Edgar Filing: INFOSYS TECHNOLOGIES LTD

e6vk

United States Securities and Exchange Commission

Washington, DC 20549

FORM 6-K

Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

For the quarter ended September 30, 2004

Commission File Number 333-72195

INFOSYS TECHNOLOGIES LIMITED

(Exact name of Registrant as specified in its charter)

Not Applicable
(Translation of Registrant’s name into English)

Bangalore, Karnataka, India
(Jurisdiction of incorporation or organization)

Electronics City, Hosur Road,
Bangalore, Karnataka, India 561 100.
+91-80-852-0261
(Address of principal executive offices)

Indicate by check mark registrant files or will file annual reports under cover Form 20-F or Form 40-F

Form 20-F x Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

If “Yes” is marked, indicate below the file number assigned to registrant in connection with Rule 12g 3-2(b).

Not applicable.

This Form 6-K contains our Quarterly Report for the quarter ended September 30, 2004 that we mailed to our equity shareholders on or about November 10, 2004.

Infosys Technologies Limited
Report for the second quarter ended September 30, 2004

(INFOSYS LOGO)

Infosys Technologies Limited

At a glance — Indian GAAP (Non-consolidated financials)

in Rs. crore, except per share data


	Quarter ended						Half year ended						Year ended
	September 30,						September 30,						March 31,
	2004			2003			2004			2003			2004
For the period
Income		1,690			1,135			3,161			2,217			4,761
Export income		1,659			1,116			3,107			2,175			4,695
Operating profit (PBIDTA)		560			378			1,051			727			1,584
PBIDTA as a percentage of income		33.13	%		33.35	%		33.24	%		32.78	%		33.26	%
Profit after tax (PAT)		455			300			849			578			1,243
PAT as a percentage of income		26.92	%		26.45	%		26.87	%		26.09	%		26.12	%
PAT as a percentage of average net worth		40.89	%		37.85	%		40.89	%		37.85	%		40.68	%
Capital expenditure		167			69			312			127			430
Dividend per share (excluding one-time special dividend)*		5.00			3.63			5.00			3.63			7.38
Dividend amount (excluding one-time special dividend)		134			96			134			96			196
One-time special dividend per share*		—			—			—			—			25.00
One-time special dividend amount		—						—			—			668
Earnings per share*(par value of Rs. 5 each, fully paid)
Basic		16.99			11.33			31.76			21.82			46.84
Diluted		16.61			11.23			31.14			21.69			46.26
At the end of the period
Total assets								4,071			3,336			3,253
Fixed assets — net								1,177			793			970
Cash and cash equivalents (including liquid mutual funds)								2,380			2,140			2,769
Net current assets								1,794			2,031			1,220
Debt								—			—			—
Net worth								4,071			3,336			3,253
Equity								134			33			33
Market capitalization								45,416			30,007			32,909

Note:

All figures above are based on unconsolidated Indian GAAP financials.

Market capitalization is calculated by considering the share price at National Stock Exchange on the shares outstanding at the period /year end.

* Adjusted for the issue of bonus shares in the ratio of 3:1 allotted on July 3, 2004 as per Accounting Standard 20 (AS 20) on Earnings Per Share.

Infosys Technologies Limited

Letter to the Shareholder
Dear shareholder,

Your company is delighted to report excellent growth in the second quarter of this fiscal year. Consolidated Indian GAAP revenues grew by 15.3% over Ql FY2005, while consolidated net profits from ordinary activities witnessed an increase of 15.2%. Revenues in US GAAP terms grew by 13.1%, as compared to the quarter ended June 30, 2004.

Your company has revised its initial guidance for fiscal year 2005. Consolidated income guidance under Indian GAAP was originally between Rs. 6,731 crore and Rs. 6,772 crore. It has been revised to between Rs. 7,132 crore and Rs. 7,160 crore, an estimated growth of 47% to 48%. In US GAAP terms, the guidance for revenues was revised from between $ 1,476 million and $ 1,485 million, to $ 1,555 million and $ 1,561 million, an estimated growth of 46% to 47%.

This quarter, your company saw the highest growth figures in three years. Strategic sourcing has become the outsourcing approach for many companies worldwide. In this context, your company continues to benefit from the positive demand environment for offshore services. Offshore volumes grew at 16.7%, as compared to onsite volumes, which grew at 7.1%. Additionally pricing has stabilized, as have margins. Your company’s billing for three clients (on an LTM basis) is more than $ 50 million each, and the number of clients billing over $ 40 million has gone up from 5 to 7.

The focus on scalability continued. Your company and its subsidiaries saw a gross addition of 6,078 employees. The net employee addition for the quarter stood at 5,010. Further, training, education and leadership development infrastructure have been enhanced in order to meet the growing business needs. It is significant to note that the expense management model has demonstrated flexibility in absorbing the cost of recruiting 5,010 net employees while maintaining margins.

Investments in the various plans of our subsidiaries and business units, supported by robust business platforms, have started yielding results, and are contributing to the growth momentum. Infosys Consulting Inc. won its first consulting deal this quarter.

Offshoring has become a mega trend, as more organizations around the world partner with your company This quarter, your company added 32 new clients. Telecom, banking, financial sectors, particularly, saw high growth. Your company strengthened its relationship with large telecom players, with the addition of one of the largest wholesale telecom carriers in Europe to its client portfolio. The company has also started providing Oracle application support to another premier communications service provider in the US.

In the insurance sector, a German multi-billion euro insurance organization selected your company to replace an existing hierarchical database, and thereby achieve organization-wide uniformity and reduced licensing costs. Additionally, an organization providing proxy voting and corporate governance solutions to its global client base selected your company to provide business consulting services.

There were significant wins in the retail space too. A leading discount retailer in the US has selected your company as a preferred provider of IT consulting for a strategic sourcing initiative. Additionally, a major European retailer chose your company to implement an REID solution.

Energy and Utilities companies are also leveraging the power of technology in increasing customer focus. Your company partnered with a Fortune 500 company in the US to provide application development and maintenance services in the area of customer relationship management. Additionally, one of the largest companies in the IT storage space has selected your company for the development of a storage management product.

The sale of the Finacle^® suite of products also made significant headway during the quarter. Union Bank of the Philippines (UBP), one of the top 10 banks in Philippines, licensed Finacle^® core banking and e-Banking solutions. The win marks a key breakthrough for Finacle^® in the core banking space in South East Asia. In Finacle’s first win in the treasury solution space in India, UTI Bank, an existing customer, chose the Finacle^® treasury solution.

As always, your company continues to display excellence in execution. A significant 96.3% of business this quarter was repeat business.

Your company’s strong growth has been made possible through the committed efforts of all Infoscions. On your behalf, we thank them for contributing to an extremely successful quarter.



	Nandan M. Nilekani	S. Gopalakrishnan
Bangalore	Chief Executive Officer, President	Chief Operating Officer
October 12, 2004	and Managing Director	and Deputy Managing Director

Infosys Technologies Limited

Auditors’ report to the members of Infosys Technologies Limited

We have audited the attached Balance Sheet of Infosys Technologies Limited (the Company) as at 30 September 2004, the Profit and Loss Account and Cash Flow Statement of the Company for the quarter and half year ended on that date, annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in India. 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 audit provides a reasonable basis for our opinion.

We report that:

(a) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;

(b) in our opinion, proper books of account have been kept by the Company so far as appears from our examination of those books;

(c) the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;

(d) in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report comply with the Accounting Standards issued by the Institute of Chartered Accountants of India, to the extent applicable; and

(e) in our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true and fair view in conformity with the accounting principles generally accepted in India:

(i)		in the case of the Balance Sheet, of the state of affairs of the Company as at 30 September 2004;

(ii)		in the case of the Profit and Loss Account, of the profit of the Company for the quarter and half year ended on that date; and

(iii)		in the case of the Cash Flow Statement, of the cash flows of the Company for the quarter and half year ended on that date.


		for BSR & Co
		(formerly Bharat S Raut & Co.) Chartered Accountants

		Subramanian Suresh
		Partner
Bangalore		Membership No. 83673
12 October 2004

Infosys Technologies Limited

Balance sheet as at

						in Rs. Crore
	September 30, 2004		September 30, 2003		March 3 1,2004
SOURCES OF FUNDS
SHAREHOLDERS’ FUNDS
Share capital		133.93		33.13		33.32
Reserves and surplus
APPLICATIONS OF FUNDS		3,937.53		3,302.48		3,220.11

APPLICATIONS OF FUNDS
		4,071.46		3,335.61		3,253.43

FIXED ASSETS
Original cost		1,809.12		1,414.53		1,570.23
Less: Depreciation and amortization		885.03		683.27		803.41

Net book value		924.09		731.26		766.82
Add: Capital work-in-progress		252.63		62.00		203.48

		1,176.72		793.26		970.30
INVESTMENTS		1,064.97		476.99		1,027.38
DEFERRED TAX ASSETS		35.77		33.87		35.63
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors		892.06		577.26		632.51
Cash and bank balances		1,251.78		1,382.71		1,638.01
Loans and advances		812.93		786.63		693.22

		2,956.77		2,746.60		2,963.74
LESS: CURRENT LIABILITIES AND PROVISIONS
Current liabilities		566.92		370.99		560.44
Provisions
NET CURRENT ASSETS		595.85		344.12		1,183.18

		1,794.00		2,031.49		1,220.12

		4,071.46		3,335.61		3,253.43

As per our report attached


for BSR &r Co.
(formerly Bharat S. Raut &
Co.) Chartered Accountants

		Nandan M. Nilekani Chief
Subramanian Suresh	N. R. Narayana Murthy	Executive Officer,	S. Gopalakrishnan Chief
Partner	Chairman and Chief	President and Managing	Operating Officer and	Deepak M. Satwalekar
	Mentor	Director	Deputy Managing Director	Director
Membership No	Marti G. Subrahmanyam	Omkar Goswami	Larry Pressler	Rama Bijapurkar
83673	Director	Director	Director	Director
	Claude Smadja	Sridar A.	K. Dinesh	S. D. Shibulal
	Director	lyengar Director	Director	Director

Bangalore	T. V Mohandas Pai	Srinath	V Balakrishnan Company
October	Director and Chief	Batni	Secretary and Senior Vice
12, 2004	Financial Officer	Director	President — Finance

Infosys Technologies Limited

Profit and loss account for the

in Rs. crore, except per share data


	Quarter ended September				Half year ended
	September 30,				September 30,				Year ended March 31,
	2004		2003		2004		2003		2004
INCOME
SOFTWARE SERVICES AND PRODUCTS
Overseas		1,659.27		1,115.98		3,106.69		2,174.63		4,694.69
Domestic		30.29		18.77		54.26		42.10		66.20

		1,689.56		1,134.75		3,160.95		2,216.73		4,760.89
SOFTWARE DEVELOPMENT EXPENSES		909.96		587.16		1,701.87		1,159.94		2,495.31

GROSS PROFIT		779.60		547.59		1,459.08		1,056.79		2,265.58
SELLING AND MARKETING EXPENSES		103.08		80.44		190.47		160.16		335.08
GENERAL AND ADMINISTRATION EXPENSES		116.78		88.72		218.02		169.90		346.85

		219.86		169.16		408.49		330.06		681.93
OPERATING PROFIT BEFORE INTEREST, DEPRECIATION AND AMORTIZATION		559.74		378.43		1,050.59		726.73		1,583.65
INTEREST		—		—		—		—		—
DEPRECIATION AND AMORTIZATION		56.55		62.33		105.93		106.59		230.90

OPERATING PROFIT AFTER INTEREST, DEPRECIATION AND AMORTIZATION		503.19		316.10		944.66		620.14		1,352.75
OTHER INCOME		30.23		44.28		48.22		76.73		127.39
PROVISION FOR INVESTMENTS		0.07		0.22		0.06		6.59		9.67

NET PROFIT BEFORE TAX		533.35		360.16		992.82		690.28		1,470.47
PROVISION FOR TAXATION		78.50		60.00		143.50		112.00		227.00

NET PROFIT AFTER TAX		454.85		300.16		849.32		578.28		1,243.47

Balance brought forward		462.36		278.12		70.51		—		—
Less: Residual dividend paid for Fiscal 2004		—		—		2.32		—		—
Dividend tax on the above		1.97		—		2.27		—		—

		460.39		278.12		65.92		—		—

AMOUNT AVAILABLE FOR APPROPRIATION		915.24		578.28		915.24		578.28		1,243.47
DIVIDEND
Interim		133.93		96.09		133.93		96.09		96.09
Final		—		—		—		—		99.96
One-time special dividend		—		—		—		—		666.41

Total dividend		133.93		96.09		133.93		96.09		862.46
Dividend tax		17.50		12.31		17.50		12.31		110.50
Amount transferred-general reserve		—		—		—		—		200.00
Balance in Profit and Loss account		763.81		469.88		763.81		469.88		70.51

		915.24		578.28		915.24		578.28		1,243.47

EARNINGS PER SHARE
Equity shares of par value Rs. 5/- each
Basic		16.99		11.33		31.76		21.82		46.84
Diluted		16.61		11.23		31.14		21.69		46.26
Number of shares used in computing earnings per share
Basic		26,76,76,465		26,50,28,112		26,74,06,246		26,50,04,404		26,54,47,776
Diluted		27,37,76,678		26,72,97,616		27,27,68,201		26,66,04,340		26,87,87,016

As per our report attached


for BSR &r Co.
(formerly Bharat S. Raut & Co.)
Chartered Accountants

Subramanian Suresh Partner Membership No.83673	N. R. Narayana Murthy Chairman and Chief Mentor	Nandan M. Nilekani Chief Executive Officer, President and Managing Director	S. Gopalakrishnan Chief Operating Officer and Deputy Managing Director	Deepak M. Satwalekar Director

	Marti G. Subrahmanyam Director Claude Smadja Director	Omkar Goswami Director Sridar A. lyengar Director	Larry Pressler Director K. Dinesh Director	Rama Bijapurkar Director S. D. Shibulal Director

Bangalore October 12, 2004	T. V Mohandas Pai Director and Chief Financial Officer	Srinath Batni Director	V Balakrishnan Company Secretary and Senior Vice President — Finance

Infosys Technologies Limited

Cash flow statement for the

in Rs. Crore


	Quarter ended						Half year ended						Year ended
	September 30,						September 30,						March 31,
	2004			2003			2004			2003			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit before tax		533.35			360.16			992.82			690.28			1,470.47
Adjustments to reconcile50 net profit before tax to cash provided by operating activities
(Profit) / Loss on sale of fixed assets		(0.05	)		—			(0.12	)		(0.01	)		(0.04	)
Depreciation and amortization		56.55			62.33			105.93			106.59			230.90
Interest and dividend income		(21.77	)		(23.43	)		(50.04	)		(46.18	)		(100.28	)
Provision for investments		0.07			0.22			0.06			6.59			9.67
Effect of exchange differences on translation of foreign currency cash and cash equivalents		(1.13	)		1.59			(8.24	)		3.16			6.59
Changes in current assets and liabilities
Sundry debtors		(73.08	)		(19.96	)		(259.55	)		(65.12	)		(120.37	)
Loans and advances		(26.97	)		8.33			(53.92	)		(1.52	)		(1.34	)
Current liabilities and provisions		94.02			16.58			25.27			55.59			245.50
Income taxes paid during the period / year		(94.50	)		(49.22	)		(102.45	)		(60.28	)		(107.13	)

