Polaris Software - Annual Report - 2007-2008

POLARIS SOFTWARE LAB LIMITED

ANNUAL REPORT 2007-2008

DIRECTOR'S REPORT

To the Members,

Your Directors have great pleasure in presenting the Fifteenth Annual Report together with the Audited Statements of Accounts for the year ended March 31, 2008.

1. Financial Results

a. Stand alone results of Polaris Software Lab Limited

Rs. in LacsYear ended March 31 2008 2007

Profit (including other income) before Depreciation,Finance Charges, provision for diminution in value ofinvestments and Tax 10,478 13,790Less:Finance charges 60 57Provision for diminution in value of investments 103 18Depreciation & Amortisation 3,907 4,330Profit Before Tax 6,408 9,385Less: Provision for tax including DeferredTax and Fringe Benefit Tax 1,145 1,426Profit After Tax 5,263 7,959Add: Surplus brought forward 19,233 14,599Profit available for appropriation 24,496 22,558Appropriations:Provision for proposed dividend 1,480 2,218Tax on Distributed profits 251 311Transferred to General Reserve 526 796Balance Transferred to Balance Sheet. 22,239 19,233

b. Consolidated results of Polaris Software Lab Limited and its subsidiaries

Rs. in LacsYear ended March 31 2008 2007

Profit (including other income) before Depreciation,Finance Charges, provision for diminution in value ofinvestments& others and Tax 13,630 16,751Less:Finance charges 79 84Depreciation 4,602 4,811Profit Before Tax 8,949 11,856Less: Provision for tax including DeferredTax and Fringe Benefit Tax 1,611 1,991Profit After Tax before share of profit / (loss) ofassociate companies 7,338 9,865Share of profit / (loss) of associate companies (17) 241Net Profit for the year 7,321 10,106Add: Surplus brought forward 22,494 15,712Profit available for appropriation 29,815 25,818AppropriationsDividend 1,480 2,218Tax on Distributed profits 251 311Transferred to General Reserve 526 796Balance Transferred to Balance Sheet. 27,558 22,493

2. Results of operations

The consolidated income of Polaris Software Lab Limited from Software development services, products and Business Process Outsourcing for the year ended March 31, 2008 stood at Rs.109,930 Lacs, registering a growth of around 6.48% over the previous year's revenues of Rs.103,237 Lacs. The consolidated Net Profit for the fiscal year ended March 31, 2008 stood at Rs.7,321 Lacs as against the previous year's Consolidated Net Profit of Rs.10,106 Lacs. The Reserves increased from Rs.55,225 Lacs in 2006-07 to Rs. 60,815 Lacs in 2007-2008.

The Company caters to its clients through its worldwide offices and its global business distribution encompasses United State of America (USA), Europe, Asia Pacific, India and Middle East. In 2007-08, USA contributed 35.10%, Europe contributed 31.34%, Asia Pacific, and India & Middle East contributed 33.56%.

3. Future outlook

According to the Nasscom report of 2008, India continues to be a primary destination for outsourcing and is also emerging as a hotbed for products and innovation. Within the outsourcing arena, the Money Verticals - Banking Financial and Insurance form the lions share and are the most highly evolved outsourcing sectors both for IT outsourcing and BPO. Continued growth predicted in these verticals provides the opportunity for Polaris to increase the share of the business in these verticals, given the following advantages:

* Only top 10 players from India to be fully focused on the Money Verticals

* Ownership of the most contemporary and broad range of Intellectual Property for the Money Verticals (Intellect Suite) including investment into R&D

From the Geographic perspective, market analysts like Gartner predict a slower growth rate for Banking and Insurance Technology Outsourcing in the industrialized countries, while high growth is expected in the emerging economies. In addition the US markets are also experiencing a slow down due to the Sub prime crisis.

For Polaris, the emerging markets pose lucrative opportunities for growth led by the Intellect Suite, while a broad geographic spread across regions enables the company to tide over the impact of economic slowdown in the USA. Outsourcing services such as Testing, Enterprise Solutions, and Business Intelligence are expected to experience good demand over the next few years.

Acute shortage of legacy technology skills and inability of older core systems to offer the global growth demanded, today is causing banks across the world to commence modernization programs. Redundant functionality and existing rigid systems are also inhibiting banks to respond to time-to-market needs and with the advent of Service Oriented Architecture (SOA) based solutions and software services, Banks are able to respond faster to their customer needs.

Trends showing increased adoption of SOA and the predicted opening up of the legacy modernization market as well as core banking renewal are also favorable to the company's growth strategy and direction and its focus on next generation solutions that leverage latest concepts such as SOA.

Key high growth areas visible across geos and across all Banking domains are:

* Retail, Core and Private Banking Front Office Applications

* SOA Reengineering and Modernization of Core Banking Platforms

* Global Portal solutions

* Global Cash and Liquidity solutions

* Wealth Management and Investor Services

* Application Testing

* Specialist Services and Consulting

* BPO

4. Dividend

Your Directors please to recommend a dividend @ 1.50 per share (30% on the nominal value of Rs.5/- per equity share) for the financial year 2007-08. The dividend, if approved at the forth coming Annual General Meeting, will be paid out of profits of the Company for the year to those equity shareholders whose name appear on the Register of Members of the Company on 10th July 2008 and to those whose names appear as beneficial owners in the records of National Securities Depository Limited and Central Depository Services (India) Limited on the said date.

5. Strategic Initiatives during the Year

* The Company entered the African Market with a significant win from one of the largest Banks in Africa, with the Intellect Treasury platform

* Total employee strength crossed the significant milestone of 10,000 this year and the talent program continued around the strategy of nurturing specialists in sub verticals and specialty skills.

* The Company has set up a Centre of Excellence (CoE) for Algorithmic create a talent pool of trained resources in the Risk Management arena

* Polaris set up a dedicated Test Lab at Sydney to offer round the clock availability of testing services

* Corporate Heights, a center for Modernization of Treasury Technology was opened at Goregaon, Mumbai. This new state-of-the-art, 66000 square foot facility housing 500 experts would focus on providing technology modernization services in treasury departments of banks and multi-national companies, besides offering specialized products and components for trading, operations and liquidity management.

6. Increase in share capital

The Company has allotted 92,470 number of Equity Shares of Rs.5/- each pursuant to the exercise of employee stock options during the year as detailed hereunder:

Date of Scheme Option No. of No. of Total Allotment Price (Rs.) Allottees Shares Shares

18/07/2007 ASOP 2000 123.65 2 4,000 66,655 ASOP 2000 71.50 1 50 ASOP 2001 123.65 2 4,000 ASOP2001 57.00 6 1,305 ASOP2003 137.4 4 1,000 ASOP2003 76.60 27 52,600 ASOP2003 116.10 2 700 ASOP2003 152.95 3 3,00017/10/2007 ASOP2000 71.50 1 100 20,175 ASOP2001 57.00 6 2,775 ASOP2001 71.50 2 3,000 ASOP2003 76.60 6 14,30023/01/2008 ASOP2000 71.50 2 140 5,640 ASOP2003 76.60 6 5,500

In view of the above, the issued, subscribed and paid-up equity share capital increased from 98,582,127 equity shares of Rs.5/- each as on March 31, 2007 to 98,674,597 equity shares of Rs.5/- each as on March 31, 2008. All the above newly alloted shares are listed and traded on stock exchanges.

7. Employees Stock Option Scheme

The Company has 4 Stock Option Schemes as on 31st March 2008. During the year, your Company has granted options to the eligible Associates under the Associate Stock Option Plan 2003 as per SEBI Guidelines on (ESOP & ESPS). The Company has not granted any options under ASOP 2000, ASOP 2001 and ASOP 2004 Plans during the year 2007-08.

(I) Details of Options under ASOP 2000 & ASOP 2001 during the year 2007-08

Particulars ASOP 2000 ASOP 2001

Options outstanding as on 01-04-2007 98,970 65,635a Options granted during the year Nil Nilb The pricing formula N.A N.Ac Options vested 41,175 17,820d Options exercised 4,290 11,080e Total number of shares arising as 4,290 11,080a result of exercise of Optionsf Options lapsed / surrendered 50,115 35,185g Variation of terms of options Nil Nilh Money realized by exercise of options in (Rs.) 515,335.00 941,660.00i Total number of options in force 44,565 19,370

j Details of Options granted to:

(i) Senior managerial personnel; Nil

(ii) any other employee who receives agrant in any one year of option amountingto 5% or more of Option granted during the year. Nil

(iii) identified employees who were grantedoptions, during any one year, equal to orexceeding 1% of the issued capital(excluding outstanding warrants andconversions) of the Company at the time of grant. Nil

k. Diluted Earnings Per Share (EPS) pursuantto issue of shares on exercise of Option (Rs.) 5.32

Note: Since the Company has not granted any Options under ASOP 2000 and ASOP 2001, disclosure as required under sub-clause (l).(m) and (n) of Clause 12.1 of SEBI (ESOP & ESPS) Guidelines, 1999 are not applicable.

