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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    FORM 20-F (Mark One)  o
    
    Registration statement pursuant to section 12(b) or (g) of the Securities
Exchange Act of 1934þ
    
    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934For the fiscal year ended March 31, 2004o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For the Transition period from ______________ to ______________ Commission File Number 333-72195 Infosys Technologies Limited  Not Applicable
(Translation of Registrants name into English) Bangalore, Karnataka, India
(Jurisdiction of incorporation or organization) Electronics City, Hosur Road,
Bangalore, Karnataka
India 560 100
+91-80-2852-0261
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    Not Applicable
 Securities registered pursuant to Section 12(g) of the Act: American Depositary Shares,
each represented by one-half of one Equity Share, par value Rs. 5 per share. (Title of class) Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: Not Applicable (Title of class) Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the Annual
Report: 66,641,056 Equity Shares 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 þ     
     No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o     Item 18 þ 1




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Currency of presentation and certain defined terms In this Annual Report on Form 20-F, references to U.S., or United States
are to the United States of America, its territories and its possessions.
References to India are to the Republic of India. Reference to $ or
dollars or U.S. dollars are to the legal currency of the United States and
references to Rs. or Rupees or Indian rupees are to the legal currency of
India. Our financial statements are prepared in accordance with United States
Generally Accepted Accounting Principles (U.S. GAAP) in Indian rupees and
translated into U.S. dollars. References to Indian GAAP are to Indian
Generally Accepted Accounting Principles. References to a particular fiscal
year are to our fiscal year ended March 31 of such year. All references to we, us, our, Infosys or the Company shall mean
Infosys Technologies Limited. Infosys is a registered trademark of Infosys
Technologies Limited in the United States and India. All other trademarks or
tradenames used in this annual report on Form 20-F are the property of the
respective owners. Except as otherwise stated in this annual report on Form 20-F, all translations
from Indian rupees to U.S. dollars are based on the noon buying rate in the
City of New York on March 31, 2004, for cable transfers in Indian rupees as
certified for customs purposes by the Federal Reserve Bank of New York which
was Rs. 43.40 per $1.00. No representation is made that the Indian rupee
amounts have been, could have been or could be converted into United States
dollars at such a rate or any other rate. Any discrepancies in any table
between totals and sums of the amounts listed are due to rounding. Information
contained in our website, www.infosys.com, is not part of this Annual Report. Forward-looking statements
may prove inaccurate. This Annual Report includes
statistical data about the information technology, or IT, industry
that comes from information published by sources including Gartner,
Inc., a provider of market information and strategic information for
the IT industry, McKinsey & Company, a consulting firm and
the National Association of Software and Service Companies, or
NASSCOM, an industry trade group. This type of data represents the
estimates of Gartner, McKinsey, and NASSCOM only. In addition,
although we believe that data from these companies is generally
reliable, this type of data is inherently imprecise. We caution you
not to place undue reliance on this data. IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN THIS REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENTS ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION,
READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND
IN THE COMPANYS PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION (SEC) FROM TIME TO TIME. 2




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Table of contents Part IItem 1
    
    
    
    Identity of directors, senior management and advisers
    
    
    04Item 2
    
    
    
    Offer statistics and expected timetable
    
    
    04Item 3
    
    
    
    Key information
    
    
    04Item 4
    
    
    
    Information on the company
    
    
    12Item 5
    
    
    
    Operating and financial review and prospects
    
    
    25Item 6
    
    
    
    Directors, senior management and employees
    
    
    35Item 7
    
    
    
    Major shareholders and related party transactions
    
    
    43Item 8
    
    
    
    Financial information
    
    
    45Item 9
    
    
    
    The offer and listing
    
    
    46Item 10
    
    
    
    Additional information
    
    
    48Item 11
    
    
    
    Quantitative and qualitative disclosure about market risk
    
    
    58Item 12
    
    
    
    Description of securities other than equity securities
    
    
    58Part IIItem 13
    
    
    
    Defaults, dividend arrearages and delinquencies
    
    
    58Item 14
    
    
    
    Material modifications to the rights of security holders and use of proceeds
    
    
    58Item 15
    
    
    
    Controls and procedures
    
    
    58Item 16
    
    
    
    A. Audit committee financial expert
    
    
    59Item 16
    
    
    
    B. Code of ethics
    
    
    59Part IIIItem 17
    
    
    
    Financial statements
    
    
    60Item 18
    
    
    
    Financial statements
    
    
    61Item 19
    
    
    
    Exhibits
    
    
    83EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 32.1EXHIBIT 99.8EXHIBIT 99.9EXHIBIT 99.10EXHIBIT 99.11
 3




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Part I 
 Item 1. Identity of directors, senior management and advisers Not applicable. 
 Item 2. Offer statistics and expected timetable Not
applicable. 
 Item 3. Key information Selected financial data Summary of selected consolidated financial data ($in thousands, except per equity share data) You should read the selected consolidated financial data below in conjunction
with the consolidated financial statements, the related notes and Operating and
Financial Review and Prospects, all of which are included elsewhere in this
Annual Report. The selected consolidated statements of income data for the five
years ended March 31, 2004 and the selected consolidated balance sheet data as
of March 31, 2000, 2001, 2002, 2003 and 2004 have been derived from our audited
consolidated financial statements and related notes, which have been prepared
and presented in accordance with US GAAP. Fiscal Year Ended March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004Statements of Income Data
    
    (1)
    
    
    
    
    
    (2)
    
    (2),(3)Revenues
    
    $
    203,444
    
    
    $
    413,851
    
    
    $
    545,051
    
    
    $
    753,807
    
    
    $
    1,062,585Cost of revenues including amortization of
stock compensation expense
    
    
    114,424
    
    
    
    216,776
    
    
    
    293,032
    
    
    
    417,359
    
    
    
    602,289Gross profit
    
    
    89,020
    
    
    
    197,075
    
    
    
    252,019
    
    
    
    336,448
    
    
    
    460,296Operating Expenses:Selling and marketing expenses
    
    
    9,644
    
    
    
    20,683
    
    
    
    27,113
    
    
    
    55,650
    
    
    
    76,811General and administrative expenses
    
    
    17,102
    
    
    
    36,958
    
    
    
    44,348
    
    
    
    57,808
    
    
    
    82,224Amortization of stock compensation expense
    
    
    1,775
    
    
    
    1,919
    
    
    
    2,010
    
    
    
    1,985
    
    
    
    1,164Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,361
    
    
    
    6,980Total operating expenses
    
    
    28,521
    
    
    
    59,560
    
    
    
    73,471
    
    
    
    117,804
    
    
    
    167,179Operating income
    
    
    60,499
    
    
    
    137,515
    
    
    
    178,548
    
    
    
    218,644
    
    
    
    293,117Other income, net
    
    
    9,039
    
    
    
    9,505
    
    
    
    13,865
    
    
    
    18,048
    
    
    
    27,950Income before income taxes
    
    
    69,538
    
    
    
    147,020
    
    
    
    192,413
    
    
    
    236,692
    
    
    
    321,067Provision for income taxes
    
    
    8,193
    
    
    
    15,072
    
    
    
    27,947
    
    
    
    41,822
    
    
    
    50,776Net income
    
    $
    61,345
    
    
    $
    131,948
    
    
    $
    164,466
    
    
    $
    194,870
    
    
    $
    270,291Earnings per Equity Share:Basic
    
    $
    0.93
    
    
    $
    2.01
    
    
    $
    2.51
    
    
    $
    2.97
    
    
    $
    4.11Diluted
    
    $
    0.93
    
    
    $
    1.98
    
    
    $
    2.49
    
    
    $
    2.93
    
    
    $
    4.05Weighted Equity Shares used in computing
earnings per Equity Share:Basic
    
    
    65,659,625
    
    
    
    65,771,256
    
    
    
    65,556,648
    
    
    
    65,571,002
    
    
    
    65,695,077Diluted
    
    
    65,863,990
    
    
    
    66,714,739
    
    
    
    66,084,874
    
    
    
    66,479,009
    
    
    
    66,791,559Cash dividend per Equity Share
    
    $
    0.09
    
    
    $
    0.14
    
    
    $
    0.35
    
    
    $
    0.51
    
    
    $
    0.63
 As of March 31,2000
    
    2001
    
    2002
    
    2003
    
    2004Balance Sheet DataCash and cash equivalents
    
    $
    116,599
    
    
    $
    124,084
    
    
    $
    210,486
    
    
    $
    354,363
    
    
    $
    444,553Investment in liquid mutual fund units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    217,605Total assets
    
    
    219,283
    
    
    
    342,348
    
    
    
    471,162
    
    
    
    704,309
    
    
    $
    1,132,182Total long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    $
    198,137
    
    
    $
    311,792
    
    
    $
    442,379
    
    
    $
    626,005
    
    
    $
    953,580
  (1)
    
    The information presented above reflects our 2-for-1 stock split in
fiscal 2000.(2)
    
    The information for fiscal 2003 and fiscal 2004 includes the results of
operations of Progeon Limited, a consolidated subsidiary.(3)
    
    The information for fiscal 2004 includes the results of Infosys
Technologies (Australia) Pty. Limited and Infosys Technologies (Shanghai)
Co. Limited, both consolidated subsidiaries. Exchange rates Fluctuations in the exchange rate between the Indian rupee and the U.S. dollar
will affect the U.S. dollar equivalent of the Indian rupee price of our equity
shares on the Indian stock exchanges and, as a result, will likely affect the
market price of our ADSs, and vice versa. Such fluctuations will also affect
the U.S. dollar conversion by the Depositary of any cash dividends paid in
Indian rupees on our equity shares represented by the ADSs. 4




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The following table sets forth, for the fiscal years indicated, information
concerning the number of Indian rupees for which one U.S. dollar could be
exchanged based on the average of the noon buying rate in the City of New York
on the last business day of each month during the period for cable transfers in
Indian rupees as certified for customs purposes by the Federal Reserve Bank of
New York. The column titled Average in the table below is the average of the
daily noon buying rate on the last business day of each month during the year. Fiscal
    
    Period End
    
    Average
    
    High
    
    Low2004
    
    Rs.43.40
    
    
    Rs.45.78
    
    
    Rs. 47.46
    
    
    Rs. 43.402003
    
    
    47.53
    
    
    
    48.36
    
    
    
    49.07
    
    
    
    47.532002
    
    
    48.83
    
    
    
    47.81
    
    
    
    48.91
    
    
    
    46.582001
    
    
    46.85
    
    
    
    45.88
    
    
    
    47.47
    
    
    
    43.632000
    
    
    43.65
    
    
    
    43.46
    
    
    
    43.75
    
    
    
    42.50
 The following table sets forth the high and low exchange rates for the previous
six months and are based on the average of the noon buying rate in the City of
New York on the last business day of each month during the period for cable
transfers in Indian rupees as certified for customs purposes by the Federal
Reserve Bank of New York: Month
    
    High
    
    LowNovember 2003
    
    Rs. 45.95
    
    
    Rs. 45.30December 2003
    
    
    45.77
    
    
    
    45.50January 2004
    
    
    45.68
    
    
    
    45.29February 2004
    
    
    45.32
    
    
    
    45.22March 2004
    
    
    45.32
    
    
    
    43.40April 2004
    
    
    44.52
    
    
    
    43.40
 On May 6, 2004, the noon
buying rate in the city of New York was Rs. 44.65. Capitalization and indebtedness Not applicable. Reasons for the offer and use of proceeds Not applicable. Risk factors This Annual Report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Annual Report. Risks Related to Our Company and Our Industry Our revenues and expenses are difficult to predict and can vary significantly
from period to period, which could cause our share price to decline. Our revenues and profitability have grown rapidly in recent years and are
likely to vary significantly in the future from period to period. Therefore, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as an indication of our
future performance. It is possible that in the future some of our results of
operations may be below the expectations of market analysts and our investors,
which could cause the share price of our equity shares and our ADSs to decline
significantly. Factors which affect the fluctuation of our operating results include:  
    
    the size, timing and profitability of significant projects;
    
    changes in our pricing policies or those of our competitors;
    
    the proportion of services that we perform outside India as opposed to at our development centers in India;
    
    the effect of wage pressures, seasonal hiring patterns and the time required to train
and productively utilize new employees, particularly information
technology, or IT, professionals;
    
    the size and timing of facilities expansion;
    
    unanticipated cancellations, contract terminations or deferrals of projects; and
    
    unanticipated variations in the duration, size and scope of our projects. A significant part of our total operating expenses, particularly expenses
related to personnel and facilities, are fixed in advance of any particular
period. As a result, unanticipated variations in the number and timing of our
projects or employee utilization rates, or the accuracy of our estimates of the
resources required to complete ongoing projects, may cause significant
variations in our operating results in any particular period. There are also a number of factors, other than our performance, that are not
within our control that could cause fluctuations in our operating results from
period to period. These include:  
    
    the duration of tax holidays or exemptions and the availability of
other Government of India incentives;
    
    currency exchange rate fluctuations, particularly when the rupee
appreciates in value against the dollar since the majority of our
revenues are in dollars and a significant part of our costs are in
rupees; and
    
    other general economic factors. We have not been able to sustain our previous profit margins or levels of
profitability. 5




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As a percentage of total revenues, net income decreased to 25.4% for fiscal
2004 from 25.8% for fiscal 2003. Net income decreased to 25.8% of revenues for
fiscal 2003 from 30.2% of revenues for fiscal 2002. As we continue to
experience declines in demand, pricing pressures for our services, appreciation
of the rupee against the dollar and increased wage pressures in India, we have
not been able to sustain our historical levels of profitability. During fiscal
2004, we incurred substantially higher selling and marketing expenses to
increase brand awareness among target clients and promote client loyalty and
repeat business among existing clients, and we expect to continue to incur
substantially higher selling and marketing expenses in the future, which could
result in declining profitability. While our Global Delivery Model allows us to
manage costs efficiently, as the proportion of our services delivered at client
sites increases, we may not be able to keep our operating costs as low in the
future. The current economic downturn, pricing pressure and rising wages in India have
negatively impacted our revenues and operating results. Spending on IT products and services in most parts of the world has
significantly decreased due to a challenging global economic environment. Some
of our clients have cancelled, reduced or deferred expenditures for IT
services. Pricing pressures from our clients, wage pressures in India and an
increase in our sales and marketing expenditures have also negatively impacted
our operating results. For example, clients often expect that as we do more
business with them, they will receive volume discounts. Additionally, clients
may ask for fixed-price arrangements or reduced rates. If the current economic downturn continues, our utilization and billing rates
for our IT professionals could be adversely affected which may result in lower
gross and operating profits. Any inability to manage our growth could disrupt our business and reduce our
profitability. We have grown significantly in recent periods. Between March 31, 1999 and March
31, 2004 our total employees grew from approximately 3,800 to approximately
23,800 representing a compound annual growth rate of 44.3%. In addition,
Progeon had approximately 1,900 employees
as of March 31, 2004. In addition, in the last five fiscal years
we have undertaken major expansions of our existing facilities, as well as the
construction of new facilities. We expect our growth to place significant demands on our management and other
resources. It will require us to continue to develop and improve our
operational, financial and other internal controls, both in India and
elsewhere. In particular, continued growth increases the challenges involved
in:  
    
    recruiting, training and retaining sufficient skilled technical, marketing and management personnel;
    
    adhering to our high quality and process execution standards;
    
    preserving our culture, values and entrepreneurial environment;  
    
    developing and improving our internal administrative infrastructure,
particularly our financial, operational, communications and other
internal systems; and
    
    maintaining high levels of client satisfaction. Our growth strategy also relies on the expansion of our operations to other
parts of the world, including Europe, Australia and other parts of Asia. In
April 2004, we announced the formation of a U.S. subsidiary focused on
consulting and announced our intention to hire aggressively in the United
States. The costs involved in entering these markets may be higher than
expected and we may face significant competition in these regions. Our
inability to manage growth in these regions may have an adverse effect on our
business, results of operations and financial condition. We may face difficulties in providing end-to-end business solutions for our
clients, which could lead to clients discontinuing their work with us, which in
turn could harm our business. Over the past three years, we have been expanding the nature and scope of our
engagements by extending the breadth of services we offer. We have recently
added new service offerings, such as IT consulting, business process
management,
systems integration and IT outsourcing. The success of these service offerings
is dependent, in part, upon continued demand for such services by our existing
and new clients and our ability to meet this demand in a cost-competitive and
effective manner. In addition, our ability to effectively offer a wider breadth
of end-to-end business solutions depends on our ability to attract existing or
new clients to these service offerings. To obtain engagements for such
end-to-end solutions, we also are more likely to compete with large,
well-established international consulting firms, resulting in increased
competition and marketing costs. Accordingly, we cannot be certain that our new
service offerings will effectively meet client needs or that we will be able to
attract existing and new clients to these service offerings. The increased breadth of our service offerings may result in larger and more
complex projects with our clients. This will require us to establish closer
relationships with our clients and a thorough understanding of their
operations. Our ability to establish such relationships will depend on a number
of factors including the proficiency of our IT professionals and our management
personnel. Larger projects may involve multiple engagements or stages, and there is a risk
that a client may choose not to retain us for additional stages or may cancel
or delay additional planned engagements. These terminations, cancellations or
delays may result from the business or financial condition of our clients or
the economy generally, as opposed to factors related to the quality of our
services. Such cancellations or delays make it difficult to plan for project
resource requirements, and inaccuracies in such resource planning may have a
negative impact on our profitability. While our Global Delivery Model allows us
to manage costs efficiently, as the proportion of our services delivered at
client sites increases, we may not be able to keep our operating costs as low
in the future. Intense competition in the market for IT services could affect our cost
advantages, which could reduce our share of business from clients and decrease
our revenues. The IT services market is highly competitive. Our competitors include large
consulting firms, divisions of large multinational technology firms, IT
outsourcing firms, Indian IT services firms, software firms and in-house IT
departments of large corporations. The IT services industry is experiencing rapid changes that are affecting the
competitive landscape, including recent divestitures and acquisitions that have
resulted in consolidation within the industry. These changes may result in
larger competitors with significant resources. In addition, some of our
competitors have added or announced plans to add cost-competitive offshore
capabilities to their service offerings. Many of these competitors are
substantially larger than us and have significant experience with international
operations, and we may face competition from them in countries in which we
currently operate, as well as in countries in which we expect to expand our
operations. We also expect additional competition from IT services firms with
current operations in other countries, such as China and the Philippines. While 6




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we believe that we are well positioned in our markets relative to our
competitors, such competitors may be able to offer services using offshore and
onshore models that are more effective than ours. Many of our competitors, including Accenture, EDS and IBM, have significantly
greater financial, technical and marketing resources, generate greater revenues
and have greater name recognition than we do. We cannot be reasonably certain
that we will be able to compete successfully against such competitors, or that
we will not lose clients to such competitors. Additionally, we believe that our
ability to compete also depends in part on factors outside our control, such as
the price at which our competitors offer comparable services, and the extent of
our competitors responsiveness to their clients needs. Our revenues are highly dependent upon a small number of clients, and the loss
of any one of our major clients could significantly impact our business. We have historically earned, and believe that in the future we will continue to
earn, a significant portion of our revenues from a limited number of corporate
clients. In fiscal 2004 and 2003, our largest client accounted for 5.0% and
5.8% of our total revenues, and our five largest clients together accounted for
22.6% and 23.4% of our total revenues for fiscal 2004 and 2003. The volume of
work we perform for specific clients is likely to vary from year to year,
particularly since we historically have not been the exclusive external IT
services provider for our clients. Thus, a major client in one year may not
provide the same level of revenues in a subsequent year. However, in any given
year, a limited number of clients tend to contribute a significant portion of
our revenues. There are a number of factors, other than our performance, that could cause the
loss of a client and that may not be predictable. In certain cases, we have
significantly reduced the services provided to a client when the client either
changed its outsourcing strategy by moving more work in-house or replaced its
existing software with packaged software supported by the licensor. Another
circumstance which may result in our loss of a client is a reduction in
spending on IT services due to a challenging economic environment. If we were
to lose one of our major clients or have it significantly reduce its volume of
business with us, our revenues and profitability could be reduced. Our revenues are highly dependent on clients primarily located in the United
States, as well as clients concentrated in certain industries, and economic
slowdowns, changes in U.S. law and other restrictions or factors that affect
the economic health of the United States and these industries may affect our
business. A significant portion of our revenues is derived from clients located in the
United States, as well as clients in certain industries. In fiscal 2004 and
2003, approximately 70.0% and 72.0% of our revenues were derived from the
United States. For the same periods, we earned 36.6% and 37.6% of our revenues from the financial services industry, and 14.8% and 16.4%
from the manufacturing industry. Consequently, if the current economic recovery
in the United States does not continue, our clients may reduce or postpone
their IT spending significantly, which may in turn lower the demand for our
services and negatively affect our revenues and profitability. Further, any
significant decrease in the growth of the financial services or other industry
segments on which we focus may reduce the demand for our services and
negatively affect our revenues and profitability. Recently, some organizations have expressed concerns about a perceived
association between offshore outsourcing and the loss of jobs in the United
States. There has also been increasing political and media attention in the
United States to the growth of offshore outsourcing. Within the last 18
months, some U.S. states have enacted legislation restricting government
agencies from outsourcing their back office processes and IT solutions work to
companies outside the United States. It is also possible that U.S. private
sector companies that work with these states may be restricted from outsourcing
their work related to government contracts. We currently do not have
significant contracts with U.S. federal or state government entities, however,
there can be no assurance that these restrictions will not extend to private
companies, such as our clients. In the future, we may also enter into
significant contracts with U.S. federal or state government entities. Any changes to existing laws or the enactment
of new legislation restricting offshore outsourcing may adversely impact our
ability to do business in the United States, particularly if these changes are
widespread. Our success depends in large part upon our highly skilled IT professionals and
our ability to attract and retain these personnel. Our ability to execute projects and to obtain new clients depends largely on
our ability to attract, train, motivate and retain highly skilled IT
professionals, particularly project managers and other mid-level professionals.
If we cannot hire and retain additional qualified personnel, our ability to bid
on and obtain new projects, and to continue to expand our business will be
impaired and our revenues could decline. We believe that there is significant
worldwide competition for IT professionals with the skills necessary to perform
the services we offer. We may not be able to hire and retain enough skilled and
experienced IT professionals to replace those who leave. Additionally, we may
not be able to redeploy and retrain our IT professionals to keep pace with
continuing changes in technology, evolving standards and changing client
preferences. Our inability to attract and retain IT professionals may have a
material adverse effect on our business, results of operations and financial
condition. Our success depends in large part upon our management team and key personnel
and our ability to attract and retain them. We are highly dependent on the senior members of our management team, including
the continued efforts of our Chairman, our Chief Executive Officer, our Chief
Operating Officer, other executive members of the board and the management
council, which consists of executive and other officers. Our future performance
will be affected by any disruptions in the continued service of these persons.
We do not maintain key man life insurance for any of the senior members of our
management team or other key personnel. Competition for senior management in
our industry is intense, and we may not be able to retain such senior
management personnel or attract and retain new senior management personnel in
the future. The loss of any members of our senior management or other key
personnel may have a material adverse effect on our business, results of
operations and financial condition. Our failure to complete fixed-price, fixed- timeframe contracts on budget and
on time may negatively affect our profitability. As an element of our business strategy, we offer a portion of our services on a
fixed-price, fixed-timeframe basis, rather than on a time-and-materials basis.
In fiscal 2004 and 2003, revenues from fixed-price, fixed-timeframe projects
accounted for 33.7% and 36.7% of our total services revenues. Although we use
our software engineering methodologies and processes and past project
experience to reduce the risks associated with estimating, planning and
performing fixed-price, fixed-timeframe projects, we bear the risk of cost
overruns, completion delays and wage inflation in connection with these
projects. If we fail to estimate accurately the resources and time required for
a project, future wage inflation rates, or currency exchange rates, or if we
fail to complete our contractual obligations within the contracted time frame,
our profitability may suffer. Our client contracts can typically be terminated without cause and with little
or no notice or penalty, which could negatively impact our revenues and
profitability. 7




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Our clients typically retain us on a non-exclusive, project-by-project basis.
Most of our client contracts, including those that are on a fixed-price,
fixed-timeframe basis, can be terminated with or without cause, with between
zero and 90 days notice and without termination-related penalties.
Additionally, our contracts with clients are typically limited to discrete
projects without any commitment to a specific volume of business or future
work. Our business is dependent on the decisions and actions of our clients,
and there are a number of factors relating to our clients that are outside our
control that might result in the termination of a project or the loss of a
client, including:  
    
    financial difficulties for a client;
    
    a change in strategic priorities, resulting in a reduced level of IT spending;
    
    a demand for price reductions;
    
    a change in outsourcing strategy by moving more work to client in-house IT departments or to our competitors; and
    
    the replacement by our clients of existing software with packaged software supported by licensors. Our client contracts are often conditioned upon our performance, which, if
unsatisfactory, could result in less revenue generated than anticipated. A number of our contracts have incentive-based or other pricing terms that
condition some or all of our fees on our ability to meet defined goals. Our
failure to meet these goals or a clients expectations in such
performance-based contracts may result in a less profitable or an unprofitable
engagement. Our business will suffer if we fail to anticipate and develop new services and
enhance existing services in order to keep pace with rapid changes in
technology and the industries on which we focus. The IT services market is characterized by rapid technological change, evolving
industry standards, changing client preferences and new product and service
introductions. Our future success will depend on our ability to anticipate
these advances and develop new product and service offerings to meet client
needs. We may not be successful in anticipating or responding to these advances
in a timely basis, or, if we do respond, the services or technologies we
develop may not be successful in the marketplace. Further, products, services
or technologies that are developed by our competitors may render our services
non-competitive or obsolete. Disruptions in telecommunications could harm our service delivery model, which
could result in client dissatisfaction and a reduction of our revenues. A significant element of our distributed project management methodology, which
we refer to as our Global Delivery Model is to continue to leverage and expand
our global development centers. We currently have 31 global development centers
located in various countries around the world. Our global development centers
are linked with a network architecture that uses multiple service providers and
various satellite and optical links with alternate routing. We may not be able
to maintain active voice and data communications between our various global
development centers and between our global development centers and our clients
sites at all times. Any significant loss in our ability to communicate could
result in a disruption in business, which could hinder our performance or our
ability to complete client projects on time. This, in turn, could lead to
client dissatisfaction and a material adverse effect on our business, results
of operations and financial condition. We may be liable to our clients for damages caused by system failures, which
could damage our reputation and cause us to lose clients. Many of our contracts involve projects that are critical to the operations of
our clients businesses, and provide benefits which may be difficult to
quantify. Any failure in a clients system or breaches of security could result
in a claim for substantial damages against us, regardless of our responsibility
for such failure. Although we attempt to limit our contractual liability for
consequential damages in rendering our services, we cannot be assured that the
limitations on liability we provide for in our service contracts will be
enforceable in all cases, or that they will otherwise be sufficient to protect
us from liability for damages. We maintain general liability insurance
coverage, including coverage for errors or omissions, however, we cannot be
assured that such coverage will continue to be available on reasonable terms or
will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. A
successful assertion of one or more large claims against us that exceeds our
available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of a large deductible or co-insurance
requirement, could adversely affect our operating results. We are investing substantial cash assets in new facilities, and our
profitability could be reduced if our business does not grow proportionately. As of March 31, 2004, we had contractual commitments of approximately $46.3
million for capital expenditure. Although we have successfully developed new
facilities in the past, we may still encounter cost overruns or project delays
in connection with new facilities. Additionally, future financing for
additional facilities, whether within India or elsewhere, may not be available
on attractive terms or at all. Such expansions will significantly increase our
fixed costs. If we are unable to grow our business and revenues
proportionately, our profitability will be reduced. We may be unable to recoup our investment costs to develop our software
products. In fiscal 2004 and 2003, we earned 2.8% and 4.6% of our total revenue from the
sale of software products. The development of our software products requires
significant investments. The markets for our primary suite of software products
that we call Finacle® are competitive. Our current software products or any
new software products that we develop may not be commercially successful and
the costs of developing such new products may not be recouped. Since software
product revenues typically occur in periods subsequent to the periods in which
the costs are incurred for the development of such software products, delayed
revenues may cause periodic fluctuations of our operating results. Our insiders are significant shareholders, are able to exercise significant
control over the election of our board and may have interests which conflict
with those of our other shareholders or holders of our ADSs. Our executive officers and directors, together with members of their immediate
families, beneficially owned, in the aggregate, approximately 22.4% of our
issued equity shares as of March 31, 2004. As a result, acting together, this
group has the ability to exercise significant control over most matters
requiring our shareholders approval, including the election and removal of
directors and significant corporate transactions. We may engage in acquisitions, strategic investments, strategic partnerships or
alliances or other ventures that may or may not be successful. We may acquire or make strategic investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships or
alliances with third parties in order to enhance our business. For example, we
recently acquired Expert Information Services Pty. Limited, Australia and
established Infosys Consulting, Inc. It is possible that we may not identify
suitable acquisition, strategic investment or strategic partnership candidates,
or if we do identify suitable candidates, we may not complete those
transactions on terms 8




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commercially acceptable to us or at all. The inability to identify suitable
acquisition targets or investments or the inability to complete such
transactions may affect our competitiveness and our growth prospects. If we acquire a company, we could have difficulty in assimilating that
companys personnel, operations, technology and software. In addition, the key
personnel of the acquired company may decide not to work for us. In some cases,
we could have difficulty in integrating the acquired products, services or
technologies into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. As
of the date of this Annual Report, we have no agreements to enter into any
material acquisition, investment, partnership, alliance or other joint venture
transaction. We make strategic investments in new technology start-up companies in order to
gain experience in or exploit niche technologies. As of March 31, 2004, we have
invested an aggregate amount of approximately $11.4 million in strategic
investments. However, our investments may not be successful. The lack of
profitability of any of our investments could have a material adverse effect on
our operating results. In fiscal 2004 and 2003, we made loss provisions of $2.1 million and $3.2 million related to investments. Our earnings may be adversely affected if we are required to change our
accounting policies with respect to the expensing of stock options. We do not currently deduct the expense of employee stock option grants from our
income based on the fair value method. The Financial Accounting Standards Board
has issued an exposure draft, which if adopted, would require companies to
change their accounting policies to record the fair value of stock options
issued to employees as an expense. Many companies have or are in the process of
voluntarily changing their accounting policies to expense the fair value of
stock options. Stock options are an important component of our employee
compensation package. If we change our accounting policy with respect to the
treatment of employee stock option grants, our earnings could be adversely
affected. We have adopted the pro forma disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation cost for our
stock-based compensation plan been determined in a manner consistent with the
fair value approach described in SFAS No. 123, our net income as reported would
have been reduced to the pro forma amounts of approximately $223.4 million and
$137.2 million in fiscal 2004 and 2003. Risks Related to Investments in Indian Companies and International Operations
Generally Our net income would decrease if the Government of India reduces or withdraws
tax benefits and other incentives it provides to us. Currently, we benefit from the tax holidays the Government of India gives to
the export of IT services from specially designated software technology parks
in India. As a result of these incentives, which include a 10-year tax holiday
from Indian corporate income taxes for the operation of most of our Indian
facilities and a partial taxable income deduction for profits derived from
exported IT services, our operations have been subject to relatively low tax
liabilities. These tax incentives resulted in a decrease in our income tax
expense of $78.3 million and $50.6 million for fiscal 2004 and 2003 compared
to the effective tax rates that we estimate would have applied if these
incentives had not been available. The Finance Act, 2000 phases out the 10-year tax holiday over a ten-year period
from fiscal 2000 through fiscal 2009. Additionally, the Finance Act, 2002
required that ten percent of all income derived from services performed in
software technology parks be subject to income tax for a one-year period which
ended March 31, 2003. For companies opting for the partial taxable income
deduction for profits derived from exported IT services, the Finance Act, 2000
phases out the deduction over five years beginning on April 1, 2000. When our
tax holiday and taxable income deduction expire or terminate, our tax expense
will materially increase, reducing our profitability. Wage pressures in India may prevent us from sustaining our competitive
advantage and may reduce our profit margins. Wage costs in India have historically been significantly lower than wage costs
in the United States and Europe for comparably skilled professionals, which has
been one of our competitive strengths. However, wage increases in India may
prevent us from sustaining this competitive advantage and may negatively affect
our profit margins. Wages in India are increasing at a faster rate than in the
United States, which could result in increased costs for IT professionals,
particularly project managers and other mid-level professionals. We may need to
increase the levels of our employee compensation more rapidly than in the past
to remain competitive. Compensation increases may result in a material adverse
effect on our business, results of operations and financial condition. Terrorist attacks or a war could adversely affect our business, results of
operations and financial condition. Terrorist attacks, such as the attacks of September 11, 2001 in the United
States and other acts of violence or war, such as the recent conflict in Iraq,
have the potential to have a direct impact on our clients. To the extent that
such attacks affect or involve the United States, our business may be
significantly impacted, as the majority of our revenues are derived from
clients located in the United States. In addition, such attacks may make travel
more difficult, may make it more difficult to obtain work visas for many of our
IT professionals who are required to work in the United States, and may
effectively curtail our ability to deliver our services to our clients. Such
obstacles to business may increase our expenses and negatively affect the
results of our operations. Many of our clients, in particular for our newer
services, such as business process management and IT outsourcing, visit several
IT services firms prior to reaching a decision on vendor selection. Terrorist
threats, attacks or war could make travel more difficult and delay, postpone or
cancel decisions to use our services. Regional conflicts in South Asia could adversely affect the Indian economy,
disrupt our operations and cause our business to suffer. South Asia has from time to time experienced instances of civil unrest and
hostilities among neighboring countries, including between India and
Pakistan. In recent years there have been military confrontations between India and
Pakistan that have occurred in the region of Kashmir and along the
India-Pakistan border. Military activity or terrorist attacks in the future
could influence the Indian economy by disrupting communications and making
travel more difficult and such political tensions could create a greater
perception that investments in Indian companies involve higher degrees of risk.
This, in turn, could have a material adverse effect on the market for
securities of Indian companies, including our equity shares and our ADSs, and
on the market for our services. Restrictions on immigration may affect our ability to compete for and provide
services to clients in the United States, which could hamper our growth and
cause our revenues to decline. The vast majority of our employees are Indian nationals. The ability of our IT
professionals to work in the United States, Europe and in other countries
depends on the ability to obtain the necessary visas and work permits. As of
March 31, 2004, the majority of our IT professionals in the United States held
H-1B visas (approximately 3,200 persons), allowing the employee to remain in
the United States during the term of the work permit, and work as long as he or she remains an employee of the sponsoring
firm, or L-1 visas (approximately 700 persons), allowing for the employee to
stay in the United States 9




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only temporarily. Although there is no limit to new L-1 visas, there is a limit
to the aggregate number of new H-1B visas that the U.S. Citizenship
and Immigration Services, or CIS, may approve in any government fiscal year. In
2000, the United States temporarily increased the annual limit for H-1B visas
to 195,000, however this increase expired in 2003 and the limit was returned to
65,000 annually. Further, in response to the terrorist attacks in the United
States, the CIS has increased the level of scrutiny in granting visas. This may
also lead to limits on the number of L-1 visas granted. The U.S. immigration
laws may also require us to meet certain levels of compensation, and to comply
with other legal requirements, as a condition to obtaining or maintaining work
visas for our IT professionals working in the United States. Immigration laws in the United States and in other countries are subject to
legislative change, as well as to variations in standards of application and
enforcement due to political forces and economic conditions. It is difficult to
predict the political and economic events that could affect immigration laws,
or the restrictive impact they could have on obtaining or monitoring work visas
for our IT professionals. Our reliance on work visas for a significant number
of IT professionals makes us particularly vulnerable to such changes and
variations as it affects our ability to staff projects with IT professionals
who are not citizens of the country where the work is to be performed. As a
result, we may not be able to obtain a sufficient number of visas for our IT
professionals or may encounter delays or additional costs in obtaining or
maintaining the condition of such visas. Changes in the policies of the Government of India or political instability
could delay the further liberalization of the Indian economy and adversely
affect economic conditions in India generally, which could impact our business
and prospects. Since 1991, successive Indian governments have pursued policies of economic
liberalization, including significantly relaxing restrictions on the private
sector. Nevertheless, the role of the Indian central and state governments in
the Indian economy as producers, consumers and regulators has remained
significant. The current Government of India, formed in October 1999, has
announced policies and taken initiatives that support the continued economic
liberalization policies that have been pursued by previous governments.
However, these liberalization policies may not continue in the future. The rate
of economic liberalization could change, and specific laws and policies
affecting technology companies, foreign investment, currency exchange and other
matters affecting investment in our securities could change as well. A
significant change in Indias economic liberalization and deregulation policies
could adversely affect business and economic conditions in India generally, and
our business in particular. Elections to the lower house of the Indian Parliament are currently in process.
Formation and continuation of the government would require support of a
majority of the members of the lower house. The inability of any one coalition
to be elected to a majority of the seats in the lower house could result in
political instability. Such instability could delay the reform of the Indian
economy and could have a material adverse effect on the market for securities
of Indian companies, including our equity shares and our ADSs, and on the
market for our services. Currency exchange rate fluctuations may affect the value of our ADSs. Our functional currency is the Indian rupee although we transact a major
portion of our business in foreign currencies and accordingly face foreign
currency exposure through our sales in the United States and elsewhere and
purchases from overseas suppliers in dollars. Historically, we have held a
substantial majority of our cash funds in rupees. Accordingly, changes in
exchange rates may have a material adverse effect on our revenues, cost of
services sold, gross margin and net income, which may in turn have a negative
impact on our business, operating results and financial condition. The exchange
rate between the rupee and the dollar has changed substantially in recent years
and may fluctuate substantially in the future. We expect that a majority of our
revenues will continue to be generated in U.S. dollars for the foreseeable
future and that a significant portion of our expenses, including personnel
costs, as well as capital and operating expenditures, will continue to be
denominated in Indian rupees. Consequently, the results of our operations are
adversely affected as the rupee appreciates against the dollar. We have sought to reduce the effect of exchange rate fluctuations on our
operating results by purchasing foreign exchange forward contracts to cover a
portion of outstanding accounts receivable. As of March 31, 2004, we had
outstanding forward contracts in the amount of $149.0 million. This increase is
primarily attributable to our decision to actively hedge our foreign currency
exposure in light of the recent steady appreciation of the Indian rupee against
the U.S. dollar. We may not purchase contracts adequate to insulate ourselves
from foreign exchange currency risks. Additionally, the policies of
the Reserve Bank of India may change from time to time which may
limit our ability to hedge our foreign currency exposures adequately. Fluctuations in the exchange rate between the rupee and the dollar will also
affect the dollar conversion by Deutsche Bank Trust Company Americas, the
Depositary, of any cash dividends paid in rupees on the equity shares
represented by the ADSs. In addition, these fluctuations will affect the dollar
equivalent of the rupee price of equity shares on the Indian stock exchanges
and, as a result, the prices of our ADSs in the United States, as well as the
dollar value of the proceeds a holder would receive upon the sale in India of
any equity shares withdrawn from the Depositary under the Depositary Agreement.
Holders may not be able to convert rupee proceeds into dollars or any other
currency, and there is no guarantee of the rate at which any such conversion
will occur, if at all. Our international expansion plans subject us to risks inherent in doing
business on an international level. Currently, we have global development centers in six countries around the
world. The majority of our global development centers are located in India. We
intend to establish new development facilities, potentially in Southeast Asia,
Africa, Latin America and Europe. In April 2004, we announced the formation of
a consulting subsidiary in the United States. Because of our limited experience
with facilities outside of India, we are subject to additional risks related to
our international expansion strategy, including risks related to complying with
a wide variety of national and local laws, restrictions on the import and
export of certain technologies and multiple and possibly overlapping tax
structures. In addition, we may face competition in other countries from
companies that may have more experience with operations in such countries or
with international operations generally. We may also face difficulties
integrating new facilities in different countries into our existing operations,
as well as integrating employees that we hire in different countries into our
existing corporate culture. In 2003, China experienced an outbreak of Severe
Acute Respiratory Syndrome, or SARS. As a result travel restrictions to the
region were heightened. Our international expansion strategy in China may face
difficulty resulting from a potential outbreak of SARS recurring again. Our
international expansion plans may not be successful and we may not be able to
compete effectively in other countries. It may be difficult for you to enforce any judgment obtained in the United
States against us or our affiliates. We are incorporated under the laws of India and many of our directors and
executive officers reside outside the United States. Virtually all of our
assets and the assets of many of these persons are located outside the United
States. As a result, you may be unable to effect service of process upon us
outside India or upon such persons outside their jurisdiction of residence. In
addition, you may be unable to enforce against us in courts outside of India,
or against these persons outside the jurisdiction of their residence, judgments
obtained in courts of the United States, including judgments predicated solely
upon the federal securities laws of the United States. 10




