company in the life sciences industry providing integratedbusiness, information technology, and regulatory compliance products andservices.

 

Theprimary purpose for the acquisition was to enhance Patni’s market specificservices and provide additional capability to support the growing and diverserequirements of the Life Sciences market, from pharmacovigilance to demand-drivensupply chains. The consolidated financial statements include the operatingresults of Taratec Development Corporation effective July 1, 2007, thedesignated effective date for convenience purposes. The purchase price of$15,680,226 (including direct acquisition related expenses of $435,008), waspaid in cash on July 23, 2007.

 

F-21

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**3             Acquisitions*****(Continued)***

 

***3.1.3       Acquisition of Taratec Development Corporation (Taratec)******(Continued)***

 

The terms of the purchase also provide for payment of contingentconsideration to all the selling shareholders, payable over three years, andcalculated based on the achievement of specified revenue and margin targets.The contingent consideration is payable in cash and cannot exceed $13,200,000.The Company has followed the consensus reached in EITF 95-8, “Accounting forContingent Consideration Paid to the Shareholders of an Acquired Enterprise ina Purchase Business Combination” and accordingly, will record the contingentpayments, other than payments to certain employees under the incentive plandescribed below, as goodwill in the periods in which the contingency isresolved.

 

Further, as a part of the acquisition, the Company initiated anincentive plan linked to revenues and margins, for certain specific employeesof Taratec and Patni. The incentive payments under this plan will not exceed$3,500,000 over the next three years. Since, the incentive payments are linkedto continuing employment; the payments under the plan are recognized ascompensation for post acquisition services. Accordingly, $156,974 and $17,867have been recorded as Cost of revenues and Selling, General and Administrativeexpenses, respectively for the year ended December 31, 2007.

 

This transaction has been accounted using the purchase method ofaccounting as required by SFAS No. 141 “Business Combinations”. Thepurchase price, net of cash acquired of $2,843,782, has been allocated to theacquired assets and assumed liabilities as per management’s estimates andindependent valuation as summarized below:

 
| Net current  assets                                              |       |       |   | $         | 2,528,948      |   |
|------------------------------------------------------------------|------------|------------|--------|-----------|----------------|--------|
| Deferred tax  asset                                              |       |       |   | 920,600   |           |
| Property, plant  and equipment                                   |       |       |   | 84,538    |           |
| Deferred tax  liability                                          |       |       |   | (696,000  | )         |
| Intangible  assets                                               |       |       |   |      |           |
| - Customer  contracts and non contractual customer relationships |       | 1,550,000  |   |      |           |
| - Intellectual  property rights                                  |       | 190,000    |   | 1,740,000 |           |
| Goodwill                                                         |       |       |   | 8,258,358 |           |
| **Total  purchase price**                                        | ** ** | ** ** |   | **$**     | **12,836,444** |   |

 

Goodwillgenerated from the above acquisition was allocated to “Manufacturing Services”segment.

 

**4             Significantevents**

 

The Company’s executive directors, Mr G.K.Patni and Mr A.K.Patni, undercontract of employment until October 22, 2010, ceased to be executivedirectors effective October 1, 2007 to become founder-directors.Termination benefit payments as provided in the contract of employment are asper the Indian Companies Act and amounted to $2,220,139, which have beenrecorded as selling, general and administrative expenses in the consolidatedstatement of income for the year ended December 31, 2007.

 

In their capacity as non-executive directors, an amount of $141,074 hasbeen recorded as commission payable to Non-executive directors which forms apart of selling, general and administrative expenses.

 

F-22

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**5             Investments**

 

5.1.1       Investment securitiesconsist of the following:

 
| ** **                                     | ** ** | **As of December 31, 2006 ** | ** **  |
|------------------------------------------------|------------|-------------------------------------------------------|-------------|
| ** **                                     | ** ** | **Carrying   Value**                             | ** **  | **Gross unrealised  holding gains** | ** ** | **Gross unrealized   holding losses** | ** ** | **Fair value** | ** ** |
| **Available for sale:**                        |       |                                                  |        |   |   |   |   |   |   |
| **Mutual Fund Units:**                         |       |                                                  |        |   |   |   |   |   |   |
| - Liquid                                       |       | $                                                     | 126,858,670 |   | $ | 1,125,406 |   | $ | (9,391 | )  | $ | 127,974,685 |   |
| - Fixed Maturity  Plan                         |       | 102,437,905                                           |        | 3,350,195 |   |   |   | 105,788,100 |   |
| Other  Investments                             |       | 9,205,263                                             |        | — |   |   |   | 9,205,263 |   |
| Amount reported  as investments – current | ** ** | **238,501,839**                                       | ** **  | **4,475,601** | ** ** | **(9,391** | **)**  | **$** | **242,968,048** |   |
| **Held to maturity:**Bonds                     |       | 3,048,092                                             |        | — |   | — |   | 3,048,092 |   |
| Amount reported  as investments- non current   | ** ** | **3,048,092**                                         |        | — | ** ** | — |   | **3,048,092** |   |
|                                                |            |                                                       |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **As of December 31, 2007** | ** **      |
|------------------------------------------------|------------|-------------------------------------------------|-----------------|
| ** **                                     | ** ** | **Carrying   value**                       | ** **      | **Gross unrealized  holding gains** | ** ** | **Gross unrealized  holding losses** | ** ** | **Fair Value** | ** ** |
| **Available for sale:**                        |       |                                            |            |   |   |   |   |   |   |
| **Mutual Fund Units:**                         |       |                                            |            |   |   |   |   |   |   |
| - Liquid                                       |       | $                                               | 136,918,416     |   | $ | 1,446,308 |   | $ | (10,226 | )  | $ | 138,354,498 |   |
| - Fixed Maturity  Plan                         |       | 135,584,588                                     |            | 7,475,568 |   | — |   | 143,060,156 |   |
| Other  Investments                             |       | 16,311,529                                      |            | — |   | — |   | 16,311,529 |   |
| Amount reported  as investments – current | ** ** | **$**                                           | **288,814,533** | ** ** | **$** | **8,921,876** | ** ** | **$** | **(10,226** | )  | **$** | **297,726,183** |   |
| **Held to maturity:**Bonds                     |       | $                                               | 3,425,527       |   | — |   | — |   | $ | 3,425,527 |   |
| Amount reported  as investments- non current   | ** ** | **$**                                           | **3,425,527**   |   | — | ** ** | — |   | **$** | **3,425,527** |   |

 

5.1.2       Dividends from securities available for sale, during the yearended December 31, 2005, 2006 and 2007 were $2,488,691, $5,941,888 and$9,946,965, respectively. Gross realized gains on sale of securities classifiedas available for sale was $1,141,015, $1,963,728 and $6,399,319, gross realisedlosses on sale of securities, available for sale was $12,945, $284,631and$31,861 for the years ended December 31, 2005, 2006 and 2007,respectively.

 

F-23

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**5             Investments*****(Continued)***

 

5.1.3       Maturity of investment securities classified asavailable-for-sale and held-to-maturity were as follows as ofDecember 31,2007:

 
| ** **                              | ** **   | **Carrying Value** | ** **      | **Fair Value** | ** **   |
|-----------------------------------------|--------------|-------------------------|-----------------|---------------------|--------------|
| **Available for Sale:******             | *** *** | *** ***            | *** ***    | *** ***        | *** *** |
| Mutual Fund Units (Fixed Maturity Plan) |         |                    |            |                |         |
| - Within one year                       |         | $                       | 133,047,161     |                | $            | 140,507,961 |   |
| - Due after one year through five years |         | 2,537,427               |            | 2,552,195           |         |
| ** **                              | ** **   | **$**                   | **135,584,588** | ** **          | **$**        | **143,060,156** |   |
| **Held to Maturity :**                  | *** *** | *** ***            | *** ***    | *** ***        | *** *** |
| Bond                                    |         |                    |            |                |         |
| - Due after one year through five years |         | 3,425,527               |            | 3,425,527           |         |
| ** **                              | ** **   | **$**                   | **3,425,527**   | ** **          | **$**        | **3,425,527** | *** *** |

 

**6             Accountsreceivable**

 

6.1.1       Accounts receivableconsist of the following:

 
| ** **                             | ** ** | **2006**   | ** **      | **2007**   | ** ** |
|----------------------------------------|------------|------------|-----------------|------------|------------|
|                                   |       |       |            |       |       |
| **As of December 31,**            |       | $          | 118,724,268     |       | $          | 138,699,173 |   |
| Receivables                            |       |       |            |       |       |
| Less: Allowances for doubtful accounts |       | (3,105,764 | )               | (2,327,490 | )          |
|                                   |       |       |            |       |       |
| ** **                             | ** ** | **$**      | **115,618,504** | ** ** | **$**      | **136,371,683** |   |

 

6.1.2       The activity in the allowance for doubtful accounts receivablefor the years ended December 31, 2005, 2006 and 2007 is as follows

 
| ** **                                                                             | ** ** | **2005**   | ** **    | **2006**   | ** ** | **2007**      | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|---------------|------------|
| **As of December 31,**                                                  |       |       |          |       |       |          |       |
| Allowance for  doubtful accounts as of the beginning of the year                       |       | $          | 3,435,320     |       | $          | 2,495,219     |       | $ | 3,105,764 |   |
| Additions  charged (net of recoveries) to provision for doubtful debts during the year |       | (164,464   | )             | 1,147,109  |       | 1,050,245     |       |
| Write-downs  charged against the allowance during the year                             |       | (775,637   | )             | (536,564   | )          | (1,828,519    | )          |
| ** **                                                                             | ** ** | ** ** | ** **    | ** ** | ** ** | ** **    | ** ** |
| Allowance for  doubtful accounts as of the end of the year                             | ** ** | **$**      | **2,495,219** | ** ** | **$**      | **3,105,764** | ** ** | **$** | **2,327,490** | ** ** |

 

F-24

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**7             Costs and estimated earnings inexcess of billings and billings in excess of costs and estimated earnings onuncompleted contracts**

 
| **As of December 31,**                                                                                                                     | ** ** | **2006**    | ** **     | **2007**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|
| Cost incurred on  uncompleted contracts                                                                                                                   |       | $           | 28,813,363     |        | $          | 37,932,876 |   |
| Estimated  earnings                                                                                                                                       |       | 21,676,222  |           | 33,967,584  |       |
| Less: Billings  till date                                                                                                                                 |       | 50,489,585  |           | 71,900,460  |       |
|                                                                                                                                                      |       | (30,979,821 | )              | (43,038,314 | )          |
|                                                                                                                                                      |       | $           | 19,509,764     |        | $          | 28,862,146 |   |
| Included in the  accompanying balance sheet under the following captions:                                                                                 |       |        |           |        |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 22,834,345  |           | 32,417,391  |       |
|                                                                                                                                                      |       | (3,324,581  | )              | (3,555,245  | )          |
| ** **                                                                                                                                                | ** ** | **$**       | **19,509,764** | ** **  | **$**      | **28,862,146** |   |

 

**8****            ****Otherassets**

 

Other assets consist of the following:

** **
| **As of December 31,**                | ** ** | **2006**   | ** **     | **2007**    | ** ** |
|------------------------------------------------------|------------|------------|----------------|-------------|------------|
| Advances to  vendors                                 |       | $          | 1,340,596      |        | $          | 1,969,206 |   |
| Prepaid gratuity  costs                              |       | 918,045    |           | —      |       |
| Refundable  security deposit                         |       | 6,708,622  |           | 7,907,629   |       |
| Deferral of cost  in respect of revenue arrangements |       | 902,063    |           | 3,303,564   |       |
| Due from  employees                                  |       | 2,695,126  |           | 3,356,975   |       |
| Derivative  contracts                                |       | 3,035,271  |           | 13,292,568  |       |
| Leasehold Land                                       |       | 5,223,196  |           | 17,225,046  |       |
| Deposit with tax  authorities                        |       | —     |           | 6,829,927   |       |
| Others                                               |       | 495,069    |           | 1,191,310   |       |
| ** **                                           | ** ** | **$**      | **21,317,988** | ** **  | **$**      | **55,076,225** |   |
| Less : Other  current assets                         |       |       |           |        |       |
| Advances to  vendors                                 |       | (1,340,596 | )              | (1,969,206  | )          |
| Refundable  security deposit                         |       | (1,424,163 | )              | (2,403,420  | )          |
| Deferral of cost  in respect of revenue arrangements |       | (902,063   | )              | (3,303,564  | )          |
| Due from  employees                                  |       | (2,663,601 | )              | (3,181,259  | )          |
| Derivative  contracts                                |       | (3,035,271 | )              | (11,721,845 | )          |
| Deposit with tax  authorities                        |       |       |           | (6,829,927  | )          |
| Others  Assasserassetds                              |       | (495,069   | )              | (1,191,310  | )          |
|                                                 |       | (9,860,763 | )              | (30,600,531 | )          |
| Other assets                                         | ** ** | **$**      | **11,457,225** | ** **  | **$**      | **24,475,694** | ** ** |

 

 

F-25

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**9             Property,plant and equipment**

 

9.1.1       Property, plant andequipment consists of the following:

 
| **As of December 31,**                 | ** ** | **2006**    | ** **      | **2007**     | ** ** |
|-------------------------------------------------------|------------|-------------|-----------------|--------------|------------|
| Land                                                  |       | $           | 24,476          |         | $          | 4,339 |   |
| Building                                              |       | 31,944,802  |            | 56,168,539   |       |
| Leasehold  improvements                               |       | 5,814,610   |            | 7,833,303    |       |
| Computer –  Hardware and other service equipment |       | 41,075,166  |            | 55,676,933   |       |
| Computer –  Software                             |       | 23,109,772  |            | 29,953,484   |       |
| Furniture and  fixtures                               |       | 18,092,401  |            | 20,818,460   |       |
| Other equipment                                       |       | 27,003,946  |            | 41,844,783   |       |
| Vehicles                                              |       | 2,295,679   |            | 2,133,390    |       |
| Asset held for  sale                                  |       | —      |            | 3,421,179    |       |
| Capital  work-in-progress                             |       | 26,864,096  |            | 36,962,152   |       |
| Capital advances                                      |       | 20,537,480  |            | 18,271,144   |       |
|                                                  |       | 196,762,428 |            | 273,087,706  |       |
| Less:  Accumulated depreciation and amortization      |       | (71,004,604 | )               | (102,060,924 | )          |
| ** **                                            | ** ** | **$**       | **125,757,824** | ** **   | **$**      | **171,026,782** |   |

 

9.1.2       Depreciation and amortization expense on property, plant andequipment was $15,212,682, $18,605,047 and $22,965,130 for the years endedDecember 31, 2005, 2006 and 2007, respectively and include amortizationfor computer software of $3,642,520, $4,437,291 and $4,796,933 respectively.Unamortized computer software cost as at December 31, 2006 and 2007 amountedto $7,399,398 and $6,065,303, respectively.

 

9.1.3       Fixed assets include building amounting to $3,421,179 which isretired from active use and held for sale to an identified buyer and the saletransaction has been concluded subsequently.

 

**10           Goodwill and intangible assets**

 

10.1.1     Intangible assets as at December 31,2006 and 2007 consist of the following:

 
| **As of December 31,** | ** ** | **2006**       | ** **    | **2007**       | ** ** |
|---------------------------------------|------------|----------------|---------------|----------------|------------|
| Customer related  intangibles         |       | $              | 11,176,500    |           | $          | 14,009,439 |   |
| Technology  related intangibles       |       | 497,879        |          | 497,879        |       |
| Intellectual  property rights         |       | —         |          | 21,448,600     |       |
| ** **                            | ** ** | **11,674,379** | ** **    | **35,955,918** |       |
| Less:  Accumulated amortization       |       | (1,986,936     | )             | (4,074,782     | )          |
| ** **                            | ** ** | **$**          | **9,687,443** | ** **     | **$**      | **31,881,136** |   |

 

Duringthe year ended December 31, 2007, Patni has, through its wholly ownedsubsidiary, Patni USA, acquired from one of its major customers, the worldwiderights for software Proprietary Intellectual Property Rights (“IPR”) thatenables communication service providers to offer customer management, retailpoint-of-sale and billing services for a variety of products and services. Costof acquisition of the IPR amounting to $20,368,600

 

F-26

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**10          Goodwilland intangible assets*****(Continued)***

 

has been capitalized as an intangible asset and is being amortized overa period of ten years. The Company intends to use this intellectual propertyfor the purposes of software licensing, provision of reusable IP-led ITservices, managed services and provision of hosted or software-as-a-servicesolutions. A royalty of 5% is payable to seller on such sales.

 

10.1.2     Amortization for the years endedDecember 31, 2005, 2006 and 2007 amounted to $748,023, $968,501 and$2,087,930 respectively. The estimated amortization for the intangible assets,for the next five years will be as follows:

 
| ** **   | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012**  | ** ** |
|--------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Amortization |       | 4,513,661 |       | 4,404,189 |       | 3,959,397 |       | 3,380,405 |       | 3,241,855 |       |

 

10.1.3     The movement ingoodwill balance is given below:

 
| ** **                                                                                 | ** ** | **December 31,   2006** | ** **     | **December 31,   2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------|----------------|-----------------------------------|------------|
| Balance at  beginning of the year                                                          |       | $                                 | 27,987,198     |                              | $          | 39,831,664 |   |
| Add: Additional  goodwill arising on account of contingent consideration for Patni Telecom |       | 12,184,832                        |           | 12,402,039                        |       |
| Add: Goodwill on  business acquisition                                                     |       | —                            |           | 14,712,296                        |       |
| Less: Tax  benefit on incentive stock option of Patni Telecom                              |       | (340,366                          | )              | (235,057                          | )          |
| Add: Exchange  Difference                                                                  |       |                              |           | 2,228                             |       |
| Balance at end  of the year                                                                | ** ** | **$**                             | **39,831,664** | ** **                        | **$**      | **66,713,170** | ** ** |

 

Goodwill as of December 31, 2007 includes $6,453,938 which isdeductible for tax purposes as per local taxation laws in the United Kingdom.

 

10.1.4     Goodwill as ofDecember 31, 2006 and 2007 has been allocated to the following reportablesegments:

 
| **Segment**                             | ** ** | **December 31,   2006** | ** **     | **December 31,   2007** | ** ** |
|-----------------------------------------|------------|-----------------------------------|----------------|-----------------------------------|------------|
| Financial  services                     |       | $                                 | 2,594,374      |                              | $          | 2,594,374 |   |
| Communication,  Media and Entertainment |       | $                                 | 37,237,290     |                              | $          | 55,860,438 |   |
| Manufacturing  Services                 |       | —                            |           | $                                 | 8,258,358  |   |
| **Total**                               | ** ** | **$**                             | **39,831,664** | ** **                        | **$**      | **66,713,170** | ** ** |

 

F-27

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**11          Changein estimate**

 

During 2006, the Company reached a settlement with the Internal RevenueService (the “IRS”) relating to its tax returns of its U.S. operations (PatniUSA and its US branch) for fiscal years 2001 and 2002. The settlement addressedtransfer pricing, branch tax matters and payroll taxes. The Company was unableto substantiate to the IRS that returns pertaining to its U.S. branch for theyears ended March 31, 2002 and 2003 were filed within 18 months from therespective due dates and hence were deemed as delinquent returns by the IRS.Accordingly, the IRS disallowed all of the deductions on the branch income taxreturns and assessed additional income tax obligations of U.S. $15.2 million.Delinquent tax returns were treated as errors in computation of income taxesfor the years in which such tax returns were due for filing under the IRS rules andthe Company restated its 2003 and 2004 financial statements for such errors.

 

The Company reviewed the adequacy of the previously established taxexposure reserves with respect to prior years in July 2006 in light ofcertain positions taken by the IRS during the settlement for 2001 and 2002 andbased on such positions, the Company revised its estimate for tax exposurerelating to various income tax matters along with related adjustments toaccrued interest. The IRS settlement for 2001 and 2002 also covered payroll taxmatters for which a provision had previously been established. The settlementresulted in a liability that was less than the amount previously provided for,in part due to the liability being offset by an increase in income taxliability during settlement. As a result, the Company reduced its accrual forpayroll taxes exposure during 2006 with a consequential reversal of the relateddeferred tax asset.

 

These revisions to the established tax exposure reserves represented arevision to previous reserve estimates, and accordingly, such amounts have beenrecorded as part of the consolidated statement of income for the Company’sfiscal year ended December 31, 2006 as a change in estimate as follows:

 
| Reduction of accrual for payroll taxes (1) |   | $          | (9,041,958     | )      |
|--------------------------------------------|--------|------------|----------------|--------|
| Increase in interest expense               |   | 2,600,608  |           |
| Increase in other expense (2)              |   | (3,743,032 | )              |
| Increase in income taxes - current         |   | 26,928,920 |           |
| Increase in income taxes - deferred        |   | 3,421,312  |           |
| ** **                                 |   | **$**      | **20,165,850** |   |

 

----

(1)      Includedunder cost of revenues

(2)      Includedunder other income/expense

 

The respective annual amounts with respect to theabove amount are shown in the table provided below:

 
| **2001** | ** **  | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **Total**  | ** ** |
|----------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|------------|------------|
| $        | (1,248,987) |     | $          | (372,881 | )          | $        | 2,572,523  |     | $          | 10,862,317 |       | $ | 8,352,878 |   | $ | 20,165,850 |   |
|          |             |          |            |          |            |          |            |          |            |            |            |  |  |  |  |  |  |

 

F-28

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**12          ****Accrued expenses consist of the following:**

 
| **As of December 31,** | ** ** | **2006**   | ** **     | **2007**   | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|
| Employee costs                        |       | $          | 21,427,493     |       | 31,718,079 |   |
| Subcontractor  accruals               |       | 5,029,497  |           | 5,553,123  |       |
| Professional  fees payable            |       | 1,512,893  |           | 2,786,817  |       |
| Others                                |       | 15,337,618 |           | 15,021,905 |       |
| ** **                            | ** ** | **$**      | **43,307,501** | ** ** | **$**      | **55,079,924** |   |
|                                       |            |            |                |            |            |  |  |

