1.  BACKGROUND
 
 Cambridge Solutions Limited (the Company), incorporated on February
 1, 2002, is a business process outsourcing (BPO) and information
 technology (IT) services provider with operations in India and an
 international presence established through offices in several countries
 including the USA and Australia.
 
 Pursuant to agreements, arrangements, amalgamations, etc. (with
 requisite approvals from various High Courts in India, wherever
 applicable), the Company has, during earlier years, acquired BPO and IT
 services businesses (including assets and liabilities) of / from
 following entities:
 
 SSI Limited (Information Technology division with operations in India,
 USA and several other countries).
 
 Scandent Group Limited, Mauritius (with operations in USA, Singapore,
 Germany, etc.).
 
 Cambridge Services Holdings LLC, USA (with operations in USA and
 Australia).
 
 Cambridge Integrated Services India Private Limited (with operations in
 India)
 
 Matrix One India Limited (with operations in India)
 
 Pursuant to share purchase agreements between Xchanging (Mauritius)
 Limited (XML), a wholly owned subsidiary of Xchanging Plc, a listed
 company incorporated in UK, and the erstwhile principal shareholders of
 the Company, and consequent open offer to public, XML now owns 75.62%
 (2009:76.04%) of the outstanding share capital of the Company.  Though
 the open offer procedures were completed on April 9, 2009, XML obtained
 the power of operational control of the Company effective January 1,
 2009.
 
    
                                                    (Rs. ’000) 
 
 2.1 Contingent Liabilities:
 
                                          2010           2009
 
 Bank Guarantees [Note (b)]              351,782        369,182
 
 Income tax matters:
 
 Assessment year 2004-05 [Note (c)]        5,820          5,820
 Assessment year 2005-06 [Note (d)]      119,316        119,316
 Assessment year 2006-07 [Notes (e)]      13,741        124,151
 Assessment year 2007-08 [Notes (f)]       7,210            -
 
 Notes:
 
 (a) The above contingent liabilities are possible obligation or present
 obligation that may (but probably will not) require an outflow of
 resources.
 
 (b) Bank guarantee facilities are mainly with Yes Bank for the purpose
 of issuance of standby letter of credit (SBLC) in favour of a
 correspondent bank in India / outside India for extending bank
 guarantee facilities to the Company’s subsidiaries in the USA and
 Australia. In the event of default by the subsidiaries, the Company
 will have to indemnify Yes Bank.
 
 (c) Relates to transfer pricing adjustment for arms length price by
 the assessing officer and other adjustments which is disputed by the
 Company, and the matter is lying under appeal with the Commissioner of
 Income-tax (Appeals), Bangalore. An amount of Rs.2,802 (2009: Rs.2,802)
 has been paid under protest against the demand.
 
 (d) Relates to transfer pricing adjustment for arms length price by
 the assessing officer and other adjustments which is disputed by the
 Company, and the matter is lying under appeal with the Commissioner of
 Income-tax (Appeals), Bangalore. An amount of Rs.30,504 (2009:
 Rs.15,000) has been paid under protest against the demand.
 
 (e) Relates to certain tax adjustments arrived at by the assessing
 officer, which is disputed by the Company. An amount of Rs. 3,800
 (2009: Nil) has been paid under protest against the demand. The Company
 has filed an appeal to the Income Tax Appellate Tribunal in this
 regard.
 
 (f) Relates to transfer pricing adjustment for arms length price by
 the assessing officer which is disputed by the Company, and the matter
 is to filed with the Income Tax Dispute Resolution Panel, Bangalore.
 
 Contingent Liabilities does not include the following:
 
 (i) The Company has export obligations in India under the Software
 Technology Parks of India (STPI) scheme. In accordance with such
 scheme, the Company procures capital goods without payment of duties,
 for which, agreements and bonds are executed by the Company in favour
 of the Government. In case the Company does not fulfil the export
 obligation, it is liable to pay, on demand an amount equal to such
 duties saved including interest and liquidated damages. As at December
 31, 2010, the Company has availed duty benefits amounting to Rs.74,497
 (2009: Rs 72,847). The Company expects to meet its commitment to earn
 requisite revenue in foreign currency as stipulated by the STPI
 regulations.
 
 (ii) The Company has counter guaranteed the term loan facility of Rs.
 3,006,244 (US$ 66 million) (2009: 2,578,950 (US$ 55 million) ) granted
 by Xchanging UK Limited, a fellow subsidiary of the Company, to
 Cambridge Integrated Services Group Inc, USA, a wholly owned subsidiary
 of the Company.
 
 (iii) As at December 31, 2010, Cambridge Integrated Services Group Inc.
 USA and Scandent Group Inc. USA, both wholly owned subsidiary companies
 have negative net assets amounting to Rs 3,998,501(2009 Rs. 4,279,019 )
 and Rs.1,850,570 (2009: Rs. 1,778,176) respectively. While the
 respective subsidiaries are confident of generating funds from their
 operations, the Company intends to support the shortfall, if any.
 
 2.3 Employee benefits
 
 Defined contribution plan:
 
 During the year, the Company has recognised Rs.46,269 (2009 :
 Rs.35,514) in the Profit and Loss Account relating to defined
 contribution plans, which are included in the Contribution to Provident
 and other funds in Schedule 15.
 
 Defined benefit plan:
 
 The Company provides for gratuity, a defined benefit plan (the gratuity
 plan) to its employees in India. The gratuity plan provides a lump sum
 payment to vested employees at retirement or termination of employment
 based on the respective employee’s last drawn salary and years of
 employment with the Company.
 
 The following tables summarise the components of net benefit expense
 recognised in the profit and loss account and amounts recognised in the
 balance sheet for the gratuity plan.
 