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We have been advised by our Indian counsel that the United States and India do
not currently have a treaty providing for reciprocal recognition and
enforcement of judgments (other than arbitration awards) in civil and
commercial matters. Therefore, a final judgment for the payment of money
rendered by any federal or state court in the United States on civil liability,
whether or not predicated solely upon the federal securities laws of the United
States, would not be enforceable in India. However, the party in whose favor
such final judgment is rendered may bring a new suit in a competent court in
India based on a final judgment that has been obtained in the United States.
The suit must be brought in India within three years from the date of the
judgment in the same manner as any other suit filed to enforce a civil
liability in India. It is unlikely that a court in India would award damages on
the same basis as a foreign court if an action is brought in India.
Furthermore, it is unlikely that an Indian court would enforce foreign
judgments if it viewed the amount of damages awarded as excessive or
inconsistent with Indian practice. A party seeking to enforce a foreign
judgment in India is required to obtain approval from the Reserve Bank of India
under the Foreign Exchange Management Act, 1999, to execute such a judgment or
to repatriate any amount recovered. The laws of India do not protect intellectual property rights to the same
extent as those of the United States, and we may be unsuccessful in protecting
our intellectual property rights. We may also be subject to third party claims
of intellectual property infringement. We rely on a combination of patent, copyright, trademark and design laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
intellectual property. However, the laws of India do not protect proprietary
rights to the same extent as laws in the United States. Therefore, our efforts
to protect our intellectual property may not be adequate. Our competitors may
independently develop similar technology or duplicate our products or services.
Unauthorized parties may infringe upon or misappropriate our products, services
or proprietary information. The misappropriation or duplication of our intellectual property could disrupt
our ongoing business, distract our management and employees, reduce our
revenues and increase our expenses. We may need to litigate to enforce our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. Any such litigation could be time consuming and
costly. As the number of patents, copyrights and other intellectual property
rights in our industry increases, and as the coverage of these rights increase,
we believe that companies in our industry will face more frequent infringement
claims. Defense against these claims, even if not meritorious, could be
expensive and divert our attention and resources from operating our company. Although there are currently no material pending or threatened intellectual
property claims against us, infringement claims may be asserted against us in
the future. However, if we become liable to third parties for infringing their
intellectual property rights, we could be required to pay a substantial damage
award and be forced to develop non-infringing technology, obtain a license or
cease selling the applications or products that contain the infringing
technology. We may be unable to develop non-infringing technology or to obtain
a license on commercially reasonable terms, or at all. Our ability to acquire companies organized outside India depends on the
approval of the Government of India and/or the Reserve Bank of India and
failure to obtain this approval could negatively impact our business. Generally, the Reserve Bank of India must approve any acquisition by us of any
company organized outside of India. The Reserve Bank of India has recently
permitted acquisitions of companies organized outside of India without approval
where the transaction value is:  
    
    if in cash, up to 100% of the proceeds from an ADS offering or up to 100% of the net worth of the company; and
    
    if in stock, up to the greater of $100 million or ten times the acquiring companys previous fiscal years export earnings. Any required approval from the Reserve Bank of India and the Ministry of
Finance of the Government of India or any other government agency may not be
obtained. Our failure to obtain approvals for acquisitions of companies
organized outside India may restrict our international growth, which could
negatively affect our business and prospects. Indian law limits our ability to raise capital outside India and may limit the
ability of others to acquire us, which could prevent us from operating our
business or entering into a transaction that is in the best interests of our
shareholders. Indian law relating to foreign exchange management constrains our ability to
raise capital outside India through the issuance of equity or convertible debt
securities. Generally, any foreign investment in, or acquisition of, an Indian
company requires approval from relevant government authorities in India,
including the Reserve Bank of India. There are, however, certain exceptions to
this approval requirement for IT companies on which we are able to rely.
Changes to such policies may create restrictions on our capital raising
abilities. For example, a limit on the foreign equity ownership of Indian IT
companies may constrain our ability to seek and obtain additional equity
investment by foreign investors. In addition, these restrictions, if applied to
us, may prevent us from entering into certain transactions, such as an
acquisition by a non-Indian company, which might otherwise be beneficial for us
and the holders of our equity shares and ADSs. Additionally, under current Indian law, the sale of an IT services company can
result in the loss of the tax benefits for specially designed software
technology parks in India. The potential loss of this tax benefit may
discourage others from acquiring us or entering into a transaction with us that
is in the best interest of our shareholders. Risks Related to the ADSs Indian law imposes foreign investment restrictions that limit a holders
ability to convert equity shares into ADSs, which may cause our ADSs to trade
at a premium or discount to the market price of our equity shares. Except under limited circumstances, the Reserve Bank of India must approve the
sale of equity shares underlying ADSs by a non-resident of India to a resident
of India. Since foreign exchange controls are in effect in India, the Reserve
Bank of India will also approve the price at which equity shares are
transferred based on a specified formula, and a higher price per share may not
be permitted. Additionally, except under certain limited circumstances, if an
investor seeks to convert the rupee proceeds from a sale of equity shares in
India into foreign currency and then repatriate that foreign currency from
India, he or she will have to obtain an additional Reserve Bank of India
approval for each transaction. Required approval from the Reserve Bank of India
or any other government agency may not be obtained on terms favorable to a
non-resident investor or at all. Investors who exchange ADSs for the underlying equity shares and are not
holders of record will be required to declare to us details of the holder of
record, and the holder of record will be required to disclose the details of
the beneficial owner. Any investor who fails to comply with this requirement
may be liable for a fine of up to Rs. 1,000 for each day such failure
continues. Such restrictions on foreign ownership of the underlying equity
shares may cause our ADSs to trade at a premium or discount to the equity
shares. 11




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An investor in our ADSs may not be able to exercise preemptive rights for
additional shares and may thereby suffer dilution of his or her equity interest
in us. Under the Indian Companies Act, a company incorporated in India must offer its
holders of equity shares preemptive rights to subscribe and pay for a
proportionate number of shares to maintain their existing ownership percentages
prior to the issuance of any new equity shares, unless such preemptive rights
have been waived by three-fourths of the shares voting on the resolution to
waive such rights. Holders of ADSs may be unable to exercise preemptive rights
for equity shares underlying ADSs unless a registration statement under the
Securities Act is effective with respect to such rights or an exemption from
the registration requirements of the Securities Act is available. We are not
obligated to prepare and file such a registration statement and our decision to
do so will depend on the costs and potential liabilities associated with any
such registration statement, as well as the perceived benefits of enabling the
holders of ADSs to exercise their preemptive rights, and any other factors we
consider appropriate at the time. No assurance can be given that we would file
a registration statement under these circumstances. If we issue any such
securities in the future, such securities may be issued to the Depositary,
which may sell such securities for the benefit of the holders of the ADSs.
There can be no assurance as to the value, if any, the Depositary would receive
upon the sale of such securities. To the extent that holders of ADSs are unable
to exercise preemptive rights granted in respect of the equity shares
represented by their ADSs, their proportional interests in us would be reduced. ADS holders may be restricted in their ability to exercise voting rights. At our request, the Depositary will mail to you any notice of shareholders
meeting received from us together with information explaining how to instruct
the Depositary to exercise the voting rights of the securities represented by
ADSs. If the Depositary receives voting instructions from you in time, relating
to matters that have been forwarded to you, it will endeavor to vote the
securities represented by your ADSs in accordance with such voting
instructions. However, the ability of the Depositary to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. We cannot assure that you will receive voting
materials in time to enable you to return voting instructions to the Depositary
in a timely manner. Securities for which no voting instructions have been
received will not be voted. There may be other communications, notices or
offerings that we only make to holders of our equity shares, which will not be
forwarded to holders of ADSs. Accordingly, you may not be able to participate
in all offerings, transactions or votes that are made available to holders of
our equity shares. 
 Item 4. Information on the company Company Overview We are a leading global IT services firm. Progeon Limited (Progeon), Infosys
Technologies (Australia) Pty. Limited (Infosys Australia), Infosys
Technologies (Shanghai) Co. Limited (Infosys China) and Infosys Consulting,
Inc. (Infosys Consulting) are our majority owned and controlled subsidiaries.
We provide end-to-end business solutions that leverage technology for our
clients across the entire software life cycle: consulting, design, development,
re-engineering, maintenance, systems integration, and package evaluation and
implementation. We also provide software products to the banking industry, as
well as client business process management services through our majority-owned
subsidiary, Progeon. Our clients rely on our solutions to enhance their own
business performance. Our IT professionals ensure the highest levels of client satisfaction by
delivering to our clients high quality solutions through our Global Delivery
Model. Using our Global Delivery Model, we divide projects into components that
we execute simultaneously at the client site and at our development centers in
India and around the world. We optimize our cost structure by having the
flexibility to execute project components where it is most cost effective.
Additionally, the flexibility to execute project components across time zones
around the clock and the easily scalable infrastructure of our Global Delivery
Model allows us to reduce project delivery times. We have organized our sales, marketing and business development teams to focus
on specific geographies and industries, thus enabling us to customize our
service offerings to our clients markets. Our primary client markets are
financial services, manufacturing, telecommunications, and retail, as well as
utilities and logistics. We believe we have the best talent in the Indian IT services industry, and we
are committed to remain among the industrys leading employers. In June 2003, Infosys was ranked 61 in the top 100 list of
Best Places to Work for IT Professionals by Computerworld. We were incorporated in 1981 as Infosys Consultants Private Limited, as a
private limited company under the Indian Companies Act, 1956. We changed our
name to Infosys Technologies Private Limited in April 1992 and later to Infosys
Technologies Limited in June 1992, when we became a public limited company. The
address of our registered office is Electronics City, Hosur Road, Bangalore-560
100, Karnataka, India. The telephone number of our registered office is +91 80
2852 0261. Our agent for service in the United States is CT Corporation System,
818 West Seventeenth Street, Los Angeles, CA 90017. We completed our initial public offering of equity shares in India in 1993 and
our initial public offering of ADSs in the United States in 1999. In August
2003, on behalf of our stockholders, we completed a sponsored secondary
offering of ADSs in the United States. We did not receive any of the proceeds
from this sponsored secondary offering. Our revenues grew from $121.0 million in fiscal 1999 to $1,062.6 million in
fiscal 2004, representing a compound annual growth rate of 54.4%. Our net
income grew from $17.5 million, after a one-time stock compensation expense to
$270.3 million during the same period, representing a compound annual growth
rate of 72.9%. Our revenue growth is attributable to a number of factors,
including an increase in the size and number of projects for existing and new
clients. For fiscal 2004, 93.4% of our revenue came from repeat 12




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business, which we define as revenue from a client who also contributed to our
revenue during the prior fiscal year. Between March 31, 1999 and
March 31, 2004,
our total employees grew from approximately 3,800 to approximately
23,800
representing a compound annual growth rate of 44.3%. In addition, Progeon had
approximately 1,900 employees as of
March 31, 2004.  
    
    Industry Overview Current Global Dynamics in IT The role of IT has evolved from supporting enterprises to transforming them. To
succeed in this transformation, corporations must respond rapidly to market
trends, create new business models and drive productivity gains. In this
dynamic, competitive environment, decisions with respect to technology have
become increasingly important. Additionally, multiple technology platforms and
an enhanced emphasis on security and back-up facilities have increased the
complexity and cost of IT systems, resulting in greater IT-related risks for
corporations. This increased complexity, cost and risk has created a growing
need for specialists with experience in leveraging technology to help drive
business strategy. Due to the global economic downturn, corporations have reduced
their IT budgets. In October 2002, the Gartner 2002 IT Spending and Staffing
Survey estimated that worldwide IT spending would decline 7% in 2002 and remain
constant in 2003. In October 2003, the Gartner 2003 IT Spending and
Staffing Survey specified that after two years of budget cuts,
enterprises were poised to boost their investment in IT. It estimated
an increase in IT spending by around 4% for 2004. Chief information officers are increasingly focused on
closely managing discretionary IT spending. Corporations are redirecting their
IT spending towards upgrading and leveraging prior IT investments and are
increasingly outsourcing their IT requirements, which allows them to optimize
their IT cost structure by converting a portion of their fixed costs to
variable costs. However, even during this difficult economic environment, corporations view
technology as a critical source of competitive advantage and the longer-term
growth prospects for outsourced IT services remain positive. In November 2002,
Gartner Dataquest projected that the global IT services market will grow from
$557 billion in 2002 to $737 billion in 2006, representing a compound annual
growth rate of approximately 7%. Increasing Trend Towards Offshore IT Services Amidst this difficult economic environment, corporations have become reliant on
IT as a strategic advantage. To acquire the high quality IT services needed at
a more cost-competitive level, corporations are increasingly using alternatives
such as offshore IT services that deliver a definitive cost-value benefit.
Offshore vendors are becoming mainstream and are growing in recognition and
sophistication. For example, an increasing number of requests for proposals
require significant detail about the IT services providers offshore
capabilities. As a result, a large number of global technology and IT services
companies have begun to incorporate offshore operations into their own business
models over the last few years. According to a Gartner report in August 2002, 79% of large U.S. corporations
are currently engaged in offshore outsourcing while the remaining 21% plan to
engage in offshore outsourcing within the subsequent 12 months. The report
cited the following criteria for selecting service providers as their offshore
outsourcing partner: maturity of offshore services process and methodology,
cost, quality of resources, speed to delivery, project management capabilities,
business process expertise and certifications. The India Advantage India has consolidated its position as the premier destination for offshore
services. In August 2002, a Gartner report indicated that India was ranked as
the primary country for supplying offshore IT services by more than 70% of
large U.S. corporations surveyed, while the next highest ranked country was
preferred by 10% of the corporations surveyed. Additionally, the Indian IT
services export, as well as the product and technology services, markets are
expected to grow from approximately $9.3 billion in 2003, as estimated by
NASSCOM, to $36 billion in 2008, as estimated by the NASSCOM-McKinsey Report
2002, or the NASSCOM-McKinsey Report. There are several key factors contributing to this growth. High Quality Delivery :According to Carnegie Mellon Software Engineering
Institutes Survey of High Maturity Organizations and High Maturity Workshop
Research, as of October 2002, 50 of 74 high-maturity organizations choosing to
list themselves as organizations with SEI-CMM Level 5 certification, the
highest level of certification, are based in India. SEI-CMM is the Software
Engineering Institutes Capability Maturity Model, which assesses the quality
of organizations management system processes and methodologies. Significant Cost Benefits :The NASSCOM Strategic Review 2004 suggests that the
overseas companies could realize savings of 30% to 60% by utilizing offshore
processes. Abundant Skilled Resources :According to the NASSCOM Strategic Review 2004,
India graduates approximately 290,000 engineering students annually from its
educational institutions across the country. The factors listed above also make India a premier destination for other
services such as IT-enabled services, which we refer to as business process
management. Industry analysts have observed that business process management
services of leading offshore IT service providers have strong prospects for
growth given the providers experience, proven track record and breadth of
client relationships. According to the NASSCOM-McKinsey Report, the IT-enabled
services export market is expected to grow to over $21 billion by 2008. While these advantages apply to a majority of companies that operate with
offshore capabilities in India, we believe that there are additional factors
critical to the successful creation of a sustainable and scalable IT services
business. These include abilities to: 13




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
    
    effectively integrate onsite and offshore execution capabilities to deliver seamless, scalable services;
    
    increase depth and breadth of service offerings to provide a one-stop solution in an environment where corporations are
increasingly reducing their number of IT services vendors;
    
    leverage in-house industry expertise to customize business solutions for clients;
    
    attract and retain high quality IT professionals; and
    
    maintain financial strength to make strategic investments in human resources and physical infrastructure throughout
business cycles. Furthermore, clients are requesting that IT services firms provide a full range
of services to minimize the risk of technology implementation in meeting their
business objectives. Firms that provide individual components of solutions
typically have less meaningful client relationships and are vulnerable to
shifts in technology or client preferences.  
    
    Our Competitive Strengths We believe our competitive strengths include: Innovation and Leadership :We are a pioneer in the Indian IT services
industry. In addition to being rated as the employer of choice in India, we
have been the first to achieve a number of significant milestones that have
solidified our reputation in the marketplace. For example, we were one of the
first Indian companies to develop and deploy a global delivery model, attain
SEI-CMMI Level 5 certification for both offshore and onsite operations, comply
with the quarterly certification requirements of the U.S. Sarbanes-Oxley Act of
2002, introduce campus-style development centers, list on a U.S. stock
exchange, report Indian GAAP audited quarterly financial statements and report
audited U.S. GAAP financial statements. Mature Global Delivery Model :We believe our highly evolved Global Delivery
Model represents a key competitive advantage. Over the past decade, we have
developed our onsite and offshore execution capabilities to deliver high
quality and scalable services. In doing so, we have made substantial
investments in our process, infrastructure and systems and refined our Global
Delivery Model to effectively integrate onsite and offshore services. Our
Global Delivery Model provides clients with seamless, high quality solutions in
reduced timeframes which enables our clients to achieve operating efficiencies
and realize significant cost savings. Comprehensive and Sophisticated End-to-End Solutions :We offer a suite of
comprehensive, end-to-end technology-based solutions that span the entire
software life cycle. These comprehensive offerings enable us to capture a
greater share of our clients IT budgets, extend our network of relationships,
broaden our dialogue with key decision makers within each client, increase the
points of sale for new clients and reduce our service-mix concentration. Our
suite of solutions encompasses consulting, design, development, re-engineering,
maintenance, systems integration and package evaluation and implementation.
Through our domain competency group and software engineering and technology
lab, we research and engineer new solutions for our clients. We have a
well-defined methodology to update and extend our service offerings to meet the
evolving needs of the global marketplace. Commitment to Superior Quality and Process Execution :We have developed a
sophisticated project management methodology to ensure timely, consistent and
accurate delivery of superior quality solutions to maintain a high level of
client satisfaction. Long-Standing Direct Client Relationships :We have long-standing direct
relationships with large multi-national corporations. We typically do not
accept subcontracted assignments from other IT services providers. Our track
record of delivering high quality solutions across the entire software life
cycle and our strong industry expertise helps us to solidify these
relationships and gain increased business from our existing clients. As a
result, we have a history of client retention and derive a significant
proportion of revenues from repeat clients. Approximately 44.6% of our top 100
clients by revenue in fiscal 2004 have been clients in successive years since
fiscal 1998. Ability to Scale :We have successfully managed our growth by investing in
infrastructure and by recruiting, training and rapidly deploying new
professionals. Our strong financial position allows us to make the required
investments in infrastructure and personnel to continue to grow our business.
We can rapidly deploy resources and execute new projects through the scalable
network of our global delivery centers. These factors allow us to execute
large-scale, long-term projects in an efficient and cost-competitive manner. Employer of Choice :We believe we have the best talent in the Indian IT
services industry and we are committed to remain among the industrys leading
employers. We have a presence in nine major cities throughout the country,
which allows us to recruit IT professionals with specific geographic
preferences. Our training programs ensure that new hires enhance their skills
in alignment with our requirements and are readily deployable upon completion
of their training programs. Our lean organizational structure and strong
unifying culture facilitate the sharing of knowledge and best practices among
our employees.  
    
    Our Strategy We seek to further enhance our position as a leading global IT services
company. To achieve this goal, we focus on the following key elements of our
strategy: Continue to Enhance our Solution Set :We seek to continually enhance our
portfolio of solutions as a means of developing and growing our business. To
differentiate our services and achieve recognition as a leading provider of
comprehensive solutions we focus on emerging trends, new technologies, specific
industries and pervasive business issues that confront our clients. This
enables us to better service our clients, thereby increasing our penetration of
existing clients and gaining new clients. Over the past four years we have
added new service offerings such as IT consulting, business process management,
systems integration and IT outsourcing. 14




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Increase Business from Existing and New Clients :Our goal is to build enduring
relationships with both existing and new clients. With existing clients, we aim
to expand the nature and scope of our engagements by increasing the size and
number of projects and extending the breadth of our service offerings. For new
clients, we seek to provide value-added solutions by leveraging our in-depth
industry expertise. We manage first-time engagements by educating clients about
the offshore model, taking on smaller projects to minimize client risk and
showcasing our superior execution capabilities. We also plan to increase our
recurring business with our existing and new clients by selling re-engineering,
maintenance, IT outsourcing and business process management services which are
long-term in nature and require frequent client contact. Expand Into New Regions :We seek to diversify our presence in select
geographic locations throughout North America, Europe and the Asia Pacific
region in order to enhance our ability to service client needs on a global
basis. We plan to accomplish this by establishing new sales and marketing
offices, representative offices and global development centers and by providing
services to existing clients in new geographies. We intend to increase our
presence in China through our recently established subsidiary and in Australia
through the recent acquisition of Expert Information Services Pty. Limited,
Australia. We recently announced the formation of Infosys Consulting, a
subsidiary in the United States, that will focus on consulting work in the
United States. We intend to use our operations in these regions to eventually
support clients in the local market, our global clients and clients in the Asia
Pacific region. All of our development centers are also used as business
continuity or disaster recovery centers, if necessary. Additionally, as a means
of mitigating geographic risks, we have established a dedicated business
continuity and disaster recovery center in Mauritius. Enhance Brand Visibility :We intend to continue to invest in the development
of our premium brand identity in the marketplace. Such efforts include media
and industry analyst events, sponsorship of and participation in targeted
industry conferences, trade shows, recruiting efforts, community outreach and
investor relations. We plan to expand the use of Milan,our annual multi-client
retreat in North America and Europe. We have also instituted the Wharton
Infosys Business Transformation Award, offered jointly with the Wharton School
at the University of Pennsylvania. We believe that a strong Infosys brand will
continue to facilitate the lead generation process and enhance our ability to
attract talented personnel globally. Pursue Alliances and Strategic Acquisitions :We intend to continue to develop
alliances that complement our core competencies. Our alliance strategy is
targeted at leading technology providers, which allows us to take advantage of
emerging technologies in a mutually beneficial and cost-competitive manner. We
also intend to pursue selective acquisitions that augment our existing skill
sets, industry expertise, client base or geographical presence. We recently
acquired Expert Information Services Pty. Limited, Australia primarily because
of the acquired companys market position, skilled employees, management
strength and potential to serve as a platform for enhancing business
opportunities in Australia. We also established Infosys Consulting,
Inc. to add
high-end consulting capabilities to our Global Delivery Model. While we continue to pursue our business strategies, we intend to maintain our
focus on scaling our operations by investing in physical and technological
infrastructure, retaining our status as a preferred employer by continuing to
invest in recruiting, training and maintaining a challenging work environment
and by increasing productivity.  
    
    Our Global Delivery Model One of our significant competitive strengths is our Global Delivery Model that enables us to derive maximum benefit from:  
    
    access to our large pool of highly skilled IT professionals;
    
    a 24-hour execution capability across multiple time zones;
    
    the ability to accelerate delivery times of large projects by simultaneously processing project components;
    
    physical and operational separation of client projects to provide enhanced security;
    
    cost competitiveness across geographic regions;
    
    built-in redundancy to ensure uninterrupted services; and
    
    a knowledge management system that enables us to reuse solutions where appropriate. Our Global Delivery Model allows us to produce where it is most cost effective
and sell services where it is most profitable. In a typical offshore
development project, we assign a team of IT professionals to visit a clients
site to determine the scope and requirements of the project. Once the initial
specifications of the project have been established, our project managers
return to the relevant global development center to supervise a larger team of
IT professionals dedicated to the development or implementation of the
solution. Typically, a small team remains at the clients site to manage
project coordination and address changes in requirements as the project
progresses. Teams return to the clients site when necessary to ensure seamless
integration. To the extent required, a dedicated team provides ongoing
maintenance from our global development centers. The clients systems are
linked to our facilities enabling simultaneous processing in our global
development centers. Our model ensures that project managers remain in control
of execution throughout the life of the project regardless of location. For the
past 12 years, we have successfully executed projects at our global development
centers for our clients located in North America, Europe and Asia.
Approximately 68.1% of the total billed person months during fiscal 2004 was
performed at our global development centers in India, and the balance of the
work was performed at client sites and our global development centers located
outside India. We have two types of global development centers: proximity development centers
and offshore software development centers. Our proximity development centers
are typically located regionally for projects that require proximity to the
client for execution. We currently have 12 proximity development centers, six
located in the United States, two in the United Kingdom, one in Japan and three
in Australia. We have 19 offshore development centers, 18 of which are located
in nine cities in India and the remaining offshore development center is
located in Toronto. 15




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Our quality control processes and programs are designed to minimize defects and
ensure adherence to pre-determined project parameters. Additionally, software
quality advisors help individual teams establish appropriate processes for
projects and adhere to multi-level testing plans. The project manager is
responsible for tracking metrics, including actual effort spent versus initial
estimates, project budgeting and estimating the remainder of efforts required
on a project. Our Global Delivery Model mitigates client risks associated with offshore IT
services. For our communications needs, we use multiple service providers and a
mix of satellite and optical fiber links with alternate routing. In India, we
rely on two telecommunications carriers to provide high-speed links
inter-connecting our global development centers. Internationally, we rely on
multiple satellite links to connect our Indian global development centers with
network hubs in other parts of the world. Our significant investment in
redundant infrastructure permits us to provide uninterrupted service to our
clients. We have also established a business continuity and disaster recovery
center in Mauritius.  
    
    Our End-to-End Solutions We provide end-to-end complex business solutions that leverage technology. Our
service offerings include custom application development, maintenance and
production support, software re-engineering, package evaluation and
implementation, IT consulting, and other solutions, including testing services,
engineering services, business process management, systems integration and IT
outsourcing. We also provide banking software products for the banking
industry. When required, we complement our industry expertise with specialist support for
our clients using our domain competency group whose members have specialties in
financial securities, insurance, banking and cash management, supply chain
management and manufacturing, retail and distribution, energy and utilities,
healthcare, and travel and tourism. We also use our software engineering group
and technology lab to create customized solutions for our clients. In addition,
we continually evaluate and train our professionals in new technologies and
methodologies. Finally, we ensure the integrity of our service delivery by
utilizing a scalable, redundant and secure infrastructure. In each of our solution offerings we assume full project management
responsibility and do not accept subcontracted assignments from providers of
other IT services. We strictly adhere to our SEI-CMMI Level 5, internal quality
and project management processes. We have a knowledge management system to
enable reuse of solutions across our company where appropriate and have
developed in-house tools for project management and software life cycle
support. These processes, methodologies, knowledge management systems and tools
reduce the overall cost to the client and enhance the quality and speed of
delivery. Our engagements generally include more than one of the solutions listed below.
Revenues attributable to custom application development, maintenance and
production support, software re-engineering, package evaluation and
implementation and IT consulting services represented a majority of our total
revenues in fiscal 2004. Custom Application Development Our custom application development services offer customized software solutions
for our clients. We create new applications and enhance the functionalities of
our clients existing software applications. Our projects vary in size and
duration and are increasingly entered into on a fixed-price, fixed-timeframe
basis. Each project typically involves all aspects of the software development
process, including defining, designing, prototyping, programming, module
integration and installation of the custom application. We perform system
design and software coding and run pilots primarily at our global development
centers, while transition planning, user training and deployment activities are
performed at the clients site. Our application development services span the
entire range of mainframe, client server and Internet technologies. An
increasing proportion of our applications development engagements are related
to emerging platforms such as Microsofts .NET or open platforms such as J2EE. As an example, a client in the insurance industry had several disparate legacy
systems, due to multiple acquisitions, that created inconsistencies in its
customer and product data. Over a 20-month period, our team of over 80
professionals replaced these systems with a new commercial brokerage policy
management and accounting software solution. This solution provides an
integrated and unified view for over 10,000 users across all of our clients 70
offices in the United States. Maintenance and Production Support We provide maintenance services for our clients large legacy software systems
that cover a wide range of technologies and businesses, and are typically
essential to a clients business. Our consultants take a proactive approach to
software maintenance, by focusing on long-term functionality, stability and
preventive maintenance to avoid problems that typically arise from incomplete
or short-term solutions. This approach, coupled with our quality processes,
allows our clients to continually reduce recurring maintenance costs. While we perform most of the maintenance work at our global development centers
using secure and redundant communication links to our clients systems, we also
maintain a team at the clients facility to coordinate certain key interface
and support functions. As an example, another client in the insurance industry was facing difficulties
in maintaining its existing legacy systems while simultaneously developing its
new Internet-based system. We rapidly assumed the clients in-house
responsibilities by deploying over 350 professionals across several
projects providing maintenance, enhancement and support services for over 50
applications and 20,000 users covering mainframe, client server and Internet
technologies. Software Re-engineering 16




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Our re-engineering services assist our clients in converting their existing IT
systems to newer technologies and platforms developed by third party vendors.
Our re-engineering services include: web enabling our clients existing legacy
systems, database migration, implementing product upgrades, and platform
migrations, such as mainframe to client-server and client-server to Internet
platforms. As an example, a client in the computer manufacturing industry had a large,
disparate installed base of legacy systems which needed to be re-engineered to
open systems with newer technologies. Our team of over 150 professionals
re-engineered a suite of applications from several legacy systems such as
VAX/VMS, AS/400 and IBM mainframes, running on Ingres, Sybase and DB2
databases, to new generation systems such as RS6000/AIX, running on Oracle
database and Holos OLAP tool. Our solution provides a unified, enterprise-wide
platform for over 50 applications for 10,000 users spread across North America,
Europe and Asia. Package Evaluation and Implementation We assist our clients in the evaluation and implementation of software packages
developed by third party vendors, as well as provide training and support
services in the course of their implementation. We specialize in enterprise
resource planning packages developed by several vendors, including: JD Edwards,
Oracle, PeopleSoft, Retek and SAP; supply chain management packages developed
by vendors including i2, Manugistics and Oracle; customer relationship
management packages developed by vendors including PeopleSoft (Vantive) and
Siebel; and enterprise application integration, packages including MQ Series,
SeeBeyond and TIBCO. Our engagements cover a broad range of industries such as
automotive, beverages, financial services, food, healthcare, manufacturing,
media, pharmaceuticals, retail, technology and telecommunications. As an example, a client in semiconductor manufacturing required greater
operational flexibility and improved supply chain visibility. Over a period of
18 months we implemented a global order management and material planning
solution that provided our client with visibility into orders from subsidiaries
across the world and enabled our client to respond in real time. This solution
was implemented using i2 for supply chain planning and Oracle applications for
supply chain execution. We implemented our solution using over 100
professionals across Asia, Europe and the United States. IT Consulting We offer IT consulting services that focus on defining, optimizing and aligning
our clients business objectives with their IT strategies. We assist our
clients by first understanding their business objectives and then analyzing and
recommending the appropriate hardware and software specifications that would
deliver a system that would meet these objectives. Our consultants have a broad
mix of functional and industry expertise. They lead engagements by working with
client executives to develop innovative e-commerce and technology-related
strategies and solutions. These solutions enable our clients to benefit from
emerging technologies and offer new products and services to their customers. We offer IT consulting in the following areas:  
    
    e-business, which includes e-business strategies and solutions and e-commerce road-map definition;  
    
    program management, which includes migration planning, institutionalised implementation and overall
project management involving multiple vendors under a common architecture; and  
    
    IT infrastructure assessment, which includes assessing our clients IT capabilities against current and
future business requirements and recommending appropriate technology infrastructure. As an example, a client in mortgage services needed assistance in restructuring
its processes and systems for loan origination and servicing operations. Over
an 11-month period, our team of over 70 professionals made several
recommendations and redesigned the clients core business processes and systems
architecture for these operations. As a result of having closely understood its
core operations, we were engaged by the client for developing a custom
application for its new post-funding system. Other Solutions We have been expanding the nature and scope of our engagements by extending the
breadth of services we offer. We have recently added new service offerings
including testing services, engineering services, business process management,
systems integration and IT outsourcing. These services are expected to
represent a growing percentage of our total revenues, but currently represent a
less significant percentage of our total revenues. We cannot be certain that
these service offerings will effectively meet client needs or that these
services will grow as a percentage of our revenues. Testing Services :We offer independent testing and validation services that
include functional, usability, compatibility, internationalization and
compliance testing. This testing is designed to evaluate the efficiency of our
clients IT systems against criteria specified by our clients and is provided
from our offshore-based centers. Our team members are well trained in several
test management tools such as Win Runner and Load Runner from Mercury
Interactive, WebLoad from RadView and Rational Softwares (IBM) suite of
products. Solutions are delivered from our testing lab based in Bangalore.
These services are extensively automated to address our clients key objectives
of increasing independence of their testing and validation process at a reduced
cost. As an example, a client in retailing needed to migrate its systems to new
point-of-sale networks, applications and devices. Our team of professionals
spent over 50 person-months and developed and executed a performance test
strategy for the clients new systems that had a complex heterogeneous
architecture involving mainframe, client server, Internet and point-of-sale
devices. Our solution required enterprise-wide modeling of performance and the
testing of over 20 applications for the clients network of 150 retail stores
with over 14,000 point-of-sale devices across the United States. 17




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Engineering Services :We offer engineering services that primarily assist our
clients in the manufacturing sector, in their new product development process
and in managing the life cycles of their existing product lines. We focus on
the following areas:  
    
    for the automotive, aerospace and heavy equipment industries
applications involving computer-aided design, computer-aided
manufacturing and computer-aided engineering technologies; and  
    
    for the automotive, electronics, aerospace and industrial automation
industries design and development of software that is embedded in
various hardware components. As an example, a client in automotive seating systems and interior supplies
needed to reduce costs and cycle time in the design of automotive seating
systems. Our team of professionals employed advanced techniques in mathematics,
structural mechanics, finite element analysis, iterative design and simulation. Business Process Management :We offer business process management services
through our majority-owned subsidiary, Progeon Limited. Progeon enables its clients to outsource several of their IT-intensive
processes related to customer relationship management, finance and accounting,
administration and sales order processing. Its service offerings include the
following:  
    
    for the banking industry credit and debt services, check processing, loan servicing, collections, customer account
management and treasury operations management;  
    
    for the insurance and health care industries policy owner services, claims processing, transaction and reinsurance
accounting, statutory and regulatory reporting, annuities processing and benefits administration; and  
    
    for the securities and brokerage industry client account management services and corporate action services. As an example, we deliver extensive sales order processing services for a
client in telecommunications equipment manufacturing. Our services include
order capture and validation, performing credit checks and monitoring credit
utilization, determining discount levels, order finalization and entry as well
as monitoring and updating orders for rejections, cancellations and amendments.
Our operations are fully integrated with our clients data and fax server networks on a
real-time, 24-hour basis. Systems Integration :Our services include the integration of disparate IT
solutions and software systems, and often include procurement of various
hardware and software products, development of software that enhances the
compatibility between various components of the overall IT infrastructure and
management of programs, vendors and consortia during this process. As an example, a client in affinity programming needed an affordable,
customized, secure and scalable system to provide online access to its
customers. This system required real-time integration for seamless transfer of
complete and current customer information. Over a period of 18 months, our team
of over 20 professionals provided a solution that included strategy and process
consulting, product evaluation, architecture design and development and
environment design to address security, performance testing and redundancy
issues. In addition, we designed and implemented the optimal hosting model,
selected the hosting vendor, formulated service level agreements and the
infrastructure change management process, and provided post implementation
support. IT Outsourcing :Through IT outsourcing, we take over the management and
operations of our clients IT infrastructure. This service offering enables our
clients to focus on their core business areas. Our IT outsourcing service
offerings including data center management, technical support services and
application and management services and are delivered primarily from our global
management network and data operations center in Bangalore, India and our
proximity development centers in the United States. We have a sophisticated
system that monitors and manages these services through recorded system agent
alerts, telephone calls, e-mails and faxes. As an example, a client in network products wanted to outsource its complete IT
infrastructure management services. We took over the responsibilities of
network and security management, server and desktop management and enterprise
application management and currently provide several services including system
administration, database management, network management and desktop support.
The systems are managed from a centralized location and cover a large network
of 17 locations across the United States.  
    
    Banking Software Products We also develop, market and license proprietary software products for the
banking industry. Our principal banking products and solutions are the Finacle®
suite of products and professional services. Finacle® Suite of Products :Our suite of software products include Finacle®
Core Banking, Finacle® eChannels, Finacle® eCorporate, Finacle® CRM and Finacle®
Treasury. This product suite is a fully web-enabled, integrated core banking
solution that addresses the retail, corporate and trade finance activities of
banks. We granted 25 licenses to 13 clients for our products in fiscal 2004. Professional Services :Our services complement our product suite and include
implementation, customization, support, consulting, training and documentation.  
    
    Our Clients We market our services to large corporations in North America, Europe and the
Asia Pacific Region. We have a strong market presence in North America and a
growing presence in Europe. Our revenues for the last three fiscal years by
geographic area are as follows: 18




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##### Table of Contents



Fiscal2002
    
    2003
    
    2004North America
    
    
    71.2
    %
    
    
    73.0
    %
    
    
    71.2
    %Europe
    
    
    19.5
    %
    
    
    17.7
    %
    
    
    19.2
    %India
    
    
    2.0
    %
    
    
    2.1
    %
    
    
    1.4
    %Rest of the World
    
    
    7.3
    %
    
    
    7.2
    %
    
    
    8.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 We have in-depth expertise in the financial services, manufacturing,
telecommunications and retail industries, as well as, to a lesser extent, the
utilities and logistics industries. Our revenues for the last three fiscal
years by market segment are as follows: Fiscal2002
    
    2003
    
    2004Financial Services
    
    
    36.6
    %
    
    
    37.6
    %
    
    
    36.6
    %Manufacturing
    
    
    17.2
    %
    
    
    16.4
    %
    
    
    14.8
    %Telecommunications
    
    
    15.6
    %
    
    
    15.2
    %
    
    
    16.6
    %Retail
    
    
    12.3
    %
    
    
    11.4
    %
    
    
    11.6
    %Others (primarily Utilities and Logistics)
    
    
    18.3
    %
    
    
    19.4
    %
    
    
    20.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Our top 20 clients represented 52.9% of our revenues for fiscal 2004. For
fiscal 2004, 2003 and 2002, our largest client accounted for approximately 5.0%
5.8% and 6.1%, respectively, of our total revenues. The volume of work we
perform for specific clients is likely to vary from year to year, particularly
since we are not the exclusive external IT services provider for our clients.
Thus, a major client in one year may not provide the same level of revenues in
a subsequent year. However, in any given year, a limited number of clients tend
to contribute a significant portion of our revenues.  
    
    Sales and Marketing Our sales and marketing strategy seeks to increase awareness and gain new
business from target clients and promote client loyalty and repeat business
among existing clients. Members of our executive management team are actively
involved in business development and in managing key client relationships
through targeted interaction with our clients senior management. New Business Development :We use a cross-functional, integrated sales approach
in which our account managers, sales personnel and project managers analyze
potential projects and collaboratively develop strategies to sell our expertise
to potential clients. This approach allows for a smooth transition to execution
once the sale is completed. Our sales professionals located throughout the
world proactively contact potential clients. For larger projects, we typically
bid against other IT services providers in response to requests for proposals.
Clients often cite the following as reasons for awarding us contracts: our
Global Delivery Model, comprehensive end-to-end solutions, ability to scale,
superior quality and process execution, industry expertise, experienced
management team, talented professionals, track record and competitive pricing.
In addition, client references and endorsements provide objective validation of
our competitive strengths. Promoting Client Loyalty :We constantly seek to expand the nature and scope
of our engagements with existing clients by increasing the volume of our
business and extending the breadth of services offered. For existing clients,
our onsite project and account managers proactively identify client needs and
work with our sales team to structure solutions to address those needs. In
fiscal 2004, 93.4% of our revenue came from repeat business. We promote client
loyalty through a sales and marketing program that includes media and industry
analyst events, sponsorship of and participation in targeted industry
conferences, trade shows, recruiting efforts, community outreach and investor
relations. We also intend to expand the use of Milan,our annual multi-client retreat in
North America and Europe, to gain additional visibility among our client base. Sales and Marketing
Organization :We sell and market our services from 31
sales offices located in 15 countries. With our global sales headquarters in
Fremont, California and our corporate marketing group in Bangalore, India, we
target our efforts towards Global 1000 corporations. Our sales efforts are
complemented by our marketing team, which assists in brand building and other
corporate level marketing efforts. As of March 31, 2004, we had 275 sales and
marketing employees outside of India and 33 in India.  
    
    CompetitionWe operate in a highly competitive and rapidly changing market and compete with:  
    
    consulting firms such as Accenture Ltd., BearingPoint, Inc., Cap Gemini, and Braxton Associates; 19




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##### Table of Contents




    
    divisions of large multinational technology firms such as Hewlett-Packard Company and International Business
Machines Corporation;  
    
    IT outsourcing firms such as Computer Sciences Corporation, Electronic Data Systems Corporation, Keane, Inc.,
Logica CMG, and Perot Systems Corporation;  
    
    Indian IT services firms such as Satyam Computer Services Limited, Tata Consultancy Services and Wipro Limited;  
    
    software firms such as Oracle Corporation and SAP AG; and  
    
    in-house IT departments of large corporations. In the future we also expect competition from firms in countries with lower
personnel costs than those prevailing in India. However, we recognize that
price alone cannot constitute sustainable competitive advantage. We believe
that the principal competitive factors in our business include the ability to:  
    
    effectively integrate onsite and offshore execution capabilities to deliver seamless, scalable services;  
    
    increase scale and breadth of service offerings to provide a one-stop solution in an environment where corporations are
increasingly reducing their number of IT services vendors;  
    
    provide industry expertise to clients business solutions;  
    
    attract and retain high quality IT professionals; and  
    
    maintain financial strength to make strategic investments in human resources and physical infrastructure through business
cycles. We believe we compete favorably with respect to these factors.  
    
    Human Capital Our employees are our most important assets. We believe that the quality and
level of service that our professionals deliver are among the highest in the
global IT services industry. We are committed to remaining among the industrys
leading employers. In June 2003, Infosys was ranked 61 in the top
100 list of Best Places to Work for IT Professionals by Computerworld. As of March 31, 2004, we
employed approximately 25,700 employees, including
approximately 22,100 IT professionals. During fiscal 2004, we recorded
approximately 9,800 net hires. Our culture and reputation as a leader in the IT
industry enables us to recruit and retain the best available talent in India.
The key elements that define our culture include: Recruiting We have built our global talent pool by recruiting new students from premier
universities, colleges and institutes in India and through need-based hiring of
project leaders and middle managers. We typically recruit only the top 20% of
students in India who have consistently shown high levels of achievement. We
also rely on a rigorous selection process involving a series of aptitude tests
and interviews to identify the best applicants. This selection process is
continually assessed and refined based on performance tracking of past
recruits. Our reputation as a premier employer enables us to select from a large pool of
qualified applicants. For example, in fiscal 2004, we received approximately
908,500 applications, interviewed approximately 18,200 applicants and extended
job offers to approximately 13,600 applicants. These statistics do not include
Progeon which recorded approximately 1,400 net hires. Training and Development Our training, continuing education and career development programs are
primarily designed to ensure our IT professionals enhance their skill-sets in
alignment with their respective roles. Most new student hires complete
approximately three months of integrated on-the-job training before becoming
billable to our clients. We continually provide our IT professionals with
challenging assignments and exposure to new skills, technologies and global
opportunities. We have instituted an appraisal program that incorporates a
360-degree feedback system recognizing high performers and providing
constructive feedback and coaching to under-performers. We employ approximately 98 faculty members in our training division, including
approximately 65 with doctorate or masters degrees. Our faculty conducts the
integrated training for new employees, as well as approximately 160 different
two-week continuing education courses in technology and management skills for
all employees. Leadership development is also a key part of our training program. We
established the Infosys Leadership Institute, a 228-acre campus at Mysore,
India, to enhance leadership skills that are required to manage the
complexities of the rapidly changing marketplace and to further instill our
culture through leadership training. We provide a challenging, entrepreneurial
and empowering work environment that demands dedication and a strong work
ethic. Compensation Our IT professionals receive competitive salaries and benefits and are eligible
to participate in our stock option plans. We have also adopted a
performance-linked compensation program that links compensation to individual
performance, as well as our performance. The Financial Accounting Standards Board of the US has issued an exposure
draft, which if adopted, would require companies to change their accounting
policies to record the fair value of stock options issued to employees as an
expense. A decision on the adoption of the exposure draft is expected by
December 2004. Since there is uncertainty attached to the future of the rules
governing stock options, we have decided to suspend grants of stock
options until
the rulemaking uncertainties are resolved. 20




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##### Table of Contents




    
    Intellectual Property Our intellectual property rights are important to our business. We rely on a
combination of patent, copyright, trademark and design laws, trade secrets,
confidentiality procedures and contractual provisions to protect our
intellectual property. We currently have no issued patents. Four of our patent
applications are pending in the U.S. Patent and Trademark Office. We have two
registered trademarks and three unregistered trademarks. We require employees,
independent contractors and, whenever possible, vendors to enter into
confidentiality agreements upon the commencement of their relationships with
us. These agreements generally provide that any confidential or proprietary
information developed by us or on our behalf be kept confidential. These
agreements also provide that any confidential or proprietary information
disclosed to third parties in the course of our business be kept confidential
by such third parties. However, our clients usually own the intellectual
property in the software we develop for them. Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products and/or services. Unauthorized parties may infringe upon or
misappropriate our products, services or proprietary information. In addition,
the laws of India do not protect intellectual property rights to the same
extent as laws in the United States. For example, India does not grant patents
for software applications or products. In the future, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Any such litigation
could be time-consuming and expensive. We could be subject to intellectual property infringement claims as the number
of our competitors grows and our product or service offerings overlap with
competitive offerings. In addition, we may become subject to such claims since
we may not always be able to verify the intellectual property rights of third
parties from which we license a variety of technologies. Defending against
these claims, even if they are not meritorious, could be expensive and divert
our attention from operating our company. If we become liable to third parties
for infringing upon their intellectual property rights, we could be required to
pay substantial damage awards and be forced to develop non-infringing
technology, obtain licenses or cease selling the applications that contain the
infringing technology. The loss of some of our existing licenses could delay
the introduction of software enhancements, interactive tools and other new
products and services until equivalent technology could be licensed or
developed. We may be unable to develop non-infringing technology or obtain
licenses on commercially reasonable terms, if at all. We regard our trade name, trademarks, service marks and domain names as
important to our success. We rely on the law to protect our proprietary rights
to them, and we have taken steps to enhance our rights by filing trademark
applications where appropriate. We have obtained registration of our key brand
INFOSYS as a trademark in both India and in the United States. We also
aggressively protect these names and marks from infringement by others.  
    
