---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2006 Commission file number
0-20943

|INTELLIGROUP,   INC.                                          
|--------------------------------------------------------------
|                                                              
|(Exact Name of Registrant as Specified In Its Charter)        
|                                                              
|New Jersey                                                    
|                                                              
|(State or Other Jurisdiction of Incorporation or Organization)
|                                                              
|499 Thornall Street, Edison, New Jersey                       
|                                                              
|(Address   of Principal Executive Offices)                    
|                                                              
|(732) 590-1600                                                
|                                                              
|(Registrants Telephone Number, Including Area Code)          
|                                                              
|Securities registered pursuant to Section 12(b) of the Act:   
|                                                              
|Title of   each class                                         
|                                                              
|None                                                          
|                                                              
|Securities registered pursuant to Section 12(g) of the Act:   
|                                                              
|Common Stock, $.01 par value                                  
|                                                              
|(Title of Class)                                              

Indicate by check
mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.

|Yes
o | No
x
|----- | ----

Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.

|Yes
o | No
x
|----- | ----

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

|Yes
x | No
o
|----- | ----



Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o

Indicate by check
mark whether the registrant is a large accelerated filer, accelerated filer, or
a non-accelerated filer (as defined in Exchange Act Rule 12b-2) (Check one).

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

Indicate by check
mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).

|Yes
o | No
x
|----- | ----

The aggregate market
value of the voting stock held by non-affiliates of the registrant at June 30,
2006 (the last business day of the most recent second quarter) was $28,011,549
(based on the closing price as quoted on the Nasdaq Stock Market on that date).
For the purposes of this calculation, shares owned by officers, directors and
10% shareholders known to the registrant have been deemed to be owned by
affiliates.  This determination of affiliate status is not a determination
for other purposes.

Indicate the number
of shares outstanding of each of the registrants classes of common stock,
as of March 19, 2007:

|Class                          |  | Number of   Shares
|------------------------------ |  | ------------------
|                               |  |                   
|Common Stock, $.01 par   value |  | 41,932,857        

---



TABLE OF CONTENTS

|                     | Item |                                                                                                | Page
|-------------------- | ---- | ---------------------------------------------------------------------------------------------- | ----
|                     |      |                                                                                                |     
|PART I               | 1    | Business                                                                                       | 4   
|                     |      |                                                                                                |     
|                     | 1A   | Risk Factors                                                                                   | 16  
|                     |      |                                                                                                |     
|                     | 1B   | Unresolved Staff Comments                                                                      | 23  
|                     |      |                                                                                                |     
|                     | 2    | Properties                                                                                     | 24  
|                     |      |                                                                                                |     
|                     | 3    | Legal Proceedings                                                                              | 25  
|                     |      |                                                                                                |     
|                     | 4    | Submission of Matters to a Vote of Security
Holders                                            | 26  
|                     |      |                                                                                                |     
|PART II              | 5    | Market for the Registrants Common Equity and Related
Shareholder Matters                      | 27  
|                     |      |                                                                                                |     
|                     | 6    | Selected Financial Data                                                                        | 28  
|                     |      |                                                                                                |     
|                     | 7    | Managements Discussion and Analysis of Financial
Condition and Results of Operations          | 30  
|                     |      |                                                                                                |     
|                     | 7A   | Quantitative and Qualitative Disclosure About Market
Risk                                      | 47  
|                     |      |                                                                                                |     
|                     | 8    | Financial Statements and Supplementary Data                                                    | 47  
|                     |      |                                                                                                |     
|                     | 9    | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure           | 47  
|                     |      |                                                                                                |     
|                     | 9A   | Controls and Procedures                                                                        | 48  
|                     |      |                                                                                                |     
|PART III             | 10   | Directors and Executive Officers and Corporate
Governance                                      | 52  
|                     |      |                                                                                                |     
|                     | 11   | Executive Compensation                                                                         | 52  
|                     |      |                                                                                                |     
|                     | 12   | Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters | 52  
|                     |      |                                                                                                |     
|                     | 13   | Certain Relationships and Related Transactions                                                 | 52  
|                     |      |                                                                                                |     
|                     | 14   | Principal Accounting Fees and Services                                                         | 52  
|                     |      |                                                                                                |     
|PART IV              | 15   | Exhibits, Financial Statement Schedules                                                        | 53  
|                     |      |                                                                                                |     
|EXHIBIT INDEX        | 54  
|                     |     
|SIGNATURES           | 62  
|                     |     
|FINANCIAL STATEMENTS | 63  

2



This annual
report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, among other things,
business strategy and expectations concerning industry conditions, market
position, future operations, margins, profitability, liquidity and capital
resources. Forward-looking statements generally can be identified by the use of
terminology such as may, will, expect,
intend, estimate, anticipate, or
believe or similar expressions or the negatives thereof. These
expectations are based on managements assumptions and current beliefs
based on currently available information. Although we believe that the
expectations reflected in such statements are reasonable, we can give no
assurance that such expectations will be correct. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this annual report on Form 10-K. Our operations are subject to a number
of uncertainties, risks and other influences, many of which are outside its
control, and any one of which, or a combination of which, could cause actual
results of operations to differ materially from the forward-looking statements.
Important factors that could cause actual results to differ materially from
expectations are disclosed in Item 1A, Risk Factors and Item 7,
Managements Discussion and Analysis and elsewhere in this
annual report on Form 10-K.

3



PART
I

| | Item 1. | Business.
| | ------- | ---------

General

Overview

Intelligroup is a
vertically led global Information Technology (IT) services
organization and a leading provider of consulting, business optimization, and
outsourcing solutions.  We provide end to end services including advisory,
implementation, testing and application management and support (AMS)
of Enterprise Resource Planning (ERP) solutions from SAP, and Oracle including
PeopleSoft, as well as e-business solutions using Java and the Microsoft .NET
platforms and infrastructure management services.  Our customer base
includes global Fortune 500 customers, middle market businesses and public
sector organizations. Our global delivery model, along with its International
Organization for Standardization (ISO) and Capability Maturity Model
(CMM) processes, enables customers to achieve rapid Return on
Investment (ROI) and reduced Total Cost of Ownership (TCO). With extensive
expertise in industry-specific enterprise solutions Intelligroup has earned a
reputation for consistently exceeding client expectations.

We improve
clients business performance by aligning business with IT. Through our
strategic alliances with SAP, Oracle, Microsoft and Compuware, we offer our
clients comprehensive process solutions combined with timely and cost effective
implementation of new business systems. Focusing on vertical solutions and full
lifecycle implementation in ERP, e-business solutions and application management
services, we enable clients to achieve significant business advantage, with
excellent quality, reduced time-to-market, optimized costs and long-term
customer relationships.

The implementation
of these solutions makes our clients more competitive.  Our ISO
9001:2000-certified and SEI/SW-CMMi Level 5 assessed offshore development center
delivers high quality, cost-effective, around the clock rapid development
services, for enterprise, e-commerce and mobile commerce applications. Our
offshore Global Support Center manages customers critical applications,
systems and infrastructure, keeping the critical applications stable, current
and optimized through efficient and cost-effective user, technical and
operations support.

In order to service
our customers in an optimal manner, our go to market strategy is guided by a
regional solution competency and industry vertical focus.  The regional
spread covers territories within North America, India, Middle-East, Europe and
Japan. These regional practices are responsible for managing and building
overall client relationships.  We have established practices for SAP,
Oracle, PeopleSoft and e-business solutions using Java and the Microsoft .Net
platforms.  These practices develop key service offerings, support business
development efforts, and provide critical support to implementation and support
projects. We have created industry vertical practices in Consumer Products, Life
Sciences, High tech, Banking Finance Securities and Insurance, Discrete
Manufacturing, State and Local Government, and K-12 and Higher Education.

4



Company
History

We were incorporated
in New Jersey in October 1987 under the name Intellicorp, Inc. to provide
systems integration and custom software development services.  The
companys name was changed to Intelligroup, Inc. in July 1992.  In
March 1994, we acquired Oxford Systems Inc. (Oxford).  On
December 31, 1996, Oxford was merged into Intelligroup and ceased to exist as an
independent entity.  In October 1996, we consummated its initial public
offering of its common stock (Common Stock).  Our executive
offices are located at Edison, New Jersey 08837.

In 1994, we began to
diversify our customer base by expanding the scope of our systems integration
and custom development services to include ERP software.  For many
customers, ERP solutions are viewed as an alternative to the custom design and
development of their own applications. Although ERP products are pre-packaged
solutions, there is a significant amount of technical work involved in
implementing such solutions and tailoring their use for a particular
customers needs.

Throughout the
mid-to-late 1990s, we grew significantly by capitalizing on the business
opportunity to provide implementation and customization services work to the
expanding ERP market.  We first began to provide these technical services
to customers implementing SAP software before expanding our service offerings to
include ERP products developed by Oracle in 1995 and PeopleSoft in
1997.

In late 1999, we
made the strategic decision to spin-off our Internet services business to our
shareholders. Accordingly, on January 1, 2000, Intelligroup transferred its
Internet applications services and management consulting businesses to SeraNova,
a wholly-owned subsidiary of Intelligroup on such date.

On July 5, 2000, we
distributed all of the outstanding shares of the common stock of SeraNova then
held by Intelligroup to holders of record of Intelligroups Common Stock as
of the close of business on May 12, 2000 (or to their subsequent transferees) in
accordance with the terms of a Distribution Agreement dated as of January 1,
2000 between Intelligroup and SeraNova.

Beginning in 2000,
we began to focus on the management and support of customers enterprise,
e-commerce and m-commerce applications. Additionally, we introduced certain
SAP-based proprietary tools that are designed to reduce the time and cost of
upgrading and maintaining SAP systems (Power Up
Services(SM)).  In 2001, we developed pre-configured SAP
solutions for the pharmaceutical industry (Pharma
Express(SM)) and the engineering and construction industry
(Contractor Express(SM)). Pharma Express, a solution
designed for small-to-medium sized life sciences companies, improves
manufacturing efficiencies and helps control the total cost of production.
Contractor Express, which has implementation accelerators developed for
mid-sized construction/contractor companies, assists in improving operational
efficiency and controlling project schedules.

On April 2, 2003, we
consummated the sale, effective as of March 1, 2003, of our Asia-Pacific group
of subsidiary companies (the Sale), operating in Australia, New
Zealand, Singapore and Hong Kong (together, the Former
Subsidiaries), to Soltius Global Solutions PTE Ltd, a Singapore
corporation (Soltius).  As consideration, Intelligroup received
a 5% minority shareholding in Soltius and a $650,000 note to be paid by Soltius
to Intelligroup over a period of 12 months.  We received the required
payments by January 2005.

5



In 2004, we
completed a $15 million private placement transaction whereby SOFTBANK Asia
Infrastructure Fund, L.P. (SAIF), an affiliate of SOFTBANK
Corporation, acquired approximately 33.5% of Intelligroups outstanding
Common Stock, and Venture Tech Assets Pvt. Ltd. (Venture Tech)
acquired approximately 16.8% of Intelligroups outstanding Common Stock
(Private Placement Transaction).  In connection with the
Private Placement Transaction, SAIF and Venture Tech designated five of nine
directors to the Companys Board of Directors.

On March 31, 2006,
we completed a $10 million private placement transaction whereby SAIF acquired
an additional 3,333,333 shares of Intelligroups common stock and Venture
Tech acquired an additional 3,333,334 shares of Intelligroups common
stock, at a share price of $1.50 (the 2006 Private Placement). 
The 2006 Private Placement was approved by a special committee of the
disinterested members of the Board of Directors and generated $9.8 million of
proceeds to us, net of transaction expenses.  Following the 2006 Private
Placement, SAIF and Venture Tech own 36% and 26% of our common stock,
respectively.

The following is a
description of Intelligroups business, including, among other things, our
services, markets and competitors. Financial information regarding geographic
areas and results of operations appears in the footnote entitled Segment Data
and Geographic Information in the Notes to the Consolidated Financial Statements
included in  Item 8. Financial Statements and Supplementary Data, and Managements Discussion and Analysis-Results of Operations by Business Segment.

Intelligroup
Services

Our services address
the implementation, upgrade, and application management needs of our customers.
Our proven methodologies and innovative tools allow customers to reduce costs by
accelerating implementations and upgrades, and by lowering ongoing support and
maintenance costs for ERP and extended ERP applications.

Historically, our
services have ranged from providing customers with staff augmentation services
to projects where we assume full project management responsibilities.  We
provide these services to our customers primarily on a time and materials or a
fixed bid basis and pursuant to agreements that are terminable upon mutually
agreed notice periods. During 2000, we began to focus on providing application
management services (AMS) for our customers ERP applications.
The contractual arrangements in these situations are typically fixed term, fixed
price and multi-year, as is common in the outsourcing market. Our focus on
management and support services is also intended to encourage ongoing and
recurring service relationships, rather than one-time implementation
engagements.

We created the
industrys first offshore lab dedicated to SAP development in 1995. 
Since then, our India-based offshore servicescoupled with the operations
in the United States, Europe and Japan, have helped our clients develop,
implement, maintain, support and integrate ERP and e-commerce solutions. Our
onsite/offshore model has been refined into a series of repeatable,
quality-embedded processes that continually enable it to:

6



| |  | Significantly reduce clients development time and costs;                         
| | - | ----------------------------------------------------------------------------------
| |   |                                                                                   
| |  | Deliver superior-quality enhancements on schedule;                                
| |   |                                                                                   
| |  | Ensure reliable service levels;                                                   
| |   |                                                                                   
| |  | Accommodate requirement changes and manage risks;                                 
| |   |                                                                                   
| |  | Provide 24x7 seamless access to scalable, dedicated and skilled professionals;
and
| |   |                                                                                   
| |  | Meet the peaks and valleys of resource requirements.                              

Customers partner
with Intelligroup in order to implement, extend and support existing
applications; or establish dedicated offshore Centers of Excellence (CoE) that
provide seamless services to the client and cope with the resource requirement
fluctuations.  Such CoEs are setup to provide clients a dedicated
pool of resources that are available to provide a wide range of services to the
client.

Intelligroup has
partnerships with SAP, Oracle (including PeopleSoft), Microsoft, and
Compuware.  We believe that such partnerships will continue to result in
enhanced industry recognition and market opportunities.

In 1995, we achieved
the status of a SAP National Implementation Partner. In 1997, we
enhanced our partnership status with SAP, by first achieving National Logo
Partner status and then Accelerated SAP Partner status. 
In July 1997, we were awarded PeopleSoft Implementation Partnership
status. In June 1998, we expanded our Oracle applications implementation
services practice and added upgrade services to meet market demand of mid to
large size companies that were implementing or upgrading Oracle
applications.  In 2000, we achieved SAP Services Partner status
and SAP Hosting Partner for the pharmaceuticals industry vertical
status.  In 2001, Intelligroups pharmaceutical template for the small
and medium-size businesses market (covering current Good Manufacturing Processes
(cGMP) and validation standards) was certified by SAP America. 
In 2002, we were awarded the SAP Services Partner Award of Excellence. In 2004
our Japan Subsidiary was awarded the SAP Award of Excellence  Upgrade
Business Award.  In 2005, we became SAP Powered by Netweaver Partner and in
2006, we became a member of the SAP Enterprise Services Community.  In
2006, we also became Reseller and Implementation partners of HP-Mercury and
Compuware Testing products.

As a result of our
experience in implementing ERP software, we have developed a proprietary
methodology and associated toolset for implementing enterprise business software
applications. The toolset also contains a project management and tracking tool,
which we utilize to monitor implementation projects undertaken for customers. We
believe that our methodology and toolset may enable our customers to realize
significant savings in time and resources. Furthermore, we believe that use of
the methodology and toolset also shortens the turn-around time for program
development, as it streamlines the information flow between Intelligroups
offices and customer sites.

Additionally, we
have introduced certain SAP-based proprietary tools and services, that are
designed to reduce the time and cost of upgrading and maintaining SAP systems.
Through these services, we help to cost-effectively size and analyze SAP upgrade
projects, as well as to efficiently evaluate and test SAP support packages. We
combine the assessment capabilities of our proprietary Uptimizer(SM)
Tool Kit with the skills and expertise of its SAP-certified global
implementation team to deliver high-quality, cost-effective upgrades to
customized SAP environments. HotPac Analyzer(SM) enables our
customers to analyze and test the impact of a support package on their own SAP
production environment before the support package is actually applied.  In
addition, HotPac Analyzer enables our customers to validate the overall impact
that a support package can have and isolate and identify the business
transactions that require thorough testing.

7



In 2001, we
developed Pharma Express and Contractor Express.  Pharma Express is a
ready-to-run, fully integrated pharmaceutical solution that enables
pharmaceutical companies of all sizes to improve the efficiency of their
manufacturing process to effectively control the cost-of-production and
distribution while keeping the production environment cGMP-compliant. 
Pharma Express incorporates SAP Best Practices for the highly regulated
pharmaceutical industry and seamlessly integrates order management, process
manufacturing, quality management, inventory and distribution and financials.
Contractor Express has implementation accelerators that enable engineering and
construction companies of medium and large sizes to implement SAP ERP solutions
faster to improve their operational efficiency and to effectively control
project schedules and manage the costs and resources associated with
construction projects.  Contractor Express incorporates SAP Best Practices
for the engineering and construction industry and seamlessly integrates order
management, procurement, project systems, plant maintenance, asset management,
human resources, financials and project costing.

Our offshore
centers, located in India, allow us to provide cost-effective, timely and high
quality professional services to customers throughout the world.

The offshore centers
are structured along the following lines 

| | Centers of Excellence (CoE)  which are development and support centers,
dedicated to certain strategic customers, that provide multi-platform,
multi-service, integrated and complete solutions to such strategic
customers.          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                        
| | Competencies groups  which are responsible for building process oriented
consulting excellence in SAP, Oracle- PeopleSoft, Microsoft, e-Business,
especially focused on upgrades.                                                     
| |                                                                                                                                                                                                                                        
| | Infrastructure Management  which provides monitoring services for our
customers internal systems, networks, and wide area networks. 
Technologies within this offering include Cisco, Sun, Nortel, IBM, Linux,
Citrix, and Microsoft.
| |                                                                                                                                                                                                                                        
| | Research and Development group  which is a center for the development of
proprietary tools designed to enhance the information technology solutions
offered to our customers.                                                         

We leverage our
offshore centers, in coordination with consultants located at customer sites, to
deliver rapid, around the clock services to provide customers with savings in
application deployment costs and expedited project completion. 
Intelligroup is able to deliver high value services at competitive prices due
to: (i) the high level of expertise and experience of consultants; (ii) the
rigorous application of our proprietary project methodologies, tools and project
management disciplines; and (iii) the cost structures associated with our
offshore centers.

Our customers are
primarily global Fortune 500 and other large and mid-sized companies in the
United States and other diverse geographical locations.  They include
Armstrong World Industries, Cox Newspapers, Inc. Joy Mining, San Diego Unified
School District, Eastman Chemical, AM General, Allergan, Kimball International,
Infineon Technologies, Hitachi America, 2Wire, Telik, New Age Electronics,
Hacienda, and Puerto Rico Telephone Company  Verizon.

8



We have also
participated in project teams led by IT consulting firms such as Accenture and
BearingPoint.

Application
Management Services

Intelligroups
Application Management Services provide the resources, processes and tools
needed for quality-driven user, technical and operations support. We use a
well-defined set of assessment, transition and long-term processes to deliver
customized, affordable and highly responsive support.

The Application
Management Services provides service offerings for Application Management,
Application Development and Application Integration

Companies around the
world entrust Intelligroup to manage their complex ERP and eCommerce environment
and infrastructure and to keep them stable and optimized, and aligned with new
business processes.  Intelligroup delivers:

| |  | Significant   reduction in support costs;                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             
| |  | Predictable   costs for easier budgeting;                                                                                   
| |   |                                                                                                                             
| |  | 24x7, on-demand access to skilled functional and technical professionals through
its offshore centers located in India;     
| |   |                                                                                                                             
| |  | Assured service levels and flexible, individualized support programs;                                                       
| |   |                                                                                                                             
| |  | Dedicated teams that are on-site, offshore or a combination of on-site and
offshore, depending on client requirements; and  
| |   |                                                                                                                             
| |  | Improved reliability, availability and performance of the infrastructure,
database, operations, applications and interfaces.

Key to our ability
to deliver Application Management Services is our offshore centers located in
India, which help to provide responsive global support to customers through
delivery teams that work around-the-clock. Intelligroup is able to deliver high
value services at attractive prices due to: (i) the high level of expertise and
experience of support professionals; and (ii) the cost structures associated
with the offshore centers.

We provide
Application Management Services directly to end-user organizations. Our
customers are primarily Fortune 500 and other large and mid-sized companies in
the United States and other global locations. They include General Electric,
Hitachi, Owens Corning, Armstrong World Industries, Bristol-Myers Squibb, Power
One, 2Wire, Joy Mining Machinery and Pearsons Technology Center.

9



Testing
Services

Intelligroup focuses
on providing ERP Test Automation services.  We provide test strategy and
provide functional, regression, and performance testing.  We are building
scripts that automate SAP and Oracle applications testing.

Trademarks and
Service Marks

Intelligroup,
the Intelligroup logo and Creating the Intelligent Enterprise are
all trademarks of the Company.

Power Up
Services, Uptimizer, HotPac Analyzer, Pharma
Express, Contractor Express,  4Sight,
4Sight Plus, EZ Path, Implementation
Assistant, myADVISOR and ASPPlus
are service marks.

Empower
Solutions is a service mark of Empower Solutions, a subsidiary of
Intelligroup.

All other trade
names, trademarks or service marks referenced herein are the property of their
respective owners and are not our property.

Sales and
Marketing

We historically
generate new sales leads from (i) referrals from existing customers, (ii)
introductions to potential customers by our alliance partners, which often need
to recommend qualified systems integrators to implement or enhance their
software products, and (iii) internal sales efforts.  In addition, we have
been introduced to customers by certain of our competitors, such as the
consulting practices of the former Big Five accounting firms, which
at times use our expertise and ability to deliver qualified personnel for
complex projects.

We have a focused
approach towards sales and marketing efforts. Our sales efforts are primarily
driven by onsite Business Development Managers (BDMs) who are
supported by Client Service Executives (CSE) who serve as leaders in
multiple engagements and have both sales and delivery responsibilities. BDMs are
primarily vertically focused and are responsible for developing and increasing
the sales pipeline, and for closing sales with new and existing customers. 
We continually evaluate the size of direct sales force in comparison to market
conditions and shall expand its direct sales force where market conditions
warrant.

CSEs are
responsible for all aspects of the customer relationship, with a focus on
service delivery and customer satisfaction.  CSEs will typically
focus on a region of the country or in a particular industry area. In addition
to their responsibilities for generating new revenue opportunities and expanding
revenue within existing clients, typically CSEs are also billable
headcount. The CSEs also serve in a quality assurance function and oversee all
services delivered to the client to ensure projects are delivered on-time and
within budget.

We have established
a Business Development Center (BDC) in our facilities in Hyderabad,
India.  The primary objectives of the BDC are to:  (i) generate
qualified leads for local BDMs to pursue with existing and prospective clients;
and, (ii) support the proposal efforts of local BDMs by providing strategic
research and proposal writing capabilities. We intend to continue to expand the
BDC in proportion to its local BDMs sales presence.

10



The primary
objective of our Marketing and Alliances function is branding and lead
generation.  We will continue to market to potential customers with
demonstrated needs for Intelligroups expertise in ERP, Testing, and
e-business solutions.  Intelligroup has exhibited and presented our
expertise at trade events associated with the primary ERP offerings.  These
include events such as SAPPHIRE, the annual SAP conference for SAP service
providers and end-users, the Americas SAP User Group, the Oracle Americas User
Group and the PeopleSoft Users Group and industry analyst shows like Gartner IT
Expo. We intend to continue participation in such industry-recognized programs
and trade shows.

In regard to
Alliances, we have strengthened our Alliance with SAP by becoming an Enterprise
Services Partner, a Duet Partner, and an SAP xApps Certified Partner.  We
have become a Certified Partner of Oracle, and are initiating joint campaigns
with them.  Our Microsoft Partnership has grown, and we are now part of
their Offshore Advisory Partner Council.

