**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, 2006**                                                                                                                                                                                                                |
| ** ** | ** ** | **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**

**(Exact name of registrant asspecified in its charter)**

**Not applicable**

(Translation of registrant’sname into English)

**Republic of India**

(Jurisdiction ofincorporation or organization)

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

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

**+91 22 6693 0500**

(Address of principal executive offices)

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**Securities registered or to beregistered pursuant to Section 12(b) of the Act:**

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

New York Stock  Exchange |

 

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

**None**

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

**Not applicable**

**The number of outstanding shares of each of the issuer’s classes ofcapital or common stock as of December 31, 2006 was:**

**Equity shares:  138,281,853**

**Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act of 1933, or theSecurities Act.**

YES   o      NO   x

**If this report is an annual ortransition report, indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.**

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 markwhether the 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

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

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

 

**Indicate by checkmark which financial statement item the registrant has elected to follow.**

Item 17   o      Item 18   x

**Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).**

YES   o      NO   x.

 

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**TABLEOF CONTENTS**

| **PART - I** | ** ** | ** **                                                                    | ** ** | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------|------------|------------|
| ITEM 1.           |       | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         |       | 2          |
| ITEM 2.           |       | OFFER STATISTICS AND EXPECTED TIMETABLE                                       |       | 2          |
| ITEM 3.           |       | KEY INFORMATION                                                               |       | 2          |
| ITEM 4.           |       | INFORMATION ON THE COMPANY                                                    |       | 22         |
| ITEM 4A.          |       | UNRESOLVED STAFF COMMENTS                                                     |       | 43         |
| ITEM 5.           |       | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  |       | 43         |
| ITEM 6.           |       | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    |       | 66         |
| ITEM 7.           |       | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             |       | 75         |
| ITEM 8.           |       | FINANCIAL INFORMATION                                                         |       | 80         |
| ITEM  9.          |       | THE  OFFER AND LISTING                                                        |       | 81         |
| ITEM 10.          |       | ADDITIONAL INFORMATION                                                        |       | 87         |
| ITEM 11.          |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                   |       | 118        |
| ITEM 12.          |       | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                        |       | 119        |
| **PART II**  | ** ** | ** **                                                                    | ** ** | ** ** |
| ITEM 13.          |       | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                               |       | 119        |
| ITEM 14.          |       | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF PROCEEDS |       | 119        |
| ITEM 15T.         |       | CONTROLS AND PROCEDURES                                                       |       | 119        |
| ITEM 16.          |       | RESERVED                                                                      |       | 121        |
| ITEM 16A.         |       | AUDIT COMMITTEE FINANCIAL EXPERT                                              |       | 121        |
| ITEM 16B.         |       | CODE OF ETHICS                                                                |       | 121        |
| ITEM 16C.         |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        |       | 121        |
| ITEM 16D.         |       | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT  COMMITTEES                   |       | 122        |
| ITEM 16E.         |       | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND  AFFILIATED PURCHASES        |       | 122        |
| **PART III** | ** ** | ** **                                                                    | ** ** | ** ** |
| ITEM  17.         |       | FINANCIAL  STATEMENTS                                                         |       | 122        |
| ITEM  18.         |       | FINANCIAL  STATEMENTS                                                         |       | 122        |
| **ITEM 19.**      | ** ** | **EXHIBITS**                                                                  |       | 122        |

 

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**CURRENCY OFPRESENTATION AND CERTAIN DEFINED TERMS**

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

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

·       “India”refers to the Republic of India;

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

·       aparticular “fiscal” year are to our fiscal year ended December 31 of suchyear.

The financial statements have been prepared using U.S.dollars as the reporting currency. In addition for your convenience, thisAnnual Report contains translations of certain Indian rupee amounts into U.S.dollars which should not be construed as a representation that those Indianrupee or U.S. dollar amounts could have been, or could be, converted into U.S.dollars or Indian rupees, as the case may be, at any particular rate, the ratestated below, or at all.

Except as otherwise stated in this Annual Report, alltranslations from Indian rupees to U.S. dollars contained in this Annual Reporthave been based on the noon buying rate in the City of New York on December 31,2006 for cable transfers in Indian rupees as certified for customs purposes bythe Federal Reserve Bank of New York. The noon buying rate on December 31,2006 was Rs. 44.11 per $1.00.

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

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

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

·       ourability to attract and retain clients;

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

·       ourfuture operating results;

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

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

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

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

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

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predictions. Actual eventsor results may differ materially. In evaluating these statements, you shouldspecifically consider various factors, including the risks outlined in “Item3.D. Key Information—Risk Factors”. These factors may cause our actual resultsto differ materially from any forward-looking statement. Although webelieve that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievement.

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

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

**PART I**

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

Not applicable.

**ITEM 2. OFFERSTATISTICS AND EXPECTED TIMETABLE**

Not applicable.

**ITEM 3. KEYINFORMATION**

**3.A. Selectedfinancial data**

*The selectedconsolidated historical financial data set forth below should be read inconjunction with our consolidated financial statements, the notes to thosestatements and “Item 5. Operating and Financial Review and Prospects” includedelsewhere in this Annual Report. The selected data presented below under thecaptions “Statement of Income Data”, “Balance Sheet Data” and “Cash Flow Data”for, and as of the end of, each of the years in the five-year period ended December 31,2006, are derived from our consolidated financial statements (except for cashdividend per equity share) and have been prepared and presented in accordancewith U.S. GAAP. The consolidated financial statements as of December 31,2006 and 2005, and for each of the years in the three-year period ended December 31,2006, and the audit report thereon, are included elsewhere in this AnnualReport. Historical results are not necessarily indicative of the results to beexpected for any future period.*

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| ** **                                                                                         | ** ** | **Fiscal Year ended December 31,**    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2002**                                                  | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands, except share data)** | ** ** |
| **Statement  of Income Data**                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                           |       | $                                                         | 92,416     |   | $ | 147,641 |   | $ | 223,141 |   | $ | 350,973 |   | $ | 494,448 |   |
| Revenues from a significant shareholder                                                            |       | 95,858                                                    |       | 103,402 |   | 103,441 |   | 99,359 |   | 84,403 |   |
| Cost of revenues                                                                                   |       | 108,629                                                   |       | 157,473 |   | 202,462 |   | 288,481 |   | 370173 |   |
| **Gross Profit**                                                                                   | ** ** | **$**                                                     | **79,645** | ** ** | **$** | **93,570** | ** ** | **$** | **124,120** | ** ** | **$** | **161,851** | ** ** | **$** | **208,678** | ** ** |
| Selling, general and administrative                                                                |       | 39,533                                                    |       | 50,065 |   | 61,195 |   | 89,729 |   | 111,456 |   |
| Foreign exchange (gain) loss, net                                                                  |       | (317                                                      | )          | (172 | ) | 2,082 |   | 1,693 |   | 2,748 |   |
| **Operating Income**                                                                               | ** ** | **$**                                                     | **40,429** | ** ** | **$** | **43,677** | ** ** | **$** | **60,843** | ** ** | **$** | **70,429** | ** ** | **$** | **94,474** | ** ** |
| Interest and dividend income                                                                       |       | 706                                                       |       | 1,574 |   | 4,223 |   | 4,190 |   | 10,088 |   |
| Interest expenses                                                                                  |       | (1,114                                                    | )          | (2,146 | ) | (2,083 | ) | (2,044 | ) | (2,840 | ) |
| Gain on sale of investments, net                                                                   |       | 391                                                       |       | 1,278 |   | 144 |   | 1,128 |   | 1,679 |   |
| Other income (expenses), net                                                                       |       | (404                                                      | )          | (2,025 | ) | (3,693 | ) | 966 |   | 3,541 |   |
| Change in fair value of put option                                                                 |       | —                                                    |       | 1,186 |   | — |   | — |   | — |   |
| **Income before income taxes**                                                                     | ** ** | **$**                                                     | **40,008** | ** ** | **$** | **43,544** | ** ** | **$** | **59,434** | ** ** | **$** | **74,669** | ** ** | **$** | **106,942** | ** ** |
| Income taxes                                                                                       |       | 8,491                                                     |       | 10,240 |   | 12,886 |   | 13,802 |   | 47,692 |   |
| Cumulative effect due to change in accounting  principle due to adoption of SFAS No. 150 |       | —                                                    |       | 3,274 |   | — |   | — |   | — |   |
| **Net income**                                                                                     | ** ** | **$**                                                     | **31,517** | ** ** | **$** | **36,578** | ** ** | **$** | **46,548** | ** ** | **$** | **60,867** | ** ** | **$** | **59,250** | ** ** |
| **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**                                                                             | ** ** | **$**                                                     | **0.32**   | ** ** | **$** | **0.33** | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** | **$** | **0.43** | ** ** |
| **Diluted**                                                                                        | ** ** | **$**                                                     | **0.32**   | ** ** | **$** | **0.33** | ** ** | **$** | **0.38** | ** ** | **$** | **0.48** | ** ** | **$** | **0.43** | ** ** |
| Weighted average  number of common shares used in computing earnings per share                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| —Basic                                                                                        |       | 99,059,168                                                |       | 111,420,849 |   | 123,066,042 |   | 125,736,592 |   | 137,957,477 |   |
| —Diluted                                                                                      |       | 99,059,168                                                |       | 111,420,849 |   | 124,084,992 |   | 127,457,632 |   | 138,904,860 |   |
| Cash dividend per  equity share                                                                    |       | $                                                         | 0.008      |   | $ | 0.009 |   | $ | 0.025 |   | $ | 0.046 |   | 0.057 |   |

 

| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2002**                      | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in thousands)**       | ** ** |
| **Balance  Sheet Data**          |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents        |       | $                             | 32,801     |   | $ | 47,940 |   | $ | 77,143 |   | $ | 148,820 |   | $ | 46,510 |   |
| Investments in securities        |       | 35,341                        |       | 49,245 |   | 85,623 |   | 141,776 |   | 246,016 |   |
| Total assets                     |       | 163,016                       |       | 226,084 |   | 373,063 |   | 553,886 |   | 640,341 |   |
| Capital lease obligations        |       | 301                           |       | 357 |   | 391 |   | 416 |   | 391 |   |
| Redeemable share capital         |       | 117,373                       |       | — |   | — |   | — |   | — |   |
| Total  shareholders’ equity |       | 758                           |       | 154,832 |   | 273,227 |   | 439,029 |   | 508,593 |   |
|                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                       | ** ** | **Fiscal Year ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **2002**                                               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in thousands)**                                | ** ** |
| **Cash  Flow Data**              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided  by (used in): | ** ** | $                                                      | 50,159     | ** ** | $ | 41,382 | ** ** | $ | 47,792 | ** ** | $ | 73,058 | ** ** | $ | 59,091 | ** ** |
| Operating  activities            | ** ** | (46,112                                                | )          | (27,816 | ) | (85,484 | ) | (111,750 | ) | (155,426 | ) |
| Investing  activities            | ** ** | 3,369                                                  | ** ** | (1,165 | ) | 61,423 | ** ** | 111,875 | ** ** | (7,106 | ) |
| Financing  activities            | ** ** | 12,849                                                 | ** ** | 13,742 | ** ** | 21,591 | ** ** | 53,282 | ** ** | 48,620 | ** ** |
| Capital expenditures             | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                  |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Exchange rates**

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

Thefollowing table sets forth, for the fiscal years indicated, informationconcerning the number of Indian rupees for which one U.S. dollar could beexchanged based on the average of the noon buying rate in the City of New Yorkfor cable transfers in Indian rupees as certified for customs purposes by theFederal Reserve Bank of New York:

| **Year**                      | ** ** | ** ** | ** ** | **Average(1)** | ** ** | **High**  | ** ** | **Low** | ** ** | **Period-End** | ** ** |
|-------------------------------|------------|------------|------------|----------------|------------|-----------|------------|---------|------------|----------------|------------|
| 2002                          |       | Rs. 48.63  |       | Rs. 49.07      |       | Rs. 47.96 |       |    | Rs. 48.00  |           |       |
| 2003                          |       | 46.59      |       | 48.10          |       | 45.29     |       |    | 45.55      |           |       |
| 2004                          |       | 45.26      |       | 46.45          |       | 43.27     |       |    | 43.27      |           |       |
| 2005                          |       | 44.00      |       | 46.26          |       | 43.05     |       |    | 44.95      |           |       |
| 2006                          |       | 45.19      |       | 46.83          |       | 43.89     |       |    | 44.11      |           |       |
| 2007 (through June 25,  2007) |       | 42.56      |       | 44.49          |       | 40.14     |       |    | 40.73      |           |       |

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

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

| ** **                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| December 2006                      |       | 44.70    |       | 44.11   |       |
| January 2007                       |       | 44.49    |       | 44.07   |       |
| February 2007                      |       | 44.21    |       | 43.87   |       |
| March 2007                         |       | 44.43    |       | 42.78   |       |
| April 2007                         |       | 43.05    |       | 40.56   |       |
| May 2007                           |       | 41.04    |       | 40.14   |       |
| June 2007 (through  June 25, 2007) |       | 40.82    |       | 40.27   |       |

 

On update as most recentpracticable date prior to filing) the noon buying rate in the city of New Yorkwas Rs. 40.73 per $1.

**3.B. Capitalizationand indebtedness**

Not applicable.

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

Not applicable.

**3.D. Risk factors**

*Investors should carefully consider all of theinformation set forth in this Annual Report and the following risk factors thataffect us and our industry. The risks below are not the only ones we face.Additional risks not currently known to us or that we presently deem immaterialmay also affect our business operations. Our business, financial condition orresults of operations could be materially or adversely affected by any of these*

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*risks. This Annual Report also containsforward-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.”*

**Risks Related toour Operations**

***Our revenues are highly dependent on a limited numberof clients and the loss of any one of our major clients could adversely affectour revenues.***

We derive a significantportion of our revenues from a limited number of clients in a few selectindustries. In 2004, 2005 and 2006 our largest client and one of ourshareholders, General Electric, accounted for 31.7%, 22.1% and 14.6% of ourrevenues and our second largest client accounted for 14.9%, 11.5% and 9.6% ofour revenues. In 2004, 2005 and 2006, our top ten clients accounted for 69.0%,59.3% and 53.1% of our revenues. As a result of our reliance on a limitednumber of clients, we may face pricing and other competitive pressures. Thevolume of work performed for specific clients is likely to vary from year toyear, especially since we are not the exclusive external service provider forour clients. In addition, there are a number of factors, other than ourperformance, that could cause the loss of a client and that may not bepredictable. For example, our clients may decide to reduce spending on ITservices or sourcing from us due to a challenging economic environment andother factors, both internal and external, relating to their business such asrestructuring or supplier rationalizations. The loss of any one of our majorclients, a decrease in the volume of work they outsource to us or a decrease inthe price at which we sell our services to them could adversely affect ourrevenues.

***Our client contracts, including those with our twolargest customers, typically can be terminated without cause and with little orno 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-priceand fixed-price service level agreement, or SLA, basis, can be terminatedwith or without cause, with 0 to 90 days notice and without termination-relatedpenalties. Our MSAs typically do not include any commitment by our clients togive us a specific volume of business or future work. Additionally, certain ofour MSAs do not require the client to make payments for any services or workproduct reasonably deemed unacceptable to the client. Our business is dependenton the decisions and actions of our clients, many of which are outside ourcontrol, 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 softwaresupported by licensors. Any of these decisions or actions could adverselyaffect our revenues and profitability.

***Our revenues are highly dependent on clients locatedin the United States. Economic slowdowns or factors that affect the economichealth of the United States may adversely affect our business.***

In 2004, 2005 and 2006,approximately 87.8%, 84.8% and 80.8% of our revenues were derived from clientslocated in the United States. Any economic slowdown in the United States mayresult in our clients reducing or postponing their technology spendingsignificantly, which may in turn lower the demand for our services.

***Our clients operate in a limited number of industries.Factors that adversely affect these industries or IT spending by companieswithin these industries may adversely affect our business.***

We derive a largeproportion of our revenues from clients which operate in a limited number ofindustries. In 2004, 2005 and 2006, we derived 32.8%, 27.7% and 23.2% of ourrevenues from the 

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insuranceindustry, 28.3%, 21.9% and 21.7% of our revenues from the manufacturingindustry, 2.6%, 15.3% and 18.9% of our revenues from the telecommunicationsindustry, and 19.2%, 16.0% and 15.3% of our revenues from the financialservices industry. Any significant decrease in IT services spending by clientsin these industries or other industries from which we derive significantrevenues in the future may reduce the demand for our services. Further, anysignificant decrease in the growth of the insurance, manufacturing, financialservices or telecommunications industries, or significant consolidation inthose industries, or any decrease in growth or consolidation in other industrysegments in which we operate, may reduce the demand for our services.

***We face intense competition for employees in ourmarket. Our success depends in large part upon our highly skilled softwareprofessionals and our ability to attract and retain these personnel.***

Our ability to execute projects and to obtain newclients depends largely on our ability to attract, train, motivate and retainhighly-skilled software professionals, particularly project managers andother mid-level professionals. Our attrition rates have been high due to ahighly competitive labor market in India and have increased significantly in2006 compared to the prior years. Our attrition rates were 19.4%, 20.1% and28.5% in 2004, 2005 and 2006. We define our attrition rate as the ratio of thenumber of employees that have left us during a defined period to the averagenumber of employees that are on our payroll during such period.

We invest in training theprofessionals that we hire to perform the services we provide. Theseprofessionals are often targeted by the lateral recruitment efforts of ourcompetitors. If we cannot hire and retain additional qualified personnel, ourability to bid on and obtain new projects may be impaired and our revenuescould decline. In addition, we may not be able to expand our 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 as AccentureLimited, or Accenture, and International Business Machines Corporation, or IBM.Additionally, we may not be able to redeploy and retrain our softwareprofessionals to keep pace with continuing changes in technology, evolvingstandards and changing client preferences. For 2006, the attrition rate appearshigher as compared to 2005 because we made a decision not to add to ourheadcount and utilized our existing resources to support growth during suchperiod.

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

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

In the eight quarters ended December 31, 2006,our quarterly revenue growth varied from 1.7% to 10.2% and during the sameperiod our operating income as a percentage of revenues also variedsignificantly. As a large part of any quarter’s revenues are derived fromexisting customers, revenue growth can vary due to project start and stops andcustomer-specific situations. Operating income variation is due tovarious factors such as changes in compensation, which are typically effectedin the second quarter and reduce our operating margin in such quarter; changesin our use of onsite subcontractors, with higher usage in any quarter leadingto lower operating income; changes in the ratio of onsite and offshoreservices, with higher offshore revenues enhancing the particular quarter’soperating income; changes in utilization of resources, with lower utilizationleading to reduction in operating income; and changes in foreign exchangerates. We also experience variations in immigration costs.

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

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

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

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

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

·       annualincreases in compensation of our employees;

·       thesize and timing of expansion of our facilities;

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

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

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

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

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

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

·       other general economicfactors.

***Our earnings may be adversely affected if we receivean adverse determination resulting from a pending U.S. Internal RevenueService tax review of our U.S. operations.***

We face challenges from domestic and foreign taxauthorities regarding the amount of current taxes due. These challenges includequestions regarding the timing and amount of deductions and the allocation ofincome among various tax jurisdictions. To the extent we are able to prevail inmatters for which accruals have been established or are required to pay amountsin excess of our reserves related to future events, our effective tax rate in agiven financial statement period may be materially affected. During 2006, wereached a settlement with the IRS, relating to our tax returns for our USoperations for 2001 and 2002. IRS has also commenced, but not yet completed, atax review of our U.S. operations for the years 2003 and 2004. Pursuant tothe settlement, we revised our tax provisions for 2001 and 2002 and recomputedour tax provision for 2003, 2004 and 2005. This revision, representing changes inestimates, has resulted in an additional charge of approximately $14.1 millionin our financial statements for the year ended December 31, 2006.Additionally, the consequential interest and deferred tax charge in an amountof $6.0 million******has been accrued in ourfinancial statements for the year ended December 31, 2006. As the IRSreview for 2003 and 2004 is still in progress, we cannot currently assesswhether this review may result in increased tax liability.

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Our total income taxliability for the year ended December 31, 2006 was $47.7 million, of which$30.3 million resulted from provisioning due to reassessment of our payroll andcorporate tax obligations for our international operations. We experienced adecline in net income, which decreased from $60.9 million in 2005 to $59.3million in 2006.

***Our earnings may be adversely affected if we receivean adverse determination resulting from a review on compliance matters relatingto our past and present international labor practices.***

We are currentlycooperating with the US Department of Labor with respect tocompliance matters related to our past and present labor practices. We haveestimated and provided for liability of $2.6 million as of March 31,2007. Any adverse finding from this review could adversely impact ourearnings.

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

***The market for IT services is rapidly evolving and highlycompetitive. We expect that competition will continue to intensify. We facecompetition or competitive pressure from:***

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

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

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

·       in-houseIT departments of large corporations;

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

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

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

A number of our international competitors are settingup operations in India. Further, a number of our international competitors withexisting operations in India are ramping up their presence in India as offshoreoperations in India have become an important element of their deliverystrategy. This has resulted in increased employee attrition among Indianvendors and increased wage pressure to retain software professionals and reducesuch attrition.

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

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

We have experiencedsignificant growth in recent years. Our revenues have grown at a compoundannual growth rate or CAGR, of 32.4% from $188.3 million in 2002 to$578.9 million in 2006. The total number of our employees has grown from5,570 as of December 31, 2002 to 12,804 as of December 31, 2006.

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:

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

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

·       expandedour expertise and operations in our product engineering technology practices;

·       enhancedoperations in Europe and Asia; and

·       expandedour 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 managementpersonnel;

·       adheringto our high quality and process execution standards;

·       maintaininghigh levels of client satisfaction;

·       creatingand managing economies of scale;

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

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

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

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

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

We have been expanding thenature and scope of our engagements by extending the breadth of our practicesand the services we offer. The success of our new practices and serviceofferings is dependent, in part, upon demand for such services by our existingand new clients and our ability to meet this demand in a cost-competitive andeffective manner. We cannot be certain that we will be able to attract existingand new clients for such new services or effectively meet our clients’ needs.

We intend for theincreased breadth of our practices and service offerings to result in largerand more complex projects for our clients. To achieve this result, we need toestablish closer relationships with our 

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clientsand develop a thorough understanding of their operations. Our ability toestablish such relationships will depend on the proficiency of our managementpersonnel, software professionals and, if necessary subcontractors, as well asother competitive factors such as our performance and delivery capability.Larger and more complex projects may involve multiple engagements or stages,and there is a risk that a client may choose not to retain us for additionalstages or may cancel or delay additional planned engagements. Suchcancellations or delays make it difficult to plan for project resourcerequirements, and failure to plan appropriately may have a negative impact onour business, results of operations and financial condition.

***Our business will suffer if we fail to keep pace withthe rapid changes in technology in the industries on which we focus. We need toanticipate and develop new services and enhance existing services in order tokeep our clients satisfied.***

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

***We have 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 our competitivenessand our growth prospects.

In November 2004, wecompleted the acquisition of Cymbal (now Patni Telecom), a U.S.-basedprovider of IT services to clients in the telecommunications industry, which isnow integrated with our operations.

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

***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 $150 million to $175 million in capital expendituresthrough 2008, which is a significant increase from our past capitalexpenditures. Most of the new spending will be for construction of newfacilities and physical infrastructure. However, we may not receive thebenefits that we expect from our investment in these facilities. Further, wemay encounter cost overruns or project delays in connection with newfacilities. These expansions will increase our fixed costs. If we are unable togrow our business and revenues proportionately, our profitability will bereduced.

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***We are subject to risks arising from exchange ratefluctuations.***

Although our functional currency is the Indian rupee,we transact a significant portion of our business in several other currencies,particularly the U.S. dollar. Our exchange rate risk primarily arises from ourforeign currency revenues, receivables, payables and other foreign currencyassets and liabilities. We expect that a majority of our revenues will continueto be generated in U.S. dollars for the foreseeable future. In 2004, 2005 and 2006,our dollar denominated revenues represented 94.3%, 90.3% and 87.1% of our totalrevenues respectively.

A significant portion of our expenses, comprising thecost of revenues and selling, marketing and general administrative expenses,are and will continue to be denominated and incurred in Indian rupees. In 2004,2005 and 2006, rupee costs represented 37.6%, 39.1% and 37.0% of these cost ofrevenues and selling, marketing and general administrative expenses. Therefore,changes in the exchange rate between the rupee and other currencies, especiallywith respect to the U.S. dollar, may have a material adverse effect on ourrevenues, other income, cost of services, operating costs and net income, whichmay in turn have a negative impact on our business, operating results andfinancial condition. On December 31, 2006, the exchange rate per U.S.dollar was Rs. 44.11 compared to Rs. 44.95 on December 31, 2005and Rs. 43.27 on December 31, 2004. On June 25, 2007, the exchangerate per US$ was Rs. 40.73. The exchange rate between the rupee and the dollarhas changed substantially in recent years and may fluctuate substantially inthe future.

We have sought to reducethe effect of exchange rate fluctuations on our operating results by purchasingderivative instruments such as foreign exchange forward contracts and netwritten options to cover a portion of outstanding accounts receivables. As of December 31,2006, we had outstanding forward contracts in the amount of $182.6 million andoutstanding currency written options in the amount of $19.5 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 5. Operating and Financial Reviewand Prospects—Exchange Rates.”

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

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

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

Offshore outsourcing hasbecome a politically sensitive topic in the United States and Europe due to itsperceived association with the loss of jobs in such countries. Current orprospective clients may elect to perform services we offer or may bediscouraged from transferring these services to offshore providers to avoid anynegative perception that may be associated with using an offshore provider.These trends could harm our ability to compete effectively with competitorsthat operate primarily out of facilities located in the United States. Avariety of U.S. federal and state legislation has been proposed that, ifenacted, could restrict or discourage U.S. companies from outsourcing theirservices to companies outside the 

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United States.In addition, it is possible that legislation could be adopted that wouldrestrict U.S. private sector companies that have federal or state governmentcontracts from outsourcing their services to offshore service providers.Because most of our clients are located in the United States, any expansion ofexisting laws or the enactment of new legislation restricting offshoreoutsourcing by U.S. companies could adversely impact our ability to dobusiness.

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

We derived 40.5% and 35.2%of our revenues from fixed-price contracts in 2005 and 2006. We bear therisk of cost overruns, completion delays and wage inflation in connection withall fixed-price projects, any of which may result in a decrease in our marginsfrom work performed on fixed-price contracts. Our revenues from fixed-pricecontracts also include revenues from fixed-price SLAs, which areconditioned upon our meeting predetermined performance levels. Any failure tomeet such performance levels could result in a reduction in our revenues. Anyfailure to accurately estimate the resources and time required for a project orany failure to complete our contractual obligations at the committedperformance level could adversely affect our revenues and profitability.

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

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

***We may be liable to our clients for damages caused bysystem 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.

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

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

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***We may be subject to third party claims ofintellectual property infringement.***

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

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

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

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

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

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

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

Most of our employees are Indian nationals. Theability of our software professionals to work in the United States, Europe andin other countries depends on our ability to obtain necessary visas and workpermits. As of December 31, 2006, a majority of our software professionalsin the United States held H-1B visas, a temporary visa which allows theemployee to remain in the United States while he or she remains an employee ofthe sponsoring firm, and L-1 visas, an intra company transfer visaallowing managers and executives or employees with specialized knowledge tostay in the United States only temporarily. An H-1B visa may be grantedto certain categories of persons in several “specialty occupations” includingsoftware professionals such as our employees, so long as their compensationmeets annually adjusted minimums. Those adjustments may force increases in thesalaries we pay to our employees with H-1B visas, resulting in lower profitmargins. Although there is currently no limit to new L-1 visas, there isa limit to the aggregate number of new H-1B visas that may be approved bythe United States government in any fiscal year. Such annual limit is fixed at65,000 and has already been reached for the year 2007 (October 1, 2006 to September 30,2007) as well as for the year 2008 (October 1, 2007 to September 30, 2008). Webelieve that the demand for H-1B visas will continue to be high. Further,the United States government has increased the level of scrutiny in grantingvisas. This may lead to limits on the number of L-1 visas granted. TheU.S. immigration laws also require us to comply with other legal requirementsincluding those relating to displacement and secondary displacement of U.S.workers and recruiting and hiring of U.S. workers, as a condition to obtainingor maintaining work visas for our software professionals working in the UnitedStates.

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

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

Wage costs in India havehistorically been significantly lower than wage costs in the United States andEurope for comparably skilled professionals, which has been one of ourcompetitive strengths. However, wage increases in India may prevent us fromsustaining this competitive advantage and may negatively affect our profitmargins. Wages in India are increasing at a faster rate than in the UnitedStates, which could result in increased costs for software professionals,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 toreduce their dependence on India for outsourced IT services or take advantageof the services provided in countries with labor costs similar to or lower thanIndia.***

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

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abilityto compete effectively will become increasingly dependent on our reputation,the quality of our services and our expertise in specific industries.

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

Presently, we benefit from the tax holidays given bythe Government of India for the export of IT services from specially designatedsoftware technology parks and special economic zones in India. As a result ofthese incentives, which include a 10-year tax holiday from Indiancorporate income taxes for the operation of most of our Indian facilities and apartial taxable income deduction for profits derived from exported IT services,our operations have been subject to relatively low tax liabilities.

In December 2006, we received an assessment orderdisallowing deduction in respect of the profits earned by our various softwaredevelopment units, along with a demand notice for approximately Rs. 630.16million ($14.20 million), including interest. As required by the taxauthorities, we have made a payment of $2.5 million as deposit in this regardduring the three months ended March 31, 2007. Additionally, a deposit ofRs. 220 million (approximately $5.4 million) is required to be paid in monthlyinstalments of Rs. 20 million (approximately $0.5 million) each, commencing May 2007.We have filed an appeal challenging the assessment order, which is currentlypending before the income tax appellate authority. Considering the facts andnature of disallowances and based on the advice given by the our legal counsel,we believe that the disallowance is not tenable and we are confident of afavourable outcome in the appeal proceedings.

Further, provisions of the Income Tax Act of India areamended on an annual basis by enactment of the Finance Act. The Finance Bill,2007 has marginally increased the corporate income tax rate from an effectiverate of 33.66% to 33.99%. Further, it has extended the scope under fringebenefit tax to cover benefits given to employees to subscribe for shares underan employee stock option plan. The Finance Bill, 2007 has also extended thescope of service tax to cover renting, leasing or licensing of immoveableproperty as office building, warehouse and factories for use in business orcommerce. These changes, if implemented in their current form, are likely toincrease our operating expenses.

In addition, we may also be subject to changes intaxation resulting from the actions of applicable income tax authorities inIndia or from Indian tax laws that may be enacted. For example, we may incurincreased tax liability as a result of a determination by applicable income taxauthorities that the transfer price applied to transactions involving oursubsidiaries and us was not appropriate.

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

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

Any disruption in basicinfrastructure, including the supply of power, could negatively impact ourability to provide timely or adequate services to our clients. We rely on anumber of telecommunications service and other infrastructure providers tomaintain communications between our various facilities in India and our clients’operations in the United States and elsewhere. Telecommunications networks aresubject to failures and periods of service disruption which can adverselyaffect our ability to maintain active voice and data communications among ourfacilities and with our clients. Such disruptions may cause harm to 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.

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

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

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

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

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

·       tomake overseas direct investments in a joint venture or wholly-owned subsidiaryoutside India of up to 200% of our net worth as of the date of our last auditedbalance sheet;

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

·       subjectto certain conditions, to acquire shares of a foreign company engaged in a *bona fide* business activity in exchange for our ADRs orGDRs, provided that such an investment, taken together with all our overseasdirect investments, does not exceed an amount equivalent to ten times ourexport earnings during the preceding financial year as reflected in our auditedbalance sheet.

In certain other cases, we are required to obtain theapproval of the Reserve Bank of India to acquire shares of a foreign companyfor cash consideration.

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

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

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

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

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

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

The United States and Indiado not currently have a treaty providing for reciprocal recognition andenforcement of judgments (other than arbitration awards) in civil andcommercial matters.

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

Incidents such as theterrorist attacks that occurred in 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 conflictsin South Asia could adversely affect the Indian economy, disrupt our operationsand cause our business to suffer.***

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

***Our performance is linked to the stability of policiesand the political situation in India.***

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

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deregulation policiescould adversely affect business and economic conditions in India generally, andour business in particular.

Since 1996, the Governmentof India has changed several times. The current Indian government is acoalition of many parties, some of which are communist and other far leftparties in India. The withdrawal of one or more of these parties or any disputebetween groups of those parties could result in political instability. Anypolitical instability could delay or otherwise adversely affect the reform ofthe Indian economy and could have a material adverse effect on the market forour equity shares and our ADSs and on the market for our services.

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

India is susceptible tonatural disasters, including tsunamis, floods and earthquakes. On December 26,2004, southeast Asia, including the eastern coast of India, experienced atsunami that caused significant loss of life and property damage. While ourfacilities were not damaged, the tsunami struck Chennai and other areas inwhich we operate. Substantially all of our facilities and IT professionals arelocated in India 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 our business,financial condition and results of operations.

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

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

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

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

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

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

Sales of a substantialnumber of equity shares, including sales by our insiders, into the publicmarket, whether on the Indian Stock Exchanges or into the United States byissuances of ADSs, or the perception 

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thatsuch sales may occur, could adversely affect the market price of the ADSs andour equity shares or our ability to raise capital through an offering of oursecurities. In the future, we may also sponsor the sale of shares currentlyheld by some of our shareholders, or issue new shares. We can make noprediction as to the timing of any such sales or the effect, if any, thatfuture sales of our equity shares, or the availability of our equity shares forfuture sale, will have on the market price of our equity shares or ADSs prevailingfrom time to time. In addition, we have adopted an employee stock option planas a means to reward and motivate our employees. You may experience dilution ofyour shareholding to the extent that we make future equity offerings or issueequity shares pursuant to the exercise of stock options under our employeestock option plan.

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

Mr. Narendra K. Patni, Mr. Gajendra K. Patni andMr. Ashok K. Patni, together with their families and entities controlledby them, and General Atlantic own 14.69%, 14.42%, 14.87% and 16.52% of ouroutstanding equity shares.

Our Articles of Association confer certain rights onour controlling shareholders relating to our governance, includingrepresentation on our board of directors and an ability to adjourn ashareholder or board of directors meeting for lack of quorum if theirrepresentative is not present at the first such meeting. In addition, ourArticles of Association can only be amended if members holding not less than75% of our equity shares (and who are entitled to vote) cast votes in favor ofsuch amendments and such votes include the favorable votes of each of thecontrolling shareholders so long as the respective groups hold at least 10% ofour equity shares and vote on such amendment. Pursuant to the terms of ourArticles of Association, Mr. Narendra K. Patni is the permanent Chairmanof our Board, with a casting vote in the event of a tie.

Pursuant to an employment agreement with our U.S.subsidiary, Patni Computer Systems, Inc., and a consultancy agreementbetween our U.S. subsidiary and us, Mr. Narendra K. Patni serves as ourchief executive officer and the chief executive officer of our U.S. subsidiary.So long as our consultancy agreement is in effect, Mr. Narendra K. Patniwill act as our chief executive officer and, pursuant to our Articles ofAssociation, so long as he remains our chief executive officer, he will havethe right to appoint and remove all key senior personnel and senior management,following consultation with General Atlantic. The employment agreement withMr. 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.

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

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

Each of the four controlling shareholders has theright to appoint one director to our board of directors so long as suchcontrolling shareholder holds 5% or more of our equity shares. Inaddition, two of our directors formerly served as specialadvisors to General Atlantic.

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

***Trading suspensions and closures at the Indian StockExchanges may adversely affect the trading price of ADSs.***

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

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

***Exchange rate fluctuations between the dollar and therupee 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 

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wouldreceive upon the sale in India of any equity shares withdrawn from thedepositary under the deposit agreement. Holders may not be able to convertrupee proceeds into dollars or any other currency, and there is no guarantee ofthe rate at which any such conversion will occur, if at all.

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

Under certaincircumstances, the Reserve Bank of India must approve the sale of equity sharesunderlying ADSs by a non-resident of India to a resident of India. 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, if an investorseeks to convert the rupee proceeds from a sale of equity shares in India intoforeign currency, approval from the Reserve Bank of India will have to beobtained for each such transaction. Required approval from the Reserve Bank ofIndia or any other government agency may not be obtained on terms favorable toa non-resident investor or at all.

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

Under the Indian CompaniesAct a company incorporated in India must offer its holders of equity sharespreemptive rights to subscribe and pay for a proportionate number of shares tomaintain their existing ownership percentages prior to the issuance of any newshares, unless such preemptive rights have been waived by holders ofthree-fourths of the shares voting on the resolution to waive such rights. Aholder of ADSs may be unable to exercise preemptive rights for equity sharesunderlying ADSs unless a registration statement under the Securities Act iseffective with respect to such rights or an exemption from the registrationrequirements of the Securities Act is available. We are not obligated toprepare and file such a registration statement and our decision to do so willdepend on the costs and potential liabilities associated with any suchregistration statement, as well as the perceived benefits of enabling theholders of ADSs to exercise their preemptive rights, and any other factors weconsider appropriate at the time. We cannot assure you that we wouldfile a registration statement under these circumstances. If we issue anysuch securities in the future, such securities may be issued to the depositary,which may sell such securities for the benefit of the holders of the ADSs.There can be no assurance as to the value, if any, the depositary would receiveupon the sale of such securities. To the extent that a holder of ADS is unableto exercise preemptive rights granted in respect of the equity sharesrepresented by the ADSs, his proportional interest in us would be reduced.

***ADS holders may be restricted in their ability toexercise 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 be forwardedto holders of 

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ADSs.Accordingly, the holders of ADSs may not be able to participate in allofferings, transactions or votes that are made available to holders of ourshares.

***An active or liquid trading market for our ADSs is notassured.***

An active, liquid tradingmarket for our ADSs may not be maintained in the long term. We cannotpredict the extent to which an active, liquid public trading market for ourADSs will exist. If there is no longer any active trading market for our ADSs,or if we fail to meet eligibility requirements, we may be required to delistfrom the NYSE, which could adversely affect the price of our ADSs and,potentially, our equity shares. Although ADSs holders are entitled to withdrawthe equity shares underlying our ADSs from our Depositary at any time, there isno public market for our equity shares in the United States.

**ITEM 4.**                INFORMATIONON THE COMPANY

**4.A.**      Historyand development of the Company

We were incorporated as Patni Computer Systems PrivateLimited on February 10, 1978 under the Indian Companies Act. We areregistered with the Registrar of Companies, Pune, Maharashtra, India. Ourcompany registration number is 11-020127 (CIN U72200MH1978PLC020127). In 1988,since our turnover exceeded prescribed limits under the then-applicable Section 43Aof the Indian Companies Act, we became a deemed public 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 20 2669 3457.

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

Our corporate headquartersare located at Akruti Softech Park, MIDC Cross Road No. 21, Andheri East,Mumbai 400 093, India, and our North American headquarters are located at OneBroadway Cambridge, MA 02142. General Atlantic made a significant investment inour company in 2002. To enhance our domain expertise in financial services andtelecommunications, we made selective acquisitions such as Patni Telecom(formerly Cymbal Corporation), which we acquired in November 2004. Wecompleted our initial public offering of equity shares in India in February 2004and our initial offering of ADSs listed on the New York Stock Exchange in December 2005.

Our capital expendituresfor 2004, 2005 and 2006 were $22.5 million, $55.4 million and$53.4 million, respectively. These capital expenditures were primarily tofinance the expansion of our existing facilities as well as the construction ofnew facilities in India. We anticipate capital expenditures of betweenapproximately $150 million to $175 million through 2008, principally to financethe construction of our new knowledge park facilities in Navi Mumbai andChennai and other facilities and physical infrastructure in India. We areobliged under a number of contracts relating to capital expenditure. Estimatedamounts remaining to be executed on such contracts (net of advances),aggregated approximately $31.9 million at 

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December31, 2006. We currently intend to finance our planned capital expenditureentirely from the proceeds of our ADS offering and funds generated fromoperations.

**4.B.**     Businessoverview

We are a leading Indian provider of information technologyservices. We deliver a comprehensive range of IT services through globallyintegrated onsite and offshore delivery locations primarily in India, which wecall our global delivery model. We offer our services to customers throughindustry-focused practices, including insurance, manufacturing, financialservices and telecommunications, and through technology-focusedpractices. Within these practices, our service lines include applicationdevelopment, application maintenance and support, packaged softwareimplementation, infrastructure management services, product engineeringservices, business process outsourcing and quality assurance services.

We have in-depth knowledge in our industry andtechnology practices. Insurance, manufacturing, telecommunications andfinancial services accounted for 27.7%, 21.9%, 15.3% and 16.0% of our revenuesin 2005, and 23.2%, 21.7%, 18.9% and 15.3% in 2006. We also have knowledge,experience and a growing presence in other industries including retail, energyand utilities, logistics and transportation, and media and entertainment. Ourtechnology practices offer research, design and development services forproduct engineering and to independent software vendors, or ISVs. Through ourdedicated sales and management teams in each of our industry and technologypractices, we believe we are able to provide better client service, effectivelycross-sell services to our existing clients and develop new clientrelationships.

We have a track record of successfully developing andmanaging large, long-term client relationships with some of the world’s largestand best known companies. Our customer base has increased significantly from 87clients as of December 31, 2002 to 239 clients as of December 31,2006. Several of our key executives are located in our client geographies tobetter develop and maintain client relationships at senior levels. Repeatbusiness accounted for 90.3% in 2003, 88.8% in 2004, 91.7% in 2005 and 91.5% ofour revenues in 2006.

Our revenues grew from $188.3 million in 2002 to$578.9 million in 2006, representing a compound annual growth rate of32.4%. Our net income grew from $31.5 million in 2002 to$59.3 million in 2006, representing a CAGR of 17.1%. Our total number ofemployees was 5,570 as of December 31, 2002 and 12,804 as of December 31,2006. 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, 2006 we had 205 sales and marketing personnel supported bydedicated industry specialists in 21 sales offices around the globe, includingNorth America, Europe, Japan and the rest of the Asia-Pacific region.

We have a highly qualifiedmanagement team with a broad range of experience in the IT industry. Our ChiefExecutive Officer is an entrepreneur and engineer who has been in this industryfor over 30 years and has led us from our inception in 1978. Most of oursenior management has worked as a team with us for over 20 years. We useour competitive recruitment program to select the best talent from India’spremier engineering institutions.

**Industry Background**

Businesses areincreasingly relying on IT service providers to help manage the growingcomplexity, cost, and risk of today’s IT infrastructure. Client engagementshave evolved from simple staff augmentation and generic technology services tocustomized IT solutions requiring skilled IT professionals with in-depthindustry knowledge. Further, the maturity of outsourced and offshore servicedelivery has generated client demand for more sophisticated engagement modelscombining onsite and offshore IT management. We believe these trends willcontinue to drive growth generally in the worldwide market for IT services andspecifically in the Indian IT services industry.

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

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

According to Gartner ITServices Worldwide forecast 2003-2010, end-user spending on IT services willgrow at a 6.4% compound annual growth rate through 2010 to reach $855.6billion, with positive growth in nearly all market segments. (Source: Forecast:IT Services, Worldwide, 2003-2010 (Update) 30 November, 2006 Ellie Babaie,Kathryn Hale, Robert De Souza, Yuko Adachi Freddie Ng .)

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

Businesses are outsourcing their IT requirements tobetter manage their IT spending and reduce costs. Outsourcing enablesbusinesses to optimize their IT cost structures by converting a portion oftheir fixed costs to variable costs. Consequently, we believe outsourcingpresents significant long-term growth potential. The following table showsGartner’s worldwide forecast for core outsourcing by vertical market for 2005to 2009.

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Source : Publication Date:14 December 2005 ID Number: G00131095, Gartner on Outsourcing, 2005 ByLorrie Scardino, Dane S. Anderson, Robert H. Brown, Claudio Da Rold, CassioDreyfuss, Frances Karamouzis, John-David Lovelock, William Maurer, CynthiaMoore, Allie Young

***Trend towards offshore IT services***

Macroeconomic trends of globalization andindustrialization, and a rapidly evolving economic and business environmenthave driven the trend towards offshoring of IT services. To acquire highquality IT services more cost effectively, businesses are increasingly usingoffshore IT providers. It has become common for requests for proposals torequire significant detail about the IT services providers’ offshorecapabilities. As a result, over the last few years a large number of globaltechnology and IT services companies have begun to incorporate offshoreoperations as part of their business models.

According to an IDC reportpublished in 2006, worldwide spending on offshore IT services is expected togrow from $13.1 billion in 2005 to $29.4 billion in 2010. This represents aCAGR of 17.6%. [Source : IDC Worldwide & U.S. Offshore IT Services2006-2010 Forecast Barry Rubenstein, Jason Bremner, Marianne Kolding, PhilHassey, Christopher Real, Vladimír Kroa, Nigel Wallis]

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***Growing Indian IT services sector***

India is a premier source for offshore IT services.

We believe thatthere are several key factors favoring India:

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

·       Significantcost benefits: The NASSCOM 2007 Strategic Review states that India has a strongtrack record of delivering a significant cost advantage, with clients regularlyreporting savings of 25-50% over the original cost base.

·       Abundant skilled resources:With over half the population of India aged less than 25 years, India has anabundant, highly-skilled, English-speaking labor pool. According to theNASSCOM 2007 Strategic Review, Indian educational institutions turn outapproximately 4,95,000 technical graduates (including 264,000 engineeringgraduates), nearly 2.3 million other graduates and over 300,000 post graduatesannually. NASSCOM estimates that direct employment in the IT-BPO sector inIndia will cross 1.6 billion this year.