    Research and Development Our research and development efforts focus on developing and refining our
methodologies, tools and techniques, implementing metrics, improving estimation
processes and adopting new technologies. We have several groups engaged in our
research and development activities. These groups are listed below. Education and Research Group :This group conducts short-term and long-term
research in the areas of knowledge management, performance testing, e-commerce,
and education and training methodologies. Software Engineering and Technology Labs :This group monitors advances in
technologies that could impact the business of our clients such as knowledge
management, collaborative technologies, convergence technologies and web
services. They also develop new methodologies and software tools that assist us
in our execution of IT services projects. Domain Competency Group :This group monitors emerging business trends in
particular domains that are relevant to our client base and seeks to understand
and develop solutions that are highly specific to an individual industry. We have also established concept centers for several advanced technologies and
have a performance-testing center to develop solutions for a number of our
development projects. Our research and development expenses for the fiscal years ended March 31,
2004, 2003, and 2002 were $9.4 million, $2.9 million, and $3.1 million
respectively.  
    
    Effect of Government Regulation of Our Business Regulation of our business by the Indian government affects our business in
several ways. We benefit from certain tax incentives promulgated by the
Government of India, including a ten-year tax holiday from Indian corporate
income taxes for the operation of most of our Indian facilities and a partial
taxable income deduction for profits derived from exported IT services under
Indian tax laws. As a result of these incentives, our operations have been
subject to relatively insignificant Indian tax liabilities. We have also
benefited from the liberalization and deregulation of the Indian economy by the
successive Indian governments since 1991, including the current Indian
government. Further, there are restrictive parts of Indian law that affect our
business, including the fact that we are generally required to obtain approval
from the Reserve Bank of India and/or the Ministry of Finance of the Government
of India to acquire companies organized outside India, and we are generally
required, subject to some exceptions, to obtain approval from relevant
government authorities in India in order to raise capital outside India.
Finally, the conversion of our equity shares into ADSs is governed by
guidelines issued by the Reserve Bank of India.  
    
    Legal Proceedings 21




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##### Table of Contents



In the ordinary course of business, we may from time to time become involved in
certain legal proceedings. As of the date of this Annual Report, we are not a
party to any pending material legal proceedings Ms. Jennifer Griffith, a former employee, has filed a lawsuit
against us and our former director, Mr. Phaneesh Murthy. The lawsuit has been
served on us. Management is reviewing the allegations. Based on its
present knowledge of facts, management estimates that the lawsuit will not have
material impact on our results of operation or financial position. Organizational structure We hold a majority interest in the following companies:  
    
    Progeon Limited.We established Progeon Limited in April 2002, under
the laws of India. We hold 100% of the equity share capital of
Progeon. The equity shares have been issued to us as per the terms of
the stock subscription agreement signed in April 2002, between us,
Citicorp International Finance Corporation (CIFC) and Progeon.
12,250,000 equity shares have been issued to us in each of April 2002
and March 2004 for an aggregate consideration of $5.3 million.
Pursuant to the agreement, CIFC has been issued 4,375,000 (0.0005%)
cumulative convertible preference shares in each of June 2002 and March
2004 for an aggregate consideration of $20.3 million.Unless earlier converted pursuant to an agreement in this behalf between us
and CIFC, these cumulative convertible preference shares shall automatically
be converted into equity shares upon the earlier of, (i) one year prior to
Progeons initial public offering (IPO) date , (ii) June 30, 2005, or (iii)
at the holders option, immediately upon the occurrence of any Liquidity
Event. The term Liquidity Event includes any of a decision of the Board of
Directors of the company to make an IPO, merger, reconstruction, capital
reorganization or other event which, in the sole opinion of the holder of the
convertible preference shares, amounts to an alteration in the capital
structure of the company. Each preference share is convertible into one
equity share, par value $0.20 each. Indian law requires redemption of
preference shares within a period of 20 years.
    
    Infosys Technologies Australia Pty LimitedIn January 2004 we acquired, for
cash, 100% of the equity in Expert Information Services Pty. Limited, Australia
for $14.5 million. The purchase consideration includes $3.4 million retained
in escrow for representations and warranties made by the selling shareholders.
The acquired company was renamed as Infosys Technologies (Australia) Pty.
Limited. There is a further contingent consideration payable to the sellers
subject to continued employment and meeting of defined operating and financial
performance parameters.
    
    Infosys Technologies (Shanghai) Co Limited.In October 2003, we
established a wholly-owned subsidiary, Infosys Technologies (Shanghai)
Co Limited (Infosys China) in Shanghai, China, to expand our business
operations in China. Our board of directors has approved the
investment of up to $5.0 million in the share capital of Infosys
Shanghai. We have invested $1.0 million in Infosys Shanghai as of
March 31, 2004.
    
    Infosys Consulting Inc.In April 2004, we established a wholly-owned
subsidiary, Infosys Consulting, Inc., incorporated in the State of
Texas to add high-end consulting capabilities to our Global Delivery
Model. Our board of directors has
approved the investment of up to $20.0 million in the share capital of
Infosys Consulting. Infosys Consulting has issued 10,000,000 $1.00
par value equity shares to us in exchange for an aggregate
consideration of $10,000,000. Property, plants and equipment Our principal campus, Infosys City is located at Electronics City, Bangalore,
India. Infosys City consists of approximately 3 million square feet of land and
1.59 million square feet of operational facilities. The campus features:  
    
    960,000 square feet of landscaped area;
    
    226 conference rooms;
    
    An Education and Research unit consisting of 115,000 square feet of facilities space, including a library, six class rooms
and six training rooms, computer-based learning and audio-visual aids, and over 70 faculty rooms;
    
    A Management Development Center consisting of 75,500 square
feet of facilities space, with 21 class rooms and 22 faculty rooms;
    
    A world-class conference room with the capacity to simultaneously video-conference 24 locations across the globe;
    
    Redundant power supply through captive generators;
    
    Leisure facilities, including cafeterias, tennis courts, a miniature golf course, a basketball court, a swimming pool, and a
health club; and
    
    A store selling Infosys branded merchandise and a grocery store. Our software development facilities are equipped with a world-class technology
infrastructure that includes networked workstations, servers, data
communication links and video-conferencing. We have eleven sales and marketing offices in the United States, four in India,
two in Germany, two in China and one each in Australia, Belgium, Canada,
France, Hong Kong, Japan, Netherlands, Sweden, Switzerland, Italy, the UAE and the
United Kingdom. We believe our facilities are optimally utilized. Appropriate
expansion plans are being planned and undertaken to meet our future growth. 22




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##### Table of Contents



Our most significant leased and owned properties are listed in the table below: Building
    
    LandLocation
    
    Approx. Sq. ft.
    
    Approx Sq. ft.
    
    OwnershipSoftware Development FacilitiesBangalore (Infosys City), Karnataka
    
    
    1,591,536
    
    
    
    2,687,826
    
    
    Leased308,406
    
    
    OwnedBangalore (B.T.M. Layout), Karnataka
    
    
    11,300
    
    
    
    
    
    
    LeasedBangalore (Koramangala), Karnataka
    
    
    22,000
    
    
    
    
    
    
    LeasedBangalore (Dickenson Road), Karnataka
    
    
    7,000
    
    
    
    
    
    
    OwnedBangalore (J.P. Nagar), Karnataka
    
    
    59,500
    
    
    
    
    
    
    LeasedBhubaneswar (Chandaka Industrial Park), Orissa
    
    
    189,000
    
    
    
    1,999,408
    
    
    LeasedChennai (Sholinganallur), Tamil Nadu
    
    
    421,317
    
    
    
    577,608
    
    
    LeasedHyderabad (Manikonda Village), Andhra Pradesh
    
    
    462,000
    
    
    
    2,178,000
    
    
    OwnedMangalore (Kottara), Karnataka
    
    
    198,000
    
    
    
    119,790
    
    
    OwnedMohali (S.A.S. Nagar Industrial Area), Chandigarh
    
    
    21,000
    
    
    
    
    
    
    LeasedMysore (Hebbal Electronic City), Karnataka
    
    
    518,450
    
    
    
    9,934,729
    
    
    LeasedPune (Hinjewadi), Maharashtra
    
    
    589,647
    
    
    
    1,089,004
    
    
    LeasedTrivandrum, Kerala
    
    
    22,000
    
    
    
    
    
    
    LeasedTOTAL
    
    
    4,112,750
    
    
    
    18,894,771Proposed Software Development FacilitiesBangalore (Infosys City), Karnataka
    
    
    452,000
    
    
    
    
    
    
    LeasedChennai (Sholiganallur), Tamil Nadu
    
    
    75,000
    
    
    
    
    
    
    LeasedChennai (Maraimalai nagar), Tamil Nadu
    
    
    125,000
    
    
    
    3,267,000
    
    
    LeasedHyderabad (Manikonda village), Andhra Pradesh
    
    
    154,000
    
    
    
    
    
    
    OwnedBhubaneshwar (Chandaka Industrial Area), Orissa
    
    
    195,000
    
    
    
    
    
    
    LeasedMysore (Hebbal Electronic City), Karnataka
    
    
    1,091,000
    
    
    
    
    
    
    LeasedPune (Campus 2, Hinjewadi), Maharashtra
    
    
    135,000
    
    
    
    4,883,076
    
    
    LeasedMasarykova, Czech Republic
    
    
    7,109
    
    
    
    
    
    
    LeasedShanghai,
China
    
    
    13,901
    
    
    
    
    
    
    LeasedTOTAL
    
    
    2,248,010
    
    
    
    8,150,076Proximity and Global Development FacilitiesBerkeley Heights, New Jersey
    
    
    20,535
    
    
    
    
    
    
    LeasedBoston, Massachusetts
    
    
    33,252
    
    
    
    
    
    
    LeasedChicago, Illinois
    
    
    13,965
    
    
    
    
    
    
    LeasedCroydon,
United Kingdom
    
    
    10,300
    
    
    
    
    
    
    LeasedFremont, California
    
    
    32,000
    
    
    
    
    
    
    LeasedPhoenix, Arizona
    
    
    4,704
    
    
    
    
    
    
    LeasedToronto, Ontario
    
    
    20,515
    
    
    
    
    
    
    LeasedSydney, Australia
    
    
    3,077
    
    
    
    
    
    
    LeasedMelbourne, Australia
    
    
    46,472
    
    
    
    
    
    
    LeasedTokyo, Japan
    
    
    6,894
    
    
    
    
    
    
    LeasedCharlotte, North Carolina
    
    
    11,057
    
    
    
    
    
    
    LeasedLondon,
United Kingdom
    
    
    1,200
    
    
    
    
    
    
    LeasedTOTAL
    
    
    203,971
    
    
    
    Disaster Recovery FacilityMauritius
    
    
    27,000
    
    
    
    
    
    
    LeasedOtherBangalore (J.P. Nagar Sarakki), Karnataka
    
    
    
    
    
    
    16,553
    
    
    OwnedBangalore (Adarsh Gardens), Karnataka
    
    
    78,700
    
    
    
    
    
    
    OwnedBhubaneswar (Jayadev Vihar Mouza), Orissa
    
    
    
    
    
    
    293,334
    
    
    LeasedMangalore (Kadri Kambala Crossroad), Karnataka
    
    
    5,100
    
    
    
    
    
    
    OwnedMumbai (Vallabhai Patel Road), Maharashtra
    
    
    13,620
    
    
    
    
    
    
    OwnedPune (Shanti Sadan Erandawane), Maharashtra
    
    
    3,300
    
    
    
    
    
    
    OwnedTOTAL
    
    
    100,720
    
    
    
    309,887
 23




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24




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Item 5. Operating and financial review and prospects Operating results This information is set forth under the caption Managements discussion and
analysis of financial condition and results of operations below and such
information is incorporated herein by reference. Liquidity and capital resources This information is set forth under the caption Managements discussion and
analysis of financial condition and results of operations below and such
information is hereby incorporated herein by reference. Research and development, patents and licenses, etc. We have committed and expect to continue to commit in the future, a material
portion of resources to research and development. Efforts towards research and
development are focused on refinement of methodologies, tools and techniques,
implementation of metrics, improvement in estimation process and the adoption
of new technologies. Our research and development expenses for the fiscal years ended March 31,
2004, 2003, and 2002 were $9.4 million, $2.9 million, and $3.1 million
respectively. Trend information Managements discussion and analysis of financial condition and results of
operations Investors are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties. When used in this discussion,
the words anticipate, believe, estimate, expect, intend, project,
seek, should, will and other similar expressions as they relate to us or
our business are intended to identify such forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise. Actual results, performances or achievements could differ materially
from those expressed or implied in such forward-looking statements. Factors
that could cause or contribute to such differences include those described
under the heading Risk Factors in this Annual Report. Readers are cautioned
not to place undue reliance on these forward-looking statements, as they speak
only as of the date of this Annual Report. The following discussion and
analysis should be read in conjunction with our financial statements included
herein and the notes thereto. Overview We are a leading global IT services company founded in 1981, and headquartered
in Bangalore, India. Progeon Limited (Progeon), Infosys Technologies
(Australia) Pty. Limited (Infosys Australia), Infosys Technologies (Shanghai)
Co. Limited (Infosys China) and Infosys Consulting Inc. (Infosys Consulting)
are our majority owned and controlled subsidiaries. We provide end-to-end
business solutions that leverage technology, thus enabling our clients to
enhance business performance. Our solutions span the entire software life
cycle, encompassing consulting, design, development, re-engineering,
maintenance, systems integration, package evaluation, and implementation. In
addition, we offer software products for the banking industry and we also offer
business process management services through Progeon, which typically include
offsite customer relationship management, finance and accounting,
administration and sales order processing functions. We completed our initial public offering of equity shares in India in 1993 and
our initial public offering of ADSs in the United States in 1999. In August
2003, on behalf of our stockholders, we completed a sponsored secondary
offering of ADSs in the United States. We did not receive any of the proceeds
from this sponsored secondary offering. Our revenues grew from $121.0 million in fiscal 1999 to $1,062.6 million in
fiscal 2004, representing a compound annual growth rate of 54.4%. Our net
income grew from $17.5 million, after a one-time stock compensation expense to
$270.3 million during the same period, representing a compound annual growth
rate of 72.9%. Our revenue growth is attributable to a number of factors,
including an increase in the size and number of projects for existing and new
clients. For fiscal 2004, 93.4% of our revenue came from repeat business,
which we define as revenue from a client who also contributed to our revenue
during the prior fiscal year. Between March 31, 1999 and March 31, 2004 our
total employees grew from approximately 3,800 to approximately 23,800
representing a compound annual growth rate of 44.3%. In addition,
Progeon had approximately 1,900 employees as of
March 31, 2004. We use a distributed project management methodology that we refer to as our
Global Delivery Model. We divide projects into components that we execute
simultaneously at client sites and at our geographically dispersed development
centers in India and around the world. Our Global Delivery Model allows us to
efficiently execute projects across time zones and development centers, thereby
optimizing our cost structure. We also offer a secure and redundant
infrastructure for all client data. We earned 71.2% of our total revenues from
North America, 19.2% from Europe, 1.4% from India and 8.2% from the rest of
the world for fiscal 2004. Our revenues are generated principally from IT services provided on either a
time-and-materials or a fixed-price, fixed-timeframe basis. Revenues from
services provided on a time-and-materials basis are recognized as the related
services are performed. Revenues from services provided on a fixed-price,
fixed-timeframe basis are recognized pursuant to the percentage of completion
method. Most of our client contracts, including those that are on a
fixed-price, fixed-timeframe, basis can be terminated with or without cause,
without penalties and with short notice periods between zero and 90 days. Since
we collect revenues on contracts as portions of the contracts are completed,
terminated contracts are only subject to collection for portions of the
contract completed through the time of termination. Our contracts do not
contain specific termination-related penalty provisions. In order to manage and
anticipate the risk of early or abrupt contract terminations, we monitor the
progress on all contracts and change orders according to their characteristics
and the circumstances in which they occur. This includes a focused review of
our ability and our clients ability to perform on the contract, a review of
extraordinary conditions that may lead to a contract termination, as well as
historical client performance considerations. Since we also bear the risk of
cost overruns and inflation with respect to fixed-price, fixed-timeframe
projects, our operating results could be adversely affected by inaccurate
estimates of contract completion costs and dates, including wage inflation
rates and currency exchange rates that may affect cost projections. Losses on
contracts, if any, are provided for in full in the period when determined.
Although we revise our project completion estimates from time to time, such 25




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revisions have not, to date, had a material adverse effect on our operating
results or financial condition. We also generate revenue from software
application products, including banking software. Such software products
represented 2.8% of our total revenues for fiscal 2004. We have also experienced pricing pressure from our clients, especially during
the recent economic downturn, which has adversely affected our revenues,
margins and gross profits. For example, clients often expect that as we do more
business with them, they will receive volume discounts. Additionally, clients
may ask for fixed-price arrangements or reduced rates. We attempt to use
fixed-price agreements for work where the specifications are complete, so
individual rates are not negotiated. We are also adding new services at higher
price points and where more value is added for our clients. Our cost of revenues primarily consists of salary and other compensation
expenses, depreciation, overseas travel expenses, cost of software purchased
for internal use, subcontracting costs, data communications expenses and
computer maintenance. We depreciate our personal computers and servers over two
years and mainframe computers over three years. Third party software is written
off over the estimated useful life. Cost of revenues also includes amortization
of deferred stock compensation expense arising from option grants relating to
the 1994 stock option plan which have been accounted for under the intrinsic
value method. We typically assume full project management responsibility for each project
that we undertake. Approximately 68.1% of the total billed person months during
fiscal 2004 was performed at our global development centers in India, and the
balance of the work was performed at client sites and global development
centers located outside India. The proportion of work performed at our
facilities and at client sites varies from quarter to quarter. We charge higher
rates and incur higher compensation and other expenses for work performed at
client sites and global development centers located outside India. Services
performed at a client site or global development centers located outside India
typically generate higher revenues per-capita at a lower gross margin than the
same services performed at our facilities in India. As a result, our total
revenues, cost of revenues and gross profit in absolute terms and as a
percentage of revenues fluctuate from quarter to quarter based on the
proportion of work performed outside India. Additionally, any increase in work
performed at client sites or global development centers located outside India
can decrease our gross profits. We hire subcontractors on a limited basis from
time to time for our own IT development needs, and we do not perform
subcontracted work for other IT service providers. For fiscal 2004
approximately 2.3% of our cost of revenues was attributable to subcontracting
costs. We do not anticipate that our subcontracting needs will increase
significantly as we expand our business. Revenues and gross profits are also affected by employee utilization rates. We
define employee utilization as the proportion of total billed person months to
total available person months excluding support personnel. We manage
utilization by monitoring project requirements and timetables. The number of
consultants assigned to a project will vary according to size, complexity,
duration, and demands of the project. An unanticipated termination of a
significant project could also cause us to experience lower IT professional
utilization resulting in a higher than expected number of unassigned IT
professionals. In addition, we do not fully utilize our IT professionals when
they are enrolled in training programs, particularly our 14-week training
course for new employees. Selling and marketing expenses represent 5.0%, 7.4% and 7.2% of total revenues
for fiscal 2002, 2003 and 2004. Our selling and marketing expenses primarily
consist of expenses relating to salaries of sales and marketing personnel,
travel, brand building, sales and marketing offices and telecommunication. We
have recently decided to increase our selling and marketing expenses as a
percentage of revenues to increase brand awareness among target clients and
promote client loyalty and repeat business among existing clients. During
fiscal 2003, we redeployed certain employees from our delivery function to
sales and marketing. General and administrative expenses represent 8.1%, 7.7%
and 7.7% of total revenues for fiscal 2002, 2003 and 2004. Our general and
administrative expenses comprise of expenses relating to salaries of senior
management and other support personnel, travel expenses, legal and other
professional fees, telecommunications, utilities and other miscellaneous
administrative costs. Amortization of stock compensation expense consists of costs relating to option
grants under the 1994 stock option plan which have not been included in cost of
revenues. These costs have been accounted under the intrinsic value method. Our amortization of intangible assets consists of non-cash expenses arising
from the acquisition of certain intellectual property rights and identified
intangibles arising from purchase price allocations for business combinations.
We amortize intangible assets over their estimated useful lives. Other income includes interest income, income from mutual fund investments,
foreign currency exchange gains/losses including marked to market gain/losses
on foreign exchange forward contracts, and provisions for losses on
investments. Our functional currency is the Indian rupee. The functional currency for
Infosys Australia, Infosys China and Infosys Consulting is the respective
local currency. The financial statements included in this Annual Report are
reported in U.S. dollars. The translation of rupees to dollars is performed for
the balance sheet accounts using the exchange rate in effect at the balance
sheet date, and for revenue and expense accounts using a monthly average
exchange rate for the respective periods. The gains or losses resulting from
such translation are reported as other comprehensive income. Generally, Indian law requires residents of India to repatriate any foreign
currency earnings to India to control the exchange of foreign currency. More
specifically, Section 8 of the Foreign Exchange Management Act, or FEMA,
requires an Indian company to take all reasonable steps to realize and
repatriate into India all foreign exchange earned by the company outside India,
within such time periods and in the manner as specified by the Reserve Bank of
India, or RBI. The RBI has promulgated guidelines that require the company to
repatriate any realized foreign exchange back to India, and either:  
    
    sell it to an authorized dealer for rupees within seven days from the date of receipt of the foreign exchange;
    
    retain it in a foreign currency account such as an Exchange Earners Foreign Currency; or EEFC, account with an authorized dealer; or
    
    use it for discharge of debt or liabilities denominated in foreign exchange. We typically collect our earnings and pay expenses denominated in foreign
currencies using a dedicated foreign currency account located in the local
country of operation. In order to do this, we are required to, and have
obtained, special approval from the RBI to maintain a foreign currency account
in overseas countries like the United States. However, the RBI approval is
subject to limitations, including a requirement that we repatriate all foreign
currency in the account back to India within a reasonable time, except an
amount equal to our local monthly operational cost of our overseas branch and
personnel. We currently pay such expenses and repatriate the remainder of the
foreign currency to 26




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India on a regular basis. We have the option to retain those in an EEFC account
(foreign currency denominated) or an Indian-rupee-denominated account. We
convert substantially all of our foreign currency to rupees to fund operations
and expansion activities in India. Our failure to comply with these regulations could result in RBI enforcement
actions against us. Income taxes Our net income earned from providing services outside India is subject to tax
in the country where we perform the work. Most of our tax paid in countries
other than India can be applied as a credit against our Indian tax liability to
the extent that the same income is subject to tax in India. Currently, we benefit from the tax holidays the Government of India gives to
the export of IT services from specially designated software technology parks
in India. As a result of these incentives, our operations have been subject to
relatively low tax liabilities. These tax incentives include a 10-year tax
holiday from Indian corporate income taxes for the operation of most of our
Indian facilities and a partial taxable income deduction for profits derived
from exported IT services. We can use either of these two tax incentives. As a
result of these two tax exemptions, a substantial portion of our pre-tax income
has not been subject to significant tax in recent years. These tax incentives
resulted in a decrease in our income tax expense of
$48.7 million, $50.6 million and $78.3 million for fiscal 2002, 2003 and 2004 compared to the
effective tax rates that we estimate would have applied if these incentives had
not been available. The Finance Act, 2000 phases out the ten-year tax holiday over a ten-year
period from fiscal 2000 through fiscal 2009. Accordingly, facilities set up in
India on or before March 31, 2000 have a ten-year tax holiday, new facilities
set up on or before March 31, 2001 have a nine-year tax holiday and so forth
until March 31, 2009. After March 31, 2009, the tax holiday will no longer be
available to new facilities. Our current tax holidays expire in stages by 2009.
For companies opting for the partial taxable income deduction for profits
derived from exported IT services, the Finance Act, 2000 phases out the
deduction over five years beginning April 1, 2000. When our tax holiday and taxable income deduction expire or terminate, our tax
expense will materially increase, reducing our profitability. As a result of
such tax incentives, our effective tax rate for fiscal 2004 was 15.8% and our
Indian statutory tax rate for the same period was 35.9%. Results of operations The following table sets forth certain financial information as a percentage of
revenues: Fiscal2002
    
    2003
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues including amortization of stock compensation expenses
    
    
    53.8
    %
    
    
    55.4
    %
    
    
    56.7
    %Gross profit
    
    
    46.2
    %
    
    
    44.6
    %
    
    
    43.3
    %Operating Expenses:Selling and marketing expenses
    
    
    5.0
    %
    
    
    7.4
    %
    
    
    7.2
    %General and administrative expenses
    
    
    8.1
    %
    
    
    7.7
    %
    
    
    7.7
    %Amortization of stock compensation expenses
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    0.1
    %Amortization of intangible assets
    
    
    
    
    
    
    0.3
    %
    
    
    0.7
    %Total operating expenses
    
    
    13.4
    %
    
    
    15.7
    %
    
    
    15.7
    %Operating income
    
    
    32.8
    %
    
    
    28.9
    %
    
    
    27.6
    %Other income, net
    
    
    2.5
    %
    
    
    2.4
    %
    
    
    2.6
    %Income before income taxes
    
    
    35.3
    %
    
    
    31.3
    %
    
    
    30.2
    %Provision for income taxes
    
    
    5.1
    %
    
    
    5.5
    %
    
    
    4.8
    %Net income
    
    
    30.2
    %
    
    
    25.8
    %
    
    
    25.4
    %
 Results for fiscal 2004 compared to fiscal 2003 Revenues.Our revenues were $1,062.6 million in fiscal 2004, representing an
increase of $308.8 million, or 41.0% over revenues of $753.8 million for fiscal
2003. Revenues continued to increase in most segments of our services. The
increase in revenues was attributable, in part, to an increase in business from
existing clients and from certain new clients, particularly in industries such
as financial services, telecom, utilities and logistics. Our financial services
clients comprised 36.6% and 37.6% of revenues for each of fiscal 2004 and 2003,
while our clients in the telecom industry comprised 16.6% and 15.2% of revenues
for each of fiscal 2004 and 2003. Sales of our software products represented
2.8% of our total revenues for fiscal 2004, as compared to 4.6% for fiscal
2003. Revenues from services represented 97.2% of total revenues for fiscal
2004, as compared to 95.4% for fiscal 2003. Revenues from fixed-price,
fixed-timeframe contracts and from time-and-materials contracts represented
33.7% and 66.3% of total services revenues for fiscal 2004, as compared to
36.7% and 63.3% for fiscal 2003. Revenues from North America, Europe, India and
the rest of the world represented 71.2%, 19.2%, 1.4% and 8.2% of total revenues
for fiscal 2004 as compared to 73.0%, 17.7%, 2.1% and 7.2% for fiscal 2003. During fiscal 2004, the total
billed person months for our services other than business process
management grew by 49.5% as compared to 38.6% in fiscal
2003. The onsite and offshore volume growth were 39.3% and 55.1%
during fiscal 2004 as compared to 52.1% and 32.0% in fiscal 2003.
This growth in fiscal 2004 was offset by a pricing decline of
5.0% in US
dollar terms consisting of
2.9% decline
in onsite rates and
a 2.6% decline
in offshore rates. During fiscal 2003, the pricing decline of 0.8% in
US dollar terms consisted of a 4.7% decline in offshore rates and a
2.5% decline in onsite rates. Cost of revenues.Our cost of revenues was $602.3 million for fiscal 2004,
representing an increase of $184.9 million, or 44.3%, over our cost of revenues
of $417.4 million for fiscal 2003. Cost of revenues represented 56.7% and 55.4%
of total revenues for fiscal 2004 and 2003. This increase in our cost of
revenues was partially attributable to an increase of approximately
$163.6 million in personnel costs due to new hires and
compensation review as well as a one-time incentive payment to
employees on the company achieving a billion dollars in revenues, $8.3 million in depreciation expenses,
$4.1 million in communication expenses, $3.7 million in
overseas travel expenses, $2.6 million in software purchased for own
use, and $1.4 million in accruals for post sales client support offset by a
decrease of approximately $1.9 million in subcontractor costs. Cost of
revenues includes amortization of stock compensation expense of $1.7 million
and $2.8 million for fiscal 2004 and 2003 respectively. Gross profit.As a result of the foregoing, our gross profit was $460.3 million
for fiscal 2004, representing an increase of $123.9 million, or 36.8%, over our
gross profit of $336.4 million for fiscal 2003. As a percentage of revenues,
gross profit decreased to 43.3% for fiscal 2004 from 44.6% for fiscal 2003. This
decrease was attributable to a 44.3% increase in cost of revenues from fiscal
2003 to fiscal 2004, offset by a 41.0% increase in revenues in the same period. 27




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Selling and marketing expenses.We incurred selling and marketing expenses of
$76.8 million in fiscal 2004, representing an increase of $21.2 million, or
38.1%, over the $55.6 million expended in fiscal 2003. As a percentage of total
revenues, selling and marketing expenses were 7.2% and 7.4% for fiscal 2004 and
2003. The number of our sales and marketing personnel increased to 308 as of
March 31, 2004, from 280 as of March 31, 2003. The increase in selling and
marketing expenses is mainly attributable to increases of approximately $17.9
million in personnel costs of selling and marketing employees
including a one-time incentive payment to employees on the company
achieving one billion dollars in revenues, $2.3 million on
rental expenses, and $1.5 million for brand building activities offset by a
decrease of $0.9 million in professional charges. General and administrative expenses.Our general and administrative expenses
were $82.2 million for fiscal 2004, representing an increase of $24.4 million,
or 42.2%, over general and administrative expenses of $57.8 million for fiscal
2003. General and administrative expenses were 7.7% of total revenues for
fiscal 2004 and 2003. The increase in general and administrative expenses was
primarily attributable to increases of approximately $5.7 million for personnel
costs including a one-time incentive payment to employees on the company
achieving one billion dollars in revenues, $4.7 million in insurance charges, $2.3 million in office maintenance
expenses, $2.2 million for telecommunications, $1.9 million in power and fuel
charges and $1.9 million in donations to charities. There has also been an
increase of approximately $3.3 million in the provision for doubtful accounts
receivable. The factors which affect the fluctuations in our provisions for
bad debts and write offs of uncollectible accounts include the financial health
and economic environment of our clients. We specifically identify the credit
loss and then make the provision. No one client has contributed significantly
to a loss, and we have had no significant changes in our collection policies or
payment terms. Amortization of stock compensation expenses.Amortization of stock compensation
expenses was $1.2 million and $2.0 million for fiscal 2004 and 2003. Amortization of intangible assets.Amortization of intangible assets was $7.0
million and $2.4 million for fiscal 2004 and 2003. This relates to
amortization of certain intellectual property rights we acquired through
purchases and licenses of software during fiscal 2003. The amortization for
fiscal 2004 also includes $0.3 million being amortization of the identified
intangible of customer contracts arising on the allocation of purchase price of
Expert Information Services Pty. Limited, Australia. In fiscal 2003, we acquired the intellectual property rights to the Trade IQ
product from IQ Financial Systems Inc., USA for its banking business unit. The
$3.5 million consideration was recorded as an intangible asset and amortized
over two years being our initial estimate of the useful life. In the same
fiscal year, we also entered into an agreement for transferring the
intellectual property rights to a commercial software application product used
in the design of high performance structural systems. We are required to pay
the committed consideration of $5.0 million within ten years of the contract
date. The ownership of intellectual property in the product transfers to us on
payment of the consideration. The committed consideration of $5 million was
recorded as an intangible asset and was being amortized over our estimate of
the useful life, which was initially 5 years. During fiscal 2004, we revised
our estimates of the remaining useful lives of both the intangible assets. The
additional amortization for fiscal 2004 due to the revisions in the estimates
of remaining useful lives was $3.6 million. The recorded values of both these
intangible assets have been completely amortized as of March 31, 2004. Operating income.Our
operating income was $293.1 million for fiscal 2004
representing an increase of $74.5 million, or 34.1%, over our operating income
of $218.6 million for fiscal 2003. As a percentage of revenues, operating
income decreased to 27.6% for fiscal 2004 from 28.9% for fiscal 2003. Other income.Other income was $28.0 million for fiscal 2004 representing an
increase of $10.0 million, or 55.6%, over other income of $18.0 million for
fiscal 2003. The increase is mainly due to increases in interest and dividend
income, foreign currency exchange gains and decrease in write-downs to
investments. Other income includes interest and dividend income of $22.4
million and $16.7 million for fiscal 2004 and 2003. This increase is on
account of the increased level of cash invested. Other income also includes
net foreign currency exchange gains of $7.5 million and $4.2 million for fiscal
2004 and 2003, the increase being mainly attributable to gains on forward
contracts marked to market. The average exchange rate
between the rupee and the US dollar was Rs 45.78 per US dollar in
fiscal 2004 compared to Rs 48.36 in fiscal 2003 resulting in an
average appreciation of 5.3% in the value of the rupee against the
US dollar. We hedge our foreign exchange risk by pro-actively
hedging our foreign currency denominated receivables. As of
March 31, 2004, we had $149.0 million of forward cover. For
fiscal 2004, US dollar denominated revenues represented 84.9% of
total revenues. During fiscal 2004, the US dollar depreciated substantially against other
currencies. The closing exchange rate between the rupee and the US
dollar was Rs 43.40 per US dollar on March 31, 2004 compared
to Rs 47.53 as of March 31, 2003 resulting in an appreciation of
8.7% in the value of the rupee against the US dollar. For fiscal 2004
this
appreciation resulted in transaction and translation losses of
approximately $9.9 million which have been offset by gains of
$17.4 million on foreign exchange forward contracts. In fiscal 2004 and 2003, we provided for write downs to our investments in the
aggregate amount of approximately $2.1 million and $3.2 million. In fiscal
2003, the write downs included approximately $1.5 million for Asia Net Media
(BVI) Limited, $0.2 million for Jasdic Park Company, $1.5 million for Workadia
Inc., and other miscellaneous investments. In fiscal 2004, the write-downs
included approximately $1.5 million towards investment in CiDRA Corporation,
$0.4 million towards investment in Stratify Inc, and other miscellaneous
investments. These write-downs were required due to the non-temporary impact
of adverse market conditions on these entities business models and
contemporary transactions on the securities of the entities which have been
indicative of their current fair value. Provision for income taxes.Our provision for income taxes was $50.8 million
for fiscal 2004, representing an increase of $9.0 million, or 21.5%, over our
provision for income taxes of $41.8 million for fiscal 2003. Our effective tax
rate decreased to 15.8% for fiscal 2004 from 17.7% for fiscal 2003. The
decrease is primarily attributable to a one-time tax on 10% of the profits
generated by our operations located in software technology parks in fiscal
2003. These operations were subject to a 100% tax holiday in fiscal 2004. Net income.Our net income was $270.3 million for fiscal 2004, representing an
increase of $75.4 million, or 38.7%, over our net income of $194.9 million for
fiscal 2003. As a percentage of total revenues, net income decreased to 25.4%
for fiscal 2004 from 25.8% for fiscal 2003. Results for fiscal 2003 compared to fiscal 2002 Revenues.Our revenues were $753.8 million in fiscal 2003, representing an
increase of $208.8 million, or 38.3% over revenues of $545 million for fiscal
2002. This increase was attributable to an increase in billed persons
months of 44.4%, offset by a 6.1% decrease in prices at which
contracts were executed. Revenues continued to increase in most segments of our services. The
increase in revenues was attributable, in part, to an increase in business from
existing clients and from certain new clients, particularly in the financial
services industries and to a lesser extent, from clients in other industries,
including utilities and logistics. Our financial services clients comprised
37.6% and 36.6% of revenues for each of fiscal 2003 and 2002, while our clients
in other industries comprised 19.4% and 18.3% of revenues for each of fiscal
2003 and 2002. Sales of our software products represented 4.6% of our total
revenues for fiscal 2003, as compared to 4.0% for fiscal 2002. Revenues from
services represented 95.4% of total revenues for fiscal 2003, as compared to
96% for fiscal 2002. Revenues from fixed-price, fixed-timeframe contracts and
from time-and-materials contracts represented 36.7% and 63.3% of total services
revenues for fiscal 2003, as compared to 31.6% and 68.4% for fiscal 2002.
Revenues from North America, Europe, India and the rest of the world
represented 73.0%, 17.7%, 2.1% and 7.2% of total revenues for fiscal 2003 as
compared to 71.2%, 19.5%, 2.0% and 7.3% for fiscal 2002. Cost of revenues.Our cost of revenues was $417.4 million for fiscal 2003,
representing an increase of $124.4 million, or 42.5%, over our cost of revenues
of $293.0 million for fiscal 2002. Cost of revenues represented 55.4% and 53.8%
of total revenues for fiscal 2003 and 2002. This 28




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increase in our cost of revenues was partially attributable to an increase of
approximately $10.7 million in compensation paid to our Indian employees
working in the United States to comply with new immigration regulations
effective July 2001; compensation of new hires of $18.9 million and increased
personnel costs of approximately $65.4 million; overseas travel costs of
approximately $10.6 million; software purchased for own use approximately $4.4
million; depreciation expenses of approximately $3.4 million and professional
charges of approximately $13.6 million paid to sub-contractors. This increase
was offset by a decrease of $2.4 million in our telecommunication expenses and
$2.1 million in the provision for post-sales client support. Cost of revenues
includes amortization of stock compensation expense of $2.8 million and $3.0
million for fiscal 2003 and 2002 respectively. Gross profit.As a result of the foregoing, our gross profit was $336.4 million
for fiscal 2003, representing an increase of $84.4 million, or 33.5%, over our
gross profit of $252.0 million for fiscal 2002. As a percentage of revenues,
gross profit decreased to 44.6% for fiscal 2003 from 46.2% for fiscal 2002.
This decrease was attributable to a 42.5% increase in cost of revenues from
fiscal 2002 to fiscal 2003, offset by a 38.3% increase in revenues in the same
period. As a result of the continued
uncertainty and weakness in the global economic and political
environment, companies continued to seek to outsource their IT
spending offshore to companies like ours and therefore our client
base and revenues continued to grow. However, we continued to
experience erosion in our gross profit with significant pricing
pressures in our core service offerings, as a result of clients
needs to reduce their costs and the increased competitive environment
among IT companies. In response to the continued pricing pressures
and increased competition for outsourcing clients, we continued to focus on
expanding our service offerings into areas with higher and
sustainable price margins, on managing our cost structure, and on
anticipating and correcting for decreased demand, and skill and pay
level imbalances in our personnel. Our immediate measures included
increased management of compensation expenses through headcount
management and variable compensation plans, as well as increasing
utilization rates or reducing non-deployed or non-billable IT
professionals. We also reduced infrastructure and corporate expenses
through deferral of certain non-critical expansion initiatives and
reductions in our third party vendor pricing plans. Selling and marketing expenses.We incurred selling and marketing expenses of
$55.6 million in fiscal 2003, representing an increase of $28.5 million, or
105.2%, over the $27.1 million expended in fiscal 2002. As a percentage of
total revenues, selling and marketing expenses were 7.4% and 5.0% for fiscal
2003 and 2002. The number of our sales offices increased to 30 as of March 31,
2003 from 28 as of March 31, 2002, and the number of our sales and marketing
personnel increased to 280 as of March 31, 2003, from 143 as of March 31,
2002. This increase in personnel is attributable to the reclassification during
fiscal 2003 of 107 account managers and business support managers, which was
previously reported as cost of revenues into the sales and marketing group, and
30 new hires. Previously, the reclassified account managers primarily performed
delivery support and account management functions. They were billable resources
during this period and their costs were included in cost of revenues. Since the
beginning of the current fiscal year, the employees have been responsible for
account management and sales. This involves creating new opportunities with
clients, preparation of proposals, negotiation of contracts and collection of
accounts receivables. The resources are now in a support function and are no
longer billable. Accordingly, we have reclassified these expenses effective
April 1, 2002. This re-classification has resulted in an increase in our
selling and marketing expenses of approximately $8.8 million. The increase in
selling and marketing expenses is also attributable to increases of
approximately $9.4 million in personnel costs of selling and marketing
employees, $4.3 million on travel, $3.3 million for brand building activities
and $1.0 million on professional fees. General and administrative expenses.Our general and administrative expenses
were $57.8 million for fiscal 2003, representing an increase of $13.5 million,
or 30.5%, over general and administrative expenses of $44.3 million for fiscal
2002. General and administrative expenses were 7.7% and 8.1% of total revenues
for fiscal 2003 and 2002. This increase in general and administrative expenses
was primarily attributable to increases of approximately $3.1 million for
compensation costs, $4.6 million in professional fees, $2.0 million for
telecommunications, $1.3 million in office maintenance costs, $0.8 million in
power and fuel charges and $1.0 million for insurance expenses. The above
increases have been offset by a reduction in the provision for doubtful
accounts receivable of $2.6 million. The factors which affect the fluctuations
in our provisions for bad debts and write offs of uncollectible accounts
include the financial health and economic environment of our clients. We
specifically identify the credit loss and then make the provision. No one
client has contributed significantly to a loss, and we have had no significant
changes in our collection policies or payment terms. Amortization of stock compensation expenses.Amortization of stock compensation
expenses was $2.0 million for both fiscal 2003 and 2002. Amortization of intangible assets.Amortization of intangible assets was $2.4
million for fiscal 2003, representing amortization of certain intellectual
property rights we acquired through purchases and licenses of software during
fiscal 2003. We recorded no amortization of intangible assets in fiscal 2002. Operating income.Our operating income was $218.6 million for fiscal 2003
representing an increase of $40.1 million, or 22.5%, over our operating income
of $178.5 million for fiscal 2002. As a percentage of revenues, operating
income decreased to 28.9% for fiscal 2003 from 32.8% for fiscal 2002. Other income.Other income was $18.0 million for fiscal 2003 representing an
increase of $4.1 million, or 29.5%, over other income of $13.9 million for
fiscal 2002. Other income includes interest income of $16.7 million and $10.4
million for fiscal 2003 and 2002. Other income also includes foreign currency
exchange gains of $4.2 million and $2.7 million for fiscal 2003 and 2002. The
increase in other income was offset by a provision for loss on investments of
$3.2 million for fiscal 2003. In fiscal 2003, we provided for write downs to our investments in the aggregate
amount of approximately $3.2 million. These included approximately $1.5 million
for Asia Net Media (BVI) Limited, $0.2 million for Jasdic Park Company, $1.5
million for Workadia Inc., and other miscellaneous investments. These
write-downs were required due to the non-temporary impact of adverse market
conditions on these entities business models and their inability to continue
operations. In addition, these entities are currently in liquidation. It is
unlikely that we will recover any significant additional funds on their
liquidation. Provision for income taxes.Our provision for income taxes was $41.8 million
for fiscal 2003 , representing an increase of $13.9 million, or 49.8%, over our
provision for income taxes of $27.9 million for fiscal 2002. Our effective tax
rate increased to 17.7% for fiscal 2003 from 14.5% for fiscal 2002. The
increase is primarily attributable to a one-time tax on 10% of the profits
generated by our operations located in software technology parks in fiscal
2003. These operations were subject to a 100% tax holiday in the previous
fiscal year. Net income.Our net income was $194.9 million for fiscal 2003, representing an
increase of $30.4 million, or 18.5%, over our net income of $164.5 million for
fiscal 2002. As a percentage of total revenues, net income decreased to 25.8%
for fiscal 2003 from 30.2% for fiscal 2002. Liquidity and capital resources Our growth has been financed largely by cash generated from operations and, to
a lesser extent, from the proceeds from the sale of equity. In 1993, we raised
approximately $4.4 million in gross aggregate proceeds from our initial public
offering of equity shares in India. In 1994, we raised an additional $7.7
million through private placements of our equity shares with foreign
institutional investors, mutual funds, Indian domestic financial institutions
and corporations. On March 11, 1999 we raised $70.4 million in gross aggregate
proceeds from our initial U.S. public offering of ADSs. As of March 31, 2004 we
had $444.6 million in cash and cash equivalents,
$217.6 million invested in liquid mutual fund units, $719.8
million in working capital and no outstanding bank borrowings or long term
debt. We believe that a sustained reduction in IT spending, a longer sales
cycle, and a continued economic downturn 29