 

**13           Otherliabilities**

 

Other liabilities consist of the following:

 
| **As of December 31,**                   | ** ** | **2006**    | ** **     | **2007**    | ** ** |
|---------------------------------------------------------|------------|-------------|----------------|-------------|------------|
| Deferred revenue                                        |       | $           | 1,095,217      |        | $          | 4,188,096 |   |
| Provision for  leave encashment                         |       | 12,321,032  |           | 15,440,999  |       |
| Provision for  retirement benefits                      |       | 8,073,273   |           | 9,922,971   |       |
| Capital  expenditure payable                            |       | 5,524,966   |           | 6,715,195   |       |
| Provision for  payroll tax matters                      |       | 6,481,233   |           | 6,481,233   |       |
| Interest on  corporate taxes and other related expenses |       | 5,744,001   |           | 8,633,630   |       |
| Advance from  customers                                 |       | 185,968     |           | 1,237,237   |       |
| Others                                                  |       | 6,920,116   |           | 7,030,853   |       |
| ** **                                              | ** ** | **$**       | **46,345,806** | ** **  | **$**      | **59,650,214** |   |
| Less : Other  Current liabilities                       |       |        |           |        |       |
| Deferred revenue                                        |       | (1,095,217  | )              | (4,188,096  | )          |
| Provision for  leave encashment                         |       | (12,321,032 | )              | (15,440,999 | )          |
| Provision for  retirement benefits                      |       | —      |           | (164,127    | )          |
| Capital  expenditure payable                            |       | (5,524,966  | )              | (6,715,195  | )          |
| Provision for  payroll tax matters                      |       | (6,481,233  | )              |        |       |
| Interest on  corporate taxes and other related expenses |       | (5,744,001  | )              |        |       |
| Advance from  customers                                 |       | (185,968    | )              | (1,237,237  | )          |
| Others                                                  |       | (6,869,329  | )              | (6,541,601  | )          |
|                                                    |       | (38,221,746 | )              | (34,287,255 | )          |
| Other  Liabilities                                      | ** ** | **$**       | **8,124,060**  | ** **  | **$**      | **25,362,959** | ** ** |

 

 

F-29

----

 
| **Patni  Computer Systems Limited and subsidiaries**             |
|------------------------------------------------------------------|
|                                                             |   |   |
| **Notes to the consolidated financial statements *(Continued)*** |

 

**14          Leases**

 

14.1.1     Patni acquires certain vehicles undercapital lease for a non-cancelable period of 4 years.The gross amount recordedunder such capital lease is $1,255,948 with accumulated depreciation of$556,251 as at December 31, 2006. The gross amount recorded in property,plant and equipment under such capital leases is $1,375,858 with accumulateddepreciation of $757,413 as at December 31, 2007. The depreciation expensein respect of these assets aggregated $321,127, $264,623 and $347,542 for theyears ended December 31, 2005, 2006 and 2007, respectively.

 

14.1.2     Patni USA has operating lease agreements,primarily for leasing office space, that expire over the next 1-6 years. Theseleases generally require Patni USA to pay certain executory costs such astaxes, maintenance and insurance.

 

14.1.3     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 days to120 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.

 

14.1.4     Patni Telecom and its subsidiaries haveoperating leases for office space, that expire over the next 1-3 years. Theseagreements provide for cancellation by either party with a notice periodranging from 30 days to 180 days, after the initial lock-in period, if any.

 

14.1.5     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 31,2007 are as follows:

 
| ** **                                                       | ** ** | **Capital   leases** | ** ** | **Operating   leases** | ** ** |
|------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| 2008                                                             |       | $                         | 300,863    |                        | $          | 9,994,991 |   |
| 2009                                                             |       | 199,958                   |       | 6,364,603                   |       |
| 2010                                                             |       | 105,434                   |       | 3,037,729                   |       |
| 2011                                                             |       | 40,456                    |       | 753,667                     |       |
| beyond 2011                                                      |       |                      |       | 342,984                     |       |
| Total minimum lease payments                                     |       | 646,711                   |       | $                           | 20,493,974 |   |
| Less: Amount representing interest                               |       | (43,155                   | )          |                        |       |
| Present value of net minimum capital lease payments              |       | 603,557                   |       |                        |       |
| Less: Current installments of obligations under capital leases   |       | (277,704                  | )          |                        |       |
| Obligations under capital leases, excluding current installments |       | $                         | 325,853    |                        |       |   |

 

The related assets for capital leases are included under vehicles inproperty, plant and equipment in the consolidated balance sheets.

 

14.1.6    Rental expense for all operating leases forthe years ended December 31, 2005, 2006 and 2007 was $10,228,316,$12,510,436 and $14,291,084, respectively.

 

F-30

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**15****           Derivatives financialinstruments**

 

15.1.1      The Company frequently enters into foreign currency forward and optioncontracts to hedge inter company and end customer receivables, both anticipatedand firm commitments. These contracts are entered into to mitigate foreigncurrency risk caused by changes in exchange rates and are used to hedge theseinter company and end customer receivables. At December 31, 2007, theCompany’s foreign currency contracts mature within one to twenty nine months.

 

Since there is a direct relationship between the forward contracts andthe currency denomination of the underlying transaction, the forward contractsare highly effective in hedging the cash flows of the Company’s inter companyand end customer receivables.  Theseforward contracts also meet the criteria for cash flow hedge accountingtreatment and, accordingly, part of revaluation gains or losses on these forwardcontracts are included in other comprehensive income (loss) and are recognizedin the consolidated statement of income based on occurance of the underlyingtransaction.

 

For forward contracts designated as a cash flow hedge, the hedgeeffectiveness is assessed based on changes in fair value attributable tochanges in spot prices and accordingly, the changes in the fair value of thecontract related to the changes in the difference between the spot price andthe forward or futures price would be excluded from assessment of hedgeeffectiveness and recognised in consolidated statements of income together withany ineffective portion of the hedge.

 

At December 31, 2007, the Company had $ 462,451 of net gainsrelated to cash flow hedges deferred in Accumulated Other Comprehensive Income.At December 31, 2007 $ 390,968 of deferred gains on derivative instrumentsaccumulated in other comprehensive income are expected to be reclassified toearnings during the next 12 months. There were no cash flow hedges which werediscontinued during the year because of non-occurence of forecastedtransaction.

 

15.1.2      The following table presents the aggregate contracted principal amountsof the Company’s derivative contracts outstanding:

 
| ** **                                  | ** ** | **Currency** | ** ** | **December 31,  2006** | ** **  | **December 31,  2007** | ** **  |
|---------------------------------------------|------------|--------------|------------|-----------------------------|-------------|-----------------------------|-------------|
| Forward  contracts, sell                    |       | USD          |       | $                           | 182,564,103 |                        | $           | 165,170,000 |   |
| Forward  contracts, sell                    |       | JPY          |       |                        |        | JPY                         | 481,580,000 |   |
| Forward  contracts, sell                    |       | EURO         |       | —                      |        | €                      | 4,000,000   |   |
| Foreign currency  written options, sell     |       | EURO         |       | —                      |        | €                      | 5,000,000   |   |
| Foreign currency  purchased options, sell   |       | USD          |       | —                      |        | $                           | 81,500,000  |   |
| Foreign currency  written options, net sell |       | USD          |       | $                           | 19,500,000  |                        | $           | 2,500,000 |   |
|                                             |            |              |            |                             |             |                             |             |  |  |  |

 

F-31

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**16****          ****Shareholders’ equity**

 

***Common shares***

 

16.1.1      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 Companyon the 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.

 

16.1.2      In December 2005,pursuant to an Initial Public Offering of American Depositary Shares, theCompany issued 6,156,250 ADSs (12,312,500 common shares) for a net proceeds of$117,021,852 (after adjusting for direct expenses relating to ADSs of$8,196,274). The common shares represented by the ADSs are similar to othercommon shares except for voting rights. Under the depository agreement, thedepository of ADSs shall vote as directed by the Board of Directors of theCompany.

 

***Retained earnings and dividends***

 

16.1.3      Retainedearnings as of December 31, 2006 and 2007 include profits aggregating$4,389,546 and $5,221,083, respectively which are not distributable asdividends under Indian Companies Act, 1956 (Companies Act).

 

16.1.4      Theability of Patni to declare and pay dividend under the Companies Act, isdetermined by its distributable profits as shown by its statutory accountsprepared in accordance with Indian GAAP. When Patni wishes to declaredividends, it is required as per the Companies Act, to transfer upto 10% of itsnet income (after the deduction of any accumulated deficit) computed inaccordance with local regulations to a general reserve before a dividend can bedeclared. Also, Indian law on foreign exchange governs the remittance ofdividends outside India.

 

**17****          ****Employee stock compensation plans**

 

17.1.1      On June 302003, Patni established the ‘Patni ESOP 2003’ plan (‘the plan’). Under theplan, the Company is authorized to issue up to 11,142,085 equity shares toeligible employees. Employees covered by the Plan are granted an option, whichmay be based on service or performance criteria, to purchase shares of theCompany subject to the requirements of vesting. The options vest in a gradedmanner over four years with 25% of the options vesting at the end of each yearand expire at the end of 5 years from the date of vesting. A compensationcommittee constituted by the Board of Directors of the Company administers theplan. The plan has been amended to enable the Company to issue up to 2,000,000ADR linked options (wherein one ADR linked option is equal to two equityshares) to the employees of the Company as well as its subsidiaries and hence “PatniESOP 2003- Revised 2006” has come into force with effect from June 21,2006.

 

F-32

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**17****          ****Employee stock compensation plans *(Continued)***

 

The Company issued 200,000 Performance Linked options in May 2006to certain Senior Management Personnel under the Patni ESOP 2003-Revised 2006”Plan wherein vesting of options is dependant on achieving certain settargets.Vesting is triggered on achievement of the targets ,but no lesser than12 months after grant of options.Based on set targets,as at 31 December 2007,70,000 options vested. Compensation cost is recognised on a cumulative catch upbasis based on the assessment of probability of performance criteria beingachieved.

 

17.1.2      Theweighted average grant date fair values of options granted during the yearended December 31,2005 and 2006 are $3.10 and $3.85 respectively.Theweighted average grant date fair values of options granted during the yearended December 31, 2007 was $ 3.58 for equity linked options and $ 4.39for ADR linked options respectively.