Most importantly,
however, we believe that satisfying customer expectations within budgets and
time schedules is critical to gaining repeat business and obtaining new business
from referrals.  We believe that we have consistently met customer
expectations with respect to budgets and time schedules.

Our services require
a substantial financial commitment by customers and, therefore, typically
involve a long sales cycle.  Once a lead is generated, we endeavor to
quickly understand the potential customers business needs and objectives
in order to develop the appropriate solution and bid accordingly.  Our CSEs
and project managers are involved throughout the sales cycle to ensure mutual
understanding of customer goals, including time to completion and technological
requirements. Sales cycles for complex business solutions projects typically
range from one to six months from the time we initially meet with a prospective
customer until the customer decides whether to authorize commencement of an
engagement.

Industry
Background

Organizations face a
rapidly changing business environment, including intense global competition,
accelerating technological change, and the need to embrace emerging technology
strategies.  Such businesses continually seek to improve the quality of
products and services, lower costs, reduce cycle times, optimize their supply
chain and increase the value to their customers. As a result, many businesses
implement and utilize advanced information solutions, which enable them to
optimize their business processes in such areas as product development,
manufacturing, sales, distribution and finance.

Historically, many
businesses have adopted information systems strategies using pre-packaged
software applications. Client/server systems widely replaced mainframe and
legacy systems with the promise of more functional, flexible and cost effective
applications, which are critical to the competitive needs of businesses.

11



As part of their
client/server strategies, organizations often acquire, or consider acquisition
of, the pre-packaged enterprise-wide business software applications offered by
leading ERP vendors, such as SAP, Oracle and PeopleSoft. These applications are
then implemented and maintained to meet their particular business needs. 
Alternatively, the organizations may develop, or commission the development of,
customized software applications to meet the needs of these organizations. In
both cases, customers have a set of core operations applications, which they use
to support their central business processes. These customers must balance
demands from their user departments for new, innovative business applications
against the absolute requirement to maintain, manage and optimize the core
operations applications.  These competing demands reflect areas of
potential business opportunity for us.

The majority of
customers who implement ERP solutions are Fortune 500 companies. We believe that
opportunities for new ERP implementations will continue predominantly in
subsidiaries and operating units of large-market clients and toward mid-market
clients.  Many mid-size companies have the need for core financial and
other operations systems that can be addressed by ERP products.  We believe
that opportunity exists to sell both professional consulting services and
application management services to mid-market clients. The mid-market segment is
very cost conscious and requires a highly efficient services delivery model,
which we believe it can provide through a combination of innovative tools and
templates, which expedite delivery and use of our offshore services, thereby
reducing costs.

The task of
developing and implementing enterprise-wide, mission-critical, information
solutions is complex.  It presents significant challenges for most customer
organizations and can be a time consuming and costly undertaking, which
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage information systems
environments consisting of multiple computing platforms, operating systems,
databases and networking protocols, as well as multiple packaged and custom
developed applications.

To support their IT
needs, many businesses increasingly engage experienced outside specialists for
assistance across the full life cycle of their solutions. Because of the
heightened business pressures they face, these customers are demanding
innovative solutions, in shorter timeframes, with lower life cycle cost of
ownership, at higher levels of quality and service, all with lower risk to
themselves and their businesses.

Companies must also
continually keep pace with a broad, and often confusing, array of new
technological developments, which can render internal IT skills obsolete.
Professionals with the requisite technology skills often are in short supply and
many organizations are reluctant to expand their internal information systems
department for particular projects.  At the same time, external economic
factors encourage organizations to focus on their core competencies and trim
work forces in the IT management area. Accordingly, organizations often lack
sufficient, and/or appropriate, technical resources necessary to design,
develop, implement and manage the information technology solutions needed to
support their business needs.  Thus, the Company believes that there is
significant potential business opportunity for implementing ERP
version-to-version upgrades as well as application management and support
services.

Another area of
opportunity for us is strategic offshore outsourcing.  With our history as
a pioneer in providing offshore management and support of mission critical
applications, we can offer clients a flexible, low cost option for managing ERP
applications.

12



We believe we also
have an opportunity in Service Oriented Architecture (SOA)
solutions.  SOA based solutions enable integration and building of
composite applications that enable flexible business processes.

Customers

We provide our
services directly to many Fortune 500 companies, as well as small to medium
sized enterprises, and, to a lesser extent, as a member of consulting teams
assembled by other information technology consultants, such as the consulting
practices of the former Big Five accounting firms.  During 2006 and 2005, one customer, various businesses of General Electric Company, accounted for more than 10% of revenue.

Although
Intelligroup has contracts with many of its customers to provide its services,
in general such contracts are terminable upon relatively short notice, typically
not more than 30 days. When providing application management and support
services for customers, we expect to compete for multi-year fixed term, fixed
price contracts.  There can be no assurance that our customers will
continue to enter into contracts with us or that existing contracts will not be
terminated.

Many of our
engagements involve projects that are critical to the operations of our
customers businesses and provide benefits that may be difficult to
quantify.  Our failure or inability to meet a customers expectations
in the performance of our services could result in a material adverse change to
the customers operations giving rise to claims against us for damages or
causing damage to our reputation, adversely affecting its business, financial
condition and results of operations.  In addition, certain of our
agreements with our customers require us to indemnify the customer for damages
arising from services provided to, or on behalf of, such customer.  Under
certain of our customer contracts, we warrant that we will repair errors or
defects in its deliverables without additional charge to the customer.  We
have not experienced, to date, any material claims against such
warranties.  We have purchased and maintain errors and omissions insurance
to insure us for damages and expenses incurred in connection with alleged
negligent acts, errors or omissions.

Competition

The markets for
Intelligroups services are highly competitive.  We believe that our
principal competitors include the internal information systems groups of its
prospective customers, as well as the following classes of companies (some of
which are also customers or referral sources of Intelligroup):

| |  | Consulting and software integration firms: including, IBM Global
Services, Electronic Data Systems, Computer Sciences Corporation, Cap Gemini
Ernst & Young, Accenture, BearingPoint Deloitte Consulting, IDS Scheer, SAP
Professional Services, Oracle Consulting, Hitachi, Atos Origin and
Rapidigm;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                       
| |  | Software applications vendors:  including, SAP, and Oracle including
PeopleSoft; and                                                                                                                                                                                                                  

13



| |  | Application management services firms: including, Covansys, Wipro
Technologies, Infosys Technologies Limited, Satyam Computer Services Ltd, HCL
Technologies Ltd., Cognizant Technology Solutions, Patni Computer Systems and
Tata Consultancy Services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many of our
competitors have longer operating histories, possess greater industry and name
recognition and/or have significantly greater financial, technical and marketing
resources than the Company.  In addition, there are relatively low barriers
to entry into Intelligroups markets and we have faced, and expect to
continue to face, additional competition from new entrants into these
markets.

We believe that the
principal competitive factors in our markets include quality of service and
deliverables, speed of development and implementation, price, project management
capability and technical and business expertise.  We believe that our
ability to compete also depends in part on a number of competitive factors
outside our control, including the ability of our competitors to hire, retain
and motivate project managers and other senior technical staff, the development
by others of services that are competitive with our services and the extent of
our competitors responsiveness to customer needs.

We believe that we
compete based on our expertise across the full life cycle of its clients
ERP solutions.  This expertise includes strategic IT consulting skills,
plus design and implementation skills in ERP products (primarily SAP, PeopleSoft
and Oracle), application integration and application management and support
related to those solutions. There can be no assurance that we will be able to
continue to compete successfully with existing and new competitors.

Employees

As of December 31,
2006, we employed 2,137 full-time employees, of whom 1,800 were engaged as
consultants or as software developers, 114 were engaged in sales and marketing,
and 223 were engaged in delivery management, finance and administration. Of the
total number of employees, 488 were based in the United States, 31 were based in
Japan, 39 were based in Europe and 1,579 were based in India.  In addition,
we engaged 110 independent contractors to perform information technology
services as of December 31, 2006.

None of our
employees are covered by a collective bargaining agreement. Substantially all of
our employees have executed employment agreements containing non-competition,
non-disclosure and non-solicitation clauses. In addition, we require that all
new employees execute such agreements as a condition of employment by
Intelligroup. We believe that we have been successful in attracting and
retaining skilled and experienced personnel.  There is increasing
competition for experienced sales and marketing personnel and technical
professionals.  Our future success will depend in part on our ability to
continue to attract, retain, train and motivate highly qualified
personnel.  We consider relations with our employees to be good.

Intellectual
Property Rights

Our success is
dependent, in part, upon our proprietary implementation methodology, development
tools and other intellectual property rights.  We rely upon a combination
of trade secret, non-disclosure and other contractual arrangements, and
copyright and trademark laws, to protect our

14



proprietary rights.  We generally enter into confidentiality agreements with our employees, consultants and customers, and limit access to and distribution of our proprietary information.  We also require that substantially all of our employees and consultants assign to us their rights in intellectual property developed while employed or engaged by us.  In addition we require that all new employees execute agreements that assign to us their rights in any intellectual property developed during the term of employment as a condition of employment by us.  There can be no assurance that the steps taken by us in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use of and take appropriate steps to enforce our intellectual property rights.

15



| | Item 1A. | Risk Factors
| | -------- | ------------

This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, including, without
limitation, statements regarding our intention to shift more of our focus
towards the management and support of customers enterprise, e-commerce and
m-commerce applications. Our business, operations and financial conditions are
subject to various risks. Our material risks that are currently known to
management are described. This section may not describe all risks associated
with us, our industry or business. The factors discussed below could cause
actual results and developments to be materially different from those expressed
in or implied by such statements.

If we are unable
to generate new sales and attain profitability, our business and financial
condition and results of operations may be adversely impacted.

Our lack of
profitability over recent periods may impact our ability to attract customers,
employees, investors and creditors. Our ability to achieve profitability in
future periods will depend in large part on our ability to generate new sales,
particularly annuity-based engagements, to improve our rate of employee
utilization, and to manage selling, general and administrative expenses in
proportion to our top line. We cannot assure you that we will be able to
generate profits or that a failure to do so would not have a material adverse
effect on our financial condition and results of operations.

The departure of
one or more key employees may have a material adverse effect on our ability to
operate our business.

Our future
performance depends to a significant degree upon the continued service of the
key members of our management team, as well as marketing and sales personnel,
and our ability to attract retain new management and other personnel.  In
addition, our future performance depends on the ability to effectively
transition key management, sales and operational roles, including adequate
knowledge transfer, in the event any turnover in our key personnel.  The
loss of any one or more of our key personnel or the failure to attract and
retain key personnel or the ability to effectively manage changes in key
personnel could have a material adverse effect on our business, results of
operations and financial condition.

If we are unable
to remediate the weaknesses in our internal control over financial reporting
identified in this report or to improve our control environment, it could result
in adverse consequences to us, including, but not limited to, a loss of investor
confidence in the reliability of our financial statements, which could cause the
market price of our stock to decline; increased costs and efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002; and further disclosures that
could be viewed negatively by our stakeholders.

We have reported
material weaknesses in our internal controls over financial reporting. If we are
unable to remediate such material weaknesses, to continue to improve our control
environment and to prevent future material weaknesses, or to remediate any
weaknesses that may arise, such failure will adversely impact our ability
to:  (i) effectively manage the business; (ii) timely record, process,
summarize and report financial statements that fairly present, in all material
aspects, our financial condition, statements of operations and cash flows; and
(iii) comply with applicable law, including the Sarbanes-Oxley Act of
2002. Furthermore, it could result in additional adverse consequences to
us, including, but not limited to, a loss of investor confidence in the
reliability of our financial statements,

16



which could cause the market price of
our stock to decline and further disclosures that could be viewed negatively by
our stakeholders.  In addition, we will be required to comply with the
internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act
of 2002 beginning in 2007.  If we are unable to maintain effective internal
control over financial reporting, complying with Section 404 of the
Sarbanes-Oxley Act of 2002 may be costly, require a significant portion of our
senior managements time and result in disclosures that could be viewed
negatively by the our stakeholders.

If we are unable
to attract and retain a sufficient number of highly skilled employees it may
adversely affect our profitability.

Our business is
labor intensive and, therefore, our success depends in large part on our ability
to recruit, retain, train and motivate highly skilled employees, particularly
project managers and other senior level technical personnel. Our ability to
attract and retain a sufficient number of highly skilled employees is impacted
by a number of factors including, but not limited to, concerns regarding our
financial condition and competition for employees in India which may cause
increasing compensation for existing and prospective employees, and the
continued ability to use stock options to compensate such highly skilled
employees in light of recent changes in accounting rules related to stock
options. We cannot assure you that we will be able to attract and retain a
sufficient number of highly skilled employees or that a failure to do so would
not have a material adverse effect on our financial condition and results of
operations.

We may not be
able to compete effectively for technical personnel in India.

The market for
technical personnel in India, which represents the primary recruiting market for
our technical personnel, is extremely competitive resulting in increased
compensation costs. These increasing compensation costs have contributed to the
deterioration of our gross margins. We cannot assure you that we will be able to
effectively compete for technical personnel in India or that a failure to
compete would not have a material adverse effect on our financial condition and
results of operations.

Our performance
could be materially adversely affected by a general economic downturn or
lessening demand in the information technology services industry.

Our business and
financial condition depends on the health of the general economy, as well as the
information technology services industry. Our revenue and profits are driven by
demand for our products and services. A lessening demand in either the overall
economy or the software sector could lead to a material decrease in our future
revenues and earnings. Other factors, that are beyond our control, that can also
impact our performance include: (i) patterns of software and hardware capital
spending by customers, (ii) information technology outsourcing trends, (iii) the
timing, size and stage of projects, (iv)  new service introductions by us
or our competitors and the timing of new product introductions by our ERP
partners, (v) levels of market acceptance for our services, (vi) general
economic conditions, and (vii) the hiring of additional staff. We cannot that
assure you that there will not be a general economic downturn or that such a
downturn would not have a material adverse effect on our business and financial
condition.

If we are unable
to maintain access to external funding, we may be unable to continue our ongoing
business or fund future growth.

In addition to cash
generated by our on-going operations, we rely on access to external sources of
funding and our ability to timely collect cash from our customers to manage our
business. Our ability to continue our ongoing business operations and fund
future growth depends on our ability to maintain compliance with the financial
and other covenants in our credit facility or to secure alternate sources of

17



financing.  However, such alternate financing may not be available or if available may not be on terms favorable to us.

The information
  technology services industry is highly competitive and we may not be able to
  compete effectively.

The markets for our
services are highly competitive. Many of our competitors have greater financial,
technical and marketing resources than we do. The increased competition in the
industry, among other negative effects, may cause a decrease in our billing and
employee utilization rates. We cannot assure you that we will be able to compete
effectively or that our inability to compete effectively would not have a
material adverse effect on our financial condition and results of
operations.

Business and
financial risks to important business partners may negatively impact our
financial condition.

We rely on continued
relationships and business associated with SAP America and Oracle. The continued
uncertainty relating to Oracles integration of PeopleSoft into its product
offerings and the affect that this may have on general market acceptance of
PeopleSofts products, could adversely impact our ability to sell
professional consulting services related to such enterprise resource
applications.

If we lose any
large customer, our financial condition could be materially, negatively
impacted.

We derive a
significant portion of our revenue from a limited number of customers and
projects. Our ability to grow our business depends in large part on maintaining
such customer relationships and the continuing purchasing power of such
customers. The loss of any large customer could have a material adverse effect
on our business, financial condition and results of operations. There can be no
assurance that we will not lose a large customer or that losing a large customer
would not have a material adverse effect on our financial condition and results
of operations.

The fact that our
common stock is not listed on a national exchange may negatively impact our
ability to attract investors and to use our common stock to fund future growth.

Our common stock
trades on the Pink Sheets. In order to maintain liquidity in our common stock,
we depend upon the continuing availability of a market on which our securities
may be traded. The fact that our common stock is not listed on a national
exchange may impact our ability to attract investors and to use our common stock
to fund future growth.

We are unable to
predict the outcomes of various lawsuits and legal claims or the potential
losses related to those lawsuits and claims.

We and certain
former officers are defendants in a shareholder class action suit relating to
the restatement of historical financial statements. If we are unable to defend
ourselves and resolve the ongoing shareholder litigation related to our
restatement of prior periods consolidated financial statements within the
limits of our director and officer liability insurance policy such failure will
adversely affect our financial condition.

In addition, there
is the potential for significant claims against us relating to our professional
services from customers or otherwise and our ability to adequately mitigate the
risk of such potential claims may impact our future financial condition. Our
ability to comply with existing and future immigration regulations may impact
our ability to engage and deploy consultants on billable engagements. 
Uncertainties resulting from pending litigation matters and from potential
administrative

18



and regulatory issues may adversely affect our business, including, but not limited to, accounting, corporate governance, immigration and taxation matters.

Currency
  fluctuations may have a material adverse effect on our financial condition and results of operations.

Uncertainty relating
to worldwide currency exchange rates, particularly in regard to the Indian
rupee, the Euro, British Pound, Danish Krone and Japanese Yen, and the
fluctuations in such exchange rates may impact our quarterly and/or annual
financial results. We cannot assure you that such a fluctuation in currency
would not have a material adverse effect on our financial condition and results
of operations.

We can not
predict shifts in policy or political changes in governments which can regulate
or impact our business operations, specifically in the United States and
India.

There is the
potential for future legislation by the U.S. government regulating or taxing
outsourcing which may adversely affect our business model. In addition, there is
continued uncertainty relating to the current geopolitical climate, particularly
relative to internal India politics and their relation to Indias
continuing efforts to liberalize its economy and be receptive to economic
conditions and policies favorable to our business model. Changes in Indias
economic policies or additional legislation regarding information technology
services businesses may adversely affect our business model.

If our measures
to protect our intellectual property rights are inadequate, our financial
condition could be negatively impacted.

We rely upon a
combination of trade secrets, nondisclosure and other contractual arrangements,
and copyright and trademark laws to protect our proprietary rights. Our future
success is dependent, in part, upon our proprietary methodologies and toolsets,
development tools and other intellectual property rights. We enter into
confidentiality agreements with our employees, generally require that our
consultants and customers enter into such agreements, and limit access to and
distribution of our proprietary information. We also require that substantially
all of our employees and consultants assign to us their rights in intellectual
property developed while employed or engaged by us. There can be no assurance
that the steps taken by us in this regard will be adequate to deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use of and take appropriate steps to enforce our
intellectual property rights.

We may be subject
to increased tax liabilities, including if the spin-off of our former
subsidiary, SeraNova, is determined to be taxable, we would be liable for up to
approximately $65 million, which would negatively impact our financial
condition.

We were previously
entitled to a tax holiday for certain revenue earned and expenses incurred by
our existing Software Technology Parks of India Unit (STPI Unit) of
our Hyderabad operations. Such tax holiday expired effective March 31, 2006 and
therefore our future tax liability will increase. In addition, in July 2000, we
completed the tax-free spin-off of SeraNova, our former subsidiary. In March
2001, SeraNova and Silverline Technologies Limited (Silverline)
consummated the acquisition of SeraNova by Silverline. Had the acquisition of
SeraNova by Silverline been contemplated at the time of the spin-off, the
spin-off would have been a taxable transaction. SeraNovas management has
represented that such acquisition was not contemplated at the time of the
spin-off of SeraNova by Intelligroup, and accordingly should not impact the
tax-free nature of the spin-off. Although we and SeraNova are parties to a tax
sharing agreement pursuant to which SeraNova agreed to indemnify Intelligroup
with respect to any possible tax liability related to the spin-off, SeraNova has
filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy
Code and would be unable to

19



pay the resultant tax liability pursuant to SeraNovas indemnification
obligations under its tax sharing agreement with Intelligroup. If it were
determined that the spin-off was taxable, Intelligroup may have to bear the
liability to pay such the tax liability, which would be material. Please refer
to Note 8 to the financial statements for the year ended December 31,
2006.



Third parties may
claim that our services or deliverables infringe upon their intellectual
property rights, which could result in material costs.

Third parties may
assert infringement claims against us in the future, especially in light of
recent developments in patent law expanding the scope of patents on software and
business methods.  These assertions, regardless of their validity, could
result in costly and time-consuming litigation, including damage awards and
indemnification payments to customers, or could require costly redesign of
products or present the need to enter into royalty arrangements which could
decrease margins and could adversely affect our results of operations. Any such
litigation or redesign of products could also negatively impact customer
confidence in our services or deliverables and could result in damage to our
reputation and reduced licensing revenue.

If accounting
interpretations relating to revenue recognition change, our reported revenues
could decline or we could be forced to make changes in our business
practices.

There are several
accounting standards and interpretations covering revenue recognition for the
software industry. These pronouncements include Statement of Position
(SOP) 97-2, Software Revenue Recognition, SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, and the
Securities and Exchange Commission Staff Accounting Bulletin No. 101 and 104,
Revenue Recognition in Financial Statements.  These standards
address software revenue recognition matters primarily from a conceptual level
and do not include specific implementation guidance. We believe that our revenue
has been recognized in compliance with pronouncements.

The accounting
profession and regulatory agencies continue to discuss various provisions of
these pronouncements with the objective of providing additional guidance on
their application. These discussions and the issuance of new interpretations,
once finalized, could lead to unanticipated reductions in recognized revenue.
They could also drive significant adjustments to our business practices which
could result in increased administrative costs, lengthened sales cycles and
other changes which could adversely affect our reported revenues and results of
operations.

Some of our
clients may experience unique economic conditions that are specific to their
particular industry.

We provide services
to clients in a wide variety of industries.  Many of the industries are
subject to factors and economic conditions that are unique to the particular
industry and may not be reflected in the overall health of the economy in
general. Our revenue growth and the realizability of our accounts receivable
could be adversely affected if our clients in these particular industries
encounter economic difficulties. Such difficulties could include:  (1)
inability of participants in the industry to access the capital or credit
markets; (2) business slowdowns due to excess inventory; and (3) shortfalls in
demand for the product or service produced by a particular industry.

If we are
unable to negotiate customer contract renewals on comparable terms, it may
materially adversely effect our financial condition and results of operations.

Contracts
continually expire and must be renegotiated or rebid. Due to the competitive
nature of our industry and variable economic status of our clients, we may
experience difficulty in negotiating terms comparable to current or recently
expired contracts. There can be no assurance that difficulty in

20



renegotiating or renewing contracts would not have a material adverse effect on our financial condition and results of operations.

Our stock price
  may be extremely volatile, and you may not be able to resell your shares of
  common stock at or above your purchase price.

There has been
significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of our common stock. You may not be able to resell your shares
at or above the price you pay for your shares due to fluctuations in the market
price of our common stock caused by changes in our operating performance or
prospects and other factors.

Some specific
factors that may have a significant effect on our common stock market price
include:

| |  | actual or anticipated fluctuations in our operating results or future
prospects;                                                                                                                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                             
| |  | the publics reaction to our press releases, our other public announcements
and our filings with the SEC;                                                                                                                   
| |   |                                                                                                                                                                                                                             
| |  | strategic actions by us or our competitors, such as acquisitions or
restructurings;                                                                                                                                         
| |   |                                                                                                                                                                                                                             
| |  | new laws or regulations or new interpretations of existing laws or regulations
applicable to our business;                                                                                                                  
| |   |                                                                                                                                                                                                                             
| |  | changes in accounting standards, policies, guidance, interpretations or
principles;                                                                                                                                         
| |   |                                                                                                                                                                                                                             
| |  | changes in the information technology services industry as a result of changes
in financial markets or general economic conditions, including those resulting
from war, incidents of terrorism and responses to such events;
| |   |                                                                                                                                                                                                                             
| |  | sales of common stock by us or members of our management team; and                                                                                                                                                          
| |   |                                                                                                                                                                                                                             
| |  | changes in stock market analyst recommendations or earnings estimates regarding
our common stock, other comparable companies or the information technology
services industry generally.                                     

There may be
circumstances in which the interests of our major shareholders could be in
conflict with your interests as a shareholder.