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in any of the various industry segments in which we operate, could result in a
decline in our revenue and negatively impact our liquidity and cash resources. Net cash provided by operating activities was $373.5 million and $211.2 million
for fiscal 2004 and 2003. Net cash provided by operations consisted primarily
of net income and increases in other accrued liabilities and provision for
income taxes, offset in part by an increase in accounts receivable. Accounts
receivable as a percentage of revenues represented 14.1%
and 14.5% as of March 31, 2004 and 2003. Prepaid expenses and other current assets increased by $8.1 million during
fiscal 2004, as compared to a $5.2 million increase during fiscal 2003. The
increase in fiscal 2004 is primarily due to marked to market gains on forward
foreign exchange contracts. There has been an increase in unbilled revenues of
$0.7 million in fiscal 2004. In fiscal 2003, there was an increase in unbilled
revenue of $15.4 million. Unbilled revenues represent revenues that are
recognized but not yet invoiced. The decrease in unearned revenues was
negligible during fiscal 2004. We had an increase of $9.5 million in unearned
revenues during fiscal 2003. Unearned revenue resulted primarily from advance
client billings on fixed-price, fixed-timeframe contracts for which related
efforts have not been expended. Unbilled and unearned revenue arise from our
fixed-price, fixed-timeframe contracts and the changes in unbilled and unearned
revenue is due to the decrease in the proportion of fixed-price,
fixed-timeframe contracts as a percentage of total services revenues to 33.7%
for fiscal 2004 from 36.7% for fiscal 2003. Other accrued liabilities
increased by $44.4 million and $22.8 million during
fiscal 2004 and 2003, primarily due to increases in our accrued employee
compensation including provision for a one-time incentive of approximately
$23.0 million on the company achieving one billion dollars in
revenues, withholding taxes payable and provisions for expenses. Net cash used in investing activities was $304.7 million and $53.9 million for
fiscal 2004 and 2003. Net cash used in investing activities, relating to our
acquisition of additional property, plant and equipment for fiscal 2004 and
2003, was $93.2 million and $43.2 million. During fiscal 2004, we invested
$10.4 million for the acquisition of Expert Information Services Pty. Limited,
Australia. In fiscal 2004, we also invested approximately $205.3 million in
liquid mutual fund units. We provide various loans primarily to employees in India who are not executive
officers or directors, including car loans, home loans, personal computer
loans, telephone loans, medical loans, marriage loans, personal loans, salary
advances, education loans and loans for rental deposits. All of these loans,
except for the housing and car loans, are available to all of our employees,
who are not executive officers or directors, in India. Housing and car loans
are available only to middle level managers, senior managers and non-executive
officers. The loan program is designed to assist our employees and increase
employee satisfaction. These loans are generally collateralized against the
assets of the loan and the terms of the loans range from 1 to 100 months. In
the aggregate, these loans represented approximately $27.3 million and $28.7
million as of March 31, 2004 and 2003. During fiscal 2004, we discontinued
fresh disbursements under several of these loan schemes including housing and
car loans leading to a decrease of $4.0 million in loans to employees during
fiscal 2004. Net cash used in financing activities for fiscal 2004 was $9.8 million. This
is primarily comprised of $27.1 million of cash raised by issuance of common stock
on exercise of stock options by employees, $10.3 million in issuance of
preferred stock by Progeon, our subsidiary, offset by dividend payments of
$47.2 million. Net cash used in financing activities for fiscal 2003 was $21.1
million, which is primarily comprised of $10.0 million of cash raised by the
issuance of preferred stock by our subsidiary, offset by dividend payments of
$33.9 million. As of March 31, 2004, we had contractual commitments for
capital expenditures of $46.3 million. These commitments include approximately
$37.3 million in domestic purchases and $ 9.0 million in imports and overseas
commitments for hardware, supplies and services to support our operations
generally, which we expect to be completed significantly by September 2004. Our Board of Directors, in their meeting on April 13, 2004, has proposed a
final dividend of Rs. 15 per equity share and a special one-time
dividend of Rs. 100 per equity share. The proposal is subject to
the approval of members at the Annual General Meeting to be held on June 12,
2004 and, if approved, would result in a cash outflow of approximately $199.2
million. We have provided information to the public regarding forward-looking guidance
on our business operations. This information is consistent with market
expectations. Reconciliation between Indian and U.S. GAAP All financial information in this annual report is presented in U.S. GAAP,
although we also report for Indian statutory purposes under Indian GAAP. There
are material differences between financial statements prepared in Indian and
U.S. GAAP. The material differences that affect us are primarily attributable
to U.S. GAAP requirements for the:  
    
    accounting for stock-based compensation;
    
    deferred taxes;
    
    amortization of intangible assets;
    
    provision for investments acquired through a non-cash transaction; and
    
    accounting for foreign exchange forward contracts Reconciliation of net income Year ended March 31,2002
    
    2003
    
    2004Net profit as per Indian GAAP
    
    $
    169,102,534
    
    
    $
    197,351,462
    
    
    $
    272,293,258Amortization of stock compensation expense
    
    
    (5,009,772
    )
    
    
    (4,803,534
    )
    
    
    (2,817,066
    )Forward
contracts  marked to market
    
    
    
    
    
    
    513,269
    
    
    
    3,505,670Deferred taxes
    
    
    373,547
    
    
    
    (191,156
    )
    
    
    (1,105,142
    )Provision for investments
    
    
    
    
    
    
    2,000,000
    
    
    
    Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    (260,723
    )Others
    
    
    
    
    
    
    
    
    
    
    (1,325,697
    )Net income as per U.S. GAAP
    
    $
    164,466,309
    
    
    $
    194,870,041
    
    
    $
    270,290,300
 30




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Quantitative and qualitative disclosures about market risk General Market risk is the risk that changes in the price of a financial instrument
will impact future earnings or cash flow. The value of a financial instrument
may change as a result of changes in the interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market risk sensitive instruments. Market risk is attributable to all
market sensitive financial instruments including foreign currency receivables
and payables. Our exposure to market risk is a function of our borrowing activities and
revenue generating activities in foreign currency. The objective of market risk
management is to avoid excessive exposure of our earnings and equity to loss.
Most of our exposure to market risk arises out of our foreign currency accounts
receivable. Risk management procedures We manage market risk through treasury operations. Treasury operations
objectives and policies are approved by senior management and our audit
committee. The activities of treasury operations include management of cash
resources, implementing hedging strategies for foreign currency exposures,
borrowing strategies, if any, and ensuring compliance with market risk limits
and policies. Components of market risk Exchange rate risk.Our exposure to market risk arises principally from
exchange rate risk. Even though our functional currency is the Indian rupee, we
transact a major portion of our business in foreign currencies, particularly
the U.S. dollar. The exchange rate between the rupee and the dollar has changed
substantially in recent years and may fluctuate substantially in the future.
Consequently, the results of our operations are adversely affected as the rupee
appreciates against dollar. For fiscal 2004, 2003, and 2002 our U.S. dollar
denominated revenues represented 84.9%, 89.0%, and 87.7% of our total revenues.
Our exchange rate risk primarily arises from our foreign currency revenues,
receivables and payables. We have sought to reduce the effect of exchange rate
fluctuations on our operating results by purchasing foreign exchange forward
contracts to cover a portion of outstanding accounts receivable. As of March
31, 2004 and 2003, we had outstanding forward contracts in the amount of $149.0
million and $88.0 million. These contracts typically mature within one to
twelve months, must be settled on the day of maturity and may be cancelled
subject to the payment of any gains or losses in the difference between the
contract exchange rate and the market exchange rate on the date of
cancellation. We use these instruments only as a hedging mechanism and not for
speculative purposes. We may not purchase adequate contracts to insulate
ourselves from foreign exchange currency risks. The policies of the
Reserve Bank of India may change from time to time which may limit
our ability to hedge our foreign currency exposures adequately. In addition, any such contracts
may not perform adequately as a hedging mechanism. We may, in the future, adopt
more active hedging policies, and have done so in the past. Fair value.The fair value of our market rate risk sensitive instruments
approximates their carrying value. Critical accounting policies We consider the policies discussed below to be critical to an understanding of
our financial statements as their application places the most significant
demands on managements judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently uncertain. Specific
risks for these critical accounting policies are described in the following
paragraphs. For all of these policies, future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment. Estimates We prepare financial statements in conformity with U.S. GAAP, which requires us
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities on the date of
the financial statements and the reported amounts of revenues and expenses
during the financial reporting period. We primarily make estimates related to
contract costs expected to be incurred to complete development of software,
allowances for doubtful accounts receivable, our future obligations under
employee retirement and benefit plans, useful lives of property, plant and
equipment, future income tax liabilities and contingencies and litigation. We continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Since the use of estimates is an integral component of the financial
reporting process, actual results could differ from those estimates. Revenue recognition We derive our revenues primarily from software development and related
services, licensing of software products and from business process management
services. We make and use significant management judgments and estimates in
connection with the revenue that we recognize in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period, if we made different judgments or utilized different estimates. Arrangements with customers for software development and related services are
either on a fixed price, fixed time frame or on a time and material basis.
Revenue on time and material contracts is recognized as the related services
are rendered. Revenue from the end of the last billing to the balance sheet
date is recognized as unbilled revenues. Maintenance revenues are recognized
ratably over the term of the underlying maintenance arrangement. When the
company receives advances for services and products, such amounts are reported
as client deposits until all conditions for revenue recognition are met. Revenue from our fixed price arrangements for software development and related
services that involves significant production, modification or customization of
the software, is accounted in conformity with ARB No. 45, using the guidance in
Statement of Position (SOP) 81-1, and the Accounting Standards Executive
Committees conclusion in paragraph 95 of SOP 97-2. Fixed price arrangements,
which are similar to contracts to design, develop, manufacture, or modify
complex aerospace or electronic equipment to a buyers specification or to
provide 31




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services related to the performance of such contracts and contracts for
services performed by architects, engineers, or architectural or engineering
design firms, as laid out in Paragraph 13 of SOP 81-1, are also accounted for
in conformity with SOP 81-1. In the above mentioned fixed price arrangements, revenue has been recognized
using the percentage-of-completion method. Costs and earnings in excess of
billings are classified as unbilled revenue while billings in excess of costs
and earnings are classified as unearned revenue. In measuring progress towards
completion, we have selected a method that we believe is reliable and best
approximates the progress to completion. The input (efforts expended) method
has been used to measure progress towards completion as there is a direct
relationship between labor hour input and productivity and the method indicates
the most reliable measure of progress. However, we evaluate each contract and
apply judgment to ensure the existence of a relationship between labor hours
input and productivity. At the end of every reporting period, we evaluate each project for estimated
revenue and estimated efforts. Any revisions or updates to existing estimates
are made wherever required by obtaining approvals from officers having the
requisite authority. Management regularly reviews and evaluates the status of
each contract in progress to estimate the profit or loss. As part of the
review, detailed actual efforts and a realistic estimate of efforts to complete
all phases of the project is compared with the details of the original estimate
and the total contract price. To date, we have not had any fixed-price,
fixed-timeframe contracts that resulted in a material loss. However, our policy
is to establish a provision for losses on a contract as soon as losses become
evident. We evaluate change orders according to their characteristics and the
circumstances in which they occur. If such change orders are considered by the
parties to be a normal element within the original scope of the contract, no
change in the contract price is made. Otherwise, the adjustment to the contract
price may be routinely negotiated. Contract revenue and costs are adjusted to
reflect change orders approved by the client and us, regarding both scope and
price. Changes are reflected in revenue recognition only after the change order
has been approved by both parties. The same principle is also followed for
escalation clauses. Costs that are incurred for a specific anticipated contract
that will result in no future benefits unless the contract is obtained are not
included in contract costs or deferred costs before the signing of the
contract. Such costs are deferred only if the costs can be directly associated
with a specific anticipated contract and if their recoverability from that
contract is determined to be probable. We provide our clients with a fixed-period warranty for corrections of errors
and telephone support on all fixed-price, fixed-time frame contracts. Costs
associated with such support services are accrued at the time related revenues
are recorded and included in cost of revenues. We estimate such costs based on
historical experience, and review estimates on a periodic basis for any
material changes in assumptions and likelihood of occurrence. In accordance with SOP 97-2, Software Revenue Recognition, license fee revenues
are recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the license fee is fixed and determinable, and the collection of the
fee is probable. Arrangements to deliver our software product generally have
three elements: license, implementation and Annual Technical Services, or ATS.
We have applied the principles in SOP 97-2 to account for revenue from these
multiple element arrangements. Vendor Specific Objective Evidence of fair value
or VSOE has been established for ATS. VSOE is the price charged when the
element is sold separately. When other services are provided in conjunction
with the licensing arrangement, the revenue from such contracts are allocated
to each component of the contract using the residual method, whereby revenue is
deferred for the undelivered services and the residual amounts are recognized
as revenue for delivered elements. In the absence of an established VSOE for
implementation, the entire arrangement fee for license and implementation is
recognized as the implementation is performed. Revenue from client training,
support and other services arising due to the sale of software products is
recognized as the services are performed. ATS revenue is recognized ratably
over the period in which the services are rendered. Revenues from business process management and other services are recognized on
both the time-and-material and fixed-price, fixed-time frame bases. Revenue on
time-and-material contracts is recognized as the related services are rendered.
Revenue from fixed-price, fixed-time frame contracts is recognized as per the
proportional performance method using an output measure of performance. We recognize revenue only on collectibility being probable and hence credit
losses do not have an impact on our revenue recognition policy. Fluctuations in
our provisions for bad debts and write offs of uncollectible accounts depend on
the financial health and economic environment governing our clients. Our
provisions are based on specific identification of the credit risk. No one
client has contributed significantly to credit losses. We have had no
significant changes in our collection policies or payment terms. Income taxes As part of our financial reporting process, we are required to estimate our
liability for income taxes in each of the tax jurisdictions in which we
operate. This process requires us to estimate our actual current tax exposure
together with an assessment of temporary differences resulting from differing
treatment of items, such as depreciation on property, plant and equipment, for
tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our balance sheet. We face challenges from domestic and foreign tax authorities regarding the
amount of current taxes due. These challenges include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. Based on our evaluation of our tax position and the information
presently available to us, we believe we have adequately accrued for probable
exposures as of March 31, 2004. To the extent we are able to prevail in matters
for which accruals have been established or are required to pay amounts in
excess of our reserves, our effective tax rate in a given financial statement
period may be materially impacted. Our deferred tax liabilities mainly arise from taxable basis differences in
foreign exchange forward contracts, intangible assets and investments in liquid mutual funds. Our
deferred tax assets comprise assets arising from basis differences in
depreciation on property, plant and equipment, investments for which the
ultimate realization of the tax asset may be dependent on the availability of
future capital gains, and provisions for doubtful accounts receivable. We
assess the likelihood that our deferred tax assets will be recovered from
future taxable income. This assessment takes into consideration tax planning
strategies, including levels of historical taxable income and assumptions
regarding the availability and character of future taxable income over the
periods in which the deferred tax assets are deductible. We believe it is more
likely than not that we will realize the benefits of those deductible
differences, net of the existing valuation differences at March 31, 2004. The
ultimate amount of deferred tax assets realized may be materially different
from those recorded, as influenced by potential changes in income tax laws in
the tax jurisdictions where we operate. To the extent we believe that realization of a deferred tax asset is not
likely, we establish a valuation allowance or increase this allowance in an
accounting period and include an expense within the tax provision in our
statements of income. As of March 31, 2004 and 2003, we recorded valuation
allowances of $2.0 million and $0.6 million due to uncertainties related to our
ability to utilize some of our deferred tax assets comprising provisions for
doubtful accounts receivable and investments. In the event that actual results
differ from these estimates of 32




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valuation allowance or if we adjust these estimates in future periods, we may
need to establish an additional valuation allowance, which could materially
impact our financial position and results of operations. Business Combinations,
Goodwill and Intangible Assets We account for business combinations in accordance with SFAS No. 141, Business
Combinations. Cash and amounts of consideration that are determinable at the
date of acquisition are included in determining the cost of the acquired
business. The accounting for contingent consideration based on earnings or
other performance measures is a matter of judgment that depends on the relevant
facts and circumstances. If the substance of the contingent consideration is
to provide compensation for services, use of property, or profit sharing, we
account for the additional consideration as an expense of the appropriate
period. Otherwise, the additional consideration paid is recorded as an
additional cost of the acquired business. Goodwill represents the cost of the acquired businesses in excess of the fair
value of identifiable tangible and intangible net assets purchased. We
generally seek the assistance of independent valuation experts in determining
the fair value of the identifiable tangible and intangible net assets of the
acquired business. We assign all the assets and liabilities of the acquired
business, including goodwill, to reporting units in accordance with SFAS No.
142, Goodwill and Other Intangible Assets. We test goodwill for impairment on an annual basis. In this process, we rely
on a number of factors including operating results, business plans and future
cash flows. Recoverability of goodwill is evaluated using a two-step process.
The first step involves a comparison of the fair value of a reporting unit with
its carrying value. If the carrying amount of the reporting unit exceeds its
fair value, the second step of the process involves a comparison of the fair
value and carrying value of the goodwill of that reporting unit. If the
carrying value of the goodwill of a reporting unit exceeds the fair value of
that goodwill, an impairment loss is recognized in an amount equal to the
excess. Goodwill of a reporting unit shall be tested for impairment between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of the reporting unit below its carrying amount. We amortize intangible assets over their respective individual estimated useful
lives on a straight-line basis. Our estimates of the useful lives of
identified intangible assets are based on a number of factors including the
effects of obsolescence, demand, competition, and other economic factors (such
as the stability of the industry, and known technological advances), and the
level of maintenance expenditures required to obtain the expected future cash
flows from the asset. We evaluate intangible assets for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets. In evaluating goodwill and intangible assets for impairment, we may seek the
assistance of independent valuation experts, perform internal valuation
analyses and consider other information that is publicly available. The
results of our evaluation may be dependent on a number of factors including
estimates of future market growth and trends, forecasted revenue and costs,
discount rates and other variables. While we use assumptions which we believe
are fair and reasonable, actual future results may differ from the estimates
arrived at using the assumptions. Off-balance sheet arrangements None 33




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##### Table of Contents



Contractual obligations Contractual obligations ($ in millions)
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsOperating lease obligations
    
    $
    21.5
    
    
    $
    6.2
    
    
    $
    8.9
    
    
    $
    5.3
    
    
    $
    1.1Purchase obligations
    
    $
    60.3
    
    
    $
    60.3
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock of subsidiary
    
    $
    21.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21.6Other long term liabilities
    
    $
    5.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.0Total
    
    $
    108.4
    
    
    $
    66.5
    
    
    $
    8.9
    
    
    $
    5.3
    
    
    $
    27.7
 34




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##### Table of Contents



Item 6. Directors, senior management and employees Directors and executive officers Our policy in determining our executive officers for Securities and Exchange
Commission reporting purposes has traditionally been to include all statutory
officers and all members of our management council. As of April 1, 2004, in
line with our growth and strategic objectives, we divided our management
council into two levels, one comprised of senior executives and the other
comprised of directors and statutory officers. From time to time, we
re-evaluate who we consider to be senior executives. The respective ages and
positions of our directors and executive officers, which include only statutory
officers and independent directors, as of March 31, 2004 are as follows: Name
    
    Age
    
    PositionN. R. Narayana Murthy
    
    
    57
    
    
    Chairman of the Board and Chief MentorNandan M. Nilekani
    
    
    49
    
    
    Director, Chief Executive Officer,
President and Managing Director and Chairman, Management CouncilS. Gopalakrishnan
    
    
    49
    
    
    Chief Operating Officer,
Deputy Managing Director and Head  Customer Service and
TechnologyDeepak
M Satwalekar(2)(3)(4)(5)
    
    
    55
    
    
    Lead Independent DirectorMarti G. Subrahmanyam (2)(3)(4)
    
    
    57
    
    
    DirectorPhilip Yeo
Liat Kok(1)(4)(5)
    
    
    57
    
    
    DirectorOmkar Goswami (1)(3)(4)(5)
    
    
    47
    
    
    DirectorLarry Pressler (2)(3)(4)(5)
    
    
    62
    
    
    DirectorRama Bijapurkar (1)(3)(4)
    
    
    47
    
    
    DirectorClaude Smadja (1)(4)(5)
    
    
    58
    
    
    DirectorSridar A. Iyengar(2)(3)(4)
    
    
    57
    
    
    DirectorK. Dinesh
    
    
    49
    
    
    Director and Head  Human Resources Development, Information Systems, Quality and Productivity and Communication Design GroupS. D. Shibulal
    
    
    49
    
    
    Director and Head  Worldwide
Customer DeliveryT. V. Mohandas Pai
    
    
    45
    
    
    Director, Chief Financial Officer
and Head  Finance and AdministrationSrinath Batni
    
    
    49
    
    
    Director and Head  Strategic
Groups and Co-customer DeliveryV. Balakrishnan
    
    
    39
    
    
    Company Secretary and Senior Vice President  Finance
  (1)
    
    Member of the Investors Grievance Committee(2)
    
    Member of the Compensation Committee(3)
    
    Member of the Audit Committee(4)
    
    Independent director(5)
    
    Member of the Nominations Committee N. R. Narayana Murthyis one of our co-founders and has served as one of our
directors since July 1981. He is currently the Chairman of our board of
directors and our Chief Mentor. Prior to March 2000, Mr. Murthy was our Chief
Executive Officer. Mr. Murthy has served as a director on the Board of the
Reserve Bank of India since 2000. Mr. Murthy also serves on the boards of
various other organizations. He serves on the Indian Prime Ministers Council
on Trade and Industry (India), the Board of Overseers at the Wharton School of
the University of Pennsylvania, the Cornell University Council, and the Board
of Advisors for the William F. Achtmeyer Center for Global Leadership at the
Tuck School of Business. Mr. Murthy received a Bachelor of Engineering, or
B.E., in Electrical Engineering from the University of Mysore and a Master of
Technology, or M.Tech., in Electrical Engineering from the Indian Institute of
Technology, or IIT, Kanpur. Nandan M. Nilekaniis one of our co-founders and has served as one of our
directors since July 1981. He is currently our Chief Executive Officer,
President and Managing Director and Chairman of our Management Council. Prior to this,
Mr. Nilekani served in various capacities with the Company, including as our
Chief Operating Officer and Head  Banking Business Unit. Mr. Nilekani is a
co-founder of NASSCOM and the Bangalore chapter of The IndUS Entrepreneurs
(TiE). He also serves on the London Business Schools Asia Pacific Regional
Advisory Board and is a member of the Board of Trustees of the Conference
Board, an international research and business membership organization. Mr.
Nilekani served as a member of the sub-committee of the Securities and Exchange
Board of India that dealt with issues related to insider trading and as a
member of the Reserve Bank of Indias Advisory Group on Corporate Governance.
Mr. Nilekani received a Bachelor of Technology, or B.Tech., in Electrical
Engineering from IIT Bombay. S. Gopalakrishnanis one of our co-founders and served as one of our directors
from 1981 to 1987, and since October 1994. Mr. Gopalakrishnan is currently our
Chief Operating Officer, Deputy Managing Director and Head  Customer Service and Technology. From 1999 to 2002, he served as our Deputy Managing Director
and Head  Client Delivery and Technology. From 1996 to 1999, he served as our
Head  Customer Service and Technology. Between 1994 and 1996, he was Head 
Technical Support Services. Mr. Gopalakrishnan received an M.S. in Physics and
an M.Tech. in Computer Science from IIT Madras. Mr. Gopalakrishnan is the
chairperson of Infosys Consulting, Inc, our wholly owned subsidiary. Deepak M. Satwalekar
is the Managing Director and CEO of HDFC Standard Life Insurance Co.
Ltd since 2000. Before that, he was the Managing Director of Housing
Development Finance Corporation (HDFC) since 1993. He has been a
consultant to the World Bank, the Asian Development Bank, the United
States Agency for International Development (USAID) and the United
Nations Centre for Human Settlements (HABITAT). He is a member of the
Insurance Committee of the Confederation of Indian Industries (CII)
and is also a Director on the boards of several other companies.
Mr. Deepak M. Satwalekar obtained a Bachelors Degree in
Technology from the Indian Institute of Technology, Bombay and a
Masters Degree in Business Administration from The American
University, Washington DC. 35




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##### Table of Contents



Marti G. Subrahmanyamis the Charles E. Merrill Professor of Finance and
Economics in the Stern School of Business at New York University. He holds
degrees from the Indian Institute of Technology, Madras, the Indian Institute
of Management, Ahmedabad and the Massachusetts Institute of Technology.
Professor Subrahmanyam has published numerous articles and books in the areas
of corporate finance, capital markets and international finance. He has been a
visiting professor at leading academic institutions around the world including,
most recently, Cambridge University in the UK, INSEAD in France, University of
Melbourne and Monash University in Australia, LUISS in Italy and Singapore
Management University in Singapore. Professor Subrahmanyam currently serves on
the editorial boards of many academic journals and is the co-editor of the
Review of Derivatives Research.He has won many teaching awards including New
York Universitys Distinguished Teaching Medal. He has served as a consultant
to several corporations, industrial groups, and financial institutions around
the world, such as Merrill Lynch and State Street Bank. He also sits on the
boards of several companies, including ICICI Bank, the Murugappa Group, Nexgen
Financial Holdings and Nomura Asset Management, and has served as an advisor to
international and government organizations, including the Securities and
Exchange Board of India. Philip Yeo Liat Kokis Chairman of the Agency for Science, Technology &
Research (A*STAR) and Co-Chairman of the Economic Development Board (EDB).
Recognised for his
contributions to Singapores economic development and his pioneering role in
the promotion and development of the countrys information technology,
semiconductor and chemical industries. He brings wide government and private
sector experience over a 33-year career. Appointed as Director of
Nasdaq-listed Infosys of India since October 1999. Chairman of SPI and
non-executive Director of the United Overseas Bank Board. He holds a Bachelor
of Applied Science (Industrial Engineering) and Doctorate of Engineering from
the University of Toronto, Master of Science (Systems Engineering) from the
University of Singapore and Master of Business Administration from Harvard
University. Omkar Goswamihas served as one of our directors since November 2000. In April
2004, he set up CERG Advisory, a company specializing in corporate consulting
and economic advisory services, of which he is the Founder-Chairman. Before
that, he was the Chief Economist to the Confederation of Indian Industry from
August 1998 to March 2004. Between 1997 and 1998, Dr. Goswami was the Editor of
Business India magazine. Between 1981 and 1997, he taught at Oxford University,
Delhi School of Economics, Harvard University, Tufts University, Jawaharlal
Nehru University, Rutgers University, and the Indian Statistical Institute (New
Delhi). Dr. Goswami also serves on the board of Dr. Reddys Laboratories,
Infrastructure Development and Finance Company Limited, Crompton Greaves
Limited and DSP Merrill Lynch. Dr. Goswami has served on several government
committees and has also been a consultant to the World Bank, the International
Monetary Fund, the Asian Development Bank and the Organization for Economic
Co-operation and Development. Dr. Goswami received his Master of Economics from
the Delhi School of Economics and his Ph.D. in Economics from Oxford
University. Larry Presslerhas served as one of our directors since January 2001. He is
currently the President and Chairman of the Washington, D.C. law firm, The
Pressler Group, LLC. Between 1974 and 1997, he served as a member of the U.S.
Congress, with 18 years in the U.S. Senate. While in the U.S. Senate, he
chaired the Commerce, Science and Transportation Committee and authored the
Telecommunications Act of 1996, among other legislation. Senator Pressler
serves on the board of The Philadelphia Stock Exchange, Sky Ventures Capital
Inc and Flight Safety Technologies, Inc. He also serves on the board of
advisors of several private companies in the pharmaceutical, telecommunications
and financial sectors. Senator Pressler received a Bachelor of Arts in
Government from the University of South Dakota, a Diploma in Public and Social
Administration from Oxford University under a Rhodes Scholarship, as well as a
Juris Doctor from Harvard Law School, Harvard University. Rama Bijapurkarhas served as an independent director of Infosys, since March
2001. She is currently an independent management consultant specializing in
marketing strategy and is also a visiting faculty at the Indian Institute of
Management, Ahmedabad. She also serves on the boards of Titan Industries
Limited, Godrej Consumer Products Limited, Credit Rating Information Services
of India Limited, Arvind Mills Limited, Ambit Corporate Finance Pte, Give
Foundation. Ms Bijapurkar has over twenty five years of marketing consulting
and market research experience. Immediately prior to setting up her own
practice in 1997, she was a senior marketing consultant with McKinsey &
Company, and before that, with MARG Marketing and Research Group, as their
Deputy Managing Director. She has a B.Sc (hons) degree in Physics from the
Delhi University and a Post Graduate Diploma in Management from the Indian
Institute of Management, Ahmedabad. Claude Smadjahas served as one of our directors since October 2001. He is
currently the President of Smadja & Associates, a firm advising global
corporations and governments on strategic issues. Between 1996 and 2001, he
served as the Managing Director of the World Economic Forum. Prior to that, Mr.
Smadja served as the director for the News and Current Affairs Department of
the Swiss Broadcasting Corporation. Mr. Smadja serves on the boards of
directors of the Edipresse, Infotec Company and the Kudeslki Groups, as well as
several private corporations. He is also the Chairman of the International
Board of Overseers at the Illinois Institute of Technology. Mr. Smadja received
a B.A. in Political Science from the University of Lausanne. Sridar A. Iyengaris the President of TiE (The Indus Entrepreneurs) in Silicon
Valley. Previously he was the Partner-in-Charge of KPMGs Emerging Business
Practice. He has had a number of leadership roles within KPMGs global
organization particularly in setting up and growing new practices. He has the
unique distinction of having worked as a partner in all three of KPMGs regions
- Europe, America and Asia Pacific  as well as in all four of KPMGs
functional disciplines  assurance, tax, consulting and financial advisory
services. He was Chairman and CEO of KPMGs India operations between 1997 and
2000 and during that period was a member of the Executive Board of KPMGs Asia
Pacific practice. Prior to that he headed up the International Services
practice in the West Coast. On his return from India in 2000 he was asked to
lead a major effort of KPMG focused on delivering audit and advisory services
to early stage companies. He served as a member of the Audit Strategy group of
KPMG LLP. He was with KPMG from 1968 until his retirement in March 2002. Sridar
is the Fellow of the Institute of Chartered Accountants in England and Wales,
holds Bachelor Degree in Commerce (Honors) from University of Kolkota and has
attended the Executive Education course at Stanford. K. Dineshis one of our co-founders and has served as one of our directors
since 1985. He is currently our Director and Head  Human Resources
Development, Information Systems, Quality and Productivity and Communication
Design Group. Between 1996 and 2001, he was our Head  Quality, Productivity
and Management Information Systems. Mr. Dinesh received his M.S. in Mathematics
from Bangalore University. Mr. Dinesh also serves on the Board of Infosys
Technologies Australia Pty Limited. S. D. Shibulalis one of our co-founders and served as one of our directors
from 1984 to 1991, and since 1997. Mr. Shibulal also serves as a director of
Progeon Limited ( our majority-owned subsidiary), and Infosys Consulting Inc
(wholly owned subsidiary). He is currently our Head  Worldwide Customer Delivery. From
1998 to 1999, he was our Head  Manufacturing, Distribution and Year 2000
Business Unit, as well as Head  Internet and Intranet Business Unit. He
received an M.S. in Physics from the University of Kerala and an M.S. in
Computer Science from Boston University. T. V. Mohandas Paiis
Director, Chief Financial Officer and Head  Finance &
Administration of Infosys. Having joined Infosys in 1994, he was a
member of the Internal Committee, which formulated and instituted the
guidelines for the first Employee Stock Option Plan in India. He is
one of the key members of the core team responsible for producing
Infosys Annual Report (which has won the Best Annual Report
Award for the last eight successive years from the Institute of
Chartered Accountants of India). He was part of the Infosys team,
which enabled the listing of the company on the NASDAQ in March 1999,
the first listing of an Indian Company on an American stock exchange,
and which enabled the Sponsoring of Secondary American Depository
Shares in July 2003. He is the Chairperson of Progeon Limited, the
majority owned subsidiary and is a member of the board of Infosys
Technologies (Shanghai) Company Limited, the wholly owned subsidiary.
He was in practice as a Chartered Accountant before joining a
financial services company in 1988 as the Executive Director. He has
presented at various national and international seminars on capital
markets, financial services, accounting standards, information
technology, etc. He is a member of the Accounting Standard Committee
set up by SEBI. He has a Bachelors degree in Commerce from
St. Josephs College of Commerce, Bangalore, LL.B degree
from Bangalore University and is a Fellow Chartered Accountant. 36




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##### Table of Contents



Srinath Batnihas served as one of our directors since May 2000. He is
currently our Head  Strategic Groups and Co-Customer Delivery. From 1996 to 2000 he served as Senior
Vice President and Head  Retail and Telecommunications Business Unit. Mr.
Batni received a B.E. in Mechanical Engineering from Mysore University and an
M.E. in Mechanical Engineering from the Indian Institute of Science, Bangalore.
Mr. Srinath Batni serves on the board of Infosys Technologies (Shanghai)
Company Limited and Infosys Technologies Australia Pty Limited. V. Balakrishnanis our
Company Secretary and Senior Vice President  Finance. Since he joined
the Company in 1991, he has served in various capacities in our Finance
department. Prior to that, Mr. Balakrishnan was Senior Accounts Executive for
Amco Batteries Limited. Mr. Balakrishnan received a B.Sc. from the University
of Madras. He is an Associate Member of the Institute of Chartered Accountants
of India, an Associate Member of the Institute of Company Secretaries of India
and an Associate Member of the Institute of Cost & Works Accountants of India.
Mr. Balakrishnan also serves on the boards of Infosys Technologies Australia
Pty Limited and Infosys Consulting, Inc, both wholly owned subsidiaries. Compensation In fiscal 2004, our eight non-employee directors were paid an aggregate of
$324,990. Directors who are also employees do not receive any additional
compensation for their service on the board of directors. Directors are also
reimbursed for certain expenses in connection with their attendance at board
and the committee meetings. We operate in numerous countries and compensation for our officers and
employees may vary significantly from country to country. As a general matter,
we seek to pay competitive salaries in all the countries in which we operate. The table below describes the compensation for our officers and directors, for
the fiscal year ended March 31, 2004. Annual compensation awards
    
    Stock optionsName
    
    Salary
    
    Bonus
    
    Other
    
    No. of
    
    Grant
    
    No. of
    
    Grant
    
    Expiration
    
    AmountAnnual
    
    Options
    
    price
    
    Options
    
    price
    
    date
    
    accruedCompen
    
    granted
    
    
    
    granted
    
    
    
    
    
    for-sation
    
    during
    
    
    
    during
    
    
    
    
    
    long termthe year
    
    
    
    the year
    
    
    
    
    
    benefits(1999 ESOP)
    
    
    
    (1998 ESOP)N. R. Narayana Murthy
    
    $
    19,351
    
    
    
    
    
    
    $
    22,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,241Nandan M. Nilekani
    
    
    19,351
    
    
    
    
    
    
    
    23,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,241S. Gopalakrishnan
    
    
    19,351
    
    
    
    
    
    
    
    21,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,241K. Dinesh
    
    
    19,351
    
    
    
    
    
    
    
    23,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,241S. D. Shibulal
    
    
    167,722
    
    
    
    
    
    
    
    49,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deepak M. Satwalekar
    
    
    
    
    
    
    
    
    
    
    47,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Marti G. Subrahmanyam
    
    
    
    
    
    
    
    
    
    
    42,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Philip Yeo
    
    
    
    
    
    
    
    
    
    
    34,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sridar Iyengar
    
    
    
    
    
    
    
    
    
    
    40,832
    
    
    
    2,000
    
    
    $
    70
    
    
    
    
    
    
    
    
    
    
    April 9, 2013
    
    
    Omkar Goswami
    
    
    
    
    
    
    
    
    
    
    40,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Larry Pressler
    
    
    
    
    
    
    
    
    
    
    36,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rama Bijapurkar
    
    
    
    
    
    
    
    
    
    
    42,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Claude Smadja
    
    
    
    
    
    
    
    
    
    
    38,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jitendra Vir Singh
    
    
    
    
    
    
    
    
    
    
    18,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T. V. Mohandas Pai
    
    
    23,585
    
    
    
    
    
    
    
    35,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,286Srinath Batni
    
    
    21,387
    
    
    
    
    
    
    
    30,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,024V. Balakrishnan
    
    $
    22,925
    
    
    
    
    
    
    $
    47,021
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,855
 37




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##### Table of Contents



Board composition

Our Articles of Association provide that the minimum number of directors shall
be three and the maximum number of directors shall be 18. Currently, we have 15
directors, 8 of whom are independent as defined by NASDAQ Rule 4200(a)(15).
Our Articles of Association and the Indian Companies Act require that at least
two-thirds of our directors be subject to retirement by rotation. One-third of
these directors must retire from office at each Annual General Meeting of the
shareholders. A retiring director is eligible for re-election. Our executive
directors are appointed for five-year terms by the shareholders. They
customarily retire every three years and are eligible for re-election at that
time. Executive directors are required to retire at age 60 in accordance with
our employee retirement policies. Other board members must retire from the
board at age 65.

All executive directors are also liable to retire by rotation. The terms of
office of the directors are given below

Name
    
    Expiration of current
    
    Term of officeterm of officeN. R. Narayana Murthy
    
    April 30, 2007
    
    5 yearsNandan M. Nilekani
    
    April 30, 2007
    
    5 yearsS. Gopalakrishnan*
    
    October 17, 2004
    
    5 yearsK. Dinesh
    
    April 30, 2007
    
    5 yearsS. D. Shibulal *
    
    January 09, 2007
    
    5 yearsT. V. Mohandas Pai *
    
    May 26, 2005
    
    5 yearsSrinath Batni
    
    May 26, 2005
    
    5 yearsDeepak M. Satwalekar*
    
    
    
    
    
    Retirement by rotationMarti G. Subrahmanyam*
    
    
    
    
    
    Retirement by rotationPhilip Yeo
    
    
    
    
    
    Retirement by rotationOmkar Goswami
    
    
    
    
    
    Retirement by rotationLarry Pressler
    
    
    
    
    
    Retirement by rotationRama Bijapurkar1
    
    
    
    
    
    Retirement by rotationClaude Smadja
    
    
    
    
    
    Retirement by rotationSridar Iyengar
    
    
    
    
    
    Retirement by rotation




|* |  | Directors who are retiring by rotation and are seeking re-election at our Annual
General Meeting of our stockholders scheduled to take place on June 12, 2004
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Option grants

There were no option grants
to our Chairman, CEO, CFO or COO in the fiscal
years ended March 31, 2004, 2003 and 2002. Details of options granted to other
senior executives are reported elsewhere in Item 6 in the section titled
Compensation.

Option exercises and holdings

Our Chairman, CEO and COO did not exercise or hold any options during the
fiscal year ended March 31, 2004. The details of stock options held and
exercised with respect to other senior executives are reported elsewhere in
Item 6 in the section titled Share Ownership.

Employment and indemnification contracts

Under the Indian Companies Act, our shareholders must approve the salary, bonus
and benefits of all employee directors at an Annual General Meeting of
shareholders. Each of our employee directors has signed an agreement containing
the terms and conditions of employment, including a monthly salary, performance
bonus and benefits including vacation, medical reimbursement and pension fund
contributions. There are no benefits payable upon termination of this
agreement. These agreements are made for a five-year period, but either we or
the employee director may terminate the agreement upon six months notice to the
other party.