(II) Details of Options under ASOP 2003 & ASOP 2004 during the year 2007-08

Particulars ASOP 2003 ASOP 2004

Options outstanding as on 01-04-2007 3,286,400 780,000

a Options granted during the year 313,500 Nil

b The pricing formula As per Market Value

c Options vested 632,990 155,400

d Option exercised 77,100 *16,100

e Total number of shares arising as 77,100 16,100 a result of exercise of Options

f Options lapsed / surrendered 582,900 46,900

g Variation of terms of options Nil Nil

h Money realized by exercise of options in (Rs.) 6,223,360.00 1,233,260.00

i Total number of options in force 2,939,900 717,000

j (i) Details of Options granted to Senior Managerial personnel:

a. Number of Options granted 90,000 Nil

b. Total number of personnel to whom the above options were granted Nil

(ii) any other employee who receives a grantin any one year of option amounting to 5%or more of Option granted during the year Nil

(iii) identified employees who were grantedoptions, during any one year, equal toor exceeding 1% of the issued capital(excluding outstanding warrants andconversions) of the Company at the time of grant. Nil

k. Diluted Earnings Per Share (EPS) pursuantto issue of shares on exercise of Option (Rs.) 5.32

l. (i) Employee Compensation cost usingintrinsic method of accounting 0

(ii) Employee compensation cost usingFair Value method of accounting. Rs.107,149,701Difference between (i) & (ii) Rs.107,149,701If intrinsic value method is used, impact for theaccounting period had the fair value methodbeen used on the following:Net results decreased by Rs.107,149,701Basic EPS will reduce by 0.02

m. Options whose exercise price either equalsor exceeds or less than the market price of the stock:

Weighted average exercise price (Rs.) 80.72 -Weighted average fair value (Rs.) 76.70 122.12

n. Method and significant Black & Scholes Method: Significant assumptions Assumptionsused to estimate the fair value of Options. a. Risk-free interest rate 7.81% b.Expected life of options 2.5 to 6.5 Years c. Expected Volatility 54.42% d. Expected Dividend yield 1.07%

e. Price of the underlying share in market at the time of option grant

Date of Grant Share price on Exercise the date of Price (Rs.) grant (Rs.)

18/05/07 174.85 171.95 18/07/07 140.30 149.65 17/10/07 114.80 115.60 23/01/08 85.85 66.05

* The shares were alloted from Orbitech Employees Welfare Trust for the Options exercised under ASOP 2004.

8. Subsidiaries

The subsidiary companies of your Company along with the country(s) of incorporationare given below:

Polaris Software Lab Pte Ltd. SingaporePolaris Software Lab Ltd. United KingdomPolaris Software Lab GmbH GermanyPolaris Software Lab S.A SwitzerlandPolaris Software Pty Ltd. AustraliaPolaris Software Lab Ireland Ltd. IrelandPolaris Software Lab Japan KK JapanPolaris Software Lab Canada Inc. CanadaPolaris Software Lab Chile Limitada ChilePolaris Software Lab B.V. NetherlandsPolaris Retail Infotech Ltd IndiaOptimus Global Services Ltd. India

The overseas subsidiaries, in addition to providing service to various international clients have greatly enhanced the capability of your Company in generating more business opportunities in international markets. The Board of Directors of your Company has reviewed the affairs of the subsidiary Companies. Details of the investment made by your Company in its subsidiaries & Associate Companies are shown in Note No.6, in Abridged Financials and also Note No. (B) 15 of Significant Accounting Policies and Notes to Accounts provided as an annexure to the complete and full Balance Sheet and Profit & Loss Account.

Your Company has applied for an exemption under Section 212 of the Companies Act, 1956 to the Central Government, Ministry of Company Affairs (MCA) from attaching theBalance Sheet, Profit & Loss Account, Directors' Report and the Auditor's Report of itssubsidiaries to the Annual Report. This Annual Report does not contain the financial statements of the subsidiaries, instead contains the Consolidated Audited Financialsof your Company and its subsidiaries, based on the expected approval form MCA.Further, information relating to each subsidiary has been disclosed in an abstract format, which is forming part of the consolidated Balance Sheet.

The Annual Accounts of the subsidiary companies will be made available to the holding and subsidiary company investors seeking such information at any point of time. Annual Accounts of the subsidiary companies will also be kept for inspection during business hours at the Company's Registered Office and that of the subsidiary companies concerned.

9. Notable accolades received during the year

a. Market Recognition for Consulting and Outsourcing at Polaris

* Recognized as Leader in the category of 'Specialty Application Development' among the Top 100 Global Companies from Cyber Media Publication for two consecutive years in 2006 and 2007.

* Polaris ranked by Tower group among worlds top Professional services and Consulting organizations - in line and at par with all other key tier I players in the IT and business consulting segments

* Optimus ranks among Tower Group's list of Select 'Offshore Business Process Outsourcing Providers' in Financial Services

* Polaris Optimus placed among the select outsourcing providers offering lending outsourcing and collections/delinquency management services

* Polaris ranks among top 3 global financial services testing specialists in report by Gartner on Outsourced Testing in Financial Services

b. Market Recognition for Intellect Global Banking Platform

* Polaris Intellect Ranked by Forrester Research (07) as Global Challenger and among top 5 Banking Platforms worldwide

* Polaris' Intellect Treasury wins the 'The Banker' Award for Capital Markets Projects, 2007

* Polaris Intellect listed among the most contemporary global core banking solutions in Cap Gemini Survey of Core Banking Solution Providers

* A report on Corporate Banking Portals by Tower Group has recognized Intellect portals as 'a comprehensive portal framework that closely matches the vision of most leading US banks'

10. Society Connect

The Ullas Trust was founded in 1997 with a desire to integrate Polaris Associates with a larger community. The Charter for the Trust includes:

* Encouraging a 'Can Do It' spirit among the young, economically challenged students, during the vulnerable stage of adolescence.

* Recognising academic excellence in students from Corporation and Government Schools between classes 9th to 12th and enabling them to dream big and work towards realizing their dreams.

Ullas celebrated 10th Annual workshop on 15th December 2007. Last year, 3313 students were awarded young achievers scholarship awards. On this number, 40 scholarships benefitted students from Killai, a Tsunami affected village near Chidambaram. 'Ullas Young Achieves Higher Education Scholarships' were also awarded to 24 students.

11. Fixed Deposits

Your Company has not accepted any deposits and, as such, no amount of principal or interest was outstanding on the date of the Balance Sheet.

12. Auditors

M/s S.R. Batliboi & Associates, Chennai, Chartered Accountants, who are the Statutory Auditors of the Company retire at the forthcoming Annual General Meeting and are eligible for re-appointment. The retiring Auditors have furnished a Certificate of their eligibility for re-appointment under Section 224 (1B) of the Companies Act, 1956 and have indicated their willingness to be re-appointed.

13. Directors

Messrs Satya Pal, Dr.Ashok Jhunjhunwala and Anil Khanna directors, retire at the forthcoming Annual General Meeting and, being eligible, offer themselves for reappointment.

14. Corporate Governance

Your company perceives Corporate Governance as an endeavor for transparency and a wholehearted approach towards establishing Professional Management, aimed at continuous enhancement of Shareholders' value. Your Company has been complying with the conditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement. Separate reports on Corporate Governance along with Auditors' Certificate on compliance with of the Corporate Governance norms as stipulated in Clause 49 of the Listing Agreement and Management Discussions & Analysis forming part of this report are provided elsewhere in this Annual Report.

15. Impending Litigation(s)

Details of impending litigations are shown in Note No.2 of the Abridged Financial Statements and also in Note No. (B)5 under Significant Accounting Policies and Notes to Accounts provided as an annexure to the complete and full Balance Sheet and Profit & Loss Account.

16. Conservation of Energy, Technology Absorption, Foreign Exchange Earnings & Outgo

The particulars, as prescribed under clause (e) of sub-section (1) of Section 217 of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 are set out in the Annexure to the Directors' Report forming part of the complete and full Annual Report 2007-08. (In view of the expected exemption under the Companies Act, the said Annexure has not been enclosed with the Directors' Report forming part of the abridged Annual Report).