 

17.1.3      Stockoptions activity under the plan is as follows:

 
| ** **                                | ** ** | **Year ended December 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **Exercise price**                              | ** ** | **Shares arising  out of options** | ** ** | **Weighted average  remaining  contractual life  (months)** | ** ** |
| Outstanding at  the beginning of the year |       | $3.16                                                |       | 1,759,550 |   | 67 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,574,007 |   | 75 |   |
|                                      |       | $8.71-$10.25                                         |       | 851,710 |   | 86 |   |
| Granted during  the year                  |       | $7.29-$10.93                                         |       | 1,968,750 |   | 90 |   |
| Forfeited during  the year                |       | $3.16                                                |       | (101,650 | ) | — |   |
|                                      |       | $7.35                                                |       | (254,560 | ) | — |   |
|                                      |       | $8.71-$10.93                                         |       | (189,600 | ) | — |   |
| Exercised during  the year                |       | $3.16                                                |       | (414,934 | ) | — |   |
|                                      |       | $5.51-$7.35                                          |       | (68,520 | ) | — |   |
| Outstanding at  the end of the year       |       | $3.16                                                |       | 1,242,966 |   | 56 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,420,927 |   | 65 |   |
|                                      |       | $8.37-$10.93                                         |       | 2,460,860 |   | 81 |   |
| Exercisable at  the end of the year       |       | $3.16                                                |       | 727,016 |   | 47 |   |
|                                      |       | $5.51-$7.35                                          |       | 1,108,256 |   | 51 |   |
|                                      |       | $8.71-$10.25                                         |       | 186,149 |   | 56 |   |
| Vested and  expected to vest              |       | $3.16                                                |       | 1,128,376 |   | 58 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,363,501 |   | 65 |   |
|                                      |       | $8.37-$10.93                                         |       | 2,197,568 |   | 80. |   |

 

F-33

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**17****          ****Employee stock compensation plans *(Continued)***

 
| ** **                                                        | ** ** | **Year ended December 31, 2007** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Exercise price**                              | ** ** | **Shares arising  options out of** | ** ** | **Weighted average  remaining  contractual life  (months)** | ** ** |
| Outstanding at  the beginning of the year                         |       | $3.16                                                |       | 1,242,966 |   | 56 |   |
|                                                              |       | $5.51-$7.35                                          |       | 2,420,927 |   | 65 |   |
|                                                              |       | $8.37-$10.93                                         |       | 2,460,860 |   | 81 |   |
| Granted during  the period (including 154,000 ADR linked options) |       | $7.55 -$11.18                                        |       | 425,000 |   | 90 |   |
| Forfeited during  the year                                        |       | $3.16                                                |       | (65,075 | ) | — |   |
|                                                              |       | $5.51 - $7.35                                        |       | (194,579 | ) | — |   |
|                                                              |       | $8.71-$11.18                                         |       | (416,363 | ) | — |   |
| Exercised during  the year                                        |       | $3.16                                                |       | (594,065 | ) | — |   |
|                                                              |       | $5.51-$7.35                                          |       | (140,479 | ) | — |   |
|                                                              |       | $8.71 - $10.25                                       |       | (3,442 | ) | — |   |
| Outstanding at  the end of the year                               |       | $3.16                                                |       | 583,826 |   | 47 |   |
|                                                              |       | $5.51-$7.35                                          |       | 2,085,869 |   | 53 |   |
|                                                              |       | $7.55 - $11.18                                       |       | 2,466,055 |   | 71 |   |
| Exercisable at  the end of the year                               |       | $3.16                                                |       | 583,826 |   | 47 |   |
|                                                              |       | $5.51-$7.35                                          |       | 1,474,250 |   | 46 |   |
|                                                              |       | $8.37-$10.93                                         |       | 706,655 |   | 53 |   |
| Vested and  expected to vest                                      |       | $3.16                                                |       | 563,871 |   | 52 |   |
|                                                              |       | $5.51-$7.35                                          |       | 2,055,503 |   | 53 |   |
|                                                              |       | $7.55 - $11.18                                       |       | 2,389,906 |   | 70 |   |

 

 

17.1.4      The fair value of each option is estimated on the date of grant usingthe Black-Scholes model with the following assumptions for the equity linkedoptions.

 
| **Year ended**              | ** ** | **2006**      | ** ** | **2007**       | ** ** |
|----------------------------------|------------|---------------|------------|----------------|------------|
| Dividend yield                   |       | 0.59% - 0.63  | %          | 0.78           | %          |
| Weighted average  dividend yield |       | 0.61          | %          | 0.78           | %          |
| Expected life                    |       | 3.5-6.5 years |       | 3.5-6.5 years  |       |
| Risk free  interest rates        |       | 6.45% - 7.85  | %          | 8.00% - 8.22   | %          |
| Volatility                       |       | 30.22% - 55   | %          | 32.84% - 42.32 | %          |
| Weighted Average  Volatality     |       | 37.96         | %          | 36.68          | %          |

 

17.1.5      The fair value of each option is estimated on the date of grant usingthe Black-Scholes model with the following assumptions for ADR linked options.

 
| **Year ended**              | ** ** | **2007**       | ** ** |
|----------------------------------|------------|----------------|------------|
| Dividend yield                   |       | 0.65% - 0.79   | %          |
| Weighted average  dividend yield |       | 0.76           | %          |
| Expected life                    |       | 3.5-6.5 years  |       |
| Risk free  interest rates        |       | 4.25%-475      | %          |
| Volatility                       |       | 34.32% - 44.07 | %          |
| Weighted average  volatility     |       | 38.80          | %          |

 

F-34

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**17****          ****Employee stock compensation plans (Continued)**

 

17.1.6      The aggregate intrinsic value of options exercised during the years2005, 2006 and 2007 was $2,914,354, $2,420,290 and $4,160,153 respectively andthe aggregate fair value of options vested during the years 2005, 2006 and 2007was $1,750,742, $ 2,534,827 and $ 4,850,500 respectively. As of December 31,2007 and 2006 the options outstanding under the plan had intrinsic value of$2,984,374 and $13,235,201 respectively and options exercisable under the planhad an intrinsic value of $2,885,587 and $6,566,550 respectively.. The methodused to estimate the expected term of the instruments in our option valuationmodel is the ‘Simplified Method’ as per SAB 107.

 

17.1.7      The compensation expense recognized for the year ended ended December 31,2006 is $1,668,108 as cost of revenues and $ 2,315,963 as selling, general andadministrative expenses. The compensation expense recognized for the year endedDecember 31, 2007 is $ 1,832,103 as cost of revenues and $ 2,841,180 asselling, general and administrative expenses, respectively.

 

As on December 31, 2007 the total compensation cost related tonon-vested awards not yet recognized is $3,976,472 and the weighted averageperiod over which it is expected to be recognized is 22 months.

 

17.1.8      During the year ended December 31,2007 the company granted 425,000options (including 154,000 ADR linked options) of which 53,000 options werevalued using the Binomial Model.

 

The fair value of options granted after April 1,2007 is estimatedon the date of grant using the Binomial model with the following assumptionsfor equity linked options.

 
| **Year ended**       | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| Dividend yield            |       | 07%-0.8                         | %          |
| Expected life             |       | 3.5-6.5 years                   |       |
| Risk free  interest rates |       | 7.93% - 8.01                    | %          |
| Volatility                |       | 38.2% - 38.3                    | %          |

 

F-35

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**18****          ****Income Tax**

 

18.1.1      Total income tax for the year ended December 2005, 2006 and 2007were allocated as follows:

 
| **For the years ended December 31,** | ** ** | **2005**   | ** **     | **2006**   | ** ** | **2007**       | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Income from  operations                                       |       | $          | 13,802,583     |       | $          | 47,691,763     |       | $ | 21,783,963 |   |
| Shareholders’  equity, for                               |       |       |           |       |       |           |       |
| - unrealized  holding gain/loss on investment securities      |       | 261,520    |           | 1,076,106  |       | (424,845       | )          |
| - pension                                                     |       | 194,848    |           | (305,835   | )          | 118,638        |       |
| - gratuity                                                    |       | —     |           | (17,820    | )          | (71,454        | )          |
| - tax benefit  arising on exercise of stock options           |       | (136,816   | )              | 317,028    |       | (442,165       | )          |
| Goodwill and  intangible assets                               |       | (3,351,045 | )              | (340,366   | )          | (235,057       | )          |
| **Total**                                                     | ** ** | **$**      | **10,771,090** | ** ** | **$**      | **48,420,876** | ** ** | **$** | **20,729,081** | ** ** |

 

18.1.2      Income tax expense attributable to income from continuing operationsconsists of the following:

 
| **For the years ended December, 31** | ** ** | **2005**   | ** **     | **2006**   | ** ** | **2007**       | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| **Current taxes**                                        |       |       |           |       |       |           |       |   |   |   |
| Domestic                                                      |       | $          | 1,787,316      |       | $          | 1,655,461      |       | $ | 9,186,360 |   |
| Foreign                                                       |       | 13,904,560 |           | 41,691,833 |       | 22,727,637     |       |
|                                                          |       | 15,691,876 |           | 43,347,294 |       | 31,913,997     |       |
| **Deferred  taxes**                                           |       |       |           |       |       |           |       |
| Domestic                                                      |       | (91,396    | )              | (336,467   | )          | (5,731,246     | )          |
| Foreign                                                       |       | (1,797,897 | )              | 4,680,936  | )          | (4,398,789     | )          |
|                                                          |       | (1,889,293 | )              | 4,344,470  |       | (10,130,035    | )          |
| **Total**                                                     | ** ** | **$**      | **13,802,583** | ** ** | **$**      | **47,691,763** | ** ** | **$** | **21,783,963** | ** ** |

 

Pre-tax income from domestic and foreign operations is set out below:

 
| **For the years ended December 31,** | ** ** | **2005**   | ** **     | **2006**   | ** ** | **2007**        | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|-----------------|------------|
| **Pre-tax income**                                       |       |       |           |       |       |            |       |
| Domestic                                                      |       | 58,644,162 |           | 71,188,552 |       | 110,443,904     |       |
| Foreign                                                       |       | 16,025,097 |           | 35,753,981 |       | 25,315,553      |       |
| **Total**                                                     | ** ** | **$**      | **74,669,259** | ** ** | **$**      | **106,942,533** | ** ** | **$** | **135,759,457** | ** ** |
|                                                               |            |            |                |            |            |                 |            |  |  |  |

 

F-36

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**18****          ****Income Tax *(Continued)***

 