We have also entered into agreements to indemnify our directors and officers
for claims brought under U.S. laws to the fullest extent permitted by Indian
law. These agreements, among other things, indemnify our directors and officers
for certain expenses, judgments, fines and settlement amounts incurred by any
such person in any action or proceeding, including any action by or in the
right of Infosys Technologies Limited, arising out of such persons services as
our director or officer.

Board committee information

Details relating to the Audit, Compensation and Nomination committees of our
board are provided below.

Audit committee

Our audit committee is comprised of six independent directors, as determined
under applicable NASDAQ rules. They are:

Mr. Deepak M. Satwalekar, Chairman;   Prof.
Marti G. Subrahmanyam;   Dr. Omkar
Goswami;   Sen. Larry
Pressler;   Ms. Rama
Bijapurkar; and   Mr. Sridar
Iyengar (Audit Committee Financial Expert)

The primary objective of the audit committee is to monitor and provide
effective supervision of our financial reporting process with a view towards
ensuring accurate, timely and proper disclosures and the transparency,
integrity and quality of financial reporting. Our audit committee oversees the
work carried out in the financial reporting process  by our management,
including the internal auditors and the independent auditor  and reviews the
processes and safeguards employed by each. The audit committee held four
meetings during fiscal 2004.

The audit committee has adopted a charter. The charter is attached as Exhibit
99.7.

See Item 18 for the report of
the audit committee.

38



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##### Table of Contents



Compensation committee Our compensation committee consists entirely of non-executive, independent
directors as determined under applicable NASDAQ rules, and consists of: Prof. Marti G. Subrahmanyam, Chairman;   Mr. Deepak
M. Satwalekar;   Sen.
Larry Pressler; and   Mr. Sridar
Iyengar The purpose of our compensation committee is to discharge the Boards
responsibilities relating to compensation of our executive directors and senior
management. The compensation committee has overall responsibility for approving
and evaluating our compensation plans, policies and programs for executive
directors and senior management. The compensation committee is also responsible for producing an annual report
on executive compensation for inclusion in our proxy statement. The
compensation committee held four meetings during fiscal 2004. The compensation committee has adopted a charter. The charter is attached as
Exhibit 99.8. Nominations committee The nominations committee of the board consists exclusively of the following
non-executive, independent directors as determined under applicable NASDAQ
rules: Mr. Claude Smadja, Chairman; Sen. Larry Pressler   Mr. Philip
Yeo;   Dr. Omkar
Gosami; and   Mr. Deepak
M Satwalekar 39




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##### Table of Contents



The purpose of our nominations committee is to ensure that our board is
properly constituted to meet its fiduciary obligations to Infosys and our
shareholders. To carry out this purpose, the nominations committee assists the
board by identifying prospective director nominees and selecting and
recommending to our board the director nominees for the next annual meeting of
our shareholders, overseeing the evaluation of the board and management, and
recommending to the board director nominees for each committee. The
nominations committee held two meetings in fiscal 2004. The nominations committee has adopted a charter. The charter is attached as
Exhibit 99.9. Employees As of March 31, 2004, we
employed approximately 25,700 employees, including
approximately 22,100 IT professionals. We seek to attract and motivate IT
professionals by offering:  
    
    an entrepreneurial environment that empowers IT professionals;
    
    programs that recognize and reward performance;
    
    challenging assignments;
    
    constant exposure to new skills and technologies; and
    
    a culture that emphasizes openness, integrity and respect for the employee. Recruiting We focus our recruiting on the top 20% of students from engineering departments
of Indian schools and rely on a rigorous selection process involving a series
of tests and interviews to identify the best applicants. Our reputation as a
premier employer enables us to select from a large pool of qualified
applicants. For example, in fiscal 2004, we received approximately
908,500 applications, interviewed approximately 18,200 applicants and extended job
offers to approximately 13,600 applicants. These statistics do not include
Progeon which recorded approximately 1,400 net hires. Performance appraisals We use a 360-degree appraisal system in addition to our proprietary performance
appraisal methodology to appraise each employee and to provide him or her
feedback and set objectives for career development. Training and development We spend significant resources on training and continuing education. We employ
approximately 98 faculty members in our training division, including
approximately 65 with doctorate or masters degrees. Our faculty conducts the
integrated training for new employees, as well as approximately 160 different
two-week continuing education courses in technology and management skills for
all employees. Leadership development is also a key part of our training
program. We established the Infosys Leadership Institute, a 228-acre campus at
Mysore, India, to enhance leadership skills that are required to manage the
complexities of the rapidly changing marketplace and to further instill our
culture through leadership training. Compensation Our IT professionals receive competitive salaries and benefits and are eligible
to participate in our stock option plans. We have also adopted variable
compensation program which links compensation to company, team and individual
performance. Visas As of March 31, 2004, the majority of our IT professionals in the United States
held H-1B visas (approximately 3,200 persons), allowing the employee to remain
in the United States during the term of the work permit, and as long as he or she remains an employee of the sponsoring
firm, or L-1 visas (approximately 700 persons). Share ownership The following table sets forth as of March 31, 2004, for each director and
executive officer, the total number of equity shares, ADSs and options to
purchase equity shares and ADSs exercisable within 60 days from March 31, 2004.
Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission. All information with respect to the beneficial
ownership of any principal shareholder has been furnished by such shareholder
and, unless otherwise indicated below, we believe that persons named in the
table have sole voting and sole investment power with respect to all the shares
shown as beneficially owned, subject to community property laws, where
applicable. The shares beneficially owned by the directors include the equity
shares owned by their family members to which such directors disclaim
beneficial ownership. The stock option grant price has been translated into U.S. dollars based on the
noon buying rate in the City of New York on March 31, 2004, for cable transfers
in Indian rupees as certified for customs purposes by the Federal Reserve Bank
of New York which was Rs. 43.40 per $1.00. The share numbers and percentages
listed below are based on 66,641,056 equity shares outstanding as of March 31,
2004. Amounts representing less than 1% are indicated with an *. 40




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##### Table of Contents



Equity Shares
    
    
    
    
    
    Equity SharesName
    
    shares
    
    
    
    
    
    underlyingBeneficially
    
    beneficially
    
    % of equity
    
    options
    
    Exercise
    
    Date ofOwned
    
    owned
    
    shares
    
    granted
    
    Price
    
    ExpirationN. R. Narayana Murthy1
    
    
    4,456,685
    
    
    
    6.69
    
    
    
    
    
    
    
    
    
    
    
    Nandan M. Nilekani2
    
    
    3,097,550
    
    
    
    4.64
    
    
    
    
    
    
    
    
    
    
    
    S. Gopalakrishnan3
    
    
    2,993,622
    
    
    
    4.49
    
    
    
    
    
    
    
    
    
    
    
    K. Dinesh4
    
    
    2,196,640
    
    
    
    3.29
    
    
    
    
    
    
    
    
    
    
    
    S. D. Shibulal5
    
    
    1,980,062
    
    
    
    2.97
    
    
    
    
    
    
    
    
    
    
    
    T. V. Mohandas Pai
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Srinath Batni
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Deepak Satwalekar
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Marti G. Subrahmanyam
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Philip Yeo
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Sridar IyengarOmkar Goswami
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Larry Pressler
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Rama Bijapurkar
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Claude Smadja
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    V. Balakrishnan
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    14,940,618
    
    
    
    22.42
  1
    
    Shares beneficially owned by Mr. Murthy include 3,959,725 Equity Shares
owned by members of Mr. Murthys immediate family. Mr. Murthy disclaims
beneficial ownership of such shares.2
    
    Shares beneficially owned by Mr. Nilekani include 1,788,170 Equity Shares
owned by members of Mr. Nilekanis immediate family. Mr. Nilekani
disclaims beneficial ownership of such shares.3
    
    Shares beneficially owned by Mr. Gopalakrishnan include 2,015,669 Equity
Shares owned by members of Mr. Gopalakrishnans immediate family. Mr.
Gopalakrishnan disclaims beneficial ownership of such shares.4
    
    Shares beneficially owned by Mr. Dinesh include 1,478,172 Equity Shares
owned by members of Mr. Dineshs immediate family. Mr. Dinesh disclaims
beneficial ownership of such shares.5
    
    Shares beneficially owned by Mr. Shibulal include 1,594,168 Equity Shares
owned by members of Mr. Shibulals immediate family. Mr. Shibulal
disclaims beneficial ownership of such shares. The following table sets forth the options to purchase securities granted to
executive officers and directors that were outstanding as of
March 31, 2004 Weighted averageClass of securities
    
    Total securities
    
    exercise price
    
    Expiration datesEquity shares
    
    
    84,250
    
    
    $
    97.07
    
    
    Nov 2005-Feb 2011American Depositary Shares
    
    
    18,000
    
    
    $
    28.50
    
    
    Mar 2005-Apr 2013
 Option plans 1994 Employees Stock Offer Plan In September 1994, we established our 1994 Employees Stock Offer Plan, or the
1994 Plan, which provided for the issue of 6,000,000 warrants, as adjusted, to
eligible employees. The warrants were issued to an employee welfare trust (the
Trust). In 1997, in anticipation of a share dividend to be declared by us,
the Trust exercised all warrants held by it and converted them into equity
shares. As and when the Trust issued options/stock to eligible employees, the
difference between the market price and the exercise price was accounted as
deferred stock compensation expense and amortized over the vesting period. Such
amortized deferred compensation expense was $5,009,772, $4,803,534 and $
2,817,066 in the fiscal 2002, 2003 and 2004, respectively. The 1994 plan lapsed
in fiscal 2000 and, consequently, no further shares will be issued to employees
under this plan. 41




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##### Table of Contents



1998 Stock Option Plan Our 1998 Stock Option Plan, or the 1998 stock plan, provides for the grant of
two types of options to our employees and directors: incentive stock options,
which may provide our employees with beneficial tax treatment, and
non-qualified stock options. The 1998 stock plan was approved by our board of
directors in December 1997, and by our shareholders in January 1998. Unless
terminated sooner by our board of directors, the 1998 stock plan will terminate
automatically in January 2008. A total of 1,600,000 ADSs, representing 800,000
equity shares, are currently reserved for issuance under the 1998 stock plan.
All options granted under the 1998 stock plan will be exercisable for our ADSs. Our compensation committee administers the 1998 stock plan. The committee has
the power to determine the terms of the options granted, including exercise
prices, the number of ADSs subject to each option, the exercisability thereof,
and the form of consideration payable upon such exercise. In addition, the
committee has the authority to amend, suspend, or terminate the 1998 stock
plan, provided that no such action may affect any ADS previously issued and
sold or any option to purchase an ADS previously granted under the 1998 stock
plan. The 1998 stock plan generally does not allow for transfer of options, and only
the optionee may exercise an option during his or her lifetime. An optionee
generally must exercise an option within three months of termination of
service. If an optionees termination is due to death or disability, his or her
option will fully vest and become exercisable and the option must be exercised
within twelve months after such termination. The exercise price of incentive
stock options granted under the 1998 stock plan must at least equal the fair
market value of the ADSs on the date of grant. The exercise price of
nonstatutory stock options granted under the 1998 stock plan must at least
equal 90% of the fair market value of the ADSs on the date of grant. The term
of options granted under the 1998 stock plan may not exceed 10 years. The 1998 stock plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation shall either assume the outstanding options or grant equivalent
options to the holders. If the successor corporation neither assumes the
outstanding options nor grants equivalent options, such outstanding options
shall vest immediately, and become exercisable in full. 1999 Stock Option Plan In fiscal 2000, we instituted the 1999 Stock Option Plan, or the 1999 Plan. Our
shareholders and board of directors approved the 1999 Plan in June 1999. The
1999 Plan provides for the issue of 6,600,000 equity shares to employees. The
1999 Plan is administered by our compensation committee. Under the 1999 Plan,
options will be issued to employees at an exercise price, which shall not be
less than the Fair Market Value, or FMV. Under the 1999 Plan, options may also
be issued to employees at exercise prices that are less than FMV only if
specifically approved by our members in a General Meeting. All options under
the 1999 plan are exercised for equity shares. The 1999 Plan generally does not allow for transfer of options, and only the
optionee may exercise an option during his or her lifetime. An optionee
generally must exercise an option within three months of termination of
service. If an optionees termination is due to death or disability, his or her
option will fully vest and become exercisable and the option must be exercised
within twelve months after such termination. Unless a prior shareholder
approval has been obtained, the exercise price of stock options granted under
the 1999 Plan must at least equal the fair market value of the equity shares on
the date of grant. The 1999 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation shall either assume the outstanding options or grant equivalent
options to the holders. If the successor corporation neither assumes the
outstanding options nor grants equivalent options, such outstanding options
shall vest immediately, and become exercisable in full. 42




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##### Table of Contents



Item 7. Major shareholders and related party transactions Major shareholders The following table sets forth as of March 31, 2004, certain information with
respect to beneficial ownership of our equity shares by each shareholder or
group known by us to be the beneficial owner of 5% or more of our outstanding
equity shares. Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission, which generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power or investment
power with respect to those securities and includes equity shares issuable
pursuant to the exercise of stock options or warrants that are immediately
exercisable or exercisable within 60 days of March 31, 2004. These shares are
deemed to be outstanding and to be beneficially owned by the person holding
those options or warrants for the purpose of computing the percentage ownership
of that person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless otherwise indicated, all
information with respect to the beneficial ownership of any principal
shareholder has been furnished by such shareholder and, unless otherwise
indicated, we believe that persons named in the table have sole voting and sole
investment power with respect to all the equity shares shown as beneficially
owned, subject to community property laws where applicable. Except as otherwise
noted below, the address for each person listed on the table is c/o Infosys
Technologies Limited, Electronics City, Hosur Road, Bangalore-560 100 India.
The shares beneficially owned by the directors include equity shares owned by
their family members to which such directors disclaim beneficial ownership. The share numbers and percentages listed below are based on 66,641,056 equity
shares outstanding, as of March 31, 2004. No of shares
    
    
    
    
    
    No of shares
    
    
    
    
    
    No of sharesName of the
    
    Class of
    
    beneficially
    
    % of
    
    beneficially
    
    % of
    
    beneficially
    
    % ofbeneficial owner
    
    security
    
    Held1,2
    
    class
    
    held
    
    class
    
    held
    
    classMarch 31, 2004
    
    March 31, 2003
    
    March 31, 2002N. R. Narayana Murthy1
    
    Equity shares
    
    
    4,456,685
    
    
    
    6.69
    
    
    
    4,738,400
    
    
    
    7.15
    
    
    
    4,819,400
    
    
    
    7.28Emerging Markets
Growth Fund Inc.2
    
    Equity shares
    
    
    4,599,546
    
    
    
    6.90
    
    
    
    4,840,954
    
    
    
    7.31
    
    
    
    4,046,080
    
    
    
    6.11Shareholding of all
directors and officers
as a group (16
persons)3
    
    
    
    
    15,015,068
    
    
    
    22.53
  1.
    
    Shares beneficially owned by Mr. Murthy include 3,959,725 Equity Shares
owned by members of Mr. Murthys immediate family. Mr. Murthy disclaims
beneficial ownership of such shares.2.
    
    Emerging Markets Growth Inc. is a US registered
mutual fund.3.
    
    Comprised of 216,059 shares owned by non-founder directors and officers
and 74,450 options that are currently exercisable or exercisable within 60
days of March 31, 2004 by our various officers and directors. These have
been deemed to be outstanding and to be beneficially owned by the person
holding such options for calculating the total shareholding of all
directors and officers as a group. Accordingly, the percentage ownership
of the group is calculated on a base of 69,439,064 equity shares which
includes 2,798,008 options that are currently exercisable or exercisable
by all employees within 60 days of March 31, 2004. Our American Depository Shares are listed on the NASDAQ National Market. Each
ADS currently represents one half of one equity share of par value Rs. 5/- (or $0.16) per
share. Our ADSs are registered pursuant to section 12(g) of the Securities
Exchange Act, 1934 and, as of March 31, 2004 are held by approximately 25,375
holders of record in the United States. Our equity shares can be held by Foreign Institutional Investors or FIIs,
Overseas Corporate Bodies or OCBs, and Non Resident Indians or NRIs, who are
registered with the Securities and Exchange Board of India, or SEBI, and the
Reserve Bank of India, or RBI. Currently around 42.5% of our equity shares are
held by these FIIs, OCBs and NRIs of which some of them may be residents or
bodies corporates registered in the United States and else where. We are not
aware of which FIIs, OCBs and NRIs hold our equity shares as residents or as
corporate entities registered in the United States. Our major shareholders do not have differential voting rights with respect to
the equity shares. To the best of our knowledge, we are not owned or controlled
directly or indirectly by any government or by any other corporation. We are
not aware of any arrangement, the operation of which may at a subsequent date
result in a change in control. Related party transactions We believe that all transactions described in this section are on no less
favorable terms to us than on terms that could be obtained from disinterested
third parties. Progeon We established Progeon in April 2002, under the laws of India. We hold 100%
of the equity share capital of Progeon. The equity shares have been issued to
us as per the terms of the stock subscription agreement signed in April 2002,
between us, Citicorp International Finance Corporation (CIFC) and Progeon.
12,250,000 equity shares have been issued to us in each of April 2002 and March
2004 for an aggregate consideration of $5.3 million. Pursuant to the
agreement, CIFC has been issued 4,375,000 (0.0005%) cumulative convertible
preference shares in each of June 2002 and March 2004 for an aggregate
consideration of $20.3 million. 43




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##### Table of Contents



Infosys Australia In January 2004 we acquired, for cash, 100% of the equity in Expert
Information Services Pty. Limited, Australia for $14.5 million. The purchase
consideration includes $3.4 million retained in escrow for representations and
warranties made by the selling shareholders. The acquired company was renamed
as Infosys Technologies (Australia) Pty. Limited. There is a further
consideration payable to the sellers subject to continued employment and
meeting of defined operating and financial performance parameters. During
fiscal 2004, we engaged Infosys Australia for software development services for
which we have been billed $10.6 million. Infosys China In October 2003, we established a wholly-owned subsidiary, Infosys Technologies
(Shanghai) Co Limited (Infosys China) in Shanghai, China, to expand our
business operations in China. Our board of directors has approved the
investment of up to $5.0 million in the share capital of Infosys Shanghai. We
have invested $1.0 million in Infosys Shanghai as of March 31, 2004. Infosys Consulting In April 2004, we established a wholly-owned subsidiary, Infosys Consulting,
Inc., incorporated in the State of Texas to add high-end consulting
capabilities to our Global Delivery Model. Our board of
directors has approved the investment of up to $20.0 million in the share
capital of Infosys Consulting. Infosys Consulting has issued 10,000,000 $1.00
par value equity shares to us in exchange for an aggregate consideration of
$10,000,000. Employment and indemnification agreements We have entered into agreements with our employee directors that provide for a
monthly salary, performance bonuses, and benefits including, vacation, medical
reimbursements and pension fund contributions. These agreements have a
five-year term and either party may terminate the agreement with six months
notice. We have also entered into agreements to indemnify our directors and officers
for claims brought under U.S. laws to the fullest extent permitted by Indian
law. These agreements, among other things, indemnify our directors and officers
for certain expenses, judgments, fines and settlement amounts incurred by any
such person in any action or proceeding, including any action by or in the
right of Infosys Technologies Limited, arising out of such persons services as
our director or officer. Loans to employees We provide various loans primarily to employees in India who are not executive
officers or directors, including car loans, home loans, personal computer
loans, telephone loans, medical loans, marriage loans, personal loans, salary
advances, education loans and loans for rental deposits. All of these loans,
except for the housing and car loans, are available to all of our employees,
who are not executive officers or directors, in India. Housing and car loans
are available only to middle level managers, senior managers and non-executive
officers. The loan program is designed to assist our employees and increase
employee satisfaction. These loans are generally collateralized against the
assets of the loan and the terms of the loans range from 1 to 100 months. Loans
aggregating $28,706,332 and $27,268,356 were outstanding as of March 31, 2003
and 2004. During fiscal 2004, we discontinued fresh disbursements under several
of these loan schemes including housing and car loans. 44




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##### Table of Contents



Item 8. Financial information Consolidated statements and other financial information The following financial statements and auditors report appear under Item 18 in
this Annual Report and are incorporated herein by reference:  
    
    Independent auditors report
    
    Balance sheets as of March 31, 2003 and 2004
    
    Statements of Income for the years ended March 31, 2002, 2003 and 2004
    
    Statements of Stockholders Equity and Comprehensive Income for the years ended March 31, 2002, 2003 and 2004
    
    Statements of Cash Flows for the years ended March 31, 2002, 2003 and 2004
    
    Notes to the financial statements
    
    Financial Statement Schedule  Valuation and qualifying accounts Export revenue For the fiscal year ended March 31, 2004, we generated $1,047.7 million or
98.6% of our total revenues of $1,062.6 million, from the export of our
products and services out of India. Legal proceedings This information is set forth under Item 4 under the heading Legal
proceedings and such information is incorporated herein by reference. Dividends Under Indian law, a corporation pays dividends upon a recommendation by the
board of directors and approval by a majority of the shareholders, who have the
right to decrease but not increase the amount of the dividend recommended by
the board of directors. Dividends may be paid out of profits of an Indian
company in the year in which the dividend is declared or out of the
undistributed profits of previous fiscal years. In fiscal 2004, we paid cash
dividends of approximately $0.63 per equity share
or approximately $0.32 per ADS. Although we have no current intention to
discontinue dividend payments, future dividends may not be declared or paid and
the amount, if any, thereof may be decreased. Holders of ADSs will be entitled
to receive dividends payable on equity shares represented by such ADSs. Cash
dividends on equity shares represented by ADSs are paid to the Depositary in
Indian rupees and are generally converted by the Depositary into U.S. dollars
and distributed, net of Depositary fees, taxes, if any, and expenses, to the
holders of such ADSs. Translations from Indian rupees to U.S. dollars are based on the average of the
monthly average of the noon buying rate in the City of New York during the
period for cable transfers in Indian rupees as certified for customs purposes
by the Federal Reserve Bank of New York. Dividend per
    
    Dividend per
    
    Dividend perFiscal
    
    Equity Share (Rs.)
    
    Equity Share ($)
    
    ADS ($)2004
    
    
    29.00
    
    
    
    0.63
    
    
    
    0.322003
    
    
    25.00
    
    
    
    0.51
    
    
    
    0.262002
    
    
    15.00
    
    
    
    0.35
    
    
    
    0.17
 Significant changes None. 45




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##### Table of Contents



Item 9. The offer and listing Price history Our equity shares are traded in India on the Stock Exchange, Mumbai, formerly
known as the Bombay Stock Exchange, or BSE, the Bangalore Stock Exchange, or
BgSE, and the National Stock Exchange of India Limited, or NSE, or
collectively, the Indian stock exchanges. Our ADSs are traded on Nasdaq under
the ticker symbol INFY. Each ADS represents one-half of one equity share. Our
ADSs began trading on the Nasdaq on March 11, 1999. As of March 31, 2004, we had 66,641,056 equity shares issued and outstanding.
As of March 31, 2004, there were approximately 25,375 record holders of ADSs
evidencing 10,580,610 ADRs (equivalent to 5,290,305 equity shares). As of March
31, 2004, there were approximately 66,945 record holders of our equity shares
listed and traded on the Indian stock exchanges. The following tables set forth for the periods indicated the price history of
the equity shares and the ADSs on the Indian stock exchanges and the Nasdaq.
Stock prices have been restated to reflect our 2-for-1 stock splits in each of
fiscal 1999 and 2000. All translations from Indian rupees to U.S. dollars are
based on the noon buying rate in the City of New York on March 31, 2004 for
cable transfers in Indian rupees as certified for customs purposes by the
Federal Reserve Bank of New York which was Rs. 43.40 per $1.00. BSE
    
    NSE
    
    BgSEPrice per Equity
    
    Price per Equity
    
    Price per Equity
    
    NasdaqShare
    
    Share
    
    Share (1)
    
    Price per ADSFiscal
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low2004
    
    $
    141.22
    
    
    $
    55.76
    
    
    $
    140.55
    
    
    $
    60.00
    
    
    
    
    
    
    
    
    
    
    $
    102.50
    
    
    $
    38.512003
    
    
    102.52
    
    
    
    61.75
    
    
    
    102.50
    
    
    
    61.79
    
    
    
    
    
    
    
    
    
    
    
    86.83
    
    
    
    46.552002
    
    
    102.28
    
    
    
    45.36
    
    
    
    102.55
    
    
    
    44.50
    
    
    $
    90.47
    
    
    $
    57.44
    
    
    
    81.50
    
    
    
    30.602001
    
    
    223.56
    
    
    
    78.71
    
    
    
    223.04
    
    
    
    79.22
    
    
    
    222.34
    
    
    
    79.00
    
    
    
    284.56
    
    
    
    60.132000
    
    
    290.61
    
    
    
    26.40
    
    
    
    293.12
    
    
    
    26.41
    
    
    
    294.02
    
    
    
    50.49
    
    
    
    375.00
    
    
    
    19.63
   (1)
    
    There were no trades of our shares on the BgSE
since August 2002. The board of directors in their meeting held
on April 13, 2004 recommended de-listing from the Bangalore Stock
Exchange and the same is subject to approval by the shareholders in
the Annual General Meeting to be held on June 12, 2004. BSE
    
    NSE
    
    BgSEPrice per Equity
    
    Price per Equity
    
    Price per Equity
    
    NasdaqShare
    
    Share
    
    Share(1)
    
    Price per ADSFiscal
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low2004First Quarter
    
    $
    101.35
    
    
    $
    55.76
    
    
    $
    101.38
    
    
    $
    62.21
    
    
    
    
    
    
    
    
    
    
    $
    65.50
    
    
    $
    38.51Second Quarter
    
    
    105.32
    
    
    
    60.00
    
    
    
    105.46
    
    
    
    60.00
    
    
    
    
    
    
    
    
    
    
    
    71.65
    
    
    
    50.10Third Quarter
    
    
    130.76
    
    
    
    98.20
    
    
    
    137.90
    
    
    
    85.48
    
    
    
    
    
    
    
    
    
    
    
    95.40
    
    
    
    68.91Fourth Quarter
    
    
    141.22
    
    
    
    110.00
    
    
    
    140.55
    
    
    
    109.12
    
    
    
    
    
    
    
    
    
    
    
    102.50
    
    
    
    76.612003First Quarter
    
    $
    86.26
    
    
    $
    64.28
    
    
    $
    84.14
    
    
    $
    64.22
    
    
    
    
    
    
    
    
    
    
    $
    70.50
    
    
    $
    46.55Second Quarter
    
    
    78.06
    
    
    
    61.75
    
    
    
    78.01
    
    
    
    61.79
    
    
    
    
    
    
    
    
    
    
    
    60.68
    
    
    
    48.00Third Quarter
    
    
    102.04
    
    
    
    70.48
    
    
    
    101.87
    
    
    
    70.48
    
    
    
    
    
    
    
    
    
    
    
    86.83
    
    
    
    50.84Fourth Quarter
    
    
    102.52
    
    
    
    83.25
    
    
    
    102.50
    
    
    
    75.43
    
    
    
    
    
    
    
    
    
    
    
    75.52
    
    
    
    55.102002First Quarter
    
    $
    92.05
    
    
    $
    57.24
    
    
    $
    91.04
    
    
    $
    56.83
    
    
    $
    90.47
    
    
    $
    57.44
    
    
    $
    81.50
    
    
    $
    50.65Second Quarter
    
    
    84.75
    
    
    
    46.50
    
    
    
    83.94
    
    
    
    44.50
    
    
    
    75.74
    
    
    
    69.43
    
    
    
    69.90
    
    
    
    30.60Third Quarter
    
    
    98.59
    
    
    
    45.36
    
    
    
    98.36
    
    
    
    45.39
    
    
    
    
    
    
    
    
    
    
    
    70.11
    
    
    
    31.69Fourth Quarter
    
    
    102.28
    
    
    
    73.43
    
    
    
    102.55
    
    
    
    73.41
    
    
    
    
    
    
    
    
    
    
    
    76.20
    
    
    
    51.15
 46




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##### Table of Contents



Month
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowNovember 2003
    
    $
    118.66
    
    
    $
    103.68
    
    
    $
    118.61
    
    
    $
    102.30
    
    
    
    
    
    
    
    
    
    
    $
    89.55
    
    
    $
    78.09December 2003
    
    
    130.76
    
    
    
    112.12
    
    
    
    137.90
    
    
    
    108.29
    
    
    
    
    
    
    
    
    
    
    
    95.40
    
    
    
    81.13January 2004
    
    
    141.22
    
    
    
    116.35
    
    
    
    140.55
    
    
    
    115.64
    
    
    
    
    
    
    
    
    
    
    
    102.5
    
    
    
    85.5February 2004
    
    
    131.65
    
    
    
    111.29
    
    
    
    131.56
    
    
    
    111.42
    
    
    
    
    
    
    
    
    
    
    
    91.72
    
    
    
    81.35March 2004
    
    
    123.79
    
    
    
    110.07
    
    
    
    134.21
    
    
    
    109.12
    
    
    
    
    
    
    
    
    
    
    
    86.73
    
    
    
    76.61April 2004
    
    
    126.50
    
    
    
    115.20
    
    
    
    126.60
    
    
    
    115.20
    
    
    
    
    
    
    
    
    
    
    
    88.50
    
    
    
    80.74
  (1)
    
    There were no trades of our shares on the BgSE since August 2002. The board of directors in their meeting held
on April 13, 2004 recommended de-listing from the Bangalore Stock
Exchange and the same is subject to approval by the shareholders in
the Annual General Meeting to be held on June 12, 2004. Source for all tables above: Datastream and www.bseindia.com for BSE quotes,
nasdaq.com for Nasdaq quotes, Datastream, and www.nse-india.com for NSE quotes
and The Economic Times for BgSE quotes. On May 7, 2004, the closing price of
equity shares on the BSE was Rs. 5,222.90 equivalent to
$120.34 per equity share ($60.17 per ADS on an imputed basis). The Indian securities trading market The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the Securities and Exchange Board of India, the BSE, and the NSE. The six major stock exchanges in India are the BSE, the stock exchanges at
Ahmedabad, Kolkata, Chennai and Delhi, and the NSE. These exchanges account for
more than 90% of the market capitalization of listed Indian companies. The BSE
and NSE together dominate the stock exchanges in India, in terms of the number
of listed companies, and the market capitalizations and trading activities of
those companies. Until March 31, 2003, the stock exchanges in India operated on a trading day
plus three, or T+3, rolling settlement system. At the end of the T+3 period,
obligations are settled with buyers of securities paying for and receiving
securities, while sellers transfer and receive payment for securities. For
example, trades executed on a Monday would typically be settled on a Thursday.
As of April 1, 2003, the stock exchanges in India now operate on a trading day
plus two, or T+2, rolling settlement system. The Securities and Exchange Board
of India, or SEBI, has proposed to move to a T+1 settlement system in the
future. In order to contain the risk arising out of the transactions entered into by
the members in various securities either on their own account or on behalf of
their clients, the largest exchanges have designed risk management procedures,
which include compulsory prescribed margins on the individual broker members,
based on their outstanding exposure in the market, as well as stock-specific
margins from the members. There are generally no restrictions on price
movements of any security on any given day. However, to restrict abnormal price
volatility, the SEBI has instructed the stock exchanges to apply the following
price bands, calculated at the previous days closing price (there are no
restrictions on price movements of index stocks, including ours). Market Wide Circuit Breakers. Market wide circuit breakers are applied to the
market for movement by 10%, 15% and 20% for two prescribed market indices: the
Sensex for the BSE and the Nifty for the NSE. If any of these circuit breaker
thresholds are reached, trading on all equity and equity derivatives markets
nationwide is halted. Price Bands. Price bands
include circuit filters of 20% movements either up or
down, and are applied to most securities traded in the markets, excluding
securities included in indices on which derivative products are
available such as the BSE Sensex and the NSE Nifty indices and derivatives
products. The National Stock Exchange of India Limited The estimated market capitalization of stocks traded on the NSE as of March 31,
2004 was approximately Rs. 11,209.8 billion. The clearing and settlement operations of
the NSE are managed by its wholly-owned subsidiary, the National Securities
Clearing Corporation. Funds settlement takes place through designated clearing
banks. The National Securities Clearing Corporation Limited interfaces with the
depositary on the one hand and the clearing banks on the other to provide
delivery versus payment settlement for depositary-enabled trades. The Stock Exchange, Mumbai The BSE was established in 1875 and is the oldest exchange in India today. The
estimated market capitalization of stocks trading on the BSE as of March 31,
2004 was Rs. 12,012.1 billion. The BSE began allowing online trading in May 1995. As of
March 2004 the BSE had 721 members, comprising individual members, Indian companies and
foreign institutional investors. Only a member of the exchange has the right to
trade in the stocks listed on the exchange. Trading on both the NSE and the BSE occurs Monday through Friday, between 9:55
a.m. and 3:30 p.m. Depositories The National Securities Depository Limited and Central Depository Services
(India) Limited are the two depositories that provide electronic depository
facilities for trading in equity and debt securities in India. The SEBI has
also provided that the issue and allotment of shares in initial public
offerings and/or the trading of shares shall only be in electronic form. 47




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Item 10. Additional information Share capital Not applicable. Memorandum and Articles of Association Set forth below is the material information concerning our share capital and a
brief summary of the material provisions of our Articles of Association,
Memorandum of Association and the Indian Companies Act, all as currently in
effect. The following description of our equity shares and the material
provisions of our Articles of Association and Memorandum of Association does
not purport to be complete and is qualified in its entirety by our Articles of
Association and Memorandum of Association that are included as exhibits or
incorporated by reference to the registration statement of which this Annual
Report forms a part and by the provisions of applicable law. Our Articles of Association provide that the minimum number of directors shall
be three and the maximum number of directors shall be 18. Currently, we have 15
directors. Our Articles of Association provide that at least two-thirds of our
directors shall be subject to retirement by rotation. One third of these
directors must retire from office at each Annual General Meeting of the
shareholders. A retiring director is eligible for re-election. Executive
directors are required to retire at age 60 in accordance with our employee
retirement policies. Other board members must retire from the board at age 65.
Our Articles of Association do not require that our directors have to hold
shares of our company in order to serve on our board of directors. Our Articles of Association provide that any director who has a personal
interest in a transaction must disclose such interest, must abstain from voting
on such a transaction and may not be counted for the purposes of determining
whether a quorum is present at the meeting. Such directors interest in any
such transaction shall be reported at the next meeting of shareholders. The
remuneration payable to our directors may be fixed by the board of directors in
accordance with provisions prescribed by the Government of India. Objects and Purposes of our Memorandum of Association The following is a summary of our Objects as set forth in Section 3 of our Memorandum of Association:  
    
    To provide services of every kind including commercial, statistical, financial, accountancy, medical, legal, management, educational,
engineering, data processing, communication and other technological, social or other services.
    
    To carry on all kinds of business as importer, exporter, buyers, sellers and lessors of and dealers in all types of components
and equipments necessary to provide the services our objects enlist.
    
    To manufacture, export, import, buy, sell, rent, hire or lease or otherwise acquire or dispose or deal in all kinds of digital
equipments, numerical controller, flexible manufacturing systems, robots, communication systems, computers, computer
peripherals, computer software, computer hardware, computer technology, machines, computer software, computer hardware,
computer technology, machines, computer aided teaching aids, energy saving devices, alternative sources of energy, electrical
and electronics components, devices, instruments, equipments and controls for any engineering applications, and all other
related components, parts and products used in communication
and computers.
    
    To conduct or otherwise subsidize or promote research and experiments for scientific, industrial, commercial economic,
statistical and technical purposes.
    
    To carry on any other trade or business whatsoever as can in our opinion can be advantageously or conveniently carried on by us. Description of equity shares Our authorized share capital is 100,000,000 equity shares, par value Rs. 5 per
share. As of March 31, 2004, 66,641,056 equity shares were issued, outstanding
and fully paid. The equity shares are our only class of share capital. We
currently have no convertible debentures or warrants outstanding. As of March
31, 2004, we had outstanding options to purchase 4,590,530 equity shares and
1,935,504 ADSs. For the purposes of this Annual Report, shareholder means a
shareholder who is registered as a member in our register of members. The board in its meeting held
on April 13, 2004 approved the increase in the authorized
capital to 350,000,000 equity shares, par value Rs. 5 per share,
which is subject to shareholder approval in the Annual General
Meeting to be held on June 12, 2004. Dividends Under the Indian Companies Act, our board of directors recommend the
payment of a dividend. However, the board is not obliged to declare a
dividend. Similarly, under our
Articles of Association and the Indian Companies Act, although the shareholders
may, at the Annual General Meeting, approve a dividend in an amount less than
that recommended by the board of directors, they cannot increase the amount of
the dividend. In India, dividends generally are declared as a percentage of the
par value of a companys equity shares. The dividend recommended by the board,
if any, and subject to the limitations described above, is distributed and paid
to shareholders in proportion to the paid up value of their shares within 30
days of the approval by the shareholders at the Annual General Meeting.
Pursuant to our Articles of Association, our board of directors has discretion
to declare and pay interim dividends without shareholder approval. With respect
to equity shares issued during a particular fiscal year, including any equity
shares underlying ADSs issued to the Depositary or in the future, unless
otherwise determined by shareholders, cash dividends declared and paid for such
fiscal year generally will be prorated from the date of issuance to the end of
such fiscal year. Under the Indian Companies Act, dividends can only be paid in
cash to the registered shareholder at a record date fixed on or prior to the
Annual General Meeting or to his order or his bankers order. The Indian Companies Act provides that any dividends that remain unpaid or
unclaimed after the 30-day period are to be transferred to a special bank
account. We transfer any dividends that remain unclaimed for seven years from
the date of the transfer to a fund created by the Government of India. After
the transfer to this fund, such unclaimed dividends may not be claimed. Under the Indian Companies Act, dividends may be paid out of profits of a
company in the year in which the dividend is declared or out of the
undistributed profits of previous fiscal years after providing for
depreciation. Before declaring a dividend greater than 10% of the par value of
its equity shares, a company is required to transfer to its reserves a minimum
percentage of its profits for that year, ranging from 2.5% to 10% depending
upon the dividend percentage to be declared in such year. 48