NET CASH GENERATED BY OPERATING ACTIVITIES		466.49			356.60			649.76			689.10			1,633.97

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets and change in capital work-in-progress		(166.61	)		(68.82	)		(312.45	)		(127.20	)		(429.87	)
Proceeds on disposal of fixed assets		0.15			(0.01	)		0.22			0.09			1.43
Acquisition of Expert Infonnation Systems Pty. Limited, Australia		—			—			—			—			(66.68	)
(Investments in) / disposal of securities		(133.46	)		(349.83	)		(37.65	)		(450.38	)		(937.17	)
Interest and dividend income		21.77			23.43			50.04			46.18			100.28

NET CASH USED IN INVESTING ACTIVITIES		(278.15	)		(395.23	)		(299.84	)		(531.31	)		(1,332.01	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital on exercise of stock options		40.80			4.01			124.73			5.07			122.27
Dividends paid during the period / year, including dividend tax		(1.97	)		—			(869.15	)		(108.35	)		(216.75	)

NET CASH USED IN FINANCING ACTIVITIES		38.83			4.01			(744.42	)		(103.28	)		(94.48	)

Effect of exchange differences on translation of foreign currency cash and cash equivalents		1.13			(1.59	)		8.24			(3.16	)		(6.59	)

NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS		228.30			(36.21	)		(386.26	)		51.35			200.89
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD /YEAR		1,224.84			1,726.07			1,839.40			1,638.51			1,638.51

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD /YEAR		1,453.14			1,689.86			1,453.14			1,689.86			1,839.40

As per our report attached

for BSR &r Co.
(formerly Bharat S. Raut &r Co.)
Chartered Accountants


Subramanian Suresh	N. R. Narayana Murthy	Nandan M. Nilekani	S. Gopalakrishnan	Deepak M. Satwalekar
Partner	Chairman and Chief Mentor	Chief Executive Officer,	Chief Operating Officer	Director
Membership No. 83673		President and Managing Director	and Deputy Managing Director

	Marti G. Subrahmanyam	Omkar Goswami	Larry Pressler	Rama Bijapurkar
	Director	Director	Director	Director

	Claude Smadja	Sridar A. lyengar	K. Dinesh	S. D. Shibulal
	Director	Director	Director	Director

Bangalore	T. V Mohandas Pai	Srinath Batni	V Balakrishnan
October 12, 2004	Director and	Director	Company Secretary and
	Chief Financial Officer		Senior Vice President — Finance

Infosys Technologies Limited

Schedules to profit and loss account for the

in Rs. crore


	Quarter ended					Half year ended					Year ended
	September 30,					September 30,					March 31,
	2004		2003			2004		2003			2004
SOFTWARE DEVELOPMENT EXPENSES
Salaries and bonus including overseas staff expenses		674.45		482.59			1,271.79		937.37			2,015.47
Staff welfare		4.13		2.86			7.48		5.99			13.17
Contribution to provident and other funds		19.19		12.99			34.95		23.74			49.90
Overseas travel expenses		61.10		43.07			117.48		84.68			168.19
Consumables		4.15		2.05			6.50		3.77			8.94
Cost of software packages
for own use		26.23		21.47			46.81		35.07			64.84
for service delivery to clients		6.04		2.48			9.55		12.34			16.04
Cost of technical sub-contractors		86.21		7.61			159.16		34.29			109.89
Computer maintenance		3.90		3.14			6.74		5.44			11.89
Communication expenses		10.86		7.75			19.67		15.93			32.18
Provision for post-sales client support and warranties		11.57		(0.32	)		18.79		(0.15	)		0.30
Rent		2.13		1.47			2.95		1.47			4.50

		909.96		587.16			1,701.87		1,159.94			2,495.31

SELLING AND MARKETING EXPENSES
Salaries and bonus including overseas staff expenses		58.60		49.36			111.30		99.20			207.25
Staff welfare		0.08		0.15			0.20		0.23			0.59
Contribution to provident and other funds		0.34		0.79			0.71		1.17			1.73
Overseas travel expenses		11.93		9.26			24.70		18.04			40.45
Consumables		0.06		0.02			0.12		0.08			0.19
Cost of software packages
for own use		0.01		—			0.01		0.01			0.18
Computer maintenance		—		0.01			—		0.02			0.02
Communication expenses		0.01		—			0.02		—			0.01
Traveling and conveyance		3.51		0.28			3.95		0.60			1.43
Rent		2.57		3.94			5.57		6.90			15.19
Telephone charges		1.44		1.19			2.52		2.29			5.06
Professional charges		5.18		0.78			8.02		2.74			5.75
Printing and stationery		0.30		0.25			0.53		0.52			0.99
Advertisements		0.17		0.12			0.31		0.24			0.53
Brand building		11.78		9.42			17.37		15.14			34.23
Office maintenance		0.06		0.07			0.13		0.11			0.24
Power and fuel		—		0.01			—		0.03			0.04
Insurance charges		0.02		0.01			0.05		0.04			0.11
Rates and taxes		—		—			0.03		0.03			0.08
Bank charges and commission		—		—			—		0.01			0.02
Commission charges		4.32		0.64			8.49		2.91			7.27
Marketing expenses		2.52		1.76			6.04		2.61			5.99
Sales promotion expenses		0.18		0.09			0.40		0.20			0.69
Miscellaneous expenses		—		2.29			—		7.04			7.04

		103.08		80.44			190.47		160.16			335.08

GENERAL AND ADMINISTRATION EXPENSES
Salaries and bonus including overseas staff expenses		21.06		17.36			41.12		34.26			73.11
Contribution to provident and other funds		1.70		1.15			3.27		2.29			4.64
Overseas travel expenses		2.12		1.87			4.17		3.57			6.36
Traveling and conveyance		8.79		5.18			16.76		9.51			22.27
Rent		4.97		3.66			8.99		10.77			19.19
Telephone charges		10.95		7.47			19.59		14.76			29.21
Professional charges		14.70		9.79			23.79		16.28			33.92
Printing and stationery		1.89		1.05			3.18		3.39			5.87
Advertisements		2.38		0.37			4.47		1.36			5.50
Office maintenance		10.02		6.32			18.29		12.55			28.83
Repairs to building		2.68		1.49			4.00		3.39			10.28
Repairs to plant and machinery		1.54		1.51			3.11		2.60			4.85
Power and fuel		9.66		7.19			18.51		14.39			28.68
Insurance charges		7.05		6.06			14.17		11.19			23.73
Rates and taxes		2.22		0.94			4.51		2.15			5.38
Donations		4.83		3.52			9.05		7.02			14.29
Auditor’s remuneration
statutory audit fees		0.09		0.08			0.18		0.15			0.31
certification charges		—		—			—		—			0.03
others		—		—			—		—			0.24
out-of-pocket expenses		—		—			0.01		0.01			0.02
Provision for bad and doubtful debts		5.25		10.73			11.58		14.02			15.99
Provision for doubtful loans and advances		0.09		0.12			0.11		0.13			0.14
Bank charges and commission		0.33		0.16			0.57		0.35			0.73
Commission to non-whole time directors		0.39		0.39			0.78		0.78			1.49
Postage and courier		1.42		0.70			2.79		1.94			3.91
Books and periodicals		0.70		0.34			1.28		0.58			1.51
Research grants		0.09		0.12			0.19		0.18			0.54
Freight charges		0.14		0.15			0.37		0.30			0.84
Professional membership and seminar participation fees		1.37		0.65			2.82		1.27			3.57
Miscellaneous expenses		0.35		0.35			0.36		0.71			1.42

		116.78		88.72			218.02		169.90			346.85

Infosys Technologies Limited

Schedules to cash flow statements for the

in Rs. crore


	Quarter ended						Half year ended						Year ended
	September 30,						September 30,						March 31,
	2004			2003			2004			2003			2004
CHANGE IN LOANS AND ADVANCES
As per the Balance Sheet		812.93			786.63			812.93			786.63			693.22
Less: Deposits with financial institutions and body corporate, included in cash and cash equivalents		(201.36	)		(307.15	)		(201.36	)		(307.15	)		(201.39	)
Advance income taxes separately considered		(275.80	)		(197.45	)		(275.80	)		(197.45	)		(209.98	)

		335.77			282.03			335.77			282.03			281.85
Less: Opening balance considered		(308.80	)		(290.36	)		(281.85	)		(280.51	)		(280.51	)

		26.97			(8.33	)		53.92			1.52			1.34

CHANGE IN CURRENT LIABILITIES AND PROVISIONS
As per the Balance Sheet		1,162.77			715.11			1,162.77			715.11			1,743.62
Add / (Less): Provisions separately considered in the cash flow Statement
Income taxes		(420.50	)		(231.05	)		(420.50	)		(231.05	)		(313.49	)
Dividends		(133.93	)		(96.09	)		(133.93	)		(96.09	)		(766.37	)
Dividend tax		(17.50	)		(12.31	)		(17.50	)		(12.31	)		(98.19	)

		590.84			375.66			590.84			375.66			565.57
Less: Opening balance considered		(496.82	)		(359.08	)		(565.57	)		(320.07	)		(320.07	)

		94.02			16.58			25.27			55.59			245.50

INCOME TAXES PAID
Charge as per the Profit and Loss Account		78.50			60.00			143.50			112.00			227.00
Add: Increase in advance income taxes		74.98			34.20			65.82			(92.54	)		(80.01	)
Increase / (Decrease) in deferred taxes		(0.24	)		(4.47	)		0.14			(2.94	)		(1.18	)
Less: (Increase) / Decrease in income tax provision		(58.74	)		(40.51	)		(107.01	)		43.76			(38.68	)

		94.50			49.22			102.45			60.28			107.13

PURCHASE OF FIXED ASSETS AND CHANGE IN CAPITAL WORK-IN-PROGRESS
As per Balance Sheet		197.05			51.05			263.30			141.76			302.95
Less: Opening Capital work-in-progress		(283.07	)		(44.23	)		(203.48	)		(76.56	)		(76.56	)
Add: Closing Capital work-in-progress		252.63			62.00			252.63			62.00			203.48

		166.61			68.82			312.45			127.20			429.87

INVESTMENTS IN / DISPOSAL OF SECURITIES
As per the Balance Sheet		1,064.97			476.99			1,064.97			476.99			1,027.38
Add: Provisions on investments		0.07			0.22			0.06			6.59			9.67

		1,065.04			477.21			1,065.03			483.58			1,037.05
Less: Opening balance considered		(931.58	)		(127.38	)		(1,027.38	)		(33.20	)		(33.20	)

		133.46			349.83			37.65			450.38			1,003.85

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD /YEAR
As per the Balance Sheet		1,251.78			1,382.71			1,251.78			1,382.71			1,638.01
Add: Deposits with financial institutions and body corporate, included herein		201.36			307.15			201.36			307.15			201.39

		1,453.14			1,689.86			1,453.14			1,689.86			1,839.40

1 . Extracts of significant accounting policies and notes on accounts

Company overview

Infosys Technologies Limited (Infosys or the company) along with its majority owned and controlled subsidiary, Progeon Limited, India (Progeon), and wholly owned subsidiaries Infosys Technologies (Australia) Pty. Limited (Infosys Australia), Infosys Technologies (Shanghai) Co. Limited (Infosys China) and Infosys Consulting, Inc., USA (Infosys Consulting), is a leading global information technology 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.

1.1 Significant accounting policies

1.1.1 Basis of preparation of financial statements

The accompanying financial statements are prepared in accordance with Indian Generally Accepted Accounting Principles (“GAAP”) under the historical cost convention on the accruals basis. GAAP comprises mandatory accounting standards issued by the Institute of Chartered Accountants of India (“ICAI”), the provisions of the Companies Act, 1956 and guidelines issued by the Securities and Exchange Board of India. Accounting policies have been consistently applied

Infosys Technologies Limited

except where a newly issued accounting standard is initially adopted or a revision to an existing accounting standard requires a change in the accounting policy hitherto in use.

Management evaluates all recently issued or revised accounting standards on an on-going basis. There are no accounting standards that although not mandatory for adoption as of the balance sheet date, have material impact on the financial statements.

1.1.2 Change in accounting policy

Accounting standard 11, “The effect of changes in foreign exchange rates”, was revised with effect from April 1, 2004 and prescribes accounting for forward exchange contracts based on whether these are entered into for hedging purposes or for trading / speculation purposes. Further, it has been recently clarified that the revised standard does not cover forward exchange contracts entered in to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. Up to March 31, 2004, such segregation was not required and the difference between the forward rate and the exchange rate on the date of the transaction was recognized as income or expense over the life of the contract.

The Company has adopted the revised accounting standard effective April 1, 2004 to the extent applicable in respect of outstanding forward exchange contracts. The forward exchange contracts constitute hedges from an economic perspective, and the Company has decided to account for these forward exchange contracts based on their designation as ‘effective hedges’ or ‘not effective’. To designate a forward contract as an effective hedge, management objectively evaluates and evidences with appropriate supporting documentation at the inception of each forward contract, whether these forward contracts are effective in achieving offsetting cash flows attributable to the hedged risk or not. The gain or loss on effective hedges is recorded in the foreign currency fluctuation reserve until the hedged transactions occur and are then recognized in the profit and loss account. In the absence of an effective hedge, the gain or loss is recognized in the profit and loss account.

Gains and losses on forward exchange contracts are computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure a gain or loss on that contract for an earlier period). The Company also assesses on an ongoing basis at the end of each reporting period whether designated hedges are effective and prospectively reclassifies the hedge as necessary.

Consequent to the change in the accounting policy, the profits for the quarter and half year ended September 30, 2004 are higher by Rs. 10.75 crore and lower by Rs. 21.61 crore respectively.

1.2 Notes on accounts

All amounts in the financial statements are presented in Rupees crore, except for per share data and as otherwise stated. All exact amounts are stated with the suffix “/-”. One crore equals 10 million.

The previous period’s / year’s figures have been regrouped / reclassified, wherever necessary to conform to the current period’s presentation.

1.2.1 Aggregate expenses

The following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to the Companies Act, 1956.


