We have audited the Balance Sheet of ITI Ltd, as on 31st March 2011,
 the Profit and Loss Account and the Cash Flow Statement for the 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 basedonour 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 a reasonable assurance about whether the financial
 statements are free from material misstatement. An audit also includes
 examining, on test basis, evidence supporting the amounts and
 disclosures in financial statements. An audit also includes assessing
 the accounting principles used and significant estimates made by the
 management, as well as evaluating the overall financial presentation.
 We believe that our audit provides a reasonable basis for our opinion.
 
 As required by the Companies (Auditors Report) Order, 2003 and as
 Amended by Companies (Auditors'' Report Order 2004), issuedbythe
 GovernmentofIndiain terms of sub section (4A) of section 227 of the
 Companies Act, 1956, and on the basis of the books and records of the
 company as we considered appropriate and according to information and
 explanations given to us, we enclose in the Annexure a statement on the
 matters specified in paragraphs4and5ofthe said Order.
 
 Further to our comments in the Annexure referred to above, we report
 that:
 
 1.  We have obtained all the information and explanations, which to the
 best our knowledge and belief were necessary for the purposeofour audit
 
 2.  In our opinion, proper books of accounts as required by the law
 have been kept by the company so far as appears from our examination
 ofthose books. Proper returns adequate for the purpose of our audit
 have been received frombranches/units not visitedbyus.
 
 3.  The reports on the accounts of the units audited by other auditors
 have been forwarded to us and have been appropriately dealt with by us
 in preparing our report.
 
 4.  The Balance Sheet, Profit and Loss Account and Cash Flow Statements
 referred to in this report are in agreement with the books of account
 and with the audited returns from the units.
 
 5.  In our opinion, The Balance Sheet, Profit and Loss Account and Cash
 Flow Statements dealt with by this report comply with the accounting
 standard referred toinSection 211(3C)ofthe CompaniesAct 1956.
 
 6.  Disclosure in terms of clause (g) of sub section (1) of section 274
 of the Companies Act, 1956 is not required for Government Companies as
 per Notification No. GSR 829 (E) dated 21st October 2003 issuedbythe
 DepartmentofCompanyAffairs:
 
 7.a. As stated in Accounting Policy No. 3.0 on Valuation of
 Inventories, Manufactured items and items lying as Work in Progress are
 valued at the lower of cost and net realizable value. However in
 Bangalore plant stocks amounting to Rs. 15.74 Crores have been carried
 at cost due to difficulty in ascertaining the Net Realisable Value. We
 are unable to ascertain the quantum of reduction in the value of
 inventory if any and consequent impact on the financial statements.
 
 7.. The Company has not provided for a sum of Rs. 26.85 Crores being
 penalty levied for non- payment of guarantee fee. This has resulted in
 understatement of Loss and Current Liabilities to the extent of Rs.
 26.85 Crores.
 
 7.c. Balances in the accounts of creditors, debtors, claims & expenses
 recoverable, loans & advances, deposits, goods with third parties and
 other payables are subject to reconciliation, confirmation, and
 consequential adjustments (Refer Note no.13).
 
 7.d. Interest & penalty leviable for non-remittance of statutory dues,
 on the sales recognized on provisional basis, delayed / short
 remittance of other statutory dues and non deduction of TDS as per the
 provisions of Income Tax Act 1961 is not ascertainable.
 
 7.e. The Company has not provided for interest on royalty payable to
 C-DOT. (Refer Note no.7)
 
 7.f. The impact of the observation in Para 7b has resulted in
 understatement of loss and understatement of liabilities to the extent
 of Rs.  26.85 Crores.
 
 The impact of the observations in Para 7a and Para''s 7c to 7e if any on
 financial statements is not ascertainable.
 
 Subject to the effect on the financial statements of the matters
 referred to in the preceding paragraphs, in our opinion and to the best
 of our information and according to explanations given to us, the
 financial statements read together with notes thereon and the
 accounting policies give the information requiredbythe CompaniesAct
 1956 in the manner so required and give a true and fair view in
 conformity with accounting principles generally accepted in India:
 
 i) In case of the Balance Sheet of the state of affairs of the
 companyasat31stMarch 2011
 
 ii) In case of the Profit and Loss Account, of the loss for the year
 endedonthat date, and
 
 iii) In case of the Cash Flow Statement, of the Cash Flows for the year
 endedonthat date.
 
 Further to our opinion, Attention is drawn to Note 6 to the Financial
 Statements regarding the payment of wage revision arrears amounting to
 Rs.165 Crores in a phased manner on the improvement of the
 profitability position and also generation and availability of funds,
 for which no provision has been made in view of BIFR declaring the
 companyasSICK.The Company has includedthe amount under Draft
 Rehabilitation Scheme submittedtoBIFR.
 