**Our Delivery Model**

We address our clients’ needs with our global deliverymodel, through which we allocate resources in a cost-efficient manner using acombination of onsite client locations in North America, Europe and Asia andoffshore locations in India. We believe an integral part of our delivery is ourindustry 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 eight 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 methodologies and believe weare better positioned to provide comprehensive and long-term support. Wemaximize the cost efficiency of our service offerings by increasing theoffshore portion of the work as the client relationship matures. To complementour domain wedge, we have aligned a majority of our sales and marketing teamsto focus on specific industry sectors.

**Our CompetitiveStrengths**

We believe our competitivestrengths enable us to deliver high-quality, efficient and scalable services.These strengths include:

***Focused Industry Expertise***

We concentrate onindustries where we believe we can generate sustained revenue growth, such asinsurance, manufacturing, financial services and telecommunications. Throughour extensive experience in these industries, we provide solutions that respondto technological challenges faced by our clients. For example, to enhance ourdomain expertise in telecommunications, we acquired Cymbal in 2004. We alsofocus on technology practices, specifically in product engineering and forISVs.

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***Successful Client Relationships***

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. For example,we have a sixteen-year relationship with our largest client General Electric,which had $84.4 million in revenues in 2006. Through our flexibleapproach, we believe we offer services that respond to our clients’ needsirrespective of their size. By leveraging our industry experience with ourproject management capabilities and breadth of technical expertise, we solidifyand expand our client relationships.

***Extensive Suite of IT Services***

We provide a comprehensiverange of IT services, including application development, application maintenanceand support, packaged software implementation, infrastructure managementservices, product engineering, business process outsourcing and qualityassurance services. Our knowledge and experience span multiple computingplatforms and technologies, which enable us to address a range of businessneeds and to function as a virtual extension of our clients’ IT departments. Weoffer a broad spectrum of services in select industry sectors, which weleverage to capitalize on opportunities throughout our clients’ organizations.

***Delivery and Operational Excellence***

Through our mature globaldelivery model, we deliver high quality and cost-effective IT services frommultiple 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-skilled Professionals***

We have a highly qualifiedmanagement team with a broad range of experience in the IT industry. Our Chief ExecutiveOfficer is an entrepreneur and engineer who has been in the IT industry forover 30 years and has led us from our inception in 1978. Most of oursenior management team has worked as a team for over twenty years. We use ourcompetitive recruitment program to select the best talent from India’s premierengineering institutions.

**Our Strategy**

We seek to further enhanceour 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 Strategic Client Accounts***

We have achieved strongrevenue growth by focusing on select, long-term customer relationshipswhich we call strategic accounts. We aim to expand the scope of our clientrelationships by leveraging our focused industry sector expertise with deliveryexcellence, responsive engagement models and breadth of services. We intend tofocus on adding new strategic clients and further penetrating our existingcustomer relationships. We address the needs of our larger strategicrelationships through dedicated account managers who have responsibility forincreasing the size and scope of our service offerings to such clients. We aimto strengthen our sales and marketing teams, a majority of whom are aligned to focuson specific industries.

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***Strengthen and Broaden our 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 Broaden our Service Lines***

We aim to deepen ourexisting client relationships through new and more comprehensive service lines.In recent 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 Expand Delivery 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” brand isan established and recognized brand in India, we intend to increase recognitionof our brand elsewhere in our client markets. We seek to achieve this throughtargeted analyst outreach programs, trade shows, white papers, sponsorships,workshops, road shows, speaking engagements and global public relationsmanagement. We believe that a stronger brand will facilitate our ability togain new clients and to attract and retain talented professionals.

***Pursue Strategic Acquisitions***

We seek to pursueselective strategic acquisitions to augment our capabilities and to addressgaps in industry expertise, technical expertise, service lines and geographiccoverage. We will continue to consider and seek acquisition opportunities suchas Cymbal, which considerably increased our capabilities in the telecommunicationssector.

**Industry Practices,Technology Practices and Service Lines**

We offer our services tocustomers through industry practices in insurance, manufacturing, financialservices and telecommunications, as well as in other industries. We also havetechnology practices that offer services in product engineering and for ISVs.Our industry practices and technology practices are complemented by our servicelines, which we develop in response to client requirements and technology lifecycles. Our service lines include application development, applicationmaintenance and support, packaged software implementation, infrastructuremanagement services, product engineering, business process outsourcing andquality assurance services.

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**Industry Practices**

***Insurance***

We offer a range ofintegrated services to global insurance companies. Our industry experts employtheir knowledge in all stages of the insurance business cycle, fromunderwriting to compliance. Our offerings include a broad spectrum of servicesto insurance carriers including life and health, property and casualty andreinsurance companies. The IT services we provide span several functions,including sales and marketing, distribution, policy services, claims,compliance, accounting and reinsurance. Our core services include:

·       systemsconsolidation and integration of mergers and acquisitions;

·       policyadministration conversions;

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

·       newproduct (life and retirement) introductions;

·       batchsystem optimization;

·       datamining;

·       developmentof business intelligence applications; and

·       legacysupport of several applications.

We are a member of globalinsurance industry organizations such as Life Office Management Association, orLOMA, the Association for Cooperative Research and Development, or ACORD, andthe Insurance and Accounting Systems Association. Several of our businessanalysts are LOMA certified and certified by the American Institute forChartered Property and Casualty Underwriters.

***Manufacturing***

Our manufacturingpractice offers IT and business process outsourcing services that support thepurchase, sales, production, engineering, finance, human resources and legalfunctions of a manufacturing company. Within the manufacturing industry, thesectors we service include consumer goods and durables, electronics,engineering, food and beverages, personal care products, paper and rubberproducts. To businesses in these sectors, we provide services in the followingareas:

·       supplychain management;

·       demandchain management;

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

·       datawarehousing; and

·       businessintelligence.

Our initiatives in thissector include application development using radio frequency identification, orRFID, technologies and business process monitoring solutions.

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***Financial Services***

Our financialservices practice focuses on clients in the banking, financial services andsecurities industries. We provide consulting and software services for consumerand corporate banking, treasury and risk management, mutual funds andinvestment management and securities. Our software services to these areasinclude:

·       architecturedesign;

·       applicationintegration and development;

·       informationsecurity assessments;

·       legacysystem maintenance;

·       businessintelligence;

·       customerrelationship management;

·       mutualfunds and capital markets solutions;

·       portfolioaccounting and reporting;

·       stockexchange and brokerage house solutions; and

·       business processoutsourcing.

***Telecommunications***

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

·       ITstrategy;

·       systemconsulting and design;

·       applicationdevelopment;

·       implementationand maintenance;

·       qualityassurance;

·       newproduct development and launch;

·       infrastructuremanagement services; and

·       business processoutsourcing.

***Other Industries***

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

*Retail*

Our experience in theretail practice includes specialty and national chains, and catalogue andinternet retailing. We also offer standard services such as global trade itemnumber assessment and redemption.

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*Energy &Utilities*

Our experience in theenergy and utilities industry includes product development support, concept toimplementation project expertise and geographic information systems and relatedservices.

*Logistics &Transportation*

We provide services tologistics and transportation companies covering operational applications suchas fleet management, repairs and spares management, vendor management,reservations, flight operations, inventory management, passenger check-inapplications, tracking, logistic applications such as warehouse management,business applications such as human resources and payroll and revenue, salesand financial management.

*Media &Entertainment*

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.

**TechnologyPractices**

***ISV***

Our ISV technologypractice offers outsourcing services that focus on design and development ofsoftware products. Our key engagements are with packaged software andengineering software vendors. We help ISVs shorten upgrade release cycles andreduce the time for a new product to be launched while maintaining costefficiencies. We leverage the latest tools and technologies to assist inre-engineering and migrations to newer technology programs. These servicesinclude:

·       prototyping;

·       designand development for new software products;

·       testing,maintenance and sustenance engineering support; and

·       deployment support.

***Product Engineering***

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

·       industrialdesign;

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

·       multilingualization;

·       technicalhelp desks;

·       productprototyping; and

·       regulatorycompliance.

From January 1, 2007,we have combined our ISV and Product Engineering technology practices.

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**Service Lines**

***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 onemerging platforms such as .NET and J2EE.

***Application Maintenance and Support***

Our application maintenanceand 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 Software Implementation***

We assess,evaluate, implement and maintain packaged software developed by global vendorsin the areas of enterprise resource planning, customer relationship managementor CRM, supply chain management, business intelligence and enterpriseapplication integration. Our offerings comprise:

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

·       implementationservices, which include product implementation and rollout;

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

·       functional extensions andintegration of diverse enterprise applications.

***Infrastructure Management 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.

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***Product Engineering Services***

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, handheld/mobile devicemanufacturing and semiconductor manufacturing. Our technology expertise spansmultiple computing languages including assembly language for various micro-controllersand processors, real-time operating systems, various computer aided design andmanufacturing platforms, GIS platforms, communication protocols and digitalsignal processing. We also offer document conversion services and GIS servicesespecially to our customers in the utilities industry.

***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 Assurance Services***

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.

**Quality and ProjectManagement**

While quality always has been an integral part of ouroperations at Patni, we became formally certified and assessed for qualitymodels in 1995. We started with ISO 9000-1994, underwent SEI-CMMlevel 4 and 5 assessments and as of today are ISO 9001-2000certified and are assessed for P-CMM Level 3 and SEI-CMMiLevel 5. ISO 9001 is an international standard for quality managementsystems maintained by the International Organization of Standardization. TheCapability Maturity Model (CMM) is a method for evaluating the quality of acompany’s management and software engineering practices, with Level 5 being thehighest attainable certification. The CMM was developed by the SoftwareEngineering Institute (SEI) at Carnegie Mellon University. The SoftwareEngineering Institute subsequently released a revised version known as theCapability Maturity Model Integration (CMMi). We have been using the Six SigmaProgram 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 and accuratedelivery of IT solutions to our clients. We were ranked highest among Indianoffshore supply chain solution providers in a customer satisfaction surveyconducted by Forrester Research Inc. In 2006, we were also recognized as one of‘The Giant 100’ companies at the first CIO 100 awards in India fordemonstrating excellence in deploying technology solutions to deliver optimumbusiness value. 

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*Centers of Excellence.*   Wehave developed 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 utilizethe latest technologies for new systems. We partner with leading technologyvendors such as IBM and Microsoft to implement technology solutions soon afterthey are made available in the market.

**Sales and Marketing**

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

We undertake detailed periodic reviews to identifyexisting and prospective clients that we believe can develop into large, strategicclients. We intend to focus on adding more strategic accounts, which we defineas those who provide $4.0 million or more in annual revenues or those withwhom we believe we have the potential to achieve such annual revenue amountsover a 24 to 30 month period. For each strategic client, a seniorexecutive is identified and charged with managing the overall clientrelationship and leading periodic reviews with the client. The number ofstrategic clients has grown from 17 as of December 31, 2002 to 31 as of December 31,2006.

We have 21 sales offices across North America, Europe,Japan and rest of the Asia-Pacific region. As of December 31, 2006, we had205 sales and marketing personnel who are supported by dedicated industryspecialists. We set targets for our sales personnel at the beginning of eachyear, which are subject to periodic reviews. In addition to a base salary, ourcompensation package for sales personnel includes an incentive-basedcompensation plan driven by achievement of the prescribed 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.

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**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,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| United States                             |       | 87.8                                                     | %          | 84.8 | % | 80.8 | % |
| Europe                                    |       | 7.9                                                      | %          | 9.1 | % | 11.6 | % |
| India                                     |       | 0.2                                                      | %          | 0.3 | % | 0.3 | % |
| Japan                                     |       | 3.3                                                      | %          | 4.3 | % | 3.8 | % |
| Asia-Pacific  (excluding Japan and India) |       | 0.4                                                      | %          | 0.4 | % | 2.0 | % |
| Rest of the World                         |       | 0.4                                                      | %          | 1.1 | % | 1.5 | % |
| Total                                     |       | 100.0                                                    | %          | 100.0 | % | 100.0 | % |

 

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

| ** **              | ** ** | **Fiscal year ended   December 31,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|
| ** **              | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Insurance               |       | 32.8                                                     | %          | 27.7 | % | 23.2 | % |
| Manufacturing           |       | 28.3                                                     | %          | 21.9 | % | 21.7 | % |
| Financial  Services     |       | 19.2                                                     | %          | 16.0 | % | 15.3 | % |
| Telecommunications      |       | 2.6                                                      | %          | 15.3 | % | 18.9 | % |
| Others                  |       | 6.6                                                      | %          | 6.5 | % | 6.7 | % |
| ISV(1)                  |       | 5.9                                                      | %          | 5.0 | % | 4.1 | % |
| Product  Engineering(1) |       | 4.6                                                      | %          | 7.6 | % | 10.1 | % |
| Total                   |       | 100.0                                                    | %          | 100.0 | % | 100.0 | % |

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(1)          InJanuary 2007, we have combined our ISV and Product Engineering technologypractices.

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,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| General Electric      |       | 31.7                                                     | %          | 22.1 | % | 14.6 | % |
| State Farm  Insurance |       | 14.9                                                     | %          | 11.5 | % | 9.6 | % |
| Top 5 Clients         |       | 57.6                                                     | %          | 46.8 | % | 37.1 | % |
| Top 10 Clients        |       | 69.0                                                     | %          | 59.3 | % | 53.1 | % |

 

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

| ** **                         | ** ** | **Fiscal year ended   December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| No. of $1  million + clients  |       |                                                     | 46         |   |   |   | 61 |   |   |   | 74 |   |   |
| No. of $5  million + clients  |       |                                                     | 12         |   |   |   | 19 |   |   |   | 26 |   |   |
| No. of $10  million + clients |       |                                                     | 4          |   |   |   | 9 |   |   |   | 13 |   |   |
| No. of $25  million + clients |       |                                                     | 2          |   |   |   | 2 |   |   |   | 3 |   |   |
| No. of $50 million  + clients |       |                                                     | 1          |   |   |   | 2 |   |   |   | 2 |   |   |

 

***The General Electric Association***

Our association with General Electric commenced in1990.~~~~We provide services to a number of entities within the GeneralElectric group of companies. For these businesses, we provide services in theareas of multi-year application support, new program development,infrastructure management, business intelligence solutions and software packageimplementation Our largest General Electric engagement is with GE ConsumerFinance, for which we act as the preferred IT services supplier for applicationdevelopment and maintenance to its credit card processing business. 

Our engagement model with General Electric includes adedicated development center, integrated telecommunications networks, qualityprogram targets and highly integrated program 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-partyIT service providers. Accordingly, our pricing for these projects is based onour cost and margin expectations for completing the project, which is the samebasis that we bid for fixed price projects with other customers. Individualprojects under the agreement are separately bid and negotiated by us. 

On August 3, 2006, we entered into a new masterInformation Technology Services Agreement with General Electric, with a termfrom January 1, 2007 to December 31, 2009. The terms of thisagreement generally reflect the provisions described below under “ContractualArrangements.” In addition, the agreement provides that we will support GeneralElectric’s aim to have (i) at least 90% of all task orders under theagreement on a “fixed price” basis; (ii) no fewer than 85% of personnelassigned to work on a specific project to remain on such project; and (iii) atleast 70% of work under the agreement undertaken at our offshore developmentcenters. 

General Electric became ashareholder in 2000, and its shareholding has declined from 9.99% as of December 31,2000 to 1.9% as of March 31, 2007. See “Item 7. B. Related PartyTransactions—General Electric.”

***Contractual Arrangements***

We enter into non-exclusive MSAs with clients thattypically have a specified term and contain general rights and obligations governingour relationship with the client. The MSAs specify the broad scope of work andtypically do not include any commitment by the client to give us a specificvolume of business or future work. For each work assignment, the client and weenter into separate work orders that specify the types of services we arerequired to provide to the client, the performance levels and the price terms.Although some of our MSAs contain the billing rates for time and materials workorders, for most of the services we provide, whether on a time and materialsbasis or on a fixed-price basis, the separately agreed work order contains thespecific pricing and other commercial terms.

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

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

·       requireus to maintain confidentiality relating to the client and the contract,including compliances with various laws relating to privacy and dataprotection;

·       requireus to protect the intellectual property of our clients;

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

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

·       limitthe liabilities of both parties under the contract; and

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

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

**Competition**

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

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

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

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

·       in-houseIT departments of large corporations;

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

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

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

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

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a broadrange of IT services, to manage and maintain large client relationships, tocontinually monitor and improve our delivery excellence and to attract andretain 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 and technologyinitiatives group is focused on applied research and development initiativesand employs emerging technologies to create new technology service offerings.The group has established systems to harness talent among our employees byproviding a shared framework for idea generation. The group is responsible foridentifying, evaluating and incubating new technology service offerings andlater converting relevant technology offerings into centers of excellence. The currentfocus areas of the group include service oriented architectures and their usagein building next generation applications, mobile computing and itsapplications, usage of RFID technologies and legacy systems modernization.

***Delivery Innovation***

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

**Human Resources**

Weemployed 9,661, 11,802 and 12,804 employees as of December 31, 2004, 2005and 2006, respectively. As of December 31, 2006, we had 10,586 softwareprofessionals. Of these software professionals, 2,546 employees werecategorized as onsite and 8,040 as offshore. The geographic breakdown for ouremployees as of December 31, 2006 is as follows:

| **Location**  | ** ** | ** ** | ** ** | **Number of Employees** | ** ** |
|---------------|------------|------------|------------|-----------------------------------|------------|
| India         |       |       | 10,009     |                              |       |
| North America |       |       | 2,329      |                              |       |
| Rest of World |       |       | 466        |                              |       |

 

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

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***Recruitment***

We have developed processes to evaluate and recruitlarge numbers of talented employees. Our hiring is driven by an annualbudgeting process, which is monitored and adjusted on a monthly basis based onbusiness visibility. We recruit talent from premier universities, colleges andinstitutes in India, including the Indian Institutes of Technology, known asIITs, regional engineering colleges, or RECs, and Indian Institutes ofManagement, or IIMs. For our offshore facilities located in India, ourcampus recruiting team visited over 149 campuses in 2006. Our rigorousselection process involves a series of activities including case interviews andtechnical and psychometric tests. We have a similarly competitive recruitmentprogram for our lateral hires. All new hires are inducted into our organizationthrough a structured program, which involves extensive training as well asmentoring.

Our software employees arehighly-skilled and have diverse educational backgrounds. As of December 31,2006, graduate engineers comprised 66.8%, post graduate engineers comprised5.6%, employees with masters degrees in computer applications or computermanagement comprised 13.8% and employees with a masters in businessadministration and equivalent qualifications comprised 4.3% of our softwareprofessionals. Other degrees comprised 9.2% of our software professionals. Webelieve that we have a balanced mix of experience with approximately 44.8%,25.1% and 30.0% of our software professionals with work experience of under3 years, 3 to 6 years and over 6 years, respectively, as of December 31,2006.

***Training and Development***

We are committed toinvesting in training programs to continually enhance the capabilities of ouremployees. We have a transparent evaluation system for tracking performance andidentifying potential 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 identifyand develop future leaders necessary for our growth. Our training plans arepersonalized and address both technical and soft-skill requirements. For eachsoftware professional, we plan a minimum of 10 working days of trainingper year. As of December 31, 2006, we had over 30 faculty members in ourtraining division, 10 dedicated classrooms, 8 computer labs and 11 online labs.

***Compensation***

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

***Retention***

We endeavor to provide a challenging and entrepreneurialwork environment and multiple growth opportunities for our employees. Thisincludes an annual salary review, the implementation of the “LeadershipExcellence At Patni” program, the introduction of skill-related bonuses, thecreation of an online grievance redressal mechanism, rotation into growthopportunities, higher employee contacts and the adoption of an employee stockoption plan in June 2003, which was amended in June 2006 to enable usto issue ADR linked options to our employees. Through the various programsdescribed above, we seek to 

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identify and develophigh-performers early in their careers. The first phase of our scalableknowledge park, a high-tech business facility fitted with lifestyle amenitiesfor our employees, is ready and under partial occupation.

In line with the Indian ITindustry, none of our employees are represented by a union. We believe we havepositive relations with our employees.

**Seasonality**

Our IT services businessis not affected by seasonality.

**GovernmentRegulation**

Regulation of our business by the Indian governmentaffects our business in several ways. Currently, we benefit from tax holidaysgiven by the Government of India for the export of IT services fromspecially designated software technology parks, or STPIs, and special economiczones, or SEZs, in India. These tax incentives currently include a 10-yearholiday from the payment of Indian corporate income tax for the operations ofmost of our Indian facilities and a partial taxable income deduction for profitsderived from exported IT services. As a result of these two taxincentives, a substantial portion of our pre-tax income has not been subject tosignificant tax in recent years. However, on December 31, 2006, wereceived an assessment order together with a notice of demand from the IncomeTax Officer (Technical)-II, Pune, India in connection with the assessment ofour income tax return for the assessment year ended March 31, 2004. Theassessment order has among other things disallowed our claim for income taxdeduction under Section 10A of the Income Tax Act, 1961 for various of oursoftware development units located in India and raised a demand of Rs. 630.16million (inclusive of interest), or approximately US$ 14.20 million. On January 22,2007 we filed an appeal challenging the assessment order before theCommissioner (Appeals). As required by the tax authorities, we have made apayment of $2.5 million as deposit in this regard during the three months endedMarch 31, 2007. Additionally, a deposit of Rs. 220 million (approximately$5.4 million) is required to be paid in monthly instalments of Rs. 20 million(approximately $0.5 million) each, commencing May 2007.

The aggregate benefit of these tax holidays anddeductions with respect to our net income was $20.6 million, $19.0 million and$25.3 million for 2004, 2005 and 2006, respectively. Our current tax holidaysfor STPI units expire in stages by 2009 and our partial taxable incomededuction for profits derived from exported IT services expired in March 2005.The tax benefits available for some of our facilities have expired and certainothers will expire upon completion of 10 years, however the tax holiday for theexport of IT service will expire on March 31, 2009. Consequently, weexpect our effective tax rate to increase.

We are also subject to other government regulations,including those relating to acquisition of foreign securities, raising capitaloutside India and conversion of our equity shares into ADSs.

Please see “Item 10.Additional Information”, as well as “Item 3. D. Key Information—RiskFactors” for additional information on the effects of governmental regulationof our business.

**IntellectualProperty**

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

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We require our employees and subcontractors to enterinto non-disclosure arrangements to limit access to and distribution of ourclients’ proprietary and confidential information as well as our own. Generallywe are responsible to our clients for complying with certain securityobligations including maintaining network security, backing-up data, ensuringour network is virus free and verifying the integrity of those employees thatwork with our clients by conducting background checks. We cannot assure youthat we will be able to comply with all such obligations without incurring anyliability.

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

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

**4.C. Organizationalstructure**

Wehave the following direct and indirect subsidiaries as of December 31,2006, all of which are wholly-owned:

| **Name**                                    | ** ** | ** ** | ** ** | **Country of Incorporation** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Patni Computer  Systems, Inc.          |       |       | USA        |                                   |       |
| Patni Computer  Systems (UK) Limited        |       |       | UK         |                                   |       |
| Patni Computer  Systems GmbH                |       |       | Germany    |                                   |       |
| Patni Telecom  Solutions Inc.(1)            |       |       | USA        |                                   |       |
| Patni Telecom  Solutions Private Limited(2) |       |       | India      |                                   |       |
| Patni Telecom Solutions  (UK) Limited(2)    |       |       | UK         |                                   |       |

----

(1)          Owned through PatniComputer Systems, Inc.

(2)          Wholly-owned subsidiaryof Patni Telecom Solutions Inc.

During 2006, The ReferenceInc., which was a subsidiary of Patni Computer Systems, Inc., and CymbalInformation Services (Thailand) Ltd., which was a subsidiary of Patni TelecomSolutions Inc., were dissolved.

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

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

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

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

Ourlocations in India are as follows (as at December 31, 2006):

| 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, Telecommunications, 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          |       |                 | 80,476        |                                                                       |       |   |   |
|   |       | Total Hyderabad |       |                 | 88,973        |                                                                       |       | Telecommunications |   |
| 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           |       |                 | 195,444       |                                                                       |       | Enterprise  Application Systems, Product Engineering |   |
|   |       |            |       |                 |          |                                                                       |       | Services,  Financial Services, Others |   |
|        | ** ** | **Total**       | ** ** | ** **           | **1,485,770** |                                                                       |       |   |   |

 

We currently have capacity for approximately 15,000professionals at these facilities. As of December 31, 2006, we usedapproximately 85.3% of our existing office space in our operations.

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

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We have 21 salesand marketing offices located in the following locations:

In keeping with our plans for expansion, we have begunconstruction of new facilities in India, including in particular two knowledgeparks in Navi Mumbai and Chennai. We anticipate that expenditures for ourexpansion plans will total approximately $150.0 million to$175.0 million through 2008. We intend these knowledge parks to havestate-of-the-art resources with extensive workspace and training facilities anda modular design for ease of segregation of dedicated projects. These campuseswill have secure, redundant infrastructure with the ability to provide scaleand service to clients from one location. The initial phase of the constructionhas already begun at each site. The Navi Mumbai and Chennai facilities areexpected to accommodate up to 14,000 and 10,000 people, respectively, whencompleted. We estimate that we may spend an aggregate of approximately $140million to complete these two projects. Phase I of the Navi Mumbai facility,having a capacity of 1,800 seats, is complete and under partial occupation.Phase I of the Chennai facility, having a capacity of 1,200 seats, is completeand under partial occupation. Another building in the Chennai facility with acapacity of 1,200 seats is complete and will be furnished as per futurerequirements. As of December 31, 2006, we had spent approximately$66.3 million on the knowledge parks.

In continuation of our policy to have our own campusoperations, land has been acquired at Pune, Hyderabad, Kolkata and Noida inaddition to our campuses in Mumbai and Chennai. These facilities when fullyconstructed will have a sitting capacity for approximately 28,000professionals.

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

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

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**ITEM 4A.**        UNRESOLVEDSTAFF COMMENTS

Not applicable

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

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

**Overview**

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

Our revenues grew from $188.3 million in 2002 to$578.9 million in 2006, representing a compound annual growth rate of32.4%. Our net income grew from $31.5 million in 2002 to$59.3 million in 2006, representing a compound annual growth rate of 17.1%. Our total number of employees was 5,570 as of December 31, 2002 and12,804 as of December 31, 2006. In light of this growth, we are investingin new high-tech facilities, which we refer to as “knowledge parks,” designedfor expanding our operations and training our employees. As of December 31,2006, we had 205 sales and marketing personnel supported by dedicated industryspecialists in 21 sales offices around the globe, including North America,Europe, Japan and the rest of the Asia-Pacific region.

Our industry segments comprise of  financial services, insurance services,manufacturing companies, telecommunications, technology services and otherssuch as energy and utilities, retail, logistics and transportation and mediaand entertainment. We evaluate segment performance and allocate resources basedon revenue growth. We categorize revenue in relation to segments based on itemsthat are individually identifiable with that segment. Costs are notspecifically allocable to individual segments as the underlying resources andservices are used interchangeably. Fixed assets used in our business orliabilities contracted have not been identified with any of the reportablesegments, as the fixed assets and services are used interchangeably betweensegments.

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

We have also developedtechnology practices that offer research, design and development services forproduct engineering and to independent software vendors, or ISVs. Our servicelines support both our industry and technology practices. We do not, however,treat our service lines as separate components of our business for financialreporting purposes.

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**5.A. Operatingresults**

**Revenues**

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

***Onsiteand Offshore Revenues***

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

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

As of December 31, 2005, 9,352 of 11,802  total employees were located in India and asof December 31, 2006, 10,009 of 12,804 total employees were located inIndia. Our overall employee numbers will increase as we add employees for bothonsite and offshore work. We measure our service efforts that can be billed toclients in units of billed person-months. The number of offshore billed person-monthshas increased as a percentage of total billed person-months from 64.6% in2005 to 67.0% in 2006.

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

| ** **              | ** ** | **Year ended December 31, 2005** | ** ** | ** **                          | ** ** | **Year ended December 31, 2006** | ** ** | ** **                        | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **Onsite  Billed  Person-months**                    | ** ** | **Offshore  Billed  Person-months** | ** ** | **Total**                                            | ** ** | **Onsite  Billed  Person-months** | ** ** | **Offshore  Billed  Person-months** | ** ** | **Total** | ** ** |
| Financial  Services     |       |                                                 | 4,711      |                                |       |                                                 | 11,123     |                              |       | 15,834 |   |   | 5,006 |   |   |   | 12,389 |   |   | 17,394 |   |
| Insurance               |       |                                                 | 8,953      |                                |       |                                                 | 11,417     |                              |       | 20,369 |   |   | 8,382 |   |   |   | 13,238 |   |   | 21,620 |   |
| Manufacturing           |       |                                                 | 6,225      |                                |       |                                                 | 13,060     |                              |       | 19,285 |   |   | 7,116 |   |   |   | 15,661 |   |   | 22,776 |   |
| Telecommunications      |       |                                                 | 3,977      |                                |       |                                                 | 4,206      |                              |       | 8,203 |   |   | 5,484 |   |   |   | 6,347 |   |   | 11,831 |   |
| ISV(1)                  |       |                                                 | 1,025      |                                |       |                                                 | 4,227      |                              |       | 5,253 |   |   | 895 |   |   |   | 3,983 |   |   | 4,878 |   |
| Product  Engineering(1) |       |                                                 | 1,804      |                                |       |                                                 | 5,041      |                              |       | 6,845 |   |   | 2,721 |   |   |   | 8,554 |   |   | 11,275 |   |
| Other                   |       |                                                 | 2,076      |                                |       |                                                 | 3,556      |                              |       | 5,642 |   |   | 2,452 |   |   |   | 3,909 |   |   | 6,361 |   |
| Total                   |       |                                                 | 28,791     |                                |       |                                                 | 52,639     |                              |       | 81,430 |   |   | 29,603 |   |   |   | 60,172 |   |   | 89,775 |   |

----

(1)          FromJanuary 2007 we have combined our ISV and Product Engineering practices.

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

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

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our facilities in India.These differences are attributable to the higher 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 suchperiod.

***Revenues by Industry Segments***

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

Wederive a significant proportion of our revenues from clients in the insurance,manufacturing, telecommunications and financial services industries. We alsoprovide services to clients in other industries, including retail, energy andutilities, logistics and transportation, and media and entertainment. Inaddition, we market our services to clients through our technology practices,comprising our product engineering and ISV practices. The following tableindicates the breakdown of our revenues by our industry and technologypractices:

| **Industry Segments** | ** **   | ** **   | ** **   | **Year ended December 31,** | ** **   |
|----------------------------|--------------|--------------|--------------|--------------------------------------------|--------------|
| ** **                 | ** **   | **2004**     | ** **   | **2005**                                   | ** **   | **2006** | ** ** |
| ***Industry  Practice***   | *** *** | *** *** | *** *** | *** ***                               | *** *** | *** *** | *** *** |
| Financial  Services        |         | 19.2         | %            | 16.0                                       | %            | 15.3 | % |
| Insurance                  |         | 32.8         | %            | 27.7                                       | %            | 23.2 | % |
| Manufacturing              |         | 28.3         | %            | 21.9                                       | %            | 21.7 | % |
| Telecommunications         |         | 2.6          | %            | 15.3                                       | %            | 18.9 | % |
| Other                      |         | 6.6          | %            | 6.5                                        | %            | 6.7 | % |
| ***Technology  Practice*** |         |         |         |                                       |         |   |   |
| ISV Practice(1)            |         | 5.9          | %            | 5.0                                        | %            | 4.1 | % |
| Product  Engineering(1)    |         | 4.6          | %            | 7.6                                        | %            | 10.1 | % |
| Total                      |         | 100.0        | %            | 100.0                                      | %            | 100.0 | % |

----

(1)          InJanuary 2007 we have combined our ISV and Product Engineering practices.

***Revenues by Contract Type***

Ourrevenues are recorded either on a time-and-material, or T&M, basis or afixed-price basis. The following table shows our revenues by contracttype:

| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Time-and-Material |       | 57.4                                       | %          | 59.5 | % | 64.8 | % |
| Fixed Price       |       | 42.6                                       | %          | 40.5 | % | 35.2 | % |
| Total             |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

Although we seek to use our software engineeringprocesses and past project experience to reduce the risks associated withestimating, planning and performing fixed-price projects, we bear therisk of cost 

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overruns and completiondelays in connection with fixed-priced contracts. Accordingly, we believethat we bear a greater amount of risk from our fixed-price contracts thanfrom our T&M contracts.

A large proportion of our revenues from fixed-pricecontracts are from fixed-price SLAs. A large proportion of our fixed-priceSLAs are application maintenance and support projects, as to which work andcost estimates have been fairly predictable. Our revenues from fixed-priceSLAs were 26.8%, 27.9%, and 24.4% in 2004, 2005 and 2006 respectively. .

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

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

***Revenues by Top Customers***

Asillustrated in the table below, a significant proportion of our revenues isderived from a small number of clients. In recent years, however, we havediversified our client revenues as a result of various initiatives, includingour addition of new strategic clients, our focus on additional industrypractices, our development of technology practices and our expansion of therange of service lines we offer. As of December 31, 2006, we had 74clients, each of whom generated revenues of $1.0 million or more, comparedto 61 in 2005 and 46 in 2004. We expect that this trend toward greater clientdiversification will continue.

| ** **            | ** ** | **Year ended   December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| General Electric      |       | 31.7                                         | %          | 22.1 | % | 14.6 | % |
| State Farm  Insurance |       | 14.9                                         | %          | 11.5 | % | 9.6 | % |
| Top 5 Clients         |       | 57.6                                         | %          | 46.8 | % | 37.1 | % |
| Top 10 Clients        |       | 69.0                                         | %          | 59.3 | % | 53.1 | % |

 

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

Repeat business accounted for 88.8%, 91.7% and 91.5%of our revenues in 2004, 2005 and 2006. Each customer is treated as a newcustomer for the quarter that it first starts business with us and continues toremain as a new customer for the four succeeding quarters. The revenues in anyquarter from customers other than new customers are termed as repeat business.We provide services to our largest client, General Electric, in a number ofindustries, including financial services, insurance and manufacturing. 

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The following tableindicates the breakdown of revenues we derive from new customers and existingcustomers.

| ** **              | ** ** | **Year ended December 31, 2006** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Existing  Customers**                              | ** ** | **New  Customers** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(in millions)**                               | ** ** |
| **Industry Practice**   | ** ** |                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Insurance               |       |                                                 | 128.3      | ** ** |   |   | 6.2 | ** ** |   | 134.5 |   |
| Manufacturing           |       |                                                 | 114.3      | ** ** |   |   | 11.1 | ** ** |   | 125.4 |   |
| Financial  Services     |       |                                                 | 82.4       | ** ** |   |   | 6.0 | ** ** |   | 88.4 |   |
| Telecommunications      |       |                                                 | 91.5       | ** ** |   |   | 17.7 | ** ** |   | 109.2 |   |
| Other Industries        |       |                                                 | 36.9       | ** ** |   |   | 2.0 | ** ** |   | 38.9 |   |
| **Technology Practice** | ** ** |                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| ISV(1)                  |       |                                                 | 20.0       | ** ** |   |   | 3.8 | ** ** |   | 23.8 |   |
| Product  Engineering(1) |       |                                                 | 56.3       | ** ** |   |   | 2.3 | ** ** |   | 58.6 |   |
| Total                   | ** ** |                                                 | **$**      | **529.8** | ** ** |   |   | **$** | **49.1** | ** ** |   | **$** | **578.9** | ** ** |
|                         |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          InJanuary 2007 we have combined our ISV and Product Engineering practices.

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

***Revenues by Geography***

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

| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| United States                            |       | 87.8                                       | %          | 84.8 | % | 80.8 | % |
| Europe                                   |       | 7.9                                        | %          | 9.1 | % | 11.6 | % |
| India                                    |       | 0.2                                        | %          | 0.3 | % | 0.4 | % |
| Japan                                    |       | 3.3                                        | %          | 4.3 | % | 3.8 | % |
| Others                                   |       |                                       |       |   |   |   |   |
| Asia-Pacific (excluding Japan and India) |       | 0.4                                        | %          | 0.4 | % | 1.9 | % |
| Rest of the World                        |       | 0.4                                        | %          | 1.1 | % | 1.5 | % |
| Total                                    |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

We have experiencedrevenue growth in the European market. Revenues in Europe have increased from$25.7 million in 2004 to $41.0 million in 2005 and were at $67.3million in 2006.

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**Expenses**

***Cost of Revenues***

Cost of revenues represented 62.0%, 64.1% and 63.9% ofour revenues in 2004, 2005 and 2006. Our cost of revenues largely consists ofcosts relating to our software professionals, including salary and othercompensation and benefits expenses, travel expenses, immigration expenses, datacommunications expenses, computer and software expenses and depreciation. Costof revenues also includes the cost of subcontractors.

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

We hire subcontractors on a limited basis from time totime. We use subcontractors across our industry practices and service lines.The use of subcontractors is more prevalent in service lines that have a largeronsite element, such as packaged software implementation and infrastructuremanagement services. We expect to continue to incur subcontractor costsprincipally to service specific technical requirements of some of our clientsin a timely manner.

The utilization rates of our software professionalsalso affect our gross profits. We define employee utilization as the proportionof total billed person-months to total available person-months, includingemployees in training and holiday and vacation time, and excluding supportpersonnel. We manage utilization by monitoring project requirements andtimetables. The number of software professionals assigned to a project variesaccording to the size, complexity, duration, and demands of the project. Ourutilization rates for the years ended December 31, 2004, 2005 and 2006were 69.2%, 67.2% and 71.4%. We try to minimize the cost impact of unutilizedcapacity by ensuring that a majority of our unutilized capacity is attributableto software professionals based in India.

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

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

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

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

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Selling, general andadministrative expenses represented 18.8%,19.9% and 19.3% of our revenues in2004, 2005 and 2006. These expenses comprise an important element of our salesstrategy, as we seek to ensure that senior management personnel are based inclient locations and continue to invest in developing our sales and marketingpresence in key markets. We expect selling, general and administrative expensesto continue at current levels as a proportion of revenues. We continue toinvest in sales and marketing and in building brand awareness, leading to aslight increase in sales and marketing expenses as a proportion of revenues. Wehave started to transfer a larger part of our general and administrativeexpenses offshore to India as the scale of our operations increases. We expectto achieve improved efficiencies in general and administrative expenses as aresult of this transfer and economies of scale resulting from our recentgrowth. Accordingly, we expect our increased selling expenses to be partiallyoffset by a decrease in our general and administrative expenses.

**Foreign CurrencyTranslation and Foreign Exchange Regulations**

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

We seek to mitigate the effect of exchange ratefluctuation on our operating results by purchasing foreign exchange forward contracts.However, these activities do not entirely mitigate the effects of exchange ratefluctuations. Effective May 2004, we designated certain forward contractsas cash flow hedges in accordance with SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*. We defer changesin fair value of designated cash flow hedges and record them as a component ofaccumulated other comprehensive income until the transactions close, at whichtime we recognize the hedges in our consolidated statements of income. Theconversion of the rupee, U.K. pound and Euro into U.S. dollars is performed forbalance sheet accounts using the exchange rate in effect at the balance sheetdate and for revenues and expense accounts using an appropriate monthlyweighted average exchange rate for the respective periods.

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

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**Accounts Receivable**

Ouraccounts receivable as of December 31, 2004, 2005 and 2006 were$72.0 million, $74.4 million and $115.6 million, respectively. Ourdays of sales outstanding in 2004, 2005 and 2006 were 80, 62 and 75 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:

| ** **          | ** ** | **As of December 31,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **          | ** ** | **($ in millions)**         | ** ** |
| **Period  in days** |       |                                  |       |   |   |   |   |
| 0-90                |       | 64.0                                  |       | 68.9 |   | 105.9 |   |
| 91-180              |       | 6.9                                   |       | 4.4 |   | 8.6 |   |
| More than 180       |       | 1.1                                   |       | 1.1 |   | 1.1 |   |
| Total               |       | 72.0                                  |       | 74.4 |   | 115.6 |   |

 

In 2004, 2005 and 2006,the provision made for doubtful debts and advances was $0.5 million,reversal of  $0.2 million and provisionof $1.2 million, respectively. We expect to continue to have low levels of provisionsfor doubtful debts.

**Taxes**

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

Currently, we benefit from tax holidays given by theGovernment of India for the export of IT services from speciallydesignated software technology parks, or STPIs, and special economic zones, orSEZs, in India. These tax incentives currently include a 10-year holidayfrom the payment of Indian corporate income tax for the operations of most ofour Indian facilities and a partial taxable income deduction for profitsderived from exported IT services. As a result of these two taxincentives, a substantial portion of our pre-tax income has not been subject tosignificant tax in recent years. The aggregate benefit of these tax holidaysand deductions with respect to our net income was $20.6 million, $19.0 millionand $25.3 million for 2004, 2005 and 2006. The tax benefits available for someof our facilities on account of tax holidays have expired and certain otherswill expire upon completion of 10 years, however the tax holiday for the exportof IT service will expire on March 31, 2009. Consequently, we expect oureffective tax rate to increase. In addition, the 10-year tax holidays aregiven for new software units.

On December 31, 2006, we received an assessmentorder, together with a notice of demand from the Income Tax officer(Technical)-II, Pune, India, in connection with the assessment of our incometax return for the year ended March 31, 2004. The said assessment orderamong other things disallowed our claim for income tax deduction under Section 10Aof the Income Tax Act, 1961 of India pertaining to various software developmentunits located in India. Section 10A of the Income Tax Act, 1961 provides a10-year tax holiday for setting up software development units in theSoftware Technology Parks of India, or STPI. The assessing officer has deniedthe tax deduction under Section 10A upon the premise that the Company isalready in the “same business” as the new software development units. Theassessing officer has also stated that the business has been “split” as thecompany has grown over the last several years. The order states that Section 10Abenefits are for new “business” undertakings and are available only for “newbusinesses”. The order further provides that the same business in newundertakings does not qualify for such benefits. Accordingly, theassessment officer has disallowed our claim for deduction under 

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Section 10A, alongwith other disallowances, and has required us to make a payment of Rs. 630.16million (inclusive of interest), or approximately $14.20 million. Based onlegal advice received by us, we believe that the demand referred to in theassessment order is not tenable against us, and accordingly, no provision forsuch income tax demand is considered necessary. On January 22, 2007, wefiled an appeal challenging the assessment order before the Commissioner(Appeals), the first appellate authority under the Indian tax laws. Asrequired by the tax authorities, we have made a payment of $2.5 million asdeposit in this regard during the three months ended March 31, 2007.Additionally, a deposit of Rs. 220 million (approximately $5.4 million) isrequired to be paid in monthly instalments of Rs. 20 million (approximately$0.5 million) each, commencing May 2007. Although we currently believe wewill ultimately prevail in our appeal, the results of such appeal, and anysubsequent appeals, cannot be predicted with certainty. Should we fail toprevail in our appeal, or any subsequent appeals, in any reporting period, thefinancial results of such reporting period could be materially adverselyaffected.

The provisions of the Income Tax Act of India areamended on an annual basis by enactment of the Finance Act. The Finance Bill,2007 has marginally increased the corporate income tax rate from effective rateof 33.66% to 33.99%. The Finance Bill, 2007 has increased dividend distributiontax rate on dividend distributed by an Indian company, from effective tax rate of 14.025% to 16.995%.****Further, it has extended the scope under the fringe benefittax to cover benefits given to employees in the form of right to subscribe forshares under an employee stock option plan. The Finance Bill, 2007 has alsoextended the scope of service tax to cover renting, leasing or licensing ofimmoveable property such as office buildings, warehouses and factories for usein business or commerce. These changes, if implemented in their current form,are likely to increase our operating expenses.

In addition, we may also be subject to changes intaxation resulting from the actions of applicable income tax authorities inIndia or from Indian tax laws that may be enacted . For example, we may incurincreased tax liability as a result of a determination by applicable income taxauthorities that the transfer price applied to transactions involving oursubsidiaries and us was not appropriate.

Any increases in our effective tax rate, as a result ofthe expiration of tax benefits we currently enjoy, changes in applicable taxlaws or the actions of applicable income tax or other regulatory authoritiescould materially reduce our profitability.

In connection with a review of various tax aspectsrelating to our international operations, during 2006, we reached a settlementwith the IRS, relating to our tax returns for our US operations for 2001 and2002. IRS has also commenced, but not yet completed, a tax review of ourU.S. operations for the years 2003 and 2004. Pursuant to the settlement,we revised our tax provisions for 2001 and 2002 and recomputed our taxprovision for 2003, 2004 and 2005. This revision, representing changes inestimates, has resulted in an additional charge of approximately $14.1 millionin our financial statements for the year ended December 31, 2006.Additionally, the consequential interest and deferred tax charge in an amountof $6.0 million *** ***hasbeen accrued in our financial statements for the year ended December 31,2006. As the IRS review for 2003 and 2004 is still in progress, we cannotcurrently assess whether this review may result in increased tax liability.

Our total income taxliability for the year ended December 31, 2006 was $47.7 million, of which$30.3 million resulted from provisioning due to reassessment of our payroll andcorporate tax obligations for our international operations.

**Cymbal Acquisition**

In November 2004, weacquired Cymbal to establish expertise and operations in the provision of ITservices to the telecommunications industry. We paid an initial purchase priceof approximately $36.1 million, including expenses, of which $25.4 millionhas been accounted for as goodwill and $10.3 million has been accountedfor as customer related intangibles. We agreed to pay contingent 

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considerationin cash of up to $33.0 million to the sellers over a three-year period endingon October 31, 2007 based on the achievement of revenue and margintargets. This contingent consideration includes the payment of up to$3.4 million as special incentives to specified employees of Cymbal. Thecontingent consideration for the period July 2004 to June 2006 hasbeen accrued and paid as of  December 31,2006 in the amount of $17.0 million and recorded as goodwill and an amount of$2.1 million has been accrued as special incentive and recorded as compensationcost. Also as part of the purchase price adjustment in accordance with thestock purchase agreement and amendments thereof, an additional amount of  $0.7 million was paid and has been recordedas goodwill. See also “Critical Accounting Policies—Income Taxes” andNote 3 to our consolidated financial statements. Revenues from Cymbal for2005 and 2006 were $60.6 million and $109.4 million respectively. Cymbal hasbeen renamed as Patni Telecom Solutions.