	Quarter ended					Half year ended					Year ended
	September 30,					September 30,					March 31,
	2004		2003			2004		2003			2004
Salaries and bonus including overseas staff expenses		754.11		549.31			1,424.21		1,070.83			2,295.83
Contribution to provident and other funds		21.23		14.93			38.93		27.20			56.27
Staff welfare		4.21		3.01			7.68		6.22			13.76
Overseas travel expenses		75.15		54.20			146.35		106.29			215.00
Consumables		4.21		2.07			6.62		3.85			9.13
Cost of software packages for own use		26.24		21.47			46.82		35.08			65.02
for service delivery to clients		6.04		2.48			9.55		12.34			16.04
Computer maintenance		3.90		3.15			6.74		5.46			11.91
Communication expenses		10.87		7.75			19.69		15.93			32.19
Cost of technical sub-contractors		86.21		7.61			159.16		34.29			109.89
Provision for post-sales client support and warranties		11.57		(0.32	)		18.79		(0.15	)		0.30
Traveling and conveyance		12.30		5.46			20.71		10.11			23.70
Rent		9.67		9.07			17.51		19.14			38.88
Telephone charges		12.39		8.66			22.11		17.05			34.27
Professional charges		19.88		10.57			31.81		19.02			39.67
Printing and stationery		2.19		1.30			3.71		3.91			6.86
Advertisements		2.55		0.49			4.78		1.60			6.03
Office maintenance		10.08		6.39			18.42		12.66			29.07
Repairs to building		2.68		1.49			4.00		3.39			10.28
Repairs to plant and machinery		1.54		1.51			3.11		2.60			4.85
Power and fuel		9.66		7.20			18.51		14.42			28.72
Brand building		11.78		9.42			17.37		15.14			34.23
Insurance charges		7.07		6.07			14.22		11.23			23.84
Rates and taxes		2.22		0.94			4.54		2.18			5.46
Commission charges		4.32		0.64			8.49		2.91			7.27
Donations		4.83		3.52			9.05		7.02			14.29
Auditor’s remuneration statutory audit fees		0.09		0.08			0.18		0.15			0.31
certification charges		—		—			—		—			0.03
others		—		—			—		—			0.24
out-of-pocket expenses		—		—			0.01		0.01			0.02

Infosys Technologies Limited

1.2.1 Aggregate expenses (contd.)


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
Provision for bad and doubtful debts		5.25		10.73		11.58		14.02		15.99
Provision for doubtful loans and advances		0.09		0.12		0.11		0.13		0.14
Bank charges and commission		0.33		0.16		0.57		0.36		0.75
Commission to non-whole time directors		0.39		0.39		0.78		0.78		1.49
Postage and courier		1.42		0.70		2.79		1.94		3.91
Books and periodicals		0.70		0.34		1.28		0.58		1.51
Research grants		0.09		0.12		0.19		0.18		0.54
Freight charges		0.14		0.15		0.37		0.30		0.84
Professional membership and seminar participation fees		1.37		0.65		2.82		1.27		3.57
Marketing expenses		2.52		1.76		6.04		2.61		5.99
Sales promotion expenses		0.18		0.09		0.40		0.20		0.69
Miscellaneous expenses		0.35		2.64		0.36		7.75		8.46

		1,129.82		756.32		2,110.36		1,490.00		3,177.24

1.2.2 Obligations on long-term, non-cancelable operating leases

The lease rentals charged during the period and maximum obligations on long-term non-cancelable operating leases payable as per the rentals stated in the respective agreements are as follows.

Quarter ended

Half year ended

Year ended

September 30,

March 31,

2004

2003

2004

2003

2004

Lease rentals recognized during the period /year

9.66

9.07

17.50

19.14

38.88


	As at		As at		As at
Lease obligations	September 30, 2004		September 30, 2003		March 31, 2004
Within one year of the balance sheet date		22.65		27.49		25.04
Due in a period between one year and five years		44.20		59.16		56.74
Due after five years		3.03		7.39		4.82
		69.88		94.04		86.60

The operating lease arrangements extend for a maximum of ten years from their respective dates of inception and relates to rented overseas premises and car rentals. Fixed assets stated below have been provided on operating lease to Progeon, a subsidiary company, as at September 30, 2004, September 30, 2003 and March 31, 2004.


			Accumulated
Particulars	Cost		depreciation		Net book value
Building		12.56		2.41		10.15
		10.24		0.96		9.28
		12.57		1.99		10.58
Plant and machinery		5.45		3.41		2.04
		3.70		1.12		2.58
		5.44		2.96		2.48
Computers		1.32		1.20		0.12
		1.23		0.76		0.47
		1.24		1.07		0.17
Furniture & fixtures		9.47		6.28		3.19
		5.60		1.59		4.01
		9.16		5.48		3.68

Total		28.80		13.30		15.50
		20.77		4.43		16.34
		28.41		11.50		16.91

The aggregate depreciation charged on the above during the quarter and half year ended September 30, 2004 amounted to Rs. 0.89 and Rs. 1.80 respectively (for the quarter and half year ended September 30, 2003 was Rs. 1.08 and Rs. 1.74 and for the year ended March 31, 2004 was Rs. 4.41).

The company has entered in to non-cancelable operating lease arrangement for premises leased to Progeon. The lease for premises extends for periods between 36 months and 70 months from their respective dates of inception. The lease rentals received are included as a component of sale of services (refer note 1.2.3 below). Lease rental commitments on contract from Progeon are as given below:


	As at		As at		As at
Lease rentals	September 30, 2004		September 30, 2003		March 31, 2004
Within one year of the balance sheet date		6.05		8.02		8.02
Due in a period between one year and five years		5.48		9.29		9.48
Due after five years		—		—		—
		11.53		17.31		17.50

The rental income from Progeon for the quarter and half year ended September 30, 2004 amounted to Rs. 2.02 and Rs. 3.89 respectively (for the quarter and half year ended September 30, 2003 was Rs. 1.61 and Rs. 2.82 and for the year ended March 31, 2004 was Rs. 6.49).

Infosys Technologies Limited

1.2.3 Related party transactions

The company entered into related party transactions with Progeon, a subsidiary company. The transactions in addition to the lease commitments described in note 1.2.2. are set out below:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars	2004		2003		2004		2003		2004
Capital transactions:
Financing transactions — amount paid to Progeon for issue of nil (nil; 1,22, 50,000) fully paid equity shares of Rs. 10/- each at par		—		—		—		—		12.25
Rental deposit received		—		1.61		—		1.61		1.61

Revenue transactions:
Purchase of services		0.18		—		0.30		0.14		0.70

Shared services including facilities and personnel		0.10		—		0.10		—		—
		0.28		—		0.40		0.14		0.70
Sale of services
Business consulting services		0.04		0.03		0.08		0.03		0.12
Shared services including facilities and personnel		3.52		3.40		7.32		6.41		12.70

		3.56		3.43		7.40		6.44		12.82

The company entered into related party transactions with Infosys Australia, a subsidiary company. The transactions are set out below:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars	2004		2003		2004		2003		2004
Capital transactions:
Purchase of fixed assets		—		—		—		—		3.50
Transfer of advances		—		—		—		—		2.33

Revenue transactions:
Purchase of services		62.63		—		121.99		—		47.20

Sale of services
Software services & products-overseas		—		—		0.12		—		2.93
Shared services including facilities and personnel		—		—		—		—		—

		—		—		0.12		—		2.93

The company entered into related party transactions with Infosys Shanghai, a subsidiary company. The transactions are set out below:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars	2004		2003		2004		2003		2004
Capital transactions:
Financing transactions — amount remitted towards capital		18.46		—		18.46		—		4.55
Revenue transactions:
Purchase of services		0.12		—		0.12		—		—

Sale of services
Software services & products-overseas		—		—		—		—		—
Shared services including facilities and personnel		—		—		—		—		—

		—		—		—		—		—

The company entered into related party transactions with Infosys Consulting, a subsidiary company. The transactions are set out below.


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars	2004		2003		2004		2003		2004
Capital transactions:
Financing transactions — amount paid to Infosys Consulting for issue of 50,00,000 (nil; nil) common stock of US$ 1.00 par value, fully paid		—		—		21.97		—		—
Revenue transactions:
Purchase of services		0.57		—		0.57		—		—

Sale of services
Software services & products-overseas		0.16		—		0.16		—		—
Shared services including facilities and personnel		—		—		—		—		—

		0.16		—		0.16		—		—

Infosys Technologies Limited

Sundry Debtors includes dues from subsidiary companies, as given below:


	As at		As at		As at
	September 30, 2004		September 30, 2003		March 31, 2004
Progeon Limited, India		—		—		—
Infosys Technologies (Shanghai) Company Limited, China		—		—		—
Infosys Technologies (Australia) Pty. Limited, Australia		0.05		—		—
Infosys Consulting, Inc., USA		—		—		—
		0.05		—		—

Sundry Creditors includes dues to subsidiary companies, as given below:


	As at		As at		As at
	September 30, 2004		September 30, 2003		March 31, 2004
Progeon Limited, India		1.61		—		1.61
Infosys Technologies (Shanghai) Company Limited, China		0.12		—		—
Infosys Technologies (Australia) Pty. Limited, Australia		24.83		—		11.34
Infosys Consulting, Inc., USA		—		—		—
		26.56		—		12.95

Loans and Advances includes dues from subsidiary companies, as given below:


	As at		As at		As at
	September 30, 2004		September 30, 2003		March 31, 2004
Progeon Limited, India		—		—		—
Infosys Technologies (Shanghai) Company Limited, China		0.99		—		0.85
Infosys Technologies (Australia) Pty. Limited, Australia		—		—		—
Infosys Consulting, Inc., USA		—		—		—
		0.99		—		0.85

Maximum balances of loans and advances due from subsidiary companies :


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars	2004		2003		2004		2003		2004
Progeon Limited, India		—		—		—		—		—
Infosys Technologies (Shanghai) Company Limited, China		0.99		—		0.99		—		—
Infosys Technologies (Australia) Pty. Limited, Australia		—		—		—		—		—
Infosys Consulting, Inc., USA		—		—		—		—		—

During the quarter and half year ended September 30, 2004, an amount of Rs. 4.00 and Rs. 8.00 has been donated to Infosys Foundation, a not-for-profit trust, in which certain directors of the company are trustees. Donation to the foundation for the quarter and half year ended September 30, 2003 and year ended March 31, 2004 were Rs. 3.50, Rs. 7.00 and Rs. 12.00 respectively

Details of the transactions with the companies in which certain directors of the company are also directors:

Quarter ended

Half year ended

Year ended

September 30,

March 31,

Particulars

2004

2003

2004

2003

2004

Purchase of services

SupplyChainge Inc., USA

—

0.71

Sale of services

ICICI Bank Limited, India

0.52

3.61

1.80

4.50

6.54

The company has an alliance with SupplyChainge Inc., USA to jointly market and deliver lead-time optimization solutions. Prof. Marti G. Subrahmanyam, an external director of the company, is also a director on the board of ICICI Bank Limited, India and SupplyChainge Inc., USA.

1.2.4 Transactions with key management personnel

Key management personnel comprise our directors and statutory officers.

Particulars of remuneration and other benefits provided to key management personnel during the quarter and half year ended September 30, 2004 and 2003 and the year ended March 31, 2004 are set out below:


			Contributions
			to provident		Perquisites		Total
	Salary		and other funds		and incentives		Remuneration
Executive Directors
Quarter ended September 30, 2004		0.43		0.07		0.19		0.69
Quarter ended September 30, 2003		0.43		0.06		0.08		0.57
Half-ended September 30, 2004		0.82		0.15		0.63		1.60
Half-ended September 30, 2003		0.72		0.12		0.40		1.24
Year ended March 31, 2004		1.31		0.24		0.92		2.47

Infosys Technologies Limited

1.2.4 Transactions with key management personnel (contd.)


					Reimbursement of
	Commission		Sitting fees		expenses		Total remuneration
Independent Directors
Quarter ended September 30, 2004		0.39		0.01		0.06		0.46
Quarter ended September 30, 2003		0.31		0.01		0.08		0.40
Half year ended September 30, 2004		0.78		0.02		0.17		0.97
Half year ended September 30, 2003		0.62		0.02		0.19		0.83
Year ended March 31, 2004		1.49		0.04		0.34		1.87

Other Senior Management Personnel


			Contributions		Perquisites						Outstanding
			to provident		and		Total		Total		loans and
	Salary		and other funds		incentives		remuneration		loans granted		advances
Other Senior Management Personnel
Quarter ended September 30, 2004		0.03		0.01		0.07		0.11		0.04		0.04
Quarter ended September 30, 2003		0.03		0.01		0.04		0.08		—		—
Half year ended September 30, 2004		0.06		0.02		0.18		0.26		0.04		0.04
Half year ended September 30, 2003		0.06		0.02		0.10		0.18		—		—
Year ended March 31, 2004		0.12		0.04		0.22		0.38		—		—

In addition, the details of the options granted to non-whole time directors and other senior officers during the quarter and half year ended September 30, 2004 and 2003 and year ended March 31, 2004 are as follows:

Number of

Exercise price

Expiration of

Name

Date of Grant

Option plan

options granted

(in Rs.)

options

Non- Whole time Directors

Sridar A. lyengar

April 10, 2003

1999

8,000

762.44

April 9, 2013

1.2.5 Pro forma disclosures relating to the Employee Stock Option Plans (“ESOPs”)

The Securities and Exchange Board of India (“SEBI”) issued the Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines in 1999, which is applicable to all stock option schemes established on or after June 19, 1999. In accordance with these guidelines, the excess of the market price of the underlying equity shares as of the date of the grant of the options over the exercise price of the options, including up-front payments, if any, is to be recognized and amortized on a straight-line basis over the vesting period. All options under the 1998 and 1999 stock option plans have been issued at fair market value, hence there are no compensation costs.

The company’s 1994 stock option plan was established prior to the SEBI guidelines on stock options.

Had the stock compensation costs for this stock option plan been determined as per the guidelines issued by SEBI, the company’s reported net profit would have been reduced to the pro forma amounts indicated below:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
Net profit:
- As reported		454.85		300.16		849.32		578.28		1,243.47

- Adjusted pro forma		454.85		295.24		849.32		568.33		1,230.57

1.2.6 Fixed assets

Profit / (loss) on disposal of fixed assets


	Quarter ended					Half year ended					Year ended
	September 30,					September 30,					March 31,
	2004			2003		2004			2003		2004
Profit on disposal of fixed assets		0.09			—		0.16			0.01		0.04
(Loss) on disposal of fixed assets		(0.04	)		—		(0.04	)		—		—

Profit / (loss) on disposal of fixed assets, net		0.05			—		0.12			0.01		0.04

Depreciation charged to the profit and loss account relating to assets costing less than Rs. 5,000/- each

Quarter ended

Half year ended

Year ended

September 30,

March 31,

2004

2003

2004

2003

2004

Charged during the period / year

3.50

4.60

4.39

6.24

28.61

The company has entered into lease-cum-sale agreements to acquire certain properties. In accordance with the terms of these agreements, the company has the option to purchase the properties on expiry of the lease period. The company has already paid 99% of the value of the properties at the time of entering into the lease-cum-sale agreements. These amounts are disclosed as “Land — leasehold” under “Fixed assets” in the financial statements. Additionally, certain land has been purchased for which the company has possession certificate for which sale deeds are yet to be executed as at September 30, 2004.

During the year ended March 31, 2004, management reduced the remaining estimated useful life of the intellectual property in a commercial software application product to three months, effective August 2003 and treasury management product to two months, effective November 2003. The revised estimation represents management’s present evaluation of the expected future commercial benefits from these products. The revision has resulted in an increased charge to the profit and loss account of Rs. 20.28 during the year ended March 31, 2004.