Our major
shareholders collectively own approximately 62% of our common stock on a
consolidated basis as of the date of this report and control our board of
directors. So long as our majority shareholders continue to own a majority to
controlling interest of our common stock and control our board of directors,
circumstances may occur in which the major shareholders (or other major
investors) may have an interest in pursuing acquisitions, divestitures or other
transactions, including among other things, taking advantage of certain
corporate opportunities that, in their judgment, could enhance their investment
in us or another company in which they invest.  These transactions might
invoke risks to our other holders of common stock or adversely affect us or
other investors, including investors who purchase common stock.

21



As a result of these
factors and others, our actual results may differ materially from the results
disclosed in the forward-looking statements contained in this report.

22



| | Item 1B. | Unresolved Staff Comments.
| | -------- | --------------------------

Not
applicable.

23



| | Item 2. | Properties.
| | ------- | -----------

As of December 31,
2006, we own no real property and currently lease or sublease all of our office
space. Within the United States, as of December 31, 2006, we lease office space
in Edison, NJ for certain technical and support personnel, sales and marketing,
administrative, finance and management personnel, and in Atlanta, GA,
Warrenville, IL, and Milpitas, CA, for certain other sales and operations
personnel. We also lease office space in Denmark, India, Japan and the United
Kingdom. The following table summarizes our leased office space as of December
31, 2006:

|Location          |  | Area    in Sq. Ft. |  | Use                                                                                                                                                                                 |  | Lease    Expiration
|----------------- |  | ------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------
|                  |  |                    |  |                                                                                                                                                                                     |  |                    
|Edison, NJ  (A)   |  | 48,476             |  | Corporate Headquarters  Consulting Services - focus on SAP, Peoplesoft
commercial, Oracle and E-Business markets in the US. Selling, general and
administrative functions in the US |  | 9/9/2008           
|Atlanta, GA       |  | 2,533              |  | Consulting Services - focus on SAP and Peoplesoft public sector market in the
US; Limited selling, general and administrative functions in the US                                   |  | 3/1/2011           
|Warrenville, IL   |  | 913                |  | Limited selling and marketing functions in the US                                                                                                                                   |  | 8/30/2007          
|Milpitas, CA      |  | 2112               |  | Limited selling and   marketing functions in the US                                                                                                                                 |  | 5/31/2007          
|Odense, Denmark   |  | 5,005              |  | Consulting Services - focus on SAP market in Denmark; Selling, general and
administrative functions in Denmark                                                                      |  | 7/31/2009          
|Hyderabad, India  |  | 18,359             |  | IT development and support   services                                                                                                                                               |  | 12/31/2010         
|Hyderabad, India  |  | 15,401             |  | IT development and support   services                                                                                                                                               |  | 5/31/2007          
|Hyderabad, India  |  | 10,727             |  | IT development and support   services                                                                                                                                               |  | 4/30/2007          
|Hyderabad, India  |  | 56,600             |  | IT development and support services and general and administrative functions                                                                                                        |  | 7/31/2010          
|Bangalore, India  |  | 5,163              |  | IT development and support   services                                                                                                                                               |  | 10/30/2010         
|Tokyo, Japan      |  | 2,826              |  | Consulting Services - focus on SAP market in Japan; Selling, general and
administrative functions in Japan                                                                          |  | 8/31/2007          
|Milton Keynes, UK |  | 2,700              |  | Consulting Services - focus on Peoplesoft and SAP market in the UK; Selling,
general and administrative functions in the UK                                                         |  | 7/27/2007          

|   
|---
|(A)

24



| | Item 3. | Legal Proceedings
| | ------- | -----------------

India Tax
Assessments

Our India subsidiary
has received tax assessments from the India taxing authority denying tax
exemptions claimed for certain revenue earned and disallowing certain expenses
claimed during the India subsidiarys fiscal years ended March 31, 1998
through March 31, 2003. The combined revised additional tax demands were for
32.9 million Indian rupees (or approximately $0.7 million) for those years. They
include tax penalties and interest for the fiscal years ended March 31, 2001 and
2002 of 1.7 million Indian rupees (or approximately $38,000) and 0.7 million
Indian rupees (or approximately $16,000), respectively. Against the total
additional tax demand of $0.7 million, we have made payments of approximately
$0.7 million under protest to the India tax authority.

We are currently
appealing at the Appellant Tribunal stage for the fiscal years ended March 31,
1998 through March 31, 2002.  For the fiscal year ended March 31, 2003, we
have filed an appeal with the Commissioner of Income Tax (Appeals) against the
assessment order passed. In the event our appeal is not successful, there will
not be any additional future cash outlay.  However, in the event we are
successful, an amount up to approximately $0.7 million could be refunded to us.

Shareholder Class
Actions

On or about October
12, 2004, the first of six class action lawsuits was filed, purportedly on
behalf of plaintiffs who purchased our securities, against the Company and
former officers Arjun Valluri, Nicholas Visco, Edward Carr and David Distel
(Defendants) in the United States District Court, District of New
Jersey (District of New Jersey). In August 2005, the District of New
Jersey consolidated the six class actions (the Shareholder Class
Action) and appointed a lead plaintiff.  Plaintiffs subsequently
dropped Mr. Distel and Mr. Carr from the Shareholder Class Action, failing to
name either of them as a defendant in the amended consolidated complaint filed
on or about October 10, 2005.  The Shareholder Class Action generally
alleges violations of federal securities laws, including allegations that the
Defendants made materially false and misleading statements regarding our
financial condition and that the Defendants materially overstated financial
results by engaging in improper accounting practices.  The Class Period
alleged is May 1, 2001 through September 24, 2004.  The Shareholder Class
Action generally seeks relief in the form of unspecified compensatory damages
and reasonable costs, expenses and legal fees.  The Defendants filed a
Motion to Dismiss on or about November 30, 2005.  Thereafter in about
February 2006, the lead plaintiff filed its second consolidated amended
complaint.  On or about March 27, 2006, the Defendants filed a motion to
dismiss the second amended complaint.  On or about December 20, 2006, the
District of New Jersey granted Defendants motion and dismissed the second
amended complaint without prejudice.  On or about January 25, 2007,
plaintiffs filed the third consolidated amended complaint.    On
or about March 5, 2007, Defendants filed a motion to dismiss the third
consolidated amended complaint.  No trial date has been scheduled and no
discovery has taken place.

There is no other
litigation pending to which we are a party or to which any of its property is
subject which would have a material impact on our consolidated financial
condition, results of operations or cash flows in the event we were unsuccessful
in such litigation.

25



| | Item 4. | Submission of Matters to a Vote of Security Holders.
| | ------- | ----------------------------------------------------

Not
applicable.

26



PART II

| | Item 5. | Market for the Registrants Common Equity and Related Shareholder   Matters.
| | ------- | ----------------------------------------------------------------------------

Our Common Stock is
currently being quoted under the symbol ITIG on the Pink Sheet
Electronic Quotation Service (Pink Sheets) maintained by Pink Sheets
LLC.  Prior to October 21, 2004, the Common Stock was quoted on the Nasdaq
Stock Market (the NASDAQ) under the symbol
ITIG.

The following table
sets forth, for each of the periods indicated, the high and low sale prices per
share of Common Stock as reported on the NASDAQ website.  The prices shown represent
quotations among securities dealers, do not include retail markups, markdowns or
commissions and may not represent actual transactions.

|Quarter   Ended      |  | High |      | Low |  
|-------------------- |  | ---- | ---- | --- | -
|                     |  |      |      |     |  
|March 31,   2005     |  | $    | 1.30 |     | $
|June 30,   2005      |  | $    | 1.49 |     | $
|September   30, 2005 |  | $    | 2.62 |     | $
|December 31,   2005  |  | $    | 2.13 |     | $
|March 31,   2006     |  | $    | 1.66 |     | $
|June 30,   2006      |  | $    | 2.08 |     | $
|September   30, 2006 |  | $    | 1.79 |     | $
|December 31,   2006  |  | $    | 1.47 |     | $

As of March 19,
2007, the approximate number of holders of record of the Common Stock was 73 and
the approximate number of beneficial holders of the Common Stock was
2,483.

We have never
declared or paid any dividends on its capital stock. We intend to retain any
earnings to fund future growth and the operation of our business, and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Furthermore, we are prohibited from paying dividends under the terms of our
revolving credit loan agreement.

The following table
summarizes securities authorized for issuance under our equity compensation
plans as of December 31, 2006.

|                                                             |  | Number of securities to be issued upon exercise of outstanding
options |           | Weighted-average exercise price of outstanding options |   | Number of securities remaining available for future issuance under equity
compensation plans | 
|------------------------------------------------------------ |  | ---------------------------------------------------------------------- | --------- | ------------------------------------------------------ | - | -------------------------------------------------------------------------------------------- | 
|                                                             |  |                                                                        |           |                                                        |   |                                                                                              | 
|2004 Equity Incentive   Award Plan                           |  |                                                                        | 3,323,361 |                                                        | $ | 1.69                                                                                         | 
|1996 Stock Option Plan                                       |  |                                                                        | 548,556   |                                                        | $ | 4.99                                                                                         | 
|1996 Non-Employee Director   Stock Option Plan               |  |                                                                        |          |                                                        | $ |                                                                                             | 
|Equity compensation plans   not approved by security holders |  |                                                                        | 40,000    |                                                        | $ | 2.06                                                                                         | 
|                                                             |  |                                                                        |           |                                                        |   |                                                                                              | 
|Total                                                        |  |                                                                        | 3,911,917 |                                                        | $ | 2.16                                                                                         | 
|                                                             |  |                                                                        |           |                                                        |   |                                                                                              | 

27



| | Item 6. | Selected Financial Data.
| | ------- | ------------------------

You should read the
selected financial data presented below, in conjunction with our consolidated
financial statements, the notes to those consolidated financial statements and
the managements discussion and analysis of financial condition and results
of operations section appearing elsewhere in this report on Form
10-K.

The consolidated
statement of operations data for the years ended December 31, 2006, 2005, and
2004 and the consolidated balance sheet data as of December 31, 2006, 2005, and
2004 have been derived from our audited consolidated financial statements, which
are included in Item 15, and should be read in conjunction with those
consolidated financial statements (including notes thereto). The selected
financial data as of December 31, 2003 and 2002, and for the years ended
December 31, 2003 and 2002, have been derived from audited consolidated
financial statements not included herein, but which were previously filed with
the Securities and Exchange Commission, or SEC.  Our historical
results are not necessarily indicative of the operating results to be realized
in the future.

On April 2, 2003, we
consummated the Sale, effective as of March 1, 2003, of its Asia-Pacific group
of subsidiary companies, operating in Australia, New Zealand, Singapore, Hong
Kong and Indonesia (together, the Former Subsidiaries), to Soltius
Global Solutions PTE Ltd., a Singapore corporation. Accordingly, the
consolidated statement of operations data and the balance sheet data have been
reclassified to reflect the Sale of the Former Subsidiaries as discontinued
operations for all periods presented.

28



|                                                                                    |  | As of December   31, |       
|----------------------------------------------------------------------------------- |  | -------------------- | ------
|                                                                                    |  |                      |       
|                                                                                    |  | 2006                 |       
|                                                                                    |  |                      |       
|                                                                                    |  | (in   thousands)     |       
|Balance   Sheet Data:                                                               |  |                      |       
|Cash and cash equivalents                                                           |  | $                    | 12,277
|Working capital                                                                     |  |                      | 20,058
|Total assets                                                                        |  |                      | 54,543
|Line of credit borrowings   and current portion of obligations under capital leases |  |                      | 5,442 
|Long-term debt and obligations under capital leases, net of current
portion         |  |                      | 552   
|Shareholders equity                                                                |  |                      | 26,394

|                                                                           |  | For the   Years Ended December 31,      |        
|-------------------------------------------------------------------------- |  | --------------------------------------- | -------
|                                                                           |  |                                         |        
|                                                                           |  |                                         | 2006   
|                                                                           |  |                                         |        
|                                                                           |  | (in   thousands, except per share data) |        
|Statement of Operations Data:                                              |  |                                         |        
|Revenue                                                                    |  | $                                       | 125,309
|Cost of revenue                                                            |  |                                         | 91,104 
|                                                                           |  |                                         |        
|Gross   profit                                                             |  |                                         | 34,205 
|                                                                           |  |                                         |        
|Selling, general and   administrative expenses                             |  |                                         | 35,031 
|Depreciation and   amortization                                            |  |                                         | 2,474  
|Proxy contest charges                                                      |  |                                         |       
|                                                                           |  |                                         |        
|Total   operating expenses                                                 |  |                                         | 37,505 
|                                                                           |  |                                         |        
|Operating  income (loss)                                                   |  |                                         | (3,300 
|Interest income                                                            |  |                                         | 27     
|Interest expense                                                           |  |                                         | (597   
|Other income (expense),   net                                              |  |                                         | 1,300  
|                                                                           |  |                                         |        
|Income (loss) from   continuing operations before income taxes             |  |                                         | (2,570 
|Provision for (benefit of)   income taxes                                  |  |                                         | 1,137  
|                                                                           |  |                                         |        
|Loss from continuing   operations                                          |  |                                         | (3,707 
|Loss from discontinued   operations                                        |  |                                         |       
|                                                                           |  |                                         |        
|Net loss                                                                   |  | $                                       | (3,707 
|                                                                           |  |                                         |        
|Loss per share:                                                            |  |                                         |        
|Basic   and diluted loss per share                                         |  |                                         |        
|Loss   from continuing operations                                          |  | $                                       | (0.09  
|Loss   from discontinued operations                                        |  |                                         |       
|                                                                           |  |                                         |        
|Net   loss per share                                                       |  | $                                       | (0.09  
|                                                                           |  |                                         |        
|Weighted   average number of common shares outstanding - basic and diluted |  |                                         | 40,179 
|                                                                           |  |                                         |        

29



| | Item 7. | Managements Discussion and Analysis of Financial Condition and Results
of Operations
| | ------- | -------------------------------------------------------------------------------------

Overview

In this Section, we
will discuss the following:  (1) key factors in evaluating our financial
performance; (2) application of critical accounting policies, which explains the
accounting policies necessary to understand how we record our financial
information; (3) results of operations - consolidated, in which our consolidated
results are compared year to year to recognize trends; (4) results of operations
by business segment, which allows us to compare the results of our different
business units; (5) liquidity and capital resources; (6) contractual obligations
and other commercial commitments; and (7) recently issued accounting
standards.

Key Factors in
Evaluating the Companys Financial Performance

Management believes
the following factors should be considered when evaluating our reported
financial information contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Revenue

The majority of our
revenue is derived from professional services rendered to customers. Revenue is
typically recognized as services are performed. Our services range from
providing customers with a single consultant to multi-personnel full-scale
projects. Although we have contracts with many of our customers to provide our
services, in general, such contracts are terminable upon relatively short
notice, typically not more than 30 days. There can be no assurance that our
customers will continue to enter into contracts with us or that existing
contracts will not be terminated. We provide our services either directly to
end-user organizations, or as a member of a consulting team assembled by another
IT consulting firm. Where contractual provisions permit, customers also are
billed for reimbursement of expenses incurred by us on the customers
behalf.

Fixed
Price Projects

We have provided
services on certain projects in which we, at the request of the clients, offer a
fixed price for our services. For the years ended December 31, 2006, 2005 and
2004, revenue derived from projects under fixed price contracts represented
approximately 39%, 43% and 43%, respectively, of the Companys total
revenue. No single fixed price project was material to our business during 2006,
2005 or 2004. We believe that, as we pursue our strategy of providing
application management services to customers, we will continue to offer fixed
price projects. We believe that there are certain risks related to fixed price
arrangements and thus we price such arrangements to reflect the associated risk.
There can be no assurance that we will be able to complete such projects within
the fixed price timeframes. The failure to perform within such fixed price
contracts, if entered into, could have a material adverse effect on our
business, financial condition and results of operations.

Customer
Concentration

We have derived and
believe that we will continue to derive a significant portion of our revenue
from a limited number of customers and projects. For the years ended
December 31, 2006, 2005 and 2004, our ten largest customers accounted for
in the aggregate approximately 49%, 49% and 45% of our

30



revenue, respectively. During 2006 and 2005, one customer, various
businesses of the General Electric Company, accounted for more than 10% of
revenue.  During 2004, no single customer accounted for 10% or more of
revenue.  For the years ended December 31, 2006, 2005 and 2004, 21%, 12%
and 22%, respectively, of our revenue was generated by providing supplemental
resources directly to the end-customer or as part of a consulting team assembled
by another IT consulting firm. There can be no assurance that such IT consulting
firms will continue to engage us in the future at current or lower levels of
retention.

Software
Partners

For the years ended
December 31, 2006, 2005 and 2004, we derived the following percentages of total
revenue from projects in which we implemented, extended, maintained, managed or
supported software developed by SAP, PeopleSoft, Oracle and other e-Business
application providers:

|           |  | Percentage   of Revenue    Year Ended December 31, |    
|---------- |  | -------------------------------------------------- | ---
|           |  |                                                    |    
|           |  | 2006                                               |    
|           |  |                                                    |    
|SAP        |  |                                                    | 72 
|PeopleSoft |  |                                                    | 13 
|Oracle     |  |                                                    | 7  
|e-Business |  |                                                    | 5  
|Others     |  |                                                    | 3  
|           |  |                                                    |    
|Total      |  |                                                    | 100
|           |  |                                                    |    

Markets

We currently serve
the United States market with our headquarters in Edison (New Jersey), and
branch offices in Atlanta (Georgia), Warrenville (Illinois), and Milpitas
(California). We also maintain local offices in other geographic areas to serve
the markets in India, the United Kingdom, Denmark and Japan.  We lease our
headquarters in Edison, New Jersey. Such lease has an initial term of ten (10)
years, which commenced in September 1998.

Expenses

Our most significant
cost is project personnel expenses, which consist of consultant salaries,
benefits and payroll-related expenses. Thus, our financial performance is based
primarily upon billing margin (billable hourly rate less the cost to us of a
consultant on an hourly basis) and personnel utilization rates (billable hours
divided by paid hours).

31



Application of
Critical Accounting Policies

The preparation of
our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period.  Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. 
Because of the use of estimates inherent in the financial reporting process,
actual results could differ from those estimates.

Certain of our
accounting policies require higher degrees of judgment than others in their
application.  These include revenue recognition and allowance for doubtful
accounts, impairments and estimation of useful lives of long-term assets, income
tax recognition of current and deferred tax items and accruals for
contingencies.  In addition, the footnotes to the Consolidated Financial
Statements include further discussion of our significant accounting
policies.

Revenue
Recognition and Allowance for Doubtful Accounts.

We generate revenue
from professional services rendered to customers. The majority of our revenue is
generated under time-and-material contracts whereby costs and revenue is
recognized as services are performed, with the corresponding cost of providing
those services reflected as cost of revenue.  The majority of customers are
billed on an hourly or daily basis whereby actual time is charged directly to
the customer.  Such method is expected to result in reasonably consistent
profit margins over the contract term.

We also derive a
portion of our revenue from fixed-price, fixed-time contracts.  Revenue
generated from most fixed-price contracts, including most application management
and support contracts, is recognized ratably over the contract term. Revenue
generated from certain other fixed-price contracts is recognized using the
percentage of completion method based on the ratio of labor hours incurred to
estimated total labor hours.  This method is used because reasonably
dependable estimates of the revenues and costs applicable to various stages of a
contract can be made, based on historical experience and milestones set in the
contract.  Our project delivery and business unit finance personnel
continually review labor hours incurred and estimated total labor hours, which
may result in revisions to the amount of recognized revenue for the
contract.  Changes in estimates are accounted for in the period of change.
If we do not accurately estimate the resources required or the scope of work to
be performed for a contract or if we do not manage the project properly within
the planned time period, then a loss may have to be recognized on the contract.
Losses are recorded in the period when they become known, and estimated through
the completion of the contract.

We occasionally
derive revenue from projects involving multiple revenue-generating activities.
Accordingly, the revenue from such projects is accounted for in accordance with
the Emerging Issues Task Force of the Financial Accounting Standards Board
(FASB) Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables.  If a contract involves the provision of
multiple service elements, total estimated contract revenue is allocated to each
element based on the relative fair value of each element. The amount of revenue
allocated to each element is limited to the amount that is not contingent upon
the delivery of another element in the future.  Revenue for each element is
then recognized as described above depending upon whether the contract is a
time-and-materials contract or a fixed-price, fixed-time contract.

32



Any estimation
process, including that used in preparing contract accounting models, involves
inherent risk.  We reduce the inherent risk relating to revenue and cost
estimates in percentage-of-completion models through approval and monitoring
processes.  Risks relating to service delivery, usage, productivity and
other factors are considered in the estimation process.

Unbilled services at
December 31, 2006 and 2005 represent services provided through December 31, 2006
and 2005, respectively, which are billed subsequent to year-end.  All such
amounts are anticipated to be realized in the following year.

We recognize revenue
for services where collection from the client is reasonably assured. We
establish billing terms at the time project deliverables are agreed, and we
continually monitor timely payments from customers and assess collection
issues.  We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required payments.  We
base our estimates on historical collection and write-off experience, current
trends, credit policy, detailed analysis of specific client situations and
percentage of accounts receivable by aging category.

Recoverability of
Long-Term Assets

We review the
carrying value of long-lived assets on a regular basis for the existence of
facts or circumstances, both internally and externally, that may suggest
impairment.  If such circumstances exist, we evaluate the carrying value of
long-lived assets to determine if impairment exists based upon estimated
undiscounted future cash flows over the remaining useful life of the assets and
comparing that value to the carrying value of the assets. If the carrying value
of the asset is greater than the estimated future cash flows, the asset is
written down to its estimated fair value.

Accounting for
Income Taxes

We record income
taxes using the asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective income tax carrying amount, and operating
loss and tax credit carry forwards. Our consolidated financial statements
contain certain deferred tax assets which have arisen primarily as a result of
operating losses incurred since 1999, as well as other temporary differences
between book and tax accounting. FASB Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income
Taxes, requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets.

Significant
management judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against
net deferred tax assets. We evaluate the weight of all available evidence to
determine whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized in the future. Management
considered the recent historical operating losses and the inherent uncertainty
in the extent and timing of future profitability in determining the appropriate
valuation allowance.  Based upon this assessment, we recorded approximately
$21.8 million of valuation allowance against gross deferred tax assets of $22.8
million through December 31, 2006. The decision to record the valuation
allowance required significant judgment including estimating the various factors
impacting future taxable income.  Had we not recorded this allowance, we
would have reported materially different results. If the realization of all
deferred tax assets in the future is considered more likely than not, a decrease
in the valuation allowance would be made resulting in an increase to the net
carrying value of deferred tax assets and increase net income in the period of
such determination by approximately $21.8 million. The amount of the deferred

33



tax asset considered realizable is based on significant estimates, and it is at
least reasonably possible that changes in these estimates in the near term could
materially affect our financial condition and results of operations. Our
effective tax rate may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance, changes to federal,
state or foreign tax laws, future expansion into areas with varying country,
state, and local income tax rates and deductibility of certain costs and
expenses by jurisdiction.

In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48), which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is more likely than not that the position is
sustainable based on its technical merits. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. We do not expect
that FIN 48 will have a material effect on our consolidated financial condition
or results of operations.

Under U.S. tax law,
the utilization of the deferred tax asset related to the NOL carry forward is
subject to an annual limitation if there is a more than 50 percentage point
change in shareholder ownership. We incurred such a change in ownership as
defined under Internal Revenue Code (IRC) Section 382 for U.S.
federal income tax purposes in September 2004. As a result, we are subject to
limitations on future usage of its previously incurred tax attributes and wrote
down our NOL carry-forward in 2004. This limitation and related write-down of
the NOL did not have an income statement impact in 2004 as we had previously
established a full valuation allowance against the net deferred tax balances,
which was subsequently removed in conjunction with the write-down.

Derivative Instruments

During August 2006, we entered into a foreign currency forward
contract to manage a portion of its foreign currency risk related to Indian
Rupee denominated asset balances at our Indian subsidiary.  The foreign
currency forward contract is marked-to-market and recorded at fair value with
unrealized gains and losses reported along with foreign currency gains or losses
in the caption other income (expense), net on our consolidated
statements of operations and comprehensive income (loss). The foreign currency forward contract settled in January 2007.