**Recent Developments**

**Expansion Plans**

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

Phase 1 of the Navi Mumbai facility having a capacityof 1,800 seats, is complete and under partial occupation. Phase I of Chennaifacility having a capacity of 1,200 seats, is complete and under partialoccupation. Another building in the Chennai facility with a capacity of 1,200seats is complete and will be furnished as per future requirements.

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

**Results ofOperations**

Thefollowing table sets forth certain financial information as a percentage ofrevenues, calculated from our consolidated financial statements under U.S.GAAP:

| ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | ** 2004 **                       | ** ** | ** 2005 ** | ** ** | ** 2006 ** | ** ** |
| Revenues                                      |       |                                       | 68.3       | % |   |   | 77.9 | % |   |   | 85.4 | % |   |
| Revenue from a  significant shareholder       |       |                                       | 31.7       | % |   |   | 22.1 | % |   |   | 14.6 | % |   |
| Cost of revenues                              |       |                                       | 62.0       | % |   |   | 64.1 | % |   |   | 63.9 | % |   |
| **Gross  profit**                             | ** ** | ** **                                 | **38.0**   | **%** | ** ** | ** ** | **35.9** | **%** | ** ** | ** ** | **36.1** | **%** | ** ** |
| Selling, general  and administrative expenses |       |                                       | 18.8       | % |   |   | 19.9 | % |   |   | 19.3 | % |   |
| Foreign exchange  gain (loss), net            |       |                                       | (0.6       | )% |   |   | 0.4 | % |   |   | 0.5 | % |   |
| **Operating  income**                         | ** ** | ** **                                 | **18.6**   | **%** | ** ** | ** ** | **15.6** | **%** | ** ** | ** ** | **16.3** | **%** | ** ** |
| Interest and  dividend income                 |       |                                       | 1.3        | % |   |   | 0.9 | % |   |   | 1.7 | % |   |
| Interest expense                              |       |                                       | (0.6       | )% |   |   | (0.5 | )% |   |   | (0.5 | )% |   |
| Gain on sale of  investments, net             |       |                                       | 0.0        | % |   |   | 0.3 | % |   |   | 0.3 | % |   |
| Other (expense)  income, net                  |       |                                       | (1.1       | )% |   |   | 0.2 | % |   |   | 0.6 | % |   |
| **Income  before income taxes**               | ** ** | ** **                                 | **18.2**   | **%** | ** ** | ** ** | **16.6** | **%** | ** ** | ** ** | **18.4** | **%** | ** ** |
| Income taxes                                  |       |                                       | 3.9        | % |   |   | 3.1 | % |   |   | 8.2 | % |   |
| **Net income**                                | ** ** | ** **                                 | **14.3**   | **%** | ** ** | ** ** | **13.5** | **%** | ** ** | ** ** | **10.2** | **%** | ** ** |

 

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

***Revenues:******  ***Our revenues were $578.9million in 2006, representing an increase of 28.5% from revenues of $450.3million in 2005. Revenues from existing customers contributed $529.8 millionand new customers contributed $49.1 million to our revenues. This representedan increase of 28.2% in revenues from existing customers and increase of 32.0%in revenues from new customers compared to 2005. Growth in revenues wasattributable to an increase of 18.1% in the total billed person-months fromwork performed at both our offshore and onsite locations. Onsite work measuredin billed-person months increased 11.3% in 2006 compared to 2005, whileoffshore work increased 21.7% over the same period. We increased our clientrelationships 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, our revenues from T&M projectsincreased by 40.0% over revenues in 2005, while revenues from fixed pricecontracts increased by 11.8% over the same period. T&M projects accountedfor 64.8% of our revenues in 2006, compared to 59.5% in 2005 mainly because 75.4%of our new business was billed on a T&M basis.

Our client concentration, as measured by theproportion of revenue generated from our top ten clients, decreased to 53.1% in2006 from 59.3% in 2005. General Electric, our largest client, contributed14.6% of our revenues in 2006, compared to 22.1% in 2005.

During 2006, clients in the insurance, manufacturing,telecommunications and financial services industries continued to contribute alarge proportion of our revenues. Revenues from clients in these industries in2006 increased by 7.7%, 27.1%, 58.6% and 22.4% compared to 2005 and contributed23.2%, 21.7%, 18.9% and 15.3% to overall revenues as compared to 27.7%,21.9%,15.3% and 16.0% in 2005. Our other industries practice contributed 6.7%and 6.5% of our revenues in 2006 and 2005. Our ISV practice contributed 4.1%and 5.0% of our revenues in 2006 and 2005 and our product engineering practicecontributed 10.1% and 7.5% of our revenues in 2006 and 2005.

During 2006, we continued to derive a significantproportion of our revenues from clients located in the United States. In 2006and 2005, we derived 80.8% and 84.8% of our revenues from clients located inthe United States. Revenues from these clients grew by 22.5% in 2006, whilerevenues from clients in other regions grew by 62.1% in the same period.

***Cost of revenues:******  ***The cost of revenues was$370.2 million in 2006, representing an increase of 28.3% from $288.5 millionin 2005. Cost of revenues represented 63.9% and 64.1% of our revenues in 2006and 2005. Out of the increase of $81.7 million in cost of revenues, $49.9 millionwas attributable to wage costs, $16.4 million to sub-contractor costs, $4.7million to travel costs, $4.2 million to rental and repairs, $0.5 million todata-link charges, $1.2 million to deferred costs, $1.7 million to stockcompensation costs, $2.1 million to other general administration costs and $2.8million to depreciation charged on assets and a reduction of $2.2 million inimmigration 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.

***Gross profit:******  ***Our gross profit for 2006 was$208.7 million, representing an increase of 28.9% from $161.9 million in 2005.Gross profit as a percentage of our revenues increased to 36.1% from 35.9%during 2006 reflecting a lower increase in cost of revenues as compared toincrease in revenues.

***Selling, generaland administrative expenses:******  ***During2006, our selling, general and administrative expenses were $111.5 million,representing an increase of 24.2% from $89.7 million in 2005. During 2006 

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our selling, general andadministrative expenses as a percentage of revenues decreased to 19.3% from19.9% in 2005.

During 2006, our sales and 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 to the additions to****sales and marketing personnel and higher compensation costsresulting from salary increases. Other selling and marketing costs increased by$0.8 million. We believe that our investment in selling and marketing expenseshas contributed to the growth and diversification of our client revenues.

Our general and administrative expenses in 2006 were$68.4 million, representing an increase of 27.4% from $53.7 million in 2005.Personnel costs increased by $7.5 million due to the addition of generaland administrative personnel and annual salary revisions. Establishment costsincreased by $0.9 million due to an increase in the number of facilities.Professional and consultancy charges increased by $0.9 million, bad debtsprovision increased by $1.3 million and other general expenses increased by$2.3 million. Depreciation expense increased by $0.6 million.

***Foreign exchangegain/loss:******  ***In2006, we had a foreign exchange loss of $2.7 million as compared to a lossof  $1.7 million in 2005. Mark to marketof foreign exchange contracts and revaluation of debtors resulted in theforeign exchange loss.

***Operating income:******  ***Our operating income was$94.5 million in 2006, representing an increase of 34.1% from $70.4 million in2005. As a percentage of revenues, operating income increased to 16.3% from15.6% in 2005 reflecting a decrease in cost of revenues and selling, generaland administration expenditures as compared to increase in revenues.

***Other income(expense), net:****  *Otherincome (expense), net reflects interest and dividend income, interest expense,net gain on sale of investments and other income or expense. Our other income(expense), net was income of $12.5 million in 2006, increasing 194.1% fromincome of  $4.2 million in 2005 resulting in a net increase of $8.3million. In 2005, we had recorded a gain on sale of asset of $3.2 million and aloss of revaluation of ADR proceeds of $2.0 million. In 2006, our gain on saleof investments was $1.7 million as compared to $1.1 million in 2005. In 2006, ourinterest and dividend income were $10.1 million as compared to $4.2 million in2005. On account of reassessment of our payroll and corporate tax obligationsfor our international operations, we have recorded a reversal for interest andother related expenses with respect to delayed payments amounting to $1.1million in 2006 against a provision of $1.7 million in 2005.

***Income taxes:******  ***We made a provision of $47.7million for income taxes in 2006, representing an increase of 245.5% from $13.8million in 2005. Our effective tax rate (excluding the impact of change inestimates on account of the IRS settlement) decreased from 18.6% in 2005 to16.2% in 2006. The 2006 income taxes include a $30.3 million provision due tothe reassessment of our payroll and corporate tax obligations for ourinternational operations. The 2005 tax provisioning included an amount ofapproximately $1.0 million relating to an adjustment for an earlier year’sincome tax assessment.

***Net income:****  *Our net income was $59.3 million in 2006,representing a decrease of 2.7% from $60.9 million in 2005. As apercentage of our revenues, net income decreased to 10.2% in 2006 from 13.5% in2005. The reduction in net income is mainly on account of the tax provision wemade in 2006 and the other reasons explained above.

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

***Revenues:******  ***Our revenues were $450.3million in 2005, representing an increase of 37.9% from revenues of $326.6million in 2004. Out of this increase, $60.6 million (representing 49.0% of theincrease in revenues) was due to revenues from Patni Telecom. Patni Telecom wasacquired in November 2004 and therefore revenues for only November andDecember 2004 were reflected in our income statement for the 

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year ended December 31,2004. Other than Patni Telecom, revenues from existing customers contributed$354.4 million and new customers contributed $27.0 million to our revenues.This represented an increase of 25.8% in revenues from existing customers anddecrease of 26.0% in revenues from new customers compared to 2004. Excludingrevenues from Patni Telecom, the growth from our existing operations would havebeen 19.8% in 2005. Growth in revenues from our existing operations was attributableto an increase of 21.2% in the total billed person-months from work performedat both our offshore and onsite locations. Onsite work measured inbilled-person months increased 12.7% in 2005 compared to 2004, while offshorework increased 26.0% over the same period. Due to this higher growth inoffshore efforts than onsite efforts, our revenue growth was less than ourgrowth in total billed person-months. We increased our client relationships to199 as of December 31, 2005 from 170 as of December 31, 2004. Inaddition, the total number of clients that individually accounted for over $1.0million in annual revenues increased to 61 as of December 31, 2005 from 46as of December 31, 2004.

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

Our client concentration, as measured by theproportion of revenue generated from our top ten clients, decreased to 59.3% in2005 from 69.0% in 2004. General Electric, our largest client, contributed22.1% of our revenues in 2005, compared to 31.7% in 2004. While revenues fromGeneral Electric declined by 4.0% in 2005 as compared to 2004, revenues fromother clients grew by 57.3%.

During 2005, clients in the insurance, manufacturingand financial services industries continued to contribute a large proportion ofour revenues. Revenues from clients in these industries in 2005 increased by16.7%, 6.8% and 15.1% compared to 2004 and contributed 27.7%, 21.9% and 16.0%to overall revenues as compared to 32.8%, 28.3% and 19.2% in 2004 respectively.Our telecommunications industry practice grew by $60.4 million mainly due tobusiness from Patni Telecom and contributed 15.3% to our overall revenues in2005. Our other industries practice contributed 6.5% and 6.6% of our revenuesin 2005 and 2004. Our ISV practice contributed 5.0% and 5.9% of our revenues in2005 and 2004 and our product engineering practice contributed 7.5% and 4.6% ofour revenues in 2005 and 2004.

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

***Cost of revenues:******  ***The cost of revenues was$288.5 million in 2005, representing an increase of 42.5% from $202.5 millionin 2004. Cost of revenues represented 64.1% and 62% of our revenues in 2005 and2004. Out of the increase of $86.0 million in cost of revenues, $36.2 millionincrease was due to the cost of revenues of Patni Telecom. Patni Telecom wasacquired in November 2004 and therefore cost only for November and December 2004was reflected in our income statement for the year ended December 31,2004. Of the remaining increase of $49.8 million in cost of revenues, $32.6million was attributable to wage costs, $2.2 million to sub-contractor cost,$2.5 million to travel costs, $2.6 million to immigration costs, $4.6 millionto rental and repairs, $1.1 million to data-link charges, $2.8 million to othergeneral administration costs and $1.4 million to depreciation charged onassets. Wage costs increased by $32.6 million due to an increase in headcountof software professionals by 2,084, annual salary revisions and recognition ofadditional payroll and related taxes for our international operations arisingon reassessment of certain wages paid, and short-term benefits given to ouremployees when working outside India. Our immigration costs were higher due toincreased costs of applications as well as an increase in the number ofapplications processed. Expansion of our facilities led to increased rentalcosts and other related expenses. Depreciation charged on assets increased by$1.4 million in 2005 as compared to 2004. Patni Telecom’s 

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cost of revenues of $36.2million consisted of wage costs of $21.2 million, sub-contractor costs of $11.9million, travel costs of $2.6 million and other costs of $0.5 million.

***Gross profit:******  ***Our gross profit for 2005 was$161.9 million, representing an increase of 30.4% from $124.1 million in 2004.Gross profit as a percentage of our revenues dropped to 35.9% from 38% during2004 reflecting the increase in cost of revenues.

***Selling, general andadministrative expenses:******  ***During2005, our selling, general and administrative expenses were $89.7 million,representing an increase of 46.6% from $61.2 million in 2004. During 2005 ourselling, general and administrative expenses as a percentage of revenuesincreased to 19.9% from 18.7% in 2004. Out of the total increase of $28.5million, $10.3 million was due to the selling, general and administrativeexpenses of Patni Telecom. Patni Telecom was acquired in November 2004 andtherefore the cost for November and December 2004 only was reflectedin our income statement for the year ended December 31, 2004.

During 2005, our sales and marketing expenses were$36.0 million, representing an increase of 55.6% from $23.2 million in 2004.Apart from the Patni Telecom costs, personnel costs increased by $5.0 milliondue to the addition of 35 sales and marketing personnel and higher compensationcosts resulting from salary increases. Other selling and marketing costsincreased by $2.0 million. Selling and marketing costs associated with PatniTelecom increased by $5.8 million. We believe that our investment in sellingand marketing expenses has contributed to the growth and diversification of ourclient revenues.

Our general and administrative expenses were $53.7million, representing an increase of 60.9% from $37.5 million in 2004. Apartfrom Patni Telecom, personnel costs increased by $1.7 million due to theaddition of general and administrative personnel and annual salary revisions.Establishment costs increased by $1.4 million due to an increase in the numberof facilities. Professional and consultancy charges increased by $3.8 million,recruitment expenses increased by $1.6 million and other general expensesincreased by $1.1 million. General and administrative expenses associated withPatni Telecom increased by $4.3 million. Depreciation expense increased by$1.8 million.

***Foreign exchangegain/loss:******  ***In2005, we had a foreign exchange loss of $1.7 million as against a loss of $2.1million in 2004, as our dollar-denominated receivables continued to be hedgedto a significant level. Our receivables are marked to market.

***Operating income:******  ***Our operating income was$70.4 million in 2005, representing an increase of 15.8% from $60.8 million in2004. As a percentage of revenues, operating income dropped to 15.6% from 18.6%in 2004 reflecting increase in cost of revenues and selling, general andadministration expenditures at an increasing rate compared to revenues.

***Other income(expense), net:****  *Otherincome (expense), net reflects interest and dividend income, interest expense,net gain on sale of investments and other income or expense. Our other income(expense), net was income of $4.2 million in 2005, increasing 401% from anexpense of  $1.4 million in 2004 resulting in net increase of $5.6 millionrepresented by following. In 2005, we had recorded gain on sale of asset of$3.2 million and loss of revaluation of ADR proceeds $2.0 million. In 2004, weincurred expenses of approximately $1.0 million in relation to our initialpublic offering. In 2005, our gain on sale of investments were $1.1 million ascompared to $0.1 million in 2004. On account of reassessment of our payroll andcorporate tax obligations for our international operations, we have providedfor interest and other related expenses with respect to delayed paymentsamounting $1.7 million in 2005 and $4.3 million in 2004

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***Income taxes:******  ***We made a provision of $13.8million for income taxes in 2005, representing an increase of 7.1% from $12.9million in 2004. Our effective tax rate decreased to 18.5% in 2005 from 21.7%in 2004. The 2005 tax provisioning included an amount of approximately $1.0million relating to an adjustment for an earlier year’s income tax assessment.The 2004 tax provisioning included $5.2 million for taxes arising on account ofreassessment of the corporate taxes for our international operations. Also, thetax provision for Patni Telecom was for the whole year of 2005 as compared totwo months of 2004. While significant portion of income is derived from Indiaoperations is exempt from income tax, income from Patni Telecom operations istaxed at the enacted tax rate of approximately 40%.

***Net income:****  *Our net income was $60.9 million in 2005,representing an increase of 30.8% from $46.5 million in 2004. As apercentage of our revenues, net income decreased to 13.5% in 2005 from 14.3% in2004. The reduction in net income is mainly on account of the reasons explainedabove.

**5.B. Liquidity and Capital Resources**

Our operations and our growth have been financed bycash generated from operations and from the proceeds of sales of equity shares.We received net proceeds of $117.0 million from our ADSs issue in 2005. 

As of December 31, 2005, we had $148.8 million incash and cash equivalents, $108.3 million invested in units of mutual funds,and $33.4 million invested in other securities. As of December 31, 2006,we had $46.5 million in cash and cash equivalents, $136.4 million invested inunits of liquid mutual funds, and $106.6 million invested primarily in othersecurities.

Our working capital (comprising current assetsexcluding cash and cash equivalents and investments less current liabilities)at December 31, 2005 and at December 31, 2006 was $20.5 millionand  $41.2 million, respectively. Ourworking capital 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 $59.1 million, $73.1 million and $47.8 million in theyears ended December 31, 2006, 2005 and 2004 respectively. The adjustmentsfor the year ended December 31, 2006, to reconcile the $59.3 million netincome to net cash provided by operating activities, consisted primarily ofdepreciation expense of $19.6 million and gain from sale of investments of $1.7million. The adjustments for the year ended December 31, 2005, toreconcile the $60.8 million net income to net cash provided by operatingactivities, consisted primarily of depreciation expense of $16.0 million, gainfrom sale of property, plant and equipment of $3.2 million and gain from saleof investments of $1.1 million.  Theadjustments for 2004, to reconcile the $46.5 million net income to net cashprovided by operating activities, consisted primarily of depreciation expenseof $11.5 million, loss from sale of property, plant and equipment of $0.6million and gain from sale of investments of $0.1 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 $131.0 million, $92.0 million and $55.1 million in the yearsended December 31, 2006, 2005 and 2004 respectively. Provision for baddebts was $1.2 million and $0.5 million in the year ended December 31,2006 and 2004 respectively. There was a reversal of provision for bad debts of$0.2 million for the year ended December 31, 2005.

Days of sales outstanding increased to 75 in the yearended December 31, 2006 from 62 in 2005 and from 80 in 2004. Net accountsreceivable and cost and estimated earnings in excess of billings on uncompletedcontracts increased by $36.3 million for the year ended December 31, 2006,$14.7 million in 2005 and $15.4 million in 2004 primarily as a result ofincreases in activity.

Current assets and other assets increased by $1.3million for the year ended December 31, 2006 and $6.2 million for the yearended December 31, 2004 respectively, however it decreased by $3.3 million forthe year ended December 31, 2005. Cash outflows for the year endedDecember 31, 2006 were $1.4 million in leasehold land, $0.1 million inprepaid expenses, and $1.2 million in foreign exchange advances. Cash 

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inflows for the year endedDecember 31, 2006 were $1.2 million in deferred cost and revenue and$0.2 million in advances to vendors. Cash outflows for the year endedDecember 31, 2005 were $0.7 million in advances to vendors, $0.3 millionin other receivables, $0.8 million in prepaid expenses and $0.4 million inprepaid gratuities. Cash inflows for the year ended December 31, 2005were $1.0 million in deposits and $4.7 million in premium receivables onforward contracts. Cash outflows in 2004 were $0.4 million in advances tovendors, $4.0 million in rental deposits (mainly on account of new propertiesleased in India), $1.3 million in premium receivables on forward contracts and$0.7 million in prepaid gratuities.

Accounts payable and accrued expenses increased by$20.3 million for the year ended December 31, 2006, compared to anincrease of $7.5 million in 2005 and a decrease of $1.3 million in 2004. Theincrease in 2006 is due to an increase in accruals related to employee relatedexpenses of $8.0 million, $4.0 million in trade accounts payable and otheraccruals of $8.2 million.

Our billings in excess of costs and estimated earningson uncompleted contracts, which represent billings in excess of revenues thatare recognized, increased by $0.9 million in the year ended December 31,2006, decreased by $0.5 million in 2005 and increased by $0.6 million in 2004.

Taxes paid were $39.9 million as against a taxprovision of $43.3 million for the year ended December 31, 2006. Taxespaid were $15.3 million as against a tax provision of $15.7 million for theyear ended December 31, 2005. Taxes paid were $12.5 million as against atax provision of $14.8 million for the year ended December 31, 2004.

Other current liabilities and other liabilitiesdecreased by $16.0 million during the year ended December 31, 2006. Thedecrease in the year ended December 31, 2006 resulted from a $6.7 millionpremium receivables on forward 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 sales discount, $0.2 millionwarranty provision, $1.7 million pension benefit and $0.5 million other currentliabilities. Other current liabilities and other liabilities increased by $7.3million during the year ended December 31, 2005. The increase in the yearended December 31, 2005 resulted from a $1.0 million leave encashmentprovision, a $0.3 million pension benefit, a $3.6 million payroll andrelated tax liability and corporate tax liability, $1.3 million in advancesfrom customers and $0.7 million VAT payable. The increase in 2004 of  $10.6 million resulted from a $1.3 millionleave encashment provision, a $1.0 million pension benefit, a $8.2 millionpayroll and related tax liability and corporate tax liability and $0.2 millionof warranty costs. 

The changes in the operating activities is in linewith the growth in our revenues and volume of operations. 

Net cash used in investing activities was $155.4million for the year ended December 31, 2006, $111.7 million for 2005 and$85.5 million for 2004. Net cash used in the acquisition of property, plant andequipment for the years ended December 31, 2006, 2005 and 2004 was $48.5million, $48.9 million and $21.1 million respectively. In 2006 and 2005 cashoutflow was higher mainly on account of the purchases of new facilities andexpansion of our existing facilities. Net purchases of investment securitieswere $94.5 million for the year ended December 31, 2006. Additionalpurchase consideration to Cymbal shareholders for the year endedDecember 31, 2006 amounted to $12.2 million. Net purchases of investmentsecurities were $57.2 million for the year ended December 31, 2005. Additionalpurchase consideration to Cymbal shareholders for the year endedDecember 31, 2005 amounted to $5.6 million. Net cash used in investingactivities in 2004 included $32.5 million for the acquisition of CymbalCorporation, net of cash acquired. Net purchase of investment securities was$32.0 million in 2004.

Net cash used in financing activities was $7.1 millionfor the year ended December 2006. Net cash provided by financingactivities was $112.0 million for the year ended December 2005. Net cashprovided by financing activities was $61.4 million for 2004. We paid $8.6million in dividends, including dividend tax 

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on our equity shares inthe year ended December 31, 2006. We received net proceeds of $1.8 millionfrom our employee stock option plan during the year ended December 31,2006. We paid $6.5 million in dividends, including dividend tax on our equityshares in the year ended December 31, 2005. We received net proceeds of$118.7 million from our initial offering of ADSs and our employee stock optionplan during the year ended December 31, 2005. We received net proceeds of$64.8 million from our initial public offering in India and our employee stockoption plan during 2004. We also paid $3.1 million towards dividend payouts onour equity shares in 2004.

We anticipate capitalexpenditures of between approximately $150 million to $175 million through2008, principally to finance the construction of our new knowledge parkfacilities in Navi Mumbai and Chennai and other facilities and physicalinfrastructure in India. Estimated amounts remaining to be executed on suchcontracts (net of advances), aggregated approximately $31.9 million atDecember 31, 2006. See “Item 4.D. Information on the Company—Property,plant and equipment.” We believe that existing cash and cash equivalents andfunds generated from operations will be sufficient to meet these requirements.However, we may significantly alter our proposed capital expenditures plansand, accordingly, may require additional financing to meet our requirements. Webelieve that a sustained reduction in IT spending, a longer sales cycle or aneconomic downturn in any of the various industry segments in which we operate,or a combination of these events, could result in a decline in our revenues andadversely affect our liquidity and capital resources.

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

Research and developmentexpenditures for the years ended December 31, 2004, 2005 and 2006 were$2.1 million, $2.2 million and $2.1 million, respectively. For a description ofour research and development initiatives, see “Item 4.B. Information onthe Company—Business Overview—Innovation.”

**5.D. Trendinformation**

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

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

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

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**5.F**.Tabular disclosure of contractual obligations

The following table setsforth our contractual obligations and commercial commitments to make futurepayments as of December 31, 2006. The following table excludes ouraccounts payable, accrued operating expenses and other current liabilitieswhich are payable in the normal course of operations.

| ** **                               | ** ** | **Payments due as of December 31, 2006** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Total**                                                              | ** ** | **Within  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                               | ** ** | **(in millions)**                                                 | ** ** |
| Capital (Finance) Leases                 |       | $                                                                      | 0.7        |   |   | $ | 0.3 |   |   |   | $ | 0.4 |   |   |   | $ | 0.0 |   |   |   | — |   |   |
| Operating Leases                         |       | $                                                                      | 11.8       |   |   | $ | 4.9 |   |   |   | $ | 5.4 |   |   |   | $ | 1.5 |   |   |   | $ | 0.0 |   |   |
| Capital Commitment                       |       | $                                                                      | 31.9       |   |   | $ | 24.2 |   |   |   | $ | 7.7 |   |   |   | — |   |   |   | — |   |   |
| **Total Contractual Obligations****(1)** | ** ** | **$**                                                                  | **44.4**   | ** ** | ** ** | **$** | **29.4** |   | ** ** | ** ** | **$** | **13.5** |   | ** ** | ** ** | **$** | **1.5** |   | ** ** | ** ** | **$** | **0.0** |   |   |

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(1)          In addition, pursuant toour agreement with Cymbal, we agreed to pay up to $33.0 million ascontingent consideration over a three year period ending on October 31,2007. Of this, as of December 31, 2006 contingent consideration of up to$20.2 million has been paid to the sellers of Cymbal.

**5.G.Safe Harbor**

This Annual Report contains forward-lookingstatements. See the section entitled “Special Note regarding Forward LookingStatements.”

**Recently Adopted Accounting Pronouncements under U.S.GAAP**

We adopted SFAS No.123R, “Share-Based Payment” (SFAS No. 123R) effective January 1, 2006. Thisstatement requires compensation expense relating to share-based payments to berecognized in net income using  a fairvalue measurement method. Under the fair value method, the estimated fair valueof awards is charged to income on an accelerated basis over the requisiteservice period, which is generally the vesting period. We elected the modifiedprospective method as prescribed in SFAS No. 123R and therefore, prior periodswere not restated. Under the modified prospective method, this statement wasapplied to new awards granted after the time of adoption, as well as to theunvested portion of previously granted equity-based awards for which the requisiteservice had not been rendered as of January 1, 2006. The net effect of adoptingthis new standard was a reduction to the net income by $3.3 million.

Prior to January 1,2006, we accounted for share-based employee compensation under the provisionsof SFAS No. 123 using the intrinsic value method prescribed by APB No. 25 andrelated interpretations. Under the intrinsic value method, no compensationexpense was recognized for stock options, as the exercise price of employeestock options equated the market value of our stock on the date of grant.

The Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”(“FIN 48”) in June 2006. FIN 48 clarifies the accounting for uncertainty inincome taxes recognised in an enterprise's financial statements in accordancewith FASB Statement No. 109 “Accounting for Income Taxes”. This Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The Interpretation also provides guidance onrecognition, classification, interest, penalties, accounting in interimperiods, disclosure and transition. The Interpretation is effective for fiscalyears beginning after December 15, 2006. The differences, if any between theamounts recognized in the statements of financial position prior to theadoption of FIN 48 and the amounts reported after adoption will be accountedfor as a cumulative-effect adjustment recorded to the beginning balance ofretained earnings. We adopted the provisions FASB Interpretation No. 48 “Accountingfor Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. As a result ofthe 

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implementation of FIN 48,we recognized no material adjustment in the liability for unrecognized incometax benefits. At the adoption date of January 1, 2007 we had $35.7 million ofgross unrecognized tax benefits arising out of tax position taken for periodstarting April 1, 2005, all of which would affect the effective tax rate ifrecognized.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108 (“SAB 108”). SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. Registrantselecting not to restate prior periods should reflect the effects of initiallyapplying the guidance in Topic 1N in their annual financial statements coveringthe first fiscal year ending after November 15, 2006. The cumulative effect ofthe initial application should be reported in the carrying amounts of assetsand liabilities as of the beginning of that fiscal year, and the offsettingadjustment should be made to the opening balance of retained earnings for thatyear. Registrants should disclose the nature and amount of each individualerror being corrected in the cumulative adjustment.

The disclosure should also include when and how eacherror being corrected arose and the fact that the errors had previously beenconsidered immaterial. Early application of the guidance in Topic 1N isencouraged in any report for an interim period of the first fiscal year endingafter November 15, 2006, filed after the publication of this Staff AccountingBulletin. Adoption of this guidance does not have any impact on the financialstatements..

The Financial Accounting Standards Board (“FASB”)issued SFAS No. 157 “Fair Value Measurements” (SFAS No. 157) in September2006. SFAS No. 157 establishes a framework for measuring fair value andexpands disclosures about fair value measurements. The changes to currentpractice resulting from the application of this Statement relate to thedefinition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements. The Statement is effectivefor fiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. We are currently evaluating the impact that is expected toresult from the adoption of this standard

The Financial AccountingStandards Board (“FASB”) issued SFAS No. 158 “Employer's Accounting forDefined Benefit Pension and Other Postretirement Plans” (SFAS No. 158) inSeptember 2006. SFAS 158 requires an employer to recognize the over fundedor under funded status of a defined benefit plan as an asset or liability withchanges in that funded status recognized through comprehensive income; andmeasure the funded status of a plan as of the year-end date. Effective December 31,2006, we adopted the recognition and disclosure provisions of SFAS No. 158.The adoption of SFAS No. 158, had no effect on the Company’s net income,however it was effected via a gross charge to accumulated other comprehensiveincome under stockholders’ equity of $1.2 million net of related deferredincome tax of $0.3 million.

**Critical AccountingPolicies**

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

***Estimates***

We prepare financial statements in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent assets andliabilities on the date of the financial statements and the reported amounts ofrevenues and expenses during the financial reporting period. We primarily makeestimates related to contract costs expected to be 

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incurred to completedevelopment of software, allowances for doubtful accounts receivable, ourfuture obligations under employee retirement and benefit plans, useful lives ofproperty, plant and equipment, deferred tax assets and liabilities and provisionsfor contingencies and litigation.

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

***Revenue Recognition***

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

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

·       customapplication development;

·       applicationmaintenance and support;

·       packagedsoftware implementation;

·       infrastructuremanagement services;

·       productengineering;

·       businessprocess outsourcing; and

·       quality assurance services.

*Software Services*

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

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

We review the estimated revenues and estimated costson each project at the end of each reporting period. Any revisions to existingestimates are made when required by management having the relevant authority.As part of the review process, management regularly compares and analyzes theactual costs and 

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the estimate of costs tocomplete the projects to the original estimated costs and the total contractprice with revisions to estimates reflected in the period in which changesbecome known. To date, we have not incurred a material loss on any contractsexecuted on a fixed-price basis. However, as a policy, provisions forestimated losses on such engagements will be made during the period in which aloss becomes probable and can be reasonably estimated.

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

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

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

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

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

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

***Business Process Outsourcing***

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

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

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

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

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We test goodwill for impairment at least on an annualbasis. In this process, we rely on a number of factors including operatingresults, business plans and future cash flows. Recoverability of goodwill isevaluated using a two-step process. The first step involves a comparison of thefair value of a reporting unit with its carrying value.  The fair value of a reporting unit isdetermined using the income approach If the carrying value of the reportingunit exceeds its fair value, the second step of the process involves acomparison of the implied fair value and carrying value of the goodwill of thatreporting unit. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognised in a business combination. If thecarrying 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 intangible assets over their respectiveindividual estimated useful lives in proportion to the economic benefitsconsumed in each period. Our estimates of the useful lives of identifiedintangible assets are based on a number of factors including the effects ofobsolescence, demand, competition, and other economic factors (such as thestability of the industry, and known technological advances), and the level ofmaintenance expenditures required to obtain the expected future cash flows fromthe asset.

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

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

***Income Taxes***

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

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

Our deferred tax liabilities mainly arise from taxablebasis differences in intangible assets and undistributed earnings of branch,property, plant and equipment, unrecognized gain in available for sale 

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securities and costs andestimated earnings in excess of billings on completed contracts. Our deferredtax assets comprise assets arising from our accrued expenses, provisions fordoubtful accounts receivable and from ultimate realization of the tax assetthat may be dependent on the availability of future capital gains. We assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income. This assessment takes into consideration tax planningstrategies, including levels of historical taxable income and assumptionsregarding the availability and character of future taxable income over theperiods in which the deferred tax assets are deductible. We believe it is morelikely than not that we will realize the benefits of those deductibledifferences in the future, net of the existing valuation allowance atDecember 31, 2006. The ultimate amount of deferred tax assets realized maybe materially different from those recorded, as influenced by potential changesin income tax laws in the tax jurisdictions where we operate, or future changesin 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 2006, valuation allowancewas recorded on the business loss of our Japan branch.

***Stock-based compensation***

We adopted SFAS 123R, “Share-Based Payment” (SFAS123R) effective January 1, 2006. This statement requires compensationexpense relating to share-based payments to be recognized in net incomeusing  a fair value measurement method.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 andtherefore, 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 unvested portionof previously granted equity-based awards for which the requisite service hadnot been rendered as of January 1, 2006. We granted stock options underthe ‘Patni ESOP 2003’..

The fair value of each option is estimated on the dateof 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.

***Derivatives and Hedge Accounting***

We enter into forward foreign exchange contracts tomitigate the risk of changes in foreign exchange rates on intercompanytransactions and forecasted transactions denominated in certain foreign currencies.We designate the forward contracts in respect of forecasted transactions, whichmeet the hedging criteria, as cash flows hedges. Changes in the derivative fairvalues that are designated, effective and qualify as cash flow hedges, underSFAS 133, *Accounting for Derivative Instruments andHedging Activities*, are deferred and recorded as a component ofaccumulated other comprehensive income until the hedged transactions occur andare then recognized in the consolidated statements of income. Changes in fairvalue for derivatives not designated as hedging instruments and ineffectiveportion of the hedging instruments are 

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recognized in consolidatedstatements of income in the current period. We assess the hedge effectivenessat the end of each reporting period and recognize the ineffective portion inthe consolidated statements of income.

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

Hedge ineffectiveness could result from forecastedtransactions not happening in the same amounts or in the same periods asforecasted or changes in the counterparty credit rating. Further, change in thebasis of designating forward contracts as hedges of forecasted transactions couldalter the proportion of forward contracts which are ineffective as hedges.Hedge ineffectiveness increases volatility of the consolidated statements ofincome since the changes in fair value of an ineffective portion of forwardcontracts is immediately recognized in the consolidated statements of income.

As of December 31,2006, there were no gains or losses on derivative transactions or portionsthereof that were either ineffective as hedges, excluded from the assessment ofhedge effectiveness, or associated with an underlying exposure that did notoccur.

***Commitments andContingencies***

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 and senior management**

The following table setsforth details regarding our board of directors and executive officers:

| **Name**                                | ** ** | ** ** | ** ** | **Age**                                                                               | ** ** | **Position** |
|-----------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------|------------|--------------|
| Mr. Narendra K. Patni(1)(4)(5)(7)  |       | 65         |       | Director (Chairman) and  Chief Executive Officer                                      |
| Mr. Gajendra K. Patni(1)(8)        |       | 66         |       | Executive Director                                                                    |
| Mr. Ashok K. Patni(1)(9)           |       | 55         |       | Executive Director                                                                    |
| Dr. Michael A. Cusumano(3)(11)     |       | 52         |       | Director                                                                              |
| Mr. Arun Duggal(2)                 |       | 60         |       | Director                                                                              |
| Mr. William O. Grabe(5)(6)(10)(11) |       | 69         |       | Director                                                                              |
| Mr. Arun Maira (3)(5)(11)          |       | 63         |       | Director                                                                              |
| Mr. Pradip Shah(2)                 |       | 55         |       | Director                                                                              |
| Mr. Louis T. van den Boog(2)       |       | 53         |       | Director                                                                              |
| Mr. Ramesh Venkateswaran(3)(11)    |       | 54         |       | Director                                                                              |
| Mr. Russel Boekenkroeger           |       | 61         |       | Executive Vice President                                                              |
| Mr. Neeraj Gupta                   |       | 39         |       | Executive Vice President                                                              |
| Mr. Satish M. Joshi                |       | 51         |       | Executive Vice President  and Chief Technology Officer                                |
| Mr. Vijay P. Khare                 |       | 49         |       | Executive Vice President  and Chief Delivery Officer and Chief Administrative Officer |
| Mr. Mrinal R. Sattawala            |       | 52         |       | Chief Operating Officer                                                               |

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| Mr. Surjeet Singh |   | 39 |   | Chief Financial Officer |
|------------------------|--------|----|--------|-------------------------|

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

       (2) Member of the Audit committee.

       (3) Member of the Compensation and Remunerationcommittee.

       (4) Permanent invitee of the Compensation andRemuneration committee.

       (5) Member of the Shareholder and InvestorGrievances committee.

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

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

       (8) Mr. Gajendra K. Patni is the nominee ofthe GKP Group.

       (9) Mr. Ashok K. Patni is the nominee of theAKP Group.

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

(11)   Memberof the Corporate Governance and Nomination committee.

**Board of Directorsand Executive Officers**

***Mr. NarendraK. Patni,*********Chairmanand CEO, is one of the founders of our company. Mr. Patni has a Master’sdegree in Electrical Engineering from the Massachusetts Institute ofTechnology, or MIT, and a Master’s degree in Management from the Sloan Schoolof Management at MIT. He also has a Bachelor’s degree in Electrical Engineeringfrom IIT, Roorkee. As an entrepreneur, he has played an integral role in thedevelopment of the Indian IT industry through his various ventures. Mr. Patniwas instrumental in initiating the offshore outsourcing business model for thesoftware industry. Prior to founding his first company, DataConversion Inc. (now our U.S. subsidiary Patni Computer Systems, Inc.)in 1972, he was President and Director of the Forrester Consulting Group andwas previously with the U.S. Trust Company of New York and was a consultant toArthur D. Little, Inc. Mr. Patni as a nominee of the NKP Group, isnot required to retire by rotation.

***Mr. GajendraK. Patni,*********ExecutiveDirector, is one of the founders of our company. Mr. Patni has a ChemicalEngineering background and has over 35 years of experience in finance,banking, legal and personnel functions. He has contributed significantly in thepast to the growth of the computer rental business of our company, which led tothe formation of PCS Data Products (PCSDP) in 1981, and PCS Data General(PCSDG) in 1987. These companies were merged to form what is now PCS TechnologyLimited in 1994. Mr. Patni is a Joint Managing Director of PCS TechnologyLimited. Previously he was the Managing Director of Industrial Oxygen CompanyLimited. Mr. Patni as a nominee of the GKP Group, is not required toretire by rotation.

***Mr. Ashok K.Patni,*********ExecutiveDirector, is one of the founders of our company. Mr. Patni is a MechanicalEngineer from IIT, Mumbai. Mr. Patni has over 22 years of experiencein computer hardware and systems software. Mr. Patni has contributedsignificantly in the past to the growth of the hardware business of our companywhich led to the formation of PCSDP in 1981, and PCSDG in 1987. These companieswere merged to form what is now PCS Technology Limited in 1994. He is a JointManaging Director of PCS Technology Limited. Mr. Patni as a nominee of theAKP Group, is not required to retire by rotation.

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***Dr. Michael A.Cusumano*********has been adirector since April, 2004. Dr. Cusumano has a B.A. degree from PrincetonUniversity and a PhD from Harvard University. Dr. Cusumano completed apostdoctoral fellowship in Production and Operations Management at the HarvardBusiness School. Dr. Cusumano is the Sloan Management Review DistinguishedProfessor at MIT’s Sloan School of Management. He has published eight books andis a director of Coral Networks. Dr. Cusumano’s term of office expires in2007, but he is eligible for reappointment.

***Mr. ArunDuggal*********has been adirector since November, 2003. Mr. Duggal has a Bachelor’s degree inMechanical Engineering from IIT, Delhi, and a post graduate diploma inmanagement from IIM, Ahmedabad. Mr. Duggal has over 25 yearsexperience with Bank of America, in positions including Managing Director ofBank of America in India and Chief Executive Officer of Bank of America Asia,Hong Kong. He was most recently Chief Financial Officer of HCL Technologies Limited.Mr. Duggal is currently a director of a number of other companiesincluding Blackstone Investment Company Private Limited, TransparencyInternational, Fidelity Fund Management Private Limited, FourS Services, PunjabTractors Ltd, Petronet LNG Ltd, Jubiliant Energy Limited, Canada, BellwhetherMicrofinance Company Ltd, Matrix Laboratories Limited and Info Edge (India)Pvt. Ltd. In addition, Mr. Duggal is a former special advisor to GeneralAtlantic. See “Relationship with General Atlantic” below. Mr. Duggal’sterm of office expires in 2008, but he is eligible for reappointment.

***Mr. William O.Grabe*********has been adirector since September, 2002. Mr. Grabe has a BS degree in Engineeringfrom New York University and an MBA from the University of California, LosAngeles. Since 1992, Mr. Grabe has been a managing director at GeneralAtlantic LLC, a worldwide private equity firm. Prior to that, he was a VicePresident of IBM and held various positions, the last of which was head, NorthAmerica Sales and Marketing. He is a director of various companies in whichGeneral Atlantic has investments, including Ai Metrix, Bottomline Technologies,Digital China Holdings, Lifecare and LHS GmbH, and is also a director ofCompuware Corporation and Gartner, Inc. General Atlantic is one of ourprincipal shareholders, with a shareholding of 16.52%. See “Item 7. MajorShareholders and Related Party Transactions” and “Relationship with GeneralAtlantic” below. Mr. Grabe’s term of office expires in 2008, but he iseligible 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 adirector since November, 2003. Mr. Shah is a Chartered Accountant, has anMBA from the Harvard Graduate School of Business and a degree from TheInstitute of Cost and Works Accountants of India. Mr. Shah wasresponsible for introducing credit ratings in India and is a founder of CRISILLimited. Mr. Shah is currently the Chairman of the Board at IndAsia FundAdvisors Private Limited. His directorships in other companies include AMPIndAsia Fund Advisors (Mauritius) Limited, Asset Reconstruction Company (India)Limited, BASF India Limited, Bombay Stock Exchange Limited, Godrej &Boyce Mfg Limited, Gokaldas Exports Limited, Hardy Oil & Gas Limited,IndAsia Fund Advisors Private Limited, Matsushita Lakhanpal Battery IndiaLimited, Pfizer Limited, Shah Foods Limited, Sonata Software Limited, SupraAdvisors (BVI) Limited (British Virgin Islands), The Shipping Corporation ofIndia Limited, Taib Bank EC, Wartsila India Limited, Grindwell Norton Limitedand Vakrangee Softwares Limited. Mr. Shah’s term of office expires in2009, but he is eligible for reappointment.

***Mr. Louis T.van den Boog*********has been adirector since March, 2005. Mr. van den Boog has a Master’s degree inBusiness Economics and in Public Accounting from the Free University inAmsterdam. 

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Mr. van den Boogis an IT industry veteran with approximately 20 years experience in thesoftware industry, as well as extensive experience in mergers and acquisitions,public offerings and private equity and venture capital fundings. Mr. vanden Boog has supported a series of European and U.S. portfolio companies, inparticular as a director of Metapath Software International, GWI AG, abaXXTechnology AG and other software and services companies looking to expandinternationally. Mr. van den Boog was previously with Oracle Corporationwhere he helped to build the European operations of the company. Mr. vanden Boog is a former special advisor to General Atlantic. See “Relationshipwith General Atlantic” below. Mr. van den Boog’s term of office expires in2007, but he is eligible for reappointment.

***Mr. RameshVenkateswaran*********has been adirector since November, 2003. Mr. Venkateswaran has a Bachelor’s degreein Mechanical Engineering from IIT, Mumbai and a post graduate diploma inmanagement from IIM, Bangalore. Mr. Venkateswaran is a ManagementConsultant and is currently the Managing Director of Almak Management ServicesPrivate Limited. He is a visiting professor of Marketing at the IndianInstitute of Management, Bangalore. He is also a founder member of a non profitorganization, “Vishwas.” Mr. Venkateswaran’s term of office expires in2010, but he is eligible for reappointment.

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

***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 and theIndependent Software Vendors business units, besides the Engineering Servicescenter of excellence. He has over 25 years of experience in managing largeglobal product development organizations, shared services operations,international business and product marketing while serving in a variety ofexecutive management positions at Computervision, Prime Computer and PTC. Hehas also served as an advisor to companies from a wide range of industriesaround the world, on business and technology matters.