Infosys Technologies Limited

1.2.7 Investment Activity

Details of investments in and disposal of securities during the quarter and half year ended September 30, 2004 and 2003 and year ended March 31, 2004:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
Investment in securities
Subsidiaries		18.46		—		40.43		—		83.49
Long-term investments		—		—		—		0.54		0.54
Liquid Mutual funds		115.00		350.00		115.00		450.00		930.03

		133.46		350.00		155.43		450.54		1,014.06

Redemption / Disposal of Investment in securities
Subsidiaries		—		—		—		—		—
Long-term investments		—		2.56		—		3.31		10.21
Liquid Mutual funds		—		—		117.78		—		—

		—		2.56		117.78		3.31		10.21

Net movement in investments		133.46		347.44		37.65		447.23		1,003.85

The following are the particulars of strategic investments made during the quarter and half year ended September 30, 2004 and 2003 and during the year ended March 31, 2004:


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
Particulars of investee companies	2004		2003		2004		2003		2004
Progeon Limited, India		—		—		—		—		12.25
Infosys Technologies (Shanghai) Co. Limited, China		18.46		—		18.46		—		4.55
Infosys Technologies (Australia) Pty Limited, Australia		—		—		—		—		66.69
Infosys Consulting, Inc., USA		—		—		21.97		—		—
M-Commerce Ventures Pte. Limited, Singapore *		—		—		—		0.19		(0.07	)

		18.46		—		40.43		0.19		83.42

* Net of redemptions

Subsidiaries

On April 8, 2004, the Board approved the formation of a new wholly-owned subsidiary, Infosys Consulting, Inc., incorporated in Texas, USA (Infosys Consulting) to enhance business consulting revenues in Infosys’ global delivery model. The Board approved an investment of up to US$ 20 million in Infosys Consulting. As of September 30, 2004, the company had invested US$ 5.00 million (Rs. 21.97) in the subsidiary.

On January 2, 2004, the company acquired 100% of equity in Expert Information Services Pty Limited, Australia. The transaction value approximates Aus $ 32.0 million (US $ 24.32 million or Rs. 110.90). The consideration comprises a payment in cash on conclusion, an earn-out on achieving financial conditions over a three year period ending March 31, 2007, and the release of the balance retained in escrow for representations and warranties made by the selling share holders. The acquired company has been renamed as Infosys Technologies (Australia) Pty Limited. As of September 30, 2004, the company had invested Rs. 66.69 for 1,01,08,869 equity shares of Aus $ 0.11 par value, fully paid.

On October 10, 2003, the company set up a wholly-owned subsidiary in the People’s Republic of China named Infosys Technologies (Shanghai) Co. Limited. The subsidiary will be capitalized at US$ 5 million (Rs. 22.78). As of September 30, 2004, the company had invested US$ 5.0 million (Rs. 23.01) in the subsidiary Infosys holds 99.97% 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. 1,22,49,993 equity shares have been issued to Infosys in April 2002 and 1,22,50,000 in March 2004 for an aggregate consideration of Rs. 24.50. Pursuant to the agreement, CIFC has been issued 43,75,000 0.0005% cumulative convertible preference shares each on June 30, 2002 and March 31, 2004 for an aggregate consideration of Rs. 93.80. The preference shares are convertible to an equal number of equity shares based on certain events as agreed between the company and CIFC.

Other investments

During the year ended March 31, 2004, the Company invested Rs. 0.54 in M-Commerce Ventures Pte. Limited, Singapore (M-Commerce) for 20 ordinary shares of face value Singapore $ (“S$”) 1/- each, fully paid at par and 180 redeemable preference shares of face value S$ 1/- each, fully paid for a premium of S$ 1,110. The company also received Rs. 0.61 towards return of premium of S$ 1,110/- each on 216 redeemable preference shares of face value of S$ 1/- each during the year. Accordingly, the aggregate investment in M-Commerce as at March 31, 2004 amounts to Rs. 2.04.

During the year ended March 31, 2004, the company received from CiDRA Corporation, USA (CiDRA), an amount of Rs. 6.05 in cash; 72,539 Class A common stock of par value US$ 0.001 each of CiDRA, 2,139 Non-voting redeemable preferred stock of par value US$ 0.01 each of CiDRA, 12,921, Series A preferred stock par value $0.001 of CyVera Corporation, USA on a buy back offer. The company also received 12,720 Series A preferred stock par value $0.001 of CyVera Corporation, USA, due to company’s holding in CiDRA.

During the year ended March 31, 2004, Infosys received Rs. 3.22 from Workadia Inc. and Rs. 0.47 from Stratify Inc. towards recovery of the amounts invested. The remainder of the investment was written-off during the year ended March 31, 2004.

1.2.8 Segment reporting

The company’s operations predominantly relate to providing IT services, delivered to customers globally operating in various industry segments. Accordingly, IT service revenues represented along industry classes comprise the primary 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 also consistently applied to record income and expenditure in individual segments. These are as set out in the note on significant accounting policies.

Industry segments at the company are primarily financial services comprising customers providing banking, finance and insurance services; manufacturing companies; companies in the telecommunications and the retail industries; and others such as utilities, transportation and logistics companies.

Infosys Technologies Limited

Income and direct expenses in relation to segments is categorized based on items that are individually identifiable to that segment, while the remainder of the costs are categorized in relation to the associated turnover of the segment. Certain expenses such as depreciation, which form a significant component of total expenses, are not specifically allowable to specific segments as the underlying services are used interchangeably. The company 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 directly charged against total income.

Fixed assets used in the company’s business or liabilities contracted have not been identified to any of the reportable segments, as the fixed assets and services are used interchangeably between segments. Accordingly, no disclosure relating to total segment assets and liabilities are made.

Customer relationships are driven based on the location of the respective client. North America comprises the United States of America, Canada and Mexico; Europe includes continental Europe (both the east and the west), Ireland and the United Kingdom; and the Rest of the World comprising all other places except those mentioned above and India.

Geographical revenues are segregated based on the location of the customer who is invoiced or in relation to which the revenue is otherwise recognized.

Industry segments

Quarter ended September 30, 2004 and September 30, 2003

Financial services

Manufacturing

Telecom

Retail

Others

Total

Revenues

584.38

257,63

303.95

166.85

376.75

1,689.56

436.26

172.89

171.61

134.34

219.65

1,134.75

Identifiable operating expenses

249.10

107.87

143.70

67.72

159.75

728.34

178.37

74.86

63.81

51.11

90.39

458.54

Allocated expenses

1.38.93

61.25

72.26

39.67

89.37

401.68

114.48

45.37

45.04

35.25

57.64

297.78

Segmental operating income

196.35

88.51

87.99

59.46

127.43

559.74

143.41

52.66

62.76

47.98

71.62

378.43

Unallocable expenses

56.55

62.33

Operating income

503.19

316.10

Other income (expense) net

30.16

44.06

Net profit before taxes

533.35

360.16

Income taxes

78.50

60.00

Net profit after taxes

454.85

300.16

Half year ended September 30, 2004 and September 30,2003

Financial services

Manufacturing

Telecom

Retail

Others

Total

Revenues

1,073.97

485.28

560.33

338.76

702.61

3,160.95

837.23

343.43

327.75

261.72

446.60

2,216.73

Identifiable operating expenses

457.00

212.59

277.03

128,33

294.44

1,369.39

356.61

147.62

130.75

96.62

182.88

914.48

Allocated expenses

251.83

113.74

131.38

79.31

164.71

740.97

217.40

89.15

85.12

67.95

115.90

575.52

Segmental operating income

365.14

158.95

151.92

131.12

243.46

1.050.39

263.22

106.66

111.88

97.15

147.82

726.73

Unallocable expenses

105.93

106.59

Operating income

944.66

620.14

Other income (expense), net

48.16

70.14

Net profit before taxes

992.82

690.28

Income taxes

143.50

112.00

Net profit after taxes

849.32

578.28

Year ended March 31, 2004


	Financial services		Manufacturing		Telecom		Retail		Others		Total
Revenues		1,722.08		716.47		774.83		563.16		984.35		4,760.89
Identifiable operating expenses		728.69		311.01		317.93		210.29		413.33		1,981.25
Allocated expenses		433.73		180.08		193.52		141.58		247.08		1,195.99
Segmental operating income		559.66		225.38		263.38		211.29		323.94		1,583.65
Unallocable expenses												230.90
Operating income												1,352.75
Other income (expense), net												117.72
Net profit before taxes												1,470.47
Income taxes												227.00
Net profit after taxes												1,243.47

Infosys Technologies Limited

Geographic segments

Quarter ended September 30, 2004 and September 30, 2003

North America

Europe

India

Rest of the World

Total

Revenues

1,112.63

339.66

30.29

186.98

1,689.56

837.30

203.64

18.77

75.04

1,134.75

Identifiable operating expenses

468.52

148.34

9.57

101.71

728.14

346.76

81.63

2.55

27.60

458.54

Allocated expenses

264.52

85.31

7.20

44.45

401.68

219.73

53.44

4.93

19.68

297.78

Segmental operating income

379.59

125.81

13.52

40.82

559.74

270.81

68.57

11.29

27.76

378.43

Unallocable expenses

56.55

62.33

Operating income

503.19

316.10

Other income (expense), net

30.16

44.06

Net profit before taxes

533.35

360.16

Income taxes

78.50

60.00

Net profit after taxes

454.85

300.16

Half year ended September 30, 2004 and September 30, 2003

North America

Europe

India

Rest of the World

Total

Revenues

2,079.38

686.58

54.26

340.73

3,160.95

1,643.25

393.75

42.10

137.63

2,216.73

Identifiable operating expenses

879.62

275.18

14.36

200.23

1,369.39

694.79

158.46

12.90

48.33

914.48

Allocated expenses

487.45

160.89

12.73

79.90

740.97

426.62

102.24

10.92

35.74

575.52

Segmental operating income

712.31

250.51

27.17

60.60

1,050.59

521.84

133.05

18.28

53.56

726.73

Unallocable expenses

105.93

106.59

Operating income

944.66

620.14

Other income (expense), net

48.16

70.14

Net profit before taxes

992.82

690.28

Income taxes

143.50

112.00

Net profit after taxes

849.32

578.28

Year ended March 31, 2004


	North America		Europe		India		Rest of the World		Total
Revenues		3,401.42		913.84		66.20		379.43		4,760.89
Identifiable operating expenses		1,422.01		371.35		18.25		169.64		1,981.25
Allocated expenses		856.13		229.10		16.73		94.03		1,195.99
Segmental operating income		1,123.28		313.39		31.22		115.76		1,583.65
Unallocable expenses										230.90
Operating income										1,352.75
Other income (expense), net										117.72
Net profit before taxes										1,470.47
Income taxes										227.00
Net profit after taxes										1,243.47

1.2.9 Reconciliation of basic and diluted shares used in computing earnings per share

At the annual general meeting held on June 12, 2004, the shareholders approved the issue of bonus shares in the ratio of three bonus shares for every share held. The record date for the bonus issue was July 2, 2004 and shares were allotted on July 3, 2004. All basic and diluted shares used in determining earnings per share are after considering the effect of bonus issue.


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
Number of shares considered as basic weighted average shares outstanding		26,76,76,465		26,50,28,112		26,74,06,246		26,50,04,404		26,54,47,776
Add: Effect of dilutive issues of shares / stock options		61,00,213		22,69,504		53,61,955		15,99,936		33,39,240

Number of shares considered as weighted average shares and potential shares outstanding		27,37,76,678		26,72,97,616		27,27,68,201		26,66,04,340		26,87,87,016

Infosys Technologies Limited

Consolidated financial statements of Infosys Technologies Limited and its subsidiaries

Principles of consolidation

The financial statements are prepared in accordance with the principles and procedures for the preparation and presentation of consolidated financial statements as laid down under the accounting standard on Consolidated Financial Statements issued by the ICAI. The financial statements of the parent company, Infosys, and its subsidiaries, Infosys Technologies (Australia) Pty Ltd. (“Infosys Australia”), Infosys Technologies (Shanghai) Co. Limited (“Infosys China”), Infosys Consulting, Inc., (“Infosys Consulting”) and Progeon Limited (“Progeon”) have been combined on a line-by-line basis by adding together the book values of like items of assets, liabilities, income and expenses after eliminating intra-group balances and transactions and resulting unrealized gains / losses. The consolidated financial statements are prepared applying uniform accounting policies in use at Infosys and its subsidiaries.

Management’s statement on significant accounting policies contained in the audited financial statements

The significant accounting policies of the company relate to revenue recognition, expenditure, fixed assets and capital work-in-progress, depreciation, retirement benefits to employees-principally gratuity, superannuation and provident fund benefits, research and development, income tax, earning per share, foreign currency transactions and investments.

A complete set of the audited consolidated financial statements is available at www.infosys.com.

Auditors’ report to the board of directors on the consolidated financial statements of Infosys Technologies Limited and its subsidiaries

We have audited the attached consolidated balance sheet of Infosys Technologies Limited (the Company) and its subsidiaries (collectively called ‘the Infosys Group’) as at 30 September 2004, the consolidated profit and loss account and the consolidated cash flow statement for the quarter and half year ended on that date, annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the auditing standards generally accepted in India. 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 audit provides a reasonable basis for our opinion.

We report that the consolidated financial statements have been prepared by the Company’s management in accordance with the requirements of Accounting Standard (AS) 21, Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India.

In our opinion and to the best of our information and according to the explanations given to us, the consolidated financial statements give a true and fair view in conformity with the accounting principles generally accepted in India:

(a) in the case of the consolidated balance sheet, of the state of affairs of the Infosys Group as at 30 September 2004;

(b) in the case of the consolidated profit and loss account, of the profit of the Infosys Group for the quarter and half year ended on that date; and

(c) in the case of the consolidated cash flow statement, of the cash flows of the Infosys Group for the quarter and half year ended on that date.

for BSR & Co.
(formerly Bharat S Raut & Co.)
Chartered Accountants

Subramanian Suresh
Partner
Membership No 83673

Bangalore
12 October 2004

Infosys Technologies Limited

Consolidated balance sheet as at


					in Rs. crore
	September 30, 2004		September 30, 2003		March 31, 2004
SOURCES OF FUNDS SHAREHOLDERS’ FUNDS
Share capital		133.94		33.13		33.32
Reserves and surplus		3,921.45		3,300.93		3,216.26

		4,055.39		3,334.06		3,249.58

MINORITY INTERESTS		—		—		—
PREFERENCE SHARES ISSUED BY SUBSIDIARY		93.51		49.00		93.56

		4,148.90		3,383.06		3,343.14

APPLICATIONS OF FUNDS
FIXED ASSETS
Original cost		1,893.51		1,423.85		1,633.65
Less: Depreciation and amortization		898.64		686.63		809.84

Net book value		994.87		737.22		823.81
Add: Capital work-in-progress		254.23		65.63		208.05

		1,249.10		802.85		1,031.86
INVESTMENTS		966.02		464.74		945.45
DEFERRED TAX ASSETS		44.50		33.87		39.97
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors		926.32		592.59		651.45
Cash and bank balances		1,325.61		1,387.26		1,721.51
Loans and advances		851.80		822,74		721.05

		3,103.73		2,802.59		3,094.01
LESS: CURRENT LIABILITIES AND PROVISIONS
Current liabilities		613.80		376.30		580.93
Provisions		600.65		344.69		1,187.22

NET CURRENT ASSETS		1,889.28		2,081.60		1,325.86

		4,148.90		3,383.06		3,343.14

As per our report attached

for BSR & Co.
(formerly Bharat. S. Raut & Co.)
Chartered Accountants


Subramanian Suresh	N. R. Narayana Murthy	Nandan M. Nilekani	S. Gopalakrishnan	Deepak M. Satwalekar
Partner	Chairman and Chief Mentor	Chief Executive Officer,	Chief Operating Officer	Director
Membership No. 83673		President and Managing Director	and Deputy Managing Director

