1) We have audited the attached Balance Sheet of Capsugel Healthcare
 Limited (the Company) as at 31 March 2008, the Profit and Loss
 Account and the Cash Flow Statement of the Company for the year ended
 on that date (or financial statements), annexed thereto. These
 financial statements are the responsibility of the Companys
 management. Our responsibility is to express an opinion on these
 financial statements based on our audit.
 
 2) 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.
 
 3) As required by the Companies (Auditors Report) Order, 2003 (the
 Order) issued by the Central Government of India in terms of
 sub-section (4A) of Section 227 of the Companies Act, 1956, we enclose
 in the Annexure, a statement on the matters specified in paragraphs 4
 and 5 of the said Order.
 
 4) Further to our comments in the Annexure referred to above, 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 as required by law 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 referred to in sub-section (3C) of Section 211 of
 the Companies Act, 1956;
 
 (e) on the basis of written representations received from the
 directors, as on 31 March 2008, and taken on record by the Board of
 Directors, we report that none of the directors of the Company is
 disqualified as on 31 March 2008 from being appointed as a director in
 terms of clause (g) of sub-section (1) of Section 274 of the Companies
 Act, 1956;
 
 (f) attention is invited to note 4(i) of schedule 19 to the financial
 statements, wherein the Company has paid managerial remuneration
 amounting to Rs. 655 thousands to its directors in excess of the limit
 prescribed under the provisions of Section 198, Section 269 and Section
 310 read with Schedule XIII to the Companies Act, 1956 without
 obtaining the approval of the Central Government.
 
 5) in our opinion and to the best of our information and according to
 the explanations given to us, subject to matter referred to in para
 4(f), the said accounts give the information required by the Companies
 Act, 1956, in the manner so required and 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 31 March 2008;
 
 (ii) in the case of the Profit and Loss Account, of the loss for the
 year ended on that date; and
 
 (iii) in the case of the Cash Flow Statement, of the cash flows of the
 Company for the year ended on that date.
 
 ANNEXURE TO THE AUDITORS REPORT
 
 (REFERRED TO IN OUR REPORT OF EVEN DATE)
 
 (i) (a) The Company has maintained proper records of fixed assets
 showing full particulars, including quantitative details and situation
 of fixed assets.
 
 (b) As informed to us, the Company has a policy of physically verifying
 all of its fixed assets atleast once in three years. Accordingly, the
 Company has carried out physical verification of its fixed assets
 during the year ended 31 March 2008. In our opinion, this periodicity
 of physical verification is reasonable having regard to the size of the
 Company and the nature of its assets.
 
 (c) According to the information and explanations given to us,
 substantial part of fixed assets was disposed off during the year
 however the same does not affect the going concern assumption.
 
 (ii) (a) The inventories, except stock-in transit, have been physically
 verified by management during the year.  In our opinion, the frequency
 of physical verification is reasonable.
 
 (b) In our opinion and according to the information and explanations
 given to us, the procedures for physical verification of inventories,
 followed by the management are reasonable and adequate in relation to
 the size of the Company and the nature of its business.
 
 (c) On the basis of our examination of the records of inventories, we
 are of the opinion that the Company is maintaining proper records for
 inventories. The discrepancies noticed on verification of finished
 goods, raw material, components and stores and spares between the
 physical stocks and the book records were not material.
 
 (iii) The Company has neither granted nor taken any loans, secured or
 unsecured, to or from companies, firms or other parties covered in the
 register maintained under Section 301 of the Companies Act, 1956.
 
 (iv) In our opinion and according to the information and explanations
 given to us, and having regard to the explanation that significant part
 of fixed assets purchased are for the Companys specialised
 requirements and suitable alternative sources are not available to
 obtain comparable quotations, there is an adequate internal control
 system commensurate with the size of the Company and the nature of its
 business with regard to purchases of inventories, fixed assets and with
 regard to the sale of goods. The Company is not engaged in the business
 of rendering services. Further, on the basis of our examination and
 according to the information and explanations given to us, we have
 neither come across nor have been informed of any instances of major
 weaknesses in the aforesaid internal control system.
 
 (v) (a) In our opinion and according to the information and
 explanations given to us, the particulars of contracts or arrangements
 referred to in section 301 of the Companies Act, 1956 have been entered
 in the register required to be maintained under that section.
 
 (b) In our opinion, and according to the information and explanations
 given to us, the transactions made in pursuance of contracts and
 arrangements referred to in (a) above and exceeding the value of Rs 5
 lakh with any party during the year are have been made at prices which
 are reasonable having regard to the prevailing market prices at the
 relevant time except for purchases of certain items of fixed assets
 which are for the Companys specialised requirements and for which
 suitable alternative sources are not available to obtain comparable
 quotations. However, on the basis of information and explanations
 provided, the same appear reasonable.
 
 (vi) The Company has not accepted any deposits from the public during
 the year.
 
 (vii) In our opinion and according to the information and explanation
 given to us, the Company has an internal audit system commensurate with
 the size and nature of its business.
 