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

***Mr. Satish M.Joshi*********is ourExecutive Vice President and Chief Technology Officer and he has been at Patnifor 23 years. Mr. Joshi has a Bachelor’s degree in ElectricalEngineering and a Master’s degree in Computer Science from IIT, Mumbai. Hisresponsibilities include supervision of the Manufacturing business unit and allhorizontal business units, namely BPO, Enterprise Application Solutions andInfrastructure Management Services. He also oversees several corporate sharedservices departments, namely Products and Technology Initiatives, QualityProcesses & Delivery Innovation, and IT Infrastructure Management,besides the IT Governance center of excellence. Prior to Patni, Mr. Joshiworked with the Tata Institute of Fundamental Research in areas includingconcurrent programming languages, storage techniques for large databases,compiler optimization and data communication networks.

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***Mr. Vijay P.Khare*********is ourExecutive Vice President and Patni’s Chief Administrative Officer (CAO) andChief Delivery Officer (CDO) and he has been employed with Patni for27 years. Mr. Khare has a Bachelor’s degree in Engineering from theRegional Engineering College, Nagpur and a Masters degree in Computer Sciencefrom IIT, Mumbai His responsibilities include top level control of keyoperation metrics across the organization and global delivery coordination. Headditionally has responsibility for Centers of Excellence namely Verification &Validation, Business Intelligence and Database Administration; besides that forQuality Assurance; Human Resources; CIO; Patni Academy for CompetencyEnhancement; and the Global Resource Pool. Mr. Khare began his career withPatni in 1980. During his initial years, he worked on several projects in areaslike distribution, manufacturing, and office automation in technologies rangingfrom Data General to Unix and IBM. He was later involved in the customerrelationship management of several accounts including Data General, WaterlandBV, and RBS. He managed the General Electric relationship from 1995 to 2000.

***Mr. Mrinal R.Sattawala*********wasappointed as our Chief Operating Officer with effect from May 4, 2006.Prior to this, he was designated as Executive Vice-President and Global Salesand Marketing Coordinator and has been with Patni for 20 years. He is alsodirectly responsible for the Sales and Operations of the Europe and APACregions, besides overseeing Global Sales & Marketing, and theInsurance and Financial Services business units. Mr. Sattawala is anelectrical engineer from IIT, Mumbai, and he also received his MBA in 1979 fromMacMaster University, Canada. Mr. Sattawala has over 26 years ofexperience in the IT industry. Prior to Patni, Mr. Sattawala worked withComputer Maintenance Corporation and the ICI group of companies in India.

***Mr. Surjeet Singh*********is ourChief Financial Officer (CFO). Before his appointment as CFO in 2006, he headedthe  “Mergers & Acquisitions”function and prior to this, he was the CFO at Cymbal Corporation which heco-founded and which has since been acquired by Patni. His responsibilitiesinclude managing global financial operations, corporate finance, treasury,global reporting and international taxation, financial and business planning,and enterprise-wide risk management. Mr. Singh has around two decades ofmulti-industry global experience in senior management roles at leading finance,business planning and global supply chain functions. He has a successful trackrecord of building finance as a key business enabler, fostering collaborationin large and mid-sized culturally diverse, global and matrixed organizations.Mr. Singh holds a B.S. in Finance and Accounting from the University ofPune and is a fellow of the Institute of Costs and Works Accountants, India andAICPA, USA.

**6.B. Compensation**

During fiscal 2006, the aggregate annual compensationpaid or payable by us and our subsidiaries to our executive directors andexecutive officers was approximately $4,262,700; (including Mr. N. K. Patni—$1,282,887;Mr. G. K. Patni—Rs. 19,957,535 ($440,535); Mr. A. K. Patni—Rs. 19,869,709($438,596); Mr. Russel Boekenkroeger—$228,828; Mr. Neeraj Gupta—$451,039;Mr. S. M. Joshi—Rs. 8,648,177 ($190,897); Mr. V. P. Khare—Rs. 8,282,047($182,815); Mr. Mrinal Sattawala—$711,763 and Mr. Surjeet Singh-$335,340. In addition to receiving annual base compensation, some members ofour executive management, under Indian laws and regulations, are eligible forgrants under the Employee Stock Option Plan (described below).

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

**Service Agreements**

Mr. Narendra K. Patni is our Chairman and ChiefExecutive Officer. He is also the President and Chief Executive Officer ofPatni Computer Systems, Inc, our U.S. subsidiary, pursuant to an employmentagreement with Patni Computer Systems, Inc. dated December 1, 2000,and as amended on August 29, 

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2003. The employmentagreement has an initial term until December 31, 2008. Mr. Patni’sannual base salary under the agreement is $500,000 for the first year of theinitial term, after which time it is increased by 10% of the then currentannual base salary per year. Mr. Patni does not receive a separate fee forattending board meetings. The agreement may be extended after the initial termat Mr. Patni’s option, on terms and conditions at least as favorable or asare otherwise mutually agreed between Mr. Patni and the board ofdirectors. The agreement can be terminated by the board of directors only afterthe initial term expires. In the event of termination, Mr. Patni isentitled to a lump sum severance payment equal to five times his then mostrecent annual base salary.

We have entered into a consultancy agreement withPatni Computer Systems, Inc. dated October 24, 2000, and as amendedon August 19, 2003, pursuant to which Mr. Narendra K. Patni has beenseconded to us to act as our Chairman and CEO. Our Articles provide that aslong as our consultancy agreement with Patni Computer Systems, Inc. is ineffect, Mr. Narendra K. Patni shall continue to be the CEO of the Company.In addition, our Articles of Association also provide that so long as Mr. NarendraK. Patni is the CEO, he has the right to appoint and remove all of our keysenior personnel and senior management following consultation with GeneralAtlantic. Our board of directors has approved the extension of the consultancyagreement to December 31, 2010.

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

**Relationship withGeneral Atlantic**

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

One of our directors, Mr. William O. Grabe,has been a managing director of General Atlantic since 1992. In addition, Mr. ArunDuggal and Mr. Louis T. van den Boog were the former “specialadvisors ” to General Atlantic. Special advisors are persons with industryand/or geographic expertise that provide, on a part-time basis, a range ofadvisory services to General Atlantic in different parts of the world. Theseservices range from identifying new investment opportunities to assisting inthe preparation of investment proposals, serving on the boards of portfoliocompanies and providing strategic advice to such portfolio companies. Specialadvisors are not directors, managing directors, general partners, executiveofficers or employees of General Atlantic or any of its affiliates, and do nothave any other formal association with General Atlantic, except that they enterinto consulting agreements with General Atlantic under which they receive acash retainer and/or are granted the right to co-invest in one or more of theGeneral Atlantic investment vehicles.

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Mr. Arun Duggal served as a special advisor fromOctober 2003 to December 2005. He received an annual cash retainer of$150,000 and had the right to invest as a limited partner in various GeneralAtlantic investment vehicles.

Mr. van den Boog served as a special advisor from1996 to 2004. Pursuant to past co-investment rights, Mr. van den Booginvested in various General Atlantic investment vehicles, including one that isan investor in General Atlantic Mauritius Limited, as a result of which he has anapproximate 0.2% ownership interest in General Atlantic Mauritius Limited.General Atlantic loaned certain amounts to Mr. van den Boog for purposesof such investments, of which approximately $355,127 is outstanding.

We have no financial orother obligations in respect of the status of Messrs. Duggal or van denBoog, former special advisors, and General Atlantic has informed us thatno compensation, loans or investment opportunities provided to theseindividuals are related in any way to our operating or financial performance orthe value of our equity shares or ADSs.

**Provident Fund**

All of our eligibleemployees receive provident fund benefits through a defined contribution planin which both the employee and employer make monthly contributions to the planof 12% each of the covered employee’s defined portion of salary. We have nofurther obligations under the plan beyond the monthly contribution. Wecontribute to the Provident Fund Plan maintained by the Government of India. Wecontributed $1,765,281, $2,613,644  and$3,895,116 to the Provident Fund Plan in 2004, 2005 and 2006.

**Benefits**

In 2006, we providedapproximately $0.9 million for pension, retirement or similar benefits to ourdirectors and executive officers.

**Options**

Setforth below is information concerning options granted to directors andexecutive officers. The term of stock options granted to our directors andexecutive officers will expire on completion of five years from the date ofvesting. As of June 1, 2007, our directors and executive officers as agroup (directly and indirectly) were granted options under our Employee StockOption Plan to exercise 1,535,600 of our equity shares, representing less than1% of our share capital on the following terms:

| **Name**                   | ** ** | ** ** | ** **           | **Exercise Price Per Share** | ** ** | **Number of Shares under Option** | ** ** | **Expiration Date** | ** ** |
|----------------------------|------------|------------|----------------------|---------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| 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)        |

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       (1) Options will vest infour equal instalments, i.e. 25% each year, and expiry date in respect of thefour grants will be from 2010 to 2013, 2011 to 2014, 2012 to 2015 and 2013 to2016, respectively.

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       (2) Options will vest infour equal instalments, i.e. 25% each year, and expiry date in respect of twogrants will be from 2011 to 2014, 2012 to 2015 and 2013 to 2016, respectively.

       (3) Options will vest infour equal instalments, i.e. 25% each year, and expiry date in respect of thetwo grants will be from 2009 to 2012 and 2010 to 2013, respectively.

       (4) Out of 350,000 optionsgranted in May 2006, 150,000 options will vest in four equal installmentsi.e. 25% each year, and expiry date will be 2012 to 2015. The balance 200,000options granted in May 2006 will vest in four years depending upon theperformance of the Company for which Mr. Sattawala is responsible as ChiefOperating Officer (COO) of the business units of the Company. These optionswill expire at the end of five years from the date of vesting.

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

       (6) Options will vest infour equal instalments, i.e. 25% each year, and expiry date in respect of thefirst grant will be from 2011 to 2014 and for the balance two grants expirydate will be from 2012 to 2015.

       (7) Options will vest in four equal instalments, i.e. 25% each year, andexpiry date in respect of the first grant will be from 2011 to 2014 and for thebalance two grants will be from 2012 to 2015.

       (8) Optionswill vest in four equal instalments, i.e. 25% each year, and expiry date inrespect of two grants will be from 2012 to 2015 and 2013 to 2016, respectively.

**6.C. BoardPractices**

**Board Composition**

As per the provisions of the Articles of Associationof the Company, our Board shall be comprised of not less than three directorsand not more than ten directors. Accordingly, our current strength of the Boardis ten directors. Further the Articles of Association also provides that Mr.Narendra K Patni, Mr. Gajendra K Patni and Mr. Ashok K Patni, beingnominees of the NKP Group, GKP Group and AKP Group respectively, arepermanent directors of the Company. 

Pursuant to the provisionsof the Articles of Association, two third of the total board of directors ofthe Company will retire by rotation but they are eligible for reappointment.Out of this two-third, one-third will be retiring at every Annual GeneralMeeting but being eligible for re-election can be reappointed at such AGM.Accordingly, Dr. Michael A. Cusumano’s term of office expires in 2007, but heis eligible for reappointment. Mr. Arun Duggal’s term of office expires in2008, but he is eligible for reappointment. Mr. William O. Grabe’s term ofoffice expires in 2008, but he is eligible for reappointment. Mr. Anupam Purihas resigned as a Director with effect from April 25, 2006. Mr. Pradip Shah’sterm of office expires in 2009, but he is eligible for reappointment. Mr. LouisT. van den Boog’s term of office expires in 2007, but he is eligible forreappointment. Mr. Ramesh Venkateswaran’s term of office expires in 2010, buthe is eligible for reappointment. Mr. Arun Maira was appointed as a Directorwith effect from June 21, 2006 and his term of office expires in 2009, but heis eligible for reappointment. For information regarding our board, see Item6.B.—Compensation—“Service Agreements” above and “Item 10.B. AdditionalInformation—Board of Directors.”

**Board Committees**

***Audit Committee***

The Audit committeecomprises Mr. Arun Duggal (Chairman), Mr. Pradeep Shah and Mr. Louis T vanden Boog. The primary objective of the Audit Committee is to monitor andprovide effective supervision of our financial reporting process with a viewtowards ensuring accurate, timely and proper 

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disclosuresand the transparency, integrity and quality of financial reporting. Our AuditCommittee oversees the work carried out in the financial reporting process byour management, including the internal auditors and reviews the processes andsafeguards employed by each. In addition our Audit Committee has theresponsibility of oversight and supervision over our system of internal controlover financial reporting, audit process, and process for monitoring the compliancewith related laws and regulations. The Audit Committee recommends to our Boardof Directors the appointment, reappointment and if required the replacement orremoval of our independent auditors and fixation of audit and non-audit fees. 

***Compensation and Remuneration Committee***

During the year underreview, the Compensation and Remuneration Committee was formed by merging theearlier Committees i.e., the Compensation Committee and the RemunerationCommittee. The newly formed Compensation and Remuneration Committee comprisesMr. Ramesh Venkateswaran (Chairman), Dr. Michael Cusumano (Member), Mr.Arun Maira (Member) and Mr. Narendra K. Patni (Permanent invitee). TheCommittee was formed primarily to administer our employee stock option plan.The Committee also reviews other programs and policies aimed at attracting,motivating and retaining personnel.

***Shareholder and Investor Grievances Committee***

The Shareholder andInvestor Grievances Committee comprises Mr. Arun Maira (Chairman),Mr. Narendra K. Patni and Mr. William O. Grabe (alternate director,Mr. Abhay Havaldar). The Shareholder and Investor Grievances Committeelooks into redressal of shareholder and investor complaints, is responsible forthe issue of duplicate/split/consolidated share certificates, the allotment andlisting of shares and for communications with statutory and regulatoryauthorities.

***Corporate Governance and Nomination Committee***

The Corporate Governanceand Nomination Committee comprises of Mr. William Grabe (Chairman), Mr. RameshVenkateswaran, Dr. Michael Cusumano and Mr. Arun Maira as the Members of thesaid Committee.  The said Committee wasconstituted to oversee the Corporate Governance compliance and other relatedcompliances of the Company.

**6.D. Employees**

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

**6.E. Shareownership**

For the total number ofequity shares, ADSs and options to purchase equity shares and ADSs foreach director and executive officer as of June 1, 2007, see “Item 7. MajorShareholders and Related Party Transactions” and “Item 6.B. Directors,Senior Management and Employess—Compensation—Options”.

**Employee StockOption Plan**

On June 30, 2003, our shareholders approved anemployee stock option plan, which was later ratified after our initial publicoffering in India by our shareholders at the annual general meeting on June 29,2004. Under the plan, we may issue up to 11,142,085 equity shares of Rs.2 eachto our eligible employees and directors and those of our subsidiaries. The planis administered by the Compensation and Remuneration Committee of our board ofdirectors. As of June 1, 2007, options to purchase 5,376,295 equity shareswere outstanding.

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Detailsregarding various grants to employees and directors are mentioned in the belowtable.

| **Description of Grant**                      | ** ** | ** ** | ** ** | **No. of options  granted** | ** ** | **No. of options  Vested** | ** ** | **Shares allotted  pursuant to  exercise up to  March 31, 2007** | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| Grant as on  September 1, 2003 to employees             |       |       | 2,743,400  |                                  |       |                                 | 2,057,550  |                                                                                           |       |   | 1,358,224 |   |   |
| Grant as on July  1, 2004 to certain of our directors   |       |       | 100,000    |                                  |       |                                 | 50,000     |                                                                                           |       |   | 10,000 |   |   |
| Grant as on  October 1, 2004 to employees               |       |       | 2,750,632  |                                  |       |                                 | 1,375,316  |                                                                                           |       |   | 110,967 |   |   |
| Grant as on April  1, 2005 to employees and directors   |       |       | 190,000    |                                  |       |                                 | 47,500     |                                                                                           |       |   | — |   |   |
| Grant as on  October 1, 2005 to employees               |       |       | 670,710    |                                  |       |                                 | 167,678    |                                                                                           |       |   | — |   |   |
| Grant as on  January 2, 2006 to employees               |       |       | 288,000    |                                  |       |                                 | 72,000     |                                                                                           |       |   | — |   |   |
| Grant as on April  1, 2006 to employees and directors   |       |       | 345,000    |                                  |       |                                 | —     |                                                                                           |       |   | — |   |   |
| Grant as on  October 1, 2006 to employees and directors |       |       | 840,750    |                                  |       |                                 | —     |                                                                                           |       |   | — |   |   |
| Grant as on April  2, 2007 to employees                 |       |       | 356,000    |                                  |       |                                 | —     |                                                                                           |       |   | — |   |   |
| Grant as on April 24,  2007 to directors                |       |       | 30,000     |                                  |       |                                 | —     |                                                                                           |       |   | — |   |   |

 

Apart from the grant of options described above, Mr.Mrinal Sattawala, Chief Operating Officer was granted 350,000 options on May 4,2006 and out of this grant, 37,500 options are vested as of June 1, 2007. OnJuly 1, 2006, Mr. Arun Maira, Director of the Company and Mr. Surjeet Singh,Chief Financial Officer of the Company, were also granted 20,000 and 150,000options, respectively. None of the options covered under these grants arevested as of June 1, 2007.

On April 25, 2006, our Board, subject to theapproval of our shareholders, recommended the amendment of our plan to providean option to the Company to grant ADR-linked stock options to enable certainemployees outside India to acquire ADSs upon exercise of the option. Theshareholders of the Company at the annual general meeting held on June 21,2006 have approved the said amendment to the Patni ESOP 2003 to enable theCompany to issue up to 2,000,000 ADR linked options to the employees of theCompany as well as its subsidiaries. Accordingly, the amended plan, i.e.,“Patni ESOP 2003—Revised 2006” has come into force with effect from June 21, 2006.

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

**ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

**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 June 1, 2007 by:

·       eachof our directors and executive officers;

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

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

Beneficial ownership is determined in accordance withthe rules of the U.S. Securities and Exchange Commission. In computing thenumber of shares beneficially owned by a person and the percentage ownership ofthat person, equity shares subject to options or warrants held by that personthat are currently exercisable, or will become exercisable within 60 daysare deemed outstanding, while the shares are not deemed outstanding forpurposed of computing percentage ownership of any other person. Unless 

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otherwise indicated in thefootnotes below, the persons and entities named in the table have sole votingor investment power with respect to all shares beneficially owned, subject tocommunity property laws where applicable.

Thenumber and percentage of shares beneficially owned are based on138,663,350  equity shares outstanding asof June 1, 2007 :

| **Name**                                             | ** ** | ** ** | ** **     | **Number of  Equity Shares** | ** ** | **% of  outstanding  equity shares** | ** ** |
|------------------------------------------------------|------------|------------|----------------|----------------------------------------|------------|------------------------------------------------|------------|
| **Directors and Executive  Officers**                | ** ** |       | ** **     | ** **                             |       |                                           | ** ** | ** ** |   |
| Mr. Narendra  K. Patni(1)                       |       |       | 20,364,198     | ** **                             |       |                                           | 14.69      | ** ** |   |
| Mr. Gajendra  K. Patni(2)                       |       |       | 19,994,302     | ** **                             |       |                                           | 14. 42     | ** ** |   |
| Mr. Ashok K.  Patni(3)                          |       |       | 20,614,302     | ** **                             |       |                                           | 14. 87     | ** ** |   |
| Mr. William  O. Grabe(4)                        |       |       | 22,913,949     | ** **                             |       |                                           | 16.52      | ** ** |   |
| Mr. Louis T.  van den Boog(5)                   |       |       | 48,002         | ** **                             |       |                                           | *          | ** ** |   |
| Mr. Mrinal  R. Sattawala(6)                     |       |       | 43,774         | ** **                             |       |                                           | *          | ** ** |   |
| Mr. Satish  M. Joshi                            |       |       | 17,800         | ** **                             |       |                                           | *          | ** ** |   |
| **All  Directors and Executive Officers as a Group** | ** ** |       | **61,082,378** | ** **                             |       |                                           | **44.05**  | ** ** |   |
| **5% Shareholders**                                  |       |       |           | ** **                             |       |                                           |       | ** ** |   |
| General Atlantic  Mauritius Limited(4)               |       |       | 22,913,949     | ** **                             |       |                                           | 16.52      | ** ** |   |
| HSBC(7)                                              |       |       | 10,748,996     | ** **                             |       |                                           | 7.75       | ** ** |   |
| **Total**                                            | ** ** |       | **94,745,323** | ** **                             |       |                                           | **68.33**  | ** ** |   |

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*                    Indicates lessthan 1% of the shares

(1)          Includes equity sharesheld by Mr. Narendra K. Patni and his relatives and entities controlled bythem including iSolutions Inc., a Massachusetts corporation wholly-ownedby Mrs. Poonam Patni, Mr. Narendra K. Patni’s wife, andMr. Anirudh Patni, Mr. Narendra K. Patni’s son.

(2)          Includes equity sharesheld by Mr. Gajendra K. Patni and his family members and entitiescontrolled by them.

(3)          Includes equity shares heldby Mr. Ashok K. Patni and his family members and entities controlled bythem.

(4)          Includes 20,161,868 ADSsrepresenting 20,161,868 equity shares held by The Bank of New York asdepositary. General Atlantic Mauritius Limited, or General Atlantic, owns 2,752,081our equity shares directly (after the ADS offering) and 20,161,868 ADSs, eachone of which represents one equity share. General Atlantic GenPar (Mauritius)Limited, or GenPar, controls the management of General Atlantic by virtue ofownership of a majority of its voting shares. General Atlantic LLC owns all theshares of GenPar. Mr. William O. Grabe is a managing director of GeneralAtlantic LLC. Mr. Grabe disclaims beneficial ownership of such securitiesexcept to the extent of his pecuniary interest therein.

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

(6)          Includes 43,724underlying shares represented by 21,862 ADRs held by Mr. Mrinal Sattawala.

(7)          Includes 81,88,428equity shares held by HSBC Global Investment Fund A/c HSBC Global InvestmentFunds Mauritius Limited, 14,97,568 equity shares held by The Master Trust Bankof Japan, Ltd. A/c HSBC Indian Equity Mother Fund, 10,63,000 equity shares heldby HSBC Global Investment Funds A/c HSBC Global Investment Funds BricFreestyle.

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

As of  June 1, 2007,approximately 99.97% of our equity shares were held in the namesof 26,809 record holders with registered addresses in India. As of June1, 2007, there were 11 U.S. holders of record with registered addresses inthe U.S., who accounted for less than 0.02% of our equity shares. As onDecember 31, 2006, we had 133 depositary receipts institutionalholders in the United States.

**Significant Changesin Shareholdings**

There are no significantchanges in the percentage ownership held by our major shareholders during thefiscal year.

**Preferential Rights**

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

**7.B. Related partytransactions**

**Patni FamilyCompanies**

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

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

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

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

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

These transactionshave comprised the following:

·       saleof hardware from Patni Computer Systems, Inc. to PCSTL, amounting to$8,974, nil and nil for the years ended December 31, 2004, 2005 and 2006;

·       operatinglease payments for residential and commercial property from these companies andthe relatives of our founders, amounting to $289,964, $266,325 and $127,748 forthe years ended December 31, 2004, 2005 and 2006; and

·       securitydeposits for operating leases, with amounts outstanding totaling $297,510,$251,569 and $107,203 for the years ended December 31, 2004, 2005 and2006.

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

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Pursuant to a resolution of our board of directors onAugust 26, 2005, we have determined that we will no longer enter into anytransactions for the purchase and sale of hardware with any ofMr. 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 ortheir respective relatives, who are together referred to as the “Patni Family”,or any company or entity owned or controlled by any member of the Patni Family.

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

***License Agreements***

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

***Consultancy Agreement***

We have entered into aconsultancy agreement with Patni Computer Systems, Inc., our U.S.subsidiary, for, among other things, the secondment ofMr. Narendra K. Patni. See “Item 6. B. Directors, Senior Managementand Employees—Service Agreements.”

***Donations***

We have given donations tothe Ravindra Patni Charitable Trust, in which our director Mr. Gajendra K.Patni is one of the trustees, totaling $111,898 for the two years endedDecember 31, 2005. However, pursuant to a resolution of our board ofdirectors on August 26, 2005, we have determined that we will not make anyfuture donations to the Ravindra Patni Charitable Trust or any other trust orsimilar entity owned or controlled by any member of the Patni Family or anytrust or similar entity in which a member of the Patni Family is a trustee. Therestriction will not apply to any trust set up by us, the majority of whosetrustees are independent trustees, including independent of any member of thePatni Family, and the investments in, and activities of, any such trust arereviewed on an on-going basis by our board of directors.

**GeneralElectric**

General Electric is ourlargest customer. Revenues for software services to various entities withinGeneral Electric amounted to approximately $103.4 million , $99.4 million  and $84.4 million in the years endedDecember 31, 2004, 2005 and 2006, respectively. In addition, GeneralElectric charges Patni  for data linkconnections. Data link charges paid to General Electric for the three yearsended December 31, 2006 amounted to $3.1 million. In January 2005, wealso entered into a finance lease for the use of commercial vehicles in anamount of $0.2 million with GE Capital Transportation Financial ServicesLimited. General Electric became an investor in our company in 2000. For a moredetailed description of our relationship with General Electric, please see“Item 4. Information on the Company—Business Overview—The General ElectricAssociation.”

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**Deposit Agreement**

We have entered into a deposit agreement with The Bankof New York, or the depositary, and the owners of and beneficial owners of ADSsdated July 15, 2002, pursuant to which we have deposited 20,161,868 equityshares with the depositary. The depositary has executed and delivered toGeneral Atlantic 20,161,868 ADSs representing such equity shares. The holdersof ADSs can, at any time, convert their ADSs into equity shares. Under thedeposit agreement, we have agreed to pay the fees, reasonable expenses andout-of-pocket charges of the depositary in accordance with agreements enteredinto in writing between us and the depositary from time to time. ADSs issuedunder this deposit agreement may, when General Atlantic wishes to sell ADSs, beexchanged, subject to applicable laws, for ADSs under the deposit agreement,which ADSs may be sold subject to applicable securities laws.

We have also entered intoa deposit agreement with The Bank of New York, or the depositary, and theowners and holders of ADRs dated December 7, 2005 for deposit of equity sharesof the Company from time to time with the depositary or with the Custodian asagent of the depositary for the purposes set forth in this Deposit Agreement,for the creation of ADSs representing the equity shares so deposited and forthe execution and delivery of ADRs evidencing the ADSs.  Each ADS represents two (2) equity shares. 

**Registration RightsAgreement**

We have entered into a registration rights agreementwith General Atlantic, certain General Electric entities, Mr. Ashok K.Patni, Mr. Gajendra K. Patni and certain of their relatives,Mr. Narendra K. Patni and iSolutions Inc. dated July 15, 2002.This agreement grants rights with respect to registration of our equity sharesunder the Securities Act, certain provisions of which are summarized below.Subject to limitations provided in the registration rights agreement and inlock-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 loans toemployees who are not executive officers. These loans are repayable in equalinstallments over periods ranging from six to 60 months. Interest on theseloans is charged at 7.5% to 9.0%. Loans outstanding as of December 31,2004, 2005 and 2006 were $86,453, $56,662 and $267,328. There are nooutstanding loans to any of our directors or executive officers.

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

Not applicable.

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**ITEM 8. FINANCIAL INFORMATION**

**8.A. Consolidated Statements And Other Financial Information**

The followingfinancial statements and auditors’ report for fiscal 2006 appear under Item 18in this Annual Report:

·       Reportof Independent Registered Public Accounting Firm

·       ConsolidatedBalance sheets as of December 31, 2005 and 2006

·       ConsolidatedStatements of Income for the years ended December 31, 2004, 2005 and 2006

·       ConsolidatedStatements of Shareholders’ Equity and Comprehensive Income for the years endedDecember 31, 2004, 2005 and 2006

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2005 and2006

·       Notes to the Consolidatedfinancial statements

**Amount of ExportSales**

For the yearended December 31, 2006, we generated $ 577.04 million, or99.69% of our total revenues of $ 578.85 million, from the export ofour products and rendering of services out of India.

**LegalProceedings**

Certain income tax relatedlegal proceedings  are pending against us. We are currentlycooperating with the US Department of Labor with respect tocompliance matters related to our past and present labor practices.  Additionally, we are also involved inlawsuits and claims which arise in ordinary course of business. Please see thedescription of various tax proceedings in US & India under the section titled“Taxes” under Item 5 of this Annual Report. Other than as disclosedherein, there are no such matters pending that we expect to be material inrelation to our business.

**Dividends**

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

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

Our Board of Directors atits meeting held on February 7, 2007 recommended a dividend of 150% of parvalue, i.e. Rs. 3 per share (approximately $0.07) for fiscal 2006, subject toapproval of our shareholders.

**8.B. SignificantChanges**

None

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**ITEM 9.**                THEOFFER AND LISTING

**9.A.**      Offerand listing details

Our equity shares have been listed and traded on theBombay Stock Exchange Limited, or BSE, and the National Stock Exchange of IndiaLimited, or NSE, since February 25, 2004. The prices for equity shares asquoted in the official list of each of the Indian Stock Exchanges are expressedin rupees. Our ADSs evidenced by American Depositary Receipts, or ADRs, aretraded in the United States on the New York Stock Exchange, or NYSE. Our ADSscommenced trading on the NYSE on December 8, 2005. Each ADS represents twoequity shares. The number of our outstanding equity shares (including theunderlying shares for ADSs) as of December 31, 2006 was 138,281,853. As ofDecember 31, 2006, there were 20,161,868 privately placed ADSs(representing 20,161,868 equity shares) and 7,684,781 ADSs outstanding(representing 15,369,562 equity shares).

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

| ** **                                                     | ** ** | **BSE**         | ** ** | **NSE**        | ** ** | **NYSE**        | ** ** |
|----------------------------------------------------------------|------------|-----------------|------------|----------------|------------|-----------------|------------|
| ** **                                                     | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** |
| **2006**                                                       | ** ** |            | ** ** | ** **     |       | ** **      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| First Quarter                                                  |       |            | 11.13      | ** **     |       | 9.99            |       |   | 11.12 | ** ** |   | 10.00 |   |   | 25.10 | ** ** |   | 20.59 |   |
| Second Quarter                                                 |       |            | 10.00      | ** **     |       | 6.39            |       |   | 9.95 | ** ** |   | 6.36 |   |   | 20.87 | ** ** |   | 13.94 |   |
| 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 |   |
| **2005**                                                       | ** ** |            | ** ** | ** **     |       | ** **      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| First Quarter                                                  |       |            | 9.08       | ** **     |       | 8.16            |       |   | 9.08 | ** ** |   | 8.11 |   |   | — | ** ** |   | — |   |
| Second Quarter                                                 |       |            | 8.72       | ** **     |       | 7.49            |       |   | 8.73 | ** ** |   | 7.55 |   |   | — | ** ** |   | — |   |
| Third Quarter                                                  |       |            | 10.43      | ** **     |       | 7.93            |       |   | 10.42 | ** ** |   | 7.92 |   |   | — | ** ** |   | — |   |
| Fourth Quarter  (NYSE beginning on December 8, 2005) |       |            | 11.02      | ** **     |       | 9.27            |       |   | 10.97 | ** ** |   | 9.25 |   |   | 23.56 | ** ** |   | 21.90 |   |
| Full Year                                                      |       |            | 11.02      | ** **     |       | 7.25            |       |   | 10.97 | ** ** |   | 7.30 |   |   | — | ** ** |   | — |   |
| **Month ended**                                                | ** ** |            | ** ** | ** **     |       | ** **      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| June 2007  (through June 25, 2007)                             |       |            | 13.78      | ** **     |       | 12.12           |       |   | 13.78 | ** ** |   | 12.13 |   |   | 26.99 | ** ** |   | 24.45 |   |
| May 2007                                                  |       |            | 14.00      | ** **     |       | 11.43           |       |   | 14.03 | ** ** |   | 11.42 |   |   | 27.25 | ** ** |   | 24.64 |   |
| April 2007                                                |       |            | 11.56      | ** **     |       | 9.15            |       |   | 11.56 | ** ** |   | 9.15 |   |   | 26.49 | ** ** |   | 22.35 |   |
| March 2007                                                |       |            | 9.74       | ** **     |       | 8.45            |       |   | 9.73 | ** ** |   | 8.44 |   |   | 23.43 | ** ** |   | 20.90 |   |
| February 2007                                             |       |            | 10.37      | ** **     |       | 9.37            |       |   | 10.35 | ** ** |   | 9.38 |   |   | 24.39 | ** ** |   | 20.38 |   |
| January 2007                                              |       |            | 10.50      | ** **     |       | 9.05            |       |   | 10.44 | ** ** |   | 9.05 |   |   | 22.40 | ** ** |   | 19.81 |   |
| December 2006                                             |       |            | 9.47       | ** **     |       | 8.76            |       |   | 9.48 | ** ** |   | 8.73 |   |   | 20.38 | ** ** |   | 18.61 |   |

 

**9.B.**     Planof distribution

Not applicable.

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**9.C.**     Markets

*Trading Practicesand Procedures on the Indian Stock Exchanges*

*Stock ExchangeRegulation*

The stock exchanges in India are regulated by theSecurities and Exchange Board of India, or SEBI, and the Ministry of Finance,Capital Markets Division, the Government of India under the SecuritiesContracts (Regulation) Act, 1956, as amended, or the SCRA, and the SecuritiesContracts (Regulation) Rules, 1957, as amended, or the SCRR. The SCRR, togetherwith the rules, bye-laws and regulations of the respective stock exchanges,regulate the recognition of stock exchanges, the qualifications for membershipthereof and the manner in which contracts are entered into and enforced betweenmembers of such stock exchanges.

The main objective of SEBI, pursuant to the Securitiesand Exchange Board of India Act, 1992, as amended, or the SEBI Act, is topromote the development of and regulate the Indian securities markets andprotect the interests of investors. The SEBI Act granted SEBI the powers toregulate the business of the Indian securities markets, including stock exchangesand other financial intermediaries, promote and monitor self-regulatoryorganizations, prohibit fraudulent and unfair trade practices and insidertrading, and regulate substantial acquisitions of shares and takeovers ofcompanies. SEBI has also issued guidelines concerning minimum disclosurerequirements by public companies, rules and regulations concerninginvestor protection, buybacks of securities, employee stock option schemes,stockbrokers, merchant bankers, underwriters, mutual funds, foreign institutionalinvestors, credit rating agencies and other capital market participants.

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

The Companies (Amendment)Act of 2000 amended the Indian Companies Act and incorporated significantprovisions relating to securities, options in securities and equity shares withdifferential rights. Further, the Indian Companies Act, as amended, hasempowered SEBI to administer provisions in so far as they relate to the issueand transfer of securities, non payment of dividends in the case of listedpublic companies and public companies proposing to get their securities listedand to conduct inspection of a company’s records in respect of matters relatingto the issue and transfer of securities. The power to prosecute the defaultingcompanies in compliance with the said matter has also been vested with SEBI.The Indian Companies Act has been amended to introduce significant changes suchas allowing book building for public offerings of securities, buy back ofsecurities, 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 ofSecurities and Listing*

Under the Indian Companies Act, a public offering ofsecurities in India must be made by means of a prospectus, which must containinformation specified in the Indian Companies Act and the SEBI (Disclosure andInvestor Protection) Guidelines, 2000, as amended, or the SEBI Guidelines, andbe filed with the Registrar of Companies having jurisdiction over the placewhere a company’s registered office is 

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situated. A company’sdirectors and promoters are subject to civil and criminal liability formisstatements in a prospectus. The Indian Companies Act also sets forthprocedures for the acceptance of subscriptions and the allotment of securitiesamong subscribers and establishes maximum commission rates for the sale ofsecurities.

SEBI has issued detailed guidelines concerningdisclosures by public companies making a public offering of securities andinvestor protection. Previously, the Controller of Capital Issues of theGovernment of India regulated the prices at which companies could issuesecurities. The SEBI Guidelines now permit companies to freely price theirissues of securities.

The listing of securities on recognized Indian stockexchanges is regulated by the Indian Companies Act, the SCRA, the SCRR, theSEBI Act and the listing agreements of the respective stock exchanges. Underthe standard terms of stock exchange listing agreements, the governing body ofeach stock exchange is empowered to suspend trading of or dealing in a listedsecurity for breach of an issuer’s obligations under such agreement, subject tosuch issuer receiving prior notice of the intent of the exchange. A listedcompany can be delisted under the provisions of SEBI (Delisting of Securities)Guidelines, 2003, which govern voluntary and compulsory delistings of shares ofIndian companies from the stock exchanges. SEBI has the power to amend listingagreements and bye-laws of stock exchanges in India.

Pursuant to recent amendments by SEBI to the listingagreements, with effect from May 1, 2006, listed Indian companies arerequired to ensure that the minimum level of public shareholding, on acontinuous basis, is 25% of the total issued shares of a particular class, forevery such class that is listed. However, companies which (i) have offeredless than 25% (but at least 10%) of the total number of issued shares of aparticular class to the public under Rule 19(2)(b) of the SCRR, or (ii) haveat least 20 million shares of a particular class listed and a marketcapitalization of Rs.10,000 million, are permitted to maintain their minimumpublic shareholding at 10%. Where the public shareholding in a company is lessthan 25% or 10%, as the case may be, the company is only permitted to diluteits public shareholding pursuant to certain extraordinary events with the priorapproval of the concerned stock exchanges. “Public shareholding” excludesshares held by promoters and the promoter group as well as shares held bycustodians against which depository receipts have been issued overseas.

The standard listing agreements require an acquirer ofa listed company’s shares to comply with the disclosure and tender offerrequirements under the SEBI (Substantial Acquisition of Shares and Takeovers)Regulations, 1997, as amended, or the Takeover Code. For a brief discussion onthe disclosure and tender offer requirements under the Takeover Code, see “Item10. Additional Information-Takeover Code” below.

In addition, a listed company is subject to continuingdisclosure requirements pursuant to the terms of its listing agreement with therelevant stock exchange, including the requirement to publish unauditedfinancial statements on a quarterly basis and to inform stock exchangesimmediately 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 

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informationreceived from its shareholders within five days of the receipt of suchinformation to the stock exchanges on which the company’s equity shares arelisted.

*Indian StockExchanges*

The major stock exchanges in India are the BSE and theNSE, which together account for a majority of trading volumes of securities inIndia. The BSE and NSE together dominate the stock exchanges in India in termsof the number of listed companies, market capitalization and trading volumes ofsecurities.

Beginning April 1, 2003, the stock exchanges inIndia operate on a trading day plus two, or T+2, rolling settlement system. Atthe end of the T+2 period, obligations are settled with buyers of securitiespaying for and receiving securities, while sellers transfer and receive paymentfor securities. For example, trades executed on a Monday would typically besettled on a Wednesday. SEBI proposes to move to a T+1 settlement system. Inorder to contain the risk arising out of the transactions entered into by themembers of various stock exchanges either on their own account or on behalf oftheir clients, the stock exchanges have designed risk management procedures,which include compulsory prescribed margins on the individual broker members,based on their outstanding exposure in the market, as well as stock-specificmargins from the members.

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

*MarketWide Circuit Breakers:**  *Marketwide circuit breakers are applied to the market for movement by 10%, 15% and20% for two prescribed market indices, whichever is breached earlier: the BSESensex for the BSE, or the BSE Sensex, and the Nifty for the NSE, or the NSENifty. If any of these circuit breaker thresholds are reached, trading in allequity and equity derivatives markets nationwide is halted.

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

*The National StockExchange of India Limited*

The NSE was established byfinancial institutions and banks to provide nationwide on-line satellite linkedscreen-based trading facilities with market makers and electronicclearing and settlement for securities, including Government of Indiasecurities, debentures, public sector notes and units. Deliveries for tradesexecuted “on-market” are exchanged through the National Securities ClearingCorporation Limited. The NSE commenced operations in the wholesale debt marketand capital markets in 1994 and in derivatives in 2000. As of February 2007,there were 1,063 listed companies trading on the capital markets (equities)segment of the NSE. As of February 2007, the market capitalization of theNSE was approximately Rs.32,969,310 million.

*The Bombay StockExchange Limited*

The BSE, established in 1875, is the oldest stockexchange in India and has evolved over the years into its present status as thepremier stock exchange of India. The BSE switched over to an on-line tradingnetwork in May 1995 and has expanded this network to over 411 cities inIndia. Derivatives trading commenced on the BSE in 2000. Retail trading ingovernment securities commenced in June 2003. As of February 2007,the BSE had 921 members, comprising 180 individual members, 719 Indiancompanies and 22 Foreign Institutional Investors, or FIIs. Pursuant to theBSE (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 

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February 2007, therewere 4,816 listed companies trading on the BSE with an estimated total marketcapitalization of Rs. 34,892,140 million.

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

*Derivatives (Futureand Options)*

Trading in derivatives isgoverned by the SCRA and the SEBI Act. The SCRA was amended in February 2000and derivative contracts were included within the term “securities”, as definedby the 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 thelegal framework for the establishment of depositories to record ownershipdetails and effectuate transfers in book-entry form. SEBI framed the Securitiesand Exchange Board of India (Depositories and Participants) Regulations, 1996,which, among other things, provide for the formulation of such depositories andthe regulation of participants, as well as the *inter se*rights and obligations of the depositories, participants, beneficial owners andissuers.

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.

*SecuritiesTransaction Tax*

Therates applicable on taxable 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    |       |
| 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    |       |

 

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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.

**9.D.**    SellingShareholders

Not applicable.

**9.E.**     Dilution

Not applicable.

**9.F.**      Expensesof the Issue

Not applicable.

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**ITEM 10. ADDITIONAL INFORMATION**

**Governance Standards for Listed Companies**

Many of the corporate governance standards set out inthe NYSE Listed Company Manual do not apply to us as a “foreign private issuer.”Under the NYSE corporate governance standards, we need only (i) establishan independent audit committee that satisfies the requirements of Rule 303A.06of the NYSE Listed Company Manual described in the following table; (ii) provideprompt certification by our chief executive officer of any material non-compliancewith any corporate governance rules of the NYSE; (iii) provide annualwritten affirmations to the NYSE with respect to our corporate governancepractices (and provide interim written affirmations each time a change occursto the board or any of our committees); 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 significantdifferences between the corporate governance standards applicable to us underour listing agreements with the Indian Stock Exchanges and the requirements ofstandards relating to U.S. domestic companies listed on the NYSE.
| Standard for NYSE-Listed   Companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Requirements under our Indian Listing Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Director Independence**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| A majority of the board must consist of independent  directors. Independence is defined by various criteria including the absence  of a material relationship between the director and the listed company. For  example, directors who are employees, are immediate family of an executive  officer of the company or receive over $100,000 per year in direct  compensation from the listed company are not independent. Directors who are  employees of or otherwise affiliated through immediate family with the listed  company’s independent auditor are also not independent. Determinations of  independence are made by the board. |       | If the Chairman of the Board is an executive  director then not less than 50 per cent of the board of directors should  comprise of independent directors. If the Chairman of the board is a  non-executive director, then at least one third of the board should comprise  of independent directors.

Clause 49 of the listing agreement defines an  ‘‘independent director’’ to mean a non-executive director who (i) apart  from receiving director’s remuneration, does not have any material pecuniary  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. |

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| The non-management directors  must meet at regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | There is no comparable requirement under Indian law.  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **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. |

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|                                                                                                                                                                                                                                                        |   | 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.

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. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ·  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·  Each listed company must have disclosed  whether their board of directors has identified an audit committee financial  expert (as defined under applicable rules of the SEC), and if not the  reasons why the board has not done so. |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

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

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

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

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

The committee must also discuss the company’s annual  audited financial statements and quarterly financial statements with  management and the independent auditors, the company’s earnings press  releases, as well as financial information and earnings guidance provided to  analysts and rating agencies, and policies with respect to risk assessment  and risk management. |   | ·  In addition to the role of the audit  committee described above, the audit committee is required to have powers  that include being able to investigate any activity within 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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| **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.                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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

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

 

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**10.A. Share Capital**

Not applicable.

**10.B. Memorandumand articles of association**

**General**

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

Our authorized share capital consists of 250,000,000equity shares with a par value of Rs. 2 each. As of  June 1, 2007, 138,663,350 equity shareswere issued and outstanding and fully paid. On August 30, 2003 we effecteda one for two stock split in the form of a stock dividend. The equity sharesare our only class of share capital. We currently have no convertibledebentures or warrants outstanding. Substantially all of our equity shares arein non-physical form.

We use the following terms in our Articles:

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

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

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

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

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

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

Our company registration number is 11-020127(CIN U72200MH1978PLC020127). Under our Memorandum of Association, our mainobjects include, but are not limited to the following:

1.                To manufacture,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 dealin any electronic, electrical, mechanical and electromechanical product,machine, apparatus, appliance, custom products, merchandise, systems, softwareprocedures, peripheral products, computers, tabulators, data processingmachines and systems and components thereof, electronic calculators, electricand electromechanical accounting systems, terminal products and systems,machines for registering data preparation, recording, perforating, tabulating,sorting, printing, typewriting products which possess an internal intelligencefor recognizing and co-relating any type of data or information to be processedrecognition and memory systems, optical scanning machine transmission lines,transmission equipment, terminals, copying, reproducing and distributingmachines, check signing, protecting and disbursing equipment machines forfacsimile reproduction, facsimile transmission and word processions facilitiesand accessories and devices of all kinds, and for all purposes and any productsand component parts thereof or materials or articles used in connectiontherewith, and any-all other machinery, appliance, apparatus, devices,materials, 

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substances, business firmsand supplies, articles or things of a character similar or analogous to theforegoing, or any of them or connected therewith.

2.                To establish,maintain and conduct training schools, courses and programmes in connectionwith 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 use thereofor used in connection therewith.

3.                To carry on thebusiness of developing, improving, designing, marketing, selling and licensingsoftware and program-products of any and all description.