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The Indian Companies Act further provides that, in the event of an inadequacy
or absence of profits in any year, a dividend may be declared for such year out
of the companys accumulated profits, subject to the following conditions:  
    
    the rate of dividend to be declared may not exceed 10% of its paid up capital or the average of the rate at which dividends
were declared by the company in the prior five years, whichever is less;
    
    the total amount to be drawn from the accumulated profits earned in the previous years and transferred to the reserves may
not exceed an amount equivalent to 10% of its paid up capital and free reserves, and the amount so drawn is to be used
first to set off the losses incurred in the fiscal year before any dividends in respect of preference or equity shares are
declared; and
    
    the balance of reserves after withdrawals shall not fall below 15% of its paid up capital. Bonus shares In addition to permitting dividends to be paid out of current or retained
earnings as described above, the Indian Companies Act permits a company to
distribute an amount transferred from the general reserve or surplus in the
companys profit and loss account to its shareholders in the form of bonus
shares (similar to a stock dividend). The Indian Companies Act also permits the
issuance of bonus shares from a securities premium account. Bonus shares are
distributed to shareholders in the proportion recommended by the board of
directors. Shareholders of record on a fixed record date are entitled to
receive such bonus shares. Consolidation and subdivision of shares The Indian Companies Act permits a company to split or combine the par value of
its shares, provided such split or combination is not made in fractions.
Shareholders of record on a fixed record date are entitled to receive the split
or combination. Preemptive rights and issue of additional shares The Indian Companies Act gives shareholders the right to subscribe for new
shares in proportion to their respective existing shareholdings unless
otherwise determined by a special resolution passed by a General Meeting of the
shareholders. Under the Indian Companies Act, in the event of an issuance of
securities, subject to the limitations set forth above, a company must first
offer the new shares to the shareholders on a fixed record date. The offer must
include: (i) the right, exercisable by the shareholders of record, to renounce
the shares offered in favor of any other person; and (ii) the number of shares
offered and the period of the offer, which may not be less than 15 days from
the date of offer. If the offer is not accepted it is deemed to have been
declined and thereafter the board of directors is authorized under the Indian Companies Act
to distribute any new shares not purchased by the preemptive rights holders in
the manner that it deems most beneficial to the company. Meetings of shareholders We must convene an Annual General Meeting of shareholders within six months
after the end of each fiscal year. In certain circumstances a three month
extension may be granted by the Registrar of Companies to hold the Annual
General Meeting. In addition the Board may convene an Extraordinary General
Meeting of shareholders when necessary or at the request of a shareholder or
shareholders holding at least 10% of our paid up capital carrying voting
rights. The Annual General Meeting of the shareholders is generally convened by
our Secretary pursuant to a resolution of the board of directors. Written
notice setting out the agenda of the meeting must be given at least 21 days,
excluding the days of mailing and date of the meeting, prior to the date of the
General Meeting to the shareholders of record. Shareholders who are registered
as shareholders on the date of the general meeting are entitled to attend or
vote at such meeting. The Annual General Meeting of shareholders must be held
at our registered office or at such other place within the city in which the
registered office is located; meetings other than the Annual General Meeting
may be held at any other place if so determined by the board of directors. Our
Articles of Association provide that a quorum for a General Meeting is the
presence of at least five shareholders in person. Voting rights At any General Meeting, voting is by show of hands unless a poll is demanded by
a shareholder or shareholders present in person or by proxy holding at least
ten percent of the total shares entitled to vote on the resolution or by those
holding shares with an aggregate paid up capital of at least Rs. 50,000. Upon a
show of hands, every shareholder entitled to vote and present in person has one
vote and, on a poll, every shareholder entitled to vote and present in person
or by proxy has voting rights in proportion to the paid up capital held by such
shareholders. The Chairman
has a casting vote in the case of any tie. Any shareholder of the company may
appoint a proxy. The instrument appointing a proxy must be delivered to the
company at least 48 hours prior to the meeting. Unless the Articles otherwise
provide, a proxy may not vote except on a poll. A corporate shareholder may
appoint an authorized representative who can vote on behalf of the shareholder,
both upon a show of hands and upon a poll. An authorized representative is also
entitled to appoint a proxy. Ordinary resolutions may be passed by simple majority of those present and
voting at any General Meeting for which the required period of notice has been
given. However, special resolutions such as amendments of the Articles of
Association, commencement of a new line of business, the waiver of preemptive
rights for the issuance of any new shares and a reduction of share capital,
require that votes cast in favor of the resolution (whether by show of hands or
on a poll) are not less than three times the number of votes, if any, cast
against the resolution by members so entitled and voting. As per the Indian
Companies Act, unless the articles of association of a company provide for all,
not less than two-third of the directors of a public company must retire by
rotation, while the remaining one-third may remain on the board until they
resign or are removed. Our Articles of association require two thirds of our
Directors to retire by rotation. One-third of the directors who are subject to
retirement by rotation must retire each year. Further, the Indian Companies Act
requires certain resolutions such as those listed below to be voted on only by
a postal ballot:  
    
    amendments of the Memorandum of Association to alter the objects of
the company and changing the registered office of the company under
section 146 of the Indian Companies Act;
    
    the issuance of shares with differential voting rights;
    
    the sale of the whole or substantially the whole of an undertaking or
facilities of the company;
    
    providing loans, extending guarantees or providing a security in
excess of the limits allowed under Section 372A of the Indian Companies
Act;
    
    varying the rights of the holders of any class of shares or debentures;
    
    the election of a small shareholders director; and
    
    buy back of shares. 49




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Register of shareholders; record dates; transfer of shares We maintain a register of shareholders held in electronic form through National
Securities Depository Limited. For the purpose of determining the shares
entitled to annual dividends, the register is closed for a specified period
prior to the Annual General Meeting. The date on which this period begins is
the record date. To determine which shareholders are entitled to specified shareholder rights
such as dividend, we may close the register of shareholders. The Indian
Companies Act requires us to give at least seven days prior notice to the
public before such closure. We may not close the register of shareholders for
more than thirty consecutive days, and in no event for more than forty-five
days in a year. Trading of our equity shares, however, may continue while the
register of shareholders is closed. Following the introduction of the Depositories Act, 1996, and the repeal of
Section 22A of the Securities Contracts (Regulation) Act, 1956, which enabled
companies to refuse to register transfers of shares in some circumstances, the
equity shares of a public company are freely transferable, subject only to the
provisions of Section 111A of the Indian Companies Act. Since we are a public
company, the provisions of Section 111A will apply to us. Our Articles of
Association currently contain provisions which give our board of directors
discretion to refuse to register a transfer of shares in some circumstances.
Furthermore, in accordance with the provisions of Section 111A(2) of the Indian
Companies Act, our board of directors may refuse to register a transfer of
shares if they have sufficient cause to do so. If our board of directors
refuses to register a transfer of shares, the shareholder wishing to transfer
his, her or its shares may file a civil suit or an appeal with the Company Law
Board. Pursuant to Section 111A(3), if a transfer of shares contravenes any of the
provisions of the Indian Companies Act, 1956 and Securities and Exchange Board
of India Act, 1992 or the regulations issued thereunder or any other Indian
laws, the Tribunal may, on application made by the company, a depository
incorporated in India, an investor, a participant, the Securities and Exchange
Board of India or other parties, direct the rectification of the register
/record of members/beneficial owners . Pursuant to section 111A(4) the Tribunal
may, in its discretion, issue an interim order suspending the
voting rights attached to the relevant shares before making or completing its
investigation into the alleged contravention. Under the Indian Companies Act, unless the shares of a company are held in a
dematerialized form, a transfer of shares is effected by an instrument of
transfer in the form prescribed by the Indian Companies Act and the rules
thereunder together with delivery of the share certificates. Our transfer agent
for our equity shares is Karvy Computershare Private Limited located in Bangalore,
Karnataka, India. Disclosure of ownership interest Section 187C of the Indian Companies Act requires beneficial owners of shares
of Indian companies who are not holders of record to declare to the company
details of the holder of record and the holder of record to declare details of
the beneficial owner. Any person who fails to make the required declaration
within 30 days may be liable for a fine of up to Rs. 1,000 for each day the
declaration is not made. Any charge, promissory note or other collateral
agreement created, executed or entered into with respect to any share by the
ostensible owner thereof, or any hypothecation by the ostensible owner of any
share, pursuant to which a declaration is required to be made under Section
187C, shall not be enforceable by the beneficial owner or any person claiming
through the beneficial owner if such declaration is not made. Failure to comply
with Section 187C will not affect the obligation of the company to register a
transfer of shares or to pay any dividends to the registered holder of any
shares pursuant to which such declaration has not been made. While it is
unclear under Indian law whether Section 187C applies to holders of ADSs of the
company, investors who exchange ADSs for the underlying Equity Shares of the
company will be subject to the restrictions of Section 187C. Additionally,
holders of ADSs may be required to comply with such notification and disclosure
obligations pursuant to the provisions of the Deposit Agreement to be entered
into by such holders, the company and a depositary. Audit and annual report At least 21 days before the Annual General Meeting of shareholders, a company
must distribute a detailed version of the companys audited balance sheet and
profit and loss account and the reports of the board of directors and the
auditors thereon. Under the Indian Companies Act, a company must file the
balance sheet and annual profit and loss account presented to the shareholders
within 30 days of the conclusion of the Annual General Meeting with the
Registrar of Companies. A company must also file an annual return containing a list of the companys
shareholders and other company information, within 60 days of the conclusion of
the Annual General Meeting. Company acquisition of equity shares Under the Indian Companies Act, approval by way of a special resolution of a
companys shareholders voting on the matter (votes cast in favor should be
three times the votes cast against ) and approval of the High Court of the
state in which the registered office of the company is situated is required to
reduce a companys share capital. A company may, under some circumstances,
acquire its own equity shares without seeking the approval of the High Court.
However, a company would
have to extinguish the shares it has so acquired within the prescribed time
period. A company is not permitted to acquire its own shares for treasury
operations. An acquisition by a company of its own shares that does not rely on an approval
of the High Court must comply with prescribed rules, regulations and conditions
of the Indian Companies Act. In addition, public companies which are listed on
a recognized stock exchange in India must comply with the provisions of the
Securities and Exchange Board of India (Buy-back of Securities) Regulations,
1998, or Buy-back Regulations. Since we are a public company listed on several
recognized stock exchanges in India, we would have to comply with the relevant
provisions of the Indian Companies Act and the provisions of the Buy-back
Regulations. Any ADS holder may participate in a Companys purchase of its own
shares by withdrawing his or her ADSs from the depository facility, acquiring
equity shares upon the withdrawal and then selling those shares back to the
company. There can be no assurance that equity shares offered by an ADS investor in any
buy-back of shares by us will be accepted by us. The regulatory approvals
required for ADS holders to participate in a buyback is not entirely clear. ADS
investors are advised to consult their legal advisors prior to participating in
any buyback by us, including any related regulatory approvals and tax issues. Liquidation rights 50




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Subject to the rights of creditors, employees and the holders of any shares
entitled by their terms to preferential repayment over the equity shares, if
any, in the event of our winding-up, the holders of the equity shares are
entitled to be repaid the amounts of paid up capital or credited as paid upon
those equity shares. All surplus assets after payments to the holders of any
preference shares at the commencement of the winding-up shall be paid to
holders of equity shares in proportion to their shareholdings. Redemption of equity shares Under the Indian Companies Act, unlike preference shares, equity shares are not
redeemable. Discriminatory provisions in articles There are no provisions in the Articles of Association discriminating against
any existing or prospective holder of such securities as a result of such
shareholder owning a substantial number of shares. Alteration of shareholder rights Under the Indian Companies Act, the rights of any class of shareholders can be
altered or varied with the consent in writing of the holder of not less than
three-fourths of the issued shares of that class or with the sanction of a
special resolution passed at a separate meeting of the holders of the issued
shares of that class if the provisions with respect to such variation are
contained in the memorandum or articles of association of the company, or in
the absence of any such provision in the memorandum or articles of association,
if such variation is not prohibited by the terms of issue of the shares of that
class. Under the Indian Companies Act, the Articles may be altered by a special
resolution of the shareholders. Limitations on the rights to own securities The limitations on the rights to own securities of Indian companies, including
the rights of non-resident or foreign shareholders to hold securities, imposed
by Indian law are discussed in the Risk Factors elsewhere in this filing. Provisions on changes in capital Our authorized capital can be altered by an ordinary resolution of the
shareholders in a General Meeting. The additional issue of shares is subject to
the preemptive rights of the shareholders. In addition a company may increase
its share capital, consolidate its share capital into shares of larger face
value than its existing shares or sub-divide its shares by reducing their par
value, subject to an ordinary resolution of the shareholders in a General
Meeting. Takeover code and listing agreements Under the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997, or Takeover Code, upon the acquisition
of more than 5% or 10% or 14% of the outstanding shares or voting rights of a
publicly-listed Indian company, the acquirer (meaning a person who directly or
indirectly, acquires or agrees to acquire shares or voting rights in a company,
or acquires or agrees to acquire control over a company, either by himself or
with any person acting in concert) is required to disclose the aggregate of
his shareholding or voting rights in that company to the company and the
company and the said acquirer are required to notify all the stock exchanges
on which the shares of such company are listed. Further, the Takeover Code
requires that any person holding more than 15% and less than 75% of the shares
or voting rights in a company, upon the sale or purchase of 2% or more of the
shares or voting rights of the company, is required to disclose such
sale/purchase to the company and all the stock exchanges where the shares are
listed. A person who holds more than 15% of the shares or voting rights in any
company is required to make an annual disclosure of his holdings to that
company (which in turn is required to disclose the same and to each of the
stock exchanges on which the companys shares are listed). A holder of ADSs
would be subject to these notification requirements. Upon the acquisition of 15% or more of such shares or voting rights, or a
change in control of the company, the acquirer is required to make a public
announcement offering to purchase from the other shareholders, at least a
further 20% of all the outstanding shares of the company at a minimum offer
price determined pursuant to the Takeover Code. Since we are a listed company
in India, the provisions of the Takeover Code will apply to us and to any
person acquiring our equity shares or voting rights in our company. However,
the Takeover Code provides for a specific exemption from this provision to a
holder of ADSs and states that this provision will apply to a holder of ADSs
only once he or she converts the ADSs into the underlying equity shares. We have entered into listing agreements with each of the Indian stock exchanges
on which our equity shares are listed. Each of the listing agreements provides
that if a person acquires or agrees to
acquire 5% or more of the voting rights of our equity shares the purchaser and
we must, in accordance with the provisions of the Takeover Code, report its
holding to us and the relevant stock exchange(s). The agreements also provide
that if any person acquires or agrees to acquire our equity shares exceeding 15% of voting rights in our Company or if any person who holds our equity shares
(which in the aggregate carries less than 15% of the voting rights) seeks to
acquire our equity shares exceeding 15% of voting rights in our Company, then
the acquirer/ purchaser must, in accordance with the provisions of the Takeover
Code, before acquiring such equity shares, make an offer on a uniform basis to
all of our remaining shareholders to acquire equity shares that have at least
an additional 20% of the voting rights of our total outstanding equity shares
at a prescribed price. Although the provisions of the listing agreements entered into between us and
the Indian stock exchanges on which our equity shares are listed will not apply
to equity shares represented by ADSs, holders of ADSs may be required to comply
with such notification and disclosure obligations pursuant to the provisions of
the Deposit Agreement to be entered into by such holders, our company and a
depositary. Voting rights of deposited equity shares represented by ADSs Under Indian law, voting of the equity shares is by show of hands unless a poll
is demanded by a member or members present in person or by proxy holding at
least one-tenth of the total shares entitled to vote on the resolution or by
those holding an aggregate paid up capital of at least
Rs. 50,000. A proxy may not vote except on a poll. As soon as practicable after receipt of notice of any meetings or solicitation
of consents or proxies of holders of shares or other deposited securities, our
Depositary shall fix a record date for determining the holders entitled to give
instructions for the exercise of voting rights. The Depositary shall then mail
to the holders of ADSs a notice stating (i) such information as is contained in
such notice of meeting and any solicitation materials, (ii) that each holder on
the record date set by the Depositary therefore will be entitled to instruct
the Depositary as to the exercise of the voting rights, if any pertaining to
the deposited securities represented by the ADSs evidenced by such holders
ADRs, (iii) the 51




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manner in which such instruction may be given, including
instructions to give discretionary proxy to a person designated by us, and (iv)
if the Depositary does not receive instructions from a holder, he would be
deemed to have instructed the Depositary to give a discretionary proxy to the
person designated by us to vote for such deposited securities. On receipt of the aforesaid notice from the Depositary, our ADS holders may
instruct the Depositary on how to exercise the voting rights for the shares
that underlie their ADSs. For such instructions to be valid, the Depositary
must receive them on or before a specified date. The Depositary will try, as far as is practical, and subject to the provisions
of Indian law and our Memorandum of Association and our Articles of
Association, to vote or to have its agents vote the shares or other deposited
securities as per our ADS holders instructions. The Depositary
will only vote or attempt to vote as per an ADS holders instructions. The Depositary will not
itself exercise any voting discretion. Neither the Depositary nor its agents are responsible for any failure to carry
out any voting instructions, for the manner in which any vote is cast, or for
the effect of any vote. There is no guarantee that our shareholders will
receive voting materials in time to instruct the Depositary to vote and it is
possible that ADS holders, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to exercise a
right to vote. Material contracts Not applicable. Currency exchange controls Foreign investment in Indian securities is governed by the Foreign Exchange
Management Act, 1999 or the FEMA, which replaced the more stringent Foreign
Exchange Regulation Act, 1973, effective as of June 1, 2000. The Foreign
Direct Investment Policy under the Reserve Bank of Indias Automatic Route
enables Indian companies (other than those specifically excluded in the scheme)
to issue shares to persons resident outside India without prior permission from
the Reserve Bank of India, subject to certain conditions. General permission
has been granted for the transfer of shares and convertible debentures by a
person resident outside India as follows: (i) for transfers of shares or
convertible debentures held by a person resident outside India other than
non-resident Indians, or NRIs, or overseas corporate bodies, or OCBs to any
person resident outside India, provided that the transferee has obtained
permission of the Central Government and if that person had any previous
venture or tie-up in India through investment in any manner or a technical
collaboration or trademark agreement in the same field or allied field in which
the Indian company whose shares are being transferred is engaged, (ii) NRIs or
OCBs are permitted to sell shares or convertible debentures of an Indian
company to other NRIs or OCBs and (iii) a person resident outside India may
gift securities of an Indian company to a person resident in India. In all
other cases, prior approval of the Reserve Bank of India is necessary. For the
sale of existing shares or convertible debentures of an Indian company by a
resident to a non resident the transferor should obtain approval of the Central
Government (Govt. of India) and thereafter make an application to Reserve Bank
of India for permission. In such cases the Reserve Bank of India may permit the
transfer subject to such terms and conditions, including the price at which the
sale may be made. General Shares of Indian companies represented by ADSs may be approved for issuance to
foreign investors by the Government of India under the Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt
Mechanism) Scheme, 1993, or the 1993 Regulations, as modified from time to
time, promulgated by the Government of India. The 1993 Regulations are in
addition but without prejudice to the other policies or facilities, as
described below, relating to investments in Indian companies by foreign
investors. The issuance of ADSs pursuant to the 1993 Regulations also affords
to holders of the ADSs the benefits of Section 115AC of the Income Tax Act,
1961 for purposes of the application of Indian tax law. In March 2001, the
Reserve Bank of India issued a notification permitting, subject to certain
conditions, two-way fungibility of ADSs. This would mean that ADSs converted
into Indian shares may be converted back into ADSs, subject to compliance with
certain requirements and the limits of sectoral caps as applicable. Fungibility of ADSs In March 2001, the Reserve Bank of India amended the Foreign Exchange
Management (Transfer or Issue of Securities by a Person Resident Outside India)
Regulations, 2000 and established two alternative methods to allow equity
shares converted into and sold as ADSs. Pursuant to this amendment, a registered broker in India can purchase shares of
an Indian company that has issued ADSs, on behalf of a person resident outside
India, for the purposes of converting the shares into ADSs. However, such
conversion of equity shares into ADSs is possible only if the following
conditions are satisfied:  
    
    the shares are purchased on a recognized stock exchange;
    
    the shares are purchased with the permission of the Custodian to the
ADS offering of the Indian company and are deposited with the
Custodian;
    
    the shares purchased for conversion into ADSs do not exceed the number
of shares that were released by the Custodian pursuant to conversions
of ADSs into equity shares under the Depositary Agreement; and
    
    a non-resident investor, broker, the Custodian and the Depository
comply with the provisions of the Scheme for Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 and the related guidelines issued by the
Central Government from time to time. Alternatively, the amendment to the regulations permit an issuer in India to
sponsor the issue of ADSs through an overseas depositary against underlying
equity shares accepted from holders of its equity shares in India at a price to
be determined by the managing underwriters for the offering. However, the
sponsored issue of ADSs is possible only if the following conditions are
satisfied:  
    
    the ADS offering is approved by the Foreign Investment Promotion Board and the shareholders of the issuer in an extraordinary
general meeting;
    
    the facility is available to all the shareholders of the issuer;
    
    the proceeds of the offering are repatriated into India within one month; 52




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
    
    the sale of the existing shares by the Indian shareholders are made in compliance with the Foreign Direct Investment policy in India;
    
    the number of shares offered by the Indian shareholders are subject to limits in proportion to the existing holdings of the Indian
shareholders when the sale is oversubscribed; and
    
    the offering expenses do not exceed 7% of the offering proceeds and are paid by shareholders on a pro-rata basis. The issuer company is also required to furnish a report to the Reserve Bank of
India specifying the details of the offering including amount raised through
the offering, number of ADSs issued, underlying shares offered and percentage
of equity in the issuer. Foreign Direct Investment In July 1991, the Government of India issued a New Industrial Policy, and
raised the limit on foreign equity holdings in Indian companies from 40% to 51%
in certain high priority industries. The Reserve Bank of India gave automatic
approval for such foreign equity holdings within specified limits in certain
priority industries. The Foreign Investment Promotion Board currently under the
Ministry of Finance, but formerly under the Ministry of Industry, was
thereafter formed to approve proposals of foreign direct investment by foreign
companies wishing to make considerable long-term investments. Over a period of
time, the Government of India has relaxed the restrictions on foreign
investment considerably. Currently, subject to certain exceptions, foreign
direct investment by individuals of Indian nationality or origin residing
outside India, or NRIs or OCBs, up to 49% in most sectors of industry do not
require the prior approval of the Foreign Investment Promotion Board. Some
sectors of industry have recently been relaxed to allow up to 74% investment.
Currently, subject to industry specific investment limits where applicable,
Foreign Direct Investment by non-residents of up to 100% is permitted, subject
to the fulfillment of certain conditions. Foreign equity participation in
excess of 51% in certain high priority industries and in excess of percentages
prescribed by the Ministry of Industry is currently allowed only with the
approval of the Foreign Investment Promotion Board. So also in cases which
require Industrial Licenses under the Industries Development and Regulation
Act, 1951, compulsory Government approval is required for foreign direct
investment. Proposals involving the public sector and other sensitive areas require
approval of the Cabinet Committee on Economic Affairs. The Department of
Industrial Policy and Promotion, a part of the Ministry of Industry, issued
detailed guidelines in January 1997 for consideration of foreign direct
investment proposals by the Foreign Investment Promotion Board, or the
Guidelines. Under the Guidelines, sector specific guidelines for foreign direct
investment and the levels of permitted equity participation have been
established. In February 2000, the Department of Industrial Policy and
Promotion, issued a notification that foreign ownership of up to 50%, 51%, 74%
or 100%, depending on the category, would be allowed without prior permission
of the Foreign Investment Promotion Board and, in certain cases, without prior
permission of the Reserve Bank of India. The issues to be considered by the
Foreign Investment Promotion Board, and the Foreign Investment Promotion
Boards areas of priority in granting approvals are also set out in the
Guidelines. These guidelines have been substantially modified/relaxed under the
current Foreign Exchange Management Act dispensation. The basic objective of the Guidelines is to enhance the transparency and
provide for objectivity of the Foreign Investment Promotion Boards
consideration of proposals. However, since these are administrative guidelines
issued in the form or press notes/releases by the Department of Industrial
Policy and Promotion, Government of India and have not been codified as either
law or regulations, they are not legally binding with respect to any
recommendation made by the Foreign Investment Promotion Board or with respect
to any decision taken by the Government of India in cases involving foreign
direct investment. In May 1994, the Government of India announced that purchases by foreign
investors of ADSs as evidenced by ADSs and foreign currency convertible bonds
of Indian companies would be treated as direct foreign investment in the equity
issued by Indian companies for such offerings. Therefore, offerings that
involve the issuance of equity that results in Foreign Direct Investors holding
more than the stipulated percentage of direct foreign investments (which
depends on the category of industry) would require approval from the Foreign
Investment Promotion Board. In addition, offerings by Indian companies of any such securities to foreign
investors require approval of the Foreign Investment Promotion Board whether or
not the stipulated percentage limit would be reached if the proceeds will be
used for investment in specified industries. In August 2000, the Department of
Industrial Policy and Promotion removed all limitations on Foreign Direct
Investment in the IT industry. Investment by non-resident Indians and overseas corporate bodies A variety of facilities for making investments in shares of Indian companies
are available to non-residents, being persons of Indian nationality (NRI) or
persons of Indian origin (PIO) residing outside India, and to Overseas
Corporate Bodies or OCBs. Overseas corporate bodies are those wherein not less
than sixty percent of the beneficial interest in the concern incorporated or
set up outside India is held by persons of Indian origin or by non-resident
Indians. Generally all facilities available to natural persons, i.e. NRIs and
PIOs are made available to OCBs too. These facilities permit NRIs, PIOs and
OCBs to make portfolio investments in shares and other securities of Indian
companies on a basis that is not generally available to other foreign
investors. These facilities are somewhat distinguishable from investments by
Foreign Direct Investors (i.e. investment by companies or concerns which are
not OCBs or persons who are not NRIs or PIOs) as described above. Investments
may be made on repatriation or non-repatriation basis. However, in either case,
income earned from such investments is repatriable after payment of income tax
as applicable since such remittance would be treated as a current account
transaction under the FEMA. Investment by Foreign Institutional Investors In September 1992, the Government of India issued guidelines which enable
Foreign Institutional Investors, or FIIs, including institutions such as
pension funds, investment trusts, asset management companies, nominee companies
and incorporated/institutional portfolio managers, to invest in all the
securities traded on the primary and secondary markets in India. Under the
guidelines, FIIs are required to obtain an initial registration from the
Securities and Exchange Board of India, or SEBI, and a general permission from
the Reserve Bank of India to engage in transactions regulated under the Foreign
Exchange Management Act. FIIs must also comply with the provisions of the SEBI
Foreign Institutional Investors Regulations, 1995. When it receives the initial
registration, the FII also obtains general permission from the Reserve Bank of
India to engage in transactions regulated under the Foreign Exchange Management
Act. Together, the initial registration and the Reserve Bank of Indias general
permission enable the registered FII to: (i) buy (subject to the ownership
restrictions discussed below) and sell unrestricted securities issued by Indian
companies; (ii) realize capital gains on investments made through the initial
amount invested in 53




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India; (iii) participate in rights offerings for shares; (iv) appoint a
domestic custodian for custody of investments held; and (v) repatriate the
capital, capital gains, dividends, interest income and any other compensation
received pursuant to rights offerings of shares. The current policy with
respect to purchase/sale of securities of an Indian company by an FII is
enshrined in Schedule 2 and Regulation 5(2) of the FEM (Transfer or Issue of
Securities by a Person Resident Outside India) Regulations, 2000. Ownership restrictions The SEBI and Reserve Bank of India regulations, restrict investments in Indian
companies by FIIs, NRIs and OCBs or collectively, Foreign Direct Investors.
Under the current SEBI regulations applicable to us, subject to the requisite
approvals of the shareholders in a general meeting, Foreign Direct Investors in
aggregate may hold no more than 49% of a companys equity shares, excluding the
equity shares underlying the ADSs. Pursuant to Notification No. FEMA.45/2001-RB
dated September 20, 2001 under Foreign Exchange Management (Transfer or Issue
of Securities by a Person Resident Outside India) (Amendment) Regulations,
2001, upon obtaining the approval of the shareholders by a special resolution,
the limit of FII investment in a company may be increased to 100% for companies
in the IT industry. Furthermore, SEBI regulations provide that no single FII may hold more than 10%
of a companys total equity shares. There is uncertainty under Indian law about the tax regime applicable to FIIs,
which hold and trade ADSs. FIIs are urged to consult with their Indian legal
and tax advisers about the relationship between the FII guidelines and the ADSs
and any equity shares withdrawn upon surrender of the ADSs. Detailed provisions relating to FII investment have been introduced by the SEBI
with the introduction of the SEBI Foreign Institutional Investors Regulations,
1995. These provisions relate to the registration of FIIs, their general
obligations and responsibilities, and certain investment conditions and
restrictions. One such restriction is that the total investment in equity and
equity-related instruments should not be less than 70% of the aggregate of all
investments of an FII in India. The SEBI has also permitted private placements
of shares by listed companies with FIIs, subject to the prior approval of the
Reserve Bank of India under the Foreign Exchange Management Act. Such private
placements must be made at the average of the weekly highs and lows of the
closing price over the preceding six months or the preceding two weeks,
whichever is higher. Under the Takeover Code, which replaced the 1994 Takeover Code (as defined
herein), upon the acquisition of more than 5% or 10% or 14% of the outstanding
shares of a public Indian company, a purchaser is required to notify the
company and the company and the purchasers are required to notify to all the
stock exchanges on which the shares of the company are listed. Upon the
acquisition of 15% or more of such shares or a change in control of the
company, the purchaser is required to make an open offer to the other
shareholders offering to purchase at least 20% of all the outstanding shares of
the company at a minimum offer price as determined pursuant to the rules of the
Takeover Code. Upon conversion of ADSs into equity shares, a holder of ADSs
will be subject to the Takeover Code. Open market purchases of securities of Indian companies in India by Foreign
Direct Investors above the ownership levels set forth above require Government
of India approval on a case-by-case basis. Government of India approvals Foreign direct investment by non-residents requires approval from the Foreign
Investment Promotion Board, unless it results in an issuance of securities
excepted by the FEMA. Additionally, Reserve Bank of India approval is required
for:  
    
    any holder of the underlying equity shares to transfer rights in the underlying equity shares in favor of a person resident in India; and
    
    the sale of the underlying equity shares held by a person resident outside India to a person resident in India. When the Reserve Bank of Indias approval is required the foreign investor
would have to apply to the Reserve Bank of India by submitting Form TS1, which
requires information as to the transferor, the transferee, the shareholding
structure of the company whose shares are to be sold, the proposed price and
other information. The Reserve Bank of India is not required to respond to a
Form TS1 application within any specific time frame and may grant or deny the
application at its discretion. Examples of exceptions from the Reserve Bank of Indias approval requirement
include sales made in the stock market through a registered Indian broker,
through a recognized stock exchange in India at the prevailing market rates, or
if the shares are offered in accordance with the terms of an offer under the
Takeover Code. The proceeds from any sale of the underlying equity shares by a person resident
outside India to a person resident in India may only be transferred outside
India after receipt of Reserve Bank of Indias approval, and the payment of
applicable taxes and stamp duties. No approval is required for transfer of ADSs outside India between two
non-residents. Shareholders resident outside India who intend to sell or otherwise transfer
equity shares within India should seek the advice of Indian counsel to
understand the requirements applicable at that time. The Reserve Bank of India in
terms of its direction in AP (DIR) Series Circular No. 14 dated
September 16, 2003 has de-recognized OCBs as an eligible class
of investment under various routes and schemes under the Foreign
Exchange Regulations. Accordingly, the Reserve Bank
has imposed a ban on OCBs under the Portfolio Scheme and has decided
that OCBs shall not be allowed to make fresh investment in India
under various routes and schemes. Reserve Bank has also
withdrawn the facility of NRE/FCNR/NRO deposits for OCBs. Further,
an unincorporated entity shall not be allowed to make fresh investment
under Foreign Direct Investment Scheme including the automatic route. The details of the policy
decision are available in the above circular dated September 16,
2003, which also impose the restrictions on fresh investment under
foreign direct investment, purchase of shares and debentures on
non-repatriation basis, government securities and treasury bills etc.
prohibition on transfer by OCBs of shares and debentures to other
OCBs, prohibition on purchase of equity/preference shares or
convertible debentures offered on rights basis by an Indian company. Taxation Indian taxation General.The following summary is based on the law and practice of the Indian
Income-tax Act, 1961, or Income-tax Act, including the special tax regime
contained in Sections 115AC and 115ACA of the Income-tax Act read with the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993, or the Scheme, as amended on,
January 19, 2000. The Income-tax Act is amended every year by the Finance Act
of the relevant year. Some or all of the tax consequences of Sections 115AC and
115ACA may be amended or changed by future amendments to the Income-tax Act. We believe this information is materially complete as of the date hereof.
However, this summary is not intended to constitute a complete analysis of the
individual tax consequences to non-resident holders or employees under Indian
law for the acquisition, ownership and sale of ADSs and equity shares. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS WITH
RESPECT TO INDIAN AND LOCAL TAX CONSEQUENCES OF ACQUIRING, OWNING OR DISPOSING
OF EQUITY SHARES OR ADSs. 54




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Residence.For purposes of the Income-tax Act, an individual is considered to
be a resident of India during any fiscal year if he or she is in India in that
year for:  
    
    a period or periods amounting to at least 182 days; or
    
    at least 60 days and, within the four preceding years has been in India for a period or periods amounting to at least 365 days. The period of 60 days referred to above shall be read as 182 days or more in
case of a citizen of India or a PIO living abroad. A company is a resident of India if it is incorporated in India or the control
and the management of its affairs is situated wholly in India. Individuals and
companies that are not residents of India would be treated as non-residents for
purposes of the Income-tax Act. Taxation of distributions.The Finance Act, 2003 states that after April 1,
2003, dividend income will be exempt from tax for shareholders and that
domestic companies will be liable to pay a dividend distribution tax at the
rate of 12.5% plus a surcharge at the time of the distribution. Any distributions of additional ADSs or equity shares to resident or
non-resident holders will not be subject to Indian tax. Taxation of capital gains.The following is a brief summary of capital gains
taxation of non-resident holders and resident employees relating to the sale of
ADSs and equity shares received upon redemption of ADSs. The relevant
provisions are contained mainly in sections 45, 47(vii)(a), 115AC and 115ACA,
of the Income-tax Act, in conjunction with the Scheme. Effective April 1, 2002,
the Finance Act 2001 introduced a new section 115AC in place of the prevailing
section 115AC of the Income-tax Act. You should consult your own tax advisor
concerning the tax consequences of your particular situation. Gains realized upon the sale of ADSs or shares that have been held for a period
of more than thirty-six months and twelve months, respectively, are considered
long-term capital gains. Gains realized upon the sale of ADSs or shares that
have been held for a period of thirty six months or less and twelve months or
less, respectively, are considered short-term capital gains. Capital gains are
taxed as follows:  
    
    gains from a sale of ADSs outside India by a non-resident to another non-resident are not taxable in India;
    
    long-term capital gains realized by a resident from the transfer of the ADSs will be subject to tax at the rate of 10%
excluding the applicable surcharge; short-term capital gains on such a transfer will be taxed at graduated rates with a
maximum of 30%, excluding the applicable surcharge;
    
    long-term capital gains realized by a nonresident individual holder upon the sale of equity shares obtained from the
redemption of ADSs are subject to tax at a rate of 10% excluding the applicable surcharge;
    
    long-term capital gains realized by a nonresident corporate holders upon the sale of equity shares obtained through the
redemption of ADSs are subject to taxation at the rate of 10%, excluding the applicable surcharge; and
    
    short-term capital gains realized upon the sale of equity shares obtained from the redemption of ADSs will be taxed at
variable rates with a maximum of 40% excluding the applicable surcharge, in case of foreign companies, and 30% excluding
the applicable surcharge in the case of resident and non-resident individuals with taxable income over Rs. 150,000. The Finance Act, 2003 exempts long-term capital gains from tax when they are
derived from the transfer of equity shares in a company listed on a recognized
stock exchange in India and is a constituent of BSE 500 indices and
purchased on or after March 1, 2003, but before
March 1, 2004 and purchase and sale are entered
into on a recognised stock exchange in India. The above rates may be offset by the applicable credit mechanism allowed under
double tax avoidance agreements in the case of non-residents. The capital gains
tax is computed by applying the appropriate tax rates to the difference between
the sale price and the purchase price of the equity shares or ADSs. Under the
Scheme, the purchase price of equity shares in an Indian listed company
received in exchange for ADSs will be the market price of the underlying shares
on the date that the Depositary gives notice to the custodian of the delivery
of the equity shares in exchange for the corresponding ADSs, or the stepped
up basis purchase price. The market price will be the price of the equity
shares prevailing on the Stock Exchange, Mumbai or the National Stock Exchange.
There is no corresponding provision under the Income-tax Act in relation to the
stepped up basis for the purchase price of equity shares. However the tax
department in India has not denied this benefit. In the event that the tax
department denies this benefit, the original purchase price of ADSs would be
considered the purchase price for computing the capital gains tax. According to the Scheme, a non-resident holders holding period for the
purposes of determining the applicable Indian capital gains tax rate relating
to equity shares received in exchange for ADSs commences on the date of the
notice of the redemption by the Depositary to the custodian. However, the
Scheme does not address this issue in the case of resident employees, and it is
therefore unclear as to when the holding period for the purposes of determining
capital gains tax commences for such a resident employee. The Scheme provides that if the equity shares are sold on a recognized stock
exchange in India against payment in Indian rupees, they will no longer be
eligible for the preferential tax treatment. It is unclear as to whether section 115AC and the Scheme are applicable to a
non-resident who acquires equity shares outside India from a non-resident
holder of equity shares after receipt of the equity shares upon redemption of
the ADSs. It is unclear as to whether capital gains derived from the sale of subscription
rights or other rights by a non-resident holder not entitled to an exemption
under a tax treaty will be subject to Indian capital gains tax. If such
subscription rights or other rights are deemed by the Indian tax authorities to
be situated within India, the gains realized on the sale of such subscription
rights or other rights will be subject to Indian taxation. The capital gains
realized on the sale of such subscription rights or other rights, which will
generally be in the nature of short-term capital gains, will be subject to tax
at variable rates with a maximum rate of 40%, excluding the applicable
surcharge, in case of a foreign company, and 30%, excluding the applicable
surcharge, in case of resident employees, and non-resident individuals with
taxable income over Rs. 150,000. Withholding tax on capital gains.Any gain realized by a non-resident or
resident employee on the sale of equity shares is subject to Indian capital
gains tax, which, in the case of a non-resident is to be withheld at the source
by the buyer. Buy-back of securities.Indian companies are not subject to any tax on the
buy-back of their shares. However, the shareholders will be taxed on any
resulting gains. We would be required to deduct tax at source according to the
capital gains tax liability of a non-resident shareholder. 55




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Stamp duty and transfer tax.Upon issuance of the equity shares underlying our
ADSs, we will be required to pay a stamp duty of 0.1% per share of the issue
price of the underlying equity shares. A transfer of ADSs is not subject to
Indian stamp duty. A sale of equity shares in physical form by a non-resident
holder will also be subject to Indian stamp duty at the rate of 0.5% of the
market value of the equity shares on the trade date, although customarily such
tax is borne by the transferee. Shares must be traded in dematerialized form.
The transfer of shares in dematerialized form is currently not subject to stamp
duty. Wealth tax.The holding of the ADSs and the holding of underlying equity shares
by resident and non-resident holders will be exempt from Indian wealth tax.
Non-resident holders are advised to consult their own tax advisors regarding
this issue. Gift tax and estate duty.Currently, there are no gift taxes or estate duties.
These taxes and duties could be restored in future. Non-resident holders are
advised to consult their own tax advisors regarding this issue. Service tax.Brokerage or commission paid to stock brokers in connection with
the sale or purchase of shares is subject to a service tax of 8%. The stock
broker is responsible for collecting the service tax from the shareholder and
paying it to the relevant authority. United States federal taxation The following is a summary of the material U.S. federal income and estate tax
consequences that may be relevant with respect to the acquisition, ownership
and disposition of equity shares or ADSs and is for general information only.
This summary addresses the U.S. federal income and estate tax considerations of
holders that are U.S. holders. U.S. holders are beneficial holders of equity
shares or ADSs who are citizens or residents of the United States, or
corporations created in or under the laws of the United States or any political
subdivision thereof or therein, estates, the income of which is subject to U.S.
federal income taxation regardless of its source, and trusts for which a U.S.
court exercises primary supervision and a U.S. person has the authority to
control all substantial decisions. This summary is limited to U.S. holders who
will hold equity shares or ADSs as capital assets. In addition, this summary is
limited to U.S. holders who are not resident in India for purposes of the
Convention Between the Government of the United States of America and the
Government of the Republic of India for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion With Respect to Taxes on Income. This summary does not address tax considerations applicable to holders that may
be subject to special tax rules, such as banks, insurance companies, financial
institutions, dealers in securities or currencies, tax-exempt entities, persons
that will hold equity shares or ADSs as a position in a straddle or as part
of a hedging or conversion transaction for tax purposes, persons that have
a functional currency other than the U.S. dollar or holders of 10% or more,
by voting power or value, of the shares of our company. This summary is based
on the tax laws of the United States as in effect on the date of this Annual
Report and on United States Treasury Regulations in effect or, in some cases,
proposed, as of the date of this Annual Report, as well as judicial and
administrative interpretations thereof available on or before such date, and is
based in part on the assumption that each obligation in the deposit agreement
and any related agreement will be performed in accordance with its terms. All
of the foregoing are subject to change, which change could apply retroactively
and could affect the tax consequences described below. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR WITH
RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
ACQUIRING, OWNING OR DISPOSING OF EQUITY SHARES OR ADSs. Ownership of ADSs.For U.S. federal income tax purposes, holders of ADSs will
be treated as the holders of equity shares represented by such ADSs. Dividends.Except for ADSs or equity shares, if any, distributed pro rata to
all shareholders of our company, including holders of ADSs, the gross amount of
any distributions of cash or property with respect to ADSs or equity shares
(before reduction for any Indian withholding taxes) will generally be included
in income by a U.S. holder as foreign source dividend income at the time of
receipt, which in the case of a U.S. holder of ADSs generally should be the
date of receipt by the Depositary, to the extent such distributions are made
from the current or accumulated earnings and profits (as determined under U.S.
federal income tax principles) of our company. Such dividends will not be
eligible for the dividends received deduction generally allowed to corporate
U.S. holders. To the extent, if any, that the amount of any distribution by our
company exceeds our companys current and accumulated earnings and profits as
determined under U.S. federal income tax principles, it will be treated first
as a tax-free return of the U.S. holders tax basis in the equity shares or
ADSs and thereafter as capital gain. Subject to certain conditions and limitations, any Indian withholding tax
imposed upon distributions paid to a U.S. holder with respect to ADSs or equity
shares will be eligible for credit against the U.S. holders federal income tax
liability. Alternatively, a U.S. holder may claim a deduction for such amount,
but only for a year in which a U.S. holder does not claim a credit with respect
to any foreign income taxes. The overall limitation on foreign taxes eligible
for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends distributed by us with respect to equity shares or
ADSs will generally constitute foreign source passive income (or, in the case
of certain holders, financial services income). If dividends are paid in Indian rupees, the amount of the dividend distribution
included in the income of a U.S. holder will be in the U.S. dollar value of the
payments made in Indian rupees, determined at a spot exchange rate between
Indian rupees and U.S. dollars applicable to the date such dividend is included
in the income of the U.S. holder, regardless of whether the payment is in fact
converted into U.S. dollars. Generally, gain or loss, if any, resulting from
currency exchange fluctuations during the period from the date the dividend is
paid to the date such payment is converted into U.S. dollars will be treated as
U.S. source ordinary income or loss. Sale or exchange of equity shares or ADSs.A U.S. holder generally will
recognize gain or loss on the sale or exchange of equity shares or ADSs equal
to the difference between the amount realized on such sale or exchange and the
U.S. holders tax basis in the equity shares or ADSs, as the case may be. Such
gain or loss will be capital gain or loss, and will be long-term capital gain
or loss if the equity shares or ADSs, as the case may be, were held for more
than one year. Gain or loss, if any, recognized by a U.S. holder generally will
be treated as U.S. source passive income or loss for U.S. foreign tax credit
purposes. Capital gains realized by a U.S. holder upon the sale of equity
shares (but not ADSs) may be subject to certain tax in India. See Taxation 
Indian Taxation  Taxation of Capital Gains. Due to limitations on foreign tax
credits, however, a U.S. holder may not be able to utilize any such taxes as a
credit against the U.S. holders federal income tax liability. 56




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Estate taxes.An individual shareholder who is a citizen or resident of the
United States for U.S. federal estate tax purposes will have the value of the
equity shares or ADSs held by such holder included in his or her gross estate
for U.S. federal estate tax purposes. An individual holder who actually pays
Indian estate tax with respect to the equity shares will, however, be entitled
to credit the amount of such tax against his or her U.S. federal estate tax
liability, subject to a number of conditions and limitations. Backup withholding tax and information reporting requirements.Any dividends
paid, or proceeds on a sale of, equity shares or ADSs to or by a U.S. holder
may be subject to U.S. information reporting, and a backup withholding tax
(currently at a rate of 30% for 2003, 29% for 2004-2005, 28% for 2006-2010, and
31% thereafter) may apply unless the holder is an exempt recipient or provides
a U.S. taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with any applicable backup
withholding requirements. Any amount withheld under the backup withholding
rules will be allowed as a refund or credit against the holders U.S. federal
income tax, provided that the required information is furnished to the Internal
Revenue Service. Passive foreign investment company.A non-U.S. corporation will be classified
as a passive foreign investment company for U.S. Federal income tax purposes if
either:  
    
    75% or more of its gross income for the taxable year is passive income; or
    
    on average for the taxable year by value, or, if it is not a publicly traded corporation and so elects, by adjusted basis,
if 50% or more of its assets produce or are held for the production of passive income. We do not believe that we satisfy either of the tests for passive foreign
investment company status for our current taxable year. We will be required to
determine our status as a passive foreign investment company on an annual
basis. No assurance can be given that we will not be considered a passive
foreign investment company in future taxable years. If we were to be a passive
foreign investment company for any taxable year, U.S. holders would be required
to either:  
    
    pay an interest charge together with tax calculated at ordinary income
rates on excess distributions, as the term is defined in relevant
provisions of the U.S. tax laws and on any gain on a sale or other
disposition of equity shares;
    
    if a qualified electing fund election (as the term is defined in
relevant provisions of the U.S. tax laws) is made, include in their
taxable income their pro rata share of undistributed amounts of our
income; or
    
    if the equity shares are marketable and a mark-to-market election is
made, mark-to-market the equity shares each taxable year and recognize
ordinary gain and, to the extent of prior ordinary gain, ordinary loss
for the increase or decrease in market value for such taxable year. If we are treated as a passive foreign investment company, we do not plan to
provide information necessary for the qualified electing fund election. The above summary is not intended to constitute a complete analysis of all tax
consequences relating to ownership of equity shares or ADSs. You should consult
your own tax advisor concerning the tax consequences of your particular
situation. 57