17. Particulars of Employees

As required under the provisions of Section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, as amended, a statement showing the names and other particulars of employees are set out in the Annexure to the Directors' Report forming part of the complete and full Annual Report 2007-08. (In view of the expected exemption under the Companies Act, the said Annexure has not been enclosed with the Directors' Report forming part of the abridged Annual Report). The Department of Company Affairs, has vide GSR. 212(E) dated 24.03.2004, amended the Companies (Particulars of employees) Rules, 1975 to the effect that particulars of employees of the companies engaged in Information Technology sector posted and working outside India not being directors or their relatives, drawing more than rupees twenty four lakh per financial year or rupees two lakh per month, as the case may be, need not be included in the statement but, such particulars shall be furnished to the Registrar of Companies. Accordingly, the statement referred above does not contain the particulars of employees who are posted and working outside India not being Directors or their relatives. However, on specific request, such particulars shall be made available to any shareholder.

18. Directors' Responsibility Statement

Pursuant to the provisions of Section 217(2AA) of the Companies Act, 1956 the Directors of your Company confirm that:

(i) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(ii) the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;

(iii) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(iv) the Directors had prepared the annual accounts on a 'going concern basis';

19. Acknowledgment

Your Directors take this opportunity to thank all investors, clients, vendors, banks, regulatory and government authorities, and stock exchanges for their continued support. Your Directors also wish to place on record their appreciation for the contribution made by the Associates at all levels.

Place : Chennai By Order of the BoardDate : April 23, 2008 For Polaris Software Lab Limited

Arun Jain Chairman & Managing Director

MANAGEMENT DISCUSSION AND ANALYSIS

1. Overview:

Polaris continued its focus on the Money Verticals - Banking, Financial and Insurance, in 07-08, with its portfolio of Consulting, Products and Outsourcing services, registering an annual dollar income growth of 22% over the previous year. For the year ended 31 March 2008, the total income was Rs 1,117.41 crore. Operating profit (EBITDA) was Rs 136.30 crore and profit after tax (PAT) was Rs 73.21 crore. The company witnessed good growth across its porfolio of products, outsourcing, BPO and Consulting.

The Company strategy to invest into products has provided the potential to explore markets beyond US and UK, where large banks showed knee jerk

reactions to the sub prime debacle. The Company was able to successfully manage the currency risks due to dollar depreciation through adept hedging strategies. It was also able to effectively counter the slowdown in the US economy.

Over the past five years, Polaris has worked along three dimensions to build a wholistic financial technologies institution, namely investment into the Intellect Suite, broadening of customer account landscape and building an organization-wide governance structure

Expanding new-account base: While in 2003, Polaris business was largely concentrated in a few accounts with one large customer, contributing 70% of revenue, over these years, with an account proliferation focus, a base of over 70 strategic accounts has been built. Simultaneously, the company has been able to grow the business more than four times, with the largest account.

Polaris had foreseen (5 years ago) Progressive ModernizationTM as the next big wave in outsourcing in the Money verticals. The IP-led outsourcing strategy, using the Intellect arrowhead is now getting validated by the responses from the marketplace, competition focus and research reports from leading market analysts. Legacy Modernization will spin into a huge market opportunity over the next 10 year time frame.

Polaris continued its focus on operational process improvements by putting in place a robust governance model to achieve repeatable and predictable growth.

Today the company is set to move forward on a path of rapid growth. The marketplace offers significant opportunities, with the Money verticals becoming globalized at a very fast pace, market participation from 150+ countries and over 1000 banks with an asset size of more than 1 Billion Dollars.

Outsourcing: Polaris Outsourcing business showed healthy growth with several new clients added during the year; There was significant growth in key accounts as well as in some of the specialty practices such as Independent Testing, Enterprise Solutions and Business Intelligence and Enterprise Content Management. The company has doubled its strategic account landscape from 40 accounts two years back to 70 accounts currently. Polaris, Application Certification Enterprise, with Application Performance Diagnostics and Managed Testing Services being offered out of Canada, Northern Ireland, India and Sydney is now recognized as a global top 3 provider of outsourced testing services to the Money Verticals.

Intellect Banking Platforms: The contribution from Intellect Banking Platform to the overall outsourcing business stood at 23% for the year, indicating increased acceptance and stability of the suite in the marketplace. Polaris had 12 lighthouse implementations (Implementations for Tier 1 Banks) of Intellect during the year. Three new platforms, Intellect Core, Intellect Investor Services and Intellect Portals were launched in the market this year. Growth plan of expanding the distribution footprint through partnerships and by exploring new markets is on the agenda for the coming year.

Consulting capability of Polaris was recognized by Tower Group (a leading research and consulting firm focused on the global financial industry) among the world's Top Professional Services Consulting organizations along with the Tier 1 players in the IT and business consulting segments. Polaris won a significant value Discovery engagement with a leading bank in UK for Progressive Modernization of Core Banking platform.

Optimus Global Services, Polaris' BPO subsidiary focusing on the high-growth Indian market for complete banking process outsourcing, recorded a growth of 90% on a YoY basis.

Some of the key Business Highlights for the year across services lines are highlighted below:

1. Core Banking: Intellect Core went live in one of the largest banks in Middle East. Polaris also won the prestigious order from the 5th largest State-owned bank in Vietnam

2. Wealth Management: Intellect was selected by one of the largest Private Sector banks in India.

3. Cash and Liquidity: Intellect went live in one of the largest banks in Southern Europe and in one of the Fortune 10 banks in Europe

4. Intellect Custody Platform has become the Market Leader in the Indian Market

5. Polaris was ranked among the leading global testing providers for the Money Verticals

The Company entered the African Market with a significant win from one of the largest Banks in Africa, with the Intellect Treasury platform

Employee growth: Total employee strength crossed the significant milestone of 10,000 this year and the talent program continued around the strategy of nurturing specialists in sub verticals and specialty skills.

The Company set up a Centre of Excellence (CoE) for Algorithmics to create a talent pool of trained resources in the Risk Management arena as well as a dedicated Test Lab at Sydney to offer round the clock availability of testing services.

Infrastructure: Corporate Heights, a center for Modernization of Treasury Technology was opened at Goregaon, Mumbai. This new state-of-the-art, 66000 square foot facility housing 500 experts will focus on providing technology modernization services in treasury departments of banks and multi-national companies, besides offering specialized products and components for trading, operations and liquidity management.

2. Industry Structure and Developments

2.1 Trends in Outsourcing

Changing patterns in money movement across borders driven by economic performance of countries, new demographics and a morphing global wealth scenario are impacting the business strategies of players in the Banking, Financial and Insurance domains significantly. While the nouveau rich individuals and countries offer immense opportunities, slowdown in the US economy and the intense competition to retain market share in other industrialized economies is driving companies in these sectors to explore technology options that are increasingly aligned to revenue growth and product innovation. In addition, the players in the money game need to deal with changing regulatory pressures and manage risk exposures effectively, which calls for flexible yet robust business solutions.

The Banking and Financial sector is one of the most mature adopter's of technology outsourcing, primarily driven by demanding customer needs and accelerated globalization. Agility in new product introduction, risk management, 'glocalization' and optimization of IT investments over time are key challenges for companies in this sector today. In addition, increased availability of resources for outsourcing back office functions and transactions has also enabled Banks to leverage global resources and infrastructure to improve business process.

While traditional scale based outsourcing models and the global delivery models continue their journey up the value chain towards business alignment and improved performance, the following drivers have had a significant impact on the design and delivery of outsourcing services for the next decade

* Availability and fast rate of adoption of new concepts such as Service Oriented Architecture (SOA)

* Thinning line between services and products

* Dearth of technology skills globally, specifically in legacy technologies and specialist domain areas for effective management of core systems

SOA is now a tested approach to building flexibility into business technology and year 2007 has seen increased adoption of this concept by leading players in the Banking and Financial world.

The above factors are leading to increased innovation and IP creation in business strategy, operations, processes and products, with technology as the primary enabler. Polaris has put in place new models of delivery, new tools and point solutions that are aligned to driving innovation in outsourcing approaches today in response to the need of the marketplace for sharper and more business focused solutions from technology.

2.2 Technology Outsourcing industry in India

Nasscom's strategic review of the Indian IT-BPO industry, 2008, indicates that India will continue to be the nerve-centre' for global sourcing with over 2/3rd of the Fortune 500 and a majority of the Global 2000 firms leveraging global service delivery already sourcing from India. The following are some of the indicators and trends from the report.

Continued growth in the Outsourcing sector: With the industry slated to achieve a target of USD 60 billion in software and services exports and USD 73-75 billion in overall software and services revenues, by FY2010, 2007 growth and performance of the sector has been positive and conducive to the growth projected.