	Marti G. Subrahmanyam	Omkar Goswami	Larry Pressler	Rama Bijapurkar
	Director	Director	Director	Director

	Claude Smadja	Sridar A. lyengar	K. Dinesh	S. D. Shibulal
	Director	Director	Director	Director

Bangalore	T. V. Mohandas Pai	Srinath Batni	V. Balakrishnan
October 12, 2004	Director and	Director	Company Secretary and
	Chief Financial Officer		Senior Vice President — Finance

Infosys Technologies Limited

Consolidated profit and loss account for the

in Rs. crore, except per share data


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
INCOME
SOFTWARE SERVICES, PRODUCTS AND BUSINESS PROCESS MANAGEMENT
Overseas		1,719.26		1,133.06		3,212.71		2,204.43		4,786.72
Domestic		30.07		18.74		54.00		42.07		66.23

		1,749.33		1,151.80		3,266.71		2,246.50		4,852.95
SOFTWARE DEVELOPMENT AND BUSINESS PROCESS MANAGEMENT EXPENSES		926.66		595.28		1,731.88		1,174.87		2,538.67

GROSS PROFIT		822.67		556.52		1,534.83		1,071.63		2,314.28
SELLING AND MARKETING EXPENSES		122.27		82.69		227.47		164.34		350.90
GENERAL AND ADMINISTRATION EXPENSES		139.37		92.37		257.04		175.35		369.19
		261.64		175.06		484.51		339.69		720.09

OPERATING PROFIT BEFORE INTEREST, DEPRECIATION &AMORTIZATION AND MINORITY INTEREST		561.03		381.46		1,050.32		731.94		1,594.19
INTEREST		—		—		—		—		—
DEPRECIATION AND AMORTIZATION		60.63		63.42		113.20		108.56		236.73

OPERATING PROFIT AFTER INTEREST, DEPRECIATION &AMORTIZATION AND MINORITY INTERESTS		500.40		318.04		937.12		623.38		1,357.46
OTHER INCOME		29.60		43.16		45.31		75.10		123.38
PROVISION FOR INVESTMENTS		0.07		0.22		0.06		6.59		9.67

NET PROFIT BEFORE TAX AND MINORITY INTERESTS		529.93		360.98		982.37		691.89		1,471.17
PROVISION FOR TAXATION		82.56		60.00		146.67		112.00		227.54

NET PROFIT BEFORE MINORITY INTERESTS		447.37		300.98		835.70		579.89		1,243.63
MINORITY INTERESTS		—		—		—		—		—

NET PROFIT AFTER TAX AND MINORITY INTERESTS		447.37		300.98		835.70		579.89		1,243.63

Balance brought forward		456.39		278.91		70.67		—		—
Less: Residual dividend paid for fiscal 2004		—		—		2.31		—		—
Dividend tax on the above		1.97		—		2.27		—		—

		454.42		278.91		66.09		—		—

AMOUNT AVAILABLE FOR APPROPRIATION		901.79		579.89		901.79		579.89		1,243.63
DIVIDEND
Interim		133.93		96.09		133.93		96.09		96.09
Final		—		—		—		—		99.96
One-time special dividend				—		—		—		666.41

Total dividend		133.93		96.09		133.93		96.09		862.46
Dividend tax		17.50		12.31		17.50		12.31		110.50
Amount transferred – general reserve				—		—		—		200.00
Balance in Profit and Loss account		750.36		471.49		750.36		471.49		70.67

		901.79		579.89		901.79		579.89		1,243.63

EARNINGS PER SHARE
Equity shares of par value Rs. 5/- each
Basic		16.71		11.36		31.25		21.88		46.85
Diluted		16.34		11.26		30.64		21.75		46.27
Number of shares used in computing earnings per share
Basic		26,76,76,465		26,50,28,112		26,74,06,246		26,50,04,404		26,54,47,776
Diluted		27,37,76,678		26,72,97,616		27,27,68,201		26,66,04,340		26,87,87,016

As per our report attached

for BSR & Co.
(formerly Bharat S. Raut & Co.)
Chartered Accountants


Subramanian Suresh	N. R. Narayana Murthy	Nandan M. Nilekani	S. Gopalakrishnan	Deepak M. Satwalekar
Partner	Chairman and Chief	Chief Executive Officer,	Chief Operating Officer	Director
Membership No. 83673	Mentor	President and Managing Director	and Deputy Managing Director

	Marti G. Subrahmanyam	Omkar Goswami	Larry Pressler	Rama Bijapurkar
	Director	Director	Director	Director

	Claude Smadja	Sridar A. lyengar	K. Dinesh	S. D. Shibulal
	Director	Director	Director	Director

Bangalore	T. V. Mohandas Pai	Srinath Batni	V. Balakrishnan
October 12, 2004	Director and	Director	Company Secretary and
	Chief Financial Officer		Senior Vice President — Finance

Infosys Technologies Limited

Consolidated cash flow statement for the

in Rs. crore


	Quarter ended						Half year ended								Year ended
	September 30,						September 30,								March 31,
	2004			2003			2004				2003				2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit before tax		529.93			360.98			982.37				691.89				1,471.17
Adjustments to reconcile net profit before tax to cash provided by operating activities
(Profit) / Loss on sale of fixed assets		(0.05	)		—			(0.12	)			0.01				0.41
Depreciation and amortization		60.63			63.42			113.20				108.56				236.73
Interest and dividend income		(22.92	)		(23.91	)		(52.28	)			(47.22	)			(102.23	)
Provisions for investments		0.07			0.22			0.06				6.59				9.67
Effect of exchange differences on translation of foreign currency cash and cash equivalents		(1.86	)		1.59			(9.01	)			3.17				4.91
Changes in current assets and liabilities
Sundry debtors		(89.69	)		(27.09	)		(274.87	)			(73.94	)			(132.80	)
Loans and advances		(25.68	)		4.03			(60.30	)			(5.44	)			(17.67	)
Current liabilities and provisions		107.67			18.99			51.24				56.89				262.20
Income taxes paid during the period / year		(96.94	)		(49.33	)		(108.83	)			(60.51	)			(108.60	)

NET CASH GENERATED BY OPERATING ACTIVITIES		461.16			348.90			641.46				680.00				1,623.79

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets and change in capital work-in-progress		(176.07	)		(72.63	)		(330.53	)			(133.76	)			(425.86	)
Acquisition of Expert Information Systems Pty. Limited, Australia					—			—				—				(66.68	)
Proceeds on disposal of fixed assets		0.14			(0.01	)		0.21				0.23				1.43
(Investments) in / disposal of securities		(112.11	)		(349.83	)		(20.63	)			(450.38	)			(934.17	)
Interest and dividend income		22.92			23.91			52.28				47.22				102.23

NET CASH USED IN INVESTING ACTIVITIES		(265.12	)		(398.56	)		(298.67	)			(536.69	)			(1,323.05	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issue of preference share capital		0.01			—			(0.05	)			—				44.56
Proceeds from issuance of share capital on exercise of stock options		40.81			4.02			124.74				5.08				122.27
Dividends paid during the period / year, including dividend tax		(1.97	)		—				(869.14	)			(108.35	)			(216.75	)

NET CASH USED IN FINANCING ACTIVITIES		38.85			4.02			(744.45	)			(103.27	)			(49.92	)

Effect of exchange differences on translation of foreign currency cash and cash equivalents		3.12			(1.59	)		10.39				(3.17	)			(5.76	)
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS		238.01			(47.23	)		(391.27	)			36.87				245.06
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD / YEAR		1,300.08			1,768.40			1,929.36				1,684.30				1,684.30

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD /YEAR		1,538.09			1,721.17			1,538.09				1,721.17				1,929.36

As per our report attached

for BSR & Co.
(formerly Bharat S. Raut & Co.)
Chartered Accountants


Subramanian Suresh	N. R. Narayana Murthy	Nandan M. Nilekani	S. Gopalakrishnan	Deepak M. Satwalekar
Partner	Chairman and Chief	Chief Executive Officer,	Chief Operating Officer	Director
Membership No. 83673	Mentor	President and Managing Director	and Deputy Managing Director

	Marti G. Subrahmanyam	Omkar Goswami	Larry Pressler	Rama Bijapurkar
	Director	Director	Director	Director

	Claude Smadja	Sridar A. lyengar	K. Dinesh	S. D. Shibulal
	Director	Director	Director	Director

Bangalore	T. V Mohandas Pai	Srinath Batni	V Balakrishnan
October 12, 2004	Director and	Director	Company Secretary and
	Chief Financial Officer		Senior Vice President — Finance

Infosys Technologies Limited

Ratio analysis as per Indian GAAP (Non-consolidated)

in Rs. crore


	Quarter ended				Half year ended				Year ended
	September 30,				September 30,				March 31,
	2004		2003		2004		2003		2004
Financial performance
Export revenue / total revenue (%)		98.21		98.35		98.28		98.10		98.61
Domestic revenue / total revenue (%)		1.79		1.65		1.72		1.90		1.39
Software development expenses / total revenue (%)		53.86		51.74		53.84		52.33		52.41
Gross profit / total revenue (%)		46.14		48.26		46.16		47.67		47.59
Selling and marketing expenses / total revenue (%)		6.10		7.09		6.03		7.23		7.04
General and administration expenses / total revenue (%)		6.91		7.82		6.90		7.66		7.29
Selling, general and administration expenses / total revenue (%)		13.01		14.91		12.93		14.89		14.33
Employee costs / total revenue (%)		46.14		49.99		46.53		49.81		49.69
Operating profit / total revenue (%)		33.13		33.35		33.24		32.78		33.26
Depreciation and amortization / total revenue (%)		3.35		5.49		3.35		4.81		4.85
Operating profit after depreciation and Interest / total revenue (%)		29.78		27.86		29.89		27.98		28.41
Other income / total revenue (%)		1.79		3.90		1.53		3.46		2.68
Provision for investments / total revenue (%)		—		0.02		—		0.30		0.20
Profit before tax / total revenue (%)		31.57		31.74		31.41		31.14		30.89
Tax / total revenue (%)		4.65		5.29		4.54		5.05		4.77
Tax / PBT (%)		14.72		16.66		14.45		16.23		15.44
PAT from ordinary activities / total revenue (%)		26.92		26.45		26.87		26.09		26.12
Capital expenditure / total revenue (%) (LTM)		10.78		5.93		10.78		5.93		9.03
PAT from ordinary activities / average net worth (%) (LTM)		40.89		37.85		40.89		37.85		40.68
ROCE (PBIT /Average capital employed) (%) (LTM)		47.87		45.65		47.87		45.65		48.10
Return on invested capital (%)(LTM)*		99.53		88.20		100.89		88.20		137.46
Capital output ratio (LTM)		1.54		1.45		1.54		1.45		1.56
Invested capital output ratio (LTM)		3.95		3.57		3.95		3.57		5.58
Balance sheet
Debt-equity ratio		—		—		—		—		—
Debtors turnover (Days) (LTM)		57		50		57		50		48
Current ratio*		3.34		3.86		3.34		3.86		2.14
Cash and cash equivalents / total assets (%)*		58.45		64.15		58.45		64.15		85.11
Cash and cash equivalents / total revenue (%) (LTM)*		41.72		51.00		41.72		51.00		58.16
Depreciation / average gross block (%) (LTM)		14.28		16.36		14.28		16.36		16.24
Technology investment / total revenue (%) (LTM)		3.51		3.53		3.51		3.53		3.23
Year on year growth (%)
Export revenue		49		30		43		35		32
Total revenue		49		29		43		35		31
Operating profit		48		17		45		21		25
Net profit		52		33		47		31		30
EPS		50		33		46		30		30
Per share data (period end)
Basic earnings per share from ordinary activities (Rs.)		16.99		11.33		31.76		21.82		46.85
Basic cash earnings per share from ordinary activities (Rs.)		19.11		13.68		35.72		25.84		55.54
Book value (Rs.)		152.00		125.87		152.00		125.87		122.05
Price / earning (LTM)		29.94		27.43		29.94		27.43		26.35
Price / cash earnings (LTM)		25.99		23.03		25.99		23.03		22.23
Price / book value		11.15		8.99		11.15		8.99		10.12
PE / EPS growth		0.60		0.84		0.66		2.03		0.89
Dividend per share (Rs.)		5.00		3.63		5.00		3.63		7.38
One time special dividend per share (Rs.)		—		—		—		—		25

* Investments in Liquid funds have been considered as Cash & Cash equivalents for the purpose of above ratio analysis

** Denotes growth compared with figures of the corresponding period in the previous year

LTM : Last Twelve Months

Infosys Technologies Limited

At a glance — US GAAP

(Dollars in millions except share and per share data)


	Three months ended						Six months ended						Year ended
	September 30,						September 30,						March 31,
	2003			2004			2003			2004			2004
For the period
Revenues	$	251		$	379		$	484		$	713		$	1,063
Operating income	$	68		$	109		$	131		$	205		$	293
Operating income / revenues (%)		27.1	%		28.8	%		27.1	%		28.8	%		27.6	%
Net income	$	65		$	97		$	123		$	180		$	270
Net income / revenues (%)		25.9	%		25.6	%		25.4	%		25.2	%		25.4	%
Basic earnings per equity share ($)	$	0.25		$	0.36		$	0.47		$	0.68		$	1.03
Cash dividend per equity share ($)		—			—		$	0.08		$	0.62		$	0.16
Capital expenditure	$	16		$	38		$	29		$	72		$	93
At the end of the period
Total assets	$	854		$	1,108		$	854		$	1,108		$	1,132
Property plant and equipment — net	$	173		$	263		$	173		$	263		$	228
Cash and cash equivalents	$	376		$	335		$	376		$	335		$	445
Investment in liquid mutual fund units	$	98		$	210		$	98		$	210		$	218
Working capital	$	567		$	646		$	567		$	646		$	721
Stockholders’ equity	$	754		$	921		$	754		$	921		$	953
Common stock	$	9		$	31		$	9		$	31		$	9
Market capitalization	$	6,555		$	9,892		$	6,555		$	9,892		$	7,583

Note:

(1) Balance sheet data and per share data for all periods presented have been adjusted to reflect the effect of issue of bonus shares in the ratio of 3 bonus shares for every share held

(2) Market capitalization is calculated by considering the share price at National Stock Exchange on the shares outstanding at the period / year end.

(BAR CHART)

Infosys Technologies Limited

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934

For the quarter ended September 30, 2004

Commission File Number: 333-72195

INFOSYS TECHNOLOGIES LIMITED
(Exact name of Registrant as specified in its charter)

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)

Indicate by check mark registrant files or will file annual reports under cover Form 20-F or Form 40-E

Form 20-F þ Form 40-F o

Yes o No þ

If “Yes” is marked, indicate below the file number assigned to registrant in connection with Rule 12g 3-2(b).

Not Applicable

Currency of Presentation and Certain Defined Terms

In this Quarterly Report, 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. References 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 presented in Indian rupees and translated into U.S. dollars and are prepared in accordance with United States Generally Accepted Accounting Principles, or U.S. GAAP. 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 Quarterly Report are the property of their respective owners.