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Documents on display This report and other information filed or to be filed by Infosys Technologies
Limited can be inspected and copied at the public reference facilities
maintained by the SEC at:  
    
    Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20529
    
    Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661  2511 Copies of these materials can also be obtained from the Public Reference
Section of the SEC, 450th Street, N.W. Washington, D.C. 20549, at prescribed
rates. The SEC maintains a web site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. Additionally, documents referred to in this Form 20-F may be inspected at our
corporate offices which are located at Electronics City, Hosur Road,
Bangalore-560 100. Subsidiary information
Not applicable. 
 Item 11. Quantitative and qualitative disclosure about market risk This information is set forth under the caption Operating and Financial Review
and Prospects is as set out above in this document for the fiscal year ended
March 31, 2004 and such information is incorporated herein by reference. 
 Item 12. Description of securities other than equity securities Not applicable. 
 Part II 
 Item 13. Defaults, dividend arrearages and delinquencies None. 
 Item 14. Material modifications to the rights of security holders and use of proceeds Our Board has recommended an issue of bonus shares of three additional equity
shares for every equity share held on a record date. This proposal is subject
to the approval of our shareholders in the ensuing Annual General Meeting
scheduled for June 12, 2004. If approved, all holders of equity shares on July
2, 2004, the record date, set by our Board, will receive three additional equity
shares for every equity share held by them. The Depositary will receive
likewise, three additional equity shares for every equity share deposited as
underlying equity share pursuant to the Depositary Agreement. Our Board has recommended a stock dividend of one ADS for every ADS held on a
record date. This proposal is subject to the approval of our shareholders in
the ensuing Annual General Meeting scheduled for June 12, 2004. If approved,
all holders of ADSs as on July 2, 2004, the record date, set by
our Board,
will, receive one additional ADS for every ADS held by them. The Depositary
will distribute the additional ADSs on July 6, 2004. Consequent to the issue of bonus shares to the holders of equity shares and the
issue of stock dividend to the holders of the ADSs, each ADS will represent on
conversion one equity share. Currently, each ADS represents one half of one
equity share. Our equity shares are currently traded in India on the Stock Exchange, Mumbai,
formerly known as the Bombay Stock Exchange, or BSE, the Bangalore Stock
Exchange, or BgSE, and the National Stock Exchange of India Limited, or NSE.
Our Board has recommended that our equity shares be delisted from the Bangalore
Stock Exchange and has sought the approval of the shareholders in the ensuing
Annual General Meeting for this purpose. 
 Item 15. Controls and procedures Evaluation of disclosure controls and procedures Based on their evaluation as of a date within 90 days of the filing of this
Annual Report on Form 20-F, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the Exchange Act) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms. 58




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Changes in internal controls There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken. 
 Item 16 A. Audit committee financial expert Mr. Sridar Iyengar joined our board of directors on April 10, 2003. On April
10, 2003, our Board nominated Mr. Sridar Iyengar as a member of its audit
committee. Our board of directors has determined that Mr. Sridar Iyengar is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K,
and is independent pursuant to applicable NASDAQ rules. 
 Item 16 B. Code of ethics On April 9, 2003, our audit committee adopted a written code of ethics as
defined in Item 406 of Regulation S-K, applicable to its principal executive
officer, principal financial officer, principal accounting officer and all
officers working in its finance, accounting, treasury, internal audit, tax,
legal, purchase, financial analyst, investor relations functions, disclosure
committee members, senior management, members of the audit committee and the
board. The code of ethics is posted on our website at www.infosys.com. We will
provide a copy of such code of ethics to any person without charge, upon
request. On April 9, 2003, our audit committee also adopted a Whistleblower Policy
wherein it has established procedures for receiving, retaining and treating
complaints received, and procedures for the confidential, anonymous submission
by employees of complaints regarding questionable accounting or auditing
matters, conduct which results in a violation of law by Infosys or in a
substantial mismanagement of company resources. Under this policy our employees
are encouraged to report questionable accounting matters, any reporting of
fraudulent financial information to our shareholders, the government or the
financial markets any conduct that results in a violation of law by Infosys to
our management (on an anonymous basis, if employees so desire). Likewise, under
this policy, we have prohibited discrimination, retaliation or harassment of
any kind against any employee who, based on the employees reasonable belief
that such conduct or practices have occurred or are occurring, reports that
information or participates in an investigation. Our Code of Conduct,
applicable to all officers, directors and employees is available on
our website, www.infosys.com. Item 16 C. Principal Accountant Fees and Services The following table sets forth for the fiscal years indicated the fees paid to
our principal accountant and its associated entities for various services they
provided us in these periods. Type of Service
    
    Fiscal year ended
    
    Description of ServicesMarch 31, 2003
    
    March 31, 2004(a) Audit Fees
    
    $115,342
    
    
    
    $140,673
    
    
    
    Audit of financial statements(b) Audit-Related Fees
    
    23,746
    
    
    
    63,211
    
    
    
    Services related to review of
financial statements and due diligence(c) Tax Fees
    
    54,196
    
    
    
    195,152
    
    
    
    Tax audit, tax returns, tax
processing, tax filing and advisory services(d) All Other Fees
    
    294,688
    
    
    
    339,266
    
    
    
    Statutory certifications, quality
registrar, work permit related services and other advisory services
 The principal accountants
were also paid $117,440 (fees, expenses and applicable taxes) during
the year ended March 31, 2004 by the selling shareholders for
the professional services rendered in relation to the Sponsored
Secondary ADR Program. Our audit committee charter requires us to take the prior approval of our audit
committee on every occasion we engage our principal accountants or their
associated entities to provide us any non-audit services. We disclose to our
audit committee the nature of services that are provided and the fees to be
paid for the services. All of the non-audit services provided by our principal
accountants or their associated entities in the previous two fiscal years have
been pre-approved by our Audit Committee. We were notified by our existing US GAAP accountants, KPMG (Registered), an
Indian partnership, (KPMG India) that for the fiscal year ended March 31,
2004, KPMG LLP, a UK limited liability partnership (KPMG LLP) would serve as
the our US GAAP accountants. The change was made at the request of KPMG India.
We report financial results in accordance with both US GAAP and Indian GAAP.
Under the rules promulgated by the US Securities and Exchange Commission (the
SEC), the change from KPMG India to KPMG LLP for fiscal years ended March 31,
2004 and forward constitutes a change in our certifying accountants. The
change, however, is likely to be transitory, with KPMG India expected to be
re-appointed as our US GAAP accountants once they have successfully completed
registration with the U.S. Public Company Accounting Oversight Board (the
PCAOB). There has been no change in our Indian GAAP accountants, Bharat S.
Raut and Co. The reports of KPMG India on our financial statements for each of the fiscal
years ended March 31, 2002 and 2003 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. During the fiscal years ended March 31, 2002 and 2003 and through the date of
change of accountants, there were no disagreements with KPMG India on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of KPMG
India, would have caused them to make reference to the subject matter in
connection with their reports on our financial statements for such years.
There were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K. Item 16 D. Exemptions from the Listing Standards for Audit Committees We have not sought any exemption from the listing standards for audit
committees applicable to us as foreign private issuer, pursuant to Rule
10(A)-3(d) of the Securities Exchange Act of 1934. 59




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Item 16 E. Purchase of Equity Securities by the Issuer and Affiliated
Purchasers Not Applicable 
 Part III 
 Item 17. Financial statements Not Applicable. 60




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Item 18. Financial statements Consolidated statements and other financial information Report of the audit committee To the members of Infosys Technologies Limited In connection with the March 31, 2004 consolidated financial statements
prepared under United States Generally Accepted Accounting Principles, the
audit committee: (1) reviewed and discussed the consolidated financial
statements with management; (2) discussed with the auditors the matters
required by Statement on Auditing Standards No. 61; and (3) reviewed and
discussed with the auditors the matters required by Independence Standards
Board Statement No. 1. Based upon these reviews and discussions, the audit
committee recommended to the board of directors that the audited consolidated
financial statements be included in the Annual Report on Form 20-F filed with
the Securities and Exchange Commission of the United States of America. Bangalore, India
April 13, 2004
    
    Deepak M. SatwalekarChairman, Audit committee
Senator Larry L. PresslerMember, Audit committee
Sridar IyengarMember, Audit committee
    
    Dr. Marti G. SubrahmanyamMember, Audit committee
Rama BijapurkarMember, Audit committee
    
    Dr. Omkar GoswamiMember,Audit committee
 Report of management The management is responsible for preparing the companys consolidated
financial statements and related information that appears in this annual
report. The management believes that the consolidated financial statements
fairly reflect the form and substance of transactions, and reasonably present
the financial condition and results of operations of Infosys Technologies
Limited and subsidiaries in conformity with United States Generally Accepted
Accounting Principles. The management has included, in the companys
consolidated financial statements, amounts that are based on estimates and
judgments, which it believes are reasonable under the circumstances. The company maintains a system of internal procedures and controls intended to
provide reasonable assurance, at appropriate cost, that transactions are
executed in accordance with company authorization and are properly recorded and
reported in the consolidated financial statements, and that assets are
adequately safeguarded. KPMG LLP audits the companys consolidated financial statements in accordance
with the generally accepted auditing standards in the United States of America. The board of directors has appointed an audit committee composed of outside
directors. The committee meets with the management, internal auditors, and the
independent auditors to review internal accounting controls and accounting,
auditing, and financial reporting matters. Bangalore, India
April 13, 2004
    
    T. V. Mohandas PaiChief Financial Officer and
HeadFinance and Administration
    
    S. GopalakrishnanChief Operating Officer and
Deputy Managing Director
    
    Nandan M. NilekaniChief Executive Officer,
President and Managing Director
 Independent auditors report The Board of Directors and
Stockholders
Infosys Technologies Limited We have audited the accompanying consolidated balance sheets of Infosys
Technologies Limited and subsidiaries as of March 31, 2004 and 2003, and the
related consolidated statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended March 31, 2004. In connection with our audits of the consolidated
financial statements, we also have audited the Financial Statement Schedule.
These consolidated financial statements and the related Financial Statement
Schedule are the responsibility of the companys management. Our responsibility
is to express an opinion on these consolidated financial statements and the
Financial Statement Schedule, based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Infosys
Technologies Limited and subsidiaries as of March 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the years in the
three-year period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related Financial Statement Schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. Manchester, United Kingdom
April 13, 2004 KPMG LLP 61




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Infosys Technologies Limited and subsidiaries
Consolidated balance sheets as of March 31, 2003
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    354,362,918
    
    
    $
    444,553,465Investment in liquid mutual fund units
    
    
    
    
    
    
    217,604,513Trade accounts receivable, net of allowances
    
    
    109,119,856
    
    
    
    150,102,586Deferred tax assets
    
    
    288,541
    
    
    
    Prepaid expenses and other current assets
    
    
    24,384,316
    
    
    
    35,871,753Unbilled revenue
    
    
    19,702,186
    
    
    
    23,725,119Total current assets
    
    
    507,857,817
    
    
    
    871,857,436Property, plant and equipment, net
    
    
    157,194,190
    
    
    
    228,419,168Goodwill
    
    
    
    
    
    
    7,834,269Intangible assets, net
    
    
    6,471,236
    
    
    
    1,878,105Deferred tax assets
    
    
    7,264,885
    
    
    
    7,381,530Investments
    
    
    4,613,833
    
    
    
    470,420Prepaid income taxes
    
    
    4,452,678
    
    
    
    68,963Other assets
    
    
    16,454,328
    
    
    
    14,272,380TOTAL ASSETS
    
    $
    704,308,967
    
    
    $
    1,132,182,271LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    426,611
    
    
    $
    954,890Client deposits
    
    
    3,208,295
    
    
    
    15,021,176Other accrued liabilities
    
    
    46,249,269
    
    
    
    99,518,224Deferred tax liabilities
    
    
    
    
    
    
    210,200Income taxes payable
    
    
    
    
    
    
    21,626,600Unearned revenue
    
    
    13,202,115
    
    
    
    14,711,639Total current liabilities
    
    
    63,086,290
    
    
    
    152,042,729Non-current liabilitiesPreferred stock of subsidiary
    
    
    10,000,000
    
    
    
    21,557,448Other non-current liabilities
    
    
    5,217,758
    
    
    
    5,001,628Stockholders EquityCommon stock, $0.16 par value
100,000,000 equity shares authorized,
Issued and outstanding  66,243,078 and 66,641,056
as of March 31, 2003 and 2004, respectively
    
    
    8,602,909
    
    
    
    8,647,061Additional paid-in capital
    
    
    127,042,751
    
    
    
    157,204,530Accumulated other comprehensive income
    
    
    (31,444,835
    )
    
    
    40,084,033Deferred stock compensation
    
    
    (2,817,066
    )
    
    
    Retained earnings
    
    
    524,621,160
    
    
    
    747,644,842Total stockholders equity
    
    
    626,004,919
    
    
    
    953,580,466TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    704,308,967
    
    
    $
    1,132,182,271
 See accompanying notes to the consolidated financial statements 62




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Infosys Technologies Limited and subsidiaries
Consolidated statements of income for the years ended March 31, 2002
    
    2003
    
    2004Revenues
    
    $
    545,051,214
    
    
    $
    753,807,025
    
    
    $
    1,062,584,888Cost of revenues (including amortization of stock compensation
expenses of $2,999,457, $2,818,887 and $1,653,156)
    
    
    293,031,689
    
    
    
    417,359,025
    
    
    
    602,289,263Gross profit
    
    
    252,019,525
    
    
    
    336,448,000
    
    
    
    460,295,625Operating Expenses:Selling and marketing expenses
    
    
    27,113,122
    
    
    
    55,649,913
    
    
    
    76,811,466General and administrative expenses
    
    
    44,348,181
    
    
    
    57,808,445
    
    
    
    82,224,122Amortization of stock compensation expenses
    
    
    2,010,315
    
    
    
    1,984,647
    
    
    
    1,163,910Amortization of intangible assets
    
    
    
    
    
    
    2,360,799
    
    
    
    6,980,074Total operating expenses
    
    
    73,471,618
    
    
    
    117,803,804
    
    
    
    167,179,572Operating income
    
    
    178,547,907
    
    
    
    218,644,196
    
    
    
    293,116,053Other income, net
    
    
    13,865,294
    
    
    
    18,048,110
    
    
    
    27,950,174Income before income taxes
    
    
    192,413,201
    
    
    
    236,692,306
    
    
    
    321,066,227Provision for income taxes
    
    
    27,946,892
    
    
    
    41,822,265
    
    
    
    50,775,927Net income
    
    $
    164,466,309
    
    
    $
    194,870,041
    
    
    $
    270,290,300Earnings per equity shareBasic
    
    $
    2.51
    
    
    $
    2.97
    
    
    $
    4.11Diluted
    
    $
    2.49
    
    
    $
    2.93
    
    
    $
    4.05Weighted equity shares used in computing earnings per equity shareBasic
    
    
    65,556,648
    
    
    
    65,571,002
    
    
    
    65,695,077Diluted
    
    
    66,084,874
    
    
    
    66,479,009
    
    
    
    66,791,559
 See accompanying notes to the consolidated financial statements 63




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Infosys Technologies Limited and subsidiaries
Consolidated statements of stockholders equity and comprehensive income Common stock
    
    
    
    
    
    Additional paid-in
    
    Comprehensive
    
    Accumulated other
    
    Deferred stock
    
    Retained
    
    TotalShares
    
    Par value
    
    Capital
    
    Income
    
    Comprehensive
    
    compensation
    
    Earnings
    
    stockholdersIncome
    
    
    
    
    
    equityBalance as of March 31, 2001
    
    
    66,158,117
    
    
    $
    8,594,106
    
    
    $
    122,017,518
    
    
    
    
    
    
    $
    (28,664,972
    )
    
    $
    (12,517,018
    )
    
    $
    222,362,067
    
    
    $
    311,791,701Common stock issued
    
    
    28,013
    
    
    
    2,895
    
    
    
    949,076
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951,971Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,064,211
    )
    
    
    (23,064,211
    )Deferred stock compensation
related to stock option grants
    
    
    
    
    
    
    
    
    
    
    113,354
    
    
    
    
    
    
    
    
    
    
    
    (113,354
    )
    
    
    
    
    
    
    Amortization of compensation
related to stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,009,772
    
    
    
    
    
    
    
    5,009,772Comprehensive incomeNet
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    164,466,309
    
    
    
    
    
    
    
    
    
    
    
    164,466,309
    
    
    
    164,466,309Other comprehensive incomeTranslation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,776,176
    )
    
    
    (16,776,176
    )
    
    
    
    
    
    
    
    
    
    
    (16,776,176
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    147,690,133Balance as of March 31, 2002
    
    
    66,186,130
    
    
    $
    8,597,001
    
    
    $
    123,079,948
    
    
    
    
    
    
    $
    (45,441,148
    )
    
    $
    (7,620,600
    )
    
    $
    363,764,165
    
    
    $
    442,379,366Common stock issued
    
    
    56,948
    
    
    
    5,908
    
    
    
    2,799,780
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,805,688Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,013,046
    )
    
    
    (34,013,046
    )Income tax benefit arising on
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,163,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163,023Amortization of compensation
related to stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,803,534
    
    
    
    
    
    
    
    4,803,534Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    194,870,041
    
    
    
    
    
    
    
    
    
    
    
    194,870,041
    
    
    
    194,870,041Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,996,313
    
    
    
    13,996,313
    
    
    
    
    
    
    
    
    
    
    
    13,996,313Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    208,866,354Balance as of March 31, 2003
    
    
    66,243,078
    
    
    $
    8,602,909
    
    
    $
    127,042,751
    
    
    
    
    
    
    $
    (31,444,835
    )
    
    $
    (2,817,066
    )
    
    $
    524,621,160
    
    
    $
    626,004,919Common stock issued
    
    
    397,978
    
    
    
    44,152
    
    
    
    27,040,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,084,537Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,266,618
    )
    
    
    (47,266,618
    )Income tax benefit arising on
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    3,121,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,121,394Amortization of compensation
related to stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,817,066
    
    
    
    
    
    
    
    2,817,066Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    270,290,300
    
    
    
    
    
    
    
    
    
    
    
    270,290,300
    
    
    
    270,290,300Other comprehensive incomeUnrealized gain on mutual
fund investments, net of
taxes of $82,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,904
    
    
    
    146,904
    
    
    
    
    
    
    
    
    
    
    
    146,904Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,381,964
    
    
    
    71,381,964
    
    
    
    
    
    
    
    
    
    
    
    71,381,964Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    341,819,168Balance as of March 31, 2004
    
    
    66,641,056
    
    
    $
    8,647,061
    
    
    $
    157,204,530
    
    
    
    
    
    
    $
    40,084,033
    
    
    
    
    
    
    $
    747,644,842
    
    
    $
    953,580,466
 See accompanying notes to the consolidated financial statements 64




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Infosys Technologies Limited and subsidiaries
Consolidated statements of cash flows for the years ended March 31, 2002
    
    2003
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    164,466,309
    
    
    $
    194,870,041
    
    
    $
    270,290,300Adjustments to reconcile net income to net cash
provided by operating activitiesGain on sale of property, plant and equipment
    
    
    (16,754
    )
    
    
    (2,070
    )
    
    
    89,756Depreciation
    
    
    33,608,391
    
    
    
    37,023,974
    
    
    
    45,288,910Amortization of intangible assets
    
    
    
    
    
    
    2,360,799
    
    
    
    6,980,074Provision for investments
    
    
    
    
    
    
    3,219,030
    
    
    
    2,104,043Deferred taxes
    
    
    (1,999,471
    )
    
    
    (2,418,210
    )
    
    
    809,305Amortization of stock compensation expenses
    
    
    5,009,772
    
    
    
    4,803,534
    
    
    
    2,817,066Changes in assets and liabilitiesTrade accounts receivable
    
    
    (7,196,700
    )
    
    
    (37,657,569
    )
    
    
    (26,768,538
    )Prepaid expenses and other current assets
    
    
    1,079,574
    
    
    
    (5,236,301
    )
    
    
    (8,147,376
    )Unbilled revenue
    
    
    (3,132,295
    )
    
    
    (15,436,197
    )
    
    
    (656,773
    )Income taxes
    
    
    869,109
    
    
    
    (3,922,235
    )
    
    
    25,854,186Accounts payable
    
    
    (27,382
    )
    
    
    419,750
    
    
    
    (507,553
    )Client deposits
    
    
    1,075,855
    
    
    
    919,545
    
    
    
    10,933,375Unearned revenue
    
    
    (3,753,943
    )
    
    
    9,491,122
    
    
    
    (33,283
    )Other accrued liabilities
    
    
    1,492,616
    
    
    
    22,756,370
    
    
    
    44,399,069Net cash provided by operating activities
    
    
    191,475,081
    
    
    
    211,191,583
    
    
    
    373,452,561INVESTING ACTIVITIES:Expenditure on property, plant and equipment
    
    
    (68,347,644
    )
    
    
    (43,157,754
    )
    
    
    (93,226,060
    )Expenditure on intangible assets
    
    
    
    
    
    
    (3,551,433
    )
    
    
    Proceeds from sale of property, plant and equipment
    
    
    335,079
    
    
    
    70,383
    
    
    
    310,863Loans to employees
    
    
    (5,547,203
    )
    
    
    (7,249,008
    )
    
    
    3,961,650Purchase of subsidiary, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (10,383,445
    )Purchase of investments
    
    
    (2,200,000
    )
    
    
    (54,378
    )
    
    
    (205,324,508
    )Net cash used in investing activities
    
    
    (75,759,768
    )
    
    
    (53,942,190
    )
    
    
    (304,661,500
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    963,351
    
    
    
    2,805,688
    
    
    
    27,084,537Proceeds from issuance of preferred stock by subsidiary
    
    
    
    
    
    
    10,000,000
    
    
    
    10,267,126Payment of dividends
    
    
    (22,902,618
    )
    
    
    (33,913,973
    )
    
    
    (47,183,238
    )Net cash used in financing activities
    
    
    (21,939,267
    )
    
    
    (21,108,285
    )
    
    
    (9,831,575
    )Effect of exchange rate changes on cash
    
    
    (7,374,351
    )
    
    
    7,735,870
    
    
    
    31,231,061Net increase in cash and cash equivalents during the period
    
    
    86,401,695
    
    
    
    143,876,978
    
    
    
    90,190,547Cash and cash equivalents at the beginning of the period
    
    
    124,084,245
    
    
    
    210,485,940
    
    
    
    354,362,918Cash and cash equivalents at the end of the period
    
    $
    210,485,940
    
    
    $
    354,362,918
    
    
    $
    444,553,465Supplementary information:Cash paid towards taxes
    
    $
    27,493,194
    
    
    $
    45,398,138
    
    
    $
    23,722,149
 See accompanying notes to the consolidated financial statements 65




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Infosys Technologies Limited and subsidiaries
Notes to the consolidated financial statements 1 Company overview and significant accounting policies 1.1 Company overview Infosys Technologies Limited (Infosys) along with its majority owned and
controlled subsidiaries, Progeon Limited (Progeon), Infosys Technologies
(Australia) Pty. Limited (Infosys Australia), and Infosys Technologies
(Shanghai) Co. Limited (Infosys China) is a leading global information
technology, or IT, services company. The Company provides end-to-end business
solutions that leverage technology thus enabling its clients to enhance
business performance. The Company provides solutions that span the entire
software life cycle encompassing consulting, design, development,
re-engineering, maintenance, systems integration and package evaluation and
implementation. In addition, the Company offers software products for the
banking industry and business process management services. 1.2 Basis of preparation of financial statements The consolidated financial statements include Infosys and its subsidiaries
(the company) and are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). Infosys
consolidates entities in which it owns or controls more than 50% of the voting
shares. The results of acquired businesses are included in the consolidated
financial statements from the date of acquisition. Inter-company balances and
transactions are eliminated on consolidation. 1.3 Use of estimates The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and assumptions are used for, but not
limited to accounting for costs and efforts expected to be incurred to complete
performance under software development arrangements, allowance for
uncollectible accounts receivable, future obligations under employee benefit
plans, provisions for post-sales customer support, the useful lives of property,
plant, equipment and intangible assets and income tax valuation allowances.
Actual results could differ from those estimates. Appropriate changes in
estimates are made as management become aware of changes in circumstances
surrounding the estimates. Changes in estimates are reflected in the
financials statements in the period in which changes are made and, if material,
their effects are disclosed in the notes to the consolidated financial
statements. 1.4 Revenue recognition The company derives revenues primarily from software development and related
services, licensing of software products and from business process management
services. Arrangements with customers for software development and related
services are either on a fixed price, fixed timeframe or on a time and material
basis. Revenue on time-and-material contracts is recognized as the related services
are performed. Revenue from the end of the last billing to the balance sheet
date is recognized as unbilled revenues. Revenue from fixed-price, fixed-time
frame contracts is recognized as per the percentage-of-completion method.
Guidance has been drawn from paragraph 95 of Statement of Position (SOP) 97-2
to account for revenue from fixed price arrangements for software development
and related services in conformity with SOP 81-1. The input (efforts expended)
method has been used to measure progress towards completion as there is a
direct relationship between input and productivity. Provisions for estimated
losses, if any, on uncompleted contracts are recorded in the period in which
such losses become probable based on the current contract estimates. Costs and
earnings in excess of billings are classified as unbilled revenue while
billings in excess of costs and earnings are classified as unearned revenue.
Maintenance revenue is recognized ratably over the term of the underlying
maintenance agreement. The company provides its clients with a fixed-period warranty for corrections
of errors and telephone support on all its fixed-price, fixed-time frame
contracts. Costs associated with such support services are accrued at the time
related revenues are recorded and included in cost of revenues. The company
estimates such costs based on historical experience and estimates are reviewed
on a periodic basis for any material changes in assumptions and likelihood of
occurrence. In accordance with SOP 97-2, Software Revenue Recognition, license fee revenues
are recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the license fee is fixed and determinable, and the collection of the
fee is probable. Arrangements to deliver software products generally have three
elements: license, implementation and Annual Technical Services (ATS). The
company has applied the principles in SOP 97-2 to account for revenue from
these multiple element arrangements. Vendor specific objective evidence of fair
value (VSOE) has been established for ATS. VSOE is the price charged when the
element is sold separately. When other services are provided in conjunction
with the licensing arrangement, the revenue from such contracts are allocated
to each component of the contract using the residual method, whereby revenue is
deferred for the undelivered services and the residual amounts are recognized
as revenue for delivered elements. In the absence of an established VSOE for
implementation, the entire arrangement fee for license and implementation is
recognized as the implementation is performed. Revenue from client training,
support and other services arising due to the sale of software products is
recognized as the services are performed. ATS revenue is recognized ratably
over the period in which the services are rendered. Revenues from business process management and other services are recognized on
both, the time-and-material and fixed-price, fixed-time frame basis. Revenue on
time-and-material contracts is recognized as the related services are rendered.
Revenue from fixed-price, fixed-time frame contracts is recognized as per the
proportional performance method using an output measure of performance. When the company receives advances for services and products, such amounts are
reported as client deposits until all conditions for revenue recognition are
met. 66




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1.5 Cash and cash equivalents The company considers all highly liquid investments with a remaining maturity
at the date of purchase / investment of three months or less and that are
readily convertible to known amounts of cash to be cash equivalents. Cash and
cash equivalents comprise cash, and cash on deposit with banks, and
corporations. 1.6 Investments Investments in non-readily marketable equity securities of other entities where
the company is unable to exercise significant influence and for which there
are no readily determinable fair values are recorded at cost. Declines in
value judged to be other than temporary are included in earnings. Investment securities designated as available for sale are carried at their
fair value. Fair value is based on quoted market prices. Temporary unrealized
gains and losses, net of the related tax effect are reported as a separate
component of stockholders equity until realized. Realized gains and losses
and declines in value judged to be other than temporary on available for sale
securities are included in earnings. The cost of securities sold is based on the specific identification method.
Interest and dividend income are recognized when earned. 1.7 Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated
depreciation. The company depreciates property, plant and equipment over their
estimated useful lives using the straight-line method. The estimated useful
lives of assets are as follows: Buildings
    
    15 years
    
    Plant and equipment
    
    5 yearsFurniture and fixtures
    
    5 years
    
    Vehicles
    
    5 yearsComputer equipment
    
    2-5 years
 The cost of software purchased for internal use is accounted under SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Deposits paid towards the acquisition of these long lived assets
outstanding at each balance sheet date and the cost of assets not put to use
before such date are disclosed under Capital work-in-progress. Costs of
improvements that substantially extend the useful life of particular assets are
capitalized. Repairs and maintenance cost are charged to earnings when
incurred. The cost and related accumulated depreciation are removed from the
consolidated financial statements upon sale or disposition of the asset. The company evaluates the recoverability of these assets whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying value of the assets exceeds the fair value of the assets. Assets
to be disposed are reported at the lower of the carrying value or the fair
value less the cost to sell. 1.8 Business combinations Business combinations have been accounted using the purchase method under the
provisions of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations. Cash and
amounts of consideration that are determinable at the date of acquisition are
included in determining the cost of the acquired business. 1.9 Goodwill Goodwill represents the cost of the acquired businesses in excess of the fair
value of identifiable tangible and intangible net assets purchased. Goodwill
is tested for impairment on an annual basis, relying on a number of factors
including operating results, business plans and future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first
step involves a comparison of the fair value of a reporting unit with its
carrying value. If the carrying amount of the reporting unit exceeds its fair
value, the second step of the process involves a comparison of the fair value
and carrying value of the goodwill of that reporting unit. If the carrying
value of the goodwill of a reporting unit exceeds the fair value of that
goodwill, an impairment loss is recognized in an amount equal to the excess.
Goodwill of a reporting unit shall be tested for impairment between annual
tests if an event occurs or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. 1.10 Intangible assets Intangible assets are amortized over their respective individual estimated
useful lives on a straight-line basis. The estimated useful life of an
identifiable intangible asset is based on a number of factors including the
effects of obsolescence, demand, competition, and other economic factors (such
as the stability of the industry, and known technological advances), and the
level of maintenance expenditures required to obtain the expected future cash
flows from the asset. Intangible assets are evaluated for recoverability whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets 1.11 Research and development Research and development costs are expensed as incurred. Software product
development costs are expensed as incurred until technological feasibility is
achieved. Research and development costs and software development costs
incurred under contractual arrangements with customers are accounted as cost of
revenues. 1.12 Foreign currency The functional currency of the company is the Indian rupee (Rs.). The
functional currency for Infosys Australia and Infosys China is the respective
local currency. The consolidated financial statements are reported in U.S.
dollars. The translation of Rs. to U.S. dollars is performed for balance sheet
accounts using the exchange rate in effect at the balance sheet date and for
revenue, expense and cash-flow items using a monthly average exchange rate for
the respective periods. The gains or losses resulting from such translation are
included in Other 67




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comprehensive income, a separate component of stockholders equity. The
translation of the financial statements of foreign subsidiaries from the local
currency to the functional currency of the company is also performed on the
same basis. Foreign-currency denominated assets and liabilities are translated into the
functional currency at exchange rates in effect at the balance sheet date. The
gains or losses resulting from such translation are included in earnings.
Transaction gains or losses realized upon settlement of foreign currency
transactions are included in determining net income for the period in which the
transaction is settled. Revenue, expense and cash-flow items denominated in
foreign currencies are translated into the functional currency using the
exchange rate in effect on the date of the transaction. 1.13 Earnings per share Basic earnings per share is computed by dividing net income for the period by
the weighted average number of equity shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the diluted
weighted average number of equity shares outstanding during the period. The
dilutive effect of convertible securities is reflected in diluted earnings per
share by application of the if-converted method. Diluted earnings per share
reflects the potential dilution from equity shares issuable through employee
stock options and preferred stock of subsidiary. 1.14 Income taxes Income taxes are accounted for using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of changes in tax rates on
deferred tax assets and liabilities is recognized as income in the period that
includes the enactment date. The measurement of deferred tax assets is reduced,
if necessary, by a valuation allowance for any tax benefits of which future
realization is not more likely than not. Changes in valuation allowance from
period to period are reflected in the income statement of the period of change.
Deferred taxes are not provided on the undistributed earnings of subsidiaries
outside India where it is expected that the earnings of the foreign subsidiary
will be permanently reinvested. Tax benefits earned on exercise of employee
stock options in excess of compensation charged to earnings are credited to
additional paid in capital. 1.15 Fair value of financial instruments In determining the fair value of its financial instruments, the company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. The methods used to determine fair
value include discounted cash flow analysis and dealer quotes. All methods of
assessing fair value result in general approximation of value, and such value
may never actually be realized. 1.16 Concentration of risk Financial instruments that potentially subject the company to concentrations of
credit risk consist principally of cash equivalents, trade accounts receivable,
investment securities and hedging instruments. By nature, all such financial
instruments involve risk, including the credit risk of non-performance by
counterparties. In managements opinion, as of March 31, 2003 and March 31,
2004, there was no significant risk of loss in the event of non-performance of
the counterparties to these financial instruments, other than the amounts
already provided for in the financial statements, if any. Exposure to credit
risk is managed through credit approvals, establishing credit limits and
monitoring procedures. The companys cash resources are invested with
corporations, financial institutions and banks with high investment grade
credit ratings. Limitations are established by the company as to the maximum
amount of cash that may be invested with any such single entity. 1.17 Derivative financial instruments On April 1, 2001, the company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activitiesas amended, when the rules became effective
for companies with fiscal years ending March 31. The company enters into
foreign exchange forward contracts where the counter party is generally a bank.
The company purchases foreign exchange forward contracts to mitigate the risk
of changes in foreign exchange rates on accounts receivable and forecasted cash
flows denominated in certain foreign currencies. Although these contracts
constitute hedges from an economic perspective, they do not qualify for hedge
accounting under SFAS 133, as amended. Any derivative that is either not
designated a hedge, or is so designated but is ineffective per SFAS 133, is
marked to market and recognized in earnings immediately. 68




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1.18 Retirement benefits to employees 1.18.1 Gratuity In accordance with the Payment of Gratuity Act, 1972, Infosys provides for
gratuity, a defined benefit retirement plan (the Gratuity Plan) covering
eligible employees. The Gratuity Plan provides a lump sum payment to vested
employees at retirement, death, incapacitation or termination of employment, of
an amount based on the respective employees salary and the tenure of
employment. Liabilities with regard to the Gratuity Plan are determined by actuarial
valuation. The company fully contributes all ascertained liabilities to the
Infosys Technologies Limited Employees Gratuity Fund Trust (the Trust). In
case of Progeon, contributions are made to the Progeon Employees Gratuity Fund
Trust. Trustees administer contributions made to the Trust and contributions
are invested in specific designated instruments as permitted by law and
investments are also made in mutual funds that invest in the specific
designated instruments. 1.18.2 Superannuation Certain employees of Infosys are also participants in a defined contribution
plan. The company makes monthly contributions under the superannuation plan
(the Plan) to the Infosys Technologies Limited Employees Superannuation Fund
Trust based on a specified percentage of each covered employees salary. The
company has no further obligations to the Plan beyond its monthly
contributions. Certain employees of Progeon are also eligible for
superannuation benefit. Progeon makes monthly provisions under the
superannuation plan based on a specified percentage of each covered employees
salary. Progeon has no further obligations to the superannuation plan beyond
its monthly provisions which are periodically contributed to a trust fund, the
corpus of which is invested with the Life Insurance Corporation of India. 1.18.3 Provident fund Eligible employees receive benefits from a provident fund, which is a defined
contribution plan. Both the employee and the company make monthly contributions
to the provident fund plan equal to a specified percentage of the covered
employees salary. The company contributes a part of the contributions to the
Infosys Technologies Limited Employees Provident Fund Trust. The remaining
portion is contributed to the Government administered provident fund. The
company has no further obligations under the provident fund plan beyond its
monthly contributions. In respect of Progeon, eligible employees receive benefits from a provident
fund, which is a defined contribution plan. Both the employee and Progeon make
monthly contributions to this provident fund plan equal to a specified
percentage of the covered employees salary. Amounts collected under the
provident fund plan are deposited in a government administered provident fund.
Progeon has no further obligations under the provident fund plan beyond its
monthly contributions. 1.19 Stock-based compensation The company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees,and related interpretations including FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25,issued in March 2000, to account for its
fixed stock option plans. Under this method, compensation expense is recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement No. 123. All stock
options issued to date have been accounted as a fixed stock option plan. The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation. Year ended March 31,2002
    
    2003
    
    2004Net income, as reported
    
    $
    164,466,309
    
    
    $
    194,870,041
    
    
    $
    270,290,300Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    5,009,772
    
    
    
    4,803,534
    
    
    
    2,817,066Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (64,294,987
    )
    
    
    (62,447,389
    )
    
    
    (49,665,156
    )Pro forma net income
    
    $
    105,181,094
    
    
    $
    137,226,186
    
    
    $
    223,442,210Earnings per share:Basic  as reported
    
    
    2.51
    
    
    
    2.97
    
    
    
    4.11Basic  pro forma
    
    
    1.60
    
    
    
    2.09
    
    
    
    3.40Diluted  as reported
    
    
    2.49
    
    
    
    2.93
    
    
    
    4.05Diluted  pro forma
    
    
    1.59
    
    
    
    2.09
    
    
    
    3.36
 69




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The fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions: Year ended March 31,2002
    
    2003
    
    2004Dividend yield %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %Expected life
    
    1-5years
    
    1-5years
    
    1-5yearsRisk free interest rate
    
    
    9.5
    %
    
    
    6.0
    %
    
    
    5.1-5.7
    %Volatility
    
    
    69.0
    %
    
    
    60-75
    %
    
    
    60-75
    %
 1.20 Dividends Final dividends on common stock are recorded as a liability on the date of
declaration by the stockholders and interim dividends are recorded as a
liability on the date of declaration by the board of directors. 1.21 Reclassifications Certain reclassifications have been made to conform prior period data to the
current presentations. 70




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2 Notes to the consolidated financial statements 2.1 Cash and cash equivalents The cost and fair values for cash and cash equivalents are as follows: As of March 31,2003
    
    2004Cost and fair valuesCash and bank deposits
    
    $
    283,302,326
    
    
    $
    396,660,847Deposits with corporations
    
    
    71,060,592
    
    
    
    47,892,618$
    354,362,918
    
    
    $
    444,553,465
 Cash and cash equivalents include restricted cash balances in the amount of
$336,610 and $456,401 as of March 31, 2003 and 2004 respectively. The
restrictions are primarily on account of unclaimed dividend. 2.2 Trade accounts receivable Trade accounts receivable as of March 31, 2003 and 2004, net of allowance for
doubtful accounts of $3,010,568 and $3,078,798 respectively, amounted to
$109,119,856 and $150,102,586. The age profile of trade accounts receivable,
net of allowances is given below. In %As of March 31,2003
    
    2004Period (in days)0  30
    
    
    65.8
    
    
    
    69.731  60
    
    
    29.0
    
    
    
    21.661  90
    
    
    3.9
    
    
    
    4.7More than 90
    
    
    1.3
    
    
    
    4.0100.0
    
    
    
    100.0
 2.3 Business combination On January 2, 2004 the company acquired, for cash, 100% of the equity in Expert
Information Services Pty. Limited, Australia for $14,500,243. The purchase
consideration includes $3,359,738 retained in escrow for representations and
warranties made by the selling shareholders. The acquired company was renamed
as Infosys Technologies (Australia) Pty. Limited. There is a further
contingent consideration payable to the sellers subject to continued employment
and meeting of defined operating and financial performance parameters. The
contingent consideration will be accounted as compensation. The purchase price, including transaction costs, has been allocated based on
managements estimates and independent appraisals of fair values as follows: Component
    
    Purchase price allocatedPlant and equipment
    
    $
    441,588Net current assets
    
    
    5,199,094Non current liabilities
    
    
    (510,563
    )Customer contracts
    
    
    2,045,094Goodwill
    
    
    7,464,485Total purchase price
    
    $
    14,639,698
 The identified customer contracts intangible is being amortized over a period
of two years beginning January 2004, being managements estimate of the useful
life of the asset. The company believes that the acquisition resulted in
recognition of goodwill primarily because of the acquired companys market
position, skilled employees, management strength and potential to serve as a
platform for enhancing business opportunities in Australia. The goodwill has
been allocated to the Australia reporting unit. 2.4 Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following: As of March 31,2003
    
    2004Rent deposits
    
    $
    2,856,226
    
    
    $
    3,447,398Security deposits with service providers
    
    
    2,814,216
    
    
    
    2,094,238Loans to employees
    
    
    12,252,004
    
    
    
    12,995,976Prepaid expenses
    
    
    5,209,907
    
    
    
    12,343,022Other current assets
    
    
    1,251,963
    
    
    
    4,991,119$
    24,384,316
    
    
    $
    35,871,753
 Other current assets represent advance payments to vendors for the supply of
goods and rendering of services and marked to market gains on foreign exchange
forward contracts. Deposits with service providers relate principally to
leased telephone lines and electricity supplies. 71




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2.5 Property, plant and equipment  net Property, plant and equipment consist of the following: As of March 31,2003
    
    2004Land
    
    $
    9,948,480
    
    
    $
    20,796,805Buildings
    
    
    81,114,141
    
    
    
    105,902,504Furniture and fixtures
    
    
    43,969,763
    
    
    
    59,074,894Computer equipment
    
    
    77,299,299
    
    
    
    107,248,308Plant and equipment
    
    
    47,832,904
    
    
    
    65,425,296Vehicles
    
    
    73,995
    
    
    
    98,321Capital work-in-progress
    
    
    16,281,831
    
    
    
    47,937,529276,520,413
    
    
    
    406,483,657Accumulated depreciation
    
    
    (119,326,223
    )
    