The industry has exhibited strong fundamentals, as evident from the resilience shown while countering slowing economy and financial sector crisis in the US, as well as the sharp appreciation of the INR against the USD. The sector continued to maintain double digit revenue growth, driven by strategies such as geographic diversification as well as service portfolio expansion.

a. Banking, Financial and Insurance sectors lead in outsourcing

Although the outsourcing industry's vertical market exposure is well diversified across several mature and emerging sectors, Banking, Financial Services and Insurance (BFSI) remains the largest vertical market for Indian IT-BPO exports, followed by Hightechnology and Telecom, and these sectors together accounted for nearly 60 per cent of the Indian IT-BPO exports in FY2007.

b. India: Emerging as a hotbed of products and innovation

The NASSCOM report has also identified continued growth of about 27% across product development and engineering services, which also reflects India's increasing role in global technology IP creation.

Polaris has leveraged this trend with timely investment into product development and the launch of the Intellect Suite.

2.3 Global Market Indicators of Money Verticals

Both the Banking and Insurance verticals are expected to experience continued growth, with the various geographic segments showing a differing growth rates, reflecting the economic activity of the region.

a. Banking

Technology outsourcing drivers in the Banking vertical, as per research by Gartner, shows that increased trend in linkage of technology to front-office revenue-generation goals,more adoption of service-oriented architecture, business process management and software services and increased regulatory pressures are key drivers of outsourcing in these verticals.

b. Insurance

The main drivers of growth in insurance include a significant shift from back-office to front-office delivery systems to reduce spending on policy administration and claims, wider adoption of business process management, service-oriented architecture and enterprise content management, fraud detection and BPO.

2.4 Polaris focus on differentiation

Given the strong growth projected for the Indian IT/BPO industry as well as the uptrend's in the global Banking and Insurance domains, Polaris is positioned to leverage the following factors which are key to a differentiated strategy for growth in the marketplace

* Sharp focus and knowledge of the money verticals helps provide end to end outsourcing solutions to the Banking, Financial and Insurance sector companies

* Leverage the Intellect Suite of applications, the broadest range of intellectual property in this domains, to deliver the flexibility and scalability of solutions required for these domains

* Super-specialization into sub-verticals in the money domain to provide the required business focus of solutions delivered

* High performance business applications delivered to stringent customer requirements of functionality, cost and time enabled by strong commitment to process quality

* Leverage methodology that uses SOA concepts for progressive modernization of business technology

2.5 Next decade Outsourcing

Outsourcing is becoming an increasingly complex business proposition due to the advancements in technology delivery methods and new concepts such as SOA. In addition, skill shortages in legacy technologies are expected to drive increased innovation and bundling of domain expertise into point solutions tied to business outcomes. Hence increased focus on business outcomes, agile technology solutions and the ability of technology to influence business growth will be the critical success factors for players in this industry in the next decade. Moreover the geo specific nature of markets will demand a well balanced geo portfolio across major regional segments to leverage emerging markets as well as mitigate the risks of impact due to decreased economic activity in some regions.

Investment into innovation, domain specialization, new markets and creation of relevant intellectual property are key competitive advantages for Polaris that will enable to the company to compete effectively in the next decade.

3. Strengths, Opportunities and Threats

The following section discusses the inherent strengths of Polaris that can be leveraged to create value for customers continually.

3.1 Strengths

* Intellectual Property Assets: The Company's inherent strengths include Intellectual property in the form of IntellectTM, which has been recognized by leading market analysts as a promising and agile platform for companies in the Banking and Financial vertical. The IntellectTM suite comprises of nine platforms namely Intellect Consumer Finance, Intellect Core, Intellect Cards, Intellect Front Office, Intellect Treasury, Intellect Liquidity, Intellect Wealth, Intellect Investor Services and Intellect Portals.

* Consulting capability and Proprietary Solution Build Methodology: Polaris has been listed as among the top 5 consulting companies from India in the Banking and Financial Services space by leading analyst house, Tower Group. The company has been awarded prestigious consulting assignments in the area of technology modernization roadmaps during the year by Tier 1 Banks

* Customer base of leading global banks and Financial Institutions. We partner with 70 named strategic accounts comprising of 17 AAA, 16 AA and 37 A accounts.

* Optimized Operational Performance: Polaris strength is in its focus on extreme execution, processes and robust delivery engines. The Company is dedicated to achieving world class delivery services through a resolute focus on continuous enhancements. It has attained high standards of process maturity, which have helped to deliver a strong business performance in 2007. The company has successfully delivered several projects using the new model, a combination of software assets and outsourcing

Domain Expertise: The Polaris pedigree has been established over the years as a pure play Banking and Financial Services player and the company continues on the road to super-specialization, the key to growth in the coming years. Polaris Business Solution Centers are engaged in engineering solutions and in delivery of projects for customers across multiple sub domains.

* Retail Banking Products and Solutions Center, Chennai : Catering to a wide range of products and solutions for Retail Banks, this center offers profitable core propositions including Core Banking, Lending and Mortgage, Credit cards, Branch Banking Applications, CRM, Internet Banking, Multi-Channel Integration, Origination and ATM Solutions.

* Investment Banking Center, Hyderabad: The Capital, Polaris Investment Banking Center is a one-of-its-kind Investment Banking, Capital Markets and Wealth Management Center.

* Cash and Liquidity Management Center, Mumbai: This center offers expertise in global liquidity pooling and sweeping, cash management and other corporate Banking solutions

* Risk & Treasury Management Center, Mumbai: Polaris offers solutions in areas such as Basel II, Transfer Pricing, Compliance Reporting and Risk Analytics such as ALM, Credit Solutions, Collateral Management and Collection.

* Insurance Center, Chennai: This center caters to Polaris growing clientele in the Insurance domain. It houses Intellectual Property assets and accelerators for building Insurance Applications for the next decade

* Technology Innovation Center, Chennai: This center houses technology capabilities in internet and legacy technologies, Application testing and Certification, Workflow and Content Management

* Intellect Development Center: The seat of development of Intellect IP assets, this center is focused on Research and Development of business components to enhance the functionality and technology capability of the Intellect Suite of Applications

* Enterprise Solutions Center, Delhi: This center delivers enterprise solutions such as SAP, Oracle Apps and Baan to global customers through proprietary technologies and shared services models of high business value to users.

3.2 Opportunities & Threats

a. Opportunities:

As an innovative technology solutions provider with a unique service mix and investment into IPR, Polaris has identified several key business opportunity areas which will drive the Company's organic growth for the foreseeable future. Some of these growth drivers are:

1. Geographic expansion to new markets

The Company has consolidated on the new regions entered in 2006-2007 and continues on its strategy for growth into emerging markets

* In the Americas, the Company has initiated fresh inroads into the Latin Americas.

* In EMEA Polaris is paying special attention to deepened presence in France, Germany and building new client relationships in Netherlands and Scandinavia.

* For Asia Pacific, the China, Japan and Australian markets are being built up.

2. IP Monetization: New international market strategies and monetization of the Intellect assets poses an immense opportunity for growth for the company in the coming years.

3. Service Portfolio Enhancement

In continuance to its strategy of identifying high value segments of the business, the Company is further enhancing and strengthening its service portfolio through investment and marketing of Intellect Product range and SOA based services.

4. New Sales

The Company continues its sales thrust in areas of industry verticals and key accounts in which it has built significant competitive strength, which are also the mainstay business of the Company.

5. Account Growth:

The company has doubled its strategic account landscape from 40 accounts two years back to 70 accounts currently. This was achieved through a concerted program of realigning sales enhancing efforts into focus on key accounts.

The Polaris customer base, including Fortune/Global 500 Banks offer significant scope for expanding its share of their IT budgets and this is indicative of the continued potential for growth. Most importantly, the Company is leveraging its capability as an integrated solutions provider, with appropriate technology expertise and domain knowledge, to deepen its relationships with its clients.

b. Threats:

While a slowdown is expected in North American geography, Polaris does not envisage any major threats to its business or operations due to this or other factors

4. Segment Wise Performance

The Company's proportion of revenue across all its business segments/verticals, are shown below.

Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4FY07-08

Banking and Finance, Insurance 88.00% 89.00% 89.00% 89.00%Emerging Verticals 12.00% 11.00% 11.00% 11.00%Total 100.00% 100.00% 100.00% 100.00%

5. Outlook

While various geographic markets are experiencing different technology outsourcing drivers the opportunities for Polaris at a global level continue to be favorable, given its domain specialization, intellectual property and innovation orientation. Key high growth areas visible across geos and across all Banking domains are:

* SOA Reengineering and Modernization of Core Banking Platforms

* Front Office Applications

* Portal solutions

* Global Cash and Liquidity solutions

* Wealth Management

* Application Testing

* Specialist Services and Consulting

Market opportunity from Tier 2 and Tier 3 banks is also opening up Insurance sector offers significant potential, driven by accelerated globalization.

6. Internal Control Systems and their adequacy

The CEO/CFO certification provided in the Report on Corporate Governance discusses the adequacy of our internal control systems and procedures.

7. Risks and Concerns

Polaris adopted the Risk Manual and proposed Risk framework presented to the Board in May 2005. All Risk mitigation steps are embedded and form part of all the key process followed in the company. Risks are classified into Macro or micro based on the scope of the impact on the organization and classified as corporate and non-corporate based on the level at which it needs to be identified and mitigated. The following figure depicts the Risk model in use.

All risks are handled based on the level best placed to mitigate the risks associated with each of the significant accounts. The perceived risks on each of the significant accounts on account of deficiencies in every process associated with those accounts are documented. The process owners are identified for each of the process and they were required to design a remediation plan to control perceived risks, which would eventually remove all the identified control deficiencies. The detailed exercise of mapping all the financial reporting processes covers 90-95% of the significant accounts. The process of moving internal audit from a transaction based to a risk based one has also been initiated.

7.1. Risk Governance

The governance of risk in the organization is entrusted to a board appointed by the risk committee. The risk committee consists of the CEO, Group CFO and Head Quality & Project Risk as its members. This committee has been authorized to

* review and suggest changes to the risk manual as may be necessary from time to time,

* Adopt such processes and procedures to enable compliance and mitigate risk

* Further delegate such powers and authorize persons to implement the same as may be necessary.

This committee, to put in place the corporate risk management framework, aligned all critical risk management functions as illustrated.

An organizational structure aligned to risks illustrated in the adjacent figure has been implemented. Along with the change in structure major policies and procedures were also reviewed and implemented to help management at all the levels to be attuned to the risk management framework of the company.

The risks are broadly classified into macro financial and operational. All the macro financial risks are aligned with the Group Chief financial Officer while the Operational risks are aligned with the Head, quality and project risks both of who are members of the board appointed risk committee.

7.2. Risk Identification Assessment Monitoring and control

The members of the Polaris board have authorized the risk committee, developed policies and procedures to identify, monitor, escalate and control major corporate risks. Greater awareness of risks and their implications were communicated throughout the organization by training programs and review meetings. Polaris organization has developed a common color-coding methodology of 'Red, Amber and Green' with corresponding context specific threshold limits. Various departmental and inter departmental meetings mandated at regular intervals at appropriate levels help in identifying assessing, monitoring and control of all identified risks.

Risk Manager

The risk manager at the corporate level along with the internal auditors identify through audit any process deviations in existing policies and procedures or any new control deficiencies through periodic testing and evaluation of the existing processes.

The risk manager is also responsible for conducting periodic surveys on the processes control deficiencies and corresponding remediation plans. Identification and maintenance of adequate risk coverage for major macro risks and also maintenance of the insurance dashboards for senior management review.

Market Risks

a. Price Risk

Competitive forces due to increasing trend of more global companies in banking and financial services market opening their own local outfits in India as well as the presence of a large number of Indian and MNC outsourcing providers operating out of India would constantly exert pressure on prices. Global weakening of the pricing of technology outsourcing services would be one of the major market related risks. To mitigate this risk, Polaris has opted to differentiate in the market place through IPR led solutions. This strategy reduces the resource and effort requirements for similar solution offerings in the market from plain vanilla resource suppliers.

b. Geographic Concentration Risks

Concentration of revenue from any country exposes Polaris to the risks specific to its economic condition, global trade policies, local laws, political environment, and its diplomatic relationship with India etc. Each market has distinct characteristics pertaining to costs of penetration, country risk, maturity of the market for the products on offer, growth potential, price/profitability, therefore rigid limits on geographical concentration are not imposed. However it is monitored at the corporate level to balance any substantial skew in revenues. The following figure illustrates that the geographic revenue breakup has by and large remained stable throughout the last 4 quarters. The trend demonstrates a balanced portfolio across geographies.

Geographic Revenue Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4 FY07-08

Break-up (Rs. Lacs) 25,745.05 27,355.08 28,214.15 28,615.78US/North America 34.78% 35.67% 35.88% 34.08%Europe 31.82% 31.77% 30.39% 31.42%India 11.43% 11.18% 11.93% 12.88%Asia Pacific & Japan 21.97% 21.38% 21.80% 21.62%Total 100.00% 100.00% 100.00% 100.00%

c. Industry Concentration Risk

As per most analyst research reports financial services and manufacturing (including discrete and process) rank first and second in IT services market size in the United States and worldwide. Industry analysts predict that although financial services demonstrate only moderate growth in industrialized economies, strong growth in most smaller-regions tends to place the financial industry ahead of average IT spending growth. Therefore we consciously have pursued a path of focusing on this sector.

d. Client Concentration Risks

The following healthy trend in new relationships throughout the year shows a healthy trend in the mix of new and existing businesses at Polaris, and reduced risk due to client concentration.

Client data Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4 FY07-08

New major clients added 14 16 14 14Repeat Business 88.00% 88.00% 88.00% 86.00%Client concentrationTop Client 11.48% 10.85% 11.02% 12.57%Top 5% 35.59% 36.60% 38.00% 38.30%Top 10% 48.71% 50.34% 51.81% 52.45%Citigroup Contribution 39.60% 38.70% 38.39% 38.92%Intellect Revenue (Rs. Lacs) 5,381.00 5,845.00 5,728.29 5,610.77

e. Technology Obsolescence risk

Polaris provides global and contemporary financial solutions by partnering with other industry leading technology partners. It continuously invests in new technologies and new products based on new technologies to maintain currency. These investments are charged to the P&L account as per the present policy but in case technological feasibility is established for the product so developed are used in future. Software development costs incurred subsequent to the achievement of technological feasibility are capitalized and amortized over estimated useful life of the products. The amortization of software development costs is allocated on a systematic basis over the best estimate of its useful life after the product is ready for use. The factors considered for identifying the basis include obsolescence, product life cycle and actions of competitors. The amortization period and the amortization method are reviewed at each period end. If the expected useful life of the product is shorter from previous estimates, the amortization period is changed accordingly. At present in Polaris the products are amortized over a period of five years

f. Security and Business Continuity

Polaris has implemented a system for the management of information security in line with the standard BS 7799-2:1999. Accordingly, information security controls are implemented based on best practices and clients requirements. All offices located at Chennai, Mumbai, Hyderabad, Gurgaon and New Jersey have been assessed for information security compliance and are certified as BS 7799 compliant. Polaris has well-defined corporate guidelines for Business Continuity Plan. We have established a management system in order to ensure the continuation and rapid recovery from failure or unexpected interruptions, if any, to business critical processes and operations including IT processes and systems. Business continuity planning due to the round the clock availability requirements of the business are accorded very high priority. We have a Business Continuity committee consisting of members from the senior business management team, which is well supported by all infrastructure groups. Business continuity plans are in place for identified critical projects and tested periodically to meet any disaster and continue operations at an alternate office in the same city or at another city or another country outside India to an alternate facility based on severity of disruption.

g. Inflation of Cost structure

A major cost in the IT services industry is the wage cost, which has the highest degree of inflationary uncertainty. Over the years the basic wage structure is expected to increase in response to the rising talent demand and macroeconomic trends. To de-risk, Polaris has worked with governments, educational institutions and charitable organizations to increase the talent pool, provide extensive training to quickly enable employee skills and competencies. The company also continues to put in place cost optimization programs in the organization and also embed cost management in the organization's culture.

h. Political Environment

Polaris operates in 16 countries around the world and political developments in any of these countries would have an impact on our performance to a greater or lesser extent. Operations in multiple development centers in different countries is in itself a de-risking strategy for delivery related risks borne out of political risks. Reducing our revenue exposure to countries with greater perceived politico-economic risk helps in mitigating market related risks arising out of a country's political climate.

i. Immigration Regulation

The majority of Polaris employees are Indian nationals. The ability of IT professionals to work in other countries depends on the ability to obtain necessary visas and work permits. Immigration laws in different 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. To limit the risks posed due to visa related regulations of any single country, we focus on diversifying our operations in countries across the world. The other way to mitigate such risks is by partnering with local companies in project implementations.

