Megasoft Ltd

"DESPITE A CHALLENGING YEAR, WE REMAINED CASH POSITIVE AND CONTINUED TO INVEST IN BUSINESS GROWTH"

Mr GV Kumar, CEO, reviews the Company's performance

Q: Were you pleased with the Company's performance during the year under review?

A: The Company's performance was not what we had budgeted at the start of 2011. The under performance was on account of the following reasons: - We lost a major client during the year under review. The full impact of this attrition will be felt visibly only during the first six months of 2012.

- There was a delay in launching the poster product by six months from the second half of 2011, translating into a notional revenue loss of around Rs 150 million in 2011. The launch will happen in the first half of 2012.

- The currency volatility made it difficult to plan.

However, we must assure our shareholders that we embarked on a number of initiatives to mitigate the impact of client attrition and currency volatility, while making up for lost time through the profitable launch of our poster product and other new business lines.

Q: What were some of the high points of the Company's working in 2011?

A: The biggest point that I must make is that despite facing a decline in revenues, the Company continued to deliver on its core philosophy - continued to innovate, achieved 100 percent SLAs with all clients (execution excellence) and remained cash positive (financial discipline).

Besides, what was assuring is that the core competence that we built over the years in our specialised line of business continued to remain protected in 2011 despite external upheavals. The result was that a number of our old clients continued to work with us; 85 percent of our revenues were derived from long-standing customers during the year under review without any penalties for under-delivery. This is easily our single most assuring factor in 2011.

We didn't just work with long-standing customers; we conducted a customer satisfaction survey that made it possible to rate our performance in an unambiguously numerical way. The result was that our rating increased from 6 to 8, which will translate into higher bookings from each customer and a wider spread of customers.

We extended our positive working experience with LatAm telco from two properties to seven, which is an index of the customer's confidence in our capability.

Even as the external environment continued to remain challenging, we continued to launch new products: a full 10-inch Android-based system in our poster product segment and scalability-cum-3G and 4G compatibility of our Mobile Services Platform.

We entered the 4G segment when 3G investments are yet to complete their pay back. Mobile operators, especially regional and smaller operators, face a number of competitive issues: launching next-generation services like mobile broadband comprising the following issues:

- Supporting and maintaining existing 2G/3G subscribers while embarking on building a 4G network

- Mobilising significant investments for a broadband network overlay - Marketing innovative solutions to attract subscribers

XIUS leverages years of mobile network and infrastructure design, development and operational experience to deliver the following solutions:

- Work closely with clients to assess and build a map for their network evolution goals

- Provide best-in-class solutions and components to enable clients to deliver quality cost-effective services

- Provide appropriate shared managed services infrastructure and solutions, resulting in a combination of prudent capex and opex models

Q: What initiatives did the Company take to protect it from operational volatility in a technology-led business?

A: Over the years, we took a conscious decision. We would create a hybridised business model comprising one-off income from technology intensive product sales on the one hand and recurring income from multi-year managed services on the other. While one part of the business would bring chunky revenues, the other part would generate predictable and sustainable revenue flows. The result was evident in 2011: we generated around 80 percent of our business from recurring multi-year managed services, helping us remain cash positive and report a reasonable surplus in 2011.

The Company strengthened other de-risking initiatives as well: its cash and caution approach resulted in debt draw down of over Rs 109 million during the year. This in turn reduced the Company's

interest outflow from Rs 151 million in 2010 to Rs 98 million in 2011, strengthening interest cover even as we faced a temporary decline in our bottomline from Rs 217 million to Rs 175 million - a rare phenomenon. This only indicates that while there was a decline in the quantum of our earnings, there was an increase in the quality.

As a responsible Company, we continued to clean up our balance sheet: we wrote off (including provisions) Rs 69 million of bad debts that were derived from old infrastructure clients, where the revenues were distributed across about four years. We expect to write off old outstanding debts, if any, completely by 2014.

Q: What is the optimism that you would like to leave with shareholders?

A: The optimism that we would like to leave with our shareholders is the depth of our robust business model: our existing managed services order book possesses long-term contract tenures. Additionally, we possess a good order book position and also expect to start earning attractive revenues from the launch of our poster product. The combination of these three revenue streams at slightly higher margins is likely to more than cover our projected cumulative annual expense for 2012.

Q: You indicated the launch of a poster product. Can you explain its significance?