Share-Based
Compensation Plans

We have share-based
compensation plans that reserve common shares for issuance to key employees and
directors.  Prior to January 1, 2006, we accounted for such share-based
employee compensation plans under the measurement and recognition provisions of
APB No. 25, Accounting for Stock Issued to Employees, as permitted
by SFAS No.  123, Accounting for Stock-Based
Compensation.  Accordingly, we used the intrinsic value method of
accounting for stock option awards and did not recognize compensation expense
for stock options that were granted at an exercise price equal to or greater
than the market price of common stock on the date of grant.  In accordance,
with SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, we provided pro forma net
income or loss and net earnings or loss per common share disclosures for each
period prior to January 1, 2006, as if it had applied the fair value-based
method in measuring compensation expense for share-based compensation
plans.

34



Effective January 1,
2006, we adopted the fair value provisions of SFAS No. 123R, Share-Based
Payment, using the modified prospective transition method.  Under
this method, we recognize share-based compensation expense for (i) all
share-based payments granted prior to, but not yet vested as of, January 1,
2006, based on the grant date fair value originally estimated in accordance with
the provisions of SFAS No. 123, and (ii) all future share-based payment awards
based on the grant date fair value estimated in accordance with the provisions
of SFAS No. 123R.  Because we elected to use the modified prospective
transition method, results for prior periods have not been restated.

The compensation
cost that has been charged against income for share-based compensation plans was
$1.6 million for the year ended December 31, 2006.  Due to our net
operating losses carried forward, along with current year losses, we did not
recognize income tax benefit in the consolidated statement of operations and
comprehensive income for the year ended December 31, 2006.   We
received approximately $245,000 and $0 from option exercises under share-based
compensation plans for the years ended December 31, 2006 and 2005,
respectively.

As of December 31,
2006, there was $3.1 million of total unrecognized compensation cost related to
stock options.  Those costs are expected to be recognized during the next
four years.

The fair value of
each option award is estimated on the date of grant using the Black-Scholes
option valuation model.  We recognize the fair value of each option as
compensation expense ratably using the straight-line attribution method over the
service period (generally the vesting period).  The Black-Scholes model
incorporates the following assumptions:

| |  | Expected volatility  we estimate the volatility of common stock at the
date of grant using a combination of unadjusted historical volatility,
historical volatility adjusted for periods of unusual stock price
activity.                                                                                                                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                             
| |  | Expected term  we estimate the expected term of options granted based on a
combination of vesting schedules, life of the option, historical experience and
in cases where we do not have significant historical experience, the simplified
method of determining expected term outlined in Staff Accounting Bulletin 107 is
used for grants issued in 2006.
| |   |                                                                                                                                                                                                                                                                                                                                                             
| |  | Risk-free interest rate  we estimate the risk-free interest rate using the
U.S. Treasury yield curve for periods equal to the expected life of the options
in effect at the time of grant.                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                             
| |  | Dividends  we use an expected dividend yield of zero since we have never
declared or paid any dividends on its capital stock. We intend to retain any
earnings to fund future growth and for the operation of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.                                          

Additionally, we
estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates.  We
use a combination of historical data, demographic characteristics and other
factors to estimate pre-vesting option forfeitures and record share-based
compensation expense only for those awards that are expected to vest.  For
purposes of calculating pro forma information under SFAS No. 123 for periods
prior to January 1, 2006, we accounted for forfeitures as they
occurred.

If factors change
and we employ different assumptions in the application of SFAS No. 123R to
options grants made in future periods, the compensation expense that we record
under SFAS No. 123R for those future awards may differ significantly from what
it has recorded in the current period.  There is

35



a high degree of subjectivity involved in selecting the option pricing model assumptions used to estimate share-based compensation expense under SFAS No. 123R.

Option pricing
  models were developed for use in estimating the value of traded options that
  have no vesting or hedging restrictions, are fully transferable and do not cause
  dilution.  Because share-based payments have characteristics significantly
  different from those of freely traded options, and because changes in the
  subjective input assumptions can materially affect estimates of fair values,
  existing valuation models may not provide reliable measures of the fair values
  of share-based compensation.  Consequently, there is a risk that our
  estimates of the fair values of share-based compensation awards on the grant
  dates may bear little resemblance to the actual values realized upon the
  exercise, expiration or forfeiture of those share-based payments in the
  future.  Stock options may expire worthless or otherwise result in zero
  intrinsic value as compared to the fair values originally estimated on the grant
  date and reported in our financial statements.  Alternatively, value may be
  realized from these instruments significantly in excess of the fair values
  originally estimated on the grant date and reported in our financial
  statements.

There are
significant differences among valuation models.  This may result in a lack
of comparability with other companies that use different models, methods and
assumptions.

Contingent
Liabilities

We have certain
contingent liabilities that arise in the ordinary course of business.  We
accrue contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated.  We are subject
to various pending or threatened legal matters which have arisen in the ordinary
course of business.  The ultimate outcome of these items is uncertain and
the potential loss, if any, may be significantly higher or lower than amounts
previously accrued by us.

Principles of
Consolidation and Use of Estimates

The consolidated
financial statements included in Item 15 include the accounts of Intelligroup,
Inc. and its majority owned subsidiaries.  All significant intercompany
balances and transactions have been eliminated.

The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.

Results of
Operations - Consolidated

The following table
sets forth for the periods indicated certain financial data expressed as a
percentage of total revenue, for continuing operations:

36



|                                               |  | Percentage   of Revenue    Year Ended December 31, |      
|---------------------------------------------- |  | -------------------------------------------------- | -----
|                                               |  |                                                    |      
|                                               |  | 2006                                               |      
|                                               |  |                                                    |      
|Revenue                                        |  |                                                    | 100.0
|Cost of revenue                                |  |                                                    | 72.7 
|                                               |  |                                                    |      
|Gross   profit                                 |  |                                                    | 27.3 
|                                               |  |                                                    |      
|Selling, general and   administrative expenses |  |                                                    | 28.0 
|Depreciation and   amortization expense        |  |                                                    | 2.0  
|                                               |  |                                                    |      
|Total   operating expenses                     |  |                                                    | 30.0 
|                                               |  |                                                    |      
|Operating   loss                               |  |                                                    | (2.7 
|Interest income                                |  |                                                    |     
|Interest expense                               |  |                                                    | (0.4 
|Other income (expense),   net                  |  |                                                    | 1.0  
|                                               |  |                                                    |      
|Loss before income taxes                       |  |                                                    | (2.1 
|Income tax provision   (benefit)               |  |                                                    | 0.9  
|                                               |  |                                                    |      
|Net loss                                       |  |                                                    | (3.0 
|                                               |  |                                                    |      

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

The following
discussion compares the consolidated results of operations for the year ended
December 31, 2006 to the year ended December 31, 2005.

Revenue. 
Total revenue remained relatively constant at $125.3 million in 2006 and 2005,
which was attributable to a decrease in revenue generated in the United States
(a decrease of $5.7 million), offset by India (an increase of $3.1 million),
Europe (an increase of $2.1 million), and Japan (an increase of $0.5
million).  In 2006, the net change includes an increase in SAP and Oracle
revenues of $6.6 million, and an increase in infrastructure management services
of $2.8 million, offset by a decrease in revenue in the Companys
PeopleSoft business of $9.5 million.  This decrease in PeopleSoft revenue
from $25.7 million for 2005 to $16.2 million for 2006 is attributable to the
completion of several major implementation projects during 2005 coupled with the
absence of new projects to replace this revenue.

Cost of revenue
and gross profit.  Our cost of revenue consists primarily of the
salaries paid to the consultants and related employee benefits and payroll taxes
for such consultants, as well as travel costs. Our cost of revenue has decreased
by 1.3%, or $1.2 million, from $92.3 million in 2005, to $91.1 million in
2006.  Our gross profit increased by 3.6%, or $1.2 million, from $33.0
million in 2005, to $34.2 million in 2006.  As a percentage of revenue, the
gross margin increased from 26.4% in 2005 to 27.3% in 2006, primarily due to
improved resource management and increased utilization, which was offset
partially by increased compensation costs for our technical professionals. 
We believe that through our efforts in 2006 to improve our resource management
we have achieved healthy utilization rates and do not expect to further improve
our utilization rates in 2007 and thereby achieve similar improvement in gross
margin in 2007.

37



Selling, general
and administrative expenses.  Selling, general and administrative
expenses primarily consist of salaries, and related benefits costs for sales and
general administrative personnel, occupancy costs, travel
and entertainment, professional fees and other general expenses. Selling,
general and administrative expenses decreased by 7.1%, or $2.7 million, to $35.0
million in 2006, from $37.7 million in 2005, and decreased as a percentage of
revenue to 27.9% from 30.1%, respectively.  The decrease in selling,
general and administrative expenses was related primarily to a reduction in
accounting fees incurred in connection with restating prior periods
consolidated financial statements, professional fees associated with
Sarbanes-Oxley compliance, and legal fees incurred in 2005.  This was
partially offset by increased selling and marketing expenses and a $1.3 million
reserve against an outstanding receivable and unbilled services related to one customer.  We do
not expect significant additional investments in selling and marketing in
2007.

Other Income
(expense).  Other income (expense), results from transaction gains or
losses associated with changes in foreign currency exchange rates, sublease
income, dividend income from investments, and other items.  For the year
ended December 31, 2006, we recorded transaction losses of approximately $0.4
million, primarily the result of the write-down of cumulative translation
adjustments related to Sweden, compared with transaction losses of $0.4 million
for the year ended December 31, 2005, as a result of currency translation,
primarily as a result of currency fluctuations in Asia and Europe. 
Additionally, we had sublease income, dividend income and other adjustments
items of approximately $1.0 million for the year ended December 31, 2006,
compared with $0.6 million for the year ended December 31, 2005, and other out
of court settlements for approximately $0.6 million for the year ended December
31, 2006, compared with $0.1 million for the year ended December 31, 2005.

Income tax
provision.  We had pretax losses of $2.6 million in 2006 and $6.8
million in 2005, on which we recorded a provision for income taxes of $1.1
million in 2006 and a benefit for income taxes of $0.2 million in 2005. 
The provision for income taxes in 2006 was due mainly to the expiration of the
India tax holiday on March 31, 2006, whereas the benefit for income taxes in
2005 was due mainly to our recognition of deferred tax assets not offset by
valuation allowances in our India and Japan operations.  Our net deferred
tax assets as of December 31, 2006 related to our Indian operations.  Based
on various positive evidence, including historical profitability, management
believes it is more likely than not that the Indian operations deferred
tax assets of $752,000, will be realized in the future and therefore, no
valuation allowance has been established against these net deferred tax assets
for the year ended December 31, 2006.  We expect our effective tax rate to
increase during 2007, due to the expiration of the India tax holiday on March 31,
2006.

In 1996, we elected
a five year tax holiday in India, in accordance with a local tax incentive
program whereby no income tax would be due in such period. Such tax holiday was
extended an additional five years in 1999.  Effective April 1, 2000,
pursuant to changes introduced by the Indian Finance Act, 2000, the tax incentive
previously granted was no longer available and has been replaced in the form of
a tax deduction incentive on export revenue.  Effective April 1, 2002, the
tax deduction incentive for income from the export of software and related
services is restricted to 90% of such income.  Further, domestic revenue
from software and related services is taxable in India. Effective April 1, 2003,
the 90% tax deduction incentive restriction was repealed and the tax incentive
is again available for the entire amount of income from the export of software
and related services. For 2005 and 2004, the tax holiday favorably impacted our
effective tax rate.

The tax holiday in
India expired in March 2006.  As a result, the income earned by our Indian
subsidiary is now taxable, and our India tax expense increased to $1.1 million
in 2006 as compared to a tax benefit of $0.2 million in 2005.

38



Our India subsidiary
has received tax assessments from the India taxing authority denying tax
exemptions claimed for certain revenue earned and disallowing certain expenses
claimed during the India subsidiarys fiscal years ended March 31, 1998
through March 31, 2003. The combined revised additional tax demands were for
32.9 million Indian rupees (or approximately $0.7 million) for those years. They
include tax penalties and interest for the fiscal years ended March 31, 2001 and
2002 of 1.7 million Indian rupees (or approximately $38,000) and 0.7 million
Indian rupees (or approximately $16,000), respectively. Against the total
additional tax demand of $0.7 million, we have made payments of approximately
$0.7 million under protest to the India tax authority.

We
are currently appealing at the Appellant Tribunal stage for the fiscal years
ended March 31, 1998 through March 31, 2002.  For the fiscal year ended
March 31, 2003, we have filed an appeal with the Commissioner of Income Tax
(Appeals) against the assessment order passed. In the event our appeal is not
successful, there will not be any additional future cash outlay.  However,
in the event we are successful, an amount up to approximately $0.7 million could
be refunded to us.

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

The following
discussion compares the consolidated results of operations for the year ended
December 31, 2005 to the year ended December 31, 2004.

Revenue. 
Total revenue decreased by 2.8%, or $3.6 million, from $128.9 million in 2004 to
$125.3 million in 2005.  The decrease was attributable primarily to a
decrease in revenue generated in the United States (a decrease of $8.7 million),
and Japan (a decrease of $1.2 million) offset primarily by India (an increase of
$6.2 million), while Europe remained relatively constant. In 2005, the decrease
in US revenue was attributable to the completion of two large contracts during
2004, and the decrease in Japan revenue was attributable to the completion of
one large contract during early 2005.  India revenue generated by the
US-based customers have increased by 34% from $15.0 million in 2004 to $20.2
million in 2005.

Cost of revenue and
gross profit.  Our cost of revenue increased by 0.5%, or $0.5 million,
from $91.8 million in 2004, to $92.3 million in 2005.  Our gross profit
decreased by 10.9%, or $4.1 million, from $37.1 million in 2004, to $33.0
million in 2005. As a percentage, gross margin decreased from 28.8% in 2004 to
26.4% in 2005, primarily due to increased compensation costs for its technical
professionals.

Selling, general
and administrative expenses.  Selling, general and administrative
expenses increased by 8.5%, or $3.0 million, to $37.7 million in 2005, from
$34.7 million in 2004, and increased as a percentage of revenue to 30.1% from
27.0%, respectively. The increase in selling, general and administrative
expenses was related primarily to the accounting fees incurred in connection
with restating prior periods consolidated financial statements,
professional fees associated with Sarbanes-Oxley compliance, and legal fees
incurred in 2005.

Income tax
provision.  Based on pretax losses of $6.8 million in 2005 and pretax
losses of $508,000 in 2004, a benefit for income taxes of ($240,000) and a
provision for income taxes of $358,000 were required in 2005 and 2004,
respectively. The benefit for income taxes in 2005 was due mainly to our
recognition of deferred tax assets not offset by valuation allowances in its
India and Japan

39



operations, while the provision for income taxes in 2004 was due to taxable income in certain jurisdictions combined with a valuation allowance offsetting other loss benefits in other jurisdictions.  Our net deferred tax assets as of December 31, 2005 related primarily to its Indian and Japanese operations.  Based on various positive evidence, including historical profitability, management believes it is more likely than not that the Indian and Japanese operations deferred tax assets of $427,000 and $284,000, respectively, will be realized in the future and therefore, no valuation allowance has been established against these net deferred tax assets for the year ended December 31, 2005.

Results of Operations by Business Segment

We operate in one
industry operating segment, information technology solutions and services.

We have four
reportable geographic operating segments from continuing operations, which are
organized and managed on a geographical basis, as follows:

| |  | United States (US)  the largest segment of the Company, with
operations in the United States & Puerto Rico. Includes the operations of
the Companys US subsidiary, Empower, Inc., and all corporate functions and
activities. The US and corporate headquarters is located in Edison, New
Jersey.                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                   
| |  | India  includes the operations of the Company in India, including services
provided on behalf of other subsidiaries. The Indian headquarters is located in
Hyderabad, India.                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                   
| |  | Europe  includes the operations of the Company in Denmark, and the United
Kingdom.  The Company had transitioned its operations in Sweden to Denmark
as of January 1, 2003, and the Company is currently in the process of
liquidating the Sweden entity.  The European headquarters is located in
Milton Keynes, United Kingdom.
| |   |                                                                                                                                                                                                                                                                                                                                   
| |  | Japan  includes the operations of the Company in Japan. The Japanese
headquarters is located in Tokyo, Japan.                                                                                                                                                                                                                    

The CEO has been
identified as the Chief Operating Decision Maker (CODM) because he
has the final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, primarily revenue and operating
income, to evaluate segment performance.

During 2006, the
Companys India subsidiary engaged a PCAOB registered firm to evaluate and
recommend changes, if any, to its existing transfer pricing methodology. 
As a result of such transfer pricing study, the Company changed its transfer
pricing methodology and adopted a cost plus fixed margin
methodology, which applies a fixed margin to the total cost of services
performed as opposed to a net margin method in which revenues are allocated on a
fixed percentage without regard to cost of services.  While the application
of the new transfer pricing methodology did not change the Companys
revenue or operating performance on a consolidated basis, it impacted the
allocation of revenue between the Company and its international
subsidiaries.  Hence the revenues and operating performance reported for
the geographic segments, particularly India and United States, for the year
ended December 31, 2006 reflect the impact of the new transfer pricing
methodology as well as year over year trends in revenue

40



and operating performance.  Please see Note 1 to the Consolidated Financial Statements for additional information regarding the impact of the change in transfer pricing methodology.

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

The following
discussion compares the segment results of operations for the year ended
December 31, 2006 to the year ended December 31, 2005.

Revenue. 
The following table displays revenues by reportable segment (in
thousands).

|              |  | Year Ended December 31 |        
|------------- |  | ---------------------- | -------
|              |  |                        |        
|              |  | 2006                   |        
|              |  |                        |        
|              |  | Dollars                |        
|              |  |                        |        
|United States |  | $                      | 80,875 
|India         |  |                        | 31,335 
|Europe        |  |                        | 9,130  
|Japan         |  |                        | 3,969  
|              |  |                        |        
|Total         |  | $                      | 125,309
|              |  |                        |        

Revenue in the
United States decreased by 6.6%, or $5.7 million, from $86.6 million in 2005 to
$80.9 million in 2006.  The decrease in this revenue is attributable to the
decline in our PeopleSoft business due to the completion of several major
implementation projects during 2005 and the lack of new projects to replace this
revenue.  This was partially offset by growth in Oracle and SAP revenues
and additional revenues from services performed for US customers by our India
subsidiary being allocated to the US geographic segment as a result of the
change in transfer pricing methodology.

India revenue
increased by 11.4%, or $3.2 million, from $28.2 million in 2005, to $31.3
million in 2006.  The increase was attributable primarily to increased
demand for services provided in India, Gulf Coast and Middle East regions, as
well as increased demand for offshore services from customers in the United
States and consequent increased demand from our affiliated companies in US and
other geographies.  This was partially offset by a decrease in the revenue allocated to the India entity in connection with services performed by India for its affiliated companies in the US and other geographies due to the change in transfer pricing methodology.

Europe revenue
increased by 29.6%, or $2.1 million, from $7.0 million in 2005 to $9.1 million
in 2006.  The increase was attributable primarily to one large contract
entered into during the three months ended June 30, 2006.

Japan revenue
increased by 14.3% or $0.5 million, from $3.5 million for 2005, to $4.0 million
in 2006.  The increase was due primarily to increased demand for the
Companys consulting services within the local SAP market.

41



Operating Income
(Loss).  The following table displays operating income (loss) by
reportable segment (in thousands).

|              |  | Year Ended December 31, |       
|------------- |  | ----------------------- | ------
|              |  |                         |       
|              |  | 2006                    |       
|              |  |                         |       
|United States |  | $                       | (6,969
|India         |  |                         | 3,595 
|Europe        |  |                         | 853   
|Japan         |  |                         | (779  
|              |  |                         |       
|Total         |  | $                       | (3,300
|              |  |                         |       

US operating loss
decreased by $2.7 million, from $9.6 million in 2005, to $6.9 million in
2006.  The improvement in operating performance is primarily attributable
to the change in transfer pricing methodology, which resulted in increased
revenues in the US, and also due to significant reduction in accounting,
professional and legal fees.  These improvements were partially offset by
increased sales and marketing expenses and a $1.3 million reserve against an
outstanding receivable and unbilled revenue related to one customer contract in
2006.

India operating
income increased by $0.1 million, from $3.5 million in 2005, to $3.6 million in
2006. The increase was attributable primarily to an increase in demand for
offshore services, and services provided to customers in the India and Middle East regions, offset by the change in transfer pricing
methodology in 2006.

Europe operating
performance improved by $1.1 million, from operating loss of $289,000 in 2005,
to operating income of $853,000 in 2006.  The improvement was attributable
primarily to increased revenues and improved resource management and
utilization.

Japan operating
performance decreased by $0.2 million, from operating loss of $543,000 in 2005,
to operating loss of $779,000 in 2006.  The decrease was attributable
primarily to lower margins resulting from increased consultant cost, and
increased selling and marketing expenses.

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

The following
discussion compares the segment results of continuing operations for the year
ended December 31, 2005 to the year ended December 31, 2004.

42



Revenue. 
The following table displays revenues by reportable segment (in
thousands).

|              |  | Year Ended December 31 |        
|------------- |  | ---------------------- | -------
|              |  |                        |        
|              |  | 2005                   |        
|              |  |                        |        
|              |  | Dollars                |        
|              |  |                        |        
|United States |  | $                      | 86,617 
|India         |  |                        | 28,206 
|Europe        |  |                        | 7,030  
|Japan         |  |                        | 3,473  
|              |  |                        |        
|Total         |  | $                      | 125,326
|              |  |                        |        

US revenue decreased
by 9.1%, or $8.7 million, from $95.3 million in 2004 to $86.6 million in
2005.  The decrease in US revenue was attributable to the completion of two
large contracts during 2004.

India revenue
increased by 28.0%, or $6.2 million, from $22.0 million in 2004, to $28.2
million in 2005.  The increase was attributable primarily to increased
demand for services in the United States, as a majority of the total revenue
generated in India is derived from providing offshore development and support
services to customers sourced through our affiliated entities in other parts of
the world, but most predominantly with the United States. India revenues
generated by US-based customers have increased by 34% from $15.0 million in 2004
to $20.2 million in 2005.

Europe revenue
increased slightly from $6.9 million in 2005 to $7.0 million in 2004.

Japan revenue
decreased by 26.3% or $1.2 million, from $4.7 million for 2004, to $3.5 million
in 2005.  The decrease was primarily attributable to the completion of one
large contract during early 2005.

Operating Income
(Loss).  The following table displays operating income (loss) by
reportable segment (in thousands).

|              |  | Year Ended December 31 |       
|------------- |  | ---------------------- | ------
|              |  |                        |       
|              |  | 2005                   |       
|              |  |                        |       
|United States |  | $                      | (9,637
|India         |  |                        | 3,526 
|Europe        |  |                        | (289  
|Japan         |  |                        | (543  
|              |  |                        |       
|Total         |  | $                      | (6,943
|              |  |                        |       

US operating loss
increased by $5.5 million, from $4.1 million in 2004, to $9.6 million in
2005.  The increase in operating loss is attributable to decreased revenues
and increased professional and legal fees incurred in 2005.

43



India operating
income increased by $0.2 million, from $3.3 million in 2004, to $3.5 million in
2005. The increase was attributable primarily to an increase in demand for
offshore services, offset by increased compensation costs and infrastructure
costs for new facilities.

Europe operating
performance decreased by $0.1 million, from operating loss of $183,000 in 2004,
to operating losses of $289,000 in 2005.

Japan operating
performance decreased by $1.4 million, from operating income of $857,000 in
2004, to operating loss of $543,000 in 2005.  The decrease was attributable
primarily to lower revenues resulting from the completion of one large contract
during early 2005.

Liquidity and Capital Resources

2006 Cash
Position and Cash Flows

We had cash and cash
equivalents of $12.3 million at December 31, 2006 and $5.3 million at December
31, 2005.  We had working capital of $20.1 million at December 31, 2006 and
$11.3 million at December 31, 2005.  The increase in working capital
resulted primarily from the $10 million private placement transaction completed
in March 2006.