Financial Reporting Risks

The clause 49 of the listing agreement, which includes the CEO/ CFO certification, has served to herald a new era in corporate governance enforcement in the country. Under this sub-clause the CEO and the CFO shall certify that:

* They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief

* These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

* These statements together present a true and fair view of the company's affairs and are in compliance with existing accounting standards, applicable laws and regulations.

* There are, to the best of their knowledge and belief, no transactions entered into by the company during the year that are fraudulent, illegal or violative of the company's code of conduct.

* They accept responsibility for establishing and maintaining internal controls for financial reporting and they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

* They have indicated to the auditors and the audit committee

* Significant changes in internal control over financial reporting during the year;

* Significant changes in accounting policies during the year and the same have been disclosed in the notes to the financial statements; and

* Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company's internal control system over financial reporting.

Recognizing the concerns of the act to address, Polaris sought early adoption of several of the act's requirements, well before the prescribed mandatory applicability dates in fiscal 2006. Polaris has formed a risk group within the business leadership team reporting to the audit committee. During this fiscal we have completed the above project so as to enable in the CEO/CFO certification. Polaris prepares financial statements in conformity with Indian GAAP. This requires 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. These estimates and assumptions are made based on judgments about carrying values of assets and liabilities. Such judgments carry inherent reporting risks.

Exchange rate Risks

The Company's functional currency (Capital and operating expenses) is the Indian Rupee although a major portion of our revenues is transacted in US Dollars. Exchange rate fluctuation introduces substantial amount of risks on our profits. Our positions in the forex markets are therefore entirely to protect our profitability. The company uses forward contracts to hedge its foreign exchange receivables. The level of the hedge is based on the market volatility. The company does not use the foreign exchange forward contracts for trading or speculation purposes.

Contractual compliance risk

Litigations regarding adherence to deliverables and service level agreements, intellectual property rights, patents and copyrights are a challenge in the knowledgedominated software industry. In addition there are other general corporate legal risks. The management has charted out a review and documentation process for contracts. This was further improved the contract clearance process to include multidimensional contract vetting process. The contract management team includes the legal, commercial and risk teams apart from external consultants. Operational teams have been trained on compliance- related issues so that they ensure adherence to all contractual commitments.

Compliance with local laws

Polaris has been duly complying with various local laws and deviations if any has been reported to the Board. Further, Polaris' business operations spread across multiple countries and hence compliance with the laws of the respective countries is one of the paramount issues for the Company. The Company has put in place proper mechanism and ensures due compliance of such laws

Intellectual property management

Polaris prides itself as a niche player in the BFSI segment due to the knowledge it has developed in this segment. This knowledge is embedded in its products, components, procedures etc. Protection of its Intellectual Property Rights, it understands, is of utmost importance for its very existence. Therefore to guard against unauthorized usage of proprietary information, infringement upon or misappropriation of our products it relies on a combination of patent, copyright, trademark, design laws, trade secrets, confidentiality procedures and contractual provisions.

8. Financial Performance/Overview

The financial statements are prepared under the historical cost convention, on accrual basis in accordance with Generally Accepted Accounting Principles (GAAP) in India, and materially comply with the mandatory accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the provisions of the Companies Act, 1956.

Balance Sheet as on 31st March 2008

Sources of Funds

As at 31 March 2008, the authorized share capital of the company was Rs.65.00Cr. Comprising of:

1. Equity shares of Rs 60.00 Cr. (120,000,000 equity shares of Rs 5 each)

2. 11% Preference shares of Rs 5.00 Cr. (10,000,000 shares of Rs 5 each)

As at 31 March 2008 the total issued, subscribed & paid-up capital was Rs.49.34 Cr. (98,674,597 equity shares each of Rs 5). During the year, 92,470 equity shares (Rs 0.05 Cr.) were allotted to 70 associates & directors under various Associate Stock Option Plans.

Reserves and surplus

Reserves & Surplus stood at Rs 608.15 Cr. as at 31 March 2008 an increase of Rs 55.90 Cr. compared to Rs 552.25 Cr. as on 31 March 2007

Transfer to the General Reserve from Profit & Loss Account for the year was Rs 5.26 Cr. Premium received on shares issued to employees (under various ASOP schemes) during the year was Rs 0.72 Cr. Foreign Currency Translation Reserve stands at Rs (0.91) Cr.

Internal accruals made during the year Rs 275.57 Cr. after appropriation of Dividend, Tax on Dividend and General Reserve.

Secured Loans

Finance lease obligation of Rs. 0.83 Cr represents vehicle loan (for associates) arrangement with financial institutions.

Application of Funds

Fixed assets

Capital expenditure incurred during the year was Rs 38.98 Cr and details are given below:

Table 1: Additions to Fixed Assets

Particulars Amount(Rs. Cr)

Computer Equipments and Software 20.71Buildings - Business Solution Centre at Mumbai 9.27Furniture, Fixtures & Office equipment 9.00Total 38.98

Addition is mainly on account of establishment of new development facility at Mumbai and also for further augmentation of our Hyderabad facility.

Fixed assets include properties (Land & Building) owned by the company in Chennai, Hyderabad, Mumbai and Gurgaon, wherein the software development centers are situated. Land & Buildings and other assets are carried at historic cost, even though, the intrinsic market value of these properties are significantly high, as they are all located in prime places.

Investments

Investments of the Company comprise long term trade investments in subsidiaries, associates and non-trade, current investments. During the year the company made additional investments in the following

* Subscribed additionally for 32,500,000 redeemable optionally convertible cumulative preference shares of Rs 2/- each amounting to Rs.650.00 during the year in Optimus Global Service Limited (subsidiary company);

* Subscribed additionally for 1,200,000 7% cumulative preference shares of Rs 5/- each fully paid up amounting to Rs 60.00 during the year in Adrenalin eSystems (associate company);

* Final call of Re.1/- Paid for 1,000,000 equity shares of Rs 5 each at a premium of Rs. 5 each in Adrenalin eSystems Limited (associate company) during the year;

* Subscribed additionally for 225,756 equity shares of Rs.10 each at a premium of Rs.40.94 amounting to Rs.115.00 during the year in NMS Works Software Private Limited (associate company).

The Group's equity ownership interest in Adrenalin eSystems Limited (formerly Empower Works Limited) is 40.25 % as on 31 March 2008. Adrenalin eSystems Limited ('ASL') is primarily engaged in the business of providing specific solutions relating to Human Relations suite of software solutions and products. The Company registered 96% growth in revenue as compared to previous year and earned cash profit in the current year. International experience suggests that the product companies have longer gestation period. Further, the promoters of ASL are committed to provide continued support to its operations and ASL is expected to generate profits in the future. Accordingly, there is no permanent diminution in the value of its investments in ASL and the share of loss is also restricted to the extent of equity.

The Company's equity ownership interest in NMS Works Software Private Limited ('NMS') is 45.85% as on 31 March 2008. NMS is primarily engaged in the business of designing network management in Telecommunication and Internet Services. Based on the un-audited financials statements as at 31 March 2008, NMS had accumulated losses aggregating to Rs. 5.17 Cr. The company is in the recovery path and made profit for the quarter ended 31st March 2008. Accordingly, the Company has determined and recorded a provision of Rs. 3.44 Cr. for other than temporary diminution in the value of its equity investment in NMS.

Cash & Cash Equivalents

Cash and cash equivalents as at 31 March 2008 have increased to Rs 155.05 Cr. from Rs 117.21 Cr. as at 31 March 2007, the increase is mainly on account of improved collections during the year. Details are given below:

Table 2: Cash and Cash Equivalent

Rs. in CroresParticulars 31 March 2008 31 March 2007

Cash In Hand 0.07 0.03Cash in Current Account 24.68 51.52Foreign Currency Account 42.55 31.31In Bank Deposits 9.46 10.15Total 76.76 93.01Investments in Mutual Funds 78.29 24.20Grand Total 155.05 117.21

The company's treasury policy calls for investing surpluses with highly rated mutual funds, banks and financial institutions for short term maturities with a overall cap on investments in a particular institution.

Loans & Advances

Loans and advances have increased by Rs. 25.92 Cr. and stood at Rs. 244.50 Cr. as at 31 March 2008

Movement in Loans & Advances during the year as compared to previous year balance is given below

Table 3: Loans and Advances

Particulars Rs. in Crores

Income tax 6.31Revenues accrued and not billed due to billing cycle 7.80Advances and Forward cover receivable 4.23Cenvat / VAT Receivable 5.98Security Deposits 1.60Total 25.92

Deferred tax assets / liability

The company recorded deferred tax liability & deferred tax asset aggregating Rs 1.00 Cr. and Rs. 2.06 Cr. respectively as of 31 March 2008. Deferred tax assets/ liabilities represent timing differences in the financial and tax books arising out of depreciation on assets, investment provisions and provision for sundry debtors.