4.                To carry on thebusiness of electricians, electrical, electronic engineers and manufacturers ofand dealers in electrical, mechanical, chemical, optical and electronicmachines, appliances and apparatus of every description.

5.                To carry on thebusiness of consultants in computers, computer-oriented systems all branches ofcomputer science, civil, electrical, electronic, mechanical, chemical, optical,metallurgical and all other branches of engineering.

6.                To carry on thebusiness of consultancy services related to the preparation and maintenance ofaccounting, statistical, scientific or mathematical, information and reports,data conversion, data processing, programming, collecting, storing, processingand transmitting information and data of every kind and description, systemsanalysis and machine services for solving or aiding commercial, industrial,scientific and research problems and for all other related business.

7.                To carry on thebusiness of advisers and consultants and collaborators on all matters andproblems 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.                Tosupply and provide, maintain and operate, design any engineering consultancyservices applicable over the whole range of industry, trade, commerce andagriculture.

**Board of Directors**

*Election*

The Articles ofAssociation provide that our board of directors shall be comprised of not lessthan three directors and not more than ten directors. Eight directors on theBoard shall be appointed as follows:

·       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

·       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.

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Each director nominated by a Significant Shareholdershall hold office and may only be removed by that Significant Shareholder.Except in the event of the removal of a director for a breach of duty, fraud,bankruptcy or unless contrary to law, all the Significant Shareholders haveagreed in the Articles that the independent directors shall not be removedexcept at a general meeting by the votes of shareholders (present and voting)holding not less than 51% of the equity shares, which includes the votes of atleast three Significant Shareholders in a general meeting and except by amajority of the directors, which includes at least three nominee directorsappointed by the Significant Shareholders.

General Atlantic is alsoentitled to nominate one of the members to each committee of the board ofdirectors, including the Audit Committee, the Compensation Committee and suchother committees, so long as General Atlantic holds 5% or more of the equityshares.

*Notice and Quorum*

Under the Articles, subject to Section 287 of theIndian Companies Act, the quorum for a meeting of the board of directors shallbe the presence of at least four directors which must include at least onenominee director (or his or her alternate) of each of the AKP Group, the GKPGroup, the NKP Group, and General Atlantic (unless the absent nominee directorconsents in writing to a quorum requirement being satisfied despite his or herabsence). Provided that where at any time the number of interested directorsexceeds or is equal to two-thirds of the total strength, the number ofremaining directors, that is to say, the number of directors who are notinterested, present at the meeting being not less than two, shall be the quorumduring such time.

If a quorum is not present on the date the boardmeeting is convened, it shall automatically stand adjourned to a date 7 daysafter the original board meeting. The adjourned board meeting may be held onsuch other date and such other place as may be unanimously agreed by a nomineedirector of each of the AKP Group, the GKP Group, the NKP Group and GeneralAtlantic. In the event of a quorum once again not being available at such anadjourned board meeting, the directors present shall constitute the quorum.

The Articles require that at least 15 clear days noticebe provided for any board meeting unless a shorter notice period is agreed by amajority of the directors.

Under our Articles, Mr. NarendraK. Patni shall be the permanent Chairman of the Board. The Chairman shallpreside at all board and shareholder meetings. In the absence of Mr. NarendraK. Patni at any meeting of the board, a General Atlantic nominee shall presideas Chairman. The Chairman has a casting vote in case of a tie. If for anyreason Mr. Narendra K. Patni is unable to continue as the Chairman, theboard shall appoint the Chairman.

*InterestedDirectors*

Pursuant to Section 300 of the Indian CompaniesAct, interested directors are not allowed to take part in the discussion of, orvote on, any contract or arrangement entered into or to be entered into by oron behalf of the Company if the director is in any way, directly or indirectly,concerned with or interested in the contract or arrangement. In addition, adirector is required to disclose the nature of his concern or interest under Section 299of the Indian Companies Act.

Under Section 297 ofthe Indian Companies Act, the consent of the board of directors is requiredwhere a director of the company or his relative, a firm in which such adirector or relative is a partner, any other partner in such a firm, or aprivate company of which the director is a member or director, is entering intocertain contracts with the company.

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*Qualifying Shares*

Our directors are notrequired to hold any of our equity shares to be qualified to serve on the boardof directors.

*Borrowing Powers*

Our directors shall not,except with the consent of the shareholders in a general meeting, borrowmoneys, where the moneys to be borrowed together with the moneys alreadyborrowed by the company (apart from temporary loans obtained from the company’sbankers in the ordinary course of business) will exceed the aggregate of ourpaid up capital and the aggregate of all free reserves.

*DirectorCompensation*

The board of directors isentitled to set its remuneration subject to maximum limits prescribed by Indianlaw and our Articles. If the number of interested directors exceeds the quorumrequirement for board meetings, then the resolution to be passed would besubject to the approval of the shareholders at a general meeting. Normally anyresolution of the board regarding an increase in director’s fees is subject toshareholder approval in a general meeting.

*Rotation andRetirement*

There is no age limit forretirement of our directors. Our Articles require two-thirds of ourdirectors to retire by rotation, but they are eligible for re-election.One-third of the directors who are subject to retirement by rotation mustretire at each annual general meeting but can be re -appointed at suchannual general meeting. Mr. Narendra K. Patni, Mr. Gajendra K. Patniand Mr. Ashok K. Patni as the respective nominees of the NKP Group, GKPGroup and AKP Group are permanent directors according to our Articles in thatcapacity they are not required to retire by rotation like our other directors.

**Dividends**

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

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

The Indian Companies Act provides that any dividendsthat remain unpaid or unclaimed after the 30-day period referred to abovemust be transferred to a special bank account. We transfer any dividends thatremain unclaimed for seven years from the date of such transfer to an InvestorEducation and Protection Fund created by the Indian Government. The proceeds ofsuch funds are utilized to promote investor’s awareness and protection ofinvestors’ interests. Following such transfer, such unclaimed 

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dividends cannot beclaimed. Neither we nor such fund shall be liable in respect of amountstransferred to such fund.

Under the IndianCompanies Act, dividends may be paid out of profits of a company in the year inwhich the dividend is declared or out of the undistributed profits of theprevious fiscal years, in either case after providing for depreciation. Beforedeclaring a dividend on its shares, a company is required under the IndianCompanies Act to transfer to its reserves, a certain percentage of its profitsfor that year, ranging from 2.5% to 10% depending upon the dividend percentageto be declared in such year. The Companies (Declaration of Dividend out of Reserves)Rules, 1975 provide that, in the event of inadequacy or absence of profits inany year, a dividend may be declared for such year out of the company’saccumulated profits, subject to the following conditions:

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

·       thetotal amount to be drawn from the accumulated profits earned in the previous yearsand transferred to the reserves may not exceed an amount equivalent to 10% ofthe sum of its paid up capital and free reserves, and the amount so drawn is tobe used first to set off the losses incurred in the fiscal year before anydividends in respect of preference or equity shares are declared; and

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

**Bonus Shares**

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

The SEBI Guidelinesprescribe that no company shall, pending conversion of convertible securities,issue any shares by way of bonus unless a similar benefit is extended to theholders of such convertible securities, through reservation of shares inproportion to 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 unlesspartly paid-up shares, if any, are made fully paid-up. Further, for the issueof such bonus shares a company should not have defaulted in the payment ofinterest or principal in respect of fixed deposits and interest on existingdebentures or principal on redemption of such debentures. Further, a companyshould have sufficient reason to believe that it has no outstanding dues inrespect of the payment of statutory dues of the employees such as contributionto a provident fund, gratuity and bonus. The issue of bonus shares must beimplemented within six months from the date of approval by the board ofdirectors.

**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.

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

The Indian Companies Actand our Articles give shareholders the pre-emptive right to subscribe for newshares in proportion to their respective existing shareholdings unlessotherwise determined by a special resolution passed by a general meeting of theshareholders. This special resolution must be approved by a number of voteswhich is not less than three times the number of votes against the specialresolution. The offer must include: (a) the right, exercisable by theshareholders of record, to renounce 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.

**Annual GeneralMeeting of Shareholders**

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

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

**Quorum**

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

**Voting Rights**

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

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

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

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

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

·       alterationof the articles of association in relation to deletion or insertion ofprovisions defining private company;

·       theissue of shares with differential rights with respect to voting, dividend orotherwise;

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

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

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

·       powerto compromise or make arrangement with creditors and members;

·       theelection of a director; and

·       thebuy-back of shares.

While the IndianCompanies Act permits a company to issue shares with differential rights as todividend, voting or otherwise, it may do so subject to certain conditionsspecified under the Companies (Issue of Share Capital with Differential VotingRights) Rules, 2001, some of which are:

·       thecompany should have distributable profits (in terms of Section 205 of theIndian Companies Act) for a period of three financial years immediatelypreceding the year in which it was decided to issue such shares;

·       theshares with differential voting rights shall not be in excess of 25% of thetotal issued share capital; and

·       thevoting rights of existing shares cannot be altered.

Our Articles permit the issue of shares withdifferential voting rights.

Our Articles require thatcertain shareholders ensure that they do not vote for any resolution to vary ormodify the terms of appointment of Mr. Ashok K. Patni and Mr. GajendraK. Patni. The shareholders referred to in this provision are limited to GeneralAtlantic, the AKP Group, the GKP Group and the NKP Group and anyof their permitted transferees, permitted assigns or affiliates (as such termsare defined in the Articles).

**Register ofShareholders; Record Dates; Transfer of Shares**

We are required to maintain a register of shareholdersat our registered office. The register and index of beneficial ownersmaintained by a depositary under the Depositories Act, 1996 is deemed to be anindex of members and register and index of debenture holders. We recognize asshareholders only those persons who appear on our register of shareholders anddo not recognize any person holding any share or part of it 

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upon any trust, express,implied or constructive, except as permitted by law. In the case of shares heldin physical form, we register transfer of shares on the register ofshareholders upon receiving the share transfer form duly complete in allrespects accompanied by a share certificate or if there is no certificate, theletter of allotment in respect of shares to be transferred together with dulystamped transfer forms. In respect of electronic transfers, the depositarytransfers shares by entering the name of the purchaser in its books as the beneficialowner of the shares. We then enter the name of the depositary in our records asthe registered owner of the shares. The beneficial owner is entitled to all therights and benefits as well as the liabilities with respect to the shares thatare 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 through depositories are transferred inthe form of book entries or in electronic form in accordance with the Securitiesand Exchange Board of India (Depositories and Participants) Regulations, 1996.These regulations provide the regime for the functioning of the depositoriesand the participants and set forth the manner in which the records are to bekept and maintained and the safeguards to be followed in this system. Transfersof beneficial ownerships of shares held through a depositary are exempt fromstamp duty. We have entered into an agreement for such depositary services withNational Securities Depository Limited and the Central Depository Services(India) Limited.

The shares of an Indian public company are freelytransferable, subject to the provisions of the Indian Companies Act pursuant towhich if a transfer of shares contravenes the SEBI Act, or regulations madethereunder, or the Sick Industrial Companies (Special Provisions) Act, 1985 orany other similar law, the Company Law Board (which is expected to be replacedby the National Company Law Tribunal) may, on an application made by thecompany, a depositary, a participant, an investor or SEBI, direct arectification of the register of records. If a company without sufficient causerefuses to register a transfer of shares within two months from the date onwhich the instrument of transfer is delivered to the company, the transfereemay appeal to the Company Law Board seeking to register the transfer of shares.

Pursuant to listing agreements with the Indian StockExchanges, in the event a company has not effected the transfer of shareswithin one month or where the company has failed to communicate to thetransferee any valid objection to the transfer within the stipulated timeperiod of one month, the company is required to compensate the aggrieved partyfor the opportunity losses caused during the period of delay.

Our Articles provide forcertain restrictions on the transfer of shares, including granting power to theboard of directors to refuse to register or acknowledge transfer of shares orother securities issued by the company. However, to the extent that theprovisions of the Articles are in conflict with any of the provisions of theIndian Companies Act, the Indian Companies Act shall prevail.

**Disclosure ofOwnership Interest**

Section 187C of the Indian Companies Act requiresbeneficial owners of shares of Indian companies who are not holders of recordto declare to the company details of the holder of record and the holder ofrecord to declare details of the beneficial owner. Any charge, promissory noteor other collateral agreement created, executed or entered into with respect toany equity share by its registered owner or any hypothecation by the registeredowner of any equity share shall not be enforceable by the beneficial owner orany person claiming through the beneficial owner if such declaration is notmade. Failure by a person to comply with Section 187C will not affect thecompany’s obligation to register a transfer of shares or to pay any dividendsto the registered holder of any shares in respect of which the declaration hasnot been made. 

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While it is unclear underIndian law whether Section 187C applies to holders of ADSs, investors whoexchange ADSs for underlying equity shares will be subject to the requirementsof Section 187C. Additionally, holders of ADSs may be required to complywith the notification and disclosure obligations pursuant to the provisions ofthe deposit agreement entered into by such holders, the company and thedepositary.

Any investor who fails tocomply with the requirement to make a declaration under Section 187C may beliable 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 AnnualReport**

A public limited company’s audited financialstatements, the directors’ report and the auditors’ report must be approved atthe annual general meeting. These documents also include certain otherfinancial information, a report on corporate governance and a section onmanagement’s discussion and analysis. These documents need to be made availablefor inspection at the company’s registered office during normal working hoursfor 21 days prior to the annual general meeting.

Under the Indian CompaniesAct, a company must file the above documents with the Registrar of Companieswithin 30 days after the date of the annual general meeting. Under thelisting agreement, copies of the statutory and director’s annual reports,balance sheets and profit and loss accounts and other special reports arerequired to be sent to the stock exchanges as soon as they are issued. Acompany is also required to file with the stock exchanges a compliance reporton a quarterly basis, within 15 days from the end of the quarter incorporating,*inter alia*, the shareholding pattern.The listing agreement also requires companies to furnish to the stock exchangeunaudited quarterly and semi-annual financial results of operations and publishsuch information in at least one English language newspaper.

**Liquidation Rights**

Subject to the rights ofcreditors, employees and the holders of any shares entitled by their terms topreferential repayment over the equity shares, if any, in the event of ourwinding-up, the holders of the equity shares are entitled to be repaidthe amount of paid up capital or credited as paid up on those equity shares.All surplus assets after payments to the employees, statutory creditors,secured and unsecured creditors and holders of any preference shares shall bepaid to holders of equity shares in proportion to the amount paid up on suchshares at the commencement of the winding-up.

**Buy-back**

Pursuant to Section 77A of the Indian CompaniesAct and the SEBI (Buyback of Securities) Regulations, 1998, as amended, alisted company may buy its equity shares out of its free reserves or securitiespremium account or the proceeds of any equity shares or other specifiedsecurities. No buy-back of any kind of shares or other specifiedsecurities can be made out of the proceeds of an earlier issue of the same kindof securities. If such buy-back constitutes more than 10% of the total paid-upequity capital and free reserves of the company, it shall require the approvalof at least 75% of the shareholders present and voting at a general meeting ofshareholders of such company. A board resolution will constitute sufficientcorporate authorization for a buy-back within the above limit. A company cannotbuy-back shares representing more than 25% of its paid-up equitycapital in a single financial year. Further, the total consideration for thebuy-back cannot exceed 25% of the paid-up capital and free reservesof a company.

A company is not permitted to make any further issue(including a rights issue) of the same kind of shares or other specifiedsecurities within a period of six months of such buy-back, except by way of a 

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bonus issue or indischarge of its existing obligations such as conversion of warrants, stockoption schemes, sweat equity or conversion of preference shares or debentures intoequity.

The buy-back may be (a) from the existingsecurity holders on a proportionate basis through a tender offer; (b) fromthe open market through (i) a book-building process or (ii) the stockexchange; (c) from odd-lot holders or (d) by purchasing thesecurities issued to the employees pursuant to a stock option plan or similarscheme. Buy-backs through negotiated deals, whether on a stock exchange orthrough spot transactions or through any other private arrangements, are notpermitted.

Any ADS holder mayparticipate in a company’s purchase of its own shares by withdrawing its ADSsfrom the depositary facility, acquiring equity shares upon the withdrawal andselling such shares back to the company. We cannot guarantee that equity sharesoffered by an ADS investor in any buy-back of shares by us will be accepted byus. The regulatory approvals required for ADS holders to participate in a buy-backare not entirely clear, and ADS investors are advised to consult their legaladvisors prior to participating in any buy-back of shares by us, includingadvice related to any related regulatory approvals and tax issues.

**Alteration ofShareholder Rights**

Under the Indian Companies Act, and subject to theprovisions of the articles of association of a company and the relevant rules asissued by the Department of Company Affairs, the rights of any class ofshareholders can be altered or varied (i) with the consent in writing ofthe holders of not less than three-fourths of the issued shares of thatclass; or (ii) by the special resolution passed at a separate meeting ofthe holders of the issued shares of that class. In the absence of any suchprovision in the articles, such alteration or variation is permitted as long asit is not prohibited by the agreement governing the issue of the shares of thatclass. Under the Indian Companies Act, the articles may be amended by a specialresolution of the shareholders..

Our Articles can beamended if shareholders holding not less than 75% of the equity shares (who areentitled to vote) cast votes in favor of each such amendment of the Articlesand which shall include the favorable votes of each of the AKP Group, the GKPGroup, the NKP Group and General Atlantic, so long as each of the respectivegroups hold at least 10% of the equity shares and vote on each amendment(s).

**Limitation on theRights to Own Securities**

The limitation on therights to own securities of Indian companies, including the rights ofnon-resident or foreign shareholders to hold securities, are discussed below in“Item 10.D. Additional Information—Exchange Controls”.

**Takeover Code**

The SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, asamended, or the Takeover Code, prescribes certain thresholds of securitiesownership or trigger points that give rise to certain obligations thereunder.The Takeover Code requires disclosure of the aggregate shareholding or votingrights in a listed company by any acquirer who acquires shares or voting rightswhich (taken together with shares or voting rights, if any, already held bysuch acquirer) entitle him to more than 5%, 10%, 14%, 54% or 74% of the sharesor voting rights in that company. The Takeover Code also requires (unlessspecifically exempted) the making of an open offer to acquire an additional 20%of the voting capital of a company in the following circumstances:

(a)   anyacquirer, who together with persons acting in concert with such acquirer,acquires or agrees to acquire 15% or more of the equity shares or voting rightsin the company;

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(b)   anyacquirer who, together with persons acting in concert with such acquirer, hasacquired 15% or more, but less than 55%, of the equity shares or voting rightsin the shares of the company and who acquires additional shares or votingrights entitling such acquirer to exercise more than 5% of the voting rights inany financial year ending March 31;

(c)   anyacquirer who, together with persons acting in concert with such acquirer, hasacquired 55% or more, but less than 75%, of the shares or voting rights in theshares of the company (or, where the company concerned had obtained the initiallisting of its shares by making an offer of at least 10% of the issue size tothe public pursuant to Rule 19(2)(b) of the SCRR, less than 90% of theshares or voting rights in the company) and who acquires any additional shareor voting right;

(d)   anyacquirer who, together with persons acting in concert with such acquirer, holds55% or more, but less than 75%, of the shares or voting rights of the company(or, where the company concerned had obtained the initial listing of its sharesby making an offer of at least 10% of the issue size to the public pursuant to Rule 19(2)(b)of the SCRR, less than 90% of the shares or voting rights in the company),intends to consolidate its holdings while ensuring that the public shareholdingin the target company does not fall below the minimum level permitted by thelisting agreement with the stock exchanges; or

(e)   anyacquirer who acquires control over the company (directly or indirectly),irrespective of whether there has been any acquisition of shares or votingrights in the company.

However, in the event a public offer is made pursuantto paragraph (d) above, the minimum size of the public offer to acquirethe voting capital of the target company is required to be the lesser of (i) 20%of the voting capital of the company; or (ii) such other lesser percentageof the voting capital of the company as would, assuming full subscription ofthe offer, enable the acquirer, together with persons acting in concert withhim, to increase his holding to the maximum level possible, which is consistentwith the target company meeting the requirements of minimum public shareholdingas set forth in the listing agreement.

Further, if the acquisition of voting capital of atarget company made by an acquirer pursuant to a public offer results in thepublic shareholding in the target company being reduced below the minimum levelrequired in the listing agreements with the stock exchanges for the purpose ofcontinuous listing, the acquirer is required to take necessary steps tofacilitate compliance of the target company with the relevant provisions of thelisting agreement within the time period mentioned in the listing agreements.

The Takeover Codesets out the contents of the required public announcements as well as theminimum offer price. The minimum offer price depends on whether the shares ofthe company are “frequently” or “infrequently” traded (as defined in theTakeover Code). In case the shares of the company are frequently traded, theoffer price shall be the higher of:

·       thenegotiated price under the agreement for the acquisition of shares in thecompany;

·       thehighest price paid by the acquirer or persons acting in concert with him forany acquisitions, including through an allotment in a public, preferential orrights issue, during the 26-week period prior to the date of publicannouncement;

·       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 ofdirectors of the target company in the offer process have also been specified.Acquirers making a public offer also must deposit in an escrow account a 

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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 conditionsspecified in the Takeover Code, exempts certain specified acquisitions from therequirement of making a public offer, including, among others, the acquisitionof shares (1) by allotment in a public issue or a rights issue; (2) byunderwriters pursuant to an underwriting agreement; (3) by registeredstockbrokers in the ordinary course of business on behalf of clients; (4) inunlisted companies; (5) pursuant to a scheme of reconstruction oramalgamation; (6) pursuant to a scheme under Section 18 of the SickIndustries Companies (Special Provisions) Act, 1985; (7) resulting from,inter se transfers between companies belonging to the same group of companiesas defined in the Monopolies and Restrictive Trade Practices Act, 1969, asamended or between relatives or between “qualifying promoters” of a publiclylisted company or between qualifying Indian promoters and foreign collaboratorswho are shareholders; (8) by way of transmission through inheritance orsuccession; (9) resulting from transfers by Indian venture capital fundsor foreign venture capital investors registered with SEBI, to promoters of aventure capital undertaking or venture capital undertaking pursuant to anagreement between such venture capital funds or foreign venture capitalinvestors with such promoters or venture capital undertaking; (10) by theGovernment controlled companies, unless such acquisition is made pursuant to adisinvestment process undertaken by the Government or a state government; (11)change in control by takeover/restoration of the management of the borrowercompany by the secured creditor in terms of the Securitisation andReconstruction of Financial Assets and Enforcement of Security Interest Act,2002; (12) acquisition of shares by a person in exchange of equity sharesreceived under a public offer made under the Takeover Code; and (13) in termsof guidelines and regulations relating to delisting of securities as specifiedby SEBI. The Takeover Code does not apply to acquisitions in the ordinarycourse of business by public financial institutions either on their own accountor as a pledgee. An application may also be filed with the takeover panelseeking exception from the open offer requirements of the Takeover Code.

In addition, the provisionsof the Takeover Code relating to making of a public offer do not apply to theacquisition of American Depository Receipts or Global Depository Receipts solong as they are not converted into equity shares carrying voting rights.

**Provisions onChanges in Capital**

Our authorized capital canbe altered by an ordinary resolution of the shareholders in a general meeting.The additional issue of equity shares is subject to the pre-emptiverights of the shareholders. In addition, a company may increase its sharecapital, consolidate its share capital into shares of larger face value thanits existing shares or sub-divided its shares by reducing their par value,subject to an ordinary resolution of the shareholders in a general meeting.

**DiscriminatoryProvisions in the Articles**

There are no provisions inour Articles discriminating against any existing or prospective shareholder asa result of such shareholder owning a substantial number of shares.

**10.C.Material Contracts**

Other than describedelsewhere in the document herein, we have not entered into any materialcontracts in the two years preceding the date of this Annual Report, other thancontracts entered into in the ordinary course of business.

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**10.D. ExchangeControls**

The subscription, purchaseand sale of shares of an Indian company are governed by various Indian lawsrestricting the issuance of shares by the company to non-residents orsubsequent transfer of shares by or to non-residents. These restrictions havebeen relaxed in recent years. Set forth below is a summary of various forms ofinvestment, and the restrictions applicable to each, including the requirementsunder Indian law applicable to this issue of ADSs.

**Foreign DirectInvestment**

*Issues by theCompany*

Over a period of time, theGovernment of India has relaxed the restrictions on foreign investment. Subjectto certain conditions, under current regulations, foreign direct investment inmost industry sectors does not require prior approval of the Foreign InvestmentPromotion Board or the Reserve Bank of India, if the percentage of equityholding by all foreign investors does not exceed specified industry-specificthresholds. These conditions include certain minimum pricing requirements andownership restrictions based on the nature of the foreign investor. Purchasesby foreign investors of ADSs are treated as direct foreign investment in theequity issued by Indian companies for such offerings. Foreign investment of upto 100% of our share capital is currently permitted in the IT industry.

*SubsequentTransfers*

Restrictions for subsequent transfers of shares ofIndian companies between residents and non-residents were relaxed significantlyas of October 2004. The RBI has granted general permission to personsresident outside India to transfer shares and convertible debentures held bythem to an Indian resident, subject to compliance with certain terms andconditions and reporting requirements. As a result, for a transfer between aresident and a non-resident of securities of an Indian company in the ITsector, such as ours, no prior approval of either the RBI or the Government ofIndia is required, as long as certain conditions are met. These conditionsinclude compliance, as applicable, with pricing guidelines, the Takeover Code,and the ownership restrictions based on the nature of the foreign investor. Ifa sale or purchase is conducted on a stock exchange at prevailing marketprices, the pricing guidelines will be deemed satisfied. For off-market,negotiated transactions, the guidelines require a transaction price based onthe prevailing market price.

Transfers between twonon-residents by way of sale or gifts are not subject to RBI approvals orpricing restrictions.

**PortfolioInvestment by Non-Resident Indians**

Investments by persons of Indian nationality or originresiding outside of India, or Non Resident Indians (NRIs), or registeredForeign Institutional Investors, or FIIs, made through a stock exchange areknown as portfolio investments, or Portfolio Investments.

NRIs are permitted to make Portfolio Investments onfavorable tax and other terms under India’s Portfolio Investment Scheme. Underthe scheme, an NRI can purchase up to 5% of the paid up share capital of anIndian company, subject to the condition that the aggregate paid up sharecapital purchased by all NRIs through Portfolio Investments does not exceed 10%of the paid up capital of the company. This limit may be increased up to 24% bypassing a special resolution of its members. We have not obtained shareholderapproval for our equity shares to be owned by the NRIs beyond the aforesaid 10%limit. In addition to Portfolio Investments in Indian companies, NRIs may alsomake foreign direct investments in Indian companies pursuant to the foreigndirect investment route discussed above.

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Overseas corporate bodies,or OCBs, i.e., entities in which at least 60% is owned by NRIs, were previouslypermitted to invest on favorable terms under the Portfolio Investment Scheme.With effect from September 16, 2003, OCBs are no longer recognized by theRBI as an eligible class of investors in India. Accordingly, OCBs will not beeligible to subscribe for ADSs.

**Investment byForeign Institutional Investors**

Currently, FIIs such as pension funds, investmenttrusts, insurance or reinsurance companies, international or multilateralorganizations and asset management companies, are eligible to make PortfolioInvestments on favorable terms in all the securities traded on the primary andsecondary markets in India. Investment by FIIs in certain sectors is prohibited.

The Securities and Exchange Board of India (ForeignInstitutional Investors) Regulations, 1995 provide that no single FII may holdmore than 10% of a company’s total issued capital in its own name, and where anFII is investing 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 an Indian company of all FIIstogether with their sub-accounts is subject to a cap of 24% of the total issuedcapital of the company, which may be increased up to the percentage of sectoralcap on FDI in respect of the said company pursuant to a resolution of the boardof directors of the company and the approval of the shareholders of the companyby a special resolution. For arriving at the ceiling on holdings of FIIs,investments made by FIIs through ADRs are not included. We have not obtainedshareholder approval for our equity shares to be owned by FIIs beyond theaforesaid 24% limit.

There is uncertainty underIndian law about the tax regime applicable to FIIs that hold and trade ADSs.FIIs are urged to consult with their Indian legal and tax advisers about therelationship between the FII guidelines and the ADSs and any equity shareswithdrawn upon surrender of the ADSs.

**ADSs**

*Issue of ADSs*

Subject to the fulfillment of certain conditions,including compliance with the Issue of Foreign Currency Convertible Bonds andOrdinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, or the1993 Regulations, as amended from time to time, Indian companies issuing ADSsare not required to obtain the prior approval of the Ministry of Finance or theRBI, except in certain cases. An Indian company issuing ADSs must comply withcertain reporting requirements specified by the RBI.

On August 31, 2005the Government of India amended the 1993 Regulations to provide a pricing floorfor Global Depositary Receipt (which includes ADSs) and Foreign CurrencyConvertible Bond issues. Under the revised regulations, the offer price of theGDSs/ADSs cannot be less than the higher of the average of the weekly high andlow of the closing prices of the shares as quoted on the BSE or the NSE during (a) thesix months and (b) the two weeks immediately preceding the date that is 30days prior to the date on which the shareholder meeting was held to considerthe proposed issue.

*Fungibility of ADSs*

As per thedirections issued by the RBI on the two-way fungibility of ADSs, a personresident outside India is permitted to purchase, through a registered stockbroker in India, shares of an Indian company for the purposes of converting thesame into ADSs, subject, *inter alia*, tothe following conditions:

·       theshares of the Indian company are purchased on a recognized stock exchange inIndia;

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

·       theIndian company has authorized the custodian to accept shares from non-residentinvestors for reissuance of ADSs;

·       thenumber of shares of the Indian company so purchased does not exceed the ADSsconverted into underlying shares and shall be subject to sectoral caps, asapplicable; and

·       compliance with theprovisions of the 1993 Regulations.

*Sponsored ADSFacilities*

By notificationdated November 23, 2002, the RBI has permitted existing shareholders ofIndian companies to sell their shares through the issue of ADSs against theblock of existing shares of an Indian company, subject to the followingconditions:

·       thefacility to sell the shares will be available *pari passu*toall categories of shareholders;

·       thesponsoring company whose shareholders propose to divest existing shares in theoverseas market through the issue of ADSs will give an option to all itsshareholders indicating the number of shares to be divested and the mechanismof determining the price under the applicable ADS norms. If the shares offeredfor divestment are more than the pre-specified number to be divested, shareswould be accepted from the existing shareholders in proportion to theirexisting shareholdings;

·       theproposal for divestment of the shares will have to be approved by a specialresolution of the shareholders of the Indian company in a general meeting;

·       theproceeds of the ADS issue raised abroad shall be repatriated to India within aperiod of one month from the closing of the issue. However, the proceeds of theADS offering can also be retained abroad to meet the future foreign exchangerequirements of the company; and

·       theissue-related expenses in relation to the public issue of ADSs under thisscheme will be subject to a ceiling of 7% of the issue size, in the case ofpublic issues, and 2% of the issue size, in the case of private placements.Issue-related expenses will include underwriting commissions and charges, legalexpenses and reimbursable expenses. Issue-related expenses shall be passed onto shareholders participating in the sponsored issue on a pro-rata basis.Issue-related expenses beyond the ceiling will require the approval of the RBI.

The issuer is alsorequired to furnish a report to the RBI specifying the details of the offering,including the amount raised through the offering, the number of ADSs issued,the underlying shares offered, the percentage of foreign equity in the issuerrepresented by the ADSs, details of issue parameters and details ofrepatriation within 30 days of such issue.

*Transfer of ADSsand Surrender of ADSs*

A person resident outsideIndia may transfer the ADSs held in Indian companies to another person residentoutside India without prior approval of Government of India or the RBI. Otherthan mutual funds that may purchase ADSs subject to terms and conditions specifiedby the RBI, a person resident in India is not permitted to hold ADSs of anIndian company, except in connection with the exercise of stock options. An ADSholder is permitted to surrender the ADSs held by him in an Indian company andto receive the underlying equity shares under the terms of the depositagreement.

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**10.E. Taxation**

**Indian Taxation**

*General*

The following summary is not intended to constitute acomplete analysis of the individual tax consequences to non-resident holders oremployees under Indian law for the acquisition, ownership and sale of ADSs andequity shares. This summary is based on the law and practice of the IndianIncome-tax Act, 1961, or Income-Tax Act, including the special tax regimecontained in Sections 115AC and 115ACA of the Income-tax Act read with theIssue of 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. The Income-tax Act is amended every year by the Finance Act of therelevant year. Some or all of the tax consequences of Sections 115AC and 115ACAmay be amended or changed by future amendments to the Income-tax Act.

**EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER ORITS OWN TAX ADVISORS WITH RESPECT TO INDIAN AND LOCAL TAX CONSEQUENCES OFACQUIRING, OWNING OR DISPOSING OF EQUITY SHARES OR ADSs.**

***Levy ofIncome Tax***

In India, tax is chargedon the basis of the residential status of a person (under terms of theprovisions of the Indian Income Tax Act) on his/her total income in theprevious year, at the rates as specified in the Finance Act as applicable inthe relevant assessment year. A period of 12 months commencing on the first dayof April every year is referred to as an Assessment Year. Generally, thePrevious Year means the financial year immediately preceding the AssessmentYear. Tax is paid in the Assessment Year on income earned in the Previous Year.In general, in the case of a person who is “resident” in India in a previousyear, his/her global income is subject to tax in India. In the case of a personwho is “non-resident” in India, only the income that is received or deemed tobe received in India or the income that accrues or arises or is deemed toaccrue or arise to such person in India is subject to tax in India. In the caseof a person who is “not ordinarily resident” in India, the income chargeable totax is the same as persons who are resident and ordinarily resident except thatthe income which accrues or arises outside India is not included in his totalincome unless it is derived from a business controlled from India.

***Residence***

For purposes of the Income-tax Act, an individual isconsidered to be a resident of India during any fiscal year if he or she is inIndia in that year for:

182 days or more in a fiscal year

OR

60 days or more in that fiscal year if the person hasbeen present in India for 365 days or more in the preceding four years.

However, where the person concerned is a person ofIndian origin, or a person who has left India for employment outside India, theperson will be considered a resident of India only when present in India for aperiod of 182 days in the previous year, even though the person has beenpresent in India for 365 days or more in the preceding four years.

An Individual would be considered “not ordinarilyresident” if he / she is resident in India in a particular Previous Year buthas been a non-resident in India for a period of 9 out of 10 years before thatyear, OR has been present in India for 729 days or less in the 7 years previousto that year.

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A company is a resident ofIndia if it is incorporated in India or the control and the management of itsaffairs is situated wholly in India. Individuals and companies that are notresidents of India would be treated as non-residents for purposes of theIncome-tax Act.

***Taxation of Distributions***

Currently dividend income is exempt from tax for allshareholders (whether resident in India or not). However, the company declaring/distributingdividends is required to pay, in addition to corporate tax, a tax on dividendsdistributed, called dividend distribution tax at the rate of 14.025% includinga surcharge of 10% on the total amounts distributed as dividend and an educationsurcharge at the rate of 2% of such tax and surcharge.

However with effect from the tax year beginning April 1,2007, the rate of dividend distribution tax has increased to 16.995% includinga surcharge of 10% on the total amounts distributed as dividend and aneducation and a senior education cess at the rate of 2% and 1% respectively ofsuch tax and surcharge.

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

***Taxation of Capital Gains***

The following is a brief summary of capital gainstaxation of non-resident holders and resident employees relating to the sale ofADSs and equity shares received upon conversion of ADSs. The relevantprovisions are contained mainly in sections 45, 47(vii)(a), 115AC and 115ACA,of the Income-tax Act, in conjunction with the Issue of Foreign CurrencyConvertible Bonds and Ordinary Shares Scheme.

Under the Income-tax Act, capital gains can be of twotypes, “long term capital gain” or “short term capital gain”. Normally, gainsarising on the sale of capital assets held for more than 36 months areconsidered long term capital gains and gains arising on the sale of capitalassets held for 36 months or less, are considered short term capital gains.However, gains arising from the sale of a capital asset, being shares held in acompany for more than 12 months (measured from the date of advice by adepositary to a Custodian of the delivery of the shares in exchange for ADS)are considered long term capital gains. Gains arising from the sale of sharesheld for a period of twelve months or less are considered as short term capitalgains.

Capital gains aretaxed as follows:

·       Gainsfrom a sale of ADSs outside India, by a non-resident to another non-residentare not taxable in India.

·       Conversionof the ADS into the underlying shares is not taxable in India.

Pursuant to Section 115AC of the Income-tax Actread with the provisions of the 1993 Regulations, long term capital gainsrealized on sale of ADSs (not covered above) will be subject to tax at the rateof 10% excluding the applicable general surcharge and education surcharge.Where the beneficial holder of the ADS is an individual the tax shall beincreased by a 10 % general surcharge (if the total income is in excess of Rs.1,000,000 during the previous year) and education cess of 2% and senioreducation cess 1% on tax and general surcharge. Where the beneficial holder isa non-resident company, the above amount of tax shall be increased by a 2.5%general surcharge and 2% and 1% education cess and senior education cessrespectively. This tax is levied in India by withholding the tax at the aboverates.

Any income arising from the transfer of equity sharesheld as long term capital asset that is subject to securities transaction tax,which is effective from October 1, 2004, shall be exempt from long termcapital gains tax. Any income arising from the transfer of equity shares heldas a short term capital asset, that is subject to securities transaction tax(effective from October 1, 2004), shall be taxed at a rate of 10% plus a 

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general surcharge of 10%for individuals having total income in excess of Rs. 1,000,000 during theprevious year or 2.5% in case of foreign companies, and an additional 2% and 1%education cess and senior education cess respectively on tax and surchargeamount.

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 the transfer of shares held in anIndian company may be characterized as trading income, on the basis of variousfactors, including the purpose of the holding by the investor, period of holding,the manner and method of investment and transfer, etc. Where shares are heldunder an employee stock option scheme, it is unlikely that the income fromtransfer of these shares will be characterized as 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 senior 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 senior education cess respectively, on trading orbusiness income.

***Minimum Alternate Tax (MAT)***

Pursuant to the changes introduced by the FinanceBill, 2007, the corporate shareholders may be subject to a Minimum AlternateTax (“MAT”). As per the Income-tax Act, if the tax payable by any company(including a foreign company) is less than 10 % of its book profits, it will berequired to pay MAT which will be deemed to be 11.33% of such book profits, incase of a foreign company.

Further, the provisions ofMAT 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 senior education cess at the rate of 2% and 1%respectively of such tax and surcharge) or tax computed as per normalprovisions, whichever is higher.

***Securities Transaction Tax***

The Finance Act, 2004 hasintroduced certain new provisions with regard to taxes on the sale and purchaseof securities, including equity shares. On and after October 1, 2004, inrespect of a sale and purchase of equity shares entered into on a recognizedstock exchange, (i) both the buyer and seller are required to pay each aSecurities Transaction Tax, or STT at the rate of 0.10% of the transactionvalue of the securities, if a transaction is a delivery based transaction i.e.the transaction involves actual delivery or transfer of shares; (ii) theseller of the shares is required to pay a STT at the rate of 0.02% of thetransaction value of the securities, if the transaction is a non-delivery basedtransaction, i.e. a transaction settled without taking delivery of the shares.The Finance Bill, 2007 has increased the rate to 0.125% for delivery based transactionsand 0.025% for non-delivery based transactions. The STT can be set-off againstbusiness income tax, in accordance with the provisions of the Income-tax Act,provided the gains on the transactions are taxed as business income and not ascapital gains.

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***Mode of Computation of Capital Gain***

Capital gains tax is computed by applying theappropriate tax rate on the difference between the sale price and the purchaseprice of the capital asset. For the purpose of determining the amount ofcapital gains arising from the sale of shares, converted on surrender of theADS, the cost of acquisition of such shares shall be prevailing price of sharesat the Indian Stock Exchanges, on the date on which the depositary advises theCustodian of the release of such shares on such surrender of the ADS and notthe acquisition cost 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 senior education cess of 1% in case of a foreign company,and 30%, excluding the applicable general surcharge and education and senioreducation 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 senior education cess respectively ontax and general surcharge. In case of persons other than individuals andcompanies, the rate of tax would be 30% increased by a 10% surcharge, and a 2%and 1% education and senior education cess respectively.

***Withholding tax on capital gains***

Any taxable gain realizedby a non-resident on the sale of ADSs or equity shares is to be withheld at thesource by the buyer. However, as per the provisions of section 196D(2) ofthe Income-tax Act, no withholding tax is required to be deducted from anyincome by way of capital gains arising to Foreign Institutional Investors asdefined in section 115AD of the Income-tax Act on the transfer of securitiesdefined therein, where the investment is made under the FII regime.

***Buy-back of securities***

Indian companies are notsubject to any tax on the buy-back of their shares from its shareholders inaccordance with the provisions of Section 77A of the Companies Act, 1956.However, the shareholders will be taxed on any resulting gains. We would berequired to deduct tax at source according to the capital gains tax liabilityof a non-resident shareholder.

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***Stamp Duty and Transfer Tax***

Upon issuance of theequity shares underlying our ADSs, we will be required to pay a stamp duty of0.1% per share of the issue price of the underlying equity shares. A transferof ADSs is not subject to Indian stamp duty. However, in the event that aholder of ADS wishes to enforce its rights under the ADS, and bring theinstrument into India for this purpose, the holder of ADS may be required topay stamp duty on the ADS at the applicable rate. Shares must be traded indematerialized form and the transfer of shares in dematerialized form iscurrently not subject to stamp duty.

***Wealth Tax***

The holding of the ADSsand the holding of underlying equity shares by resident and non-residentholders is not subject to Indian wealth tax. Non-resident holders are advisedto consult their own tax advisors regarding this issue.

***Gift Tax and Estate Duty***

Currently, there are nogift taxes or estate duties applicable to the gifting or inheritance of ADSs orequity shares. However, these taxes and duties could be restored in the future.Non-resident holders are advised to consult their own tax advisors regardingthis issue.

***Service tax***

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

**U.S. Federal IncomeTax Considerations**

The following is a discussion of certain material U.S.Federal income tax consequences of purchasing, owning and disposing of equityshares and ADSs. This discussion does not purport to be a comprehensivedescription of all of the U.S. tax considerations that may be relevant to aparticular person’s decision to acquire the equity shares or ADSs including anystate, local or non-U.S. tax consequences of the ownership of the equity sharesor ADSs.

**EACH HOLDER OF ADSsSHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL, STATE,LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OFEQUITY SHARES AND ADSs IN HIS OR HER PARTICULAR SITUATION.**

This discussionapplies to only to those investors that hold equity shares or ADSs as capitalassets for U.S. tax purposes (generally, for investment). This section does notapply to holders that may be subject to special tax rules, including but notlimited to:

·       adealer in securities or currencies;

·       atrader in securities that elects to use a mark-to-market method of accountingfor your securities holdings;

·       abank, insurance company or other financial institution;

·       atax-exempt organization;

·       aholder liable for alternative minimum tax;

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·       aholder that actually or constructively owns 10% or more by voting power orvalue of our stock;

·       aholder that holds equity shares or ADSs as part of a straddle, hedging orconversion transaction; or

·       aU.S. holder whose functional currency is not the U.S. Dollar.

This section is based on the U.S. Internal RevenueCode of 1986, as amended, or the Code, its legislative history, existing andproposed U.S. Treasury regulations, published rulings and other administrativeguidance of the U.S. Internal Revenue Service and court decisions, all as ineffect on the date hereof. These laws are subject to change or differentinterpretation by the U.S. Internal Revenue Service or a court, possibly on aretroactive basis.

You are a “U.S.holder” if you are a beneficial owner of equity shares or ADSs and you are:

·       acitizen or resident individual of the United States;

·       aU.S. domestic corporation, or other entity treated as a domestic corporationfor U.S. federal income tax purposes;

·       anestate whose income is subject to U.S. Federal income tax regardless of its source;or

·       atrust if a U.S. court can exercise primary supervision over the trust’sadministration and one or more U.S. persons are authorized to control allsubstantial decisions of the trust.

In addition, this discussion is limited to U.S.holders who are not resident in India for purposes of the DTAT between theUnited States and India.

If a partnership (including for this purpose anyentity treated as a partnership for U.S. tax purposes) is a beneficial owner ofthe equity shares or ADSs, the U.S. tax treatment of a partner in thepartnership generally will depend on the status of the partner and theactivities of the partnership. A holder of the equity shares or ADSs that is apartnership and partners in such a partnership should consult their own tax advisorsabout the U.S. federal income tax consequences of holding and disposing of theequity shares or ADSs.

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

For U.S. Federal income tax purposes, holders of ADSswill be treated as the owners of equity shares represented by such ADSs.

We believe that we willnot be a passive foreign investment company, or PFIC, for U.S. Federal incometax purposes for the current taxable year. However, we cannot assure you thatwe will not be considered a PFIC in the current or future years. Thedetermination whether or not we are a PFIC is a factual determination that isbased on the types of income we earn and the value of our assets and cannot bemade until the close of the applicable tax year. If we were currently or wereto become a PFIC, U.S. holders of equity shares or ADSs would be subject tospecial rules and a variety of potentially adverse tax consequences underthe Code.