Except as otherwise stated in this Quarterly Report, all translations from Indian Rupees to U.S. dollars are based on the noon buying rate in the City of New York on September 30, 2004, for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York which was Rs. 45.91 per $ 1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. 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 Quarterly Report.

Forward-looking Statements May Prove Inaccurate

In addition to historical information, this Quarterly 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 differences include but are not limited to, those discussed in the section entitled “Managements 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 Quarterly Report and in the Company’s periodic reports and other documents filed with the Securities and Exchange Commission (“SEC”) from time to time.

Infosys Technologies Limited

TABLE OF CONTENTS


Part I — Financial Information
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Part I - Financial Information

Item 1. Financial Statements
INFOSYS TECHNOLOGIES LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Dollars in millions)


	AS OF
	March 31, 2004⁽¹⁾		September 30, 2004
			(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	445	$	335
Investment in liquid mutual fund units		218		210
Trade accounts receivable, net of allowances		150		202
Deferred tax assets		—		2
Prepaid expenses and other current assets		36		30
Unbilled revenue		24		29

Total current assets		873		808
Property, plant and equipment, net		228		263
Goodwill		8		7
Intangible assets, net		2		1
Deferred tax assets		7		7
Other assets		14		22

Total Assets	$	1,132	$	1,108

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	1	$	2
Client deposits		15		9
Other accrued liabilities		99		101
Income taxes payable		22		28
Unearned revenue		15		22

Total current liabilities		152		162
Non-current liabilities
Preferred stock of subsidiary		22		20
Other non-current liabilities		5		5
Stockholders’ Equity
Common stock, $0.16 par value
300,000,000 equity shares authorized as of September 30, 2004
Issued and outstanding - 266,564,224 and 267,860,670 equity shares as of March 31, 2004 and September 30, 2004 respectively (See Note 2.11)		9		31
Additional paid-in capital		157		188
Accumulated other comprehensive income		39		(15	)
Retained earnings		748		717

Total stockholders’ equity		953		921

Total Liabilities and Stockholders’ Equity	$	1,132	$	1,108

(1) March 31, 2004 balances were obtained from audited financial statements

See accompanying notes to the unaudited consolidated financial statements

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions except share and per share data)


	Three months ended September 30,				Six months ended September 30,
	2003		2004		2003		2004
Revenues	$	251	$	379	$	484	$	713
Cost of revenues		142		214		275		401

Gross profit		109		165		209		312

Operating Expenses:
Selling and marketing expenses		18		26		35		50
General and administrative expenses		20		30		38		56
Amortization of stock compensation expense		—		—		1		—
Amortization of intangible assets		3		—		4		1

Total operating expenses		41		56		78		107

Operating income		68		109		131		205
Other income		10		6		16		6

Income before income taxes		78		115		147		211
Provision for income taxes		13		18		24		31

Net income	$	65	$	97	$	123	$	180

Earnings per equity share
Basic	$	0.25	$	0.36	$	0.47	$	0.68
Diluted	$	0.24	$	0.35	$	0.46	$	0.66
Weighted average equity shares used in computing earnings per equity share (See Note 2.11)
Basic		262,364,112		266,262,865		262,349,472		265,781,580
Diluted		265,650,900		272,121,905		264,979,408		271,186,823

See accompanying notes to the unaudited consolidated financial statements

Infosys Technologies Limited

INFOSYS TECHNOLOGIES LIMITED AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in millions)


	Common stock
	Shares		Par value							Accumulated other									Total
	(See Note 2. 11)				Additional paid-in capital		Comprehensive income			Comprehensive income			Deferred stock compensation			Retained earnings			stockholders’ equity
Balance as of March 31, 2003		264,972,312	$	9	$	127				$	(32	)	$	(3	)	$	525		$	626

Common stock issued		103,576		—		1					—			—			—			1
Cash dividends		—		—		—					—			—			(23	)		(23	)
Amortization of compensation related to stock option grants		—		—		—					—			2			—			2
Comprehensive income
Net income		—		—		—	$	123			—			—			123			123
Other comprehensive income
Translation adjustment		—		—		—		25			25			—			—			25

Comprehensive income							$	148

Balance as of September 30, 2003		265,075,888	$	9	$	128				$	(7	)	$	(1	)	$	625		$	754

Balance as of March 31, 2004		266,564,224	$	9	$	157				$	39			—		$	748		$	953

Common stock issued		1,296,446		—		27					—			—			—			27
Cash dividends		—		—		—					—			—			(189	)		(189	)
Income tax benefit arising on exercise of stock options		—		—		4					—			—			—			4
Stock split effected in the form of a stock dividend (See Note 2.11)				22		—					—			—			(22	)		—
Comprehensive income
Net income		—		—		—	$	180			—			—			180			180
Other comprehensive income
Translation adjustment		—		—		—		(54	)		(54	)		—			—			(54	)

Comprehensive income							$	126

Balance as of September 30, 2004		267,860,670	$	31	$	188				$	(15	)		—		$	717		$	921

See accompanying notes to the unaudited consolidated financial statements

Infosys Technologies Limited

INFOSYS TECHNOLOGIES LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)


	Six months ended September 30,
	2003			2004
OPERATING ACTIVITIES:
Net income	$	123		$	180
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		20			25
Amortization of intangible assets		4			1
Provision for investments		1			—
Deferred taxes		1			(2	)
Amortization of stock compensation expense		2			—
Changes in assets and liabilities
Trade accounts receivable		(16	)		(60	)
Prepaid expenses and other current assets		(6	)		5
Unbilled revenue		2			(7	)
Income taxes		10			9
Accounts payable		—			1
Client deposits		—			(6	)
Unearned revenue		2			8
Other accrued liabilities		12			7

Net cash provided by operating activities		155			161

Investing Activities:
Expenditure on property, plant and equipment		(29	)		(72	)
Loans to employees		2			1
Non-current deposits with corporations		—			(8	)
Investment in liquid mutual fund units		(98	)		(24	)
Redemption of liquid mutual fund units		—			20

Net cash used in investing activities		(125	)		(83	)

Financing Activities:
Proceeds from issuance of common stock		1			27
Payment of dividends		(22	)		(189	)

Net cash used in financing activities		(21	)		(162	)

Effect of exchange rate changes on cash		13			(26	)
Net increase / (decrease) in cash and cash equivalents during the period		22			(110	)
Cash and cash equivalents at the beginning of the period		354			445

Cash and cash equivalents at the end of the period	$	376		$	335

Supplementary information:
Cash paid towards taxes	$	13		$	24
Stock split effected in the form of a stock dividend (See Note 2.11)

See accompanying notes to the unaudited consolidated financial statements

Infosys Technologies Limited

INFOSYS TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED 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 subsidiary, Progeon Limited (Progeon), and wholly-owned subsidiaries Infosys Technologies (Australia) Pty. Limited (Infosys Australia), Infosys Technologies (Shanghai) Co. Limited (Infosys China) and Infosys Consulting Inc (Infosys Consulting) 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.

Interim information presented in the consolidated financial statements has been prepared by the management without audit and, in the opinion of management, includes all adjustments of a normal recurring nature that are necessary for the fair presentation of the financial position, results of operations and cash flows for the periods shown, and is in accordance with GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s annual report on Form 20-F for the fiscal year ended March 31, 2004.

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 and 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, Software Revenue Recognition, 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, 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.

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	Vehicles	5 years
Plant and equipment	5 years	Computer equipment	2-5 years
Furniture and fixtures	5 years

Infosys Technologies Limited

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, Infosys China and Infosys Consulting 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 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.

If the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of basic and diluted EPS are adjusted retroactively for all periods presented to reflect that change in capital structure. If such changes occur after the close of the reporting period but before issuance of the financial statements, the per-share computations for that period and any prior-period financial statements presented are based on the new number of shares.

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. The income tax provision for the interim period is based on the best estimate of the effective tax rate expected to be applicable for the full fiscal year.

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 September 30, 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.

Infosys Technologies Limited

1.17 Derivative financial instruments

On April 1, 2001, the company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities as 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.

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 employees 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 of Infosys 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.

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.

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.

(Dollars in millions except share and per share data)


	Six months ended September 30,
	2003			2004
Net income, as reported	$	123		$	180
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		2			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(29	)		(16	)

Pro forma net income	$	96		$	164

Earnings per share: (See Note 2.11)
Basic — as reported	$	0.47		$	0.68
Basic — pro forma	$	0.36		$	0.62
Diluted — as reported	$	0.46		$	0.66
Diluted — pro forma	$	0.36		$	0.61

The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions:


	Six months ended September 30,
	2003			2004
Dividend yield %		0.2	%		—
Expected life	1-5 years				—
Risk free interest rate		5.2%-5.7	%		—
Volatility		60-75	%		—

There have been no grants of stock options by Infosys during the six months ended September 30, 2004.

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.

Infosys Technologies Limited

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:

(Dollars millions)


	As of
	March 31, 2004		September 30, 2004
Cost and fair values
Cash and bank deposits	$	397	$	289
Deposits with corporations		48		46

	$	445	$	335

Cash and cash equivalents include restricted cash balances in the amount of $1 million as of September 30, 2004. The restrictions are primarily on account of unclaimed dividends.

2.2 Trade accounts receivable

Trade accounts receivable as of March 31, 2004 and September 30, 2004, net of allowance for doubtful accounts of $3 million and $4 million respectively, amounted to $150 million and $202 million. The age profile of trade accounts receivable, net of allowances is given below.

In%


	As of
	March 31, 2004		September 30, 2004
Period (in days)
0-30		69.7		76.4
31-60		21.6		11.2
61-90		4.7		7.6
More than 90		4.0		4.8

		100.0		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 million. The purchase consideration includes $3 million retained in escrow for representations and warranties made by the selling shareholders. The acquired company was renamed “Infosys Technologies (Australia) Pty. Limited”. There is further contingent consideration payable to the sellers subject to continued employment and meeting of defined operating and financial performance parameters. The contingent consideration is being 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:

(Dollars in millions)


Component	Purchase price allocated
Plant and equipment	$	1
Net current assets		5
Non current liabilities		(1	)
Customer contracts		2
Goodwill		7

Total purchase price	$	14

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:

(Dollars in millions)


	As of
	March 31, 2004		September 30, 2004
Rent deposits	$	3	$	4
Security deposits with service providers		2		3
Loans to employees		13		13
Prepaid expenses		13		10
Other current assets		5		—

	$	36	$	30

Other current assets represent advance payments to vendors lor me 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.

2.5 Property, plant and equipment – net

Property plant and equipment consist of the following:

(Dollars in millions)


	As of
	March 31, 2004			September 30, 2004
Land	$	21		$	24
Buildings		106			121
Furniture and fixtures		59			64
Computer equipment		107			117
Plant and equipment		65			70
Capital work-in-progress		48			55

		406			451
Accumulated depreciation		(178	)		(188	)

	$	228		$	263

Infosys Technologies Limited

Depreciation expense amounted to $ 19 million and $25 million for the six months ended September 30, 2003 and 2004 respectively. The amount of third party software (for internal use) expensed during the six months ended September 30, 2003 and 2004 was $ 8 million and $11 million 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 $4 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 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 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 and the recorded values of these intangible assets have been completely amortized as of March 31, 2004. Amortization of the cost of these products aggregated to $4 million for the six months ended September 30, 2003.

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 September 30, 2004 was $1 million.

2.7 Other assets

Other assets consist of the following:

(Dollars in millions)


	As of
	March 31, 2004		September 30, 2004
Non current portion of loans to employees	$	14	$	12
Non current deposits with corporations		—		8
Others		—		2

	$	14	$	22

2.8 Related parties

The company provides loans to eligible employees in accordance with policy No loans have been made to employees in connection with equity issues. The employee 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%. Loans aggregating $27 million and $25 million were outstanding as of March 31, 2004 and September 30, 2004.

The required repayments of employee loans outstanding as of September 30, 2004 are as detailed below.

(Dollars in millions)


Year ending September 30,	Repayment
2005	$	13
2006		3
2007		2
2008		3
2009		1
Thereafter		3

	$	25

The estimated fair values of related party receivables amounted to $24 million and $21 million as of March 31, 2004 and September 30, 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.

2.9 Other accrued liabilities

Other accrued liabilities comprise the following:

(Dollars in millions)


	As of
	March 31, 2004		September 30, 2004
Accrued compensation to staff	$	71	$	51
Accrued dividends		—		1
Provision for post sales client support		1		5
Withholding taxes payable		9		13
Provision for expenses		16		22
Retainage		1		3
Marked to market loss accrued on foreign exchange forward contracts		—		4
Others		1		2

	$	99	$	101

2.10 Employee post-retirement benefits

2.10.1 Gratuity

The components of the benefit costs are:

(Dollars in millions)


	Six months ended September 30
	2003			2004
Components of net benefit cost
Service cost		2			3
Interest cost		1			1
Expected return on assets		(1	)		(1	)

Net gratuity cost		2			3

The company had previously disclosed in the financial statements for the year ended March 31, 2004 that the company expects to contribute approximately $ 5 million to the gratuity trusts during fiscal 2005. As of September 30, 2004, $3 million of contributions have been made. Company presently anticipates contributing an additional $3 million to the gratuity trusts in fiscal 2005 for a total of $6 million.

Infosys Technologies Limited

2.10.2 Superannuation

The company contributed $1 million and $2 million to the superannuation plan in the Six months ended September 30, 2003 and 2004, respectively.

2.10.3 Provident fund

The company contributed $3 million and $4 million to the provident fund in the Six months ended September 30, 2003 and 2004, respectively

2.11 Stockholders’equity

Infosys has only one class of capital stock referred to as equity shares. On June 12, 2004, the members of the company approved a 3:1 bonus issue on the equity shares of the company. The bonus issue has the nature of a stock split effected in the form of a stock dividend with 3 additional shares being issued for every share held. Bonus shares have been allotted to shareholders on July 3, 2004. The computations of basic and diluted EPS has been adjusted retroactively for all periods presented to reflect the change in capital structure. 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.

2.11.1 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. Each ADS represent one underlying equity share.

2.11.2 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.

2.11.3 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.

2.11.4 Stock options

There are no voting, dividend or liquidation rights to the holders of options issued under the company’s stock option plans.

2.12 Preferred stock of subsidiary

Infosys holds a majority 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 approximating $5 million. 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 approximating $20 million.

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.

2.13 Other income

Other income consists of the following:

(Dollars in millions)


	Six months ended September 30,
	2003			2004
Interest income	$	9		$	7
Income from mutual fund investments		1			4
Foreign exchange gain / (loss) , net		7			(5	)
Provision for investments		(1	)		—

	$	16		$	6

The provision for investments during the six months ended September 30, 2003 include write-downs to investments in CiDRA Corporation ($1.0 million) and Stratify Inc ($0.4 million). 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

2.14 Research and development

Cost of revenues in the accompanying statements of income include research and development expenses of $3 million and $5 million for the six months ended September 30, 2003 and 2004 respectively. General and administrative expenses in the accompanying statements of income include research and development expenses of $1 million for the six months ended September 30, 2003 and 2004.

2.15 Employees’ Stock Offer Plans (ESOP)

In September 1994, the company established the 1994 plan, which provided for the issue of 24,000,000 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 $2 million for the six months ended September 30, 2003. The deferred stock compensation expense has been completely amortized as of March 31, 2004. The 1994 plan lapsed in fiscal 2000, and consequently no further shares will be issued to employees under this plan.