18.1.3      The tax effect of temporary differences that give rise to significantportion of deferred tax assets and liabilities are presented below:

 
| ** **                                                                   | ** ** | **2006**   | ** **    | **2007**    | ** ** |
|------------------------------------------------------------------------------|------------|------------|---------------|-------------|------------|
| **Deferred  tax assets:**                                                    |       |       |          |        |       |
| Accrued expenses  and provisions                                             |       | $          | 8,794,129     |        | $          | 12,027,255 |   |
| Accounts  receivable                                                         |       | 867,320    |          | 673,881     |       |
| Deferred revenue                                                             |       | 146,010    |          | 431,829     |       |
| Carry forward  business and other losses                                     |       | 501,719    |          | 2,736,959   |       |
| Payroll taxes  and interest on payroll and corporate taxes                   |       | 4,394,379  |          | 5,941,881   |       |
| ESOP  compensation costs                                                     |       | 705,135    |          | 1,451,337   |       |
| Others                                                                       |       | 1,015,345  |          | —      |       |
| Mat Credit  Entitlement                                                      |       | —     |          | 7,209,533   |       |
| Gross deferred  assets                                                       |       | 16,424,037 |          | 30,472,674  |       |
| Less: Valuation  allowance                                                   |       | (501,719   | )             | (934,150    | )          |
| Total deferred  tax assets                                                   |       | $          | 15,922,318    |        | $          | 29,538,524 |   |
| Deferred tax  liabilities:                                                   |       |       |          |        |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       | (846,115   | )             | (1,512,755  | )          |
| Property, plant  and equipment                                               |       | (855,386   | )             | (2,862,844  | )          |
| Undistributed  earnings of US branch                                         |       | (1,892,887 | )             | (1,806,178  | )          |
| Unrealised gain  on available for sale securities                            |       | (1,520,939 | )             | (1,078,481  | )          |
| Intangible  assets                                                           |       | (3,695,708 | )             | (3,839,354  | )          |
| Tax deduction  available for notional interest deduction                     |       | (321,119   | )             | (499,851    | )          |
| Tax deductible  Goodwill                                                     |       | —     |          | (195,190    | )          |
| Others                                                                       |       | (32,383    | )             | (191,514    | )          |
| Total deferred  tax liabilities                                              |       | (9,164,537 | )             | (11,986,168 | )          |
| Net Deferred tax  assets                                                     | ** ** | **$**      | **6,757,781** | ** **  | **$**      | **17,552,356** | ** ** |
| **Classified  as**                                                           |       |       |          |        |       |
| **Deferred  tax assets**                                                     |       |       |          |        |       |
| Current                                                                      |       | $          | 10,240,528    |        | $          | 6,879,161 |   |
| Non current                                                                  |       | 370,529    |          | 12,479,374  |       |
| **Deferred  tax liabilities**                                                |       |       |          |        |       |
| Current                                                                      |       | 108,637    |          | —      |       |
| Non current Net  Deferred tax assets                                         |       | 3,744,639  |          | 1,806,178   |       |
| ** **                                                                   | ** ** | **$**      | **6,757,781** | ** **  | **$**      | **17,552,356** |   |

 

F-37

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements *(Continued)***

 

**18****          ****Income Tax *(Continued)***

 

18.1.4      In assessing the realisability of deferred tax assets, managementconsiders whether it is more likely than not, that some portion, or all, of thedeferred tax assets will not be realised. The ultimate realisation of deferredtax assets 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 years2005, 2006 and 2007 aggregated $16,336,603, $29,143,691 and $ 34,905,541respectively.

 

18.1.5      Deferredtax liability in respect of undistributed earnings of Patni’s foreignsubsidiaries as of 2006 and 2007 aggregating $4,688,485 and $ 4,732,486respectively has not been recognised in the financial statements, as suchearnings are considered to be indefinitely re-invested. As of December 31,2007, the undistributed earnings of these subsidiaries were approximately$31,549,905 .

 

18.1.6      The netchange in the year 2005 is attributable to reversal of valuation allowance oncarry forward losses of Patni Telecom (which was acquired during the year 2004)aggregating $2,918,367 and reversal of valuation allowance of $67,623 onimpairment of leasehold land. The net change in valuation allowance in the year2006 is mainly on account of deferred tax created on business loss of Japanbranch for the year 2006 aggregating to $501,719. The net change in valuationallowance in the year 2007 is mainly on account of deferred tax created on businessloss of Australia branch aggregating to $370,305.

 

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:

 
| ** **                                                        | ** ** | **2005**    | ** **     | **2006**    | ** ** | **2007**       | ** ** |
|-------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Income before  income taxes                                       |       | $           | 74,669,259     |        | $          | 106,942,533    |       | 135,759,457 |   |
| Weighted average  enacted tax rate in India                       |       | 34.39       | %              | 33.66       | %          | 33.91          | %          |
| Computed  expected income tax expense                             |       | $           | 25,680,625     |        | $          | 35,996,857     |       | $ | 46,032,638 |   |
| Effect of:                                                        |       |        |           |        |       |           |       |
| Income exempt  from tax                                           |       | (21,756,426 | )              | (29,673,705 | )          | (32,290,707    | )          |
| Changes in  valuation allowance                                   |       | (67,623     | )              | 501,719     |       | 370,305        |       |
| Non deductible  expenses                                          |       | 1,866,968   |           | 5,767,090   |       | 792,881        |       |
| US State taxes,  net of federal tax benefit                       |       | 787,336     |           | 1,698,868   |       | 1,407,693      |       |
| Branch taxes                                                      |       | 6,461,722   |           | 5,928,986   |       | 8,162,897      |       |
| Foreign income  taxed at different rates                          |       | (105,635    | )              | (12,403     | )          | 194,339        |       |
| Change in  statutory tax rate on deferred taxes                   |       | (16,432     | )              | 0           |       | (22,301        | )          |
| Profit on sale  of investments taxed at other than statutory rate |       | (261,606    | )              | (571,740    | )          | (2,047,266     | )          |
| Change to prior  year estimates                                   |       | —      |           | 27,401,735  |       | —         |       |
| Others                                                            |       | 1,213,654   |           | 654,356     |       | (816,516       | )          |
| **Reported  income tax expenses**                                 | ** ** | **$**       | **13,802,583** | ** **  | **$**      | **47,691,763** | ** ** | **$** | **21,783,963** | ** ** |

 

F-38

----

** **

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements *(Continued)***

 

**18****          ****IncomeTax *(Continued)***

 

18.1.8     Upon acquisition of PatniTelecom, the Company was entitled to utilize tax benefits on carry forwardbusiness losses of Patni Telecom. Based on preliminary projections of futuretaxable income and tax planning strategies, management believed that thereexisted sufficient uncertainty regarding realization of tax benefits on thecarry forward losses. Consequently, the Company recorded a valuation allowancefor the carry forward business losses of Patni Telecom. In 2005, the Companyevaluated the expected realisation of suchcarry forward losses and available tax planning strategies and believed thatthe Company would make sufficient profits in future years to set off thecarry forward losses. Accordingly, the valuation allowance has been reversedand adjusted against goodwill.

 

18.1.9     A substantial portion ofprofits of the group’s India operations is exempt from Indian income tax, beingprofit from undertakings situated at Software Technology Parks. Under the taxholiday, the tax payer can utilize exemption of profits from income taxes for aperiod of ten consecutive years. The Company has opted for this exemption for undertakingssituated in Software Technology Parks and these exemptions expire on variousdates between years 2005 and 2009.The aggregate effect on net income of the taxholiday and export incentive scheme were $18,957,774, $25,304,980 and $28,931,047for 2005,2006 and 2007 respectively. Further, the per share effect was $0.15,$0.18 and $0.20 for 2005,2006 and 2007 respectively.

 

18.1.10   During the year 2005, theCompany has sold leasehold land for a consideration of $3,768,186 andrecognised a gain on sale of $3,285,169. As required by the Indian Income Taxlaw, the Company has reinvested the proceeds from this sale in prescribedsecurities for a period of three years so as to realize the gain on sale in atax free manner.

 

18.1.11   The Company and some of itssubsidiaries files income tax returns in the U.S. federal jurisdiction, andvarious states and foreign jurisdictions. With few exceptions, the Company isno longer subject to U.S. federal, state and local, or non-U.S. income taxexaminations by tax authorities for years before 2002. The Internal RevenueService (IRS) commenced an examination of the Company’s U.S. income tax returnsfor 2003 through 2005 in the first quarter of 2006 that is anticipated to becompleted by the end of 2008. As of December 31, 2007, the IRS hasproposed no significant adjustments to the Company’s tax positions. The Companydoes not anticipate that adjustments resulting from this examination wouldresult in a material change to its financial position. However, the Companyanticipates that it is reasonably possible that no additional payment will bemade by the end of 2008

 

The Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, on January 1, 2007. As aresult of the implementation of Interpretation 48, the Company recognized noincrease/decrease in the tax liability. A reconciliation of the beginning andending amount of unrecognized tax benefits is as follows:

 
| Balance at January 1, 2007                              |   | 41,701,814 |   |
|--------------------------------------------------------------|--------|------------|--------|
| Additions based on tax positions related to the current year |   | 7,631,819  |   |
| Additions for tax positions of prior years                   |   | —     |   |
| Reductions for tax positions of prior years                  |   | —     |   |
| Settlements                                                  |   | —     |   |
| Balance at December 31, 2007                            |   | 49,333,633 |   |

 

F-39

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements *(Continued)***

 

**18****          ****Income Tax *(Continued)***

 

During the year ended December 31, 2007, the Company recognized$3,520,294 in interest and penalties. As of December 31, 2007, the Companyhas $9,264,295 of accrued interest and penalties related to uncertain taxpositions.

 

The Company conducts it’s business globally, and, as a result, theCompany and some of its subsidiaries file income tax returns in India, theU.S., and various foreign jurisdictions. The tax years ended March 31,2000 to March 31, 2006 remain open to examination by the Indian taxauthorities. With few exceptions, the Company is no longer subject to U.S.federal, state and local income tax examinations by tax authorities for yearsbefore 2002. The Internal Revenue Service (IRS) commenced an examination of theCompany’s U.S. income tax returns for 2003 through 2005 in the third quarter of2006. As of December 31, 2007, the IRS has proposed no significantadjustments to the Company’s tax positions. The Company does not anticipatethat total unrecognized tax benefits will change significantly due to thesettlement of audits or the expiration of statute of limitations prior to December 31,2008.

 

As of December 31, 2007 the Company had $46,023,702 of netunrecognized tax benefits arising out of tax positions which would affect theeffective tax rate if recognized.

 

**19****          ****Retirement benefits toemployees**

 

***Gratuity benefits***

 

19.1.1     In accordance with thePayment of Gratuity Act, 1972, Patni provides for gratuity, a definedretirement plan covering all employees. The plan provides a lump sum payment tovested employees at retirement or termination of employment based on therespective employee’s defined portion of last salary and the years ofemployment with the Company.

 

19.1.2     Patni contributes each yearto a gratuity fund based upon actuarial valuations performed by an actuary. Thefund is administered by Patni through a trust set up for the purpose. Allassets of the plan are owned by the trust and comprise of approved debt andother securities and deposits with banks.