*Taxation of Dividends*

*U.S.Holders.**  **Subject*to the PFIC rules referredto below, under the U.S. Federal income tax laws, if you are a U.S. holder, youmust include in your gross income the gross amount of any dividend paid by usout of our current or accumulated earnings and profits (as determined for U.S.Federal income tax purposes). You must include the amount of any Indian taxwithheld from the dividend payment in this gross amount even though you do notin fact receive it. The dividend is ordinary income that you must include inincome when you receive the dividend, actually or constructively. Dividendsreceived by an 

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individual taxpayer duringtaxable years beginning before January 1, 2011 will be taxed at a maximumrate of 15%, where certain holding period and other requirements are satisfied,if such dividends constitute qualified dividend income. Qualified dividendincome includes dividends paid by a Qualified Foreign Corporation, and webelieve that we are, and will continue to be, a Qualified Foreign Corporation.The U.S. Treasury has announced its intention to promulgate rules pursuantto which holders of ADSs and intermediaries through whom such securities areheld will be permitted to rely on certificates from issuers to establish thatdividends are treated as qualified dividends. Because such procedures have notyet been issued, it is not clear whether we will be able to comply with them.Holders of ADSs and equity shares should consult their own tax advisorsregarding the availability of the reduced dividend tax rate in light of theirown particular circumstances. Dividends will not be eligible for thedividends-received deduction generally allowed to U.S. corporations in respectof dividends received from other U.S. corporations.

The amount of the dividend distribution that you mustinclude in your income as a U.S. holder will be the U.S. Dollar value of theIndian rupee payments made, determined at the spot Indian rupee/U.S. Dollarexchange rate on the date the dividend distribution is includible in your income,regardless of whether the payment is in fact converted into U.S. Dollars. Ifthe foreign currency received as a dividend is not converted into U.S. dollarson the date of receipt, a U.S. Holder will have a basis in the foreign currencyequal to its U.S. dollar value on the date of receipt. Generally, any gain orloss resulting from currency exchange fluctuations during the period from thedate you include the dividend payment in income to the date you convert thepayment into U.S. Dollars will be treated as ordinary income or loss. The gainor loss generally will be income or loss from sources within the United Statesfor foreign tax credit limitation purposes. If we distribute non-cash propertyas a dividend, 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 fromUnited States sources, and the remainder will be income from non-United Statessources, for U.S. foreign tax credit purposes under special U.S. Federal incometax 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 accumulatedearnings and profits, as determined for U.S. federal income tax purposes, willbe treated as a non-taxable return of capital to the extent of your basis inthe equity shares and ADSs and thereafter as capital gain.

*Non-U.S. Holders.**  **Dividends*paid to non-U.S. holdersgenerally will not be subject to U.S. income tax unless the dividends are “effectivelyconnected” with your conduct of a trade or business within the United States,and the dividends are attributable to a permanent establishment (or in the caseof an individual, a fixed place of business) that you maintain in the UnitedStates if that is required by an applicable income tax treaty as a conditionfor subjecting you to U.S. taxation on a net income basis. In such cases you generallywill be taxed in the same manner as a U.S. holder, and will not be subject toU.S. Federal withholding tax. If you are a corporate non-U.S. holder, “effectivelyconnected” dividends may, under certain circumstances, be subject to anadditional “branch profits tax” at a 30% rate or a lower rate if you areeligible for the benefits of an income tax treaty that provides for a lowerrate.

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*Taxation of CapitalGains*

*U.S.Holders.**  **Subject*to the PFIC rules referredto below, if you are a U.S. holder and you sell or otherwise dispose of yourequity shares or ADSs, you will recognize capital gain or loss for U.S. Federalincome tax purposes equal to the difference between the U.S. Dollar value ofthe amount that you realize and your tax basis, determined in U.S. Dollars, inyour equity shares or ADSs. Prior to January 1, 2011, capital gains of anon-corporate U.S. holder are generally taxed at a maximum rate of 15% wherethe property is held for more than one year. The gain or loss will generally beincome or loss from sources within the United States for foreign tax creditlimitation purposes, unless it is attributable to an office or other fixedplace of business outside the United States and certain other conditions aremet. Your ability to deduct capital losses is subject to limitations.

Pursuant to recently-enacted legislation, a penalty inthe amount of $10,000 in the case of a natural person and $50,000 in any othercase is imposed on any taxpayer that fails to timely disclose its participationin a “reportable transaction” (as defined in Section 6011 of the Code). Ataxpayer that has participated in a “reportable transaction” during the taxyear must attach a disclosure statement to its U.S. Federal income tax return.A “reportable transaction” 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 than thespecified amount (*e.g.*, $50,000 in the case of ataxpayer that is an individual or trust). Prospective purchasers are urged toconsult their own tax advisors regarding the circumstances in which aninvestment in equity shares may result in a “reportable transaction” that isrequired to be disclosed to the IRS.

*Non-U.S. Holders.**  **If*you are a non-U.S. holder, youwill not be subject to U.S. federal income tax on gain recognized on the saleor other disposition of your equity shares or ADSs unless:

·       thegain is “effectively connected” with your conduct of a trade or business in theUnited States, and the gain is attributable to a permanent establishment (or inthe case of an individual, a fixed place of business) that you maintain in theUnited States if that is required by an applicable income tax treaty as acondition for subjecting you to U.S. taxation on a net income basis; or

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

In the first case, the non-U.S. holder will be taxedin the same manner as a U.S. holder. In the second case, the non-U.S. holderwill be subject to U.S. Federal income tax at a rate of 30% on the amount bywhich such the non-U.S. holder’s U.S.-source capital gains exceed such non-U.S.holder’s U.S.-source capital losses.

If you are a corporatenon-U.S. holder, “effectively connected” gains that you recognize may also,under certain circumstances, be subject to an additional “branch profits tax”at a 30% rate or at a lower rate if you are eligible for the benefits of anincome tax treaty that provides for a lower rate.

*PFIC Rules*

We believe that our equityshares and ADSs will not be treated as stock of a PFIC for U.S. federal incometax purposes for the current tax year. The determination of whether or not weare a PFIC is a factual determination that cannot be made until the close ofthe applicable tax year and that is based on the types of income we earn andthe value of our assets (including goodwill), both of which are subject tochange. In calculating goodwill for this purpose, we will value our totalassets based on the total market value, determined with reference to the thenmarket price of the equity shares and ADSs, and will make 

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determinationsregarding the amount of this value allocable to goodwill. Because thedetermination of goodwill will be based on the market price of the equityshares and ADSs, it is subject to change. It is possible that the U.S. InternalRevenue Service may challenge our valuation of our assets (including goodwill),which may result in our being classified as a PFIC. Thus, it is possible thatwe may be or become a PFIC in the current or any future taxable year and wecannot assure you that we will not be considered a PFIC in any such tax year.

Ingeneral, if you are a U.S. holder, we will be a PFIC with respect to you if forany taxable year in which you held the equity shares or ADSs:

·       atleast 75% of our gross income for the taxable year is passive income; or

·       atleast 50% of the value, determined on the basis of a quarterly average, of ourassets is attributable to assets that produce or are held for the production ofpassive income.

Passive income generallyincludes dividends, interest, royalties, rents (other than certain rents androyalties derived in the active conduct of a trade or business), the excess ofgains over losses from certain types of transactions in commodities, annuitiesand gains from assets that produce passive income. If a foreign corporationowns at least 25% by value of the stock of another corporation, the foreigncorporation is treated for purposes of the PFIC tests as owning itsproportionate share of the assets of the other corporation, as receivingdirectly its proportionate share of the other corporation’s income.

If weare treated as a PFIC, and you are a U.S. holder that did not make amark-to-market election, as described below, you will be subject to special rules withrespect to:

·       anygain you realize on the sale or other disposition of your equity shares orADSs; and

·       anyexcess distribution that we make to you (generally, any distributions to youduring a single taxable year that are greater than 125% of the average annualdistributions received by you in respect of the equity shares or ADSs duringthe three preceding taxable years or, if shorter, your holding period for theequity shares or ADSs).

Under these rules:

·       thegain or excess distribution will be allocated ratably over your holding periodfor the equity shares and ADSs;

·       theamount allocated to the taxable year in which you realized the gain or excessdistribution will be taxed as ordinary income;

·       theamount allocated to each prior year, with certain exceptions, will be taxed atthe highest tax rate in effect for that year; and

·       theinterest charge generally applicable to underpayments of tax will be imposed inrespect of the tax attributable to each such year.

Special rules applyfor calculating the amount of the foreign tax credit with respect to excessdistributions by a PFIC.

If you own shares in aPFIC that are treated as marketable stock, you may make a mark-to-marketelection. If you make this election in a timely fashion, you will not besubject to the PFIC rules described above. Instead, in general, you willinclude as ordinary income each year the excess, if any, of the fair marketvalue of your equity shares and ADSs at the end of the taxable year over youradjusted basis in your equity shares and ADSs. You will also be allowed to takean ordinary loss in respect of the excess, if any, of the adjusted basis ofyour equity shares and ADSs over the fair market value at the end of thetaxable year (but only to the extent of the net amount of previously includedincome as a result of the mark-to-market election). Your basis in the equityshares and ADSs will be adjusted to reflect any such income or loss amounts.

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We do not intend tofurnish you with the information that you would need in order to make a “qualifiedelecting fund” election to include your share of its income on a current basis.

If you own equity sharesor ADSs during any year that we are a PFIC, you must file U.S. Internal RevenueService Form 8621 that describes the distribution received on the equityshares or ADSs and the gain realized on the disposition of the equity shares orADSs. The reduced tax rate for dividend income, discussed in “Taxation ofDividends,” is not applicable to dividends paid by a PFIC.

*Information Reporting and Backup Withholding*

In general, informationreporting requirements will apply to dividends in respect of equity shares orADSs or the proceeds received on the sale, exchange or redemption of equityshares or ADSs paid within the United States (and, in certain cases, outsidethe United States) to U.S. holders other than certain exempt recipients, suchas corporations, and backup withholding tax at the rate of 28% may apply tosuch amounts if the U.S. holder fails to provide an accurate taxpayeridentification number (or otherwise establishes, in the manner provided by law,an exemption from backup withholding) or to report dividends required to beshown on the U.S. holder’s U.S. Federal income tax returns.

Backup withholding is notan additional income tax, and the amount of any backup withholding from apayment to a U.S. holder will be allowed as credit against the U.S. holder’sU.S. Federal income tax liability provided that the appropriate returns arefiled.

A Non-U.S. holdergenerally may eliminate the requirement for information reporting and backupwithholding by providing certification of its foreign status to the payor,under penalties of perjury, on IRS Form W-8BEN.

**10.F. Dividends and paying agents**

Not applicable

**10.G. Statement by experts**

Not applicable

**10.H. Documents on display**

This report and other informationfiled or to be filed by us can be inspected and copied at prescribed rates atthe public reference facilities maintained by the SEC at:

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

The SEC maintains awebsite at www.sec.gov that contains reports, proxy and information statements,and other information regarding registrants that make electronic filings withthe SEC using its EDGAR system.

Our periodic reports andother information may also be inspected at the offices of the New York StockExchange located at 20 Broad Street, New York, New York 10005.

Additionally, documentsreferred to in this Form 20-F may be inspected at our corporateoffice which is located at Akruti Softech Park, MIDC Cross Road No. 21,Andheri (E), Mumbai-400 093, India.

**10.I. Subsidiaryinformation**

Not applicable

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**ITEM 11. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

*General*

Market risk is the loss of future earnings, orreduction in fair value or future cash flows, that may result from a change inthe price of a financial instrument. The value of a financial instrument maychange as a result of changes in interest rates, foreign currency exchangerates, equity prices and other market changes that affect market risk sensitiveinstruments. Market risk is attributable to all market sensitive financialinstruments including foreign currency receivables and payables.

Our exposure to marketrisk is a function of our revenue and expense generating activities in foreigncurrency, the activity of investment in securities and liquid mutual fund unitsand the results of our hedging strategies for foreign currency exposures. Theobjective of market risk management is to avoid excessive exposure of ourearnings and equity to loss.

***Risk Management Procedures***

We manage market riskthrough treasury operations. Our market risk objectives and policies areapproved by our senior management and board of directors. The activities oftreasury operations include management of cash resources and investment insecurities and liquid mutual fund units, implementing hedging strategies forforeign currency exposures, borrowing strategies, and ensuring compliance withmarket risk limits and policies.

***Components of Market Risk***

*ExchangeRate Risk.**  *Ourexposure to market risk arises principally from exchange rate risk. We transacta major portion of our business in foreign currencies, particularly the U.S.dollar. The exchange rate between the rupee and the dollar has changedsubstantially in recent years and may fluctuate substantially in the future.The results of our operations can be adversely affected as the rupee fluctuatesagainst the dollar. Our exchange rate risk primarily arises from our foreigncurrency revenues, receivables, payables and other foreign currency assets andliabilities.

We have sought to reduce the effect of exchange ratefluctuations on our operating results by entering into foreign exchange forwardcontracts. As of December 31, 2005, we had outstanding forward contractsof $77.0 million. As of December 31, 2006, we had outstanding forwardcontracts of $182.6 million. These contracts typically mature withintwelve 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 exchange currencyrisks. The policies of the Reserve Bank of India may change from time to timewhich may limit our ability to hedge our foreign currency exposures adequately.In addition, any such contracts may not perform adequately as a hedgingmechanism. We may, in the future, adopt more active hedging policies.

*InterestRate Risk.**  *Oursurplus cash resources are typically invested in liquid mutual fund units,units in other debt mutual funds in India, U.S. municipal bonds and sweepfunds. These investments are exposed to interest rate risk whereby any increasein interest rates may decrease the fair value of the investments. We attempt toreduce this risk by investing in funds with shorter durations and by adequatelydiversifying our investments.

*Fair Value.**  *The fair value of our market rate risk sensitiveinstruments approximates their carrying value.

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**ITEM12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

Not applicable

**PART II**

**ITEM13.**         DEFAULTS, DIVIDENDARREARAGES AND DELINQUENCIES

Not applicable

**ITEM14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

**Modification in the rights 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 to enable the Company to issue up to 2,000,000 ADR linked stockoptions to the employees of the Company as well as its subsidiaries.Accordingly, the amended plan, i.e., “Patni ESOP 2003- Revised 2006” hascome into force with effect from June 21, 2006.

**Use of proceeds**

In our initial offering ofour ADSs, completed on December 8, 2005, we issued 6,156,250 ADSs,representing 12,312,500 equity shares of Rs. 2 each, to an underwritingsyndicate (including the underwriters’ over-allotment option of 1,031,250 ADSsrepresenting 2,062,500 equity shares) at an initial offering price of $20.34per ADS pursuant to a registration statement filed on Form F-1 (FileNo.333-129771) with the SEC. The managing underwriters were Goldman Sachs(Asia) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and ABNAMRO Rothschild LLC. We received approximately $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 31,2006, US$25 million had been utilized for capital expenditure for officefacilities and the balance $92 million remained as cash and cash equivalentspending utilization.

**ITEM 15T. CONTROLS AND PROCEDURES**

**Disclosure controls and procedures**

Based on their evaluationas of December 31, 2006, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures asdefined in Rules 13a-15 and 15d-15 under theSecurities Exchange Act of 1934 (the Exchange Act) are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms. See the certifications regarding disclosure controls and procedures setforth in Exhibits 12.1, 12.2, 13.1 and 13.2.

Our disclosure controlsand procedures, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance of achieving the objectives of the controlsystem. As such, disclosure controls and procedures or internal control systemsmay not prevent all error and all fraud. In addition, the design of a controlsystem must reflect the fact that there are resource constraints and thebenefits of controls must be considered relative to their costs and ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Because of the 

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inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, atour Company have been detected.

**Management’s Reporton Internal Controls over Financial Reporting**

***Internal controls over financial reporting***

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Internalcontrol over financial reporting as defined in Rule 13a-15(f) and15d-15(f) under the US Securities and Exchange Act of 1934, asamended.

The internalcontrol over financial reporting was designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles in the United States of America and includesthose policies and procedures that: 

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company; 

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles in the United States of America, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and 

·       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.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.

A material weakness in internal control over financialreporting is defined by the Public Company Accounting Oversight Board (“PCAOB”)Auditing Standard No. 2 as a control deficiency, or, combination ofcontrol deficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected.

Our management, including our Chief Executive Officerand Chief Financial Officer assessed the effectiveness of our internal controlover financial reporting as of December 31, 2006. In making thisassessment, our management used the criteria set forth by the Committee ofSponsoring Organizations (COSO) of the Treadway Commission in “InternalControl-Integrated Framework”. This assessment included an evaluation of thedesign and operation of internal controls over financial reporting.

Based on this assessment,the management concluded that, as of December 31, 2006, the Company hasmaintained effective internal controls over financial reporting

**Changes in internalcontrol over financial reporting**

During the period coveredby this Annual Report, there were no material changes in our internal controlover financial reporting. However, we have incorporated some process changes tostrengthen the controls that have materially affected or are reasonably likelyto materially affect our internal control over financial reporting. Forexample, in connection with an ongoing review of certain tax aspects relatingto our international operations by the tax authorities in the US, we have addeda control process of review by our senior management to ensure that properdocumentation is maintained with respect to our income tax return filings andwe have also recently appointed a VP Finance and Head Global Taxation tostrengthen our tax team.

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**ITEM 16. [RESERVED]**

**ITEM 16A. AUDITCOMMITTEE FINANCIAL EXPERT**

Our Audit Committeemembers are Mr. Arun Duggal (Chairman), Mr. Pradip Shah and Mr. Louis T.van den Boog, each of whom is an independent director pursuant to theapplicable rules of the Securities Exchange Commission and the NYSE. See “Item 6.Directors, Senior Management and Employees” for the experience andqualifications of the members of the Audit Committee. Our Board of Directorshas determined that Mr. Arun Duggal is an Audit Committee Financial Expertas defined in item 401(h) of Regulation S-K.

**ITEM 16B. CODE OFETHICS**

We have adopted a code ofbusiness ethics applicable to our executive officers, directors and all otheremployees. We will make available a copy of the code of ethics to any person,without charge, if a written request is made to our Company Secretary at ourcorporate office at Akruti Softech Park, MIDC Cross Road No.21 Andheri (E),Mumbai 400 093, India. The code is also available on our corporate website,www.patni.com.

**ITEM 16C. PRINCIPALACCOUNTANT FEES AND SERVICES**

The followingtable sets forth the fees for professional audit services rendered by KPMG forthe audit of the Company’s annual financial statements for 2005 and 2006, andfees billed for 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$)** | ** ** |
| 2005                                               |       |                           | 261,022    |                |       |                        | 4,825      |              |       | 35,267                       |       |                | 396,077    |   |   | 697,191 |   |
| 2006                                               |       |                           | 706,672    |                |       |                        | 2,293      |              |       | 580,000                      |       |                | 273,791    |   |   | 1,562,756 |   |

 

**Audit fees**

Audit fees represent feesfor professional services rendered for the audit of the standalone andconsolidated financial statements of the Company and its subsidiaries preparedin accordance with Indian GAAP and US GAAP.

**Audit-related fees**

Audit-related feesrepresent fees for professional services rendered in connection with Securitiesand Exchange Board of India requirements, requirements related to Indian StockExchanges and ESOP related matters.

**Tax fees**

Services providedprimarily consist of routine corporate tax advisory services.

**All other fees**

Services provided primarily consist of ADR supportfees, payroll related tax issues, transfer pricing study and quality review forISO 9001:2000, BS7799, CMMI/ISO.

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. For services other thanthose specified, approval would need to be obtained from the audit committeeprior to the performance of such services.

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**ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

We have not sought anyexemption from the listing standards for audit committees applicable to us as aforeign private issuer.

**ITEM 16E. PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES**

During fiscal 2006, therewere no purchases made by or on behalf of us or any affiliated purchaser ofshares of any class of our securities that are registered pursuant to Section 12of the US Securities and Exchange Act,1934, as amended.

**PART III**

**ITEM 17. FINANCIALSTATEMENTS**

See Item 18.

**ITEM18. FINANCIAL STATEMENTS**

The followingfinancial statement and auditors report for fiscal 2006 are incorporated hereinby reference and are included in this Item 18 of this report on Form 20-F:

·       Reportof Independent Registered Public Accounting Firm.

·       ConsolidatedBalance Sheets as of December 31, 2005 and 2006.

·       ConsolidatedStatements of Income for the years ended December 31, 2004, 2005 and 2006.

·       ConsolidatedStatements of Stockholders Equity and Comprehensive Income for the years ended December 31,2004, 2005 and 2006.

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2005 and2006.

·       Notes to the ConsolidatedFinancial Statements.

**ITEM19. 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                                                               |

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| *4.8 |   | Information Technology Services Agreement between  General Electric International Inc. and Patni Computer Systems Inc. dated  November 12, 2003 |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 8.1  |   | List of subsidiaries of the Registrant, see “Item 4.  Information on the Company—Organizational Structure”                            |
| 12.1 |   | Certification of Chief Executive Officer under  Section 302 of the Sarbanes Oxley Act                                                           |
| 12.2 |   | Certification of Chief Financial Officer under  Section 302 of the Sarbanes Oxley Act                                                           |
| 13.1 |   | Certification of Chief Executive Officer under  Section 906 of the Sarbanes Oxley Act                                                           |
| 13.2 |   | Certification of Chief Financial Officer under  Section 906 of the Sarbanes Oxley Act                                                           |

----

*                    Previouslyfiled on November 17, 2005 with the SEC on Form F-1 (FileNumber 333-129771)

#                 Incorporated byreference from Form S-8 (file number 33-137306)

123

----

**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.

|                          | For Patni Computer Systems Limited  |
|--------------------------|-------------------------------------|
|                     | By:                                 | /s/ NARENDRA K. PATNI |   |
|                     |                                | Narendra K. Patni |
|                     | * *                            | *Chief Executive Officer* |
|                     | For Patni Computer  Systems Limited |
|                     | By:                                 | /s/ SURJEET SINGH |   |
|                     |                                | Surjeet Singh |
|                     | * *                            | *Chief Financial Officer* |
| Mumbai, India            |                                |
| Date: June 29, 2007 |                                |

 

124

----

**Patni ComputerSystems Limited and subsidiariesConsolidated financial statementsContents**

| Report of Independent  Registered Public Accounting Firm                                                                                  |   | F-2         |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
| Consolidated  Balance Sheets as of December 31, 2005 and 2006                                                                        |   | F-3         |
| Consolidated  Statements of Income for the years ended December 31, 2004, 2005 and  2006                                             |   | F-4         |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income for the years  ended December 31, 2004, 2005 and 2006 |   | F-5         |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006                                     |   | F-6 to F-7  |
| Notes to the  Consolidated Financial Statements                                                                                           |   | F-8 to F-42 |

 

F-1

----

**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersPatni Computer SystemsLimited

We have audited the accompanying consolidated balancesheets of Patni Computer Systems Limited and subsidiaries (‘the Company’) as ofDecember 31, 2006 and 2005, and the related consolidated statements ofincome, shareholders’ equity and comprehensive income, and cash flows for eachof the years in the three-year period ended December 31, 2006. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Patni Computer Systems Limited and subsidiaries as of December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles.

As discussed in Note2.1.27 to the consolidated financial statements, effective January 1,2006, the Company adopted the fair value method of accounting for stock-basedcompensation as required by Statement of Financial Accounting Standards No. 123(R),Share- Based Payment.

Mumbai, India21 February 2007

F-2

----

**Patni ComputerSystems Limited and subsidiaries**Consolidated BalanceSheets

| ** **                                                                                                                                                                              | ** ** | **As of**              | ** **      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-----------------|
| ** **                                                                                                                                                                              | ** ** | **December 31,  2005** | ** **      | **December 31,  2006** | ** ** |
| **Assets**                                                                                                                                                                              |       | ** **                  | ** **      | ** ** | ** ** |
| *Current assets*                                                                                                                                                                        |       | ** **                  | ** **      | ** ** | ** ** |
| Cash and cash  equivalents                                                                                                                                                              |       | $                           | 148,819,600     |   | $ | 46,510,010 |   |
| Investments                                                                                                                                                                             |       | 141,775,935                 |            | 242,968,048 |   |
| Accounts receivable, net                                                                                                                                                                |       | 58,747,671                  |            | 101,893,834 |   |
| Accounts receivable from  a significant shareholder, net                                                                                                                                |       | 15,673,490                  |            | 13,724,670 |   |
| Costs and estimated  earnings in excess of billings on uncompleted contracts                                                                                                            |       | 26,094,094                  |            | 22,834,345 |   |
| Deferred income taxes                                                                                                                                                                   |       | 13,722,884                  |            | 10,240,528 |   |
| Prepaid Expenses                                                                                                                                                                        |       | 2,051,035                   |            | 2,155,676 |   |
| Other current assets                                                                                                                                                                    |       | 7,498,001                   |            | 9,860,763 |   |
| **Total current assets**                                                                                                                                                                |       | **414,382,710**             | ** **      | **450,187,874** | ** ** |
| Deferred income taxes                                                                                                                                                                   |       | 3,401,766                   |            | 370,529 |   |
| Investments                                                                                                                                                                             |       | —                      |            | 3,048,092 |   |
| Other assets                                                                                                                                                                            |       | 9,711,827                   |            | 11,457,225 |   |
| Property, plant and  equipment, net                                                                                                                                                     |       | 88,244,547                  |            | 125,757,824 |   |
| Intangible assets, net                                                                                                                                                                  |       | 10,158,065                  |            | 9,687,443 |   |
| Goodwill                                                                                                                                                                                |       | 27,987,198                  |            | 39,831,664 |   |
| **Total assets**                                                                                                                                                                        |       | **$**                       | **553,886,113** | ** ** | **$** | **640,340,651** | ** ** |
| **Liabilities and shareholders’ equity**                                                                                                                                           |       |                        |            |   |   |
| *Current liabilities*                                                                                                                                                                   |       |                        |            |   |   |
| Capital lease obligation                                                                                                                                                                |       | 289,520                     |            | 301,138 |   |
| Trade accounts payable                                                                                                                                                                  |       | 5,488,043                   |            | 11,010,564 |   |
| Billings in excess of  costs and estimated earnings on uncompleted contracts                                                                                                            |       | 2,350,346                   |            | 3,324,581 |   |
| Income taxes payable                                                                                                                                                                    |       | 17,994,936                  |            | 23,213,916 |   |
| Deferred income taxes                                                                                                                                                                   |       | 193,807                     |            | 108,637 |   |
| Accrued expenses                                                                                                                                                                        |       | 26,231,532                  |            | 43,307,501 |   |
| Other current  liabilities                                                                                                                                                              |       | 50,765,012                  |            | 38,221,746 |   |
| **Total current liabilities**                                                                                                                                                           |       | **103,313,196**             | ** **      | **119,488,083** | ** ** |
| Capital lease  obligations excluding current instalments                                                                                                                                |       | 416,342                     |            | 390,653 |   |
| Other liabilities                                                                                                                                                                       |       | 6,368,544                   |            | 8,124,060 |   |
| Deferred income taxes                                                                                                                                                                   |       | 4,758,961                   |            | 3,744,639 |   |
| **Total liabilities**                                                                                                                                                                   |       | **$**                       | **114,857,043** | ** ** | **$** | **131,747,435** | ** ** |
| Commitments and  contingencies                                                                                                                                                          |       |                        |            |   |   |
| **Shareholders’ Equity**                                                                                                                                                           |       |                        |            |   |   |
| Common shares Rs. 2 par  value; Authorized 250,000,000 shares (Issued and outstanding; 137,798,399  shares and 138,281,853 shares as of December 31, 2005 and 2006  respectively). |       | 6,101,600                   |            | 6,122,960 |   |
| Additional paid-in  capital                                                                                                                                                             |       | 299,220,619                 |            | 305,030,981 |   |
| Retained earnings                                                                                                                                                                       |       | 132,511,943                 |            | 183,197,559 |   |
| Accumulated other  comprehensive income                                                                                                                                                 |       | 1,194,908                   |            | 14,241,716 |   |
| **Total shareholders’ equity**                                                                                                                                                     |       | **$**                       | **439,029,070** | ** ** | **$** | **508,593,216** | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                                                                     |       | **$**                       | **553,886,113** | ** ** | **$** | **640,340,651** | ** ** |

 

See accompanying notes to the consolidated financial statements

F-3

----

**Patni Computer Systems Limited and subsidiaries**ConsolidatedStatements of Income

| ** **                                                                         | ** ** | **Year ended December 31,** | ** **     |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                         | ** ** | **2004**                                   | ** **     | **2005** | ** ** | **2006** | ** ** |
| Revenues                                                                           |       | $                                          | 223,141,113    |   | $ | 350,972,760 |   | $ | 494,447,726 |   |
| Revenue from a  significant shareholder                                            |       | 103,440,511                                |           | 99,359,172 |   | 84,403,156 |   |
|                                                                               |       | 326,581,624                                |           | 450,331,932 |   | 578,850,882 |   |
| Cost of revenues                                                                   |       | 202,461,490                                |           | 288,480,678 |   | 370,172,936 |   |
| **Gross  profit**                                                                  | ** ** | **124,120,134**                            | ** **     | **161,851,254** | ** ** | **208,677,946** | ** ** |
| Selling, general  and administrative expenses                                      |       | 60,699,901                                 |           | 89,880,905 |   | 110,264,979 |   |
| Provision for  doubtful debts and advances                                         |       | 495,618                                    |           | (151,954 | ) | 1,191,017 |   |
| Foreign exchange  (gain)/loss, net                                                 |       | 2,081,800                                  |           | 1,693,145 |   | 2,747,926 |   |
| **Operating  income**                                                              | ** ** | **60,842,815**                             | ** **     | **70,429,158** | ** ** | **94,474,024** | ** ** |
| Other income/(expense)                                                             |       |                                       |           |   |   |   |   |
| Interest and dividend income                                                       |       | 4,222,853                                  |           | 4,189,776 |   | 10,087,916 |   |
| Interest expense                                                                   |       | (2,083,285                                 | )              | (2,044,366 | ) | (2,839,930 | ) |
| Gain on sale of investments, net                                                   |       | 144,482                                    |           | 1,128,071 |   | 1,679,097 |   |
| Other (expense)/income, net                                                        |       | (3,692,704                                 | )              | 966,620 |   | 3,541,426 |   |
| **Income  before income taxes**                                                    | ** ** | **59,434,161**                             | ** **     | **74,669,259** | ** ** | **106,942,533** | ** ** |
| Income taxes                                                                       |       | 12,886,362                                 |           | 13,802,583 |   | 47,691,763 |   |
| **Net  income**                                                                    | ** ** | **$**                                      | **46,547,799** | ** ** | **$** | **60,866,676** | ** ** | **$** | **59,250,770** | ** ** |
| **Earnings per share**                                                             |       |                                       |           |   |   |   |   |
| Basic                                                                              |       | $                                          | 0.38           |   | $ | 0.48 |   | $ | 0.43 |   |
| Diluted                                                                            |       | $                                          | 0.38           |   | $ | 0.48 |   | $ | 0.43 |   |
| **Weighted  average number of common shares used in computing earnings per share** | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                              |       | 123,066,042                                |           | 125,736,592 |   | 137,957,477 |   |
| Diluted                                                                            |       | 124,084,992                                |           | 127,457,632 |   | 138,904,860 |   |

 

See accompanying notes to the consolidated financial statements

F-4

----

**Patni Computer SystemsLimited and subsidiariesConsolidated Statements of Shareholders’ Equity and Comprehensive Incomefor the years ended December 31, 2004, 2005 and 2006**

| ** **                                                                            | ** ** | ** **                                       | ** ** | ** **         | ** **    | ** **      | ** ** | ** **        | ** ** | ** **        | ** **      | **Accumulated**  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------|---------------|-----------------|------------|-------------------|------------|-------------------|-----------------|------------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** **                                       | ** ** | ** **         | ** **    | **Additional**  | ** ** | ** **        | ** ** | ** **        | ** **      | **Other**        | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Common shares **                     | ** ** | **Paid-In-**       | ** **    | **Retained**    | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** **      | **Shareholders** | ** ** |
| ** **                                                                            | ** ** | **Shares**                                       | ** ** | **Par value** | ** **    | **Capital**     | ** ** | **Earnings**      | ** ** | **Income**        | ** **      | **Income**       | ** ** | **Equity** | ** ** |
| ** **                                                                            | ** ** | **(in $ except share data)** | ** ** |
| **Balance as of January 1, 2004**                                                     | ** ** | **111,420,849**                                  | ** ** | **4,942,505**      | ** **    | **116,722,000** | ** ** | **34,692,917**    | ** ** | ** **        | ** **      | ** **       | ** ** | ** ** | **$**      | **(1,525,344** | **)** | ** ** | ** ** | **$** | **154,832,078** | ** ** | ** ** |
| Common shares issued through an Initial Public  Offering, net of direct expenses |       | 13,415,200                                       |       | 592,675            |          | 63,675,676      |       |              |       |              |            |             |       |       |       |   |   |   | 64,268,351 |   |   |
| Issuance of equity shares on exercise of options                                      |       | 160,960                                          |       | 7,121              |          | 509,183         |       |              |       |              |            |             |       |       |       |   |   |   | 516,304 |   |   |
| Cash dividend on common shares                                                        |       |                                             |       |               |          |            |       | (3,061,551        | )          |              |            |             |       |       |       |   |   |   | (3,061,551 | ) |   |
| Comprehensive income                                                                  |       |                                             |       |               |          |            |       |              |       |              |            |             |       |       |       |   |   |   |   |   |   |
| Net income                                                                            |       |                                             |       |               |          |            |       | 46,547,799        |       |              | 46,547,799      |             |       |       |       |   |   |   | 46,547,799 |   |   |
| Other  comprehensive income:                                                          |       |                                             |       |               |          |            |       |              |       |              |            |             |       |       |       |   |   |   |   |   |   |
| Translation adjustment                                                                |       |                                             |       |               |          |            |       |              |       |              | 9,549,971       |             |       |       |       |   |   |   | 9,549,971 |   |   |
| Unrealised gain on investments, net of tax   of $142,362                              |       |                                             |       |               |          |            |       |              |       |              | 241,535         |             |       |       |       |   |   |   | 241,535 |   |   |
| Minimum pension liability, net of tax of $153,253                                     |       |                                             |       |               |          |            |       |              |       |              | 332,292         |             |       |       |       |   |   |   | 332,292 |   |   |
| Comprehensive income                                                                  |       |                                             |       |               |          |            |       |              |       |              | 56,671,597      |             |       |       | 10,123,798 |   |   |   |   |   |   |
| **Balance as of December 31, 2004**                                                   | ** ** | **124,997,009**                                  | ** ** | **$**              | **5,542,301** | ** **      | **$**      | **180,906,859**   | ** ** | **$**             | **78,179,165**  | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **8,598,454** | ** ** | ** ** | ** ** | **$** | **273,226,779** | ** ** | ** ** |
| Common shares issued, net of direct expenses                                          |       | 12,312,500                                       |       | 537,304            |          | 116,484,548     |       |              |       |              |            |             |       |       |       |   |   |   | 117,021,852 |   |   |
| Issuance of equity shares on exercise of options                                      |       | 488,890                                          |       | 21,995             |          | 1,692,396       |       |              |       |              |            |             |       |       |       |   |   |   | 1,714,391 |   |   |
| Tax benefit arising on exercise of stock options                                      |       |                                             |       |               |          | 136,816         |       |              |       |              |            |             |       |       |       |   |   |   | 136,816 |   |   |
| Cash dividend on common shares                                                        |       |                                             |       |               |          |            |       | (6,533,898        | )          |              |            |             |       |       |       |   |   |   | (6,533,898 | ) |   |
| Comprehensive income                                                                  |       |                                             |       |               |          |            |       |              |       |              |            |             |       |       |       |   |   |   |   |   |   |
| Net income                                                                            |       |                                             |       |               |          |            |       | 60,866,676        |       |              | 60,866,676      |             |       |       |       |   |   |   | 60,866,676 |   |   |
| Other  comprehensive income:                                                          |       |                                             |       |               |          |            |       |              |       |              |            |             |       |       |       |   |   |   |   |   |   |
| Translation adjustment                                                                |       |                                             |       |               |          |            |       |              |       |              | (7,278,016      | )                |       |       |       |   |   |   | (7,278,016 | ) |   |
| Unrealised gain on investments, net of tax of  $261,520                               |       |                                             |       |               |          |            |       |              |       |              | 560,447         |             |       |       |       |   |   |   | 560,447 |   |   |
| Unrealised loss on cash flow hedging derivatives, net  of tax of $Nil            |       |                                             |       |               |          |            |       |              |       |              | (1,026,624      | )                |       |       |       |   |   |   | (1,026,624 | ) |   |
| Minimum pension liability, net of tax of $194,848                                     |       |                                             |       |               |          |            |       |              |       |              | 340,647         |             |       |       |       |   |   |   | 340,647 |   |   |
| Comprehensive income                                                                  |       |                                             |       |               |          |            |       |              |       |              | 53,463,130      |             |       |       | (7,403,546 | ) |   |   |   |   |   |
| **Balance as of December 31, 2005**                                                   | ** ** | **137,798,399**                                  | ** ** | **$**              | **6,101,600** | ** **      | **$**      | **299,220,619**   | ** ** | **$**             | **132,511,943** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **1,194,908** | ** ** | ** ** | ** ** | **$** | **439,029,070** | ** ** | ** ** |
| 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 accompanying notes to the consolidated financial statements

F-5

----

**Patni Computer Systems Limited and subsidiaries**ConsolidatedStatements of Cash Flows

| ** **                                                                        | ** ** | **Year ended December 31,** | ** **      |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|-----------------|
| ** **                                                                        | ** ** | **2004**                                   | ** **      | **2005** | ** ** | **2006** | ** ** |
| **Operating activities**                                                          |       |                                       |            |   |   |   |   |
| Net income                                                                        |       | $                                          | 46,547,799      |   | $ | 60,866,676 |   | $ | 59,250,770 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                       |            |   |   |   |   |
| Depreciation and amortization                                                     |       | 11,543,775                                 |            | 15,960,705 |   | 19,573,548 |   |
| Deferred taxes                                                                    |       | (1,937,708                                 | )               | (1,889,293 | ) | 4,344,470 |   |
| Provision/(recovery) for doubtful debts and advances                              |       | 495,618                                    |            | (151,954 | ) | 1,191,017 |   |
| (Gain)/loss on sale of property, plant and  equipment, net                        |       | 597,678                                    |            | (3,176,152 | ) | (21,977 | ) |
| (Gain)/loss on sale of investments                                                |       | (144,482                                   | )               | (1,128,071 | ) | (1,679,097 | ) |
| Compensation cost related to employee stock option plan                      |       | —                                     |            | — |   | 3,984,071 |   |
| Changes in assets and  liabilities                                                |       |                                       |            |   |   |   |   |
| Accounts receivable                                                               |       | (10,400,590                                | )               | (3,531,903 | ) | (40,234,185 | ) |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | (5,032,911                                 | )               | (11,162,155 | ) | 3,955,003 |   |
| Other current assets                                                              |       | (3,445,375                                 | )               | 3,431,844 |   | (735,650 | ) |
| Other assets                                                                      |       | (2,714,988                                 | )               | (142,962 | ) | (579,720 | ) |
| Trade accounts payable—others                                                |       | (780,814                                   | )               | 1,428,007 |   | 4,025,950 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 634,645                                    |            | (456,143 | ) | 859,218 |   |
| Tax benefit arising on exercise of stock options                                  |       | —                                     |            | 136,816 |   | — |   |
| Taxes payable                                                                     |       | 2,377,631                                  |            | (463,113 | ) | 4,956,360 |   |
| Accrued expenses                                                                  |       | (569,178                                   | )               | 6,069,364 |   | 16,246,514 |   |
| Other current liabilities                                                         |       | 9,803,420                                  |            | 14,815,277 |   | (17,063,525 | ) |
| Other liabilities                                                                 |       | 817,726                                    |            | (7,548,512 | ) | 1,018,325 |   |
| **Net  cash provided by operating activities**                                    | ** ** | **$**                                      | **47,792,246**  | ** ** | **$** | **73,058,431** | ** ** | **$** | **59,091,092** | ** ** |
| **Investing  activities**                                                         |       |                                       |            |   |   |   |   |
| Purchase of property, plant and equipment                                         |       | (21,590,640                                | )               | (53,282,451 | ) | (48,620,365 | ) |
| Proceeds from sales of property, plant and equipment                              |       | 509,570                                    |            | 4,336,910 |   | 83,097 |   |
| Purchase of investments                                                           |       | (255,601,922                               | )               | (542,994,281 | ) | (781,204,843 | ) |
| Proceeds from sale of investments                                                 |       | 223,648,957                                |            | 485,768,961 |   | 686,658,104 |   |
| Payments for acquisition, net of cash acquired                                    |       | (32,450,060                                | )               | (5,578,772 | ) | (12,184,832 | ) |
| Payments for acquisition of technology related  intangibles                       |       | —                                     |            | — |   | (497,879 | ) |
| Tax benefit on incentive stock option of Patni  Telecom                           |       | —                                     |            | — |   | 340,366 |   |
| **Net cash used in investing  activities**                                        | ** ** | **$**                                      | **(85,484,095** | **)** | **$** | **(111,749,633** | **)** | **$** | **(155,426,352** | **)** |

 

See accompanying notes to the consolidated financial statements

F-6

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**Patni ComputerSystems Limited and subsidiaries**ConsolidatedStatements of Cash Flows (Continued)

| ** **                                                                                 | ** ** | **Year ended December 31,** | ** **     |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                                 | ** ** | **2004**                                   | ** **     | **2005** | ** ** | **2006** | ** ** |
| **Financing activities:**                                                                  | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| Payment of capital lease obligations                                                       |       | (301,474                                   | )              | (329,168 | ) | (390,886 | ) |
| Dividend on common shares                                                                  |       | (3,059,633                                 | )              | (6,531,628 | ) | (8,562,666 | ) |
| Proceeds from common shares issued, net of expenses                                        |       | 64,784,655                                 |           | 118,736,243 |   | 1,824,313 |   |
| Tax benefit arising on exercise of stock options                                           |       | —                                     |           | — |   | 23,338 |   |
| **Net  cash provided by/(used in) financing activities**                                   | ** ** | **$**                                      | **61,423,548** | ** ** | **$** | **111,875,447** | ** ** | **$** | **(7,105,901** | **)** |
| Effect of  exchange rates changes on cash and cash equivalents                             |       | 5,472,249                                  |           | (1,508,142 | ) | 1,131,571 |   |
| **Net  increase in cash and cash equivalents**                                             | ** ** | **23,731,699**                             | ** **     | **73,184,245** | ** ** | **(103,441,161** | **)** |
| Cash and cash  equivalents at the beginning of the year                                    |       | 47,939,550                                 |           | 77,143,498 |   | 148,819,600 |   |
| Cash and cash  equivalents at end of the year                                              |       | $                                          | 77,143,498     |   | $ | 148,819,600 |   | $ | 46,510,010 |   |
| Supplemental  disclosure of cash flow information:                                         |       |                                       |           |   |   |   |   |
| Interest paid                                                                              |       | $                                          | 35,152         |   | $ | 673,158 |   | $ | 4,905,069 |   |
| Income taxes paid                                                                          |       | $                                          | 12,536,145     |   | $ | 15,294,446 |   | $ | 39,945,075 |   |
| Non cash investing and  financing activities:                                              |       |                                       |           |   |   |   |   |
| Additions to  property, plant and equipment, represented by capital lease obligations |       | $                                          | 393,184        |   | $ | 471,644 |   | $ | 361,133 |   |
| Property, plant and  equipment acquired on credit                                          |       | $                                          | 870,073        |   | $ | 2,104,773 |   | $ | 4,814,076 |   |

 

See accompanying notes to the consolidated financial statements

F-7

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements

**1****                                              Organization****and nature of business**

1.1.1                          Patni Computer Systems Limited (“Patni”) is acompany incorporated in India under the Indian Companies Act, 1956. OnSeptember 18, 2003, Patni converted itself from a private limited companyinto a public limited companyand changed its name from Patni Computer Systems (P) Limited to PatniComputer Systems Limited. In February 2004, Patni completed initial publicoffering of its equity shares in India and in December 2005, the Companycompleted initial public offering of American depositary shares in the US.

1.1.2                          PatniComputers Systems (UK) Limited (“Patni UK”), a company incorporated in UK,Patni Computer Systems GmbH (“Patni GmbH”), a company incorporated in Germanyand Patni Computer Systems, Inc. (“Patni USA”), a company incorporated inMassachusetts, USA are 100% subsidiaries of Patni. On November 3, 2004,Patni USA, acquired 100% equity in Patni Telecom (formerly known as CymbalCorporation), a company incorporated in California, USA, together with itssubsidiaries in India, UK & Thailand, for consideration in cash.Further, Patni also has foreign branch offices in USA, Japan, Sweden,Australia, Korea, Netherlands, Finland, Dubai and Canada.

Cymbal Information Services (Thailand) Ltd.,subsidiary of Patni Telecom has been dissolved and the liquidation has beencompleted 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 Companyprovides multiple service offerings to its clients across various industriescomprising financial services, insurance services, manufacturing,telecommunications services and technology services (comprising independentsoftware vendors and product engineering) and other industries such as energyand utilities, retail, logistics and transportation, and media andentertainment. The various service offerings comprise application development,application maintenance and support, packaged software implementation,infrastructure management services, product engineering services, qualityassurance services and BPO services.

1.1.4                          These financial statements are prepared on aconsolidated basis for all the years presented.

**2****                                             ****Summary of significant accountingpolicies**

***Basis of preparation*** of financial statements

2.1.1                          The accompanying consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“US GAAP”).

***Principles of consolidation***

2.1.2                          The consolidated financial statements includethe financial statements of Patni and all of its subsidiaries, which are morethan 50% owned and controlled. In addition, the Company consolidates anyVariable Interest Entity (“VIE”) if it is determined to be a primarybeneficiary in accordance with FASB Interpretation No. 46(R),“Consolidation of Variable Interest Entities”. The Company accounts for investments by the equity method where its investment inthe voting stock gives it the ability to exercise significant influence overthe investee. However, as of December 31, 2005 and 2006, the Company doesnot have any interest in any VIE, or any 

F-8

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

equitymethod investment. All inter-company accounts and transactions are eliminatedon consolidation.

