We have audited the attached Balance Sheet of Messrs KAYTEE COTSYNTH
 INDUSTRIES LIMITED, as at 31st March, 2007 and also the annexed Profit
 & Loss Account of the Company for the year ended on that date annexed
 thereto and Cash Flow Statement for the period ended on that date.
 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.
 
 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 from 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 statements
 presentation. We believe that our audit provides a reasonable basis for
 our opinion.
 
 We report that:
 
 1.  We have obtained all the information and explanations, which to the
 best of our knowledge and belief, were necessary for the purpose of our
 audit.
 
 2.  In our opinion, proper Books of Account as required by the law have
 been kept by the Company so far as it appears from our examination of
 those books, except for non provision for Interest, Salaries, Wages &
 Provident Fund & Electricity Charges as stated in notes 5
 
 (a), (b) & (c) and (d) & (e) respectively and non provision of
 Gratuity, Bonus & Leave encashment as stated in notes 8 A, B & C of
 Schedule 17 respectively.
 
 3.  The Balance Sheet and Profit & Loss Account dealt with by the
 Report are in agreementwith the books of account.
 
 4.  Subject to note nos. 5 (a), (b) & (c), and (d) & (e) regarding non
 provision of Interest, Salanes, Wages & Provident Fund & Electricity
 Charges, note no. 8 A, B & C regarding non provision of Gratuity, Bonus
 and Leave encashment and note no. 12 regarding non provision for
 Impairment of Assets under Schedule 17, in our opinion the Balance
 Sheet and Profit and Loss Account dealt, with by this report comply,
 with the Accounting Standards referred to in sub section (3 C) of
 Section 211 of the Companies Act, 1956, to the extent applicable.
 
 5.  On the basis of the written representations received from the
 Directors as on 31st March, 2007 and taken on record by the Board of
 Directors and further certified by the Company, we report that none of
 the Directors are prima fa.de disqualified from being appointed as a
 Director in terms of clause (g) of sub section (1) of Section 274 of
 the Companies Act, 1956.
 
 6.  As referred to in Note no. 9 of Schedule 17, despite the Companys
 net worth being fully eroded due to losses (without considering our
 remarks in paragraph 4 above with corresponding effects in the loss for
 the year and period end, net assets to the extent indicated in para 7
 below) despite abatement of references by BIFR and despite significant
 overdue loans etc., the accounts have been prepared on going concern
 aasis as followed hitherto. In view of possession of assets taken and
 disposal of movable assets of the Company by Secured Lenders as stated
 in note no. 3, in the absence of concrete developments, we are unable
 to comment as to the Companys ability to continue as going concern.
 
 7.  In our opinion and to the best of our information and according to
 the explanations given to us, the said accounts read with Note 5 (a),
 (b) & (c), and (d) & (e) regarding non provision of Interest, Salaries,
 Wages & Provident Fund and Electricity Charges, Note 5 (b) regarding
 non creation of Debenture Redemption Reserve, Note 8 A, B & C regarding
 non provision of Gratuity, Bonus & Leave encashment and Note 9
 regarding preparation of accounts on the fundamental accounting
 assumption of going concern in Schedule 17 and other notes thereon,
 give the information required by the Companies Act, 1956, in the manner
 so required and give a true and fair view:
 
 i) In the case of the Balance Sheet of the state of affairs of the
 Company as at 31st March, 2007
 
 ii) In the case of the Profit & Loss Account of the Profit for the
 year ended on that date.
 
 iii) In the case of Cash Flow Statement of the cash flows of the
 Company for the yearendedon that date 
 
 8.  As required by the Companies (Auditors Report) Order, 2003 issued
 by the 1 Central Government in terms of Section 227 (4A) of the
 Companies Act, 1956 arid on the basis of such checks of books and
 records of the Company as were considered appropriate and on the basis
 of information and explanations given to us during the course of our
 audit, we further state on the matters specified in Paragraphs 4 of the
 said order to the extent applicable to the Company as follows:
 
 i.  a.  The Company had generally maintained proper records showing
 full particulars including quantitative details and situation of fixed
 assets. However these records which needed updating and being in
 possession of Secured Lenders could not be verified by us.
 
 b.  As stated above, in view of possession of assets lying with Secured
 Lenders and disposal of movable part thereof it was not possible for
 the management to physically verify the same. In view of the foregoing,
 the question of commenting on any material discrepancies noticed by the
 management does not arise.
 
 c.  In view of possession & disposal of securitised assets by Secured
 Lenders the question of disposal of any substantial part of fixed
 assets by the Company during the year so as to affect its going concern
 status does not arise.
 
 ii.  a.  The Stocks of Finished Goods, Stores & Spares and Raw
 Materials lying in the mills premises at Charadva since suspension of
 production activities w.e.f.  1-10-2000 were taken possession of by
 Secured Lenders under Securitisation Act.  The mill was not in
 operation since then and hence the said stocks lying thereat had not
 been verified physically. The stocks of finished goods lying at Mumbai
 sales depot were not physically verified during the year by the
 management. In view of adjusting the book value of these inventories
 against sale consideration of movable assets by the Secured Lenders;
 effects of which have been carried out in accounts of the current year
 as explained in note no. 3, the question of commenting on frequency of
 verification and discrepancy between physical stocks and book records
 does not arise.
 
 b.  In view of the foregoing, the question of commenting on the
 procedure of physical verification of stocks of finished goods to be
 followed by the management and adequacy thereof in relation to the size
 of the Company and nature of its business also does not arise.
 
 c.  In view of the foregoing developments, in the absence of
 maintenance and availability of records of the Company and physical
 custody thereof by the Company, we are unable to comment as to
 propriety & discrepancy, if any, between the physical stocks of
 Finished Goods and the books/records.
 