 ANNEXURE TO AUDITOR''S REPORT
 (Referred to in paragraph 3 of our report of even date)
 
 i) (a) Company has maintained proper records showing particulars 
 including
 quantitative details and situation of fixed assets, but requires
 updation so as to reflect original cost, depreciation to date,
 impairment loss and details of revaluation so as totally with the
 figures shown in the books of account.
 
 (b) According to information and explanation given to us, all fixed
 assets have been physically verified by the management in a phased
 manner except for Rae Bareli, R & D, and Regional offices. No material
 discrepancies in physical verification have been reported to us.
 
 (c) According to information and explanations given to us the company
 has not disposed off substantial part of the fixed assetsso as to
 affect its going concern status.
 
 ii)
 
 (a) According to information and explanations give to us the
 inventories (excluding the stocks with third parties) have been
 physically verifiedbythe managementatreasonable intervals.
 
 (b) According to information and explanation given to us the procedure
 for physical verification inventory followed by the management needs to
 be codified and strengthened in order to be reasonable and
 adequateinrelationtothe sizeofthe company and the natureofits business.
 
 (c) According to information and explanation given to us the company is
 maintaining proper records of inventory. No material discrepancies were
 noticed on physical verification of inventory.
 
 iii)
 
 (a) Company has neither granted nor taken any loans, secured or
 unsecured to / from companies, firms or other parties covered in the
 register maintained under Sec 301 of Companies Act 1956. Accordingly
 clauses (iii) (b) to (iii) (g) paragraph 4 of the order are not
 applicable for the current year.
 
 (b) According to information and explanation given to us company has
 adequate internal control procedures commensurate with the size of the
 company and the nature of its business for the purchase of inventory,
 fixed assets & sale of goods. According to our information, no major
 weaknesses in internal control requiring correction have been reported.
 
 iv)
 
 (a) According to the information and explanation given to us no
 transactions have been entered during the year that need to be entered
 into the register maintained under Section 301 of the Companies Act of
 1956. Hence, our comments regarding the reasonableness of prices having
 regard to the prevailing market price at the relevant time under clause
 4(v) (b) does not arise.
 
 v) According to the information and explanations given to us company
 has not accepted any deposits from the public requiring compliance with
 the directives issued by the RBI and the provisions of Section 58A and
 58 AA of the Companies Act 1956 and the rules framed there under. The
 National Company Law Tribunal has passednoorder.
 
 vi) Company has its own Internal Audit department. However, in our
 opinion the internal audit needs to be
 
 strengthened in terms of personnel, coverage, scope of the work and
 regular reporting in order to be commensurate with size and natureofits
 business.
 
 vii) According toour information the Central Govt. has not prescribed
 any cost records under Sec. 209 (1) (d) of the CompaniesAct 1956.
 
 viii)
 
 (a) Company has been generally regular in depositing undisputed
 statutory dues with the appropriate authorities except for statutory
 dues on sales set on provisional basis, the PF dues of Rae Bareli and
 Naini unit.
 
 (b) According to information and explanation given to us, following
 undisputed statutory dues are in arrears for more than6months and
 remain unremittedon31.3.2011.
 
 Statutory Dues Amount                         (Rs.inLacs)
 
 Provident Fund                                 2109.50
 
 Investor Education andProtection Fund          61.55
 
 SalesTax, Excise Duty& EntryTax                Not ascertained as sales
                                                recognized on provisional
                                                basis
 
 Disputed statutory dues aggregating to Rs. 7767.97 Lacs that have not
 been deposited on account of matters pending beforeAppellateAuthorities
 areasunder
 
                                                           Rs. In Lakhs
 
 Particulars          Financial Year  Forum                      Amount
 
 Sales Tax                 2000-2004  Trade Tax Tribunal, 
                                      Lucknow                    912.15
 
 Sales Tax                 1998-1999
 
                           2000-2008  Additional Commissioner
                                      appeal, Lucknow            537.44
 
 Sales Tax                 2000-2001  Deputy Commissioner,
                                      Rae Bareli                   0.93
 
 Demand of Additional 
 tax against
 Form C/F                  2007-2008  Joint commissioner 
                                      Commercial Tax, Allahabad   50.26
 
 Demand of Additional 
 tax against                          Deputy commissioner
 
 Form C                    2005-2006  Commercial Tax, 
                                      Allahabad                1,013.98
 
 Demand of Additional 
 tax against Form C       2006 -2007  Deputy commissioner
                                      Commercial Tax, Allahabad  464.81
 