Deferred tax liability towards fixed assets was Rs 5.76 Cr. as on 31 March 2008 as compared to Rs 4.93 Cr. as on 31 March 2007 - an increase of Rs 0.83 Cr mainly on account of additions to fixed assets.

Deferred tax assets towards sundry debtors were Rs 4.31 Cr. as on 31 March 2008 as compared to Rs 3.89 Cr. as on 31 March 2007 - an increase of Rs.0.42 Cr mainly on account of provision for doubtful debts made during the year.

Deferred tax assets towards others were Rs. 0.45 Cr. as on 31 March 2008 as compared to Rs 0.52 Cr. as on 31 March 2007 - a decrease of Rs 0.07 Cr.

Current Liabilities

Total current liabilities have increased by Rs 32.94 Cr., primarily on account of increase in salary payable, statutory liabilities & provision for expenses.

Provisions

Total provisions have decreased by Rs 1.04 Cr. compared to the previous year. This is mainly on account of provision for leave benefits accounted as per Accounting Standard 15 (Revised) - Employee Benefits. The Company had accounted for accumulated compensated absences and encashment of accumulated leave balances upto September 30, 2007 as short term employee benefits. Effective from October 1, 2007, with a view to conform to the guidance of expert advisory committee of ICAI, the Company has actuarially valued the accumulated compensated absences and encashment of accumulated leave balances and accounted for the same.

Liquidity and Capital

Funding

The company continues to maintain its trend of utilizing internally generated funds to meet the operational growth, normal Capital expenditure requirements, Investments in Product portfolio and the funding needs of its Group Companies. Based on the present cash reserves and future operating income, the Company does not foresee any need for funding from any external agencies or institutions.

Free Cash Flow

FCFF is an important measure to stockholders. This is the cash that is left over after the payment of all cash expenses and operating investment required by the firm.

Table 4

Rs. In croresParticulars 2007-08 2006-07

Cash from operating activities 84.36 54.41Less: Capital expenditure 38.98 35.63Free Cash Flow 45.38 18.78

Accounts receivable

Sundry debtors (excluding unbilled debtors) net of provision as at 31st March 2008 are Rs. 210.45 Cr. as against Rs 180.11 Cr. in the previous year. These balances are considered good and realizable. The company assesses the need for provisioning for doubtful debts based on collectability, risk perception, and other general economic factors on every balance sheet date and necessary provisions, if required are made.

The days of sales outstanding were 61 days at the end of the current year as against 60 days at the previous year end.

Table 5: Days of Sales Outstanding

2007-08 2006-07

DSO 61 60

A dedicated team focuses on the receivables and consistent improvement is being shown to bring in more control and reduce the Days of Sales Outstanding (DSO).

Dividends

The company has a track record of delivering dividends to the shareholders in a consistent way. The table below shows the trend on dividend payouts.

Table 6: Dividend Payout

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03

Dividend % 30 45 25 35 35 35Dividend Payout % 20 22 58 30 24 31

Off Balance sheet adjustments and contractual obligations.

These have been discussed in detail in the notes to accounts to Consolidated Financial Statements.

Profit & Loss Statement for the year ended 31st March 2008

During the year under operations, Income earned Rs. 1099.30 Cr as against Rs. 1032.37 Cr and the Net Profit after Tax generated was Rs. 73.22 Cr as compared to 101.06 Cr in the previous year, primarily due to the following factors:

* Revenue registered a growth of 6% only in rupee terms due to unprecedented rupee appreciation however, in USD terms 19% growth is achieved as compared to Previous Year.

* Cost for the year has increased by 11.72% as against previous year cost to support the growth in revenue.

* Reduction in profitability is mainly on account of unprecedented rupee appreciation (more than 10% of the rupee value).

The various measures, initiated by the company last year coupled with other initiatives taken during the year as mentioned below is likely to enhance Revenues in the coming years:

* Initiated value enhancement solutions offering through the use of hybrid model of services combined with Intellectual property, which will ensure significant differentiation of Polaris from the more generic IT services company in the industry

* Repositioned its offering in the market

* Retrained the sales force in the new method of Selling.

* Improved utilization of resources

* Foreign currency risk management

The above measures are expected to create enough bandwidth for expansion leading to business transformation. The lead indicators are highly encouraging in terms of entry into Tier I and Tier II banks across geographies. Though, the revenue growth was impacted by unprecedented rupee appreciation during the year thereby affecting the profitability. The company has optimized and rationalized the cost structure and is geared up for revenue growth in the near future.

Income from software development services and products

Total revenue has increased to Rs. 1043.45 Cr. in the current year from Rs.1000.76 Cr. in the previous year, resulting in a growth of 4%. Export revenue has increased to Rs. 962.96 Cr. in the current year from Rs. 910.75 Cr. in the previous year, resulting in a growth of 6%.

Income from Business Process Outsourcing

The income from Business Process Outsourcing is from the wholly owned subsidiary namely, Optimus Global Services Limited. The total revenue has increased to Rs. 55.85 Cr. in the current year from Rs. 31.60 Cr. in the previous year, registering a growth of 77% and the momentum built up during the year is expected to continue in the coming years, where this business operation is expected to double the revenue and post good profits.

Other income

Other income has increased to Rs. 18.11 Cr. in the current year from Rs.6.24 Cr. in the previous year, this increase is primarily due to foreign exchange gain of Rs. 14.46 Cr. made during the year compared to loss of Rs.0.57 Cr. for the previous year.

Cost Management

The company has robust policy and process covering all areas of Costs. The automated systems and work flows support the cost review and approval process.

The company has embarked on a productivity efficiency project to improve the utilization as well as the grade mix.

The company has successfully implemented Cost Monitoring and Management Initiative (CMMI) and achieved nearness to perfect estimation of cost by projects.

The primary cost drivers of the company are People related costs (Compensation & Benefits), Sales & Marketing Costs and Corporate Overheads. The company has introduced a business plan linked Expense Control mechanism.

Software Development Expenses

Software development expenses as a % of revenue increased by 3.98 % compared to the previous year. The increase is primarily on account of Revenue in Rupee terms getting impacted by steep Rupee appreciation, increase in headcount on the BPO segment and salary revision granted during the year.

Table 7: Software Development Expenses

Rs. In croresParticulars Year ended % Of Year ended % Of 31st Revenue 31st Revenue March 2008 March 2007

Salaries and bonusincluding overseasstaff expenses andoutsourcedconsultants cost 624.88 56.84 535.84 51.90Staff welfare 27.43 2.50 26.25 2.54Contribution toprovident and other funds 14.66 1.33 16.09 1.56Travel Project 56.52 5.14 56.56 5.48Consumablesand computer maintenance 0.51 0.05 0.80 0.08Communication expenses 16.44 1.50 18.73 1.81License & Royalty 4.21 0.38 4.02 0.39Total 744.65 67.74 658.29 63.76Revenue 1099.30 100.00 1032.37 100.00

Selling, General and Administration

Overall SGA expenses had a marginal increase of 11.10%. Selling expense primarily consist of Salaries, Travel, Advertising, and Business promotion. General Administrative Expense primarily consists of Salaries and related costs for administrative, executive, finance and Human Resource function. The increase in staff cost is mainly due to Headcount increase in geographies to cater to account management and increase in business promotion is due to settlement made in Data Inc legal case.

Table 8: Selling, Administration & other General Expenses

Rs. In CroresParticulars Year ended % Of Year ended % Of 31st Revenue 31st Revenue March 2008 March 2007Salaries andbonus includingoverseas staff expenses 122.23 11.12 103.33 10.01Contribution toprovident and other funds 2.77 0.25 2.04 0.20Professional & Legal charges 13.17 1.20 20.22 1.96Local traveling and conveyance 16.36 1.49 15.27 1.48Rent 24.67 2.24 21.27 2.06Business promotion 11.88 1.08 8.13 0.79Power and fuel 15.17 1.38 12.81 1.24Printing and stationery 1.72 0.16 1.94 0.19Office maintenance 4.61 0.42 3.68 0.35Provision for doubtful debts 3.51 0.32 2.09 0.20Insurance charges 2.16 0.20 3.82 0.37Advertisements 0.18 0.02 1.00 0.10Rates and taxes 0.50 0.04 1.59 0.15Repairs - Building 1.88 0.17 1.23 0.12Repairs - Plant and machinery 8.23 0.75 7.90 0.76Repairs - Others 3.24 0.29 2.64 0.25Directors' sitting fees 0.09 0.01 0.06 0.01Donations 0.23 0.02 0.20 0.02Pre-operative and deferredrevenue expenses written off * - - 0.75 0.07Miscellaneous expenses 3.85 0.35 2.85 0.28Total 236.45 21.51 212.82 20.61Revenue 1099.30 100 1032.37 100

* Includes Preliminary expenses written off.