Cash used in
operating activities was $82,000 for the year ended December 31, 2006, resulting
primarily from the net loss of $3.7 million, offset by $6.2 million of non-cash
adjustments to operating activities including depreciation and amortization
($2.5 million), provision for doubtful accounts ($1.3 million), stock expense
($1.6 million), and deferred income taxes ($0.6 million).  Accounts
receivable and unbilled services increased in total by $3.0 million, due to
increased revenues in the fourth quarter of 2006 when compared to the fourth
quarter of 2005, while accounts payable decreased by $2.0 million due primarily
to decreased professional fees, offset by an increase in deferred revenue by
$2.0 million, due primarily to amounts billed in December for one contract.

We invested $2.1
million and $2.4 million in computer equipment, internal-use computer software
and office furniture and fixtures and leasehold improvements during the years
ended December 31, 2006 and 2005, respectively.   We invested $2.2
million in short-term investments during the year ended December 31,
2006.

Credit Facility

On May 23, 2006,
Intelligroup and its wholly-owned subsidiary, Empower, Inc., entered into a
second amended and restated revolving credit loan and security agreement and
second amended and restated revolving secured note (collectively Credit
Agreement) with the Steel City Capital Funding, a division of PNC Bank,
National Association (the Bank.)  The Credit Agreement is
comprised of a two year revolving line of credit pursuant to which the Company
can borrow up to $15.0 million at the Banks Base Rate (as defined in the
Credit Agreement) plus two (2%) percent.  The credit facility is
collateralized by substantially all of the assets of the United States based
operations and all subsidiary stock (not to exceed 65% of the Equity Interests
of any Foreign Subsidiary).  The maximum borrowing availability under the
Credit Agreement is based upon a percentage of eligible billed and unbilled
accounts receivable.   Please see Note 4 to the Consolidated Financial
Statements for additional information regarding our credit facility.

44



We were in
compliance with the loan agreement related to the credit facility as of December
31, 2006.  We estimate undrawn availability under the credit facility to be
$8.4 million as of December 31, 2006.

2006 Private
Placement

On March 31, 2006,
we completed a $10 million private placement transaction whereby SAIF acquired
an additional 3,333,333 shares of Intelligroups common stock and Venture
Tech acquired an additional 3,333,334 shares of our common stock, at a share
price of $1.50 (the 2006 Private Placement).  The 2006 Private
Placement was approved by a special committee of disinterested members of the
Board of Directors and generated $9.8 million of proceeds to the Company, net of
transaction expenses.  Following the 2006 Private Placement, SAIF and
Venture Tech own 36% and 26% of Intelligroups common stock,
respectively.

Cash to Fund
Operating Activities

We rely on the cash
generated by operating activities, cash on hand and the financing available
under our credit facility to fund ongoing operations.  Our credit facility
with the Bank represents our sole source of external financing for ongoing
business operations.  Our operating plan depends on continued borrowing
availability under this credit facility or securing alternate sources of
financing.  We must comply with certain covenants or secure from the Bank
waivers of its default on such covenants to maintain its line of credit with the
Bank.  Given our variable operating performance in the past few years,
there can be no assurances that we will be able to maintain compliance with our
bank covenants or obtain waivers of any defaults.

Our 2007 operating
plan contains assumptions regarding revenue and expenses. The achievement of the
operating plan depends heavily on the timing of work performed by us on existing
projects and the ability to gain and perform work on new projects.  Project
cancellations, delays in the timing of work performed by us on existing projects
or the inability to gain and perform work on new projects, or inability to
timely collect cash from our customers could have an adverse impact on our
ability to execute our operating plan and maintain adequate cash flow.  In
the event actual results do not meet the operating plan, management believes it
could execute contingency plans to mitigate such effects.  Such plans
include reductions in capital expenditures and operating costs, and/or seeking
additional financing.  In addition, we may seek additional financing from
time to time to fund our cash requirements for operating expenses and capital
expenses; however, the availability of financing may be limited because, among
other things, we are not currently listed on a national stock exchange. 
Assuming that we achieve the revenue and expense targets included in our
operating plan, management believes that our cash on hand and cash generated by
operations and borrowings under our credit facility will be sufficient to fund
our current and planned operations through at least December 31, 2007.

Contractual Obligations and Other Commercial Commitments

The following tables summarize our contractual obligations and other commercial commitments as of December 31, 2006:

45



|                                      |  | Payments   Due by Period (in 000s) |       
|------------------------------------- |  | ----------------------------------- | ------
|                                      |  |                                     |       
|Description of Contractual Obligation |  | Total                               |       
|                                      |  |                                     |       
|Revolving Credit Facility             |  | $                                   | 4,959 
|Capital Lease Obligations             |  |                                     | 1,211 
|Operating Lease   Obligations         |  |                                     | 6,495 
|                                      |  |                                     |       
|Total Contractual   Obligations       |  | $                                   | 12,665
|                                      |  |                                     |       

We use our $15.0
million revolving credit facility with the Bank to fund the working capital
needs of the business; therefore, the outstanding borrowings under the credit
facility fluctuate accordingly. The credit facility is collateralized by
substantially all of the assets of the United States based operations. The
maximum borrowing availability under the line of credit is based upon a
percentage of eligible billed and unbilled accounts receivable, as
defined.  As of December 31, 2006, we had outstanding borrowings under the
credit facility of $5.0 million. As of December 31, 2005, we had outstanding
borrowings under the credit facility of $3.4 million.  We estimate undrawn
availability under the credit facility to be $8.4 million as of December 31,
2006.

We have also entered
into various contractual arrangements to obtain certain office space, office
equipment and vehicles under capital and operating leases.

Recently Issued Accounting Standards

In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48), which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is more likely than not that the position is
sustainable based on its technical merits. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. We do not expect
that FIN 48 will have a material effect on our consolidated financial condition
or results of operations.

In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157), which defines fair value,
establishes a framework for measuring fair value in accounting principles
generally accepted in the United States of America, and expands disclosures
about fair value measurements.  The provisions are effective for the
Company beginning in the first quarter of 2008, with the cumulative effect, if
any, of the change in accounting principle recorded as an adjustment to the
opening balance of retained earnings. We are currently evaluating the impact of
adopting FAS 157 on our consolidated financial statements.

In February, 2007,
the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159).  SFAS No. 159
permits entities to choose to measure financial assets and financial liabilities
at fair value.  Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings.  SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.  The Company
is currently assessing the impact of SFAS No. 159 on its consolidated financial
position and results of operations.

46



Item
7A.          Quantitative and
Qualitative Disclosures about Market Risk.

Although we cannot
accurately determine the precise effect thereof on its operations, we do not
believe inflation or interest rate changes have historically had a material
effect on our revenues or results of operations.  Significant effects of
inflation, currency fluctuations and changes in interest rates on the economies
of the United States, Asia and Europe could favorably or adversely impact our
revenues and results of operations in the future. If there is a material change
in the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change could materially affect the result of our
European and/or Asian operations as reflected in our consolidated financial
statements.

We are exposed to
foreign currency exchange rate risk in the ordinary course of doing business as
it transacts or holds a portion of funds in foreign currencies, particularly the
Indian Rupee. Accordingly, management periodically evaluates the need for
hedging strategies to mitigate the effect of foreign currency fluctuations.
During the August 2006, the Company entered into a foreign currency forward
contract for up to a maximum of $10.0 million to sell the Indian Rupee for U.S.
dollars.  As of December 31, 2006, $1.0 million of the foreign currency
forward contract remained, which was settled in January 2007. Management may
continue to enter into such instruments in the future to reduce foreign currency
exposure to appreciation or depreciation in the value of certain foreign
currencies. Other than the aforementioned forward contract, we have not engaged
in hedging activities nor entered into off-balance sheet transactions,
arrangements or other relationships with unconsolidated entities or other
persons that are likely to affect liquidity or the availability of or
requirements for capital resources.

Item
8.          Financial
Statements and Supplementary Data.

The financial
statements and supplementary data required to be filed pursuant to this Item 8
are included under Item 15 of this Annual Report on Form 10-K.

Item
9.          Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.

Not
Applicable.

47



Item
9A.          Controls and
Procedures.

Disclosure
Controls and Procedures

The Company is
responsible for maintaining disclosure controls and procedures designed to
ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities Exchange Commissions rules and regulations, and that
such information is accumulated and communicated to its management, including
its chief executive officer and chief financial officer, as appropriate, to
allow for timely decisions regarding required disclosure.  The
Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report.   In designing and evaluating the
Companys disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures and implementing controls and
procedures based upon the application of managements judgment.  The
Companys management has concluded that due to the material weaknesses in
internal control over financial reporting described below our disclosure
controls and procedures were not effective as defined in paragraph (e) of Rules
13a-15 and 15d-15 of the Exchange Act as of the end of the period covered by
this report.

A material weakness
is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected

Management
determined the following material weaknesses in internal control over financial
reporting existed as of December 31, 2006:

| |  | The Company did not have sufficient review of the selection and application of
US GAAP to significant non-routine and complex
matters such as expected term and vesting period calculations in accordance with
FAS123R. Also, there was inadequate review and improper application of FAS 52 to the
realization of the cumulative translation adjustments resulting from the
liquidation of the Swedish subsidiary and inadequate review of the calculation
of the fair value of equipment acquired in connection with an outsourcing
agreement and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | The Company did not have  personnel with sufficient accounting and financial
reporting expertise resulting in insufficient oversight review of account
analyses, transactions and preparation of the financial statements in accordance
with US GAAP and SEC rules, specifically with regard to the classification of
account balances such as short-term investments and allowance
for doubtful accounts, foreign income taxes, and  fixed assets.                                                                                                

Notwithstanding the
material weaknesses described above, management believes that the consolidated
financial statements included in this Annual Report on Form 10-K fairly present,
in all material respects, our financial position, results of operations and cash
flows for the periods  presented.  The following are the steps that
the company intends implement to remedy the material weaknesses described above:

| |  | Hire an additional US GAAP expert in the finance and accounting team with the
objective to provide overview and guidance for dealing with non-routine or
complex transactions. We expect to hire such a resource by the end of the quarter ended June 30, 2007 and we expect that hiring such resource shall cost us an additional $40,000 in increased compensation costs per year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48



| |  | Increased focus on proactively training existing members of the finance and accounting team on new
accounting pronouncements and rules and provide additional training on
accounting treatment for non-routine or complex transactions to the current
members of finance and accounting team through a series of external seminars and
training programs or workshops. We expect such additional, increased training to be completed during fiscal 2007 and to cost approximately $50,000.                                                                                                                                                                                                                                                                                                                                                            
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Thoroughly evaluate the experience, qualifications and expertise of the external
accounting firm engaged during 2006 and any other external accounting firms
before engaging such firms to provide advice and assistance in connection with
non-routine or complex transactions and engage in substantive discussions with
such external firms on the procedures used by such firms in rendering such
assistance. For the firm we have currently retained, we expect such evaluation to be completed before the end of the  quarter ended June 30 2007. If we determine that the firm is sufficiently qualified, we intend to retain it again for 2007 and do not expect to incur substantial additional incremental cost. Effective immediately, such evaluation procedures shall be conducted for any other firms that may be engaged in the future.

Changes in
Internal Control over Financial Reporting

There were no
changes in our internal control over financial reporting during the quarter
ended December 31, 2006, that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.   Furthermore, in response to a comment from the staff of
the Division of Corporation Finance of the Securities and Exchange Commission
(the Staff), we confirm that there were no changes in our internal
control over financial reporting that materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting
during the quarters ended March 31, and June 30, 2006.   During the
quarter ended September 30, 2006, we changed our Chief Financial Officer which
we believe represents a change in our internal control over financial reporting
that materially affected or was reasonably likely to materially affect our
internal control over financial reporting.

In addition, in response to a separate comment from the Staff, we are providing revised disclosure regarding the status as of December 31, 2005 of our remediation efforts with respect to the material weaknesses identified in the Companys Report of Form 10-K for the year ended December 31, 2004.

         Weaknesses Related
to Accounting and Finance Personnel - The Company disclosed weaknesses as of
December 31, 2004 related to lack of resources and lack of adequately trained
resources with the appropriate level of accounting knowledge, experience and
training in the application of accounting principles generally accepted in the
United States of America to perform the accounting and financial reporting
functions and inadequate oversight of such resources. To remediate these
weaknesses, the Company established global centers of excellence for each of the
process areas of Finance and hired necessary personnel with historical knowledge
related to the Companys business process, which have appropriate level of
accounting knowledge, experience and training in the application of accounting
principles generally accepted in the United States of America. 
Specifically, the Company re-hired its former Corporate Controller, Theresa
Cashin, into the role of Director of Finance and transferred the following
individuals from its India subsidiary to the global finance team: 
Ramakrishna Karanam as Global Controller (who was earlier the Controller of
India subsidiary), Nishant Mohta as Director of Finance (who was earlier the
Manager of Finance at the India subsidiary) and Raghavendra Somishetty as
Assistant Controller (who was earlier the Associate Manager of Finance at the
India subsidiary). The Company also established review procedures for each of
the tasks handled by these personnel. The Company documented its processes and
cross-trained its finance resources to improve its ability to retain and
transfer knowledge in the event of personnel turnover within the finance
function.

         Weaknesses Related
to Accounting Policies and Procedures - The Company disclosed weaknesses as of
December 31, 2004 related to inadequate documentation regarding the appropriate
application of accounting principles generally accepted in the United States of
America, as well as inadequate documentation regarding the Companys
accounting policies and procedures and the

49



application of those policies and procedures. To remediate these weaknesses, the Company established complete documentation
regarding the appropriate application of accounting principles generally
accepted in the United States of America, as well as documentation regarding the
Companys accounting policies and procedures and the application of those
policies and procedures.  With the help of the Companys Internal
Assurance team, the Company documented all the existing policies and procedures
to ensure that the appropriate, up to date documentation was readily available.
The Company also subscribed to knowledge portals and journals such as Accounting
Research Manager and Compliance Week to ensure that appropriate knowledge
resources were available to its staff for purposes of continual education
regarding the latest accounting regulations.

         Weaknesses Related
to Implementation of ERP System - The Company disclosed weaknesses as of
December 31, 2004 related to its failure to adapt its accounting and business
processes to conform to the requirements of the Companys new ERP system
and its failure to provide sufficient training of its finance and accounting
personnel on the functionalities of the ERP system prior to the Companys
April 1, 2004 go-live date. To remediate these weaknesses, the
Company stabilized its accounting operations on the ERP system and developed
significant additional reports that could add value to the management
decision-making and also implemented additional modules of the ERP system. 
Beginning with the fourth quarter of 2004 and through 2005, the Company hired
staff including Ramakrishna Karanam, Nishant Mohta and Raghavendra Somishetty,
which had sufficient experience, knowledge and training on its ERP accounting
system to handle its recently implemented SAP system effectively.  In
addition, the Company also worked on implementing the additional modules /
features / reports identified below in the ERP system to use it more
effectively.

| |  | ERP enhancements / improvements to generate the financial statements and other
operational reports on a timely basis.  These changes resulted in building
robust internal controls within the accounting system.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                 
| |  | Implementation of Asset Accounting module in the ERP system, resulting in
effective internal controls over the fixed assets.                                                                                    

         Weaknesses related
to Closing and Consolidation Procedures  The Company disclosed weaknesses
as of December 31, 2004 related to the analysis and reconciliation of certain
general ledger accounts. To remediate these deficiencies, management established
required control procedures in the process of closing and consolidation.
Processes were established to ensure preparation of reconciliations on a monthly
basis related to General Ledger accounts including inter-company accounts,
foreign currency translation adjustment account, unbilled revenues, deferred
revenues, payroll accounting, vacation accrual and fixed assets. These
reconciliations were reviewed on a monthly basis prior to monthly closure of
financial statements. Finally, additional controls were established over the
consolidation process for the Companys international
subsidiaries.

         Weaknesses related
to Income Tax Accounting - The Company disclosed weaknesses as of December 31,
2004 in its controls over the determination and reporting of the provision for
income taxes and related prepaid income taxes, income taxes payable and deferred
income tax asset and liability balances. To remediate these weaknesses, the
Company retained a nationally reputed firm to provide taxation-related services
on a retainer basis. The Company also established a process and procedure to
enable effective internal controls and review of all the tax related
accounts.

50



         Weaknesses relating
to Internal Audit System - The Company disclosed weaknesses in its control
environment as of December 31, 2004 related to its inadequately staffed,
inadequately trained and inexperienced internal audit department. To remediate
this weakness, the Company strengthened its internal audit team by creating a
global internal assurance function and hired trained and experienced resources
in its internal audit department. The Internal Audit team headed by Lalit
Sharma, Director of Internal Assurance reports directly to the Audit Committee
and is supports the management team in its tasks related to internal
controls.

Considering the
internal control material weaknesses identified as of December 31, 2004, and in
preparation for an internal control assessment as of December 31, 2005, the
Company engaged substantial resources to redesign, document, test and remediate
its internal control over financial reporting during 2005. In January 2005 the
Company re-engaged a nationally-recognized accounting and consulting firm to
assist the Company in its efforts to document test and remediate its internal
control over financial reporting in accordance with the framework published by
the Committee of Sponsoring Organizations of the Treadway Commission in
preparation for 2005 year-end testing.  The Company also strengthened its
internal audit team by creating a global internal assurance team and hired
appropriate resources to manage the activities related to assurance and work
closely with the firm referred to above.  The internal assurance team, the
nationally-recognized accounting and consulting firm, and the finance team
worked during 2005 under the guidance of the Chief Financial Officer towards
design and institutionalizing the processes and procedures for establishment of
effective internal controls and remediation of the internal control weaknesses
identified during 2004.

The Company was no
longer an accelerated filer as of December 31, 2005 and because of
changes in the implementation rules related to Section 404 of the Sarbanes-Oxley
Act, the Company was not required by Section 404 to prepare an assessment of its
internal control over financial reporting as of December 31, 2005.  Prior
to the rule changes which allowed the Company to exit accelerated
filer status, the nationally recognized accounting and consulting firm
mentioned in the paragraph above in coordination with the Companys
internal assurance team had substantially completed its testing.  Based
upon the Companys evaluation of such testing and the observations of the
Companys finance management and its independent publicly registered
accounting firm during the closing and audit processes for the year ended
December 31, 2005, the Company believes that as of December 31, 2005 the
remediation measures set forth above remediated the internal control weaknesses
set forth above which had been identified during 2004.  However, it is
possible that material weaknesses in the Companys internal control over
financial reporting, including with respect to internal control issues that were
the subject of the remediation efforts described above, might have been
identified had the Company completed an assessment of its internal control over
financial reporting as of December 31, 2005.

51



PART
III

Item 10.
Directors and Executive Officers of the Registrant.

The discussion under
the heading Directors and Executive Officers of the Registrant in
our definitive proxy statement for the 2007 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.  We adopted a
Code of Business Conduct and Ethics (Code) in 2004.  Such Code
applies to our officers, directors, and employees.  A copy of the Code is
available on our website at www.intelligroup.com.

Item 11.
Executive Compensation.

The discussion under
the heading Executive Compensation in our definitive proxy statement
for the 2007 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.

Item 12. Security
Ownership of Certain Beneficial Owners and Management.

The discussion under
the heading Security Ownership of Certain Beneficial Owners and
Management in our definitive proxy statement for the 2007 Annual Meeting
of Shareholders is incorporated herein by reference to such proxy
statement.

Item 13. Certain
Relationships and Related Transactions.

The discussion under
the heading Certain Relationships and Related Transactions in our
definitive proxy statement for the 2007 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.

Item 14.
Principal Accounting Fees and Services.

The discussion under
the heading Principal Accounting Fees and Services in our definitive
proxy statement for the 2006 Annual Meeting of Shareholders is incorporated
herein by reference to such proxy statement.

52



Part IV

|Item 15.          Exhibits and
  Financial Statement Schedules.
|---------------------------------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               

53



EXHIBIT INDEX

| | Exhibit   No. |       | Description   of Exhibit
| | ------------- | ----- | ------------------------
| |               |       |                         
| |               | 2     |                         
| |               |       |                         
| |               | 3.1  |                         
| |               |       |                         
| |               | 3.2   |                         
| |               |       |                         
| |               | 4.1   |                         
| |               |       |                         
| |               | 4.2   |                         
| |               |       |                         
| |               | 10.1* |                         
| |               |       |                         
| |               | 10.2* |                         
| |               |       |                         
| |               | 10.3* |                         
| |               |       |                         
| |               | 10.4* |                         
| |               |       |                         
| |               | 10.5* |                         

54



| | Exhibit   No. |       | Description   of Exhibit
| | ------------- | ----- | ------------------------
| |               |       |                         
| |               | 10.6  |                         
| |               |       |                         
| |               | 10.7  |                         
| |               |       |                         
| |               | 10.8  |                         
| |               |       |                         
| |               | 10.9  |                         
| |               |       |                         
| |               | 10.10 |                         
| |               |       |                         
| |               | 10.11 |                         
| |               |       |                         
| |               | 10.12 |                         
| |               |       |                         
| |               | 10.13 |                         
| |               |       |                         
| |               | 10.14 |                         
| |               |       |                         
| |               | 10.15 |                         

55



| | Exhibit   No. |        | Description   of Exhibit
| | ------------- | ------ | ------------------------
| |               |        |                         
| |               | 10.16  |                         
| |               |        |                         
| |               | 10.17  |                         
| |               |        |                         
| |               | 10.18  |                         
| |               |        |                         
| |               | 10.19  |                         
| |               |        |                         
| |               | 10.20  |                         
| |               |        |                         
| |               | 10.21  |                         
| |               |        |                         
| |               | 10.22  |                         
| |               |        |                         
| |               | 10.23* |                         
| |               |        |                         
| |               | 10.24  |                         
| |               |        |                         
| |               | 10.25  |                         
| |               |        |                         
| |               | 10.26  |                         

56



| | Exhibit   No. |        | Description   of Exhibit
| | ------------- | ------ | ------------------------
| |               |        |                         
| |               | 10.27* |                         
| |               |        |                         
| |               | 10.28  |                         
| |               |        |                         
| |               | 10.29  |                         
| |               |        |                         
| |               | 10.30  |                         
| |               |        |                         
| |               | 10.31* |                         
| |               |        |                         
| |               | 10.32  |                         
| |               |        |                         
| |               | 10.33* |                         
| |               |        |                         
| |               | 10.34  |                         
| |               |        |                         
| |               | 10.35* |                         
| |               |        |                         
| |               | 10.36* |                         

57



| | Exhibit   No. |         | Description   of Exhibit
| | ------------- | ------- | ------------------------
| |               |         |                         
| |               | 10.37* |                         
| |               |         |                         
| |               | 10.38*  |                         
| |               |         |                         
| |               | 10.39*  |                         
| |               |         |                         
| |               | 10.40   |                         
| |               |         |                         
| |               | 10.41   |                         
| |               |         |                         
| |               | 10.42*  |                         
| |               |         |                         
| |               | 10.43*  |                         
| |               |         |                         
| |               | 10.44   |                         
| |               |         |                         
| |               | 10.45*  |                         
| |               |         |                         
| |               | 10.46*  |                         

58



| | Exhibit   No. |        | Description   of Exhibit
| | ------------- | ------ | ------------------------
| |               |        |                         
| |               | 10.47* |                         
| |               |        |                         
| |               | 10.48* |                         
| |               |        |                         
| |               | 10.49* |                         
| |               |        |                         
| |               | 10.50* |                         
| |               |        |                         
| |               | 10.51* |                         
| |               |        |                         
| |               | 10.52* |                         
| |               |        |                         
| |               | 10.53  |                         
| |               |        |                         
| |               | 10.54* |                         
| |               |        |                         
| |               | 10.55  |                         

59



| | Exhibit   No. |        | Description   of Exhibit
| | ------------- | ------ | ------------------------
| |               |        |                         
| |               | 10.56  |                         
| |               |        |                         
| |               | 10.57* |                         
| |               |        |                         
| |               | 10.58* |                         
| |               |        |                         
| |               | 10.59* |                         
| |               |        |                         
| |               | 10.60* |                         
| |               |        |                         
| |               | 14     |                         
| |               |        |                         
| |               | 21    |                         
| |               |        |                         
| |               | 16.1   |                         
| |               |        |                         
| |               | 16 .2  |                         
| |               |        |                         
| |               | 23    |                         
| |               |        |                         
| |               | 31.1  |                         
| |               |        |                         
| |               | 31.2  |                         
| |               |        |                         
| |               | 32.1  |                         

60



| | Exhibit   No. |       | Description   of Exhibit
| | ------------- | ----- | ------------------------
| |               |       |                         
| |               | 32.2 |                         

| 
|-
|*
|

61



SIGNATURES

Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 29th day of March 2007.

| | INTELLIGROUP,   INC.
| | --------------------
| |                     
| |                     
| | By:                 
| |                     
| |                     
| |                     

Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the date indicated.

|Signature         |  | Title                                  |  | Date   
|----------------- |  | -------------------------------------- |  | -------
|                  |  |                                        |  |        
|/s/               |  | Chief   Executive Officer and Director |  | 3/29/07
|                  |  |                                        |  |        
|Vikram   Gulati   |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Chief   Financial Officer              |  | 3/29/07
|                  |  |                                        |  |        
|Alok Bajpai       |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Director                               |  | 3/26/07
|                  |  |                                        |  |        
|Ravi   Adusumalli |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Director                               |  | 3/27/07
|                  |  |                                        |  |        
|Ajit Isaac        |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Director                               |  | 3/22/07
|                  |  |                                        |  |        
|Srinivasa   Raju  |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Director                               |  | 3/27/07
|                  |  |                                        |  |        
|Sandeep   Reddy   |  |                                        |  |        
|                  |  |                                        |  |        
|/s/               |  | Director                               |  | 3/23/07
|                  |  |                                        |  |        
|Babar Khan        |  |                                        |  |        

62



INTELLIGROUP, INC. INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                           |  | Page
|-------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                           |  |     
|Consolidated   Financial Statements:                                                                                       |  |     
|Report of Independent Registered Public Accounting
Firm                                                                    |  | 64  
|Consolidated Balance Sheets as of December 31, 2006 and
2005                                                               |  | 65  
|Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 2006, 2005 and 2004 |  | 66  
|Consolidated Statements of Changes in Shareholders
Equity for the years ended December 31, 2006, 2005 and 2004            |  | 67  
|Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004                                 |  | 68  
|Notes to Consolidated Financial Statements                                                                                 |  | 69  

63



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders Intelligroup, Inc.