 

F-40

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notes to the consolidated financial statements *(Continued)***

 

**19****          ****Retirement benefits to employees *(Continued)***

 

19.1.3     With regard to Patni Indiaand Patni Telecom India’s (formerly known as Cymbal Information Services Pvt.Ltd.) Gratuity Plan, the following table sets forth the plan’s funded statusand amounts recognized in the Company’s consolidated balance sheets.Measurement dates used to measure fair value of plan assets and benefitobligation is December 31.

 
| **At December 31,**                                                           | ** ** | **2006**  | ** ** | **2007**  | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Change in benefit obligation**                                                        |       |      |       |      |       |
| Projected benefit obligation (“PBO”) at January 1,                       |       | $         | 4,307,971  |      | $          | 4,482,982 |   |
| Service cost                                                                            |       | 982,652   |       | 1,091,201 |       |
| Interest cost                                                                           |       | 329,613   |       | 401,351   |       |
| Translation loss/(gain)                                                                 |       | 178,931   |       | 621,133   |       |
| Actuarial loss                                                                          |       | (583,370  | )          | 493,318   |       |
| Benefits paid PBO at December 31, Fair value of plan assets as  at January 1, |       | (732,815  | )          | (781,725  | )          |
| PBO at December 31,                                                                |       | 4,482,982 |       | 6,308,260 |       |
| Fair value of plan assets as at January 1,                                         |       | 4,790,090 |       | 5,308,811 |       |
| Actual return on plan assets                                                            |       | 273,829   |       | 322,368   |       |
| Employer contributions                                                                  |       | 873,430   |       | 253,798   |       |
| Benefits paid                                                                           |       | (732,815  | )          | (781,725  | )          |
| Translation gain Plan assets at December 31,                                       |       |      |       |      |       |
| Funded status                                                                           |       | 104,277   |       | 695,302   |       |
| Accumulated benefit obligation                                                          |       |      |       |      |       |
| Plan assets as at December 31,                                                     |       | 5,308,811 |       | 5,798,553 |       |
| Funded status                                                                           |       | 825,829   |       | (519,063  | )          |
| Accumulated benefit obligation                                                          |       | 2,353,522 |       | 4,309,009 |       |
| Amounts recognized in the consolidated balance sheets consists of:                      |       | —    |       |      |       |
| Prepaid benefit cost (included in ‘other assets’)                             |       | $         | (918,045   | )         |       |   |
| Provision for Gratuity (included in ‘other current liabilities’)              |       | 1,513     |       | 10,714    |       |
| Provision for Gratuity (included in other liabilities)                                  |       | 90,703    |       | 508,349   |       |
|                                                                                    |       | $         | (825,829)  |      | $          | 519,063 |   |

 

19.1.4     Key weighted averageassumptions used to determine the benefit obligation were as follows:

 
| ** **    | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount rate |       | 8.85     | %          | 9        | %          |

 

For the actuarial valuation at December 31, 2007 and 2006compensation levels have been assumed to increase at 15% p.a. for the firstyear, 12.5% per annum for the next 3 years and 7% per annum thereafter.

 

The expected rate of return on assets in future is considered to be7.5%. This is based on the expectation of the average long-term rate of returnto prevail over the next 15 to 20 years on the type of investments prescribedas per the statutory pattern of investments.

 

F-41

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notes to the consolidated financial statements *(Continued)***

 

**19****          ****Retirement benefits to employees *(Continued)***

 

19.1.5     Net periodic gratuity costincluded the following components:

 
| **Year ended December 31,** | ** ** | **2005** | ** **    | **2006**   | ** ** | **2007**    | ** ** |
|--------------------------------------------|------------|----------|---------------|------------|------------|-------------|------------|
| Service cost                               |       | $        | 919,286       |       | $          | 982,652     |       | $ | 1,091,201 |   |
| Interest cost                              |       | 302,722  |          | 329,613    |       | 401,351     |       |
| Expected return on assets                  |       | (276,826 | )             | (378,065   | )          | (416,245    | )          |
| Amortization                               |       | 99,371   |          | 41,284     |       | (920        | )          |
| **Net gratuity cost**                      | ** ** | **$**    | **1,044,553** | ** ** | **$**      | **975,484** | ** ** | **$** | **1,075,387** | ** ** |

 

19.1.6     Key weighted averageassumptions used to determine the net periodic gratuity cost were as follows:

 
| ** **                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate             |       | 7.5      | %          | 8.00     | %          | 8.85     | %          |
| Expected return on assets |       | 7.5      | %          | 7.50     | %          | 7.50     | %          |

 

For the actuarial valuation at December 31,2007 and 2006, compensation levels have been assumed to increase at 15% perannum for the first year, 12.5% per annum for thenext 3 years and 7% per annum thereafter. For determining the net periodic costfor the year ended December 31, 2005, compensationlevels have been assumed to increase at 15% per annum for the first year, 12.5%per annum for the next year, 10% per annum for next five years and 7% per annumthereafter.

 

19.1.7     Patni’s expectedcontribution to gratuity fund for the calendar year 2008 is $645,071. Theexpected benefit payments for next ten years are as follows:

 
| ** **                | ** ** | **2008** | ** ** | **2009** | ** ** | **2010**  | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 - 17** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|-------------------------|------------|
| Expected benefit payments |       | $        | 1,458,648  |     | $          | 1,549,048 |       | $        | 1,728,825  |     | $          | 1,936,031               |       | $ | 2,102,867 |   | $ | 6,989,140 |   |
|                           |            |          |            |          |            |           |            |          |            |          |            |                         |            |  |  |  |  |  |  |

 

***Pension benefits***

 

19.1.8     Founder directors of PatniIndia and Executive director in employment with Patni USA are entitled toreceive pension benefits upon retirement or on termination from employment atthe rate of 50% of their last drawn monthly salary. The pension is payable fromthe time the eligible director reaches the age of sixty five and is payable tothe directors or the surviving spouse. The liabilities for these pension plansare actuarially determined and periodically recognised. These plans are notfunded.

 

F-42

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notes to the consolidated financial statements *(Continued)***

 

**19****          ****Retirement benefits to employees *(Continued)***

 

19.1.9     With regard to Patni Indiapension plans, the following table sets forth the plan’s funded status andamounts recognised in the Company’s consolidated balance sheet. Measurementdates used to measure benefit obligation is December 31 for each fiscalyear.

 
| **At December 31,**          | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| **Change in benefit obligation**       |       |       |       |       |       |
| PBO at January 1,                 |       | $          | 1,868,072  |       | $          | 1,909,302 |   |
| Service cost                           |       | 66,718     |       | 71,175     |       |
| Interest cost                          |       | 148,860    |       | 181,987    |       |
| Translation loss/(gain)                |       | 37,573     |       | 245,816    |       |
| Actuarial loss/(gain)                  |       | (211,921   | )          | (61,101    | )          |
| Benefits paid PBO at December 31, |       |       |       |       |       |
| Funded status                          |       |       |       | (37,156    | )          |
| Accumulated benefit obligation         |       |       |       |       |       |
| PBO at December 31,               |       | 1,909,302  |       | 2,310,023  |       |
| Funded status                          |       | (1,909,302 | )          | (2,310,023 | )          |
| Accumulated benefit obligation         |       | $          | 1,327,907  |       | 2,310,023  |   |
|                                        |            |            |            |            |            |  |  |

 

19.1.10   Key weighted averageassumptions used to determine benefit obligation for Patni India pension planwere as follows:

 
| ** **                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 8.85     | %          | 9        | %          |
| Increase in compensation levels |       | 10       | %          | 0        | %          |

 

19.1.11   Net periodic pension cost ofPatni India pension plan included the following components:

 
| **Year ended December 31,** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                               |       | $        | 52,950     |     | $          | 66,718   |       | $ | 71,175 |   |
| Interest cost                              |       | 131,830  |       | 148,860  |       | 181,987  |       |
| Amortization                               |       | 137,066  |       | —   |       | —   |       |
| Net pension cost                           |       | $        | 321,846    |     | $          | 215,578  |       | $ | 253,162 |   |

 

19.1.12   Key weighted averageassumptions used to determine net periodic pension cost for the Patni Indiapension plan were as follows:

 
| **Year ended December 31,** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                              |       | 7.5      | %          | 8        | %          | 8.85     | %          |
| Rate of compensation increase              |       | 10       | %          | 10       | %          | 10       | %          |

 

19.1.13   Patni’s expectedcontribution for the calendar year 2008 is $153,413. The expected benefitpayments for next ten years are as follows:

 
| ** **                | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 - 17** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------|------------|
| Expected benefit payments |       | $        | 153,413    |     | $          | 153,413  |       | $        | 153,413    |     | $          | 153,413                 |       | $ | 153,413 |   | $ | 997,183 |   |
|                           |            |          |            |          |            |          |            |          |            |          |            |                         |            |  |  |  |  |  |  |

 

F-43

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notes to the consolidated financial statements *(Continued)***

 

**19****          ****Retirement benefits to employees *(Continued)***

 

19.1.14   With regard to Patni USApension plan, the following table sets forth the plan’s funded status andamounts recognised in the Company’s consolidated balance sheet. Measurementdates used to make up benefit obligation is December 31 for each fiscalyear

 
| **At December 31,**    | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| **Change in benefit obligation** |       |       |       |       |       |
| PBO at January 1,           |       | $          | 5,716,530  |       | $          | 6,071,754 |   |
| Service cost                     |       | 171,332    |       | 191,148    |       |
| Interest cost                    |       | 284,566    |       | 327,036    |       |
| Translation loss/(gain)          |       | 110,751    |       | 774,259    |       |
| Actuarial loss/ (Gain)           |       | (211,425   | )          | (270,312   | )          |
| PBO at December 31,         |       | 6,071,754  |       | 7,093,885  |       |
| Funded status                    |       | (6,071,754 | )          | (7,093,885 | )          |
| Accumulated benefit obligation   |       | $          | 4,147,099  |       | $          | 4,004,314 |   |

 

19.1.15   Key weighted averageassumptions used to determine benefit obligation for Patni USA pension planwere as follows:

 
| ** **                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 5.0      | %          | 4.50     | %          |
| Increase in compensation levels |       | 10       | %          | 10       | %          |

 

19.1.16   Net periodic pension cost ofPatni USA pension plan included the following components:

 
| **Year ended December 31,** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                               |       | $        | 117,766    |     | $          | 171,332  |       | $ | 191,148 |   |
| Interest cost                              |       | 234,240  |       | 284,566  |       | 327,036  |       |
| Amortization                               |       | 713,714  |       | 196,139  |       | 44,169   |       |
| Net pension cost                           |       | $        | 1,065,720  |     | $          | 652,037  |       | $ | 562,353 |   |

 

19.1.17   Key weighted averageassumptions used to determine net periodic pension cost for the Patni USApension plan were as follows:

 
| **Year ended December 31,** | ** ** | **2005**        | ** ** | **2006**       | ** ** | **2007**       | ** ** |
|--------------------------------------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| Discount rate                              |       | 5.0%  per annum |       | 5%  per annum  |       | 5%  per annum  |       |
| Rate of compensation increase              |       | 10%  per annum  |       | 10%  per annum |       | 10%  per annum |       |

 

 

19.1.18   Net periodic amount includedin Other comprehensive Income consisted of actuarial (gain)/Loss. Amountrecognised in net periodic employee benefit costs from other comprehensiveIncome in the current year amount to USD 43249, expected amortisation out ofOther comprehensive Income in 2008 is USD 151689.