 (viii) According to the information and explanations given to us, the
 Central Government has not prescribed the maintenance of cost records
 by the Company under section 209(l)(d) of the Companies Act, 1956 for
 any of the products manufactured by the Company.
 
 (ix) (a) According to the information and explanations given to us and
 on the basis of our examination of the records of the Company, amounts
 deducted or accrued in the books of account in respect of undisputed
 statutory dues including provident fund, employees state insurance,
 income tax, sales tax, customs duty, excise duty, service tax, cess and
 any other material statutory dues have generally been regularly
 deposited with the appropriate authorities, though there have been
 slight delays in few cases. As explained to us, the Company did not
 have any dues on account of investor education and protection fund and
 wealth tax.
 
 There were no dues on account of cess payable under section 441A of the
 Companies Act, 1956, since the date from which the aforesaid section
 comes into force has not yet been notified by the Central Government.
 
 According to the information and explanations given to us, no
 undisputed amounts payable in respect of provident fund, employees
 state insurance, income tax, sales tax, customs duty, excise duty,
 service tax, cess and any other material statutory dues were in arrears
 as at 31 March 2008 for a period of more than six months from the date
 they became payable.
 
 (b) According to the information and explanations given to us, the
 Company did not have any dues on account of sales tax, customs duty,
 wealth tax, service tax and cess which have not been deposited with the
 appropriate authorities on account of any dispute. According to the
 information and explanations given to us, the following dues of
 Income-tax, Local area development tax and excise duty have not been
 deposited by the Company on account of disputes:
 
 Nature of the statute      Nature of dues                  Amount
                                                       (Rs. Thousands)
 
 Income-tax Act, 1961       Income Tax                       8,018
 Income-tax Act, 1961       Income Tax                       1,007
 Income-tax Act, 1961       Income Tax                         762
 Income-tax Act, 1961       Income Tax                       3,666
 Income-tax Act, 1961       Income Tax                         153
 Income-tax Act, 1961       Income Tax                       2,257
 Haryana Local Area         Writ filed with High             7,297
 Development Tax            Court, Chandigarh
 Act, 2000                  challenging the
                            constitutional validity of
                            the levy of LADT and
                            claiming refund of
                            LADT paid under the
                            Act
 Central Excise Act, 1944   Excise duty                      1,002
 
 Period to which         Forum where
 amount relates*         dispute is pending / Remarks
 
 1998-99                 Income tax appellate tribunal
                         (ITAT)
 1999-00                 Assessing office (AO)
 2000-01                 Income tax appellate tribunal
                         (ITAT)
 2001-02                 Income tax appellate tribunal
                         (ITAT)
 2002-03                 Income tax appellate tribunal
                         (ITAT)
 2004-05                 Commissioner of income tax,
                         Appeals, CIT(A)
 2002-2003               The High Court of Punjab and
   till                  Haryana, Chandigarh (the
 2007-2008               High Court)
 2008-09                 Commissioner of Central Excise
 
 * Assessment year
 
 x) The accumulated losses of the Company are less than fifty percent of
 its net worth at the end of the financial year. However, it has
 incurred cash losses in the financial year and in the immediately
 preceding financial year.
 
 (xi) In our opinion and according to the information and explanations
 given to us, the Company has not defaulted in repayment of dues to its
 bankers or to any financial institutions. The Company did not have any
 outstanding debentures during the year.
 
 (xii) The Company has not granted any loans and advances on the basis
 of security by way of pledge of shares, debentures and other
 securities.
 
 (xiii) In our opinion and according to the information and explanations
 given to us, the Company is not a chit fund or a nidhi or a mutual
 benefit fund or society.
 
 (xiv) According to the information and explanations given to us, the
 Company is not dealing in or trading in shares, securities, debentures
 and other investments.
 
 (xv) According to the information and explanations given to us, the
 Company has not given any guarantee for loans taken by others from
 banks or financial institutions.
 
 (xvi) As explained to us and on the basis of review of utilisation of
 funds pertaining to term loans on overall basis, the term loans taken
 by the Company have been applied for the purposes for which they are
 raised.
 
 (xvii) According to the information and explanations given to us and on
 an overall examination of the balance sheet of the Company, we report
 that the Company has used funds raised on short-term basis for
 long-term investment. The Company has applied short term funds
 amounting to Rs. 5,118 thousand for long-term investment purposes.
 
 (xviii) According to the information and explanations given to us, the
 Company has not made any preferential allotment of shares to parties
 and companies covered in the register maintained under Section 301 of
 the Companies Act, 1956.
 
 (xix) The Company did not have any outstanding debentures during the
 year.
 
 (xx) The Company has not raised any money by public issues during the
 year.
 
 (xxi) According to the information and explanations given to us, no
 fraud on or by the Company has been noticed or reported during the
 course of our audit.
 
                                            For B S R & Associates
                                             Chartered Accountants
 
                                                 N. Sampath Ganesh
 Place : Gurgaon                                           Partner
 Date  : 30 September 2008                  Membership No.: 042554