We have audited the accompanying consolidated balance sheets of Intelligroup,
Inc. and Subsidiaries (the Company) as of December 31, 2006 and 2005
and the related consolidated statements of operations and comprehensive income
(loss), changes in shareholders equity and cash flows for each of the
three years in the period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2006 and 2005, and their consolidated results of operations and
cash flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in United States of
America.

As discussed in Note 2, the Company changed the manner in which it accounts for
share-based compensation in the year ended December 31, 2006.

As discussed in Note 8, the Company may be exposed to a significant potential
tax liability.

|/s/ J.H.   Cohn LLP    | 
|---------------------- | 
|                       | 
|Roseland,   New Jersey | 
|February 16,   2007    | 

64



INTELLIGROUP, INC.CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005(in thousands except par
value)



|                                                                                                                                                                                                    |  | December   31,   2006 |         | December   31,   2005 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | --------------------- | -
|                                                                                                                                                                                                    |  |                       |         |                       |  
|ASSETS                                                                                                                                                                                              |  |                       |         |                       |  
|CURRENT   ASSETS                                                                                                                                                                                    |  |                       |         |                       |  
|Cash   and cash equivalents                                                                                                                                                                         |  | $                     | 12,277  |                       | $
|Short-term   investments                                                                                                                                                                            |  |                       | 2,227   |                       |  
|Accounts receivable, less allowance for doubtful accounts of $991 and $1,329 at
December 31, 2006 and 2005, respectively                                                                            |  |                       | 20,477  |                       |  
|Unbilled   services, less allowance for doubtful accounts of $891 at December 31, 2006                                                                                                              |  |                       | 9,464   |                       |  
|Prepaid   expenses and other current assets                                                                                                                                                         |  |                       | 2,423   |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   current assets                                                                                                                                                                              |  |                       | 46,868  |                       |  
|Property and equipment,   net                                                                                                                                                                       |  |                       | 5,472   |                       |  
|Deferred taxes and other   assets                                                                                                                                                                   |  |                       | 2,203   |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   assets                                                                                                                                                                                      |  | $                     | 54,543  |                       | $
|                                                                                                                                                                                                    |  |                       |         |                       |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                |  |                       |         |                       |  
|CURRENT   LIABILITIES                                                                                                                                                                               |  |                       |         |                       |  
|Line   of credit borrowings                                                                                                                                                                         |  | $                     | 4,959   |                       | $
|Accounts   payable                                                                                                                                                                                  |  |                       | 3,078   |                       |  
|Accrued   payroll and related taxes                                                                                                                                                                 |  |                       | 11,301  |                       |  
|Accrued   expenses and other current liabilities                                                                                                                                                    |  |                       | 4,695   |                       |  
|Current   portion of deferred revenue                                                                                                                                                               |  |                       | 2,294   |                       |  
|Income   taxes payable                                                                                                                                                                              |  |                       |        |                       |  
|Current   portion of obligations under capital leases                                                                                                                                               |  |                       | 483     |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   current liabilities                                                                                                                                                                         |  |                       | 26,810  |                       |  
|Obligations undercapital   leases, net of current portion                                                                                                                                           |  |                       | 552     |                       |  
|Deferred revenue, net of   current portion                                                                                                                                                          |  |                       | 686     |                       |  
|Other long-term   liabilities                                                                                                                                                                       |  |                       | 101     |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   liabilities                                                                                                                                                                                 |  |                       | 28,149  |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Commitments and   contingencies                                                                                                                                                                     |  |                       |         |                       |  
|Shareholders   Equity                                                                                                                                                                              |  |                       |         |                       |  
|Preferred   stock, $.01 par value, 5,000 shares authorized, none issued or outstanding                                                                                                              |  |                       |        |                       |  
|Common stock, $.01 par value, 50,000 shares authorized at December 31, 2006 and
2005, respectively, and 41,933 and 35,103 shares issued and outstanding at
December 31, 2006 and 2005, respectively |  |                       | 419     |                       |  
|Additional   paid-in capital                                                                                                                                                                        |  |                       | 69,702  |                       |  
|Accumulated   deficit                                                                                                                                                                               |  |                       | (43,753 | )                     |  
|Accumulated   other comprehensive loss                                                                                                                                                              |  |                       | 26      |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   shareholders equity                                                                                                                                                                        |  |                       | 26,394  |                       |  
|                                                                                                                                                                                                    |  |                       |         |                       |  
|Total   liabilities and shareholders equity                                                                                                                                                        |  | $                     | 54,543  |                       | $
|                                                                                                                                                                                                    |  |                       |         |                       |  

The accompanying notes to the consolidated financial statements are an integral
part of these statements.

65



INTELLIGROUP, INC.CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31,
2006, 2005 AND 2004(in thousands except per share
data)

|                                                                           |  | 2006 |         | 2005 |   | 2004    |  
|-------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                           |  |      |         |      |   |         |  
|Revenue                                                                    |  | $    | 125,309 |      | $ | 125,326 |  
|Cost of revenue                                                            |  |      | 91,104  |      |   | 92,304  |  
|                                                                           |  |      |         |      |   |         |  
|Gross   profit                                                             |  |      | 34,205  |      |   | 33,022  |  
|                                                                           |  |      |         |      |   |         |  
|Selling, general and   administrative expenses                             |  |      | 35,031  |      |   | 37,705  |  
|Depreciation and   amortization                                            |  |      | 2,474   |      |   | 2,260   |  
|                                                                           |  |      |         |      |   |         |  
|Total   operating expenses                                                 |  |      | 37,505  |      |   | 39,965  |  
|                                                                           |  |      |         |      |   |         |  
|Operating   loss                                                           |  |      | (3,300  | )    |   | (6,943  | )
|Interest income                                                            |  |      | 27      |      |   | 147     |  
|Interest expense                                                           |  |      | (597    | )    |   | (318    | )
|Other income (expense), net                                                |  |      | 1,300   |      |   | 283     |  
|                                                                           |  |      |         |      |   |         |  
|Loss before income taxes                                                   |  |      | (2,570  | )    |   | (6,831  | )
|Provision for (benefit of)   income taxes                                  |  |      | 1,137   |      |   | (240    | )
|                                                                           |  |      |         |      |   |         |  
|Net loss                                                                   |  | $    | (3,707  | )    | $ | (6,591  | )
|                                                                           |  |      |         |      |   |         |  
|Loss per share:                                                            |  |      |         |      |   |         |  
|Basic   and diluted net loss per share                                     |  | $    | (0.09   | )    | $ | (0.19   | )
|                                                                           |  |      |         |      |   |         |  
|Weighted   average number of common shares outstanding - basic and diluted |  |      | 40,179  |      |   | 35,103  |  
|                                                                           |  |      |         |      |   |         |  
|Comprehensive income (loss)                                                |  |      |         |      |   |         |  
|Net   loss                                                                 |  | $    | (3,707  | )    | $ | (6,591  | )
|Other   comprehensive income (loss)                                        |  |      |         |      |   |         |  
|Currency translation adjustments                                           |  |      | 578     |      |   | (291    | )
|                                                                           |  |      |         |      |   |         |  
|Comprehensive loss                                                         |  | $    | (3,129  | )    | $ | (6,882  | )
|                                                                           |  |      |         |      |   |         |  

The accompanying notes to the consolidated financial statements are an integral part of these statements.

66



INTELLIGROUP, INC.CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2006,
2005 AND 2004(in thousands)

|                                                  |  | Common   Stock |        | Additional   Paid-in   Capital |   | Accumulated   Deficit |  | Accumulated   Other   Comprehensive   Income (Loss) |        | Total   Shareholders   Equity |  
|------------------------------------------------- |  | -------------- | ------ | ------------------------------ | - | --------------------- |  | --------------------------------------------------- | ------ | ------------------------------ | -
|                                                  |  |                |        |                                |   |                       | 
|                                                  |  | Shares         |        | Amount                         |   |                       |  |                                                     |       
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  
|Balance, January 1, 2004                          |  |                | 16,987 |                                | $ | 170                   |  | $                                                   | 42,190 |                                | $
|Exercise of stock options                         |  |                | 469    |                                |   | 5                     |  |                                                     | 1,323  |                                |  
|Issuance of common stock in   a private placement |  |                | 17,647 |                                |   | 176                   |  |                                                     | 14,499 |                                |  
|Currency translation   adjustment                 |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|Net loss                                          |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  
|Balance, December 31, 2004                        |  |                | 35,103 |                                |   | 351                   |  |                                                     | 58,012 |                                |  
|Stock compensation expense                        |  |                |        |                                |   |                       |  |                                                     | 125    |                                |  
|Currency translation   adjustment                 |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|Net loss                                          |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  
|Balance, December 31, 2005                        |  |                | 35,103 |                                |   | 351                   |  |                                                     | 58,137 |                                |  
|Stock compensation expense                        |  |                |        |                                |   |                       |  |                                                     | 1,611  |                                |  
|Currency translation   adjustment                 |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|Exercise of stock options                         |  |                | 163    |                                |   | 1                     |  |                                                     | 244    |                                |  
|Issuance of common stock in   a private placement |  |                | 6,667  |                                |   | 67                    |  |                                                     | 9,710  |                                |  
|Net loss                                          |  |                |       |                                |   |                      |  |                                                     |       |                                |  
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  
|Balance, December 31, 2006                        |  |                | 41,933 |                                | $ | 419                   |  | $                                                   | 69,702 |                                | $
|                                                  |  |                |        |                                |   |                       |  |                                                     |        |                                |  

The accompanying notes to the consolidated financial statements are an integral
part of these statements.

67



INTELLIGROUP, INC.CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (in
thousands)

|                                                                                          |  | December   31,   2006 |        | December   31,   2005 |   | December   31,   2004 |  
|----------------------------------------------------------------------------------------- |  | --------------------- | ------ | --------------------- | - | --------------------- | -
|                                                                                          |  |                       |        |                       |   |                       |  
|Cash flows from operating   activities:                                                   |  |                       |        |                       |   |                       |  
|Net   loss                                                                                |  | $                     | (3,707 | )                     | $ | (6,591                | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                       |        |                       |   |                       |  
|Depreciation   and amortization                                                           |  |                       | 2,472  |                       |   | 2,262                 |  
|Provision   for doubtful accounts and advances                                            |  |                       | 1,343  |                       |   | 44                    |  
|Stock   compensation expense                                                              |  |                       | 1,611  |                       |   | 125                   |  
|Exchange   (gain) loss                                                                    |  |                       | 203    |                       |   | (304                  | )
|Deferred   taxes                                                                          |  |                       | 602    |                       |   | (713                  | )
|Changes in operating assets   and liabilities:                                            |  |                       |        |                       |   |                       |  
|Accounts   receivable                                                                     |  |                       | (3,013 | )                     |   | 4,323                 |  
|Unbilled   services                                                                       |  |                       | 54     |                       |   | 943                   |  
|Prepaid   expenses and other current assets                                               |  |                       | 976    |                       |   | 1,030                 |  
|Other   assets                                                                            |  |                       | 316    |                       |   | (876                  | )
|Accounts   payable                                                                        |  |                       | (2,016 | )                     |   | 1,679                 |  
|Accrued   payroll and related taxes                                                       |  |                       | 487    |                       |   | 243                   |  
|Accrued   expenses and other current liabilities                                          |  |                       | (299   | )                     |   | (879                  | )
|Deferred   revenue and advanced payments                                                  |  |                       | 2,041  |                       |   | (130                  | )
|Income   taxes payable                                                                    |  |                       | (1,003 | )                     |   | 30                    |  
|Other   long-term liabilities                                                             |  |                       | (149   | )                     |   | (92                   | )
|                                                                                          |  |                       |        |                       |   |                       |  
|Net cash provided by (used   in) operating activities                                     |  |                       | (82    | )                     |   | 1,094                 |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Cash flows from investing   activities:                                                   |  |                       |        |                       |   |                       |  
|Purchase   of property and equipment                                                      |  |                       | (2,130 | )                     |   | (2,429                | )
|Purchases   of short-term investments                                                     |  |                       | (2,145 | )                     |   |                      |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Net cash used in investing   activities                                                   |  |                       | (4,275 | )                     |   | (2,429                | )
|                                                                                          |  |                       |        |                       |   |                       |  
|Cash flows from financing   activities:                                                   |  |                       |        |                       |   |                       |  
|Principal   payments under capital leases                                                 |  |                       | (312   | )                     |   | (477                  | )
|Net   proceeds from private placement                                                     |  |                       | 9,777  |                       |   |                      |  
|Proceeds   from exercise of stock options                                                 |  |                       | 245    |                       |   |                      |  
|Net   change in line of credit borrowings                                                 |  |                       | 1,532  |                       |   | 1,071                 |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Net cash provided by   financing activities                                               |  |                       | 11,242 |                       |   | 594                   |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Effect of foreign currency   exchange rate changes on cash                                |  |                       | 87     |                       |   | (193                  | )
|                                                                                          |  |                       |        |                       |   |                       |  
|Net increase (decrease) in   cash and cash equivalents                                    |  |                       | 6,972  |                       |   | (934                  | )
|Cash and cash equivalents -   beginning of year                                           |  |                       | 5,305  |                       |   | 6,239                 |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Cash and cash equivalents -   end of year                                                 |  | $                     | 12,277 |                       | $ | 5,305                 |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Supplemental disclosures of   cash flow information:                                      |  |                       |        |                       |   |                       |  
|Cash   paid for income taxes                                                              |  | $                     | 1,341  |                       | $ | 689                   |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Cash   paid for interest                                                                  |  | $                     | 589    |                       | $ | 290                   |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Supplemental disclosures of noncash investing and financing
activities                    |  |                       |        |                       |   |                       |  
|Fair value of property and equipment received for future services                         |  | $                     | 915    |                       | $ |                      |  
|                                                                                          |  |                       |        |                       |   |                       |  
|Property   and equipment acquired by capital lease                                        |  | $                     | 938    |                       | $ | 603                   |  
|                                                                                          |  |                       |        |                       |   |                       |  

The accompanying notes to the consolidated financial statements are an integral
part of these statements.

68



INTELLIGROUP, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

NOTE
1-          ORGANIZATION
AND BASIS OF PRESENTATION

Intelligroup, Inc.,
together with its subsidiaries (Intelligroup or the
Company) is a global provider of strategic IT outsourcing services.
Intelligroup develops implements and supports information technology solutions
for global corporations and public sector organizations.

The Company was
incorporated in New Jersey in October 1987 under the name Intellicorp, Inc. to
provide systems integration and custom software development services. The
Companys name was changed to Intelligroup, Inc. in July 1992. In March
1994, the Company acquired Oxford Systems Inc. (Oxford). On December
31, 1996, Oxford was merged into the Company and ceased to exist as an
independent entity. In October 1996, the Company consummated its initial public
offering of its common stock (Common Stock).

During the fourth
quarter of 2006, the Companys India subsidiary engaged a PCAOB registered
accounting firm to evaluate and recommend changes, if any, to its transfer
pricing methodology,  which applies a fixed margin to the total cost of services performed as opposed to a net margin method in which revenues are allocated on a fixed percentage without regard to cost of services. Consistent with the firms recommendation, the
Company adopted a cost plus fixed margin transfer pricing
methodology.  While the application of the new transfer pricing methodology
did not change the Companys revenue or operating loss on a
consolidated basis, it impacted the allocation of revenue and costs between the
Company and its international subsidiaries, thus impacting the tax liability for
certain international subsidiaries.  As a result, the Company revised its
estimated tax expense as of December 31, 2006.

The effect of this
change in estimate for the twelve months ended December 31, 2006 was to decrease
tax expense by $0.8 million and to reduce consolidated net loss by $0.8 million
or $0.02 per share.

NOTE 2-          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying
consolidated financial statements include the accounts of Intelligroup, Inc. and
its wholly and majority owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company
considers all highly liquid debt instruments and other short-term investments
with a maturity of three months or less, when purchased, to be cash
equivalents.

69



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company
maintains cash and cash equivalent balances at several financial institutions
that are insured by the Federal Deposit Insurance Corporation up to
$100,000.  The Company maintains cash balances in excess of insured
amounts.

An amount of $5.2
million can become restricted if a default or event of default on the
outstanding line of credit occurs and is continuing as per the terms of the
Second Amended and Restated Revolving Credit Loan and Security Agreement,
entered into on May 23, 2006.

Short-term Investments

The Company
short-term investments consist of investments in mutual funds, which are
considered to be available for sale.  The carrying value of short-term
investments as of December 31, 2006 approximated fair value. Unrealized and
realized gains or losses on these investments were insignificant for the year
ended December 31, 2006.

Allowance for Doubtful Accounts

The Company provides
an allowance for doubtful accounts, which is based upon a review of outstanding
receivables as well as historical collection information. Credit is granted to
substantially all customers on an unsecured basis. In determining the amount of
the allowance, management is required to make certain estimates and assumptions.
Activity in the allowance for doubtful accounts is as follows (in
thousands):

|Year Ended   December 31, |  | Balance at      beginning of year |        | Charged to   costs and expenses |  | Write-offs      and other |   | Balance at      end of year |    
|------------------------- |  | --------------------------------- | ------ | ------------------------------- |  | ------------------------- | - | --------------------------- | ---
|                          |  |                                   |        |                                 |  |                           |   |                             |    
|2004                      |  |                                   | (933   | )                               |  | (868                      | ) |                             | 174
|2005                      |  |                                   | (1,627 | )                               |  | (40                       | ) |                             | 338
|2006                      |  |                                   | (1,329 | )                               |  | (1,291                    | ) |                             | 738

|                                                                                  
|----------------------------------------------------------------------------------
|(1)  Includes a reserve for unbilled services of $891,000 as of December
31, 2006.

Property and Equipment

Property and
equipment is stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life. Costs
of maintenance and repairs are charged to expense as incurred.

Recoverability of Long-Lived Assets

The Company reviews the recoverability of its long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment.

70



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The assessment for potential impairment is based primarily on the
Companys ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment recognized is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Property and equipment to be disposed of by sale is carried at the lower
of the then current carrying value or fair value less estimated costs to
sell.

Revenue Recognition

The Company
generates revenue from professional services rendered to customers. The majority
of the Companys revenue is generated under time-and-material contracts
whereby costs and revenue are recognized as services are performed, with the
corresponding cost of providing those services reflected as cost of revenue. The
majority of the revenues are billed on an hourly or daily basis whereby actual
time is charged directly to the customer. Such method is expected to result in
reasonably consistent profit margins over the contract term.

The Company also
generates revenue from fixed-price and fixed-time contracts. Revenue generated
from most fixed-price contracts, including most application management and
support contracts, is recognized ratably over the contract term. Revenue
generated from certain other fixed-price contracts is recognized using the
progress of completion method as the ratio of labor hours incurred to estimated
total labor hours.

This method is used
because reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract can be made, based on historical experience and
milestones set in the contract. The Companys project delivery and business
unit finance personnel continually review labor hours incurred and estimated
total labor hours, which may result in revisions to the estimated amount of
recognized revenue for the contract. Changes in estimates are accounted for in
the period of change.  If the Company does not accurately estimate the
resources required or the scope of work to be performed for a contract or if the
Company does not manage the project properly within the planned time period,
then a loss may be recognized on the contract. Losses are recorded in the period
when they become known, and estimated through the completion of the
contract.

The Company
occasionally derives revenue from projects involving multiple revenue-generating
activities. If a contract involves the provision of multiple service elements,
total estimated contract revenue is allocated to each element based on the fair
value of each element. The amount of revenue allocated to each element is
limited to the amount that is not contingent upon the delivery of another
element in the future. Revenue for each element is then recognized depending
upon whether the contract is a time-and-materials contract or a fixed-price,
fixed-time contract.

The Company reports
gross reimbursable out-of-pocket expenses incurred as both revenue
and cost of revenue in the consolidated statements of operations.

Unbilled services
represent services provided which are billed subsequent to the period end in
accordance with the contract terms. All such amounts are anticipated to be
realized in the following period.

Deferred revenue
represents amounts billed to customers but not yet earned or included as
revenue. Such amounts are anticipated to be recorded as revenue as services are
performed in subsequent periods.

71



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Derivative Instruments

During August 2006,
the Company entered into a foreign currency forward contract to manage a portion
of its foreign currency risk related to Indian Rupee denominated asset balances
at our Indian subsidiary.  The foreign currency forward contract is
marked-to-market and recorded at fair value with unrealized gains and losses
reported along with foreign currency gains or losses in the caption other
income (expense), net on the Companys consolidated statements of
operations and comprehensive income (loss).

Share-Based Compensation Plans

The Companys
share-based compensation plans are described in Note 6.  The Company
adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised 2004), Share-Based Payment,
(SFAS No. 123R) on January 1, 2006, using the modified prospective
transition method.  Under this method, share-based compensation expense
recognized in the consolidated statement of operations and comprehensive loss
for the year ended December 31, 2006 includes compensation expense for all
share-based payments granted prior to, but not yet vested, as of January 1,
2006, based on the grant date fair value originally estimated in accordance with
the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123).

There were eleven
share-based payment awards granted in year ended December 31, 2006.  The
Company recognizes compensation expense for all share-based payment awards based
on the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R.  Because the Company elected to use the modified prospective
transition method, results for prior periods have not been restated.

