1. We have audited the attached Balance Sheet of Konar Organics Limited
 as on 31st March 2003 and also the profit and loss Account for the year
 ended as on that date annexure thereto. These financial statements are
 the responsibility of the Company's management. Our responsibility is
 to express an opinion on these financial statements based on our audit.
 
 2. We have 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 disclosure 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 manufacturing and other companies (Auditor's
 Report) Order, 1988 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.
 
 Further to our comments in the Annexure referred to above, we report
 that:
 
 I) 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.
 
 II) In our opinion, proper books of accounts as required by law have
 been kept by the company so far as it appears from our examination of
 those books.
 
 III) The Balance Sheet and the profit and loss account dealt with by
 this report are in agreement with the books of accounts.
 
 IV) 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 (3C) of section 211 of the Companies Act, 1956.
 
 V) On the basis of written representations received from the directors,
 as on 31st March, 2003 and taken on record by the Board of Directors,
 we report that none of the directors is disqualified as on 31st March,
 2003 from being appointed as a director in terms of clause (g) of
 sub-section (1) of section 274 of the Companies Act, 1956.
 
 VI) In our opinion and to the best of our information and according to
 the explanations given to us and subject to note No. B-11 regarding non
 disclosure of particulars in respect of amounts due to Small Scale
 Industrial undertakings as per the requirements of the schedule VI of
 the companies act, 1956 and subject to note no B13D regarding Gratuity
 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.
 
 1. In the case of Balance Sheet, of the state of affairs of the company
 as at 31st March, 2003 and
 
 2. In the case of profit and loss account, of the loss for the year
 ended on that date.
 
                                        For VENKAT MALLI AND ASSOCIATES
                                                  Chartered Accountants
 
                                                                   Sd/-
                                                  Y. Mallikarjuna Reddy
                                                                Partner
 
 Place: Hyderabad
 Date: 25-11-2003
 
 ANNEXURE TO THE AUDITORS REPORT TO THE MEMBERS OF KONAR ORGANICS LTD.
 
 Annexure referred to in paragraph 3 of the report of the auditors to
 the members of Konar Organics Limited for the year ended 31st, March
 2003.
 
 i) The Company is in the process of updating the records showing full
 particulars including quantitative details and situation of all the
 fixed assets. As explained and informed to us, the Fixed Assets of the
 Company were physically verified by the management during the financial
 year and no material discrepancies were noticed on physical
 verification.
 
 ii) None of the Fixed Assets have been revalued during the Financial
 Year.
 
 iii) We were informed that the stock of finished goods, stores
 Raw-materials and goods in process have been physically verified by the
 management during the financial year.
 
 In our opinion, the frequency of verification is reasonable.
 
 iv) The procedures of physical verification of Stock followed by the
 management are reasonable and adequate in relation to the size of the
 company and the nature of its business.
 
 v) According to the information and explanation given to us the
 discrepancies in stocks have been properly dealt with in the books of
 accounts.
 
 vi) In our opinion and on the basis of our examination, the valuation
 of stock is fair and proper in accordance with normally accepted
 accounting principles.
 
 vii) The Company has not taken any loans, secured or unsecured from
 companies, firms or other parties listed in the register maintained
 under Section 301 of the Companies Act, 1956.
 
 viii) The rate of interest and other terms and conditions of the loans
 given by the company to the parties listed in the register maintained
 under section 301 of the companies Act 1956.
 
 ix) As per information and explanations given to us, the company has
 not granted any loans or advances in the nature of loans to any party
 except salary advance.
 
 x) In our opinion and according to the information and explanations
 given to us, there are adequate internal control procedures
 commensurate with the size of the company and the nature of its
 business with regard to purchase of stores, Raw materials including
 components, plant and machinery, equipment and other assets and with
 regard to the sale of goods.
 
 xi) According to the information and explanations given to us, there
 are no transactions of Purchase/Sale of goods and materials made in
 pursuance of contracts or agreements entered in the register maintained
 under Section 301 of the Companies Act 1956.
 
 xii) As explained to us, the company has regular procedure for the
 determination of unserviceable or damaged stores, raw materials and
 finished goods. Adequate provision has been made in the accounts for
 the loss arising on the items so determined.
 
 xiii) As the company has not accepted the deposits from the public the
 question of complying with provision of Section 58A of the Companies
 Act, 1956 and the companies (Acceptance of Deposit) 1975 does not
 arise.
 
 xiv) In our opinion and according to the information given to us
 reasonable records have been maintained by the company for the sale and
 disposal of scrap. As per the information given to us Company has no
 by-products.
 
 xv) In our opinion and as explained to us the company is having
 adequate internal audit system commensurate with its size and nature of
 business.
 
 xvi) We have broadly reviewed without making a detailed examination,
 the books of accounts and records maintained by the Company pursuant to
 the rules made by the Central Government for maintenance of cost
 records under section 209(1)(d) of Companies Act, 1956 and are of the
 opinion that prima facie the prescribed accounts and records have been
 maintained.
 
 xvii) There were some delay in payments of P.F.  and E.S.I, to Central
 Government.
 
 xviii) According to the information and explanations given to us there
 are no undisputed amounts payable in respect of Income Tax, Wealth Tax.
 Sales Tax and Excise Duty as at the last day of the financial year
 which are outstanding for a period of more than six months from the
 date they became payable except Income tax of Rs.  3.49.846/-, Excise
 duty Rs. 5,80,240/- and sales tax Rs. 1,68,260/-.
 
 xix) According to the information and explanations given to us, no
 personal expenses of employees or Directors have been charged to
 revenue accounts, other than those payable under contracted obligations
 or in accordance with generally accepted business practice.
 
 xx) The company is a sick industrial company within the meaning of
 clause of (O) of Sub-section (1) of Section (3) of the Sick Industrial
 Companies (Special Provision) Act, 1985. As per information given to us
 so far the reference was made to the board for industrial and financial
 reconstruction.
 
                                        For VENKAT MALLI AND ASSOCIATES
                                                  Chartered Accountants
 
                                                                   Sd/-
                                                  Y. MALLIKARJUNA REDDY
                                                                Partner
 
 Place: Hyderabad
 Date : 25-11-2003