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 5,880,000 equity shares representing 5,880,000 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.

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 26,400,000 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.

Infosys Technologies Limited

The activity in the warrants / equity shares of the 1994, 1998 and 1999 ESOP in the six months ended September 30, 2003 and 2004 are set out below and are adjusted to reflect the change in the capital structure of the company (See Note 2.11)


	Six months ended September 30,
	2003					2004
				Weighted					Weighted
	Shares arising			average exercise		Shares arising			average exercise
	out of options			price		out of options			price
1994 Option plan:
Outstanding at the beginning of the period		1,272,800			—		1,266,400			—
Granted		—			—		—			—
Forfeited		(2,400	)	$	0.3
Exercised		—			—		(1,266,400	)	$	0.3

Outstanding at the end of the period		1,270,400					—

1998 Option plan:
Outstanding at the beginning of the period		5,006,812					3,871,008
Granted		190,800		$	24		—
Forfeited		(318,872	)	$	36		(85,190	)	$	45
Exercised		(70,320	)	$	9		(83,768	)	$	30

Outstanding at the end of the period		4,808,420					3,702,050

Exercisable at the end of the period		1,450,300					1,858,270
Weighted-average fair value of options granted during the period				$	6					—
1999 Option plan:
Outstanding at the beginning of the period		20,244,684					18,362,120
Granted		744,800		$	16		—
Forfeited		(702,868	)	$	24		(570,545	)	$	25
Exercised		(33,256	)	$	14		(1,212,678	)	$	20

Outstanding at the end of the period		20,253,360					16,578,897

Exercisable at the end of the period		6,783,996					9,811,259
Weighted-average fair value of options granted during the period				$	7					—

The following table summarizes information about stock options outstanding as of September 30, 2004


	Options Outstanding						Options Exercisable
			Weighted average
			remaining				No. of shares
Range of exercise	No. of shares arising		contractual life		Weighted average		arising out of		Weighted average
prices per share ($)	out of options		in years		exercise price		options		exercise price
1998 Plan
9-25		918,044		5.1	$	20		387,440	$	18
26-50		2,281,846		5.0	$	39		1,046,430	$	43
51-75		234,400		4.1	$	60		156,640	$	60
76-100		210,760		3.6	$	81		210,760	$	81
101-165		57,000		3.4	$	130		57,000	$	130

Total		3,702,050						1,858,270

1999 Plan
13-25		10,386,155		5.0	$	19		5,098,477	$	19
26-50		6,171,142		4.1	$	34		4,691,182	$	34
51-70		21,600		3.5	$	55		21,600	$	55

Total		16,578,897						9,811,259

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 two 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.


	Six months ended September 30,
	2003				2004
			Weighted					Weighted
	Shares arising		average exercise		Shares arising			average exercise
	out of options		price		out of options			price
Progeon’s 2002 Plan
Outstanding at the beginning of the period		1,801,175				3,124,625
Granted		663,750	$	1.26		271,400		$	2.29
Forfeited		—				(208,907	)	$	1.54
Exercised
Outstanding at the end of the period
Exercisable at the end of the period		—				(6,325	)	$	0.69

		2,464,925	$	0.84		3,180,793		$	1.08

		—		—		482,895		$	0.76
Weighted-average fair value of options granted during the period		—	$	0.36		—		$	0.89

Options outstanding as of September 30, 2004 have exercise prices in the range of $0.69-$2.29 with a weighted average remaining contractual life of 2.6 years

Infosys Technologies Limited

2.16 Income taxes

The provision for income taxes in the income statement comprises:

(Dollars in millions)


	Six months ended September 30,
	2003		2004
Current taxes
Domestic taxes	$	7	$	8
Foreign taxes		16		25

		23		33

Deferred taxes		1		(1	)
Domestic taxes		—		(1	)

Foreign taxes		1		(2	)

Aggregate taxes	$	24	$	31

All components of the aggregate taxes of $24 million and $31 million for the six months ended September 30, 2003 and 2004 are allocated to the continuing operations of the company. Tax benefits of $4 million earned on exercise of employee stock options have been credited to additional paid in capital during the six months ended September 30, 2004. 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:

(Dollars in millions)


	As of
	March 3 1,2004			September 30, 2004
Deferred tax assets
Property, plant and equipment	$	6		$	7
Allowances on trade accounts receivable		1			1
Investments		3			3
Accrual for compensated absences		1			1
Others		—			1

		11			13
		(2	)		(3	)

Less: Valuation allowance		9			10

Deferred tax liabilities		(1	)		—
Gains on foreign exchange forward contracts		(1	)		(1	)

Intangible assets		(2	)		—

Net deferred tax assets	$	7		$	9

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 September 30, 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. The valuation allowance was $2 million as of March 31, 2004. The valuation allowance increased by $1 million during the six months ended September 30, 2004.

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 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). The Government of India has 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.

2.17 Earnings per share

The following is a reconciliation of the equity shares used in the computation of basic and diluted earnings per equity share:


	Six months ended September 30,
	2003		2004
Basic earnings per equity share — weighted average number of common shares outstanding excluding unallocated shares of ESOP		262,349,472		265,781,580
Effect of dilutive common equivalent shares — stock options outstanding		2,629,936		5,405,243
Diluted earnings per equity share — weighted average number of common shares and common equivalent shares outstanding		264,979,408		271,186,823

Options to purchase 1,072,399 shares under the 1998 Plan and 3,936,042 shares under the 1999 Plan were not considered for calculating diluted earnings per share for the six months ended September 30, 2004 as their effect was anti-dilutive.

The computations of basic and diluted EPS has also been adjusted retroactively for all periods presented to reflect the change in capital structure. See Note 2.11

2.18 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 $149 million and $188 million as of March 31, 2004 and September 30, 2004, respectively. The foreign exchange forward contracts mature between one to 12 months.

2.19 Segment reporting

SEAS 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.

Infosys Technologies Limited

Industry segments for the company are primarily financial services comprising enterprises providing banking, finance and insurance services, manufacturing enterprises, enterprises in the telecommunications (telecom) and retail industries, and others such 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 America comprises the United States of America, Canada and Mexico; Europe includes continental Europe (both the east and the west), Ireland and the United Kingdom; and the Rest of the World comprising 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 assets 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.

2.19.1 Industry segments

(Dollars in millions)


Six months ended September 30, 2003	Financial services		Manufacturing		Telecom		Retail		Others		Total
Revenues	$	185	$	74	$	73	$	56	$	96	$	484
Identifiable operating expenses		78		32		29		21		39		199
Allocated expenses		50		19		20		14		25		128
Segmental operating income	$	57	$	23	$	24	$	21	$	32	$	157
Unallocable expenses												26
Operating income												131
Other income, net												16
Income before income taxes												147
Provision for income taxes												24

Net income											$	123


Six months ended September 30, 2004	Financial services		Manufacturing		Telecom		Retail		Others		Total
Revenues	$	246	$	106	$	130	$	74	$	157	$	713
Identifiable operating expenses		106		46		56		29		65		302
Allocated expenses		67		24		31		17		42		181
Segmental operating income	$	73	$	36	$	43	$	28	$	50		230
Unallocable expenses												25
Operating income												205
Other income, net												6
Income before income taxes												211
Provision for income taxes												31

Net income											$	180

2.19.2 Geographic segments

(Dollars in millions)


Six months ended September 30, 2003	North America		Europe		India		Rest of the World		Total
Revenues	$	360	$	86	$	9	$	29	$	484
Identifiable operating expenses		151		34		3		11		199
Allocated expenses		95		22		2		9		128
Segmental operating income	$	114	$	30	$	4	$	9		157
Unallocable expenses										26
Operating income										131
Other income, net										16
Income before income taxes										147
Provision for income taxes										24

Net income									$	123


Six months ended September 30, 2004	North America		Europe		India		Rest of the World		Total
Revenues	$	464	$	156	$	12	$	81	$	713
Identifiable operating expenses		199		63		3		37		302
Allocated expenses		113		36		3		30		182
Segmental operating income	$	152	$	57	$	6	$	14		229
Unallocable expenses										24
Operating income										205
Other income, net										6
Income before income taxes										211
Provision for income taxes										31

Net income									$	180

2.19.3 Significant clients

No client individually accounted for more than 10% of the revenues in the six months ended September 30, 2003 and 2004.

2.20 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.

In the year ended March 31, 2004, Ms. Jennifer Griffith, a former employee, filed a lawsuit against the company and its former director, Mr. Phaneesh Murthy The lawsuit was served on the company during the quarter ended December 31, 2003. The trial of the lawsuit is scheduled shortly. Based on its present knowledge of facts, management estimates that the lawsuit will not have a material impact on the results of operations or financial position of the company.

2.21 Commitments and contingencies

The company has outstanding performance guarantees for various statutory purposes totaling $2 million and $3 million as of March 31, 2004 and September 30, 2004, respectively. These guarantees are generally provided to governmental agencies.

Infosys Technologies Limited

Item 2. Managements 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 Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking statements, as they speak only as of the date of this Quarterly 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”) is a majority-owned and controlled subsidiary while Infosys Technologies (Australia) Pty. Limited (Infosys Australia), Infosys Technologies (Shanghai) Co. Limited (Infosys China) and Infosys Consulting Inc. (Infosys Consulting) are our wholly-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 million in fiscal 1999 to $1,063 million in fiscal 2004, representing a compound annual growth rate of 54.4%. Our net income grew from $18 million, after a one-time stock compensation expense to $270 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. Our revenues were $713 million for the six months ended September 30, 2004 and repeat business was 97.4% of our revenues for the period. We had approximately 32,900 employees as of September 30, 2004 including 2,700 employees in Progeon.

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-time frame 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-time frame 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-time frame 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 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.

Even though we are witnessing a stable pricing environment at present, we have 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, cost of technical subcontractors, 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. The deferred stock compensation expenses have been completely amortized as of March 31, 2004.

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 were 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 generally do not perform subcontracted work for other IT service providers. For fiscal 2004 approximately 2.3% of our cost of revenues was attributable to cost of technical subcontractors. 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, rental for sales and marketing offices and telecommunications. 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. The deferred stock compensation expenses have been completely amortized as of March 31, 2004.

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 / (expense), net 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.

Infosys Technologies Limited

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 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 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. As a result of these 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 $51 million, $78 million and $56 million for fiscal 2003, 2004 and six months ended September 30, 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

When our tax holiday 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%. The Indian statutory tax rate increased to 36.6% for the six months ended September 30, 2004.

Results for the three months ended September 30, 2004 compared to the three months ended September 30, 2003

Revenues. Our revenues were $379 million in the three months ended September 30, 2004, representing an increase of $128 million, or 51.0 % over revenues of $251 million for the three months ended September 30, 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 manufacturing, telecom, and other industries such as utilities, logistics and services. Our clients in the financial services industry comprised 35.1% and 38.9% of revenues for the three months ended September 30, 2004 and 2003. Clients in the manufacturing sector comprised 14.7% and 15.0% of revenues for the same periods. Our clients in the retail industry comprised 9.6% and 11.7% of revenues for the three months ended September 30, 2004 and 2003, while our clients in the telecom industry comprised 18.5% and 15.4% of revenues for the same periods. Clients in other industries such as utilities, logistics and services contributed 22.1% and 19.0% of revenues for the three months ended September 30, 2004 and 2003. Sales of our software products represented 2.9% of our total revenues for the three months ended September 30, 2004 as compared to 2.8% for the three months ended September 30, 2003. Revenues from services represented 97.1% of total revenues for the three months ended September 30, 2004, as compared to 97.2% for the three months ended September 30, 2003. Revenues from fixed-price, fixed-time frame contracts and from time-and-materials contracts represented 29.7% and 70.3% of total services revenues for the three months ended September 30, 2004, as compared to 35.2% and 64.8% for the three months ended September 30, 2003. Revenues from North America, Europe, India and the rest of the world represented 65.2%, 21.4%, 1.7% and 11.7% of total revenues for the three months ended September 30, 2004 as compared to 73.9%, 18.0%, 1.6% and 6.5% for the three months ended September 30, 2003.

During the three months ended September 30, 2004, the total billed person months for our services other than business process management grew by 50.8% compared to the three months ended September 30, 2003. The onsite and offshore volume growth were 45.4% and 53.4% during the three months ended September 30, 2004 compared to the three months ended September 30, 2003. During the three months ended September 30, 2004 there was a pricing decline of 1.0% in U.S. dollar terms consisting of 0.3% decline in onsite rates and a 0.7% increase in offshore rates compared to the three months ended September 30, 2003.

Cost of revenues. Our cost of revenues was $214 million for the three months ended September 30, 2004, representing an increase of $72 million, or 50.7%, over our cost of revenues of $142 million for the three months ended September 30, 2003. Cost of revenues represented 56.5% and 56.6% of total revenues for the three months ended September 30, 2004 and 2003. The increase in our cost of revenues is mainly attributable to an increase of approximately $55 million in personnel costs due to new hires and compensation review effected in April 2004, $5 million in overseas travel expenses, $4 million in charges of technical sub-contractors, $3 million in depreciation expenses, $3 million in accruals for post sales client support, $1 million in communication expenses, and $1 million in software purchased for own use, Cost of revenue for the three months ended September 30, 2003 also included amortization of deferred stock compensation expense of $1 million. The deferred stock compensation has been completely amortized as of March 31, 2004.

Gross profit As a result of the foregoing, our gross profit was $165 million for the three months ended September 30, 2004, representing an increase of $56 million, or 51.4%, over our gross profit of $109 million for the three months ended September 30, 2003. As a percentage of revenues, gross profit increased to 43.5% for the three months ended September 30, 2004 from 43.4% for the three months ended September 30 2003. The increase is attributable to a 51.0% increase in revenues for the three months ended September 30, 2004 offset by a 50.7% increase in cost of revenues in the same period compared to the three months ended September 30, 2003.

Selling and marketing expenses. We incurred selling and marketing expenses of $26 million in the three months ended September 30, 2004 representing an increase of $8 million, or 44.4%, over the $18 million expended in the three months ended September 30, 2003. As a percentage of total revenues, selling and marketing expenses were 6.9% and 7.2% for the three months ended September 30, 2004 and 2003. The number of our sales and marketing personnel increased to 334 as of September 30, 2004, from 264 as of September 30, 2003. The increase in selling and marketing expenses is mainly attributable to increase of approximately $4 million in personnel costs of selling and marketing employees on account of new hires and compensation review effective April 2004, $2 million in sales commissions, $1 million in overseas travel expenses, and $1 million in professional charges.

General and administrative expenses. Our general and administrative expenses were $30 million for the three months ended September 30, 2004, representing an increase of $10 million, or 50%, over general and administrative expenses of $20 million for the three months ended September 30, 2003. General and administrative expenses were 7.9% and 8.0% of total revenues for the three months ended September 30, 2004 and 2003. The increase in general and administrative expenses was primarily attributable to increase of approximately $2 million for personnel costs on account of new hires and compensation review effective April 2004, increase of $2 million in professional charges and increase of $1 million each in travel, telecommunication charges, office maintenance, power and fuel charges, and rental expenses. The provision for bad and doubtful debts has decreased by $1 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 less than $ 1 million for the three months ended September 30, 2003. The deferred stock compensation has been completely amortized as of March 31, 2004.