 

F-44

----

 

**Patni Computer SystemsLimited and subsidiaries**

** **

**Notes to the consolidated financial statements *(Continued)***

 
| **19**       | ** **   | **Retirement benefits to  employees *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *** *** | *** *** | ***Provident fund***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |         | All  employees of Patni India and Patni Telecom India receive provident fund  benefits through a defined contribution plan in which both the employee and  employer make monthly contributions to the plan at 12% each of the covered  employee’s defined portion of salary. The Company has no further obligations  under the plan beyond monthly contribution. Patni contributes to the  Provident Fund Plan maintained by the Government of India.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |         | Patni  contributed $2,613,644, $3,895,116 and $ 4,145,932 to the Provident Fund Plan  in 2005, 2006 and 2007 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **20**       | ** **   | **Segment Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 20.1.1       | * *     | *SFAS  No. 131, “Disclosures about Segments of an Enterprise and Related  Information”*, establishes standards for the way enterprises  report information about operating segments and related disclosures about  products and services, geographic areas and major customers. The Company’s  operations relate to providing IT services and solutions, delivered to  customers operating in various industry segments. Accordingly, revenues  represented along industry classes comprise the principal basis of segmental  information set out in these consolidated financial statements. Secondary  segmental reporting is performed on the basis of the geographical location of  the customers. The accounting policies consistently used in the preparation  of the consolidated financial statements are also consistently applied to  individual segment information.                                                     |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 20.1.2       |         | Industry segments of the  Company comprise financial services, insurance services, manufacturing  companies, communications media and entertainment, technology services  (comprising independent software vendors and product engineering) and others  such as energy and utilities, retail, logistics and transportation . The  Company evaluates segment performance and allocates resources based on  revenue growth. Revenue in relation to segments is categorized based on items  that are individually identifiable to that segment. Costs are not  specifically allocable to individual segment as the underlying resources and  services are used interchangeably. Property, plant & equipment used  in the Company’s business or liabilities contracted have not been identified  to any of the reportable segments, as the property,plant & equipment  and their services are used interchangeably between segments. |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 20.1.3       |         | Until December 31,  2006, the Company reported Product Engineering Services (PES) and Independent  Software Vendors(ISV) as separate industry segments. The PES business is  primarily related to embedded technology services for products and the ISV  unit provided the user interface for these products. Both these segments form  part of technology services. Effective January 1, 2007, the Company has  integrated these two business segments with the primary focus on the  following synergies (i) demand for providing end-to-end solutions from  product engineering clients. (ii) leveraging the domain skills and  platform skills to provide end-to-end solutions. Segment data for previous  period have been reclassified to conform to current period presentation.                                                                                                                                             |

 

F-45

----

 

**Patni Computer SystemsLimited and subsidiaries**

** **

**Notes to the consolidated financial statements *(Continued)***

 
| **20** | ** ** | **Segment Information *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 20.1.4 |       | Patni’s geographic  segmentation is based on location of customers and comprises United States of  America (‘USA’), Europe, Japan, India and Others. Revenue in relation to  geographic segments is categorized based on the location of the specific  customer entity for which services are performed irrespective of the customer  entity that is billed for the services and whether the services are delivered  onsite or offshore. Categorization of customer related assets and liabilities  in relation to geographic segments is based on the location of the specific  customer entity which is billed for the services. Substantial portion of  Patni’s long lived assets are located in India. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 20.1.5 |       | Based on the economic  characteristics of the telecommunication business segment the company has  renamed the segment as communications, media and entertainment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

F-46

----

 

**Patni Computer Systems Limitedand subsidiaries**

** **

**Notes to the consolidatedfinancial statements *(Continued)***

 

**20         Segment Information (Continued)**

 

***20.1.6    ******Industry segments***

 
| **Particulars**                                                              | ** ** | **Financial services** | ** ** | **Insurance** | ** ** | **Manufacturing** | ** ** | **Communication,  Media &Entertainment** | ** **  | **Product  Engineering** | ** ** | **Others**  |   | **Total**       | ** **      |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|-------------------|------------|---------------------------------------------------|-------------|--------------------------|------------|-------------|--------|-----------------|-----------------|
| ** **                                                                   | ** ** | ** **                  | ** ** | ** **    | ** ** | ** **        | ** ** | **December 31,  2005**                       | ** **  | ** **               | ** ** | ** **  |   | ** **      | ** **      |
| Revenues                                                                     |       | $                           | 72,185,157 |          | $          | 124,885,014       |       | $                                                 | 98,655,217  |                     | $          | 68,860,317  |   | $               | 56,438,107      |   | $ | 29,308,120 |   | **$** | **450,331,932** | ** ** |
| Accounts  receivables, net                                                   |       | 13,627,715                  |       | 16,468,689    |       | 17,230,008        |       | 9,089,355                                         |        | 11,345,994               |       | 6,659,400   |   | **$**           | **74,421,161**  | ** ** |
| Billings in  excess of cost and estimated earnings on uncompleted contracts  |       | (188,409                    | )          | (383,407      | )          | (758,503          | )          | —                                            |        | (277,144                 | )          | (291,330    | )      | **$**           | **(2,350,346**  | **)** |
| Advance from  customers                                                      |       | (1,208,504                  | )          | (94,910       | )          | (71,927           | )          | (451,553                                          | )           | (1,688                   | )          | (12,928     | )      | **$**           | **(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                                         |        | 4,632,132                |       | 1,019,150   |   | **$**           | **26,094,094**  | ** ** |
| ** **                                                                   | ** ** | ** **                  | ** ** | ** **    | ** ** | ** **        | ** ** | **December 31,  2006**                       | ** **  | ** **               | ** ** | ** **  |   | ** **      | ** **      |
| Revenues                                                                     |       | $                           | 88,360,525 |          | $          | 134,513,555       |       | $                                                 | 125,395,979 |                     | $          | 109,204,432 |   | $               | 82,457,792      |   | $ | 38,918,599 |   | **$** | **578,850,882** | ** ** |
| Accounts  receivables, net                                                   |       | 16,469,861                  |       | 21,301,154    |       | 26,507,789        |       | 22,694,977                                        |        | 16,927,759               |       | 11,716,964  |   | **$**           | **115,618,504** | ** ** |
| Billings in  excess of cost and estimated earnings on  uncompleted contracts |       | (207,662                    | )          | (211,665      | )          | (727,686          | )          | (489,852                                          | )           | (818,284                 | )          | (869,432    | )      | **$**           | **(3,324,581**  | **)** |
| Advance from  customers                                                      |       | (4,833                      | )          | (18,172       | )          | (121,713          | )          | —                                            |        | (38,721                  | )          | (2,529      | )      | **$**           | **(185,968**    | **)** |
| Cost and  estimated earnings in excess of billings on uncompleted contracts  |       | 2,425,124                   |       | 1,017,735     |       | 4,756,834         |       | 10,414,219                                        |        | 2,445,959                |       | 1,774,474   |   | **$**           | **22,834,345**  | ** ** |
| ** **                                                                   | ** ** | ** **                  | ** ** | ** **    | ** ** | ** **        | ** ** | **December 31,  2007**                       | ** **  | ** **               | ** ** | ** **  |   | ** **      | ** **      |
| Revenues                                                                     |       | $                           | 93,725,976 |          | $          | 156,608,255       |       | $                                                 | 157,413,791 |                     | $          | 89,387,331  |   | $               | 111,063,050     |   | $ | 54,713,266 |   | **$** | **662,911,669** | ** ** |
| Accounts  receivables, net                                                   |       | 17,458,013                  |       | 27,515,894    |       | 35,482,616        |       | 19,919,098                                        |        | 21,762,194               |       | 14,233,868  |   | **136,371,683** | ** **      |
| Billings in excess  of cost and estimated earnings on  uncompleted contracts |       | (322,417                    | )          | (337,306      | )          | (1,429,386        | )          | (418,269                                          | )           | (772,703                 | )          | (275,163    | )      | **(3,555,245**  | **)**           |
| Advance from  customers                                                      |       | (189,649                    | )          | (400,875      | )          | (135,283          | )          | (82,437                                           | )           | (288,354                 | )          | (140,638    | )      | **(1,237,237**  | **)**           |
| Cost and estimated  earnings in excess of billings on uncompleted contracts  |       | 3,644,377                   |       | 1,907,851     |       | 9,243,504         |       | 7,945,259                                         |        | 6,217,741                |       | 3,458,660   |   | **32,417,391**  | ** **      |

 

F-47

----

 

**Patni Computer Systems Limitedand subsidiaries**

** **

**See accompanying notes to theconsolidated financial statements *(Continued)***

 

**20           Segmentinformation *(Continued)***

 

***20.1.7     Geographic segments***

 
| **Particulars**                                                             | ** ** | **USA**     | ** **  | **Europe** | ** ** | **Japan**                   | ** ** | **India**  | ** ** | **Others** |       | **Total**       | ** **      |
|-----------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-----------------------------|------------|------------|------------|------------|------------|-----------------|-----------------|
| ** **                                                                  | ** ** | ** **  | ** **  | ** ** | ** ** | **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**  | ** ** |
| ** **                                                                  | ** ** | ** **  |        |       |       | **December 31,  2006** |       |       |       |       |       |
| Revenues                                                                    |       | $           | 467,907,248 |       | $          | 67,281,267                  |       | $          | 21,827,569 |       | $          | 2,367,695       |            | $ | 19,467,103 |   | **$** | **578,850,882** | ** ** |
| Accounts  receivables, net                                                  |       | 84,143,450  |        | 24,949,728 |       | 3,441,415                   |       | 1,562,956  |       | 1,520,955  |       | **$**           | **115,618,504** | ** ** |
| Billings in excess of cost and estimated earnings on uncompleted contracts  |       | (1,658,212  | )           | (914,024   | )          | (675,485                    | )          | (60,767    | )          | (16,093    | )          | **$**           | **(3,324,581**  | **)** |
| Advance from  customers                                                     |       | (132,511    | )           | (20,580    | )          | (3,367                      | )          | (3,356     | )          | (26,154    | )          | **$**           | **(185,968**    | **)** |
| Cost and  estimated earnings in excess of billings on uncompleted contracts |       | 11,488,904  |        | 8,518,364  |       | 1,348,568                   |       | 172,637    |       | 1,305,872  |       | **$**           | **22,834,345**  | ** ** |
| ** **                                                                  | ** ** | ** **  |        |       |       | **December 31,  2007** |       |       |       |       |       |
| Revenues                                                                    |       | $           | 516,438,299 |       | $          | 97,712,926                  |       | $          | 20,044,614 |       | $          | 5,376,202       |            | $ | 23,339,629 |   | **$** | **662,911,669** | ** ** |
| Accounts  receivables, net                                                  |       | 100,096,293 |        | 28,257,749 |       | 2,915,162                   |       | 1,245,098  |       | 3,857,380  |       | **136,371,683** | ** **      |
| Billings in excess of cost and estimated earnings on uncompleted contracts  |       | (1,833,086  | )           | (624,628   | )          | (839,150                    | )          | (172,146   | )          | (86,233    | )          | **(3,555,245**  | **)**           |
| Advance from  customers                                                     |       | (1,054,657  | )           | (98,860    | )          | (73,768                     | )          | (9,952     | **)**      | ** ** |       | **(1,237,237**  | )               |
| Cost and estimated earnings in excess of billings on uncompleted contracts  |       | 19,824,710  |        | 8,047,805  |       | 1,894,379                   |       | 268,574    |       | 2,381,923  |       | **32,417,391**  | ** **      |

 
| 20.1.8 |   | One  customer accounted for 22%,15% and 12% of the total revenues for the year  ended December 31, 2005, 2006 and 2007, respectively. Net receivables  from this customer as at December 31,2006 and 2007, amounted to 12% and  9% of the total net receivables, respectively. The revenues from this  customer were across all the industry segments of the Company. Another  customer in the Insurance industry segment accounted for 12%,10% and 9% of  the total revenues for the years ended December 31,2005, 2006 and 2007,  respectively. Net receivables for this customer as at December 31, 2006  and 2007, amounted to 4% and 6% of the total net receivables respectively. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-48