 2.4 Segment reporting
 
 The primary segment reporting of the Company is on the basis of
 business segments. The Company is organised into two business segments,
 viz., Information Technology and related services (IT) and Business
 Process Outsourcing (BPO).  Segments have been identified and
 reported considering industry segments of customers, risks and returns,
 organisation structure and internal financial reporting systems.
 
 Secondary segment reporting is performed on the basis of the
 geographical location of customers. The management views the USA,
 Europe (comprising France and UK) and Rest of the World (comprising
 India, Australia and Singapore) as distinct geographical segments.
 
 Corporate activities such as treasury and taxation, which do not
 qualify as operating segments under Accounting Standard 17, ‘Segment
 Reporting’, have been considered as unallocated items.
 
 2.5.  Lease disclosures
 
 (A) Operating leases
 
 (i) In case of assets taken on lease:
 
 The Company has operating leases for its office premises, guest houses
 and certain equipment. The lease arrangements for premises and guest
 houses have been entered up to a maximum of six years from the
 respective dates of inception. Some of these lease arrangements have
 price escalation clauses.
 
 Rent and hire charges for such operating leases recognised in the
 Profit and Loss Account for the year ended December 31, 2010 amounts to
 Rs 130,552 (2009: Rs 117,616).
 
 (B) Finance leases
 
 In case of assets taken on lease:
 
 The Company has entered into an arrangement for lease of a vehicle. The
 lease arrangement is for a period of five years. Under the terms of the
 lease, the Company is required to pay a monthly instalment over the
 lease term.
 
 2.6 Taxation
 
 Current tax
 
 Current tax charge reflects provision for income tax based on the
 taxable income of the Company after considering taxable income as per
 the local tax laws applicable in the respective countries. While
 ascertaining the taxable income for the current year, the brought
 forward losses of the respective entities, if any, have also been
 considered.
 
 In India, the Company operates out of six facilities (two each in
 Chennai and Bangalore, one in Mumbai and one in Shimoga).  The
 Bangalore and Shimoga units are registered with the Software Technology
 Parks of India (STPI) and are eligible to claim tax holiday under
 Section 10A of the Income-tax Act, 1961, of India. In Chennai, the
 Company has two units, one step up during 2002 which is not eligible to
 claim tax holiday benefit and the second facility transferred to the
 Company as a result of demerger of IT division of SSI Limited is
 entitled for tax holiday under Section 10(A) of the Income Tax Act
 1961.
 
 The current tax charge for the Company includes minimum alternate tax
 (MAT) determined under Section 115JB of the Income Tax Act, 1961.
 
 MAT Credit Entitlement
 
 Based on assessment of future taxable income and potential sunset of
 tax holiday period, the management is of the opinion that there is
 convincing evidence that the Company will pay normal income tax within
 the specified period during which MAT credit is available for set off.
 Accordingly, MAT Credit Entitlement asset (disclosed under Loans and
 Advances) of Rs.82,489 (2009: Rs 52,446) has been recognised during the
 year by way of a credit to profit and loss account. However, MAT Credit
 Entitlement asset will be reviewed at each balance sheet date for
 write-down, if any.
 
 Deferred Tax
 
 In terms of the provisions of the Accounting Standard - 22 Accounting
 for Taxes on Income no deferred tax asset has been recognised
 considering accumulated business losses and unabsorbed depreciation by
 virtue of there being no virtual certainty supported by convincing
 evidence of future taxable income. However, this position will be
 reassessed at every period end.
 
 Transfer pricing
 
 The Company has significant intra group transactions pertaining to
 revenue and expenses cross charge. The management is in the process of
 updating the transfer pricing study for such transactions entered into
 during the year ended December 31, 2010, and does not anticipate any
 adjustments with regard to the transactions involved.
 
 2.7 The Company has investments amounting to Rs.676,789
 (2009:Rs.676,789) in Scandent Group, Inc., USA (SG Inc), its wholly
 owned subsidiary. Further, the Company has granted loans and advances
 aggregating to Rs1,732,980 (2009:Rs.1,884,901) and also has receivables
 ( net of payables) from the subsidiary amounting to Rs.256,870
 (2009:Rs.218,669). Based on an evaluation in the earlier years, the
 Company has made a provision of Rs.766,420 (2009:Rs.766,420) against
 the loans, advances and receivables. The Company considers SG Inc a
 strategic long term investment and based on a proposed strategic
 restructuring plan and future growth projections, in the opinion of the
 management, the aforesaid investments, loans, advances and receivables
 are considered good and recoverable.
 
 2.8 Owing to change in strategic priorities, the investment in
 Cambridge Integrated Services Group, Inc, USA, a wholly owned
 subsidiary of the Company, which is categorised as a long term
 investment in accordance with AS 13 Accounting for Investments has
 been fully impaired considering the diminution in value of investment
 to be a decline other than temporary. The Company tested the
 investment for impairment using cash flow forecasts based on approved
 budgets and using a discounted cash flow method.
 
 2.9 Details of utilisation of proceeds raised through preferential
 issues
 
 During the financial year ended March 31, 2006, the Company had made
 preferential allotment of 1,025,227 equity shares of Rs.10 each at a
 premium of Rs.210 per share and preferential allotment of 5.22%
 Convertible Bonds amounting to Rs.1,336,500 (2009: Rs.1,336,500) to
 Indopark Holdings Limited, a wholly owned subsidiary of Merrill Lynch &
 Co.
 
 2.10 Figures in the accounts and notes are all in rupees thousands
 except for certain figures in the notes on Schedules 1 and 4 and note
 3.7 and 3.14 above.
 
 2.11 Prior year comparatives
 
 Previous years figures have been regrouped/ reclassified wherever
 necessary to conform to the current years presentation