***Accounting*** estimates

2.1.3                          The preparation of financial statements inconformity with US GAAP requires that management makes estimates andassumptions that affect the reported amount of assets and liabilities anddisclosures of contingent assets and liabilities as of the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Management believes that the estimates used in thepreparation of the consolidated financial statements are prudent and reasonable.The actual results could differ from these estimates.

***Revenue***and cost recognition

2.1.4                          TheCompany derives its revenues primarily from software services and to a lesserextent from BPO services. Revenue is recognized when there is persuasive evidenceof a contractual arrangement with customers, delivery has occurred, the salesprice is fixed or determinable and collectibility is probable. Softwareservices are provided either on a fixed price, fixed time frame or on a timeand material basis. The Company’s fixed price contracts include applicationmaintenance and support services, on which revenue is recognized on a straightline basis over the term of maintenance. Revenue with respect to other fixedprice contracts is recognized on a percentage of completion basis. Revenue withrespect to time-and-material contracts is recognized as related services areperformed.

Guidance has beendrawn from paragraph 95 of Statement of Position (‘‘SOP’’) 97-2,‘‘Software Revenue Recognition’’ to account for revenue from fixed pricearrangements for software development and related services in conformity with *SOP-81-1 (“Accounting for Performance of Construction—Typeand Certain Production—Type Contracts”)*. The input (cost expended)method has been used because management considers this to be the best availablemeasure of progress on these contracts as there is a direct relationshipbetween input and productivity.

2.1.5                          The asset, “Cost and estimated earnings inexcess of billings on uncompleted contracts”, represents revenues recognized inexcess of amounts billed. Theseamounts are billed after the milestones specified in the agreement are achievedand the customer acceptance for the same is received. The liability, “Billingsin excess of costs and estimated earnings on uncompleted contracts”, representsbillings in excess of revenues recognized.

2.1.6                          Direct and incremental contract originationand set up costs incurred in connection with support/maintenance servicearrangements are charged to expense as incurred. These costs are deferred onlyin situations where there is a contractual arrangement establishing a customerrelationship for a specified period. The costs to be deferred are limited tothe extent of future contractual revenues. Further, revenue attributable to setup activities is deferred and recognised systematically over the periods thatthe related fees are earned, as services performed during such period do notresult in the culmination of a separate earnings process.

Costs that are incurred for a specific anticipated contract and thatwill result in no future benefits unless the contract is obtained, are notincluded in contract costs before the receipt of the contract. However, suchcosts are deferred, subject to the evaluation of their probable recoverability.

F-9

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

2.1.7                          Warranty costs on sale of services areaccrued based on managements’ estimates and historical data at the time relatedrevenues are recorded.

2.1.8                          TheCompany grants volume discounts to certain customers, which are computed basedon a pre-determined percentage of the total revenues from those customersduring a specified period, as per the terms of the contract. These discountsare earned only after the customer has provided a specified cumulative level ofrevenues in the specified period. The discounts can be utilized by the customerin the form of free services.

The Companyestimates the total number of customers that will ultimately earn thesediscounts, based on which a portion of the revenue on the related transactionsis allocated to the free services that will be delivered in the future. Theamount of revenue to be allocated to the free services is based on the relativefair value of the free services.

The Company reports revenues net of discounts offered to customers. Inaccounting for the above volume discounts, guidance has been obtained from *Emerging Issues Task Force (“EITF”) 00-22 “Accounting for“Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers,and Offers for Free Products or Services to Be Delivered in the Future” andEITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer(Including a Reseller of the Vendor’s Products)”*. Accordingly, thesevolume discounts have been recorded based on estimate of the total number ofcustomers that will ultimately earn these discounts as it is believed that,based on historical experience, reliable estimates can be made of the estimatedamount of revenues from a particular customer in the specified period.

Reimbursement of out of pocket expenses received from customers havebeen included as part of revenues in accordance with *EITF 01-14“Income Statement Characterization of Reimbursements Received for ‘Out ofPocket’ Expenses Incurred”*.

2.1.9                          Revenue from BPO is recognised onproportionate performance method.

***Advertising cost***

2.1.10                   Advertising costs incurred during the yearhave been expensed. The total amount of advertising costs expensed was $1million, $1.5 million and $1.6 million for the years ended December, 31, 2004,2005 and 2006.

***Cash and cash equivalents***

2.1.11                   The Company considers investments in highlyliquid investments with an original maturity of three months or less to be cashequivalents. Cash and cash equivalents comprise cash and cash on deposit withbanks.

***Investments***

2.1.12                   Management determines the appropriateclassification of investment securities at the time of purchase andre-evaluates such designation at each balance sheet date. At December 31,2005 and 2006, investment securities were classified as available-for-sale or heldto maturity. The investment securities classified as available-for-saleconsisted of units of mutual funds. Held to maturity securities consist ofinvestment in Government bonds made by the Company pursuant to 

F-10

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

tax exemption scheme under the Indian Income Tax Act, 1961. These bondsare carried at cost in the absence of market value and mature in three years.

2.1.13                   Available-for-sale securities are carried atfair market value with unrealized gains and losses, net of deferred incometaxes, reported as a separate component of other comprehensive income in thestatement of shareholders’ equity and comprehensive income. Realized gains andlosses, and decline in value judged to be other than temporary onavailable-for-sale securities are included in the consolidated statements ofincome. The cost of securities sold or disposed is determined on average costbasis.

***Business combinations, goodwill and intangible assets***

2.1.14                   *Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations”*requires that the purchase method ofaccounting be used for all business combinations. SFAS No. 141 specifiescriteria that intangible assets acquired in a business combination must berecognized and reported separately from goodwill. In accordance with *SFAS No. 142, “Goodwill and Other Intangible Assets”*all assets and liabilities of the acquired businesses including goodwill areassigned to reporting units.

2.1.15                   Goodwill represents the cost of the acquiredbusinesses in excess of the fair value of identifiable tangible and intangiblenet assets purchased. Goodwill is not amortized but is tested for impairment atleast on an annual basis, relying on a number of factors including operatingresults, business plans and future cash flows. Recoverability of goodwill isevaluated using a two-step process. The first step involves a comparison of thefair value of a reporting unit with its carrying value. If the carrying amountof the reporting unit exceeds its fair value, the second step of the processinvolves a comparison of the fair value and carrying value of the goodwill ofthat reporting unit. If the carrying value of the goodwill of a reporting unitexceeds the fair value of that goodwill, an impairment loss is recognized in anamount equal to the excess. Goodwill of a reporting unit will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould more likely than not reduce the fair value of the reporting unit belowits carrying amount.

2.1.16                   Intangible assets are amortized over theirrespective individual estimated useful lives in proportion to the economicbenefits consumed in each period. Intangible assets comprise customer andtechnology related intangibles and are being amortized over a period of 5-10years. The estimated useful life of an identifiable intangible asset is basedon a number of factors including the effects of obsolescence, demand,competition and other economic factors (such as the stability of the industry,and known technological advances) and the level of maintenance expendituresrequired to obtain the expected future cash flows from the asset.

2.1.17                   Intangible assets are evaluated forrecoverability whenever events or changes in circumstances indicate that theircarrying amounts may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset tofuture 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.

F-11

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

***Property, plant and equipment***

2.1.18                   Property, plant and equipment are stated atcost less accumulated depreciation and amortization. Gains and losses ondisposals are included in the consolidated statements of income at amountsequal to the difference between the net book value of the disposed assets andthe net proceeds received upon disposal. Expenditures for replacements andimprovements are capitalized, whereas the cost of maintenance and repairs ischarged to income when incurred.

2.1.19                   Property, plant and equipment are depreciatedover the estimated useful life of the asset using the straight-line method,once the asset is put to its intended use. The cost of software obtained forinternal use 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 oflong-lived assets and long-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*** currency translation

2.1.21                   The functional currency of Patni and itsbranches in the US, Japan, Sweden, Australia, Korea and Netherland is theIndian Rupee. The functional currencies of Patni’s subsidiaries are theapplicable local currencies.

2.1.22                   The accompanying consolidated financialstatements are reported in US Dollars. The translation is performed for balancesheet accounts using the exchange rate in effect at the balance sheet date andfor statements 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 

F-12

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

resultingfrom such translation are reported in other comprehensive income in thestatement of shareholders’ equity and comprehensive income.

***Foreign currency transactions***

2.1.23                   Transactions in foreign currencies aretranslated into the functional currency at the rates of exchange prevailing atthe date of the transaction. Resulting gains or losses from settlement of suchforeign currency transactions are included in the consolidated statements ofincome. Unsettled monetary assets and liabilities denominated in foreigncurrencies are translated into the functional currency at the rates of exchangeprevailing at the balance sheet date. Transaction gain or loss arising fromchange in exchange rates between the date of transaction and period endexchange rates are included in the consolidated statements of income.

***Income taxes***

2.1.24                   Income taxes are accounted for under theasset and liability method. Deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss carry forwards. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof changes in tax rates is recognized in results of operations in the periodthat includes the enactment date. The measurement of deferred tax assets isreduced, if necessary, by a valuation allowance if it is more likely than notthat some portion or all of the assets will not be realised.

***Concentration of credit risk***

2.1.25                   Financial instruments that potentiallysubject the Company to concentration of credit risks consist principally ofcash, cash equivalents, investments and accounts receivables. Cash and cashequivalents are invested with corporations, financial institutions and bankswith investment grade credit ratings. To reduce credit risk, investments aremade in a diversified portfolio of mutual funds, government bonds, which areperiodically reviewed. To reduce its credit risk on accounts receivables, theCompany performs ongoing credit evaluations of customers.

***Retirement benefits to employees***

2.1.26                   Contributions to defined contribution plansare charged to income in the period in which they accrue. Current servicescosts for defined benefit plans are accrued in the period to which they relate,based on actuarial valuation performed by an independent actuary in accordancewith *SFAS No. 87, “Employers’ Accounting forPensions”, SFAS No. 132R “Employers’ Disclosures about Pensions and OtherPostretirement Benefits”, both as amended by SFAS No. 158 “Employer’sAccounting for Defined Benefit Pension and Other Postretirement Plans”*.The Company adopted SFAS No. 158 as of December 31, 2006 whichrequires the net funded position of the plans to be recognized as an asset orliability in the employers’ balance sheet. The net effect of adopting this newstandard was a reduction in the stockholders’ equity of $0.8 million. Refernote 18.1.18 for computation of the net effect.

F-13

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

***Stock-based compensation***

2.1.27                   The Company adopted *SFASNo. 123R, “Share-Based Payment” (SFAS No. 123R)* effectiveJanuary 1, 2006. This statement requires compensation expense relating toshare-based payments to be recognized in net income using a fair valuemeasurement method. Under the fair value method, the estimated fair value ofawards is charged to income on a accelerated basis over the requisite service period,which is generally the vesting period.The Company elected the modifiedprospective method as prescribed in SFAS No. 123R and therefore, priorperiods were not restated. Under the modified prospective method, thisstatement was applied to new awards granted after the time of adoption, as wellas to the unvested portion of previously granted equity-based awards for whichthe requisite service had not been rendered as of January 1, 2006. TheCompany granted stock options under the ‘Patni ESOP 2003’ plan (‘the plan’).See Note 16 for further discussion.

Share-based compensationexpense in 2006 reduced the Company’s results of operations as follows:

| ** **                  | ** ** | **2006**  | ** ** |
|-----------------------------|------------|-----------|------------|
| Income before  income taxes |       | $         | 3,984,071  |   |
| Net Income                  |       | 3,299,530 |       |
| Basic earnings per share    |       | $         | 0.02       |   |

 

Thefair value of each option is estimated on the date of grant using theBlack-Scholes model with the following assumptions.

| **Year ended December 31,** | ** ** | ** **     | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------|------------|
| Dividend yield                             |       | 0.59%  - 0.63% |       |
| Expected life                              |       | 3.5-6.5 years  |       |
| Risk free  interest rates                  |       | 6.4 5%- 7.85%  |       |
| Volatility                                 |       | 30.22% - 55%   |       |

 

2.1.28                   Prior to January 1, 2006, the companyaccounted for share-based employee compensation under the provisions of SFASNo. 123 using the intrinsic value method prescribed by APB No. 25 andrelated interpretations. Under the intrinsic value method, no compensationexpense was recognized for stock options, as the exercise price of employeestock options equated the market value of the Company’s stock on the date ofgrant. The following pro forma net income and earnings per share informationhad been determined as if the Company had accounted for its share-basedcompensation awards issued using the fair value method in 2004 and 2005.

F-14

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

 

| **Year ended December 31,**                                                                     | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income, as  reported                                                                                       |       | $          | 46,547,799 |       | $          | 60,866,676 |       |
| Less: Stock based  employee compensation expense determined under fair value based method, net  of tax effects |       | (1,253,513 | )          | (3,501,531 | )          |
| Pro forma net  income                                                                                          |       | $          | 45,294,286 |       | $          | 57,365,145 |       |
| Reported earnings per  share                                                                                   |       |       |       |       |       |
| Basic                                                                                                          |       | $          | 0.38       |       | $          | 0.48       |       |
| Diluted                                                                                                        |       | $          | 0.38       |       | $          | 0.48       |       |
| Pro forma earnings per  share                                                                                  |       |       |       |       |       |
| Basic                                                                                                          |       | $          | 0.37       |       | $          | 0.46       |       |
| Diluted                                                                                                        |       | $          | 0.37       |       | $          | 0.45       |       |

 

2.1.29                   The pro forma amounts and fair value of eachoption grant were estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions used for grantsin 2004 and 2005:

| **Year ended December 31,** | ** ** | ** **    | ** ** | **2004**      | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|---------------|------------|---------------|------------|----------|------------|
| Dividend yield                             |       | 0.34% - 0.72% |       | 0.53% - 0.54% |       |
| Expected life                              |       | 2-5 years     |       | 2-5 years     |       |
| Risk free  interest rates                  |       | 5.16% - 6.46% |       | 5.74% - 6.73% |       |
| Volatility                                 |       | 43% - 65%     |       | 28% - 50%     |       |

 

The Black-Scholes model isa trading pricing model that does not reflect either the non-traded nature ofemployee stock options or the limited transferability of such options. Thismodel also does not consider restrictions on trading for all employees,including certain restrictions imposed on senior management of the Company.Therefore, if the Company had used an option pricing model other thanBlack-Scholes, pro forma results different from those shown above may have beenreported.

2.1.30                   Prior to the adoption of SFAS 123R, theCompany was required to record benefits associated with the tax deductions inexcess of recognized compensation cost as an operating cash flow. However SFAS123R requires that such benefits be recorded as a financing cash inflow. In theaccompanying Consolidated Statements of Cash Flows for year endedDecember 31, 2006, tax benefit of $23,338 has been classified as financingcash flows.

***Dividends***

2.1.31                   Dividends on common shares are recorded as aliability on the date of declaration by the shareholders at the Annual GeneralMeeting.

***Derivative***s and hedgeaccounting

2.1.32                   The Company evaluates its risk managementprogram and hedging strategies in respect of forecasted transactions, and, uponcompletion of the formal documentation and testing for effectiveness, theCompany designates certain forward contracts in respect of forecastedtransactions, which meet the hedging criteria, as cash flow hedges. Changes infair values of designated cash flow hedges are deferred and recorded as acomponent of accumulated other 

F-15

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**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

comprehensive income until the hedged transactions occur and are thenrecognised in the consolidated statements of income. Changes in fair value forderivatives not designated as hedging instruments and ineffective portion ofthe hedging instruments are recognized in consolidated statements of income inthe current period.

2.1.33                   In respect of derivatives designated ashedges, the Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objective andstrategy for undertaking various hedge transactions. The Company also formallyassesses, both at the inception of the hedge and on an ongoing basis, whether eachderivative is highly effective in offsetting changes in fair values or cashflows of the hedged item. If it is determined that a derivative is not highlyeffective as a hedge, or if a derivative ceases to be a highly effective hedge,the Company will, prospectively, discontinue hedge accounting with respect tothat derivative.

***Earnings per share***

2.1.34                   Inaccordance with *SFAS No. 128, “Earnings per Share”*,basic earnings per share is computed using the weighted average number ofcommon and redeemable common shares outstanding during the period. Dilutedearnings per share is computed using the weighted average number of common andredeemable common shares and dilutive common equivalent shares outstandingduring the period using the treasury stock method for options except where theresult would be anti-dilutive.

***Reclassifications***

2.1.35                   Certainreclassifications have been made in the financial statements of prior years toconform to classifications used in the current year.

***Commitments andContingencies***

2.1.36                   Liabilitiesfor loss contingencies arising from claims, assessments, litigations, fines andpenalties and other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the assessment and/or remediation can bereasonably estimated.

***Recently IssuedAccounting Standards***

2.1.37                   TheFinancial Accounting Standards Board (“FASB”) issued *FASBInterpretation No. 48 “*Accounting*forUncertainty in Income Taxes”* (“FIN 48”) in June 2006. FIN 48clarifies the accounting for uncertainty in income taxes recognised in anenterprise’s financial statements in accordance with *FASBStatement No. 109 “Accounting for Income Taxes”.*ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also provides guidanceon recognition, classification, interest, penalties, accounting in interimperiods, disclosure and transition. The Interpretation is effective for fiscalyears beginning after December 15, 2006. The differences, if any betweenthe amounts recognized in the statements of financial position prior to theadoption of FIN 48 and the amounts reported after adoption will be accountedfor as a cumulative-effect adjustment recorded to the beginning balance ofretained earnings. The Company is currently evaluating the impact of thisInterpretation on its financial statements.

F-16

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

2.1.38                   TheFinancial Accounting Standards Board (“FASB”) issued *SFASNo. 157 “Fair Value Measurements”* (SFAS No. 157) inSeptember 2006. SFAS No. 157 establishes a framework for measuringfair value and expands disclosures about fair value measurements. The changesto current practice resulting from the application of this Statement relate tothe definition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements. The Statement is effectivefor fiscal years beginning after November 15, 2007 and interim periodswithin those fiscal years. The Company is currently evaluating the impact thatis expected to result from the adoption of this standard.

**3**                                              Acquisitionof Patni Telecom

On November 3, 2004,Patni USA acquired 100% equity interest in Patni Telecom which is engaged inproviding IT services to clients in the telecom sector. The primary purpose forthe acquisition was to establish presence in the Telecom IT services sector.The consolidated financial statements include the operating results of PatniTelecom from the date of acquisition. The purchase price of $25,093,065(including direct expenses of $1,311,150) was paid in cash. Additionally, inconnection with the acquisition, the Company incurred $10,968,029 of costsrelating to certain contract terminations / settlements and acquisition costsof Patni Telecom. Such costs have been recognised by the Company as liabilitiesassumed at the acquisition date resulting in additional goodwill.

Theterms of the purchase also provide for payment of contingent consideration toall the selling shareholders, payable over three years, and calculated based onthe achievement of specified revenue and margin targets. The contingentconsideration is payable in cash and cannot exceed $33,000,000, inclusive ofpayments under an incentive plan for certain employees as described below. TheCompany 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”* andaccordingly will record the contingent payments, other than payments to certainemployees under the incentive plan, as goodwill in the periods in which thecontingency is resolved.

As perthe Stock Purchase Agreement and amendments thereof, $5,578,772 and $12,184,832 was paid to the shareholders of Patni Telecom as contingentconsideration based on achievement of certain revenue and margin targets forthe years ended June 30, 2005 and 2006 . This additional consideration hasbeen recognised as Goodwill arising on acquisition of Patni Telecom.

Further,as a part of the acquisition, the Company initiated an incentive plan linked torevenues and margins, for certain specific employees of Patni Telecom. The incentivepayments under this plan will not exceed $3,400,000 till June 2007. Since,the incentive payments are linked to continuing employment, the payments underthe plan are recognised as compensation for post acquisition services.Accordingly, $664,709 and $176,177 have been recorded as Cost of revenues andSelling, General and Administrative expenses in the year endedDecember 31, 2005 respectively and $587,001 and $756,841 have beenrecorded Cost of revenues and Selling, General and Administrative expenses inthe year ended December 31, 2006 respectively. No such amounts wererecorded for the year ended December 31, 2004.

As ofDecember 31, 2006, the Company has tested the related goodwill forimpairment and concluded that there is no impairment in its carrying value.

F-17

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**4**                                              Investments

4.1.1                          Investmentsecurities consist of the following:

| ** **                              | ** ** | **As of December 31, 2005** | ** **  |
|-----------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                              | ** ** | **Carrying  value**                             | ** **  | **Gross  unrealized  holding  gains** | ** ** | **Gross  unrealised  holding  losses** | ** ** | **Fair  value** | ** ** |
| **Available  for sale:**                |       |                                            |        |   |   |   |   |   |   |   |   |
| Mutual fund units  and other securities |       | $                                               | 107,568,976 |   | $ | 774,895 |   |   | ($1,867 | ) |   | $ | 108,342,004 |   |
| Other Investments                       |       | 2,909,577                                       |        | 524,354 | ** ** | ** ** | **—** |   |   | 33,433,931 |   |
| Amount reported as  investment current  | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** |   | ** ** | **$** | **141,775,935** | ** ** |
|                                         |            |                                                 |             |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                  | ** ** | **As of December 31, 2006** | ** **  |
|---------------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                                  | ** ** | **Carrying  value**                             | ** **  | **Gross  unrealized  holding  gains** | ** ** | **Gross  unrealised  holding  losses** | ** ** | **Fair  value** | ** ** |
| **Available for sale:**                     |       |                                            |        |   |   |   |   |   |   |   |   |
| Mutual fund units  and other securities     |       | $                                               | 135,238,933 |   | $ | 1,125,406 |   |   | (9,391 | ) |   | $ | 136,354,948 |   |
| Other Investments                           |       | 103,262,905                                     |        | 3,350,195 |   |   | — |   |   | 106,613,100 |   |
| Amount reported  as investments current     | ** ** | ** **                                      | ** **  | ** ** | ** ** |   |   |   | ** ** | **$** | **242,968,048** | ** ** |
| **Held to maturity:**                       |       |                                            |        |   |   |   |   |   |   |   |   |
| Bonds                                       |       | $                                               | 3,048,092   |   | — |   |   | — |   |   | $ | 3,048,092 |   |
| Amount reported as  investments non current | ** ** | ** **                                      | ** **  | ** ** | ** ** |   |   |   | ** ** | **$** | **3,048,092** | ** ** |
|                                             |            |                                                 |             |  |  |  |  |  |  |  |  |  |  |  |

 

4.1.2                          Dividendsfrom securities available for sale, during the year ended December 31,2004, 2005 and 2006 were $3,460,351, $2,488,691 and $ 5,941,888 respectively.Gross realized gains on sale of securities, available for sale was $221,562 ,$1,141,015 and $ 1,963,728 and gross realised losses on sale of securities,available for sale was $77,080, $12,945 and $ 284,631 for the year endedDecember 31, 2004, 2005 and 2006 respectively.

4.1.3                          Investmentsheld to maturity as of December 31, 2006 mature within five years

**5**                                              Accountsreceivable

5.1.1                          Accountsreceivable consist of the following:

| **As of December 31,**                                                                                               | ** ** | ** ** | ** **     | **2005**   | ** ** | **2006**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|-----------------|------------|
| Receivables                                                                                                                         |       | $          | 76,916,380     |       | $          | 118,724,268     |       |
| Less: Allowances  for doubtful accounts (including $136,066 (2005—$80,000) for receivable due  from a significant shareholder) |       | (2,495,219 | )              | (3,105,764 | )          |
|                                                                                                                                | ** ** | **$**      | **74,421,161** | ** ** | **$**      | **115,618,504** | ** ** |

 

F-18

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

 

5.1.2                          Theactivity in the allowance for doubtful accounts receivable for the years endedDecember 31, 2005 and 2006 is as follows:

| **As of December 31,**                                                  | ** ** | ** ** | ** **    | **2004**   | ** ** | **2005**      | ** ** | **2006** | ** **    |
|----------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|---------------|------------|----------|---------------|
| Allowance for  doubtful accounts as at  beginning of the year                          |       | $          | 3,224,494     |       | $          | 3,435,320     |       | $        | 2,495,219     |   |
| Additions charged  (net of recoveries) to provision for doubtful debts during the year |       | 496,804    |          | (164,464   | )          | 1,147,109     |       |
| Write-downs  charged against the allowance during the year                             |       | (285,978   | )             | (775,637   | )          | (536,564      | )          |
| Allowance for doubtful  accounts at end of the year                                    | ** ** | **$**      | **3,435,320** | ** ** | **$**      | **2,495,219** | ** ** | **$**    | **3,105,764** | ** ** |

 

**6**                                              Costsand estimated earnings in excess of billings and billings in excess of costsand estimated earnings on uncompleted contracts

| **As of December 31,**                                        | ** ** | ** **  | ** ** | **2005**    | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Cost incurred on  uncompleted contracts                                      |       | $           | 25,750,930 |        | $          | 28,813,363 |       |
| Estimated  earnings                                                          |       | 24,028,742  |       | 21,676,222  |       |
|                                                                         |       | 49,779,672  |       | 50,489,585  |       |
| Less: Billings  till date                                                    |       | (26,035,924 | )          | (30,979,821 | )          |
|                                                                         |       | $           | 23,743,748 |        | $          | 19,509,764 |       |
| Included in the  accompanying balance sheet under the following captions:    |       |        |       |        |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | 26,094,094  |       | 22,834,345  |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | (2,350,346  | )          | (3,324,581  | )          |
|                                                                         |       | 23,743,748  |       | 19,509,764  |       |

 

F-19

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**7**                                              Otherassets

Other assets consist of the following:

| **As of December 31,**                | ** ** | ** ** | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Advances to  vendors                                 |       | $          | 1,507,000      |       | $          | 1,340,596      |       |
| Prepaid gratuity  costs                              |       | 1,442,528  |           | 918,045    |       |
| Deposits                                             |       | 6,447,290  |           | 6,708,622  |       |
| Deferral of cost  in respect of revenue arrangements |       | 1,574,252  |           | 902,063    |       |
| Due from  employees                                  |       | 1,309,344  |           | 2,695,126  |       |
| Derivative  contracts                                |       | —     |           | 3,035,271  |       |
| Leasehold Land                                       |       | 3,765,076  |           | 5,223,196  |       |
| Others                                               |       | 1,164,338  |           | 495,069    |       |
|                                                 | ** ** | **$**      | **17,209,828** | ** ** | **$**      | **21,317,988** | ** ** |
| Less : Current  assets                          |       |       |           |       |       |
| Advances to vendors                                  |       | (1,507,000 | )              | (1,340,596 | )          |
| Prepaid gratuity costs                               |       | (1,442,528 | )              | —     |       |
| Deposits                                             |       | (531,529   | )              | (1,424,163 | )          |
| Deferral of cost in respect of revenue arrangements  |       | (1,574,252 | )              | (902,063   | )          |
| Due from employees                                   |       | (1,278,554 | )              | (2,663,601 | )          |
| Derivative contracts                                 |       | —     |           | (3,035,271 | )          |
| Others                                               |       | (1,164,338 | )              | (495,069   | )          |
|                                                 |       | (7,498,001 | )              | (9,860,763 | )          |
| Other assets                                         | ** ** | **$**      | **9,711,827**  | ** ** | **$**      | **11,457,225** | ** ** |

 

**8**                                              Property,plant and equipment

**8.1.1**                          Property,plant and equipment consists of the following:

| **As of December 31,**               | ** ** | ** **  | ** **     | **2005**    | ** ** | **2006**        | ** ** |
|-----------------------------------------------------|------------|-------------|----------------|-------------|------------|-----------------|------------|
| Land                                                |       | $           | 24,053         |        | $          | 24,476          |       |
| Building                                            |       | 22,645,127  |           | 31,944,802  |       |
| Leasehold  improvements                             |       | 4,133,345   |           | 5,814,610   |       |
| Computer—Hardware  and other service equipment |       | 32,893,636  |           | 41,075,166  |       |
| Computer—Software                              |       | 19,021,359  |           | 23,109,772  |       |
| Furniture and  fixtures                             |       | 14,613,120  |           | 18,092,401  |       |
| Other equipment                                     |       | 17,522,391  |           | 27,003,946  |       |
| Vehicles                                            |       | 2,244,283   |           | 2,295,679   |       |
| Capital  work-in-progress                           |       | 18,359,453  |           | 26,864,096  |       |
| Capital advances                                    |       | 8,474,405   |           | 20,537,480  |       |
|                                                |       | 139,931,172 |           | 196,762,428 |       |
| Less: Accumulated  depreciation and amortization    |       | (51,686,625 | )              | (71,004,604 | )          |
|                                                | ** ** | **$**       | **88,244,547** | ** **  | **$**      | **125,757,824** | ** ** |

 

F-20

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

8.1.2                          Depreciationand amortization expense on property, plant and equipment was $11,332,906,$15,212,682 and $18,605,047 for the years ended December 31, 2004, 2005and 2006 respectively and include amortization for computer software of$2,586,273, $3,642,520 and $4,437,291 respectively. Unamortized computersoftware cost as at December 31, 2005 and 2006 amounted to $7,393,116 and$7,399,398 respectively.

**9**                                              Goodwilland intangible assets

9.1.1                          Intangibleassets as at December 31, 2005 and 2006 consists of the following:

| **As of December 31,** | ** ** | ** ** | ** **     | **2005**   | ** ** | **2006**      | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|---------------|------------|
| Customer related  intangibles         |       | $          | 11,176,500     |       | $          | 11,176,500    |       |
| Technology  related intangibles       |       | —     |           | 497,879    |       |
| Less: Accumulated  amortization       |       | (1,018,435 | )              | (1,986,936 | )          |
|                                  | ** ** | **$**      | **10,158,065** | ** ** | **$**      | **9,687,443** | ** ** |

 

9.1.2                          Amortizationfor the years ended December 31, 2004, 2005 and 2006 amounted to $210,869,$748,023 and $968,501 respectively. The estimated amortization for theintangible assets, for the next five years would be as follows:

| ** **   | ** ** | **2007**  | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** |
|--------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Amortization |       | 1,092,723 |       | 1,183,638 |       | 1,231,260 |       | 1,231,260 |       | 1,173,174 |       |

 

9.1.3                          Themovement in goodwill balance is given below:

| ** **                                                                                 | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| Balance at  beginning of the year                                                          |       | $          | 24,677,771     |       | $          | 27,987,198 |   |
| Add: Additional  goodwill arising on account of contingent consideration for Patni Telecom |       | 5,578,772  |           | 12,184,832 |       |
| Add: Addition to  goodwill as per final purchase price allocation of Patni Telecom         |       | 649,022    |           | —     |       |
| Less: Reduction  of valuation allowance on deferred tax assets recognised on Patni Telecom |       | (2,918,367 | )              | —     |       |
| Less: Tax benefit  on incentive stock option of Patni Telecom                              |       | —     |           | (340,366   | )          |
| Balance at end of the  year                                                                | ** ** | **$**      | **27,987,198** | ** ** | **$**      | **39,831,664** | ** ** |

 

9.1.4                          Goodwillas of December 31, 2005 and 2006 has been allocated to the followingreportable segments:

| **Segment**         | ** ** | ** ** | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|---------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Financial  services |       | $          | 2,594,374      |       | $          | 2,594,374      |       |
| Telecom services    |       | 25,392,824 |           | $          | 37,237,290 |           |
| **Total**           | ** ** | **$**      | **27,987,198** | ** ** | **$**      | **39,831,664** | ** ** |

 

F-21

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**10**                                       Changein estimate

During 2006, the Companyreached a settlement with Internal Revenue Service (the “IRS”) relating to itstax returns of its US operations (Patni USA and its US branch) for fiscal years2001 and 2002. The settlement addressed transfer pricing, branch tax mattersand payroll taxes. In connection with the settlement, the Company restated its2003 and 2004 financial statements for errors in its computations and revisedits estimates with those elements of the settlement that represented a changein estimates, along with related adjustments to accrued interest. In addition,the Company reduced its accrual for payroll taxes on account of the settlement,with consequential reversal of related deferred tax asset.

The settlement hadthe following impact on the Company’s statement of income for the year endedDecember 31, 2006:

| 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)          Included under cost ofrevenues

(2)          Includedunder other income/expense

**11**                                       Accruedexpenses

Accrued expensesconsist of the following:

| **As of December 31,** | ** ** | ** ** | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| Employee costs                        |       | $          | 14,105,923     |       | $          | 21,427,493     |       |
| Subcontractor  accruals               |       | 3,996,007  |           | 5,029,497  |       |
| Professional fees  payable            |       | 1,260,231  |           | 1,512,893  |       |
| Others                                |       | 6,869,371  |           | 15,337,618 |       |
|                                  | ** ** | **$**      | **26,231,532** | ** ** | **$**      | **43,307,501** | ** ** |

 

F-22

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

**12****                                       Otherliabilities**

Otherliabilities consist of the following:

| **As of December 31,**                   | ** ** | ** **  | ** **     | **2005**    | ** ** | **2006**       | ** ** |
|---------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Deferred revenue                                        |       | $           | 2,027,444      |        | $          | 1,095,217      |       |
| Provision for  leave encashment                         |       | 10,092,730  |           | 12,321,032  |       |
| Provision for  retirement benefits                      |       | 6,284,868   |           | 8,073,273   |       |
| Capital  expenditure payable                            |       | 1,778,355   |           | 5,524,966   |       |
| Payroll tax  liability                                  |       | 22,122,868  |           | 6,481,233   |       |
| Interest on  corporate taxes and other related expenses |       | 6,783,211   |           | 5,744,001   |       |
| Advance from  customers                                 |       | 1,389,957   |           | 185,968     |       |
| Others                                                  |       | 6,654,123   |           | 6,920,116   |       |
|                                                    | ** ** | **$**       | **57,133,556** | ** **  | **$**      | **46,345,806** | ** ** |
| Less : Other  Current liabilities                  |       |        |           |        |       |
| Deferred revenue                                        |       | (2,027,444  | )              | (1,095,217  | )          |
| Provision for leave encashment                          |       | (10,092,730 | )              | (12,321,032 | )          |
| Capital expenditure payable                             |       | (1,778,355  | )              | (5,524,966  | )          |
| Payroll tax liability                                   |       | (22,122,868 | )              | (6,481,233  | )          |
| Interest on corporate taxes and other related  expenses |       | (6,783,211  | )              | (5,744,001  | )          |
| Advance from customers                                  |       | (1,389,957  | )              | (185,968    | )          |
| Others                                                  |       | (6,570,447  | )              | (6,869,329  | )          |
|                                                    |       | (50,765,012 | )              | (38,221,746 | )          |
| Other liabilities                                       | ** ** | **$**       | **6,368,544**  | ** **  | **$**      | **8,124,060**  | ** ** |

 

**13****                                       Leases**

13.1.1                   Patniacquires certain vehicles under capital lease for a non-cancelable period of4 years. The gross amount recorded under such capital lease was $1,143,504with accumulated depreciation of $475,198 as at December 31, 2005. Thegross amount recorded under such capital lease is $1,255,948 with accumulateddepreciation of $556,251 as at December 31, 2006.The depreciation expensein respect of these assets aggregated $254,201, $321,127 and $264,623 for theyears ended December 31, 2004, 2005 and 2006 respectively.

13.1.2                   PatniUSA has operating lease agreements, primarily for leasing office space, thatexpire over the next 1-7 years. These leases generally require Patni USAto pay certain executory costs such as taxes, maintenance and insurance. 

13.1.3                   Patnihas operating lease agreements, primarily for leasing office and residentialpremises. These agreements provide for cancellation by either party with anotice period ranging from 30 days to 120 days, after the initial lock-inperiod, if any. Some leases contain a clause for renewal of the leaseagreements. Some leases provide for annual renewal of the lease payments.

13.1.4                   PatniTelecom and its subsidiaries have operating leases for office space, that expireover the next 1-4 years. These agreements provide for cancellation byeither party with a notice period ranging from 30 days to 120 days, afterthe initial lock-in period, if any. 

F-23

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

13.1.5                   Futureminimum lease payments under non-cancelable operating leases (with initial orremaining lease terms in excess of one year) and future capital lease paymentsas of December 31, 2006 are as follows:

| ** **                                                        | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| 2007                                                              |       | $                   | 320,593    |                  | $          | 4,937,290 |   |
| 2008                                                              |       | 237,356             |       | 3,094,703             |       |
| 2009                                                              |       | 132,578             |       | 2,283,112             |       |
| 2010                                                              |       | 34,119              |       | 1,223,826             |       |
| 2011                                                              |       | —              |       | 280,632               |       |
| beyond 2011                                                       |       | —              |       | —                |       |
| Total minimum  lease payments                                     |       | 724,646             |       | $                     | 11,819,563 |   |
| Less: Amount  representing interest                               |       | (32,855             | )          |                  |       |
| Present value of  net minimum capital lease payments              |       | 691,791             |       |                  |       |
| Less: Current  installments of obligations under capital leases   |       | (301,138            | )          |                  |       |
| Obligations under  capital leases, excluding current installments |       | $                   | 390,653    |                  |       |   |

 

The related assetsfor capital leases are included under vehicles in property, plant and equipmentin the consolidated balance sheets.

13.1.6                   Rentalexpense for all operating leases for the years ended December 31, 2004,2005 and 2006 was $6,801,506, $10,228,316 and $12,510,436 respectively.

13.1.7                   Commencing2005, Patni USA has sublease agreements that expire over the next 2 years. Thetotal rental income from these offices during the year 2006 is $113,152. Thefuture sub lease income is as follows:

| 2007 |   | $      | 106,606 |   |
|------|--------|--------|---------|--------|
| 2008 |   | 17,994 |    |

 

**14****                                       Derivativesfinancial instruments**

14.1.1                   The Company periodically enters into foreigncurrency forward exchange contracts to hedge inter company receivables, bothanticipated and firm commitments, denominated in the United States dollar.These contracts reduce foreign currency risk caused by changes in exchangerates and are used to hedge these inter company receivables, generally forperiods up to 12 months. At December 31, 2006, the Company’s forwardcontracts have expiration dates which range from one to thirteen months.

Since there is a direct relationship between the forwardcontracts and the currency denomination of the underlying transaction, suchforward contracts are highly effective in hedging the cash flows of theCompany’s inter company receivables related to transactions denominated in theUnited States dollar. These forward contracts meet the criteria for cash flowhedge accounting treatment and accordingly, gains or losses, are included inother comprehensive income (loss) and are recognized in the consolidatedstatement of income based on occurrence of the underlying third partytransaction.

F-24

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

For forward contracts designated as a cash flow hedge,the hedge effectiveness is assessed based on changes in fair value attributableto changes 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, 2006, the Company had $1,505,009of net gains related to cash flow hedges deferred in Accumulated OtherComprehensive Income. The Company has also entered into net written options,which do not qualify for hedge accounting and are accordingly recognised atfair value with gains or losses included in foreign exchange (gain)/loss in theconsolidated statements of income.

14.1.2                   The following table presents the aggregatecontracted principal amounts of the Company’s derivative contracts outstanding:

| ** **                                    | ** ** | **Currency** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Forward contracts  (sell)                     |       |         | USD        |     |       | $        | 77,000,000 |   | $ | 182,564,103 |   |
| Foreign currency written  options, net (sell) |       |         | USD        |     |       | —   |       | $ | 19,500,000 |   |
|                                               |            |              |            |          |            |          |            |  |  |  |  |

 

**15****                                       Shareholders’equity**

***Common shares***

15.1.1                   The Company has only one class of equity shares.For all matters submitted to vote in the shareholders’ meeting, every holder ofequity shares (except holders of American Depository Shares—ADSs), as reflectedin the records of the Company on the date of the shareholders meeting shallhave one vote in respect of each share held. In the event of liquidation of theaffairs of the Company, all preferential amounts, if any, shall be dischargedby the Company. The remaining assets of the Company after such discharge shallbe distributed to the holders of equity shares in proportion to the number ofshares held by them.

15.1.2                   In February 2004, pursuant to an initialPublic Offering in India (‘IPO’), the Company has issued 13,415,200 commonshares for a net proceeds of $64,268,351 (after adjusting for direct expensesrelating to IPO of $3,889,281).

15.1.3                   In December 2005, pursuant to an InitialPublic Offering of American Depositary Shares, the Company issued 6,156,250ADSs (12,312,500 common shares) for a net proceeds of $117,021,852 (afteradjusting for direct expenses relating to ADSs of $8,196,274). The commonshares represented by the ADSs are similar to other common shares except forvoting rights. Under the depository agreement, the depository of ADSs shallvote as directed by the Board of Directors of the Company.

***Retained earningsand dividends***

15.1.4                   Retained earnings as of December 31,2005 and 2006 include profits aggregating $9,027,884, which are notdistributable as dividends under Indian Companies Act, 1956 (Companies Act).

15.1.5                   The ability of Patni to declare and paydividend under the Companies Act, is determined by its distributable profits asshown by its statutory accounts prepared in accordance with Indian 

F-25

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

GAAP.When Patni wishes to declare dividends, it is required as per the Companies Act,to transfer up to 10% of its net income (after the deduction of any accumulateddeficit) computed in accordance with local regulations to a general reservebefore a dividend can be declared. Also, Indian law on foreign exchange governsthe remittance of dividends outside India.

**16****                                      ****Employee****stock compensation plans**

16.1.1                   On June 30 2003, Patni established the‘Patni ESOP 2003’ plan (‘the plan’). Under the plan, the Company is authorizedto issue up to 11,142,085 equity shares to eligible employees. Employeescovered by the Plan are granted an option to purchase shares of the Companysubject to the requirements of vesting. The options vest in a graded mannerover four years with 25% of the options vesting at the end of each year. Theoptions can be exercised within five years from the date of vesting. Acompensation committee constituted by the Board of Directors of the Companyadministers the plan.

16.1.2                   The weighted average grant date fair valuesof options granted during the year ended December 31, 2004, 2005 and 2006are $2.67, $3.10 and $3.85 respectively.