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**See accompanying notes to theconsolidated financial statements *(Continued)***

 
| **21** | ** ** | **Foreign exchange (gain)/loss**                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       | Aggregate  foreign exchange (gain)/loss for the years ended December 31, 2005, 2006  and 2007 amounted to $4,218,141, $3,456,706 and $ (23,350,920) respectively.  Foreign exchange loss amounting to $2,524,996, $708,780 and $ Nil for the  years ended December 31, 2005, 2006 and 2007 respectively, have been  included in “Other (expense)/income, net” in the consolidated statements  of income. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **22** | ** ** | **Earnings per share**                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       | A  reconciliation of the common shares used in the computation of basic and  diluted earnings per share is set out below:                                                                                                                                                                                                                                                                                                                   |

 
| **Years ended December 31,**                                          | ** ** | **2005**    | ** ** | **2006**    | ** ** | **2007**    | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                           | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Common  shares**                                                                   |       |        |       |        |       |        |       |
| ** **                                                                           |       |        |       |        |       |        |       |
| Weighted average  number of shares outstanding                                       |       | 125,736,592 |       | 137,957,477 |       | 138,660,785 |       |
|                                                                                 |       |        |       |        |       |        |       |
| Effect of  dilutive equivalent shares-stock options outstanding                      |       | 1,721,040   |       | 947,383     |       | 909,148     |       |
|                                                                                 |       |        |       |        |       |        |       |
| Weighted average  number of equity shares and dilutive equivalent shares outstanding |       | 127,457,632 |       | 138,904,860 |       | 139,569,933 |       |

 
|   |   | Options  to purchase Nil, 2,630,860 and 1,992,055 equity shares were outstanding  during the year ended December 31, 2005, 2006 and 2007, respectively,  but were not included in the computation of diluted earnings per share  because the exercise price of the options was greater than the average market  price of the equity shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **23** |   | **Related party transactions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1.1 |   | Patni  has various transactions with related parties, such as PCS Technology Ltd.  (‘PCSTL’), formerly known as PCS Industries Ltd, PCS Cullinet, PCS Finance,  Ashoka Computers - all affiliates, directors of Patni and their relatives.  Such transactions were consummated on terms equivalent to those that prevail  in arm’s-length transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | ***Expenses***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Patni has taken certain residential properties under  operating leases from certain affiliates and the Patni family. The rentals  and other incidental charges incurred for the same were $266,325,$ 127,748  and $93,725 for the years ended December 31, 2005, 2006 and 2007,  respectively. Amounts payable with respect to these obligations as at December 31,  2006 and 2007 were $14,495 and $13,799 respectively. Outstanding security  deposits under the operating leases placed by Patni with affiliates and the  Patni family at December 31,2006 and December 31,2007 were $107,203  and $120,478 respectively. Patni has given donations to a public charitable  trust, the trustees of which include a director of the Company and his relatives.  The donations paid during the years ended 2005, 2006 and 2007 were $56,699,  $Nil and $Nil respectively. |
|   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

F-49

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**Patni Computer Systems Limitedand subsidiaries**

 

**See accompanying notes to theconsolidated financial statements *(Continued)***

 
| **23**       | ** **   | **Related party transactions *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *** *** | *** *** | ***Due from employees***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |         | Patni grants personal loans to eligible employees,  either for housing or personal purposes and advances to meet initial  conveyance and living expenses. Personal loans include loans for vehicle  purchase and other individual employee needs. Such loans and advances are  repayable in equal installments over periods ranging from 6-60 months.  Interest on these loans and advances is charged at 0- 7.5%. Loans outstanding  at December 31, 2006 and 2007 were $ 267,328 and $ 620,271 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |         | Patni USA, Patni UK, Patni GmbH, Patni Telecom and its  subsidiaries grant personal loans to employees as well as advances to meet  initial conveyance and living expenses. Such loans and advances are repayable  over a period of 6 months. Interest charged on these loans and advances  ranged from 0% to 10%. Balance outstanding of such loans and advances at  December 31, 2006 and 2007 were $ 2,427,797 and $ 2,736,703  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |         | Employees execute promissory notes for the amount  advanced along with a guarantor’s agreement as collateral. In the case of  long term housing loan, the original house deed is sought to be deposited  with the Company as collateral, in addition to the guarantor’s agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **24**       | ** **   | **Line of Credit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |         | The Company has an overall Line of Credit of  Rs.140,000,000 ($3,160,984) and Rs.610,000,000 ($15,478,305) as of  December 31, 2006 and 2007, respectively, from its bankers for various requirements  such as pre and post shipment loan, Export Bill Discounting, Overdrafts,  Working capital demand loan, Financial Guarantees, Guarantees - Bid Bond /  Performance,etc. These facilities bear interest as negotiated with the bank  from time to time . The facilities are secured by accounts receivables of the  company. Patni Inc and Patni Telecom have a line of credit of $Nil and  $2,000,000 as of December 31,2006 and 2007, respectively, each for  meeting the working capital requirements bearing interest at Bank Prime rate  less 1%. This facility has not been availed as of December 31,2007. In  addition Patni Inc has a facility for issuance of Letters of credit to the  extent of $Nil and $ 500,000 as of December 2006 and 2007, respectively. |

 

F-50

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**Patni Computer Systems Limitedand subsidiaries**

 

**See accompanying notes to theconsolidated financial statements *(Continued)***

 
| **25.** | ** ** | **Commitments and Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 25.1.1  |       | The Company is obliged  under a number of contracts relating to capital expenditure. Estimated  amounts remaining to be executed on such contracts (net of advances),  aggregated $31,907,505 and $ 33,395,547 at December 31, 2006 and 2007  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 25.1.2  |       | Guarantees given by a bank  on behalf of Patni amounted $1,204,985 and $ 3,857,802 as at  December 31, 2006 and 2007, respectively and letter of credit issued by  bank was $Nil and $ 1,472,183 as at December 31, 2006 and 2007  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 25.1.3  |       | In December 2006, the  Company received a demand notice from the Indian Income Tax department of  approximately Rs 630.17 million, including an interest demand of  approximately Rs 186.85 million (U.S. $15,990,012 including an interest  demand of approximately U.S. $4,734,311) for the assessment year 2004-05. The  tax demand was mainly on account of disallowance of deduction claimed by the  Company under Section 10A of the Income Tax Act, 1961, in respect of  profits earned by its various eligible undertakings. Section 10A of  Indian Income Tax Act exempts the profits earned by an undertaking for the  export of computer software upon the fulfillment of certain conditions. One  of the conditions is that the unit should not have been formed by the  splitting up of an existing business. The Company had only expanded its  software development business whereas the Income Tax department contends that  the business of the new units is comprised of business transferred from  existing units by splitting them. The Company, in consultation with its tax  advisers, filed an appeal in January 2007 challenging the disallowance. |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |       | One of the requirements under the Indian Income Tax  Rules to proceed with an appeal is to deposit, either immediately or  through monthly installments, a sum equivalent to 50% of the amount that is  under appeal.Until December 31, 2007, the Company has deposited a sum of  Rs 269.17 million (U.S. $6,829,927) (Refer Note 8). Considering the facts and  nature of disallowances and based on the advice given by the Company’s legal  counsel, management believes that the disallowance is not tenable and  management therefore is confident of a favorable outcome in appeal  proceedings and hence no provision for such income tax demand is considered  necessary. Currently, the matter is at the hearing stage.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |       | Subsequently, in February 2008 the Company has  received a order from the Commissioner Income Tax (CIT) (Appeals) in favor of  the Company by allowing the deduction claimed under Section 10A. The  Company has received the refund of the taxes paid after adjustment of the new  demand for the for the assessment year 2002-03.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |       | In December 2007, the Company received another  demand, of Rs. 261.70 million inclusive an interest demand of approximately  Rs 139.88 million (U.S. $ 6,640,524 including an interest demand of approximately  US $ 3,549,285) for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

F-51

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|   |   | the assessment year 2002-03. The new demand concerns  the same issue of disallowance of tax benefits under Section 10A. In the  opinion of management, and based on advice received, the demand is not  tenable against the Company and the company has already filed an appeal with  the appellate authority. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Patni Computer Systems Limitedand subsidiaries**

 

**See accompanying notes to theconsolidated financial statements *(Continued)***

 
|   |       | Subsequently, in March 2008 the Company has  received a order from the CIT (Appeals) in favor of the Company by allowing  the deduction claimed under Section 10A.The total amount paid till  March 2008 of Rs 261.70 million (US $ 6,524,633) is receivable as refund.                                                                                                                                                                                                                                                      |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | Certain other income tax related legal proceedings are  pending against the Company. Potential liabilities, if any, have been  adequately provided for, and the Company does not currently estimate any  incremental liability in respect of these proceedings. Additionally, the  Company is also involved in lawsuits and claims which arise in ordinary  course of business. There are no such matters pending that Patni expects to  be material in relation to its business.                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **26** | ** ** | **Fair value of financial instruments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |       | The fair value of Patni’s current assets and current  liabilities approximate their carrying values because of their short-term  maturity. Such financial instruments are classified as current and are  expected to be liquidated within the next twelve months. The fair value of  capital lease obligations has been estimated by discounting cash flows based  on current rate available to the Company for similar types of borrowing  arrangements. The fair value and carrying value of capital lease obligations  is set out below: |

 
| **Capital lease obligations** | ** ** | **Fair Value** | ** ** | **Carrying value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                              | ** ** | ** **          | ** ** | ** **              | ** ** |
| At  December 31, 2006              |       | $                   | 655,088    |                    | $          | 691,791 |   |
|                                    |       |                |       |                    |       |
| At  December 31, 2007              |       | 578,708             |       | 603,557                 |       |
|                                         |            |                     |            |                         |            |  |  |

 
| **27** |   | **Subsequent events**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 27.1.1 |   | In February 2008, the Board of Directors of the Company approved  a proposal to buy back fully paid equity shares upto 10% of the paid up  capital and free reserves of the Company determined in accordance with  generally accepted accounting principles in India, at a maximum price of Rs.  325 per equity share, for an aggregate amount upto Rs. 2,370,000,000 ($60.1  million) in accordance with the provisions of the Section 77A, 77AA, 77B  and other applicable |

 

F-52

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|   |   | provisions  of the Indian Companies Act, 1956 and  the provisions of Securities and Exchange Board of India (Buy-back of  Securities) Regulations, 1998 (“Buy Back Regulations”), for which necessary  public announcements were made in April 2008. The Company plans to  announce the date  of buyback at a  future date.                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 27.1.2 |   | On May 10, 2008, the Finance Minister of India  announced that the Government of India has extended the availability of the  10-year income tax holiday by a period of one year such that the tax holiday  will be available until the earlier of fiscal year ending March 31, 2010  or 10 years after the commencement of a Company’s undertaking. |

 

F-53

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