A: At Megasoft, we have always prided on the launch of products positioned at the cutting-edge of technology that take the consumer experience ahead. Our poster product is precisely this kind of product: it provides a virtual store front (interactive kiosk where persons can use their mobile - not credit card - to download pictures, songs, transfer cash, among others). As in all successful product companies where the product is developed slightly ahead of the market requirement, we feel that this product is future-ready. More and more people will carry less and less cash; more and more people will want to use their mobile

instruments to do everything - talk, text and transact. Megasoft is positioned attractively to capitalise on the third leg: just when the uptick starts - which we expect anytime soon - Megasoft will be positioned to translate the value of its technology intensive product into revenues and profits.

Q: Shareholders find it unusual for an IT company to have debt on its books.

A: We share the sentiment. This is a legacy of the Company's acquisition finance activities a few years back. The Company is committed to an asset-light approach and, in line with this, liquidated its Hyderabad property in 2010 to pay off some of its debt, while we will pay the rest through accruals and emerge as a debt-free company by 2014. This reduction in indebtedness will not only reduce the annual interest outflow but will right size the Company's overall financial structure in relation to its revenue earning capability, resulting in renewed investor interest.

Q: Shareholders are concerned about the low market capitalisation of around Rs 500 million.

A: At Megasoft, we recognise that we are in business to enhance shareholder value. We are convinced that the Company is waiting for the right triggers - a good large account, successful closure of all pipeline deals and launch of the poster product. We are convinced that as soon as these realities transpire, there will be a renewed investor interest in the Company followed by a re-rating that strengthens our market capitalisation.

Q: How is the Company placed within the global landscape of technology-intensive mobile telephony application and services companies?

A: Megasoft enjoys a unique position for some good reasons: our technology competence is among the best in the mobile telephony industry - Near field communication, mobile commerce transaction (mobile advertising platform) and mobile retail services (enterprise mobility and mobile enablement) and wholesale MVNO services. These represent the next big waves in the global telecommunication sector and even if one of them takes off, we will be among the first companies to capitalise on the transition.

Besides, Megasoft represents a prudent and profitable combination of the east and west where our products are developed at a fraction of the cost incurred in the developed markets (the investment in these business segments was funded through accruals); we market our products in the largest market in the world (US); we operate on a global scale and more than 80 percent of our revenues are derived from mature global markets with customers drawn from credible and reputed Tier 1 backgrounds; we are a research-driven technology company having filed around 120 mobile telephony patents (30 granted).

The next obvious question that shareholders will have is how we expect to monetise this intrinsic value. What we need to educate our investors is that the success of a product-driven mobile technology company will always be influenced by spikes in revenues. As a result, investors will need to back capability as distinct from performance. In our case, we recognise that we need to demonstrate some big wins for the markets to start believing in the credibility of our business model, which I am sure, will happen soon enough.

Q: What is the message that you would like to leave with your shareholders?

A: We possess the fundamentals to succeed: presence at the cutting-edge of our business space which will make us relevant for the next number of years, R&D innovation capability that will make it possible for us to launch relevant products to take the consumer experience ahead and an operating structure that makes it possible for us to stay profitable and liquid even in the most challenging market environments.

G P Srinath

DIRECTORS' REPORT

Dear members

Your directors are pleased to present their report on the business and operations of your company for the financial year ended 31 December 2011.

Financial Results

Overview

During the financial year ended 31 December 2011, even as your company recorded consolidated revenues of Rs. 1,504 million compared to Rs. 1,679 million in the previous financial year, net profit was Rs. 175 million compared to a net loss of Rs. 217 million in 2010.

Dividend

Your Directors do not consider it prudent to recommend any dividend on equity shares for the year under review.

Outlook

A detailed discussion on the performance of the Company, industry structure, threats, opportunities, risks, future outlook and strategy is given separately in the Management Discussion and Analysis (MDA) section, which forms a part of this annual report.

Subsidiary Companies

Pursuant to the provisions of Section 212(8) of the Companies Act, 1956, the Ministry of Corporate Affairs vide its circular dated 8 February 2011 has granted general exemption from attaching the Balance Sheet, Profit and Loss Account and other documents of the subsidiary companies with the Balance Sheet of the Company, provided such companies publish the audited consolidated financial statements in the annual report. Accordingly, a statement containing brief financial details of the Company's subsidiaries for the financial year ended 31 December 2011 is included in the annual report. The annual accounts of these subsidiaries and the related detailed information will be made available to any member of the Company/its subsidiaries seeking such information at any point of time and are also available for inspection by any member of the Company/its subsidiaries at the registered office of the Company. The annual

accounts of the said subsidiaries will also be available for inspection, as above, at the head offices/registered offices of the respective subsidiary companies. The Company shall furnish a copy of the details of the annual accounts of subsidiaries to any member on demand.