Multi Dimensional Cost Analysis

The table below represents the individual cost as a % to total cost.

Table 9: Cost Matrix

Particulars % Of total cost 2007-08 2006-07

Staff Related Cost 77.04 74.29Travel 7.09 7.81Communication 1.60 2.04Professional/Legal 1.28 2.20Rent 2.40 2.31Power & Fuel 1.47 1.39Business Promotion 1.16 0.88Repairs & Maintenance 1.30 1.28Depreciation 4.48 5.23Finance Charges 0.08 0.09Other Expenses 2.10 2.48Total 100.00 100.00

Depreciation & Amortization

Depreciation on fixed assets is provided using the straight-line method based on rates specified in Schedule XIV of the Companies Act, 1956 or on estimated useful lives of assets, whichever is higher. Individual assets costing less than Rs 5,000/- are depreciated at the rate of 100 %.

Table 10: Asset Category wise Depreciation Rates & Estimated Useful Life

Asset Category Estimated Rate of useful life (years) depreciation

Buildings 29-55 3.33%Leasehold improvements 10 10%Plant & Machinery 6-7 15% Computer equipment and software 3-10 33.33%Servers and computer accessories 5-10 20%Electrical fittings, officeequipments and furniture and fixtures. 5-10 10% Vehicles 6 16.67%

Polaris has always believed in developing its own intellectual property (IP) and over the years has invested significant amount of resources in this development. All costs incurred towards development of these products were being capitalized from the technical viability stage till the product reached commercial viability. Since these products have gained acceptability with our customers, with effect from 1st Jan 2005,the capitalization of the expenses was discontinued. On the basis of an estimated useful life (calculated on the basis of Product Life Cycle, Technology obsolescence and competitor response) of the product, the capitalized expenses on products is being amortized over 60 months period (5 years).

Income Taxes

Income tax for the year is Rs. 16.11 Crores comprises the following:

Table 11:

Rs. in CroresParticulars March 31, 2008 March 31, 2007

Income tax on Operations 14.55 14.44Deferred Tax Asset/Liability (1.35) 2.92Fringe Benefit Tax: 2.91 2.55

Income tax liability was remain the same compared to last year, mainly on account of taxability of its legal entities located at various countries. New transfer pricing policy is implemented during the year for effecting tax optimisation measures.

Increase in Deferred tax was primarily due to additions to Fixed assets and reassessment of certain provisions for doubtful debts in line with 10A provisions.

Increase in FBT was primarily due to bringing ASOP under the FBT tax net during the year.

Capital Markets:

The Capital Market Information relating to the Company's shares such as stock exchanges in which they are listed/traded, trading volume, stock price movements etc., has been provided in the Report on Corporate Governance (under the heading 'General Shareholder Information') which forms part of the Annual Report 2007-08.

Subsidiary Companies

Indian Subsidiaries

Optimus Global Services Limited

Optimus Global Services Limited, incorporated in September 2002. During the year the subsidiary recorded a revenue growth of 77% over the previous year. The company has posted a profit during the year and has set itself firmly on the profit earning track.

Duing the year, the company added 3 new clients, expanded its infrastructure facility by 35,000 sq.ft, grew headcount by 1,400 and got certified for ISO 9001.

The Company continues to get it's major share of Business from Domestic BPO services market. Domestic BPO services market promises to grow significantly in the coming years and is expected to touch 80,000 Crores by 2012. The momentum built up this year is expected to continue in the coming year, where the Company expects to grow the Business by 80% and continue to improve profits. The growth will be contributed to by a big ramp up in the Domestic operations as well as significant scaling up of the International operations.

Polaris Retail Infotech Limited (PRIL)

Polaris Retail Infotech Limited (PRIL), incorporated in November 1998, to focus on fast growing retail segment. PRIL is positioned as a reliable and financially strong company offering end-to-end software solutions for retailers. Customer list includes well known retailers in different sub-vertical, from supermarket to apparel/footwear chain, from home furnishing to furniture and from agri retail to saree retail chain.

During the year, the company has achieved the revenue growth of 15% over last year and earned profits consecutively for the last two years. This clearly signals that the company is on the growth path. This could be possible due to the company's successful acquiring of new corporate customers apart from expanding the business with the existing customers. The company is expecting growth opportunities in SAP retail and consulting space by establishing critical mass and also by the positioning the existing retail products by domestic distribution model. The company is discussing with large corporate for acquiring big deals and the discussions are in the advanced stage and is expecting good growth from this segment in the ensuing financial years.

Overseas Subsidiaries

Polaris Software Lab Pte Ltd, Singapore

Polaris Software Lab Pte Ltd, incorporated in February 1997 in Singapore to tap the huge potential of Singapore and other ASEAN markets. The present share capital is SGD 385,000. During the year the subsidiary recorded a revenue of Rs. 82.77 crores with a net profit of Rs 6.44 crores.

Polaris Software Lab Ltd, UK

This subsidiary got incorporated in June 1998 with its headquarters in London to address the UK market. Current paid up share capital is GBP 889,000. the performance of the subsidiary has shown quantum jump, since its incorporation and the client list includes Citi and other high street banks. During the year, the subsidiary recorded revenue of Rs 162.50 crores with net profit of Rs 8.82 crores.

Polaris Software Lab Ltd, Japan KK

The subsidiary was incorporated in September 2001 with initial share capital of JPY 10 million. The present share capital is JPY 20 million. During the year, the subsidiary recorded revenue of Rs 33.50 crores with net profit of Rs 1.76 crores.

Polaris Software Lab Pty Ltd, Australia

The subsidiary was incorporated in November 2000 with share capital of AUD 25,000. During the year, the revenue recorded by the subsidiary was Rs.34.86 crores with net profit of Rs 2.18 crores.

Polaris Software Lab Ireland Ltd.

The subsidiary was incorporated in February 2001 and the present share capital is EUR 176,186. During the year, the revenue of the subsidiary was Rs 7.32 crores with net profit of Rs 1.79 crores.

Polaris Software Lab SA, Switzerland

The subsidiary was incorporated in August 2000 and the present share capital is CHF 350,000. During the year, the revenue of the subsidiary was Rs 9.18 crores with net profit of Rs 0.42 crores.

Polaris Software Lab GmbH, Germany

The subsidiary was incorporated in June 2000 and the present share capital is EUR 600,000. During the year, the revenue of the subsidiary was Rs 17.75 crores with net profit of Rs 0.86 crores.

Polaris Software Lab Canada Inc

Polaris Software Lab Canada Inc. Incorporated in June 2004 to provide near shore support to the vast US market. Present share capital of Polaris Canada is CAD 490,810. For Polaris Canada, being in the investment phase, has been targeting BSFI and testing services, is expected to reap its results on efforts in the forthcoming years. During the year, the revenue of the subsidiary was Rs 14.34 crores with net loss of Rs 0.84 crores.

Polaris Software Lab Chile Limitada

Polaris Chile has been incorporated in August 2006, to cater the needs of potential Latin American region. Present capital is 5,837,807 Chilean Peso. During the year the revenue was Rs 6.08 crores with a profit of Rs 0.51 crores.

Polaris Software Lab B.V, Netherlands

Polaris Netherlands has been incorporated in May 2007. Present capital is EUR 20,000. During the year the revenue was Rs 0.89 crores with a loss of Rs 0.19 crores.

9. Human Resource Development

The talent build program at Polaris was further strengthened last year. Learning Process enhancements by the Corporate University 'Nalanda' helped in making the organization reach a near 6 training days per associate, with programs spanning from Technology to Management to Behavioral and Leadership skills. Learning Architecture introduced 'Unmukt' as a concept to experience and learn the boundryless world with feeling of joy and without fear. During last year, Nalanda was awarded the 'Champion of Learning' certificate from the prestigious American Society of Training and Development (ASTD) for successful implementation of the Employee Learning Week.

Total headcount at Polaris at end FY08 is as below:

Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08

Manpower (end of period) 8820 9441 10155 10093Software Professionals 90.14% 90.10% 90.30% 89.91%Support 9.86% 9.90% 9.70% 10.09%Attrition Rate 15.74% 15.29% 16.19% 16.05%