16.1.3                   Stock options activity under the plan is asfollows:

| ** **                                | ** ** | **Year ended December 31, 2005** | ** **       |
|-------------------------------------------|------------|------------------------------------------------------|------------------|
| ** **                                | ** ** | **Exercise  price**                                  | ** **       | **Shares  arising out of  options** | ** ** | **Weighted  average  remaining  contractual  life (months)** | ** ** |
| Outstanding at  the beginning of the year |       | $ 3.16                                          |             |   | 2,352,015 |   |   |   | 75 |   |   |
|                                      |       | $                                                    | 5.51-$ 7.35 |   |   | 2,850,632 |   |   |   | 87 |   |   |
| Granted during  the year                  |       | $                                                    | 8.71-$10.25      |   |   | 860,710 |   |   |   | 90 |   |   |
| Forfeited during  the year                |       | $ 3.16                                          |             |   | (159,400 | ) |   |   | — |   |   |
|                                      |       | $ 7.35                                          |             |   | (248,625 | ) |   |   | — |   |   |
|                                      |       | $ 8.71                                          |             |   | (9,000 | ) |   |   | — |   |   |
| Exercised during  the year                |       | $ 3.16                                          |             |   | (433,065 | ) |   |   | — |   |   |
|                                      |       | $ 7.35                                          |             |   | (28,000 | ) |   |   | — |   |   |
| Outstanding at  the end of the year       |       | $ 3.16                                          |             |   | 1,759,550 |   |   |   | 67 |   |   |
|                                      |       | $                                                    | 5.51-$ 7.35 |   |   | 2,574,007 |   |   |   | 75 |   |   |
|                                      |       | $                                                    | 8.71-$10.25      |   |   | 851,710 |   |   |   | 86 |   |   |
| Exercisable at  the end of the year       |       | $ 3.16                                          |             |   | 663,243 |   |   |   | 53 |   |   |
|                                      |       | $                                                    | 5.51-$ 7.35 |   |   | 622,502 |   |   |   | 57 |   |   |

 

F-26

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

 

| ** **                                | ** ** | **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 |   |   |

 

16.1.4                   Theexercise price and weighted average remaining contractual life of stock optionsoutstanding at the end of the period are as follows:

| **Year ended December 31, 2006** | ** ** |
|------------------------------------------------------|------------|
| **Shares arising  out of options**    | ** ** | ** ** | ** ** | **Exercise  Price** | ** ** | **Weighted average  remaining contractual  life (months)** | ** ** |
|                                                 | 1,242,966  |   |   |   | $ | 3.16 |   |   |   | 56 |   |   |
|                                                 | 90,000     |   |   |   | $ | 5.51 |   |   |   | 62 |   |   |
|                                                 | 2,160,927  |   |   |   | $ | 7.37 |   |   |   | 63 |   |   |
|                                                 | 158,000    |   |   |   | $ | 8.71 |   |   |   | 69 |   |   |
|                                                 | 573,110    |   |   |   | $ | 10.25 |   |   |   | 75 |   |   |
|                                                 | 249,000    |   |   |   | $ | 10.93 |   |   |   | 78 |   |   |
|                                                 | 290,000    |   |   |   | $ | 10.27 |   |   |   | 81 |   |   |
|                                                 | 350,000    |   |   |   | $ | 8.37 |   |   |   | 82 |   |   |
|                                                 | 170,000    |   |   |   | $ | 7.29 |   |   |   | 84 |   |   |
|                                                 | 840,750    |   |   |   | $ | 8.40 |   |   |   | 87 |   |   |
|                                                 | 61,24,753  |   |   |   |   |   |   |   |   |   |   |
|                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-27

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

**17****                                       IncomeTax**

17.1.1                   Total income tax for the year endedDecember 2004, 2005 and 2006 were allocated as follows:

| **For the years ended December 31,** | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** | **2006** | ** **     |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|----------|----------------|
| Income from  continuing operations                            |       | $          | 12,886,362     |       | $          | 13,802,583     |       | $        | 47,691,763     |   |
| Shareholders’ equity,  for                               |       |       |           |       |       |           |       |
| —unrealized holding  gain/loss on investment securities  |       | 142,362    |           | 261,520    |       | 1,076,106      |       |
| —pension                                                 |       | 153,253    |           | 194,848    |       | (305,835       | )          |
| —gratuity                                                |       |       |           |       |       | (17,820        | )          |
| —tax benefit  arising on exercise of stock options       |       | —     |           | (136,816   | )          | 317,028        |       |
| Goodwill and  intangible assets                               |       | —     |           | (3,351,045 | )          | (340,366       | )          |
| **Total**                                                     | ** ** | **$**      | **13,181,977** | ** ** | **$**      | **10,771,090** | ** ** | **$**    | **48,420,876** | ** ** |

 

17.1.2                   Incometax expense attributable to income from continuing operations consists of thefollowing:

| **For the years ended December 31,** | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** | **2006** | ** **     |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|----------|----------------|
| Current taxes                                                 | ** ** | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | $          | 148,501        |       | $          | 1,787,316      |       | $        | 1,655,461      |   |
| Foreign                                                       |       | 14,675,569 |           | 13,904,560 |       | 41,691,833     |       |
|                                                          |       | $          | 14,824,070     |       | 15,691,876 |           | 43,347,294 |     |
| Deferred taxe**s**                                            |       |       | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | (303,711   | )              | (91,396    | )          | (336,467       | )          |
| Foreign                                                       |       | (1,633,997 | )              | (1,797,897 | )          | 4,680,936      |       |
|                                                          |       | (1,937,708 | )              | (1,889,293 | )          | 4,344,470      |       |
| **Total**                                                     | ** ** | **$**      | **12,886,362** | ** ** | **$**      | **13,802,583** | ** ** | **$**    | **47,691,763** | ** ** |

 

Pre-taxincome from domestic and foreign operations is set out below:

| **For the years ended December 31,** | ** ** | ** ** | ** **     | **2004**   | ** ** | **2005**       | ** ** | **2006** | ** **      |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|----------|-----------------|
| **Pre-tax income**                                            |       | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | 55,377,936 |           | 58,644,162 |       | 71,188,552     |       |
| Foreign                                                       |       | 4,056,225  |           | 16,025,097 |       | 35,753,981     |       |
| **Total**                                                     | ** ** | **$**      | **59,434,161** | ** ** | **$**      | **74,669,259** | ** ** | **$**    | **106,942,533** | ** ** |
|                                                               |            |            |                |            |            |                |            |          |                 |  |  |  |

 

F-28

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

17.1.3                   Thetax effect of temporary differences that give rise to significant portion ofdeferred tax assets and liabilities are presented below:

| ** **                                                                   | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| **Deferred tax assets:**                                                     | ** ** | ** ** | ** **     | ** ** | ** ** |
| Accrued expenses  and provisions                                             |       | $          | 6,812,271      |       | $          | 8,794,129 |   |
| Accounts  receivable                                                         |       | 662,329    |           | 867,320    |       |
| Deferred revenue                                                             |       | 489,119    |           | 146,010    |       |
| Carry forward  business losses                                               |       | 2,797,346  |           | 501,719    |       |
| Payroll taxes and  interest on payroll and corporate taxes                   |       | 9,843,043  |           | 4,394,379  |       |
| ESOP compensation  costs                                                     |       | —     |           | 705,135    |       |
| Others                                                                       |       | 57,104     |           | 1,015,345  |       |
| Gross deferred  assets                                                       |       | 20,661,212 |           | 16,424,037 |       |
| Less: Valuation  allowance                                                   |       | —     |           | (501,719   | )          |
| Total deferred  tax assets                                                   |       | $          | 20,661,212     |       | $          | 15,922,318 |   |
| Deferred tax  liabilities:                                                   |       |       |           |       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       | (1,000,371 | )              | (846,115   | )          |
| Property, plant  and equipment                                               |       | (1,078,576 | )              | (855,386   | )          |
| Undistributed  earnings of US branch                                         |       | (1,718,140 | )              | (1,892,887 | )          |
| Unrealised gain  on available for sale securities                            |       | (436,730   | )              | (1,520,939 | )          |
| Intangible assets                                                            |       | (4,063,260 | )              | (3,695,708 | )          |
| Tax deduction  available for notional interest deduction                     |       |       |           | (321,119   | )          |
| Others                                                                       |       | (192,253   | )              | (32,383    | )          |
| Total deferred  tax liabilities                                              |       | (8,489,330 | )              | (9,164,537 | )          |
| Net Deferred tax  assets                                                     | ** ** | **$**      | **12,171,882** | ** ** | **$**      | **6,757,781** | ** ** |
| **Classified  as**                                                           | ** ** | ** ** | ** **     | ** ** | ** ** |
| **Deferred tax assets**                                                      | ** ** | ** ** | ** **     | ** ** | ** ** |
| Current                                                                      |       | $          | 13,722,884     |       | $          | 10,240,528 |   |
| Non current                                                                  |       | 3,401,766  |           | 370,529    |       |
| **Deferred tax liabilities**                                                 | ** ** | ** ** | ** **     | ** ** | ** ** |
| Current                                                                      |       | 193,807    |           | 108637     |       |
| Non current                                                                  |       | 4,758,961  |           | 3,744,639  |       |
| Net Deferred tax assets                                                      | ** ** | **$**      | **12,171,882** | ** ** | **$**      | **6,757,781** | ** ** |

 

17.1.4                   Inassessing the realisability of deferred tax assets, management considerswhether it is more likely than not, that some portion, or all, of the deferredtax assets will not be realised. The ultimate realisation of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which the temporary differences and loss carryforwards aredeductible. Management considers the reversal of taxable temporary differences,the projected future taxable income, tax planning strategies and impact of taxexemptions currently 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 

F-29

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

valuation allowances.Taxable income for the years 2004, 2005 and 2006 aggregated $8,031,173,$16,336,603 and $29,143,691 respectively.

17.1.5                   Deferredtax liability in respect of undistributed earnings of Patni’s foreignsubsidiaries as of 2005 and 2006 aggregating $4,236,903 and $4,688,485respectively has not been recognised in the financial statements, as suchearnings are considered to be indefinitely re-invested. As of December 31,2006, the undistributed earnings of these subsidiaries were approximately $23,442,425.

17.1.6                   The net change in the year 2004 is attributableto valuation allowance on carry forward losses of Patni Telecom (which wasacquired during the year 2004) aggregating $2,924,898. This has been partlyoffset by tax benefits of losses utilised during the year aggregating $81,765.The net change in the year 2005 is attributable to reversal of valuationallowance on carry forward losses of Patni Telecom (which was acquired duringthe year 2004) aggregating $2,918,367 and reversal of valuation allowance of$67,623 on impairment of leasehold land. The net change in valuation allowancein the year 2006 is mainly on account of deferred tax created on business lossof Japan branch for the year 2006 aggregating to $501,719.

17.1.7                   The reported income tax expense attributableto income from continuing operations differed from amounts computed by applying the enacted tax rate toincome from continuing operations before income-taxes as a result of thefollowing:

| ** **                                                        | ** ** | **2004**    | ** **     | **2005**    | ** ** | **2006**       | ** ** |
|-------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Income before  income taxes                                       |       | $           | 59,434,161     |        | $          | 74,669,259     |       | 106,942,533 |   |
| Weighted average  enacted tax rate in India                       |       | 36.41       | %              | 34.39       | %          | 33.66          | %          |
| Computed expected  income tax expense                             |       | $           | 21,639,978     |        | $          | 25,680,625     |       | $ | 35,996,857 |   |
| Effect of:                                                        |       |        |           |        |       |           |       |
| Income exempt  from tax                                           |       | (21,826,422 | )              | (21,756,426 | )          | (29,673,705    | )          |
| Changes in  valuation allowance                                   |       | (81,765     | )              | (67,623     | )          | 501,719        |       |
| Non deductible  expenses                                          |       | 1,187,196   |           | 1,866,968   |       | 5,767,090      |       |
| US State taxes,  net of federal tax benefit                       |       | (302,726    | )              | 787,336     |       | 1,698,868      |       |
| Branch taxes                                                      |       | 12,083,807  |           | 6,461,722   |       | 5,928,986      |       |
| Foreign income  taxed at different rates                          |       | (78,857     | )              | (105,635    | )          | (12,403        | )          |
| Change in  statutory tax rate on deferred taxes                   |       | 2,057       |           | (16,432     | )          | —         |       |
| Profit on sale of  investments taxed at other than statutory rate |       | —      |           | (261,606    | )          | (571,740       | )          |
| Change to prior  year estimates                                   |       | —      |           | —      |       | 27,401,735     |       |
| Others                                                            |       | 263,094     |           | 1,213,654   |       | 654,356        |       |
| **Reported income tax expenses**                                  | ** ** | **$**       | **12,886,362** | ** **  | **$**      | **13,802,583** | ** ** | **$** | **47,691,763** | ** ** |

 

As discussed inNote 10, during 2006, the Company reached a settlement with the Internal RevenueService (the “IRS”) relating to its tax returns of its US operations (Patni USAand its US Branch) for fiscal years 2001 and 2002. The settlement addressedtransfer pricing and branch tax matters. Following the settlement, the Companyrevised its tax contingency reserves for open tax years and recorded additionalincome tax expense of $26,928,920.

F-30

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

17.1.8                   Upon acquisition of Patni Telecom, theCompany was entitled to utilize tax benefits on carry forward business lossesof Patni Telecom. Based on preliminary projections of future taxable income andtax planning strategies, management believed that there existed sufficientuncertainty regarding realization of tax benefits on the carry forward losses.Consequently, the Company recorded a valuation allowance for the carry forwardbusiness losses of Patni Telecom. In 2005, the Company evaluated the expectedrealisation of such carry forward losses and available tax planning strategiesand believed that the Company would make sufficient profits in future years toset off the carry forward losses. Accordingly, the valuation allowance has beenreversed and adjusted against goodwill.

17.1.9                   A substantial portion of profits of thegroup’s India operations is exempt from Indian income tax, being profit fromundertakings situated at Software Technology Parks. Under the tax holiday, thetax payer can utilize exemption of profits from income taxes for a period often consecutive years. The Company has opted for this exemption forundertakings situated in Software Technology Parks and these exemptions expireon various dates between years 2006 and 2009. The Company also avails benefitfor Income tax for their export operations. This exemption relating to exportoperations expires in a phased manner over a period of five financial yearscommencing from April 1, 2000. The aggregate effect on net income of thetax holiday and export incentive scheme were $20,572,502, $18,957,774 and$25,304,980 for 2004, 2005 and 2006 respectively. Further, the per share effectwas $0.17 ,$0.15 and $0.18 for 2004, 2005 and 2006 respectively.

17.1.10            During the year 2005, the Company has soldleasehold land for a consideration of $3,768,186 and recognised a gain on saleof $3,285,169. As required by the Indian Income Tax law, the Company hasreinvested $3,048,092 out of such 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**                                  Retirementbenefits to employees

***Gratuity benefits***

18.1.1                   In accordance with the Payment of GratuityAct, 1972, Patni provides for gratuity, a defined retirement plan covering allemployees. The plan provides a lump sum payment to vested employees atretirement or termination of employment based on the respective employee’sdefined portion of last salary and the years of employment with the Company.

18.1.2                   Patni contributes each year to a gratuityfund based upon actuarial valuations performed by an actuary. The fund isadministered by Patni through a trust set up for the purpose. All assets of theplan are owned by the trust and comprise of approved debt and other securitiesand deposits with banks. By statute, the trust is required to invest a minimumof 25% of its corpus in Central Government securities, 15% in State Governmentsecurities and 30% in Public Sector / Financial Institutions / Bank bonds. Thetrust can invest the remaining 30% of its corpus in any of the above specifiedcategories. Further, 10% of its corpus can be invested in private sector / bondsecurities which are rated investment grade from at least two rating agencies.

18.1.3                   With regard to Patni India and Patni TelecomIndia’s (formerly known as Cymbal Information Services Pvt. Ltd.) GratuityPlan, the following table sets forth the plan’s funded status and 

F-31

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

amountsrecognized in the Company’s consolidated balance sheets. Measurement dates usedto measure fair value of plan assets and benefit obligation isDecember 31.

| **At December 31,**                                               | ** ** | ** ** | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| **Change in benefit obligation**                                            |       |       |       |      |       |
| Projected benefit  obligation (“PBO”) at January 1,          |       | $          | 4,240,028  |      | $          | 4,307,971 |       |
| Service cost                                                                |       | 919,286    |       | 982,652   |       |
| Interest cost                                                               |       | 302,722    |       | 329,613   |       |
| Translation loss/(gain)                                                     |       | (164,522   | )          | 178,931   |       |
| Actuarial loss                                                              |       | 612,287    | )          | (583,370  | )          |
| Benefits paid                                                               |       | (377,256   | )          | (732,815  | )          |
| PBO at December 31,                                                    |       | 4,307,971  |       | 4,482,982 |       |
| Fair value of plan  assets as at January 1,                            |       | 3,629,830  |       | 4,790,090 |       |
| Actual return on plan  assets                                               |       | 257,210    |       | 273,829   |       |
| Employer contributions                                                      |       | 1,428,962  |       | 873,430   |       |
| Benefits paid                                                               |       | 77,256     | )          | (732,815  | )          |
| Translation gain                                                            |       | (148,656   | )          | 104,277   |       |
| Plan assets at  December 31,                                           |       | 4,790,090  |       | 5,308,811 |       |
| Funded status                                                               |       | 482,119    |       | 825,829   |       |
| Unrecognized actuarial  loss                                                |       | 960,409    |       | —    |       |
| Net amount recognized                                                       |       | 1,442,528  |       | 825,829   |       |
| Accumulated benefit  obligation                                             |       | 2,259,265  |       | 2,353,522 |       |
| Amounts recognized in the consolidated balance  sheets consists of:         |       |       |       | —    |       |
| Prepaid benefit cost  (included in ‘other assets’)                |       | $          | (1,442,528 | )         | $          | (918,045  | )          |
| Provision for Gratuity  (included in ‘other current liabilities’) |       | —     |       | 1,513     |       |
| Provision for Gratuity  (included in ‘other liabilities’)         |       | —     |       | 90,703    |       |
|                                                                        |       | $          | (1,442,528 | )         | $          | (825,829  | )          |

 

18.1.4                   Key weighted average assumptions used todetermine the benefit obligation were as follows:

| ** **    | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount rate |       |     | 8.0        | %        |       | 8.85 | % |
|               |            |          |            |          |            |  |  |

 

For the actuarialvaluation at December 31, 2006, compensation levels have been assumed toincrease at 15% per annum for the first year, 12.5% per annum for the next 3years and 7% per annum thereafter. For the actuarial valuation atDecember 31, 2005, compensation levels have been assumed to increase at15% per annum for the first year, 12.5% per annum for the next year, 10% perannum for next five years and 7% per annum thereafter.

Theexpected rate of return on assets in future is considered to be 7.5%. This isbased on the expectation of the average long-term rate of return to prevailover the next 15 to 20 years on the type of investments prescribed as per thestatutory pattern of investments.

F-32

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

18.1.5                   The composition of plan assets is detailedbelow:

| **As of December 31,**                 | ** ** | ** ** | ** **    | **2005**   | ** ** | **%**      | ** **    | **2006**   | ** ** | **%**      | ** ** |
|-------------------------------------------------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|------------|
| Central  Government Securities                        |       | 148,186    |          | 3.1        |       | 133,800    |          | 2.5        |       |
| Investment in  Government Securities based funds      |       | 3,478,625  |          | 72.6       |       | 4,201,692  |          | 79.1       |       |
| State Government  Securities                          |       | 42,325     |          | 0.9        |       | 55,271     |          | 1.0        |       |
| Public Sector /  Financials Institutions / Bank bonds |       | 971,670    |          | 20.3       |       | 868,676    |          | 16.4       |       |
| Others                                                |       | 149,284    |          | 3.1        |       | 49,372     |          | 0.9        |       |
| **Total**                                             | ** ** | **$**      | **4,790,090** | ** ** | **100**    | ** ** | **5,308,811** | ** ** | **100**    | ** ** |
|                                                       |            |            |               |            |            |            |               |            |            |            |            |  |

 

18.1.6                   Net periodic gratuity cost included thefollowing components:

| **Year ended December 31,** | ** ** | ** ** | ** **  | **2004**   | ** ** | **2005**      | ** ** | **2006** | ** **  |
|--------------------------------------------|------------|------------|-------------|------------|------------|---------------|------------|----------|-------------|
| Service cost                               |       | $          | 633,771     |       | $          | 919,286       |       | $        | 982,652     |   |
| Interest cost                              |       | 190,714    |        | 302,722    |       | 329,613       |       |
| Expected return  on assets                 |       | (179,505   | )           | (276,826   | )          | (378,065      | )          |
| Amortization                               |       | 49,607     |        | 99,371     |       | 41,284        |       |
| **Net gratuity cost**                      | ** ** | **$**      | **694,587** | ** ** | **$**      | **1,044,553** | ** ** | **$**    | **975,484** | ** ** |

 

18.1.7                   Key weighted average assumptions used todetermine the net periodic gratuity cost were as follows:

| ** **                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate              |       |     | 7.0        | %        |       |     | 7.5        | % |   | 8.00 | % |
| Expected return on  assets |       |     | 6.5        | %        |       |     | 7.5        | % |   | 7.50 | % |

 

For the actuarialvaluation at December 31, 2006, compensation levels have been assumed toincrease at 15% per annum for the first year, 12.5% per annum for the next 3years and 7% per annum thereafter. For determining the net periodic cost forthe year ended December 31, 2005, compensation levels have been assumed toincrease at 15% per annum for the first year, 12.5% per annum for the nextyear, 10% per annum for next five years and 7% per annum thereafter. For theyear ended December 2004, compensation levels have been assumed toincrease at 15% per annum for the first two years, 10% per annum for next 3years and 7% per annum thereafter.

18.1.8                   Patni’s expected contribution to gratuityfund for the calendar year 2007 is $ 227,297. The expected benefit payments fornext ten years are as follows:

| ** **                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012-2016** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------|------------|
| Expected benefit  payments |       | $        | 446,783    |     | $          | 512,531  |       | $        | 665,026    |     | $          | 893,046       |       | $ | 1,119,576 |   | $ | 5,451,321 |   |
|                            |            |          |            |          |            |          |            |          |            |          |            |               |            |  |  |  |  |  |  |

 

***Pension benefits***

18.1.9                   Certain directors of Patni in employment withPatni India and Patni USA are entitled to receive pension benefits uponretirement or on termination from employment at the rate of 50% of their lastdrawn monthly salary. The pension is payable from the time the eligibledirector reaches the age of sixty five and is payable to the directors or thesurviving spouse. The liabilities for these 

F-33

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

pension plans are actuarially determined and periodically recognised.These plans are not funded.

18.1.10            With regard to Patni India pension plans, thefollowing table sets forth the plan’s funded status and amounts recognised inthe Company’s consolidated balance sheet. Measurement dates used to measurebenefit obligation is December 31 for each fiscal year.

| **At December 31,**                                          | ** ** | ** ** | ** ** | **2005**   | ** ** | **2006**  | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
| **Change in benefit obligation**                                       |       |       |       |       |       |
| PBO at  January 1,                                                |       | $          | 1,778,033  |       | $          | 1,868,072 |       |
| Service cost                                                           |       | 52,950     |       | 66,718     |       |
| Interest cost                                                          |       | 131,830    |       | 148,860    |       |
| Translation  loss/(gain)                                               |       | (61,504    | )          | 37,573     |       |
| Actuarial loss/(gain)                                                  |       | (33,237    | )          | (211,921   | )          |
| PBO at  December 31,                                              |       | 1,868,072  |       | 1,909,302  |       |
| Funded status                                                          |       | (1,868,072 | )          | (1,909,302 | )          |
| Unrecognized  actuarial loss                                           |       | 137,098    |       | —     |       |
| Net amount  recognized                                                 |       | (1,730,974 | )          | (1,909,302 | )          |
| Amount recognized in the  consolidated balance sheets are as follows:  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued benefit  liability (included in ‘Other liabilities’) |       | 1,730,974  |       | (1,909,302 | )          |
| Net amount  recognized                                                 |       | 1,730,974  |       | (1,909,302 | )          |
| Accumulated benefit  obligation                                        |       | $          | 1,181,118  |       | $          | 1,327,907 |       |

 

18.1.11            Key weighted average assumptions used todetermine benefit obligation for Patni India pension plan were as follows:

| ** **                       | ** ** | **2005**      | ** ** | **2006**        |
|----------------------------------|------------|---------------|------------|-----------------|
| Discount rate                    |       | 8% per annum  |       | 8.85% per annum |
| Increase in compensation  levels |       | 10% per annum |       | 10% per annum   |

 

18.1.12            Net periodic pension cost of Patni India pension plan included the followingcomponents:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                               |       | $          | 63,594     |     | $          | 52,950   |       | $        | 66,718     |   |
| Interest cost                              |       | 115,255    |       | 131,830  |       | 148,860  |       |
| Amortization                               |       | 304,885    |       | 137,066  |       | —   |       |
| Net pension cost                           |       | $          | 483,734    |     | $          | 321,846  |       | $        | 215,578    |   |

 

18.1.13            Key weighted average assumptions used todetermine net periodic pension cost for the Patni India pension plan were asfollows:

| **Year ended December 31,** | ** ** | ** **     | ** ** | **2004**       | ** ** | **2005**      | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|----------|------------|
| Discount rate                              |       | 7.0% per annum |       | 7.5% per annum |       | 8% per annum  |       |
| Rate of compensation  increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum |       |

 

F-34

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

18.1.14            With regard to Patni USA pension plan, thefollowing table sets forth the plan’s funded status and amounts recognised inthe Company’s consolidated balance sheet. Measurement dates used to make upbenefit obligation is December 31 for each fiscal year.

| **At December 31,**                                          | ** ** | ** ** | ** ** | **2005**   | ** ** | **2006**  | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
| **Change in benefit obligation**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| PBO at  January 1,                                                |       | $          | 4,739,647  |       | $          | 5,716,530 |       |
| Service cost                                                           |       | 117,766    |       | 171,332    |       |
| Interest cost                                                          |       | 234,240    |       | 284,566    |       |
| Translation  loss/(gain)                                               |       | (187,253   | )          | 110,751    |       |
| Actuarial loss/  (Gain)                                                |       | 812,130    |       | (211,425   | )          |
| PBO at  December 31,                                              |       | 5,716,530  |       | 6,071,754  |       |
| Funded status                                                          |       | (5,716,530 | )          | (6,071,754 | )          |
| Unrecognized  actuarial loss                                           |       | 1,162,636  |       | —     |       |
| Net amount  recognized                                                 |       | (4,553,894 | )          | (6,071,754 | )          |
| Amount recognized in the  consolidated balance sheets are as follows:  |       |       |       |       |       |
| Accrued benefit  liability (included in ‘Other liabilities’) |       | 4,553,894  |       | 6,071,754  |       |
| Net amount  recognized                                                 |       | 4,553,894  |       | 6,071,754  |       |
| Accumulated benefit  obligation                                        |       | $          | 4,294,919  |       | $          | 4,147,099 |       |

 

18.1.15            Key weighted average assumptions used todetermine benefit obligation for Patni USA pension plan were as follows:

| ** **                       | ** ** | **2005**      | ** ** | **2006**      | ** ** |
|----------------------------------|------------|---------------|------------|---------------|------------|
| Discount rate                    |       | 5% per annum  |       | 5% per annum  |       |
| Increase in compensation  levels |       | 10% per annum |       | 10% per annum |       |

 

18.1.16            Net periodic pension cost of Patni USApension plan included the following components:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **2004** | ** ** | **2005**  | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|----------|------------|
| Service cost                               |       | $          | 139,182    |     | $          | 117,766   |       | $        | 171,332    |   |
| Interest cost                              |       | 217,259    |       | 234,240  |       | 284,566   |       |
| Amortization                               |       | 948,731    |       | 713,714  |       | 196,139   |       |
| Net pension cost                           |       | $          | 1,305,172  |     | $          | 1,065,720 |       | $        | 652,037    |   |

 

18.1.17            Key weighted average assumptions used todetermine net periodic pension cost for the Patni USA pension plan were asfollows:

| **Year ended December 31,** | ** ** | ** **     | ** ** | **2004**       | ** ** | **2005**      | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|----------|------------|
| Discount rate                              |       | 5.0% per annum |       | 5.0% per annum |       | 5% per annum  |       |
| Rate of compensation  increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum |       |

 

18.1.18            As discussed in Note 2.1.26, effective December 31,2006, the Company adopted the recognition and disclosure provisions of SFASNo. 158. The adoption of SFAS No. 158, had no effect on the Company’snet income, however it was effected via a gross charge to accumulated other 

F-35

----

**Patni Computer Systems Limited and subsidiaries**Notes to the consolidated financial statements (Continued)

comprehensive income of$1,166,734, net of related deferred income tax of $323,655. The effect ofapplying this statement on individual line items presented in theDecember 31, 2006 Balance Sheet is as follows:

| ** **                              | ** ** | **Before  application of  SFAS 158** | ** ** | **Adjustments** | ** **   | **After application   of SFAS 158** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|-----------------|--------------|---------------------------------------------------------|------------|
| Other assets                            |       | 11,944,215                                     |       |            | (486,990     | )                                                       |       |   | 11,457,225 |   |   |
| Deferred income  taxes non current      |       | 62,044                                         |       |            | 308,485      |                                                    |       |   | 370,529 |   |   |
| **Total  assets**                       | ** ** | **640,519,156**                                | ** ** | ** **      | **(178,505** | **)**                                                   | ** ** | ** ** | **640,340,651** |   |   |
| Other current  liabilities              |       | 38,222,059                                     |       |            | (313         | )                                                       |       |   | 38,221,746 |   |   |
| Total current  liabilities              |       | 119,488,396                                    |       |            | (313         | )                                                       |       |   | 119,488,083 |   |   |
| Deferred income  taxes non current      |       | 3,759,809                                      |       |            | (15,170      | )                                                       |       |   | 3,744,639 |   |   |
| Other liabilities                       |       | 7,444,003                                      |       |            | 680,057      |                                                    |       |   | 8,124,060 |   |   |
| **Total  liabilities**                  | ** ** | **131,082,861**                                | ** ** | ** **      | **664,574**  | ** **                                              | ** ** | ** ** | **131,747,435** |   |   |
| Accumulated Other  Comprehensive Income |       | 15,084,795                                     |       |            | (843,079     | )                                                       |       |   | 14,241,716 |   |   |
| **Total Shareholders’ Equity**     | ** ** | **509,436,295**                                | ** ** | ** **      | **(843,079** | **)**                                                   | ** ** | ** ** | **508,593,216** |   |   |

 

The estimated net loss forthe defined benefit gratuity and pension plans that will be amortized from accumulatedother comprehensive income into net periodic benefit cost over the next fiscalyear is $41,002.

18.1.19            As the assumed rates for the above definedbenefit plans have a significant effect on the amounts reported, the managementhas assessed these rates as comparable with prevalent industry standards andits projected long-term plans of growth.

***Provident fund***

18.1.20            All employees of Patni and Patni TelecomIndia receive provident fund benefits through a defined contribution plan inwhich both the employee and employer make monthly contributions to the plan at12% each of the covered employee’s defined portion of salary. The Company hasno further obligations under the plan beyond monthly contribution. Patnicontributes to the Provident Fund Plan maintained by the Government of India.

18.1.21            Patni contributed $1,765,281, $2,613,644 and$3,895,116 to the Provident Fund Plan in 2004, 2005 and 2006 respectively.

**19****                                       SegmentInformation**

19.1.1                   *SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information”*, establishes standards for the way enterprisesreport information about operating segments and related disclosures aboutproducts and services, geographic areas and major customers. The Company’soperations relate to providing IT services and solutions, delivered tocustomers operating in various industry segments. Accordingly, revenuesrepresented along industry classes comprise the principal basis of segmentalinformation set out in these consolidated financial statements. Secondary segmentalreporting is performed on the basis of the geographical location of thecustomers. The accounting policies consistently used in the preparation of theconsolidated financial statements are also consistently applied to individualsegment information, and are set out in the summary of significant accountingpolicies.

F-36

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

19.1.2                   Industrysegments of the Company comprise financial services, insurance services,manufacturing companies, telecommunications, technology services (comprisingindependent software vendors and product engineering) and others such as energyand utilities, retail, logistics and transportation and media andentertainment. The Company evaluates segment performance and allocatesresources based on revenue growth. Revenue in relation to segments iscategorized based on items that are individually identifiable to that segment.Costs are not specifically allocable to individual segment as the underlyingresources and services are used interchangeably. Fixed assets used in theCompany’s business or liabilities contracted have not been identified to any ofthe reportable segments, as the fixed assets and their services are usedinterchangeably between segments.

19.1.3                   Patni’sgeographic segmentation is based on location of customers and comprises UnitedStates of America (‘USA’), Europe, Japan, India and Others. Revenue in relationto geographic segments is categorized based on the location of the specificcustomer entity for which services are performed irrespective of the customerentity that is billed for the services and whether the services are deliveredonsite or offshore. Categorization of customer related assets and liabilitiesin relation to geographic segments is based on the location of the specificcustomer entity which is billed for the services. Substantial portion ofPatni’s long lived assets are located in India.

**19.1.3****                  ****Industry segments**

| Particulars                                                                      | ** ** | ** **                      | ** ** | **Financial  services** | ** ** | **Insurance** | ** ** | **Manufacturing** | ** ** | **Telecom** | ** ** | **Independent  Software  Vendor** | ** ** | **Product  Engineering** | ** ** | **Others** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|---------------|------------|-------------------|------------|-------------|------------|-----------------------------------|------------|--------------------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | **December 31, 2004** | ** ** |
| Revenues                                                                         |       | $                               | 62,707,961 |                    | $          | 107,001,559   |       |              | $          | 92,417,807  |       |                              | $          | 8,491,468                |       |       | $          | 19,344,147 |       |   |   | $ | 15,110,938 |   |   | $ | 21,507,744 | ** ** | **$** | **326,581,624** | ** ** |
| Accounts receivables, net                                                        |       | 8,689,913                       |       | 19,223,898              |       |          | 24,818,665 |              |       | 6,198,845   |       |                              | 3,662,373  |                     |       |       | 3,348,753  |       |       | 6,062,466 | ** ** | **72,004,913** | ** ** |
| Billings in excess of cost and estimated  earnings on uncompleted contracts |       | (55,182                         | )          | (946,385                | )          |          | (831,123   | )                 |       | (99,408     | )          |                              | (27,576    | )                        |       |       | (477,791   | )          |       | (408,881 | ) | **(2,846,346** | **)** |
| Advance from customers                                                           |       | —                          |       | (66,734                 | )          |          | (21,605    | )                 |       | —      |       |                              | (47,130    | )                        |       |       | —     |       |       | (2,570 | ) | **(138,039** | **)** |
| Cost and estimated earnings in excess of  billings on uncompleted contracts |       | 2,014,083                       |       | 1,202,844               |       |          | 4,553,774  |              |       | 1,992,678   |       |                              | 2,062,245  |                     |       |       | 1,768,014  |       |       | 1,639,802 | ** ** | **15,233,440** | ** ** |
| ** **                                                                       | ** ** | **December 31, 2005**           | ** ** |
| Revenues                                                                         |       | $                               | 72,185,157 |                    | $          | 124,885,014   |       |              | $          | 98,655,217  |       |                              | $          | 68,860,317               |       |       | $          | 22,514,511 |       |   |   | $ | 33,923,596 |   |   | $ | 29,308,120 | ** ** | **$** | **450,331,932** | ** ** |
| Accounts receivables, net                                                        |       | 13,627,715                      |       | 16,468,689              |       |          | 17,230,008 |              |       | 9,089,355   |       |                              | 3,739,578  |                     |       |       | 7,606,416  |       |       | 6,659,400 | ** ** | **74,421,161** | ** ** |
| Billings in excess of cost and estimated  earnings on uncompleted contracts |       | (188,409                        | )          | (383,407                | )          |          | (758,503   | )                 |       | (451,553    | )          |                              | (69,075    | )                        |       |       | (208,069   | )          |       | (291,330 | ) | **(2,350,346** | **)** |
| Advance from customers                                                           |       | (1,208,504                      | )          | (94,910                 | )          |          | (71,927    | )                 |       | —      |       |                              | (1,688     | )                        |       |       | —     |       |       | (12,928 | ) | **(1,389,957** | **)** |
| Cost and estimated earnings in excess of  billings on uncompleted contracts |       | 2,577,862                       |       | 5,148,267               |       |          | 3,553,636  |              |       | 9,163,047   |       |                              | 1,624,411  |                     |       |       | 3,007,721  |       |       | 1,019,150 | ** ** | **26,094,094** | ** ** |
| ** **                                                                       | ** ** | **December 31, 2006**           | ** ** |
| Revenues                                                                         |       | $                               | 88,360,525 |                    | $          | 134,513,555   |       |              | $          | 125,395,979 |       |                              | $          | 109,204,32               |       |       | $          | 23,828,82  |       |   |   | $ | 58,628,980 |   |   | $ | 38,918,599 | ** ** | **$** | **578,850,882** | ** ** |
| Accounts receivables, net                                                        |       | 16,469,861                      |       | 21,301,154              |       |          | 26,507,789 |              |       | 22,694,977  |       |                              | 4,463,335  |                     |       |       | 12,464,424 |       |       | 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    | )          |                              | (12,209    | )                        |       |       | (806,075   | )          |       | (869,432 | ) | **(3,324,581** | **)** |
| Advance from customers                                                           |       | (4,833                          | )          | (18,172                 | )          |          | (121,713   | )                 |       | —      |       |                              | (27,354    | )                        |       |       | (11,367    | )          |       | (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  |       |                              | 989,333    |                     |       |       | 456,626    |       |       | 1,774,474 | ** ** | **22,834,345** | ** ** |
|                                                                                  |            |                                 |            |                         |            |               |            |                   |            |             |            |                                   |            |                          |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-37

----

**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**19.1.3****                  *****Geographic segments***

| **Particulars**                                                             | ** ** | ** **                      | ** **  | **USA**    | ** ** | **Europe** | ** ** | **Japan** | ** ** | **India** | ** ** | **Others**      | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------|-------------|------------|------------|------------|------------|-----------|------------|-----------|------------|-----------------|------------|------------|------------|
| ** **                                                                  | ** ** | **December 31, 2004** | ** **  |
| Revenues                                                                    |       | $                               | 286,720,168 |       | $          | 25,690,385 |       | $         | 11,029,442 |      | $          | 726,011         |       | $          | 2,415,618  | ** ** | **$** | **326,581,624** | ** ** |
| Accounts receivables, net                                                   |       | 62,053,958                      |        | 8,433,786  |       | 366,978    |       | 132,587   |       | 1,017,604 | ** ** | **72,004,913**  | ** ** |
| Billings in excess of cost and estimated earnings on  uncompleted contracts |       | (2,806,346                      | )           | (28,339    | )          | (2,813     | )          | (8,848    | )          | —    | ** ** | **(2,846,346**  | **)**      |
| Advance from customers                                                      |       | —                          |        | (132,431   | )          | —     |       | (5,608    | )          | —    | ** ** | **(138,039**    | **)**      |
| Cost and estimated earnings in excess of billings on  uncompleted contracts |       | 10,463,077                      |        | 2,245,047  |       | 2,205,617  |       | 84,647    |       | 235,052   | ** ** | **15,233,440**  | ** ** |
| ** **                                                                  | ** ** | **December 31, 2005**      | ** **  |
| Revenues                                                                    |       | $                               | 381,887,038 |       | $          | 41,055,863 |       | $         | 19,362,908 |      | $          | 1,442,292       |       | $          | 6,583,831  | ** ** | **$** | **450,331,932** | ** ** |
| Accounts receivables, net                                                   |       | 59,329,356                      |        | 11,315,359 |       | 2,204,954  |       | 167,705   |       | 1,403,787 | ** ** | **74,421,161**  | ** ** |
| Billings in excess of cost and estimated earnings on  uncompleted contracts |       | (1,456,655                      | )           | (731,554   | )          | (162,137   | )          | —    |       | —    | ** ** | **(2,350,346**  | **)**      |
| Advance from customers                                                      |       | (1,333,823                      | )           | —     |       | —     |       | (2,021    | )          | (54,113   | )          | **(1,389,957**  | **)**      |
| Cost and estimated earnings in excess of billings on  uncompleted contracts |       | 20,216,375                      |        | 2,424,521  |       | 2,846,253  |       | 149,507   |       | 457,438   | ** ** | **26,094,094**  | ** ** |
| ** **                                                                  | ** ** | **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**  | ** ** |

 

19.1.4                   Onecustomer accounted for 32%, 22% and 15% of the total revenues for the yearended December 31, 2004, 2005 and 2006 respectively. Net receivables fromthis customer as at December 31, 2005 and 2006 amounted to 21% and 12% ofthe total net receivables respectively. The revenues from this customer wereacross all the industry segments of the Company. Another customer in theInsurance industry segment accounted for 15%, 12% and 10% of the total revenuesfor the years ended December 31, 2004, 2005 and 2006 respectively. Netreceivables for this customer as at December 31, 2005 and 2006 amounted toNil and 4% of the total net receivables respectively.

**20****                                       Foreignexchange (gain)/loss**

Aggregate foreign exchange(gain)/loss for the years ended December 31, 2004, 2005 and 2006 amountedto $2,081,800, $4,218,141 and $3,456,706 respectively. Foreign exchange lossamounting to $Nil, $2,524,996 and $708,780 for the years ended December 31,2004, 2005 and 2006 respectively, have been included in “Other(expense)/income, net” in the consolidated statements of income.

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**21****                                       Earningsper share**

A reconciliation of thecommon shares used in the computation of basic and diluted earnings per share isset out below:

| **Years ended December 31,**                                          | ** ** | ** **  | ** ** | **2004**    | ** ** | **2005**    | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|
| **Common shares**                                                                    |       |        |       |        |       |        |       |
| Weighted average  number of shares outstanding                                       |       | 123,066,042 |       | 125,736,592 |       | 137,957,477 |       |
| Effect of  dilutive equivalent shares—stock options outstanding            |       | 1,018,950   |       | 1,721,040   |       | 947,383     |       |
| Weighted average number  of equity shares and dilutive equivalent shares outstanding |       | 124,084,992 |       | 127,457,632 |       | 138,904,860 |       |

 

Optionsto purchase Nil, Nil and 2,630,860 equity shares were outstanding during theyear ended December 31, 2004, 2005 and 2006, respectively, but were notincluded in the computation of diluted earnings per share because the exerciseprice of the options was greater than the average market price of the equityshares.

**22****                                       Relatedparty transactions**

22.1.1                   Patnihas 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, various companies of the GE group (‘GE’) whichis a significant shareholder in Patni, directors of Patni and their relatives.Such transactions were consummated on terms equivalent to those that prevail inarm’s-length transactions.

*Revenues*

22.1.2                   PatniUSA sells computer hardware to PCSTL. Such sales during the years ended December 31,2004, 2005 and 2006 amounted to $8,974, $Nil and $Nil respectively.

*Expenses*

22.1.3                   Patnihas taken certain residential properties under operating leases from certainaffiliates and the Patni family. The rentals and other incidental chargesincurred for the same were $289,964, $266,325 and $ 127,748 for the yearsended December 31, 2004, 2005 and 2006 respectively. Amounts payable withrespect to these obligations as at December 31, 2005 and 2006 were $18,150and $ 14,495 respectively. Outstanding security deposits under the operatingleases placed by Patni with affiliates and the Patni family atDecember 31, 2005 and 2006 were $251,569 and $ 107,203 respectively.

22.1.4                   Patnihas given donations to a public charitable trusts, the trustees of which includea director of the Company and his relatives. The donations paid during theyears ended 2004, 2005 and 2006 were $55,199, $56,699 and $Nil respectively.

F-39

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

*Due from employees*

22.1.5                   Patnigrants personal loans to eligible employees, either for housing or personalpurposes. Personal loans include loans for vehicle purchase and otherindividual employee needs. Such loans are repayable in equal installments overperiods ranging from 6 - 60 months. Interest on these loans is charged at 7.5%- 9%. Loans outstanding at December 31, 2005 and 2006 were 56,662 and $267,328 respectively.

22.1.6                   PatniUSA, Patni UK, Patni GmbH, Patni Telecom and its subsidiaries grant personalloans to employees as well as advances to meet initial conveyance and livingexpenses. Such loans and advances are repayable over periods ranging up to 60months and 6 months respectively. Interest charged on these loans and advancesranged from 0% to 10%. Balance outstanding of such loans and advances atDecember 31, 2005 and 2006 were $1,252,682 and $ 2,427,797 respectively.

Employees executepromissory notes for the amount advanced along with a guarantor’s agreement ascollateral. In the case of long term housing loan, the original house deed issought to be deposited with the Company as collateral, in addition to theguarantor’s agreement.

*Transactions with General Electric (“GE”)*

22.1.7                   PatniUSA, Patni UK and Patni GmbH sell software services to various companies of theGE group. Sales to GE during the years ended December 31, 2004, 2005and 2006 amounted to $103,440,511, $99,359,172 and $84,403,156 respectively.This amounts to 32%, 22% and 15% of the total revenue for the years endedDecember 31, 2004, 2005 and 2006 respectively. Net receivables fromvarious GE companies as at December 31, 2005 and 2006 amounted to$15,673,490 and $13,724,670 respectively. This amounted to 21% and 12% of thetotal net receivables as at December 31, 2005 and 2006 respectively.

22.1.8                   GEcharges Patni and Patni USA for data link connections. Data link charges forthe years ended December 31, 2004, 2005 and 2006 amounted to $1,165,610,$933,475 and $991,277 respectively. Amount payable to GE at December 31,2005 and 2006 on account of data link charges amounted to $229,728 and $116,873respectively.

*Transactions with secondary shareholders*

22.1.9                   Duringthe year ended December 31, 2004, the Company incurred $1,021,096 as IPOrelated expenses on behalf of the secondary shareholders. During the year endedDecember 31,2005, the Company paid $491,965 for IPO related expenses onbehalf of the secondary shareholders. The secondary shareholders havereimbursed the Company for such amount in 2006.

**23****                                       Lineof Credit**

The Company has a Line ofCredit of Rs.140,000,000 ($3,160,984) as of December 31, 2006 from itsbankers for export credit requirements such as Packing Credit, Export BillDiscounting or Post Shipment Loan which have a maximum tenor of 180 days whichcan be rolled forward. This includes an inner limit of Rs.40,000,000 ($903,138)for working capital requirements such as Overdraft or Working Capital DemandLoan, which has a repayment period of 365 days for loans and 1 day forOverdraft. The Company also has a limit for issuance of Bonds and Guarantees of

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

Rs.70,000,000 ($1,580,492)for financial guarantees favoring the Government of India and other authoritieswhich have a repayment period of 36 months (including claim period). This limitis interchangeable with Letters of Credit, which have a repayment period of 365days. The line of credit bears interest as negotiated with the bank from timeto time. The facilities are secured by accounts receivables of the company andcontain financial covenants and restrictions on indebtedness. The Company hasnot availed these facilities as of December 31, 2006.

**24****                                       Commitmentsand Contingencies**

24.1.1                   TheCompany is obliged under a number of contracts relating to capital expenditure.Estimated amounts remaining to be executed on such contracts (net of advances),aggregated $22,427,362 and $31,907,505 at December 31, 2005 and 2006respectively.

24.1.2                   Guaranteesgiven by a bank on behalf of Patni amounted $399,630 and $1,204,985 as atDecember 31, 2005 and 2006 respectively and letter of credit issued bybank was $547,414 and $Nil as at December 31, 2005 and 2006 respectively.

24.1.3                   InDecember 2006, the Company received a demand from the Indian Income Taxdepartment of approximately $14,228,042 including interest demand ofapproximately $4,218,785 for the assessment year 2004 - 05. The tax demand ismainly on account of disallowance of deduction claimed by the Company underSection 10A of the Income Tax Act, 1961, in respect of profits earned byits various eligible undertakings. In January 2007, the management of theCompany has filed an appeal, within the time available under the Income TaxAct, challenging the disallowance. Considering the facts and nature ofdisallowances and based on the advice given by the Company’s legal counsel, themanagement believes that the disallowance is not tenable, is confident of afavourable outcome in appeal proceedings and hence no provision for such incometax demand is considered necessary.

Certain otherincome tax related legal proceedings are pending against the Company. Potentialliabilities, if any, have been adequately provided for, and the Company doesnot currently estimate any incremental liability in respect of theseproceedings. Additionally, the Company is also involved in lawsuits and claimswhich arise in ordinary course of business. There are no such matters pendingthat Patni expects to be material in relation to its business.

24.1.4                   TheCompany is currently under review by the US Department of Labor with respect tocompliance matters on past and present international labor practices. TheCompany has estimated and provided the liability $1,962,362 during the yearended December 31, 2006 for the years 2004 and 2005.

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**Patni Computer Systems Limited and subsidiaries Notes to the consolidated financial statements (Continued)**

**25****                                       Fairvalue of financial instruments**

Thefair value of Patni’s current assets and current liabilities approximate theircarrying values because of their short-term maturity. Such financialinstruments are classified as current and are expected to be liquidated withinthe next twelve months. The fair value of capital lease obligations has beenestimated by discounting cash flows based on current rate available to the Companyfor similar types of borrowing arrangements. The fair value and carrying valueof capital lease obligations is set out below:

| **Capital lease obligations** | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Carrying value** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------|------------|-------------------------|------------|
| At  December 31, 2005              |       | $          | 668,283    |                |       | $                       | 705,863    |   |   |
| At December 31,  2006              |       | $          | 655,088    |                |       | $                       | 691,791    |   |   |

 

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