Infosys Technologies Limited

Amortization of intangible assets. Amortization of intangible assets was $3 million for the three months ended September 30, 2003. This relates to amortization of certain intellectual property rights we acquired through purchases and licenses of software during fiscal 2003. These intangible assets were completely amortized as of March 31, 2004. The amortization for the three months ended September 30, 2004 represents amortization of the identified customer contract intangibles arising on the allocation of purchase price of Expert Information Services Pty Limited, Australia. The same was less than $1 million for the three months ended September 30, 2004.

Operating income. Our operating income was $109 million for the three months ended September 30, 2004 representing an increase of $41 million, or 60.3%, over our operating income of $68 million for the three months ended September 30, 2003. As a percentage of revenues, operating income increased to 28.8% for the three months ended September 30, 2004 from 27.1% for the three months ended September 30, 2003.

Other income. Other income, consisting mainly of interest and dividend income, foreign exchange gains and provision for investments, was $6 million for the three months ended September 30, 2004 compared to $10 million for the three months ended September 30, 2003. Interest and dividend income was approximately $5 million during the three months ended September 30, 2004 and 2003.

We had foreign currency exchange gains of $5 million in the three months ended September 30, 2003 compared to $1 million in the three months ended September 30, 2004. The exchange rate between the rupee and the U.S. dollar decreased by 1.3% from Rs. 46.40 per U.S. dollar on June 30, 2003 to Rs. 45.78 on September 30, 2003. The exchange rate between the rupee and the U.S. dollar decreased by 0.2% from Rs. 45.99 per U.S. dollar on June 30, 2004 to Rs. 45.91 on September 30, 2004. The average exchange rate between the rupee and the U.S. dollar was Rs. 45.94 and Rs. 46.22 per U.S. dollar for the three months ended September 30, 2003 and 2004 respectively. For the three months ended September 30, 2004 and 2003, U.S. dollar denominated revenues represented and 80.2% and 86.5% of total revenues. 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. As of September 30, 2004 and 2003 we had $188 million and $150 million of forward cover and we have recorded gains of $1 million and $6 million on account of foreign exchange forward contracts for the three months ended September 30, 2004 and 2003. Our accounting policy requires us to mark to market and recognize the effect in earnings immediately of any derivative that is either not designated a hedge, or is so designated but is ineffective as per SFAS 133.

Provision for income taxes. Our provision for income taxes was $18 million for the three months ended September 30, 2004, representing an increase of $5 million, or 38.5% over our provision for income taxes of $13 million for the three months ended September 30, 2003. Our effective tax rate decreased to 15.7% for three months ended September 30, 2004 from 16.7% for the three months ended September 30, 2003.

Net income. Our net income was $97 million for the three months ended September 30, 2004, representing an increase of $32 million, or 49.2%, over our net income of $65 million for the three months ended September 30, 2003. As a percentage of total revenues, net income decreased to 25.6% for three months ended September 30, 2004 from 25.9% for three months ended September 30, 2003.

Results for the six months ended September 30, 2004 compared to the six months ended September 30, 2003

Revenues. Our revenues were $713 million in the six months ended September 30, 2004, representing an increase of $229 million, or 47.3% over revenues of $484 million for the six months ended September 30, 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 manufacturing, telecom, and other industries such as utilities, logistics and services. Our clients in the financial services industry comprised 34.5% and 38.2% of revenues for the six months ended September 30, 2004 and 2003. Clients in the manufacturing sector comprised 14.9% and 15.3% of revenues for the same periods. Our clients in the retail industry comprised 10.4% and 11.6% of revenues for the six months ended September 30, 2004 and 2003, while our clients in the telecom industry comprised 18.2% and 15.1% of revenues for the same periods. Clients in other industries such as utilities, logistics and services contributed 22.0% and 19.8% of revenues for the six months ended September 30, 2004 and 2003. Sales of our software products represented 2.7% of our total revenues for the six months ended September 30, 2004 as compared to 3.2% for the six months ended September 30, 2003. Revenues from services represented 97.3% of total revenues for the six months ended September 30, 2004, as compared to 96.8% for the six months ended September 30, 2003. Revenues from fixed-price, fixed-time frame contracts and from time-and-materials contracts represented 29.7% and 70.3% of total services revenues for the six months ended September 30, 2004, as compared to 35.4% and 64.6% for the six months ended September 30, 2003. Revenues from North America, Europe, India and the rest of the world represented 65.1%, 21.9%, 1.7% and 11.3% of total revenues for the six months ended September 30, 2004 as compared to 74.4%, 17.8%, 1.9% and 5.9% for the six months ended September 30, 2003.

During the six months ended September 30, 2004, the total billed person months for our services other than business process management grew by 47.8% compared to the six months ended September 30, 2003. The onsite and offshore volume growth were 42.3% and 50.6% during the six months ended September 30, 2004 compared to the six months ended September 30, 2003. During the six months ended September 30, 2004 there was a pricing decline of 0.8% in U.S. dollar terms consisting of 0.4% decline in onsite rates and a 1.4% increase in offshore rates compared to the six months ended September 30, 2003.

Cost of revenues. Our cost of revenues was $401 million for the six months ended September 30, 2004, representing an increase of $126 million, or 45.8%, over our cost of revenues of $275 million for the six months ended September 30, 2003. Cost of revenues represented 56.2% and 56.8% of total revenues for the six months ended September 30, 2004 and 2003. The increase in our cost of revenues is mainly attributable to an increase of approximately $103 million in personnel costs due to new hires and compensation review effected in April 2004, $ 10 million in overseas travel expenses, $5 million in depreciation expenses, $4 million in accruals for post sales client support, $3 million in software purchased for own use, and $2 million in communication expenses. Cost of revenue for the six months ended September 30, 2003 also included amortization of deferred stock compensation expense of $1 million. The deferred stock compensation has been completely amortized as of March 31, 2004.

Gross profit. As a result of the foregoing, our gross profit was $312 million for the six months ended September 30, 2004, representing an increase of $103 million, or 49.3%, over our gross profit of $209 million for the six months ended September 30, 2003. As a percentage of revenues, gross profit increased to 43.8% for the six months ended September 30, 2004 from 43.2% for the six months ended September 30 2003. The increase is attributable to a 47.3% increase in revenues for the six months ended September 30, 2004 offset by a 45.8% increase in cost of revenues in the same period compared to the six months ended September 30, 2003.

Selling and marketing expenses. We incurred selling and marketing expenses of $50 million in the six months ended September 30, 2004 representing an increase of $15 million, or 42.9%, over the $35 million expended in the six months ended September 30, 2003. As a percentage of total revenues, selling and marketing expenses were 7.0% and 7.2% for the six months ended September 30, 2004 and 2003. The number of our sales and marketing personnel increased to 334 as of September 30, 2004, from 264 as of September 30, 2003. The increase in selling and marketing expenses is mainly attributable to increase of approximately $7 million in personnel costs of selling and marketing employees on account of new hires and compensation review effective April 2004, $2 million in overseas travel expenses, $1 million in professional charges, $2 million in sales commissions and $1 million each in professional charges, travel expenses and brand building.

General and administrative expenses. Our general and administrative expenses were $56 million for the six months ended September 30, 2004, representing an increase of $18 million, or 47.4%, over general and administrative expenses of $38 million for the six months ended September 30, 2003. General and administrative expenses were 7.9% of total revenues for the six months ended September 30, 2004 and 2003. The increase in general and administrative expenses was primarily attributable to increase of approximately $5 million for personnel costs on account of new hires and compensation review effective April 2004, increase of $3 million in professional charges, increase of $2 million each in travel expenses , telecommunication charges and office maintenance and increase of $1 million each in taxes other than income taxes, power and fuel charges, advertisements and insurance expenses. The provision for bad and doubtful debts has decreased by $1 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.

Amortisation of stock compensation expenses. Amortization of stock compensation expenses was $ 1 million for the six months ended September 30, 2003. The deferred stock compensation has been completely amortized as of March 31, 2004.

Amortisation of intangible assets. Amortization of intangible assets was $4 million for the six months ended September 30, 2003. This relates to amortization of certain intellectual property rights we acquired through purchases and licenses of software during fiscal 2003. These intangible assets were completely amortized as of March 31, 2004. The amortization for the six months ended September 30, 2004 represents amortization of the identified customer contract intangibles arising on the allocation of purchase price of Expert Information Services Pty. Limited, Australia. The same was $1 million for the six months ended September 30, 2004.

Infosys Technologies Limited

Operating income. Our operating income was $205 million for the six months ended September 30, 2004 representing an increase of $74 million, or 56.5%, over our operating income of $131 million for the six months ended September 30, 2003. As a percentage of revenues, operating income increased to 28.8% for the six months ended September 30, 2004 from 27.1% for the six months ended September 30, 2003.

Other income. Other income, consisting mainly of interest and dividend income, foreign exchange gains and provision for investments, was $6 million for the six months ended September 30, 2004 compared to $16 million for the six months ended September 30, 2003. Interest and dividend income was approximately $11 million and $10 million during the six months ended September 30, 2004 and 2003.

We had foreign currency exchange gains of $7 million in the six months ended September 30, 2003 compared to $5 million loss in the six months ended September 30, 2004. The exchange rate between the rupee and the U.S. dollar decreased by 3.7% from Rs 47.53 per U.S. dollar on March 31, 2003 to Rs 45.78 on September 30, 2003. The exchange rate between the rupee and the U.S. dollar increased by 5.8% from Rs 43.40 per U.S. dollar on March 31, 2004 to Rs 45.91 on September 30, 2004. The average exchange rate between the rupee and the U.S. dollar was Rs 46.44 and Rs 45.77 per U.S. dollar for the six months ended September 30, 2003 and 2004 respectively. For the six months ended September 30, 2004 and 2003, U.S. dollar denominated revenues represented 79.0% and 86.9% of total revenues. 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. As of September 30, 2004 and 2003 we had $188 million and $150 million of forward cover and we have recorded a loss of $14 million on account of foreign exchange forward contracts for the six months ended September 30, 2004 while we had recorded gains of $10 million for the six months ended September 30, 2003. Our accounting policy requires us to mark to market and recognize the effect in earnings immediately of any derivative that is either not designated a hedge, or is so designated but is ineffective as per SFAS 133.

Provision for income taxes. Our provision for income taxes was $31 million for the six months ended September 30, 2004, representing an increase of $7 million, or 29.2% over our provision for income taxes of $24 million for the six months ended September 30, 2003. Our effective tax rate decreased to 14.7% for six months ended September 30, 2004 from 16.3% for the six months ended September 30, 2003.

Net income. Our net income was $180 million for the six months ended September 30, 2004, representing an increase of $57 million, or 46.3%, over our net income of $123 million for the six months ended September 30, 2003. As a percentage of total revenues, net income decreased to 25.2% for six months ended September 30, 2004 from 25.4% for six months ended September 30, 2003.

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 September 30, 2004 we had $335 million in cash and cash equivalents, $210 million invested in liquid mutual fund units, $646 million in working capital and no outstanding bank borrowings. We believe that a sustained reduction in IT spending, a longer sales cycle, and a continued economic downturn 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 $161 million and $155 million for the six months ended September 30, 2004 and 2003. Net cash provided by operations consisted primarily of net income adjusted for depreciation and increases in unearned revenue, provision for income taxes and other accrued liabilities, and decrease in prepaid expenses and other current assets offset in part by an increase in accounts receivable and decrease in unbilled revenue and client deposits.

Trade accounts receivable increased by $60 million during the six months ended September 30, 2004. Accounts receivable as a percentage of last 12 months revenues represented 15.6% and 14.4% as of September 30, 2004 and 2003. Prepaid expenses and other current assets decreased by $5 million during the six months ended September 30, 2004, as compared to a $6 million increase during the six months ended September 30, 2003. The decrease during the six months ended September 30, 2004 is primarily due to reversal of marked to market gains on forward foreign exchange contracts as of March 31, 2004. Other accrued liabilities increased by $7 million during the six months ended September 30, 2004, primarily due to $4 million accrual of marked to market loss on forward foreign exchange contracts. Other accrued liabilities increased by $12 million during the six months ended September 30, 2003.

There has been an increase in unbilled revenues of $7 million during the six months ended September 30, 2004. Unbilled revenues represent revenues that are recognized but not yet invoiced. Client deposits decreased by $6 million during the six months ended September 30, 2004. Unearned revenues increased by $8 million during the six months ended September 30, 2004 compared to an increase of $2 million during the six months ended September 30, 2003. Unearned revenue resulted primarily from advance client billings on fixed-price, fixed-time frame contracts for which related efforts have not been expended. Revenues from fixed-price, fixed-time frame contracts and from time-and-materials contracts represented 29.7% and 70.3% of total services revenues for the six months ended September 30, 2004, as compared to 35.4% and 64.6% for the six months ended September 30, 2003.

Net cash used in investing activities was $83 million and $125 million for the six months ended September 30, 2004 and 2003. Net cash used in investing activities, relating to our acquisition of additional property, plant and equipment for the six months ended September 30, 2004 and 2003, was $72 million and $29 million. During the six months ended September 30, 2004 we invested $24 million in liquid mutual funds, $8 million in non-current deposits with corporations, and redeemed mutual fund investments of $20 million. During the six months ended September 30, 2003, we invested $98 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 mid-level managers and senior managers. 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 million and $25 million as of March 31, 2004 and September 30 2004. During fiscal 2004, we discontinued fresh disbursements under several of these loan schemes including housing and car loans.

Net cash used in financing activities for the six months ended September 30, 2004 was $162 million. This primarily comprises $27 million of cash raised by issuance of common stock on exercise of stock options by employees, offset by dividend payments of $189 million. Dividend payments are on account of a final dividend of Rs. 3.75 per equity share for fiscal 2004 and a special one-time dividend of Rs. 25 per equity share paid in June 2004. Net cash used in financing activities for six months ended September 30, 2003 primarily comprised $22 million of dividend payments. As of September 30, 2004, we had contractual commitments for capital expenditure of $57 million. These commitments include approximately $50 million in domestic purchases and $7 million in imports and overseas commitments for hardware, supplies and services to support our operations generally, which we expect to be significantly completed by March 2005.

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 quarterly 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;

	•		amortization of intangible assets; and

•

deferred taxes;

Infosys Technologies Limited

Reconciliation of net income

(Dollars in millions)


	Six months ended September 30,
	2003			2004
Net profit as per Indian GAAP	$	124		$	183
Amortization of stock compensation expense		(2	)		—
Forward contracts — marked to market		1			(4	)
Amortization of intangible assets		—			(1	)
Deferred taxes		—			2
Net income as per U.S. GAAP	$	123		$	180

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 the six months ended September 30, 2004, and 2003 our U.S. dollar denominated revenues represented 79.0% and 86.9% 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 September 30, 2004, we had outstanding forward contracts in the amount of $149 million and $188 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 ARE 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 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-time frame contracts that resulted in a material loss. However, our policy is to establish a provision for losses on a

Infosys Technologies Limited

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 loss. 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 September 30, 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 allowance at September 30, 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 September 30, 2004, we recorded valuation allowances of $2 million and $3 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 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 SEAS 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 SEAS 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

Infosys Technologies Limited

Risk factors

This Quarterly 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 Quarterly 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;