    
    (178,064,489
    )$
    157,194,190
    
    
    $
    228,419,168
 Depreciation expense amounted to $33,608,391, $37,023,974 and $45,288,910 for
fiscal 2002, 2003 and 2004 respectively. The amount of third party software
expensed during fiscal 2002, 2003 and 2004 was $7,147,614 , $11,607,776 and
$14,194,206 respectively. 2.6 Intangible assets During fiscal 2003, the company acquired the intellectual property rights to
the Trade IQ product from IQ Financial Systems Inc., USA for its banking
business unit. The consideration paid amounted to $3.5 million and was
recorded as an intangible asset and amortized over two years being managements
initial estimate of the useful life. In the same fiscal year, the company also
entered into an agreement for transferring the intellectual property rights in
a commercial software application product used in the design of high
performance structural systems. The company is required to pay the committed
consideration of $5.0 million within ten years of the contract date. The
ownership of intellectual property in the product transfers to the company on
remittance of the consideration. The committed consideration of $5.0 million
was recorded as an intangible asset and was being amortized over managements
estimate of the useful life, which was initially 5 years. During fiscal 2004,
management revised its estimates of the remaining useful life of these
intangible assets. The additional amortization for fiscal 2004 due to the
revisions in the estimates of remaining useful life was $ 3.6 million. The
recorded values of these intangible assets have been completely amortized as of
March 31, 2004. The identified customer contracts intangible arising from the purchase price
allocation of Expert Information Services Pty. Limited, Australia is being
amortized over a period of two years beginning January 2004, being managements
estimate of the useful life of the asset. The unamortized balance as of March
31, 2004 was $1,878,105. 2.7 Investments The carrying value of the companys investments in non-readily-marketable
equity securities for which there are no readily determinable fair values are
as follows: Carrying valueAs of March 31, 2003M-Commerce
Ventures Pte Ltd  80 units, each unit representing 1 Ordinary Share of
S$1 each at par and 900 Redeemable Preference Shares of S$1 each at par,
with a premium of S$1,110 per Redeemable Preference Share
    
    $
    453,863CiDRA Corporation  33,333 Series D Convertible Preferred Stock, at $90 each, fully paid,
par value $0.01 each
    
    
    2,999,970Workadia Inc., USA  880,000 Series B Preferred Stock at $2.5 each, fully paid,
par value $0.0005 each
    
    
    660,000Stratify, Inc. (formerly Purple Yogi Inc.)  276,243 Series D Convertible Preferred Stock,
at $1.81 each fully paid, par value $0.001 each
    
    
    500,000$
    4,613,833As of March 31, 2004M-Commerce Ventures Pte Ltd  100 units, each unit representing 1 Ordinary Share of
S$1 each at par and 684 Redeemable Preference Shares of S$1 each at par with a premium of
S$1,110 per Redeemable Preference Share and 126 Redeemable Preference Shares of S$1 each
at par
    
    $
    470,420$
    470,420
 Investments in liquid mutual fund units are designated as available for sale. 72




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2.8 Other assets Other assets represent the non-current portion of loans to employees. 2.9 Related parties The company grants loans to employees for acquiring assets such as property and
cars. Such loans are repayable over fixed periods ranging from 1 to 100 months.
The annual rates of interest at which the loans have been made to employees
vary between 0% through 4%. No loans have been made to employees in connection
with equity issues. The loans are generally secured by the assets acquired by
the employees. Loans aggregating $28,706,332 and $27,268,356 were outstanding
as of March 31, 2003 and 2004. The required repayments of employee loans outstanding as of March 31, 2004 are
as detailed below. Year
    
    Repayment2005
    
    $
    12,995,9762006
    
    
    4,004,8092007
    
    
    2,902,1602008
    
    
    2,088,7892009
    
    
    2,081,803Thereafter
    
    
    3,194,819$
    27,268,356
 The estimated fair values of related party receivables amounted to $24,422,419
and $23,934,228 as of March 31, 2003 and 2004 respectively. These amounts have
been determined using available market information and appropriate valuation
methodologies. Considerable judgment is required to develop these estimates of
fair value. Consequently, these estimates are not necessarily indicative of the
amounts that the company could realize in the market. 2.10 Other accrued liabilities Other accrued liabilities comprise the following: As of March 312003
    
    2004Accrued compensation to staff
    
    $
    25,382,793
    
    
    $
    71,320,274Accrued dividends
    
    
    336,610
    
    
    
    456,401Provision for post sales client support
    
    
    1,015,022
    
    
    
    1,180,440Employee withholding taxes payable
    
    
    4,964,118
    
    
    
    9,019,477Provision for expenses
    
    
    12,196,810
    
    
    
    15,613,679Retainage
    
    
    1,120,938
    
    
    
    1,213,798Others
    
    
    1,232,978
    
    
    
    714,155$
    46,249,269
    
    
    $
    99,518,224
 2.11 Employee post-retirement benefits 2.11.1 Gratuity The following tables set out the funded status of the gratuity plans and the
amounts recognized in the companys financial statements in fiscal 2002, 2003
and 2004. The measurement date used is March 31 of the relevant fiscal year. Year ended March 31,2002
    
    2003
    
    2004Change in benefit obligationsBenefit obligations at the beginning of the year
    
    $
    13,581,972
    
    
    $
    15,851,898
    
    
    $
    18,789,198Unrecognized actuarial loss
    
    
    
    
    
    
    (514,983
    )
    
    
    4,728,137Service cost
    
    
    1,341,313
    
    
    
    2,158,209
    
    
    
    3,737,069Interest cost
    
    
    1,376,398
    
    
    
    1,082,815
    
    
    
    1,231,369Benefits paid
    
    
    (175,364
    )
    
    
    (238,823
    )
    
    
    (749,864
    )Effect of exchange rate changes
    
    
    (272,421
    )
    
    
    450,082
    
    
    
    2,279,128Benefit obligations at the end of the year
    
    $
    15,851,898
    
    
    $
    18,789,198
    
    
    $
    30,015,037Change in plan assetsFair value of plan assets at the beginning of the year
    
    $
    10,147,905
    
    
    $
    12,448,532
    
    
    $
    16,064,766Effect of exchange rate changes
    
    
    (524,191
    )
    
    
    385,738
    
    
    
    1,852,497Actual return on plan assets
    
    
    1,324,702
    
    
    
    1,369,206
    
    
    
    2,127,404Employer contributions
    
    
    1,675,480
    
    
    
    2,100,113
    
    
    
    4,526,200Benefits paid
    
    
    (175,364
    )
    
    
    (238,823
    )
    
    
    (749,864
    )Plan assets at the end of the year
    
    $
    12,448,532
    
    
    $
    16,064,766
    
    
    $
    23,821,003Funded status
    
    $
    (3,403,366
    )
    
    $
    (2,724,432
    )
    
    $
    (6,194,034
    )Excess of actual return over estimated return on plan assets
    
    
    141,394
    
    
    
    552,688
    
    
    
    (1,263,439
    )Unrecognized transitional obligation
    
    
    594,784
    
    
    
    402,646
    
    
    
    391,966Unrecognized actuarial loss
    
    
    3,131,389
    
    
    
    2,235,222
    
    
    
    6,566,769(Accrued)/prepaid benefit
    
    $
    464,201
    
    
    $
    466,124
    
    
    $
    (498,738
    )
 73




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Net gratuity cost for fiscal 2002, 2003 and 2004 comprises the following
components: Year ended March 31,2002
    
    2003
    
    2004Service cost
    
    $
    1,341,313
    
    
    $
    2,158,209
    
    
    $
    3,737,069Interest cost
    
    
    1,376,398
    
    
    
    1,082,815
    
    
    
    1,231,369Expected return on assets
    
    
    (1,183,308
    )
    
    
    (816,518
    )
    
    
    (863,965
    )Amortization of unrecognized transitional obligation
    
    
    44,535
    
    
    
    43,980
    
    
    
    46,449Amortization of unrecognized actuarial loss
    
    
    105,330
    
    
    
    129,701
    
    
    
    382,516Net gratuity cost
    
    $
    1,684,268
    
    
    $
    2,598,187
    
    
    $
    4,533,438
 The assumptions used in accounting for the gratuity plan in fiscal 2002, 2003
and 2004 are set out below. Year ended March 31,2002
    
    2003
    
    2004Discount rate
    
    
    10.0
    %
    
    
    7.0
    %
    
    
    5.2
    %Rate of increase in compensation levels
    
    
    9.0
    %
    
    
    5.0-7.0
    %
    
    
    5.1
    %Rate of return on plan assets
    
    
    10.0
    %
    
    
    7.0
    %
    
    
    5.2
    %
 The company assesses these assumptions with its projected long-term plans of
growth and prevalent industry standards. Unrecognized actuarial loss is
amortized over the average remaining service period of the active
employees expected to receive benefits under the Plan. The company contributes all ascertained liabilities to the Infosys Technologies
Limited Employees Gratuity Fund Trust. In case of Progeon, contributions are
made to the Progeon Employees Gratuity Fund Trust. Trustees administer
contributions made to the trust and contributions are invested in specific
designated instruments as permitted by Indian law and investments are also made
in mutual funds that invest in the specific designated instruments. As of
March 31, 2004, all of the plan assets are invested in debt securities. The companys overall expected long-term rate-of-return-on assets has been
determined based on consideration of available market information, current
provisions of Indian law specifying the instruments in which investments can be
made, and historical returns. Historical returns during fiscal 2002, 2003 and
2004 have not been lower than the expected rate of return on plan assets
estimated for those years. Accumulated benefits obligation was $5,989,534 and $7,477,612 as of March 31,
2003 and 2004 respectively. The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid. Year ending March 31,2005
    
    $
    388,2452006
    
    
    425,7402007
    
    
    481,7812008
    
    
    529,2152009
    
    
    584,1452010-2014
    
    $
    2,884,595
 The expected benefits are based on the same assumptions used to measure the
companys benefit obligations as of March 31, 2004. The company expects to contribute approximately $5,347,926 to the gratuity trusts during fiscal 2005. 2.11.2 Superannuation The company contributed
$1,220,716, $1,216,282 and $2,204,794 to the
superannuation plan in fiscal 2002, 2003 and 2004 respectively. 2.11.3 Provident fund The company contributed
$3,146,742, $3,820,331 and $5,884,403 to the provident
fund in fiscal 2002, 2003 and 2004, respectively. 2.12 Stockholders equity Infosys has only one class of capital stock referred to as equity shares. All
references in these financial statements to number of shares, per share amounts
and market prices of equity shares are retroactively restated to reflect stock
splits made. The rights of equity shareholders are set out below. 2.12.1 Voting Each holder of equity shares is entitled to one vote per share. The equity
shares represented by American Depositary Shares (ADS) carry similar rights
to voting and dividends as the other equity shares. Two ADSs represent one
underlying equity share. 2.12.2 Dividends Should the company declare and pay dividends, such dividends will be paid in
Indian Rupees. Indian law mandates that any dividend be declared out of
distributable profits only after the transfer of a specified percentage of net
income computed in accordance with current regulations to a general reserve.
Moreover, the remittance of dividends outside India is governed by Indian law
on foreign exchange and is subject to applicable taxes. 2.12.3 Liquidation In the event of liquidation of the company, the holders of common stock shall
be entitled to receive any of the remaining assets of the company, after
distribution of all preferential amounts. The amounts will be in proportion to
the number of equity shares held by the stockholders. 2.12.4 Stock options There are no voting, dividend or liquidation rights to the holders of warrants
issued under the companys stock option plans. 74




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2.13 Preferred stock of subsidiary Infosys holds 100% of the equity share capital of Progeon. The equity shares
have been issued to Infosys as per the terms of the stock subscription
agreement signed in April 2002, between Infosys, Citicorp International Finance
Corporation (CIFC) and Progeon. 12,250,000 equity shares have been issued to
Infosys in each of April 2002 and March 2004 for an aggregate consideration of
$5,279,699. Pursuant to the agreement, CIFC has been issued 4,375,000
(0.0005%) cumulative convertible preference shares in each of June 30, 2002 and
March 31, 2004 for an aggregate consideration of $ 20,267,126. Unless earlier converted pursuant to an agreement in this behalf between the
company and CIFC, these cumulative convertible preference shares shall
automatically be converted into equity shares upon the earlier of, (i) one year
prior to Progeons initial public offering (IPO) date , (ii) June 30, 2005,
or (iii) at the holders option, immediately upon the occurrence of any
Liquidity Event.; The term Liquidity Event includes any of a decision of the
Board of Directors of the company to make an IPO, merger, reconstruction,
capital reorganization or other event which, in the sole opinion of the holder
of the convertible preference shares, amounts to an alteration in the capital
structure of the company. Each preference share is convertible into one equity
share, par value $ 0.20 each. Indian law requires redemption of preference
shares within a period of 20 years. 2.14 Other income, net Other income, net, consists of the following: Year ended March 31,2002
    
    2003
    
    2004Interest income
    
    $
    10,423,654
    
    
    $
    16,701,515
    
    
    $
    18,450,458Income from mutual fund investments
    
    
    
    
    
    
    
    
    
    
    3,922,426Exchange
gains, net
    
    
    2,749,162
    
    
    
    4,157,373
    
    
    
    7,536,326Provision for investments
    
    
    
    
    
    
    (3,219,030
    )
    
    
    (2,104,043
    )Others
    
    
    692,478
    
    
    
    408,252
    
    
    
    145,007$
    13,865,294
    
    
    $
    18,048,110
    
    
    $
    27,950,174
 In fiscal 2003, the company provided for write-downs to investments in the
aggregate amount of approximately $3.2 million. These included approximately
$1.5 million for Asia Net Media BVI Limited, $0.2 million for JASDIC Park
Company, $1.5 million for Workadia Inc., and other miscellaneous investments.
The provisions during fiscal 2004 include write-downs to investments in CiDRA
Corporation of $1.5 million, $0.4 million towards investment in Stratify Inc
and other miscellaneous investments. These write-downs were required due to
the non-temporary impact of adverse market conditions on these entities
business models and contemporary transactions on the securities of the entities
which have been indicative of their current fair value. 2.15 Operating leases The company has various operating leases, mainly for office buildings, that are
renewable on a periodic basis. Rental expenses for operating leases in fiscal
2002, 2003 and 2004 were $5,109,690, $6,141,298 and $8,575,314 respectively. The schedule of future
minimum rental payments in respect of non-cancellable operating
leases is set out below. Year ending March 31,2005
    
    $
    6,220,9052006
    
    
    5,147,1252007
    
    
    3,724,3982008
    
    
    3,390,2812009
    
    
    1,889,522Thereafter
    
    
    1,110,460Total
    
    $
    21,482,691
 2.16 Research and development General and administrative expenses in the accompanying statements of income
include research and development expenses of $3,083,994, $2,950,949 and
$9,405,854 for fiscal 2002, 2003 and 2004 respectively. 2.17 Employees Stock Offer Plans (ESOP) In September 1994, the company established the 1994 plan, which provided for
the issue of 6,000,000 warrants, as adjusted, to eligible employees. The
warrants were issued to an employee welfare trust (the Trust). In 1997, in
anticipation of a share dividend to be declared by the company, the Trust
exercised all warrants held by it and converted them into equity shares. As and
when the Trust issued options/stock to eligible employees, the difference
between the market price and the exercise price was accounted as deferred stock
compensation expense and amortized over the vesting period. Such amortized
deferred compensation expense was $5,009,772, $4,803,534 and $2,817,066 for
fiscal 2002, 2003, and 2004 respectively. The 1994 plan lapsed in fiscal 2000,
and consequently no further shares will be issued to employees under this plan. 75




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1998 Employees Stock Offer Plan (the 1998 Plan). The companys 1998 Plan
provides for the grant of non-statutory stock options and incentive stock
options to employees of the company. The establishment of the 1998 Plan was
approved by the board of directors in December 1997 and by the stockholders in
January 1998. The Government of India has approved the 1998 Plan, subject to a
limit of 1,470,000 equity shares representing 2,940,000 ADS to be issued under
the 1998 Plan. Unless terminated sooner, the 1998 Plan will terminate
automatically in January 2008. All options under the 1998 Plan will be
exercisable for equity shares represented by ADSs. The 1998 Plan is
administered by a Compensation Committee comprising four members, all of who
are independent directors on the Board of Directors. All options under the 1998
Plan are exercisable for equity shares represented by ADSs. 1999 Stock Offer Plan (the 1999 Plan). In fiscal 2000, the company instituted
the 1999 Plan. The stockholders and the Board of Directors approved the 1999
Plan in June 1999. The 1999 Plan provides for the issue of 6,600,000 equity
shares to employees. The 1999 Plan is administered by a Compensation Committee
comprising four members, all of who are independent directors on the Board of
Directors. Under the 1999 Plan, options will be issued to employees at an
exercise price, which shall not be less than the Fair Market Value (FMV).
Under the 1999 Plan, options may also be issued to employees at exercise prices
that are less than FMV only if specifically approved by the members of the
company in a general meeting. All options under the 1999 plan are exercisable
for equity shares. The options under the 1998 Plan and 1999 Plan vest over a period of one through
four years and expire 5 years from the date of completion of vesting. The activity in the warrants/equity shares of the 1994, 1998 and 1999 ESOP in
fiscal 2002, 2003 and 2004 are set out below. Year ended March 31,2002
    
    2003
    
    2004Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedShares arising
    
    average
    
    Shares arising
    
    average
    
    Shares arising
    
    Averageout of options
    
    exercise price
    
    out of options
    
    exercise price
    
    out of options
    
    exercise price1994 Option plan:Outstanding at the beginning of the period
    
    
    330,000
    
    
    
    
    
    
    
    321,400
    
    
    
    
    
    
    
    318,200Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (8,600
    )
    
    $
    1.15
    
    
    
    (3,200
    )
    
    $
    1.15
    
    
    
    (1,600
    )
    
    $
    1.15Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at the end of the period
    
    
    321,400
    
    
    
    
    
    
    
    318,200
    
    
    
    
    
    
    
    316,6001998 Option plan:Outstanding at the beginning of the period
    
    
    782,753
    
    
    
    
    
    
    
    1,131,247
    
    
    
    
    
    
    
    1,251,703Granted
    
    
    454,250
    
    
    $
    98
    
    
    
    290,100
    
    
    $
    124
    
    
    
    47,950
    
    
    $
    95Forfeited
    
    
    (77,773
    )
    
    $
    241
    
    
    
    (124,874
    )
    
    $
    92
    
    
    
    (202,466
    )
    
    $
    150Exercised
    
    
    (27,983
    )
    
    $
    44
    
    
    
    (44,770
    )
    
    $
    47
    
    
    
    (129,435
    )
    
    $
    59Outstanding at the end of the period
    
    
    1,131,247
    
    
    
    
    
    
    
    1,251,703
    
    
    
    
    
    
    
    967,752Exercisable at the end of the period
    
    
    164,527
    
    
    
    
    
    
    
    315,002
    
    
    
    
    
    
    
    385,876Weighted-average fair value of
options
granted during the period
    
    
    
    
    
    $
    31
    
    
    
    
    
    
    $
    32
    
    
    
    
    
    
    $
    241999 Option plan:Outstanding at the beginning of the period
    
    
    2,793,980
    
    
    
    
    
    
    
    4,668,815
    
    
    
    
    
    
    
    5,061,171Granted
    
    
    2,050,500
    
    
    $
    65
    
    
    
    616,850
    
    
    $
    78
    
    
    
    192,800
    
    
    $
    66Forfeited
    
    
    (175,635
    )
    
    $
    119
    
    
    
    (212,316
    )
    
    $
    97
    
    
    
    (394,898
    )
    
    $
    99Exercised
    
    
    (30
    )
    
    $
    85
    
    
    
    (12,178
    )
    
    $
    56
    
    
    
    (268,543
    )
    
    $
    73Outstanding at the end of the period
    
    
    4,668,815
    
    
    
    
    
    
    
    5,061,171
    
    
    
    
    
    
    
    4,590,530Exercisable at the end of the period
    
    
    448,530
    
    
    
    
    
    
    
    1,222,639
    
    
    
    
    
    
    
    2,112,120Weighted-average fair value of
options
granted during the period
    
    
    
    
    
    $
    32
    
    
    
    
    
    
    $
    35
    
    
    
    
    
    
    $
    29
 76




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##### Table of Contents



The following table summarizes information about stock options outstanding as
of March 31, 2004 Options Outstanding
    
    Options ExercisableNo. of shares
    
    Weighted average
    
    
    
    
    
    No. of sharesRange of exercise
    
    arising out of
    
    remaining contractual
    
    Weighted average
    
    arising out of
    
    Weighted averageprices per share ($)
    
    Options
    
    life in years
    
    Exercise price
    
    Options
    
    exercise price1994 Plan1.15
    
    
    316,600
    
    
    
    0.25
    
    
    $
    1.15
    
    
    
    
    
    
    
    1998 Plan34-50
    
    
    21,150
    
    
    
    2.94
    
    
    $
    34
    
    
    
    21,150
    
    
    $
    3451-100
    
    
    218,113
    
    
    
    5.92
    
    
    $
    84
    
    
    
    30,678
    
    
    $
    87101-150
    
    
    295,060
    
    
    
    6.24
    
    
    $
    125
    
    
    
    42,675
    
    
    $
    127151-200
    
    
    305,039
    
    
    
    4.68
    
    
    $
    190
    
    
    
    204,963
    
    
    $
    190201-300
    
    
    59,590
    
    
    
    4.63
    
    
    $
    240
    
    
    
    35,790
    
    
    $
    240301-400
    
    
    54,550
    
    
    
    4.09
    
    
    $
    325
    
    
    
    38,010
    
    
    $
    326401-660
    
    
    14,250
    
    
    
    3.91
    
    
    $
    518
    
    
    
    12,610
    
    
    $
    526967,752
    
    
    
    
    
    
    
    
    
    
    
    385,8761999 Plan51-100
    
    
    2,897,459
    
    
    
    5.30
    
    
    $
    75
    
    
    
    1,128,950
    
    
    $
    83101-150
    
    
    1,315,751
    
    
    
    4.74
    
    
    $
    125
    
    
    
    750,510
    
    
    $
    127151-200
    
    
    358,920
    
    
    
    4.46
    
    
    $
    166
    
    
    
    216,180
    
    
    $
    166201-275
    
    
    18,400
    
    
    
    3.91
    
    
    $
    208
    
    
    
    16,480
    
    
    $
    2074,590,530
    
    
    
    
    
    
    
    
    
    
    
    2,112,120
 Progeons 2002 Plan provides for the grant of stock options to its employees
and was approved by its board of directors and stockholders in June 2002. All
options under the 2002 Plan are exercisable for equity shares. The 2002 Plan is
administered by a Compensation Committee comprising three members, all of whom
are directors of the company. The 2002 Plan provides for the issue of 5,250,000
equity shares to employees, at an exercise price, which shall not be less than
the FMV. Options may also be issued to employees at exercise prices that are
less than FMV only if specifically approved by the members of the company in
general meeting. The options issued under the 2002 Plan vest in periods ranging
between one through six years, although accelerated vesting based on
performance conditions is provided in certain instances. All options granted
have been accounted for as a fixed plan. Options to purchase 1,401,150 shares of Progeon, with a weighted average
exercise price of $1.39 and fair value $0.60 have been granted during fiscal
2004. Options to purchase 77,700 shares with a weighted average exercise price
of $0.79 were forfeited during the period. Options to purchase 3,124,625
shares were outstanding as of March 31, 2004 with a weighted average remaining
contractual life of 4.81 years and weighted average exercise price of $1.00.
Options to purchase 443,641 shares were exercisable as of March 31, 2004 with a
weighted average exercise price of $0.69. Options to purchase 1,801,175 shares of Progeon, with a weighted average
exercise price of $0.69 and fair value $0.30 have been granted during fiscal
2003 and were outstanding as of March 31, 2003. There were no forfeitures or
exercises on these grants. The outstanding options as of March 31, 2003 had a
weighted average remaining contractual life of 4.33 years and weighted average
exercise price of $0.69. No options were exercisable as of March 31, 2003. 2.18 Income taxes The provision for income taxes in the income statement comprises: Year ended March 312002
    
    2003
    
    2004Current taxesDomestic taxes
    
    $
    6,483,255
    
    
    $
    18,717,241
    
    
    $
    10,488,985Foreign taxes
    
    
    23,463,108
    
    
    
    25,523,234
    
    
    
    39,477,63729,946,363
    
    
    
    44,240,475
    
    
    
    49,966,622Deferred taxesDomestic taxes
    
    
    27,126
    
    
    
    (1,122,604
    )
    
    
    1,189,074Foreign taxes
    
    
    (2,026,597
    )
    
    
    (1,295,606
    )
    
    
    (379,769
    )(1,999,471
    )
    
    
    (2,418,210
    )
    
    
    809,305Aggregate taxes
    
    $
    27,946,892
    
    
    $
    41,822,265
    
    
    $
    50,775,927
 All components of the aggregate taxes of $27,946,892, $41,822,265 and
$50,775,927 for fiscal 2002, 2003 and 2004 are allocated to the continuing
operations of the company. Deferred tax expense of $82,186 is
included in stockholders equity as of March 31, 2004,
being tax on unrealized gain on
mutual fund investments. Tax benefits of $1,163,023 and $3,121,394 earned on
exercise of employee stock options are credited to additional paid in capital
during fiscal 2003 and fiscal 2004. 77




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The tax effects of significant temporary differences that resulted in deferred
tax assets and liabilities, and a description of the financial statement items
that created these differences are as follows: As of March 312003
    
    2004Deferred tax assets:Property, plant and equipment
    
    $
    4,719,124
    
    
    $
    6,251,836Allowances
on trade accounts receivable
    
    
    1,093,701
    
    
    
    770,471Investments
    
    
    2,545,761
    
    
    
    3,211,257Accrual for compensated absences
    
    
    
    
    
    
    687,379Others
    
    
    
    
    
    
    256,7868,358,586
    
    
    
    11,177,729Less:Valuation allowance
    
    
    (614,004
    )
    
    
    (1,967,903
    )7,744,582
    
    
    
    9,209,826Deferred tax liabilitiesGains on foreign exchange forward contracts
    
    
    (191,156
    )
    
    
    (1,392,879
    )Intangible assets
    
    
    
    
    
    
    (563,431
    )Unrealized gain on mutual fund investments
    
    
    
    
    
    
    (82,186
    )(191,156
    )
    
    
    (2,038,496
    )Net deferred tax assets
    
    $
    7,553,426
    
    
    $
    7,171,330
 In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which the temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based on the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes that it is more likely than not the company will realize the benefits
of those deductible differences, net of the existing valuation allowance at
March 31, 2004. The valuation allowance relates to provision for doubtful
debts and investments. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carry forward period are reduced. At April 2001, the valuation allowance was $1,587,629. The valuation allowance
decreased by $913,329 during the year ended March 31, 2002. The valuation
allowance further decreased by $60,296 in the year ended March 31, 2003. The
valuation allowance increased by $1,353,899 during the year ended March 31,
2004. A reconciliation of the income tax provision to the amount computed by applying
the statutory income tax rate to the income before provision for income taxes
is summarized below. Year ended March 312002
    
    2003
    
    2004Net income before taxes
    
    $
    192,413,201
    
    
    $
    236,692,306
    
    
    $
    321,066,227Enacted tax rates in India
    
    
    35.70
    %
    
    
    36.75
    %
    
    
    35.875
    %Computed expected tax expense
    
    
    68,691,513
    
    
    
    86,984,422
    
    
    
    115,182,509Tax effect due to non-taxable income for Indian tax purposes
    
    
    (48,690,954
    )
    
    
    (50,569,115
    )
    
    
    (78,299,551
    )Effect of enacted tax rate change
    
    
    142,565
    
    
    
    (56,018
    )
    
    
    67,754Effect of differential foreign tax rates
    
    
    2,788,938
    
    
    
    2,944,982
    
    
    
    7,202,637Others
    
    
    5,014,830
    
    
    
    2,517,994
    
    
    
    6,622,578Aggregate taxes
    
    $
    27,946,892
    
    
    $
    41,822,265
    
    
    $
    50,775,927
 The provision for foreign taxes is due to income taxes payable overseas,
principally in the United States of America. The company benefits from certain
significant tax incentives provided to software firms under Indian tax laws.
These incentives presently include: (i) an exemption from payment of Indian
corporate income taxes for a period of ten consecutive years of operation of
software development facilities designated as Software Technology Parks (the
STP Tax Holiday); and (ii) a tax deduction for profits derived from exporting
computer software (the Export Deduction). All but one of the companys
software development facilities are located in designated Software Technology
Parks (STP). The Government of India has recently amended the tax incentives
available to companies set up in designated STPs. The period of the STP Tax
Holiday available to such companies is restricted to ten consecutive years,
beginning from the financial year when the unit started producing computer
software or April 1, 1999, whichever is earlier. The Finance Act 2002 provided
that the exempt income from an export oriented undertaking, for fiscal 2003 be
restricted to 90% of its export income. However, this restriction is not
applicable from fiscal 2004. Additionally, the Export Deduction is being
phased out equally over a period of five years starting from fiscal 2000. The company is subject to a 15% Branch Profit Tax (BPT) in the U.S. to the
extent its U.S.branchs net profit during the year is greater than the increase
in the net assets of the companys U.S. branch during the fiscal year, computed
in accordance with the Internal Revenue Code. At March 31, 2004, the companys
US branch net assets amounted to approximately $127.5 million. The company has
not triggered the BPT and intends to maintain the current level of its net
assets in the US, as it is consistent with its business plan. Accordingly, a
BPT provision has not been recorded. 78




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2.19 Earnings per share The following is a reconciliation of the equity shares used in the computation
of basic and diluted earnings per equity share: Year ended March 312002
    
    2003
    
    2004Basic earnings per equity share  weighted average
number of common shares outstanding excluding
unallocated shares of ESOP
    
    
    65,556,648
    
    
    
    65,571,002
    
    
    
    65,695,077Effect of dilutive common equivalent shares 
stock options outstanding
    
    
    528,226
    
    
    
    908,007
    
    
    
    1,096,482Diluted earnings per equity share  weighted average
number of common shares and common equivalent
shares outstanding
    
    
    66,084,874
    
    
    
    66,479,009
    
    
    
    66,791,559
 Options to purchase 635,800 shares under the 1998 Plan and 2,521,757 shares
under the 1999 Plan were not considered for calculating diluted earnings per
share for fiscal 2004 as their effect was anti-dilutive. 2.20 Derivative financial instruments The company enters into foreign exchange forward contracts where the counter
party is generally a bank. The company considers the risks of non-performance
by the counter party as non-material. Infosys held foreign exchange forward
contracts of $88,000,000 and $149,000,000 as of March 31, 2003 and 2004,
respectively. The foreign exchange forward contracts mature between one to 12
months. 2.21 Segment reporting SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments and related disclosures about
products and services, geographic areas, and major customers. The companys
operations predominantly relate to providing IT solutions, delivered to
customers located globally, across various industry segments. The Chief
Operating Decision Maker evaluates the companys performance and allocates
resources based on an analysis of various performance indicators by industry
classes and geographic segmentation of customers. Accordingly, revenues
represented along industry classes comprise the principal basis of segmental
information set out in these financial statements. Secondary segmental
reporting is performed on the basis of the geographical location of customers.
The accounting principles consistently used in the preparation of the financial
statements are consistently applied to record revenue and expenditure in
individual segments, and are as set out in the summary of significant
accounting policies. Industry segments for the company are primarily financial servicescomprising
enterprises providing banking, finance and insurance services, manufacturing
enterprises, enterprises in the telecommunications (telecom)and retail
industries, and otherssuch as utilities, transportation and logistics
companies. Geographic segmentation is based on business sourced from that geographic
region and delivered from both on-site and off-shore. North Americacomprises
the United States of America, Canada and Mexico; Europeincludes continental
Europe (both the east and the west), Ireland and the United Kingdom; and the
Rest of the Worldcomprising all other places except those mentioned above and
India. Revenue in relation to segments is categorized based on items that are
individually identifiable to that segment, while expenditure is categorized in
relation to the associated turnover of the segment. Allocated expenses of the
geographic segments include expenses incurred for rendering services from the
companys offshore software development centers and on-site expenses. Certain
expenses such as depreciation, which form a significant component of total
expenses, are not specifically allocable to specific segments as the underlying
services are used interchangeably. Management believes that it is not practical
to provide segment disclosures relating to those costs and expenses, and
accordingly these expenses are separately disclosed as unallocated and
adjusted only against the total income of the company. Fixed assets used in the companys business are not identified to any of the
reportable segments, as these are used interchangeably between segments.
Management believes that it is currently not practicable to provide segment
disclosures relating to total assets and liabilities since a meaningful
segregation of the available data is onerous. Geographical information on revenue and industry revenue information is
collated based on individual customers invoiced or in relation to which the
revenue is otherwise recognized. 79




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##### Table of Contents



2.21.1 Industry segments Year ended March 31, 2002 Financial services
    
    Manufacturing
    
    Telecom
    
    Retail
    
    Others
    
    TotalRevenues
    
    $
    199,725,558
    
    
    $
    93,404,474
    
    
    $
    85,190,054
    
    
    $
    67,027,323
    
    
    $
    99,703,805
    
    
    $
    545,051,214Identifiable
operating expenses
    
    
    74,364,097
    
    
    
    38,112,096
    
    
    
    23,873,023
    
    
    
    18,696,233
    
    
    
    34,831,145
    
    
    
    189,876,594Allocated expenses
    
    
    51,905,935
    
    
    
    23,321,898
    
    
    
    21,273,366
    
    
    
    16,667,939
    
    
    
    24,840,829
    
    
    
    138,009,967Segmental operating
income
    
    
    73,455,526
    
    
    
    31,970,480
    
    
    
    40,043,665
    
    
    
    31,663,151
    
    
    
    40,031,831
    
    
    
    217,164,653Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,616,746Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,547,907Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,865,294Income before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,413,201Provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,946,892Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    164,466,309
 Year ended March 31, 2003 Financial services
    
    Manufacturing
    
    Telecom
    
    Retail
    
    Others
    
    TotalRevenues
    
    $
    283,305,475
    
    
    $
    123,755,305
    
    
    $
    114,309,356
    
    
    $
    85,841,812
    
    
    $
    146,595,077
    
    
    $
    753,807,025Identifiable
operating expenses
    
    
    113,522,995
    
    
    
    50,493,841
    
    
    
    38,470,934
    
    
    
    27,432,075
    
    
    
    54,817,856
    
    
    
    284,737,701Allocated expenses
    
    
    81,032,424
    
    
    
    32,793,395
    
    
    
    31,096,470
    
    
    
    22,779,164
    
    
    
    39,122,548
    
    
    
    206,824,001Segmental operating
income
    
    
    88,750,056
    
    
    
    40,468,069
    
    
    
    44,741,952
    
    
    
    35,630,573
    
    
    
    52,654,673
    
    
    
    262,245,323Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,601,127Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,644,196Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,048,110Income before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,692,306Provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,822,265Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    194,870,041
 Year ended March 31, 2004 Financial services
    
    Manufacturing
    
    Telecom
    
    Retail
    
    Others
    
    TotalRevenues
    
    $
    389,295,510
    
    
    $
    156,817,111
    
    
    $
    175,944,313
    
    
    $
    123,789,209
    
    
    $
    216,738,745
    
    
    $
    1,062,584,888Identifiable
operating expenses
    
    
    163,735,082
    
    
    
    68,091,130
    
    
    
    72,990,651
    
    
    
    46,018,191
    
    
    
    90,679,001
    
    
    
    441,514,055Allocated expenses
    
    
    102,561,509
    
    
    
    38,821,686
    
    
    
    45,490,446
    
    
    
    31,230,109
    
    
    
    54,674,462
    
    
    
    272,778,212Segmental operating
income
    
    
    122,998,919
    
    
    
    49,904,295
    
    
    
    57,463,216
    
    
    
    46,540,909
    
    
    
    71,385,282
    
    
    
    348,292,621Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,176,568Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293,116,053Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,950,174Income before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,066,227Provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,775,927Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    270,290,300
 80




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##### Table of Contents



2.21.2 Geographic segments Year ended March 31, 2002 Rest of theNorth America
    
    Europe
    
    India
    
    World
    
    TotalRevenues
    
    $
    388,168,447
    
    
    $
    106,103,448
    
    
    $
    10,735,626
    
    
    $
    40,043,693
    
    
    $
    545,051,214Identifiable operating expenses
    
    
    135,362,671
    
    
    
    38,013,083
    
    
    
    4,183,775
    
    
    
    12,317,065
    
    
    
    189,876,594Allocated expenses
    
    
    98,093,268
    
    
    
    26,809,588
    
    
    
    3,119,373
    
    
    
    9,987,738
    
    
    
    138,009,967Segmental operating income
    
    
    154,712,508
    
    
    
    41,280,777
    
    
    
    3,432,478
    
    
    
    17,738,890
    
    
    
    217,164,653Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,616,746Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,547,907Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,865,294Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,413,201Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,946,892Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    164,466,309
 Year ended March 31, 2003 Rest of theNorth America
    
    Europe
    
    India
    
    World
    
    TotalRevenues
    
    $
    550,075,653
    
    
    $
    133,236,361
    
    
    $
    16,132,922
    
    
    $
    54,362,089
    
    
    $
    753,807,025Identifiable operating expenses
    
    
    218,257,001
    
    
    
    46,559,987
    
    
    
    4,084,049
    
    
    
    15,836,664
    
    
    
    284,737,701Allocated expenses
    
    
    149,621,377
    
    
    
    35,920,484
    
    
    
    5,823,309
    
    
    
    15,458,831
    
    
    
    206,824,001Segmental operating income
    
    
    182,197,275
    
    
    
    50,755,890
    
    
    
    6,225,564
    
    
    
    23,066,594
    
    
    
    262,245,323Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,601,127Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,644,196Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,048,110Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,692,306Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,822,265Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    194,870,041
 Year ended March 31, 2004 Rest of theNorth America
    
    Europe
    
    India
    
    World
    
    TotalRevenues
    
    $
    756,812,858
    
    
    $
    204,350,661
    
    
    $
    14,426,782
    
    
    $
    86,994,587
    
    
    $
    1,062,584,888Identifiable operating expenses
    
    
    317,978,761
    
    
    
    82,552,540
    
    
    
    3,949,627
    
    
    
    37,033,127
    
    
    
    441,514,055Allocated expenses
    
    
    193,007,959
    
    
    
    51,844,725
    
    
    
    3,590,587
    
    
    
    24,425,457
    
    
    
    272,868,728Segmental operating income
    
    
    245,826,138
    
    
    
    69,953,396
    
    
    
    6,886,568
    
    
    
    25,536,003
    
    
    
    348,202,105Unallocable expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,086,052Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293,116,053Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,950,174Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,066,227Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,775,927Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    270,290,300
 2.21.3 Significant clients No client individually accounted for more than 10% of the revenues in fiscal
2002, 2003 and 2004. 81




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##### Table of Contents



2.22 Litigation The company is subject to legal proceedings and claims, which have arisen, in
the ordinary course of its business. Legal actions, when ultimately concluded
and determined, will not, in the opinion of management, have a material effect
on the results of operations or the financial position of the company. Ms. Jennifer Griffith, a former employee, has filed a lawsuit against the
company and its former director, Mr. Phaneesh Murthy. The lawsuit has been
served on the company. Management is reviewing the allegations. Based on its
present knowledge of facts, management estimates that the lawsuit will not have
material impact on the result of operation or financial position of the
company. 2.23 Commitments and contingencies The company has outstanding performance guarantees for various statutory
purposes totaling $1,681,044 and $2,066,820 as of March 31, 2003 and 2004,
respectively. These guarantees are generally provided to governmental agencies. 2.24 Subsequent event The Board of Directors in its meeting on April 13, 2004, approved a 3:1 bonus
issue subject to approval by the shareholders at the Annual General Meeting to
be held on June 12, 2004. The Board also approved a stock dividend of 1 for 1
for ADS holders (i.e. 1 ADS for each ADS held). This will also result in the change
in ratio of domestic shares to ADS from 1:2 to 1:1. Subject to the approval of
the members in the Annual General Meeting on June 12, 2004, the record date for
the bonus issue would be July 2, 2004. Share and per share information in the
consolidated financial statements do not reflect the effect of these proposals.
If approved, the proposals will require retroactive presentation of such
information in subsequently issued consolidated financial statements. Financial Statement Schedule  II (Schedule II of Reg. §210.5-04(c) of Regulation S-X-17 of the Securities Act of
1933 and Securities Exchange Act of 1934) Valuation and qualifying accounts Allowance for doubtful accounts on trade accounts receivable Balance at
    
    Charged to cost
    
    
    
    
    
    Balance atDescription
    
    beginning of period
    
    and expenses
    
    Write offs
    
    end of periodFiscal 2003
    
    $
    3,941,245
    
    
    $
    150,864
    
    
    $
    (1,081,541
    )
    
    $
    3,010,568Fiscal 2004
    
    $
    3,010,568
    
    
    $
    3,432,034
    
    
    $
    (3,363,804
    )
    
    $
    3,078,798
 82




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##### Table of Contents



Item 19. Exhibits Exhibit number
    
    Description of document**3.1
    
    Articles of Association of the Registrant, as amended**3.2
    
    Memorandum of Association of the Registrant, as amended*3.3
    
    Certificate of Incorporation of the Registrant, as currently in effect****4.1
    
    Form of Deposit Agreement among the Registrant, Deutsche Bank Trust Company Americas and holders from time to
time of American Depository Receipts issued thereunder (including as an exhibit, the form of American
Depositary Receipt)*4.2
    
    Registrants Specimen Certificate for Equity Shares*10.1
    
    Registrants 1998 Stock Option Plan*10.2
    
    Registrants Employee Stock Offer Plan*10.3
    
    Employees Welfare Trust Deed of Registrant Pursuant to Employee Stock Offer Plan*10.4
    
    Form of Indemnification Agreement***10.5
    
    Registrants 1999 Stock Option Plan23.1
    
    Consent of KPMG LLP31
    
    Certification of Chief Executive Officer and Chief Financial Officer under Section 302 of the Sarbanes Oxley Act32
    
    Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes Oxley Act*****99.3
    
    Audit Committee Charter*****99.4
    
    Compensation Committee Charter*****99.5
    
    Nomination Committee Charter*****99.6
    
    Code of Ethics for Financial Professionals*****99.7
    
    Whistleblower Policy99.8
    
    Proxy Information Statement to holders of American Depositary Shares99.9
    
    Proxy Information Statement to holders of Equity Shares99.10
    
    Proxy Form to holders of American Depositary Shares99.11
    
    Proxy Form to holders of Equity Shares
  *
    
    Incorporated by reference to exhibits filed with the Registrants
Registration Statement on Form F-1 (File No. 333-72195) in the form
declared effective on March 10, 1999.**
    
    Incorporated by reference to exhibits filed with the Registrants
Quarterly Report on Form 6-K filed on January 21, 2000.***
    
    Incorporated by reference to exhibits filed with the Registrants
Quarterly Report on Form 6-K filed on August 4, 1999.****
    
    Incorporated by reference to Exhibits filed with Post Effective Amendment
No. 1 to Registrants Registration Statement on Form F-6 (File No.
333-72199) filed on March 28, 2003.*****
    
    Incorporated by reference to Exhibits filed with Registrants Annual
Report on Form 20-F filed on May 13, 2003. Signatures The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf. for Infosys Technologies LimitedBangalore, India
May 7, 2004
    
    /s/ Nandan M. NilekaniChief Executive Officer,
President and Managing Director
 83