Prior to the
adoption of SFAS No. 123R, share-based employee compensation expense related to
stock options was not recognized in the consolidated statement of operations and
comprehensive loss if the exercise price of the option was at least equal to the
market price of common stock on the grant date, in accordance with the
measurement and recognition provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, as permitted by
SFAS No. 123.  As a result, the recognition of share-based compensation
expense was generally limited to the expense attributed to modifications of
granted options.  In accordance, with SFAS No. 123 and Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, (SFAS No. 148)
the Company provided pro forma net income or loss and net earnings or loss per
common share disclosures for each period prior to the adoption of SFAS No 123R
as if it had applied the fair value-based method in measuring compensation
expense for all share-based compensation plans, including stock options. 
During 2006, the Company has made certain adjustments to the fair value of
options granted prior to January 1, 2006 for the years ended December 31, 2005
and 2004.  These adjustments resulted in an improvement to previously
reported proforma net loss of $0.5 million and $0.2 million for the years ended
December 31, 2005 and 2004, respectively.  Had compensation costs for
stock-based compensation plans been accounted for using the fair value method of
accounting described by SFAS No. 123, net loss and basic and diluted loss per
common share, as restated, for years ended December 31, 2005 and 2004 would have
been as follows (in thousands, except per share data):

72



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|                                                                                                                                         |  | 2005   As originally    reported |        | 2005   Adjustments |   | 2005   As Adjusted |  | 2004   As originally    reported |        | 2004   Adjustments |   | 2004   As Adjusted |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------ | - | ------------------ |  | -------------------------------- | ------ | ------------------ | - | ------------------ | -
|                                                                                                                                         |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  
|Net loss - as reported                                                                                                                   |  | $                                | (6,591 | )                  | $ |                    |  | $                                | (6,591 | )                  | $ | (866               | )
|Add: Total stock-based employee compensation expense using intrinsic value
method included in net loss above, net of related tax effects |  |                                  | 125    |                    |   |                    |  |                                  | 125    |                    |   |                    |  
|Deduct: Total stock-based employee compensation expense determined under fair
value based method for awards, net of related tax effects  |  |                                  | (1,994 | )                  |   | 509                |  |                                  | (1,485 | )                  |   | (1,394             | )
|                                                                                                                                         |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  
|Net loss - pro forma                                                                                                                     |  | $                                | (8,460 | )                  | $ | 509                |  | $                                | (7,951 | )                  | $ | (2,260             | )
|                                                                                                                                         |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  
|Loss per common share -   basic and diluted:                                                                                             |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  
|As   reported                                                                                                                            |  | $                                | (0.19  | )                  | $ |                   |  | $                                | (0.19  | )                  | $ | (0.04              | )
|                                                                                                                                         |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  
|Pro   forma                                                                                                                              |  | $                                | (0.24  | )                  | $ | 0.01               |  | $                                | (0.23  | )                  | $ | (0.10              | )
|                                                                                                                                         |  |                                  |        |                    |   |                    |  |                                  |        |                    |   |                    |  

Currency Translation

For subsidiaries
outside the United States that prepare financial statements in currencies other
than the U.S. dollar, the Company translates income and expense amounts at
average exchange rates for the year, translates assets and liabilities at
year-end exchange rates and equity at  historical rates. The Company
records these translation adjustments as accumulated other comprehensive income
(loss). Gains and losses from foreign currency transactions are included in
other income (expense) in the results of operations. For the years ended
December 31, 2006, 2005 and 2004, the Company recorded approximately $0.4
million in transaction losses, as a result of currency translation.

Concentrations

For the years ended
December 31, 2006, 2005 and 2004, approximately 72%, 70% and 68% of revenue,
respectively, was derived from projects in which the Companys personnel
implemented, extended, maintained, managed or supported software developed by
SAP. The Companys future success in the SAP-related consulting services
depends largely on its continued relationship with SAP and on its continued
status as an SAP National Implementation Partner, which was first obtained in
1995. The Companys agreement with SAP (the Agreement) is
awarded on an annual basis.

The Companys
current contract expires on December 31, 2007 and is automatically renewable for
successive one-year periods, unless terminated by either party. This Agreement
contains no minimum revenue requirements or cost sharing arrangements and does
not provide for commissions or royalties to either party. In July 1997, the
Company achieved Accelerated SAP Partner Status with SAP by meeting certain
criteria established by SAP.

73



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has
derived and believes that it will continue to derive a significant portion of
its revenue from a limited number of customers and projects. For the years ended
December 31, 2006, 2005 and 2004, the Companys ten largest customers
accounted for in the aggregate approximately 49%, 49% and 45% of its revenue,
respectively.  During 2006 and 2005, one customer accounted for 12% of
revenue, while during 2004, no single customer accounted for 10% or more of
revenue.  As of December 31, 2006 and 2005, one customer accounted for 16%
and 23%, respectively, of accounts receivable.

A portion of the
Companys revenue was generated by providing supplemental resources for
consulting teams assembled by other information technology consulting firms or
directly to the end-customer.  For the years ended December 31, 2006, 2005
and 2004, 21%, 12% and 22%, respectively, of the Companys revenue was
generated by providing supplemental resources directly to the end-customer or as
part of a consulting team assembled by another information technology consulting
firm. There can be no assurance that such information technology consulting
firms will continue to engage the Company in the future at current levels of
retention, if at all.

For the years ended
December 31, 2006, 2005 and 2004, approximately 13%, 21% and 25% of revenue,
respectively, was derived from projects in which the Companys personnel
implemented, extended, maintained, managed or supported software developed by
PeopleSoft.

For the years ended
December 31, 2006, 2005 and 2004, approximately 7%, 3% and 2% of revenue,
respectively, was derived from projects in which the Companys personnel
implemented, extended, maintained, managed or supported software developed by
Oracle.

For the years ended
December 31, 2006, 2005 and 2004, approximately 5%, 5% and 3% of revenue,
respectively, was derived from projects in which the Companys personnel
implemented, extended, maintained, managed or supported e-Business related
software.

Fair Value of Financial Instruments

The carrying amount
reported in the consolidated balance sheet for cash and cash equivalents,
short-term investments, accounts receivable, unbilled services, accounts payable, accrued expenses, line
of credit and obligations under capital leases approximate fair value because of
the immediate or short-term maturity of these financial instruments.

Income Taxes

The income tax
provision (benefit) is computed based on the enacted tax laws. Deferred income
taxes are recognized in accordance with the provisions of FASB Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes, (SFAS 109) and are determined based upon the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates. Provisions have not been made for
income taxes or foreign withholding taxes on cumulative earnings of foreign
subsidiaries because such earnings will either not be subject to any such taxes
or are intended to be indefinitely reinvested in those operations. It is not
practicable to determine the tax liability, if any, that would be payable if
such earnings were not reinvested indefinitely.  A valuation allowance has
been established for a portion of the Companys net deferred tax assets, as
the ability to utilize these losses may be limited in the future.

74



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Loss Per Share

Basic loss per share
(EPS) is computed by dividing the net loss by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
includes additional dilution from potential common stock, such as stock issuable
pursuant to the exercise of stock options and warrants. Potential common stock
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.

Options to purchase
3,912,000, 4,001,000, and 2,708,000 shares of Common Stock at December 31, 2006,
2005 and 2004, respectively, were not included in the computation of diluted EPS
because inclusion would have been anti-dilutive.

Recent Issued Accounting Standards

In July, 2006, the
Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires recognition in the
financial statements of the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The provisions are effective for the Company beginning in the
first quarter of 2007 with the cumulative effect, if any, of the change in
accounting principle recorded as an adjustment to the opening balance of
retained earnings. The Company does not expect that FIN 48 will have a material
effect on its consolidated financial condition or results of
operations.

In September 2006,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements (FAS
157), which defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States of
America, and expands disclosures about fair value measurements.  The
provisions are effective for the Company beginning in the first quarter of 2008,
with the cumulative effect, if any, of the change in accounting principle
recorded as an adjustment to the opening balance of retained earnings. The
Company is currently evaluating the impact of adopting FAS 157 on its
consolidated financial statements.

In February, 2007,
the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159).  SFAS No. 159
permits entities to choose to measure financial assets and financial liabilities
at fair value.  Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings.  SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.  The Company
is currently assessing the impact of SFAS No. 159 on its consolidated financial
position and results of operations.

Reclassifications

Certain amounts for
the years ended December 31, 2005 and 2004 have been reclassified to conform to
the presentation of the December 31, 2006 amounts.

75



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE
3-          PROPERTY AND
EQUIPMENT

Property and
equipment consist of the following as of December 31, 2006 and 2005 (in
thousands, except useful lives data):

|                                                  |  | Estimated   Useful   Lives (Years) |      | 2006 |   | 2005    |  
|------------------------------------------------- |  | ---------------------------------- | ---- | ---- | - | ------- | -
|                                                  |  |                                    |      |      |   |         |  
|Vehicles                                          |  |                                    | 5    |      | $ | 576     |  
|Furniture                                         |  |                                    | 5    |      |   | 3,115   |  
|Equipment                                         |  |                                    | 3-5  |      |   | 9,118   |  
|Computer software                                 |  |                                    | 3    |      |   | 8,630   |  
|Leasehold improvements                            |  |                                    | 5-10 |      |   | 2,181   |  
|                                                  |  |                                    |      |      |   |         |  
|                                                  |  |                                    |      |      |   | 23,620  |  
|Less: Accumulated   depreciation and amortization |  |                                    |      |      |   | (18,148 | )
|                                                  |  |                                    |      |      |   |         |  
|Total, net                                        |  |                                    |      |      | $ | 5,472   |  
|                                                  |  |                                    |      |      |   |         |  

Included in property
and equipment is $1.8 million and $1.1 million of assets held under capital
lease at December 31, 2006 and 2005, respectively. Accumulated amortization of
the assets held under capital lease is $0.6 million and $0.4 million at December
31, 2006 and 2005, respectively.

NOTE 4-          LINE OF
CREDIT

On May 23, 2006, the
Company and its wholly-owned subsidiary Empower, Inc. entered into a second
amended and restated revolving credit loan and security agreement and second
amended and restated revolving secured note (collectively Credit
Agreement) with the Steel City Capital Funding, a division of PNC Bank,
National Association (the Bank).  The Credit Agreement is
comprised of a two year revolving line of credit pursuant to which the Company
can borrow up to $15.0 million at the Banks Base Rate (as defined in the
Credit Agreement) of 8.25% as of December 31, 2006, plus two (2%) percent. 
The credit facility is collateralized by substantially all of the assets of the
United States based operations and all subsidiary stock (not to exceed 65% of
the Equity Interests of any Foreign Subsidiary).  The maximum borrowing
availability under the Credit Agreement is based upon a percentage of eligible
billed and unbilled accounts receivable.  The Credit Agreement 
provides for certain financial covenants that shall only be tested as of the end
of any fiscal quarter in which the average undrawn availability has been less
than five million dollars ($5.0 million) for a period of thirty (30) consecutive
days during such fiscal year.

The Company was in
compliance with the loan agreement related to the Credit Facility as of December
31, 2006.

As of December 31,
2006, the Company had $5.0 million outstanding borrowings under the Credit
Facility. The Company estimates undrawn availability under the Credit Facility
to be $8.4 million as of December 31, 2006.  The weighted average interest
rates on outstanding borrowings under the credit facility were 12.49% and 7.16%
for the years ended December 31, 2006 and 2005 respectively.

76



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE
5-          OBLIGATIONS
UNDER CAPITAL LEASES

The Company is the
lessee of equipment, vehicles and furniture under capital leases expiring in
2011.

Minimum lease
payments under capital leases at December 31, 2006 are as follows (in
thousands):

|2007                                  |  | $ | 592   |  
|------------------------------------- |  | - | ----- | -
|2008                                  |  |   | 371   |  
|2009                                  |  |   | 183   |  
|2010                                  |  |   | 48    |  
|2011                                  |  |   | 17    |  
|                                      |  |   |       |  
|                                      |  |   | 1,211 |  
|Less: amounts representing   interest |  |   | (176  | )
|Less: current portion                 |  |   | (483  | )
|                                      |  |   |       |  
|Long-term portion                     |  | $ | 552   |  
|                                      |  |   |       |  

NOTE
6-          SHAREHOLDERS
EQUITY

Preferred Stock

At December 31, 2006
and 2005, there are 5,000,000 shares of Preferred Stock, par value $0.01
authorized and no shares issued or outstanding.

Common Stock

At the
Companys 2005 Annual Shareholders Meeting on December 27, 2005, the
shareholders approved an increase to the authorized shares of Common Stock to
50,000,000 from 40,000,000.

At the
Companys 2004 Annual Shareholders Meeting on June 8, 2004, the
shareholders approved an increase to the authorized shares of Common Stock to
40,000,000 from 25,000,000.

Private Placements

In March, 2006, the
Company issued 6,666,667 shares of Common Stock at $1.50 per share in a private
placement transaction for gross proceeds of $10 million and net proceeds of $9.8
million.

In September 2004,
the Company issued 17,647,000 shares of Common Stock at $0.85 per share in a
private placement transaction for gross proceeds of $15 million and net proceeds
of $14.7 million.

Stock Options

The Companys stock option plans permit the granting of options to employees, non-employee directors and consultants. The Compensation Committee of the Board of Directors generally has the

77



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

authority to select individuals who are to receive options and
to specify the terms and conditions of each option so granted, including the
number of shares covered by the option, the type of option (incentive stock
option or non-qualified stock option), the exercise price, vesting provisions,
and the overall option term. A total of 7,105,000 shares of Common Stock have
been reserved for issuance under the plans. All of the options issued pursuant
to these plans expire ten years from the date of grant (number of shares data in
thousands).

In 2005, the
Compensation Committee of the Board of Directors extended the life of an option
award for the exercise of 160,000 stock options granted to a director.  As
a result, the Company recognized stock compensation expense of $0.1 million
associated with the incremental intrinsic value at the date of
modification.

Share-Based Compensation Plans

The Company has four
share-based compensation plans that reserve common shares for issuance to key
employees, consultants and directors, as described below.  The compensation
cost that has been charged against income for those plans was $1.6 million for
the year ended December 31, 2006.  The Company received approximately
$245,000 from option exercises under share-based compensation plans for the year
ended December 31, 2006.  Although there were options exercised during the
year ended December 31, 2006, no tax benefits were recorded due to there being
no tax benefits for tax deductions expected to be utilized, based on the history
of net operating losses.

The 2004 Equity
Incentive Award Plan (2004 Plan) was approved by the Companys
Board of Directors on April 5, 2004 and adopted by the Companys
shareholders on June 8, 2004. The maximum number of shares of Common Stock
reserved for issuance under the 2004 Plan shall be equal to 1,600,000, plus the
number of shares of Common Stock which are or become available for issuance
under the Companys 1996 Stock Plan (the Prior Plan), and which
are not issued under such plan, which includes an increase of 500,000 options as
adopted by the Board of Directors on May 4, 2006 and approved by the
stockholders of the Company on June 8, 2006. Those eligible to receive stock
option grants or stock purchase rights under the 2004 Plan include employees,
non employee Directors and consultants.  The Compensation Committee of the
Board of Directors of the Company administers the 2004 Plan.  Subject to
the provisions of the 2004 Plan, the administrator of the 2004 Plan has the
discretion to determine the optionees and/or grantees, the type of equity awards
to be granted (incentive stock options and nonqualified stock options,
restricted stock, stock appreciation rights, performance shares, performance
stock units, stock payments, deferred stock, restricted stock units, other
stock-based awards, and performance-based awards), the vesting provisions, the
terms of the grants and such other related provisions as are consistent with the
2004 Plan.

The exercise price
of a stock option may not be less than the fair market value per share of the
Common Stock on the date of grant or, in the case of an optionee receiving
incentive stock option award who beneficially owns 10% or more of the
outstanding capital stock of the Company, not less than 110% of the fair market
value per share on the date of grant.  Notwithstanding the foregoing, the
Compensation Committee of the Board may in its discretion issue non-qualified
stock options to purchase up to 500,000 shares of Common Stock with an option
exercise price of less than 100% of the fair market value of the Common Stock on
the date of grant.  The options terminate not more than ten years from the
date of grant, subject to earlier termination on the optionees death,
disability or termination of employment with the Company, provided however that
the term of any incentive stock

78



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

options granted to a holder of more than 10% of the outstanding shares of capital stock may be no longer than five years.  Options are not assignable or otherwise transferable except by will or the laws of descent and distribution.

The Compensation
  Committee may provide that if a Change of Control (as defined in the 2004 Plan)
  of the Company occurs and any awards made pursuant to the 2004 Plan are not
  converted, assumed or replaced by a successor, then all outstanding awards that
  are not converted, assumed or replaced may become fully vested and
  exercisable.  The Compensation Committee, subject to approval of the Board,
  may terminate, amend, or modify the 2004 Plan at any time; provided, however,
  that stockholder approval must be obtained for any amendment to the extent
  necessary or desirable to comply with any applicable law, regulation or stock
  exchange rule, to increase the number of shares available under the 2004 Plan,
  to permit the Compensation Committee to grant options with an exercise price
  below fair market value on the date of grant, or to extend the exercise period
  for an option beyond ten years from the date of grant. The 2004 Plan terminates
  on June 8, 2014 unless terminated earlier by the Companys Board of
  Directors.

The 1996 Stock Plan
(1996 Plan) was adopted by the Board of Directors and approved by
the shareholders of the Company on June 3, 1996, and became effective on July
12, 1996.  Those eligible to receive stock option grants or stock purchase
rights under the 1996 Plan include employees, non employee Directors and
consultants.  The Compensation Committee of the Board of Directors of the
Company administers the 1996 Plan.  Subject to the provisions of the 1996
Plan, the administrator of the 1996 Plan has the discretion to determine the
optionees and/or grantees, the type of options to be granted (incentive stock
options or nonqualified stock options), the vesting provisions, the terms of the
grants and such other related provisions as are consistent with the 1996
Plan.  The exercise price of an incentive stock option may not be less than
the fair market value per share of the Common Stock on the date of grant or, in
the case of an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company, not less than 110% of the fair market value per
share on the date of grant.  The exercise price of a nonqualified stock
options granted under the 1996 Plan may not be less than 85% of the fair market
value per share of the Common Stock on the date of grant or, in the case of an
optionee who beneficially owns 10% or more of the outstanding capital stock of
the Company, not less than 110% of the fair market value per share on the date
of grant.  The purchase price of shares issued pursuant to stock purchase
rights may not be less than 50% of the fair market value of such shares as of
the offer date of such rights.  The options terminate not more than ten
years from the date of grant, subject to earlier termination on the
optionees death, disability or termination of employment with the Company,
provided however that the term of any options granted to a holder of more than
10% of the outstanding shares of capital stock may be no longer than five
years.  Options are not assignable or otherwise transferable except by will
or the laws of descent and distribution.  In the event of a merger or
consolidation of the Company with or into another corporation or the sale of all
or substantially all of the Companys assets in which the successor
corporation does not assume outstanding options or issue equivalent options, the
Board of Directors of the Company is required to provide accelerated vesting of
outstanding options.  As of June 8, 2004, the Company ceased granting
options under the 1996 Plan.

The 1996
Non-Employee Director Plan was approved by the Board of Directors on June 3,
1996. The shareholders adopted the Companys 1996 Non-Employee Director
Stock Option Plan (the Director Plan) and it became effective on
July 12, 1996. The Director Plan provides for the grant of options to purchase a
maximum of 140,000 shares of Common Stock of the Company to non-employee
Directors of the Company.  The Board of Directors administers the Director
Plan.

79



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In October and
November 2000, the Companys Board of Directors approved grants of options
for equity compensation plans not approved by security holders (the Out of
Plan options).  Each of the Out of Plan options vest in four equal
semiannual installments beginning on the first six-month anniversary of the date
of grant and expire on the tenth anniversary of the date of grant. The price of
the options granted pursuant to the Out of Plan options is equal to the fair
market value of the shares on the date of grant.

A summary of stock
option activity as of December 31, 2006, and changes during the year then ended
is presented below:

|                                      |  | Shares    (in thousands) |       | Weighted-   Average    Exercise Price |   | Weighted-   Average    Remaining    Contractual    Term (Years) |  | Aggregate    Intrinsic Value    (in thousands) |    
|------------------------------------- |  | ------------------------ | ----- | ------------------------------------- | - | --------------------------------------------------------------- |  | ---------------------------------------------- | ---
|                                      |  |                          |       |                                       |   |                                                                 |  |                                                |    
|Outstanding as of December   31, 2005 |  |                          | 4,001 |                                       | $ | 2.32                                                            |  |                                                |    
|Granted                               |  |                          | 902   |                                       |   | 1.56                                                            |  |                                                |    
|Exercised                             |  |                          | (164  | )                                     |   | 1.50                                                            |  |                                                |    
|Canceled, forfeited or   expired      |  |                          | (827  | )                                     |   | 2.40                                                            |  |                                                |    
|                                      |  |                          |       |                                       |   |                                                                 |  |                                                |    
|Outstanding as of December   31, 2006 |  |                          | 3,912 |                                       | $ | 2.16                                                            |  |                                                | 8.1
|                                      |  |                          |       |                                       |   |                                                                 |  |                                                |    
|Exercisable as of December   31, 2006 |  |                          | 1,657 |                                       | $ | 2.51                                                            |  |                                                | 7.2
|                                      |  |                          |       |                                       |   |                                                                 |  |                                                |    

The fair value of
each option award is estimated on the date of grant using the Black-Scholes
option valuation model. The Company recognizes the fair value of each option as
compensation expense ratably using the straight-line attribution method over the
service period (generally the vesting period). The Black-Scholes model
incorporates the following assumptions:

| |  | Expected volatility  the Company estimates the volatility of common stock
at the date of grant using historical volatility.                                                                                                                                                                                                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Expected term  the Company estimates the expected term of options granted
based on a combination of vesting schedules, term of the option, historical
experience and in cases where the Company does not have significant historical
experience, the simplified method of determining expected term outlined in Staff
Accounting Bulletin 107 is used for grants issued in 2006.
| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Risk-free interest rate  the Company estimates the risk-free interest rate
using the U.S. Treasury yield curve for periods equal to the expected term of
the options in effect at the time of grant.                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Dividends  the Company uses an expected dividend yield of zero since it
has never declared or paid any dividends on its capital stock. The Company
intends to retain any earnings to fund future growth and the operation of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.                                              

Additionally, the
Company estimates forfeitures at the time of grant and revises those estimates
in subsequent periods if actual forfeitures differ from those estimates. It uses
a combination of historical data, demographic characteristics and other factors
to estimate pre-vesting option forfeitures and record share-based compensation
expense only for those awards that are expected to vest.  For purposes of

80



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

calculating pro forma information under SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.

During 2006, the
  Company has made certain adjustments to the fair value of options granted prior
  to January 1, 2006 for the years ended December 31, 2005 and December 31,
  2004.  The fair value of option grants is estimated on the date of grant
  using the Black-Scholes option-pricing model using the following weighted
  average assumptions:

|                          |  | 2006          |  | 2005Restated    |  | 2004Restated | 
|------------------------- |  | ------------- |  | --------------- |  | ------------ | 
|                          |  |               |  |                 |  |              | 
|Expected   Volatility     |  | 59 - 100%     |  | 97 - 103%       |  | 120%         | 
|Expected   Lives          |  | 1 - 6.1 years |  | 1.0 - 4.8 years |  | 4.5 years    | 
|Risk free   Interest Rate |  | 4.5 - 5.1%    |  | 3.3 - 4.4%      |  | 3.50%        | 
|Expected   Dividends      |  | 0%            |  | 0%              |  | 0%           | 

The weighted average
grant date fair value of options granted during the years ended December 31,
2006, 2005 and 2004 was $1.11, $1.15 and $4.31, respectively.  The
aggregate intrinsic value of options outstanding is calculated as the difference
between the exercise price of the underlying options and the market price of
common shares for the shares that were in-the-money at that date.  The
intrinsic value of exercised options during the years ended December 31, 2006
and 2004 was $1,100 and $2.4 million, respectively.

As of December 31,
2006, there was $3.1 million of total unrecognized compensation cost related to
the stock options.  That cost is expected to be recognized over the next
four years.

In November 2005,
the FASB issued FASB Staff Position No. FAS 123(R)-3 (FSP 123(R)-3),
Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. Intelligroup has adopted this alternative
transition method provided in FSP 123(R)-3 for calculating the tax effects of
stock-based compensation pursuant to SFAS 123(R) in 2006. The alternative
transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact on the
APIC pool and consolidated statements of cash flows of the tax effects of
employee stock-based compensation awards that are outstanding upon adoption of
SFAS 123(R).  The adoption did not have a material impact on our results of
operations and financial condition.