 Sales Tax                1986-1989   UP Government              264.89
 
 Sales Tax                1989-1996   Committee Formed by UP
 
                                      Govt. as Directed by 
                                      High Court                  15.32
 
 Sales Tax                1987-1989   High Court, Allahabad,
 
                          2000-2002   Lucknow Bench              158.12
 
 Sales Tax                1987-1989   Additional Court,
 
                          1994-1995  (Appeals) Sales Tax,
 
                          2008-2010   Gonda                      160.06
 
 ED demanded on R&D 
 prototype modules
 for field trail is 
 correct or not?          2003-2004   Commissioner of Central
                                      Excise                     329.00
 
 Nil rate of duty 
 availed on software      2001-2002
 disputed by CE dept.     2002-2003   Commissioner of Central 
                                      Excise                   1,770.64
 
 Dispatches of Software 
 (CNMS & DCME)            2007-2008   Commissioner Appeals         7.39
 
 CENVAT credit availed 
 on import of IFWT and 
 Power Supply Units, 
 denied by the CE dept         2007   Commissioner of Central 
                                      Excise                     376.14
 
 110/115% demanded on 
 Transfer of Purchased 
 Items to Sister Units         2007   Commissioner of Central 
                                      Excise                     108.28
 
 ED demanded on 
 Insurance, Freight and 
 towards Credit notes.    2000-2001   Commissioner of Central
                                      Excise                      71.55
 
 CENVAT credit availed 
 on Scrap and Written 
 off cases was 
 disallowed.              2000-2001   Commissioner of Central
                                      Excise                      16.75
 
 NIL rate of duty 
 availed on Software      2003-2004
 disputed by CE dept    & 2004-2005   Commissioner of Central 
                                      Excise                     637.00
 
 Excise duty              2004-2005   Appellate tribunal          61.55
 
 Excise duty                2000-01   Appellate tribunal         690.08
 
 Excise duty                2001-02   Commissioner Appeals        68.07
 
 Excise duty                2002-03   Commissioner Appeals         5.45
 
 Sales tax demand           2001-02   Deputy Commissioner 
                                      Appeals                     15.03
 
 Sales tax demand           2003-04   Deputy Commissioner 
                                      Appeals                     33.08
 
 Grand Total                                                   7,767.97
 
 ix) The net worthofthe company (with out reckoning the revaluation
 reserve) ason 31.3.2011 has completely eroded.  Further company has
 incurred cash losses of Rs.335.48 Crores & Rs. 434.45 Crores for the
 financial year 2010-11 and 2009-10 respectively. The cash losses for
 both the financial years have been arrived at without reckoning the
 effect of audit qualifications in our reports.
 
 x) The Company has not defaultedinrepaymentofduestoBanks and Financial
 Institutions.
 
 xi) Company has not granted any loans and advances on the basisof
 security byway ofpledge ofshares, debentures and other securities.
 
 xii) According to information given to us the company is not a chit
 fund / Nidhi or mutual benefit trust / society.  Accordingly, the
 provisions of the Para 4 (xiii) (a) to (d) of the Companies (Auditor''s
 Report) order, 2003 do not apply.
 
 xiii) According to the information given to us the company is not
 dealing or trading in shares, securities, debentures and other
 investments. Accordingly, the provisions of the Para 4 (xiv) of the
 Companies (Auditor''s Report) order, 2003, do not apply.
 
 xiv) According to information given to us, the company has not given
 any guarantee for loans taken by others from Banks or Financial
 Institutions.
 
 xv) In our opinion and according to information and explanations given
 to us, the company has prima facie applied the term loans for the
 purpose for which theywere obtained.
 
 xvi) According to the information and explanations given to us and on
 over all examination of the balance sheet of the company,wereport that
 company has during the year applied the loans for the purpose for
 whichitwas raised.
 
 xvii) According to information and explanations given to us, the
 company has not made any preferential allotment of sharestoparties and
 companies coveredinthe register maintained u/s 301ofthe CompaniesAct
 1956.
 
 xviii) The company has not issued any debentures. Hence, the question
 of creating security in respect of debentures issued does notarise.
 
 xix) According to information and explanations given to us, the company
 has not raised any money from public issues during the year.
 
 xx) According to information and explanations given to us no fraud on
 or by the company has been noticed or been reported during the year.
 
                                                     For Karra & Co., 
 
                                                Chartered Accountants 
 
                                                 Firm Reg No: 001749S
 
                                                                 sd/-
 
                                                          R.Sivakumar
 
                                                              Partner
 
                                                       Mem No. 019834
 
 Place: Delhi
 
 Date: 12th August 2011