 iii a. According to the information and explanations furnished to us,
 the Company has not granted any loans to Companies, Firms or Other
 Parties covered in the Register maintained under Section 301 of the
 Companies Act, 1956. In respect of interest free loans granted to the
 employees, we have been explained that the same woulcl be recovered
 from the amounts due to them.
 
 b. As the Company has not granted any loans, the question of commenting
 as to reasonableness of rate of interest arid other terms and
 conditions on which such loans are granted does not arise.
 
 c.  Clause (iii)(c) relating to receipt of principal and interest is
 not applicable.
 
 d.  Clause (iii)(d) relating to recovery of the principal and interest
 is not applicable.
 
 e.  According to the information and explanations given to us, the
 Company has not taken any loans, secured or unsecured, from Companies,
 Firms or Other Parties covered in the register maintained under Section
 301 of the Companies Act, 1956.
 
 f.  Clause (iii)(f) relating to the rate of interest and terms and
 conditions being prima facie prejudicial to the interest of the
 Company, is not applicable.
 
 g.  Clause (iii)(g) relating to repayment of principal and interest is
 not applicable.
 
 iv. In the absence of any purchase of inventory and/or fixed assets and
 sale of goods or services, the question of comment as to adequacy of
 internal control system in respect thereof does not arise.
 
 v.  (a) On the basis of the information and explanations given to us
 and representations made, we are of the opinion that 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) There were no transactions made, in pursuance of such contracts or
 arrangements, as per information and explanations given to us.
 
 vi. According to the information and explanations given to us, no
 deposits from the public within the meaning of Reserve Bank of India
 Directives and Section 58A, 58 AA or any other relevant provisions of
 the Act and the Rules framed thereunder have been accepted by the
 Company.
 
 vii.  No Internal Audit was carried out during the year under audit.
 
 viii.  In view of suspension of manufacturing activities since October
 2000 and absence of personnel, no records have been maintained by the
 Company pursuant to the Order made by the. Central Government for the
 maintenance of Cost Records u/s. 209 (1)
 
 (d) of the Companies Act, J956, in respect of the Companys product
 viz., Cotton Yarn.
 
 ix. (a) Since the Company does not have any employees, the question of
 depositing with appropriate authorities undisputed statutory dues;
 including Provident Fund, Investor Education Protection Fund, & E. S. I
 contribution does not arise. The Company is regular in depositing other
 dues viz. Income-tax, Sales-tax, Wealth-tax, Service-tax, Customs Duty,
 Excise Duty, Cess & other material statutory dues applicable to it.
 
 (b) According to the information and explanations given to us, except
 for unpaid Sales-tax Liability of Rs. 23.54 Lacs & Excise Duty of Rs.
 3.38 Lacs, there were no undisputed amounts payable in respect of
 Income-tax, Sales-tax, Wealth-tax, Service-tax, Custom Duty, Excise
 Duty and Cess which have remained unpaid as on the last date of
 accounting year for a period of more than six months from the date they
 became payable.
 
 (c) According to the information and explanations given to us, the
 Company has not deposited Sales Tax demands amounting to Rs. 2,196.57
 Lacs which were disputed in appeals and were remanded back for fresh
 hearing which are pending before D.C.  Appeals.
 
 x. The accumulated losses at the end of the financial year are more
 than fifty percent of its net worth. The Company has not incurred cash
 losses in the financial year under audit however it has incurred cash
 losses in the immediately preceding financial year.
 
 xi. The Company had defaulted in repayment of instalments due to the
 banks and financial institutions. Barring realisation of a sum of Rs.
 9.50 Crores by a Secured Lender by sale of movable part of assets
 acquired under Securitisation Act, the balance still remains unpaid.
 
 xii. As explained to us, 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. As the Company is not a chit fund,\ nidhi, mutual benefit fund or
 society, the provisions of clause 4 (xiii) of the Companies (Auditors
 Report) Order, 2003 are not applicable to the Company.
 
 xiv. As the Company is not dealing or trading in shares, securities,
 debentures & other investments, provisions of clause 4 (xiv) of the
 Companies (Auditors Report) Order, 2004 are not applicable to the
 Company.
 
 xv. According to information & explanations given to us and
 representations made by management, the Company has not given any
 guarantee for loans taken by others from banks or financial
 institutions, the terms & conditions whereof are prejudicial to the
 interest of the Company.
 
 xvi.  Based on the examination of the books of account and related
 records and in the absence of any fresh borrowings or utilisation
 thereof during the year, the Company had, prima facie, applied the term
 loans for the purpose for which they were obtained.
 
 xvn.  According to information & explanations given to us and on an
 overall examination of the financial statements of the Company and
 after placing reliance on the reasonable assumptions made by the
 Company for classification of the long term and short term usage of the
 funds, we are of the opinion that, prima facie, the Company has not
 applied short term borrowings for long term use, except cross usage, if
 any, resulting or caused due to transfer of excess drawings in cash
 credit accounts to term loan account on restructuring of credit
 facilities.
 
 xviii.  The Company has not made any Preferential allotment of shares
 during the year.
 
 xix.  The Company has not issued any Debentures during the year.
 
 xx.  The Company has not raised any money by way of Public Issue during
 the year.
 
 xxi. According to the information & explanations given to us and to the
 best of our knowledge and belief, no material fraud on or by the
 Company has been noticed or reported by the Company during the year.
 
                                                  For B. S. MEHTA & CO.
                                                  Chartered Accountants
 
                                                         (D.I. SHAH)
                                                           Partner
                                                       M. No. : 037326
 Place : Mumbai
 Dated : 5th September, 2007