Impact of the Adoption of SFAS No. 123R:

The Company adopted
the provisions of SFAS No. 123R on January 1, 2006.  See Note 2 for
information regarding the adoption of SFAS No. 123R.  The following table
summarizes the share-based compensation expense for stock options that were
recorded in accordance with SFAS No. 123R for the year ended December 31, 2006
(in thousands except per share information):

81



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|Cost of   Revenue                              |  | $ | 645   | 
|---------------------------------------------- |  | - | ----- | 
|Selling,   general and administrative expenses |  |   | 966   | 
|                                               |  |   |       | 
|Increase to   net loss                         |  | $ | 1,611 | 
|                                               |  |   |       | 
|Change in   loss per share:                    |  |   |       | 
|Basic and Diluted                              |  | $ | 0.04  | 
|                                               |  |   |       | 

NOTE 7-          RELATED
PARTY TRANSACTIONS

Effective August 1,
2005, Intelligroup Asia Pvt. Ltd. (IGA)  entered into an
agreement to lease certain premises for certain of the Companys India
operations from ILABS Hyderabad Technology Center Pvt. Ltd. (iLabs),
a party with which two members of the Companys Board of Directors, Srini
Raju and Sandeep Reddy, are affiliated.  The terms of the lease agreement
provide for, among other things: (1) a minimum lease period of five years with
an option for two three-year renewal periods; (2) payment of a security deposit
equivalent to nine (9) months rent in the amount of 15.3 million Indian
rupees (approximately $346,000); (3) payment of monthly lease fees in the amount
of 1.7 million Indian rupees (approximately $38,000), subject to yearly five
percent (5%) escalation; and (4) monthly operations and maintenance fees of 0.4
million Indian rupees (approximately $9,500).  Rent expense for the year
ended December 31, 2006 towards the said lease was 25.6 million rupees
(approximately $565,000). There are no advance lease rentals as of December 31,
2006.

NOTE
8-          COMMITMENTS AND
CONTINGENCIES

Tax-Free
Spin-off of SeraNova

On July 5, 2000, the
Company distributed SeraNova common stock to its shareholders in a transaction
that was structured to be and reported as a tax-free spin-off pursuant to
Section 355 of the Internal Revenue Code (IRC Section 355). For
distributions of stock qualifying under IRC Section 355, neither the Company nor
the Companys shareholders recognize any gain or income in connection with
the transaction. The Company and SeraNova executed a Tax Sharing Agreement,
dated January 1, 2000 (Tax Sharing Agreement), whereby SeraNova
would indemnify the Company for any tax liabilities in the event a future
transaction of SeraNova results in the spin-off being deemed a taxable event.
However, subsequently SeraNova and its parent company, Silverline Technologies,
Inc. filed for Chapter 7 Bankruptcy. Additionally, as a condition to the
distribution, SeraNova management represented that there was no present plan,
nor intent to enter into a subsequent transaction that would disturb the
intended taxfree nature of the distribution.

On October 27, 2000,
SeraNova and Silverline Technologies, Inc. announced that they had entered into
an agreement and plan of merger, under which Silverline Technologies, Inc. would
acquire control of SeraNova in exchange for American depository shares of
Silverline.  Subsequently, SeraNova and Silverline Technologies, Inc. filed
for Chapter 7 Bankruptcy on August 8, 2003.

82



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

IRC Section 355(e)
provides that the Company may be required to recognize a gain equal to the
excess of the fair market value of the SeraNova shares distributed over their
tax basis if the distribution is part of a plan pursuant to which one or more
persons acquire 50% or more of SeraNova common stock within two years of the
distribution date. Should the spin-off ultimately be construed as taxable, the
resultant tax liability could be up to $65.0 million, plus interest and
penalties, depending on the facts that ultimately are established. No future
benefits would inure to the Company as a result of imposition of a tax on the
SeraNova distribution, and no reserve has been recorded for this potential
tax.  However, should such a tax liability be imposed, the Company may be
able to utilize some of its existing net operating losses to mitigate this tax
liability.

Employment
Agreements

As of December 31,
2006, the Company had employment agreements with certain of its executive
officers, which provide for minimum payments in the event of termination for
reasons other than just cause.  The aggregate amount of compensation
commitment in the event of termination under such agreements is approximately
$1.1 million.  In addition, IGA had entered into Severance Packages
totaling approximately $0.6 million with certain former members of the IGA
management team.  Pursuant to the terms of the Agreement for Severance
Package, the Severance Package is activated upon the fulfillment of certain
events, including a change in management of the Company or IGA.  In April
2005, following the termination of the Companys Chief Executive Officer,
three members of the IGA management team, each of whom had a Severance Package,
resigned.  Except as set forth below, to date, the Company has not received
any claim for payment of the Severance Package.  In or about September
2005, two former members of the IGA management team sent IGA notices under
Section 433 and 434 of the Indian Companies Act, 1956 for payment of such
Severance Package. Such claims have not been pursued since such initial notice
was served, and the Company does not believe that such severance amount is owed.
In the event the Company is unsuccessful in defending against such claim for
payment, the Company would owe approximately $0.6 million to such
individuals.

Leases

The Company leases
office space under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year. Additionally, the Company has
sublet certain of its office space, which generates sublease income. Certain
leases are subject to common area maintenance or operating expense charges and
have options to renew. Future minimum aggregate annual lease payments are as
follows (in thousands):

|For the   Years Ended December 31, |  | Gross    Operating   Lease Payments |       | Sublease   Income |   | Net   Operating   Lease Payments | 
|---------------------------------- |  | ----------------------------------- | ----- | ----------------- | - | -------------------------------- | 
|                                   |  |                                     |       |                   |   |                                  | 
|2007                               |  | $                                   | 2,637 |                   | $ | 350                              | 
|2008                               |  |                                     | 2,018 |                   |   | 233                              | 
|2009                               |  |                                     | 999   |                   |   |                                 | 
|2010                               |  |                                     | 637   |                   |   |                                 | 
|2011                               |  |                                     | 204   |                   |   |                                 | 
|                                   |  |                                     |       |                   |   |                                  | 
|                                   |  | $                                   | 6,495 |                   | $ | 583                              | 
|                                   |  |                                     |       |                   |   |                                  | 

83



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Rent expense for the
years ended December 31, 2006, 2005 and 2004 was $2.8 million, $3.1 million and
$2.6 million, net of sublease income of $0.4 million, $0.4 million, and $0.3
million, respectively.

NOTE 9-          OTHER
INCOME/EXPENSE

Other income
(expense), results from transaction gains or losses associated with changes in
foreign currency exchange rates, sublease income, dividend income from
investments, and other items, as follows (in thousands):

|                                                          |  | 2006 |       | 2005 |  | 2004 |  
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | -
|                                                          |  |      |       |      |  |      |  
|Foreign   transaction gains/losses                        |  |      | (351  | )    |  | (426 | )
|Out of court   settlements                                |  |      | 628   |      |  | 88   |  
|Sublease   income, dividend income, and other adjustments |  |      | 1,023 |      |  | 621  |  
|                                                          |  |      |       |      |  |      |  
|                                                          |  |      | 1,300 |      |  | 283  |  
|                                                          |  |      |       |      |  |      |  

NOTE
10-          LITIGATION

India Tax Assessment

The Companys
India subsidiary has received tax assessments from the India taxing authority
denying tax exemptions claimed for certain revenue earned and disallowing
certain expenses claimed during the India subsidiarys fiscal years ended
March 31, 1998 through March 31, 2003. The combined revised additional tax
demands were for 32.9 million Indian rupees (or approximately $0.7 million) for
those years. They include tax penalties and interest for the fiscal years ended
March 31, 2001 and 2002 of 1.7 million Indian rupees (or approximately $38,000)
and 0.7 million Indian rupees (or approximately $16,000), respectively. Against
the total additional tax demand of $0.7 million, the Company has made payments
of approximately $0.7 million under protest to the India tax authority. The
Company has reserved the full amount of additional tax demand against this
potential liability.

The Company is
currently appealing at the Appellant Tribunal stage for the fiscal years ended
March 31, 1998 through March 31, 2002.  For the fiscal year ended March 31,
2003, the Company has filed an appeal with the Commissioner of Income Tax
(Appeals) against the assessment order passed. In the event the Companys
appeal is not successful, there will not be any additional future cash
outlay.  However, in the event the Company is successful, an amount up to
approximately $0.7 million could be refunded to the Company.

84



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Shareholder Class Actions

On or about October
12, 2004, the first of six class action lawsuits was filed, on behalf of a
purported class of investors who purchased the Companys common stock,
against the Company and former officers Arjun Valluripalli, Nicholas Visco,
Edward Carr and David Distel (Defendants) in the United States
District Court, District of New Jersey (District of New Jersey). In
August 2005, the United States District Court, District of New Jersey
consolidated the six class actions (the Shareholder Class Action)
and appointed a lead plaintiff.  Plaintiffs subsequently dropped Mr. Distel
and Mr. Carr from the Shareholder Class Action, failing to name either of them
as a defendant in the amended consolidated complaint filed on or about October
10, 2005.  The Shareholder Class Action generally alleges violations of
federal securities laws, including allegations that the Defendants made
materially false and misleading statements regarding the Companys
financial condition and that the Defendants materially overstated financial
results by engaging in improper accounting practices.  The Class Period
alleged is May 1, 2001 through September 24, 2004.  The Shareholder Class
Action generally seeks relief in the form of unspecified compensatory damages
and reasonable costs, expenses and legal fees.  On December 5, 2005,
Defendants filed motions to dismiss the amended consolidated complaint.  On
February 10, 2006, prior to the hearing on Defendants motions to dismiss,
Plaintiffs filed a second amended consolidated complaint.  Defendants
motions to dismiss the second amended consolidated complaint are currently
pending before the District of New Jersey.  On or about December 20, 2006,
the District of New Jersey granted Defendants motion and dismissed the second
amended complaint without prejudice.  On or about January 25, 2007,
plaintiffs filed the third consolidated amended complaint.  On or about
March 5, 2007, Defendants filed a motion to dismiss the third consolidated
amended complaint.  No trial date has been scheduled and no discovery has
taken place.

There is no other
litigation pending to which the Company is a party or to which any of its
property is subject which would have a material impact on the Companys
consolidated financial condition, results of operations or cash flows in the
event the Company was unsuccessful in such litigation.

Legal fees arising
in connection with litigation are expensed as incurred.

NOTE 11-          INCOME
TAXES

Income taxes
provision (benefit) consists of the following (in
thousands):

|          |  | 2006 |       | 2005 |   | 2004 |  
|--------- |  | ---- | ----- | ---- | - | ---- | -
|          |  |      |       |      |   |      |  
|Current:  |  |      |       |      |   |      |  
|State     |  | $    | (92   | )    | $ | 71   |  
|Foreign   |  |      | 605   |      |   | 304  |  
|          |  |      |       |      |   |      |  
|          |  |      | 513   |      |   | 375  |  
|Deferred: |  |      |       |      |   |      |  
|Foreign   |  |      | 624   |      |   | (615 | )
|          |  |      |       |      |   |      |  
|Total     |  | $    | 1,137 |      | $ | (240 | )
|          |  |      |       |      |   |      |  

85



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income (loss) before
taxes from domestic and foreign sources is as follows (in thousands):

|                                    |  | 2006 |        | 2005 |   | 2004   |  
|----------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                    |  |      |        |      |   |        |  
|United States                       |  | $    | (7,181 | )    | $ | (9,079 | )
|Foreign                             |  |      | 4,611  |      |   | 2,248  |  
|                                    |  |      |        |      |   |        |  
|Income (loss) before   income taxes |  | $    | (2,570 | )    | $ | (6,831 | )
|                                    |  |      |        |      |   |        |  

The provision for
income taxes differs from the amount computed by applying the statutory rate of
34% to income before income taxes. The principal reasons for the differences
are:

|                                          |  | 2006 |        | 2005 |  | 2004  |  
|----------------------------------------- |  | ---- | ------ | ---- |  | ----- | -
|                                          |  |      |        |      |  |       |  
|Tax benefit at federal statutory   rate   |  |      | 34.0   | %    |  | 34.0  | %
|State income tax benefit net of   federal |  |      | 16.8   |      |  | 8.0   |  
|Foreign taxes                             |  |      | 6.5    |      |  | 1.0   |  
|Change in valuation   allowance           |  |      | (147.6 | )    |  | (63.0 | )
|Permanent items                           |  |      | 16.9   |      |  | 7.1   |  
|Tax holiday, India                        |  |      | 16.1   |      |  | 20.8  |  
|Other                                     |  |      | 12.8   |      |  | (4.4  | )
|                                          |  |      |        |      |  |       |  
|Effective tax rate - expense              |  |      | (44.5  | )%   |  | 3.5   | %
|                                          |  |      |        |      |  |       |  

In 1996, the Company
elected a five year tax holiday in India, in accordance with a local tax
incentive program whereby no income tax will be due in such period. Such tax
holiday was extended an additional five years in 1999. Effective April 1, 2000
pursuant to changes introduced by the Indian Finance Act, 2000, the tax holiday
previously granted is no longer available and has been replaced in the form of a
tax deduction incentive. The impact of this change is not expected to be
material to the consolidated financial statements of the Company. Effective
April 1, 2002, the tax deduction incentive for income from the export of
software and related services is restricted to 90% of such income. Further,
domestic revenue from software and related services is taxable in India.
Effective April 1, 2003, the 90% tax deduction incentive restriction was
repealed and the tax incentive is again available for the entire amount of
income from the export of software and related services. This tax deduction
favorably impacted the Companys effective tax rates for the years ended
December 31, 2005 and 2004, respectively. The Companys tax holiday expired
effective March  31, 2006 and therefore the Companys tax liability
has increased in 2006.

Deferred income
taxes reflect the tax effect of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The significant components of the
Companys deferred tax assets and liabilities are as follows (in
thousands):

86



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|                                                    |  | 2006 |         | 2005 |  
|--------------------------------------------------- |  | ---- | ------- | ---- | -
|                                                    |  |      |         |      |  
|Current Deferred tax   assets:                      |  |      |         |      |  
|Allowance   for doubtful accounts                   |  | $    | 742     |      | $
|Vacation   accrual                                  |  |      | 1,389   |      |  
|Other   accrued liabilities                         |  |      | 270     |      |  
|                                                    |  |      |         |      |  
|Total current deferred tax   assets                 |  |      | 2,401   |      |  
|                                                    |  |      |         |      |  
|Non-current Deferred tax   assets:                  |  |      |         |      |  
|Net   operating losses                              |  |      | 20,378  |      |  
|Non-current Deferred tax   liabilities:             |  |      |         |      |  
|Deferred tax liability -   accelerated depreciation |  |      | (181    | )    |  
|                                                    |  |      |         |      |  
|Total Net non-current   deferred tax assets         |  |      | 20,197  |      |  
|Valuation allowance                                 |  |      | (21,846 | )    |  
|                                                    |  |      |         |      |  
|Net Deferred tax asset                              |  | $    | 752     |      | $
|                                                    |  |      |         |      |  

During 2006, 2005
and 2004, the Company generated net operating losses in certain tax
jurisdictions. The Company has provided a valuation allowance against these net
operating losses in some jurisdictions as the ability to utilize these losses
may be limited in the future. The Company increased the valuation allowance by
$3.2 million in 2006, and $4.3 million in 2005, and decreased the valuation
allowance by $2.6 million in 2004 respectively. Offsetting the tax benefit in
2004 is the Companys estimated charge to the provision representing a
reduction of the net operating loss carry-forward as a result of limitations
imposed by IRC Section 382 of $5.1 million.  The Companys valuation
allowance as of December 31, 2006 and 2005 was $21.8 million and $18.6 million
respectively.  Cumulative net operating loss carry forwards of $45.8
million expire in various years through 2026.

On October 22, 2004,
the American Jobs Creation Act of 2004 (the Jobs Creation Act) was
signed into law. The Jobs Creation Act created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85%
dividends received deduction for certain dividends from controlled foreign
corporations. Currently, the Company has not taken advantage of this incentive
and has not repatriated any earnings from its controlled foreign
operations.

NOTE
12-          DEFINED
CONTRIBUTION PLAN

The Company
maintains a defined contribution 401(k) plan. All United States employees, who
are employed on a full-time basis, are eligible to participate in the plan,
effective the first day of the next quarterly enrollment period. Costs incurred
by the Company related to this plan amounted to $0.5 million, $0.4 million and
$0.7 million for the years ended December 31, 2006, 2005, and 2004,
respectively.  The Companys match in the 401(k) plan is 2%, which
vests over a service period of three years.  The Company used $0.1 million
of forfeitures to offset contributions for the year ended December 31,
2005.

87



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE
13-          SEGMENT DATA
AND GEOGRAPHIC INFORMATION

The Company operates
in one industry, information technology solutions and services.

The Company has four
reportable operating segments from continuing operations, which are organized
and managed on a geographical basis, as follows:

| |  | United States (US)  the largest segment of the Company, with
operations in the United States and Puerto Rico. Includes the operations of the
Companys US subsidiary, Empower, Inc., and all corporate headquarters is
located in Edison, New Jersey;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                         
| |  | India  includes the operations of the Company in India, including services
provided on behalf of other group subsidiaries. The India headquarters is
located in Hyderabad, India;                                                                      
| |   |                                                                                                                                                                                                                                                         
| |  | Europe  includes the operations of the Company in Denmark and the United
Kingdom. The European headquarters is located in Milton Keynes, United
Kingdom;                                                                                               
| |   |                                                                                                                                                                                                                                                         
| |  | Japan  includes the operations of the Company in Japan. The Japanese
headquarters is located in Tokyo, Japan.                                                                                                                                          

The CEO has been
identified as the Chief Operating Decision Maker (CODM) because he
has final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, including primarily revenue and
operating income, to evaluate segment performance.

Accordingly, the
Companys consolidated operating results for the years ended December 31,
2006, 2005 and 2004 and financial position as of December 31, 2006, 2005 and
2004 are presented in the following geographic segments (in
thousands):

During 2006, the
Companys India subsidiary engaged a PCAOB registered firm to evaluate and
recommend changes, if any, to its existing transfer pricing methodology. 
As a result of such transfer pricing study, the Company changed its transfer
pricing methodology and adopted a cost plus fixed margin
methodology, which applies a fixed margin to the total cost of services
performed as opposed to a net margin method in which revenues are allocated on a
fixed percentage without regard to cost of services.  While the application
of the new transfer pricing methodology did not change the Companys
revenue or operating performance on a consolidated basis, it impacted the
allocation of revenue between the Company and its international
subsidiaries.  Hence the revenues and operating performance reported for
the geographic segments, particularly India and United States, for the year
ended December 31, 2006 reflect the impact of the new transfer pricing
methodology as well as year over year trends in revenue and operating
performance.  Please see Note 1 to the Consolidated Financial Statements
for additional information regarding the impact of the change in transfer
pricing methodology.  This change in estimate had an overall effect which
shifts revenue from India to the US and other associated entities and reduces
income tax expense by approximately $0.8 million on a consolidated
basis.

88



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|                                 |  | United   States |        | India |   | Europe |   | Japan |       | Total |  
|-------------------------------- |  | --------------- | ------ | ----- | - | ------ | - | ----- | ----- | ----- | -
|                                 |  |                 |        |       |   |        |   |       |       |       |  
|2006                             |  |                 |        |       |   |        |   |       |       |       |  
|Revenue                          |  | $               | 80,875 |       | $ | 31,335 |   | $     | 9,130 |       | $
|Depreciation   and amortization  |  |                 | 1,200  |       |   | 1,196  |   |       | 69    |       |  
|Operating   income (loss)        |  |                 | (6,969 | )     |   | 3,595  |   |       | 853   |       |  
|Interest   expense               |  |                 | 485    |       |   | 98     |   |       | 14    |       |  
|Income   tax provision (benefit) |  |                 | (92    | )     |   | 1,078  |   |       |      |       |  
|Net   income (loss)              |  |                 | (5,852 | )     |   | 2,338  |   |       | 715   |       |  
|Long-lived   assets, net         |  |                 | 918    |       |   | 3,469  |   |       | 1,029 |       |  
|Total   assets                   |  |                 | 32,329 |       |   | 16,532 |   |       | 4,550 |       |  
|2005                             |  |                 |        |       |   |        |   |       |       |       |  
|Revenue                          |  | $               | 86,617 |       | $ | 28,206 |   | $     | 7,030 |       | $
|Depreciation   and amortization  |  |                 | 1,374  |       |   | 891    |   |       | 114   |       |  
|Operating   income (loss)        |  |                 | (9,637 | )     |   | 3,526  |   |       | (289  | )     |  
|Interest   expense               |  |                 | 244    |       |   | 51     |   |       | 5     |       |  
|Income   tax provision (benefit) |  |                 | 111    |       |   | (163   | ) |       |      |       |  
|Net   income (loss)              |  |                 | (9,190 | )     |   | 3,803  |   |       | (699  | )     |  
|Long-lived   assets, net         |  |                 | 1,339  |       |   | 2,650  |   |       | 57    |       |  
|Total   assets                   |  |                 | 28,778 |       |   | 11,038 |   |       | 2,418 |       |  
|2004                             |  |                 |        |       |   |        |   |       |       |       |  
|Revenue                          |  | $               | 95,270 |       | $ | 22,029 |   | $     | 6,890 |       | $
|Depreciation   and amortization  |  |                 | 2,201  |       |   | 572    |   |       | 112   |       |  
|Operating   income (loss)        |  |                 | (4,129 | )     |   | 3,324  |   |       | (183  | )     |  
|Interest   expense               |  |                 | 394    |       |   | 65     |   |       | 3     |       |  
|Income   tax provision (benefit) |  |                 | 5      |       |   | 33     |   |       |      |       |  
|Net   income (loss)              |  |                 | (4,235 | )     |   | 2,697  |   |       | 152   |       |  
|Long-lived   assets, net         |  |                 | 2,191  |       |   | 1,094  |   |       | 165   |       |  
|Total   assets                   |  |                 | 35,547 |       |   | 8,388  |   |       | 2,455 |       |  

|   
|---
|(1)
|   
|(2)
|   
|(3)
|   
|(4)
|   
|(5)

89



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -
          UNAUDITED QUARTERLY
FINANCIAL DATA

2006 and 2005 Quarterly Financial Data

The following tables
set forth certain unaudited results of operations for each quarter during 2006
and 2005.  The unaudited information has been prepared on the same basis as
the audited consolidated financial statements and includes all adjustments which
management considers necessary for a fair presentation of the financial data
shown.  The operating results for any quarter are not necessarily
indicative of the results to be attained for any future period.  Basic and
diluted earnings (loss) per share are computed independently for each of the
periods presented.  Accordingly, the sum of the quarterly earnings (loss)
per share may not agree to the total for the year (in thousands, except per
share data).

|                                                  |  | For the   quarters ended |       
|------------------------------------------------- |  | ------------------------ | ------
|                                                  |  |                          |       
|Statement   of Operations (See Note 10)           |  | March 31,    2006        |       
|                                                  |  |                          |       
|Revenue                                           |  | $                        | 29,171
|Cost of revenue                                   |  |                          | 21,247
|Total operating expenses                          |  |                          | 9,729 
|Operating income (loss)                           |  |                          | (1,805
|Income (loss) before   provision for income taxes |  |                          | (1,933
|Provision for income taxes                        |  |                          | 42    
|                                                  |  |                          |       
|Net income (loss)                                 |  |                          | (1,975
|                                                  |  |                          |       
|Net income (loss) per   common share - basic      |  | $                        | (0.06 
|Net income (loss) per   common share - diluted    |  | $                        | (0.06 
|Shares Outstanding:                               |  |                          |       
|Basic                                             |  |                          | 35,176
|                                                  |  |                          |       
|Diluted                                           |  |                          | 35,176
|                                                  |  |                          |       

90



INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

|                                                      |  | For the   quarters ended |       
|----------------------------------------------------- |  | ------------------------ | ------
|                                                      |  |                          |       
|Statement of Operations                               |  | March 31,    2005        |       
|                                                      |  |                          |       
|Revenue                                               |  | $                        | 32,436
|Cost of revenue                                       |  |                          | 24,303
|Total operating expenses                              |  |                          | 8,855 
|Operating loss                                        |  |                          | (722  
|Loss before provision for   (benefit of) income taxes |  |                          | (998  
|Provision for (benefit of)   income taxes             |  |                          | (307  
|                                                      |  |                          |       
|Net loss                                              |  |                          | (691  
|                                                      |  |                          |       
|Net loss per common share                             |  | $                        | (0.02 
|Shares Outstanding:                                   |  |                          |       
|Basic and Diluted                                     |  |                          | 35,103
|                                                      |  |                          |       

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