Corporate Governance

In accordance with Clause 49 of the Listing Agreement with the stock exchanges, a separate report on Corporate Governance and Management Discussion & Analysis together with a certificate from the Company's auditors are provided as part of this annual report.

Disclosure as per the companies (Disclosure of particulars in the report of board of directors) Rules, 1988

In terms of Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, your Directors furnish the required details below:

(a) Conservation of Energy

The nature of your Company's operations is not energy intensive. Your Company believes that it forms part of the duty to save energy and also install necessary apparatus which will help conserve energy. Your Company's computer terminals, air conditioning systems, lighting and utilities are modern technology-enabled to facilitate the optimal use of energy and power.

(b) Research and Development (R&D)

Your Company is actively engaged in the research and development of software. The Company's management team performs an end-to-end function by acting as the sounding board and mentors for the R&D team to develop their ideas to facilitate market launch. The teams will develop a unique approach and strengthen our positioning through tools, frameworks and methodologies to provide value-added services to clients.

(c) Technology absorption

Your Company believes that in addition to progressive thought, it is imperative to invest in research and development to ascertain future exposure and prepare for challenges. In its endeavour to obtain and deliver the best, your Company entered into alliances with major global players in the industry to harness and tap the latest and the best of technology in its field, upgrade itself in line with latest technology globally and deploy/absorb technology wherever feasible, relevant and appropriate. Also, your Company also attached tremendous importance to indigenous development and technology upgradation through its extensive Research and Development operations. The benefits derived from these processes are phenomenal and improved the quality of your Company's world-class services.

(d) Foreign Exchange Earnings and Outgo

Foreign Exchange Earnings and Outgo: The details of foreign exchange earnings and outgo are given in note no. 10 & 9 of Schedule 17 -Notes to Accounts, forming part of the Balance Sheet and Profit & Loss Account of your Company.

Particulars of Employees

There are no employees falling within the provisions of Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, as amended.

Fixed Deposits

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

Directors

Mr R Janardhana and Mr Anish Mathew, directors of the Company, retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for reappointment.

Mr SV Ramkumar was co-opted as an additional director at the meeting of the board of directors held on 28 February 2012. His appointment requires the approval of the members at the ensuing Annual General Meeting. Notices have been received from members pursuant to Section 257 of the Companies Act, 1956 along with the prescribed fees. Mr SV Ramkumar, Chartered Accountant, with over 17 years of experience in consulting and industry, started his career in audit and consulting and has experience in agri commodities and software industries. In the recent past, he was responsible for M&A and capital raising including infra, construction, engineering and real estate. Currently, he is associated with Peepul Capital Advisors.

Human Resources Development

Your Company recognises the importance of human resources as it represents the backbone of corporate success. Your Company believes in nurturing human resources. Its focus is to enhance employee professional value and create a win-win for both. Your Company reinforced the best HR practices to recruit and retain talented employees. Your Company is confident of reaping the best from its talent pool and sharing benefits with employees on an equitable basis.

Auditors

The joint statutory auditors, M/s Srikanth & Shanthi Associates and M/s TN Rajendran & Co., Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office, if re-appointed.

Directors' responsibility statement

As required under Section 217(2AA) of the Companies Act, 1956, it is hereby stated that:

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

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

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

(iv) the Directors had prepared the annual accounts on a "going concern basis".

Employee Stock Option Schemes

As required by Clause 12 of the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, the particulars of the stock option schemes are furnished as annexure to this report.

Acknowledgements

Your Directors place on record their appreciation of the customers, bankers, Government of India and of other countries, Registrar and Share Transfer Agent, vendors and technology partners for the support extended. Your Directors also wish to place on record their appreciation of the contribution made by employees at all levels without whom the growth of the Company is unattainable. Your Directors seek and look forward to the same support during future years of growth.

Employees Stock Option Plans

Note: Disclosures under clause (j), (m) and (n) are not applicable as the company has not granted any options during the year.