1.  We have audited the attached Balance Sheet of NATCO Pharma Limited
 (the ''Company'') as at 31 March 2011, and also the Profit and Loss
 Account and the Cash Flow Statement for the year ended on that date
 annexed thereto (collectively referred as the ''financial statements'').
 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 conducted our audit in accordance with the 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 (Auditor''s Report) Order, 2003 (the
 ''Order'') (as amended), issued by the Central Government of India in
 terms of sub-section (4A) of Section 227 of the Companies Act, 1956
 (the ''Act''), we enclose in the Annexure a statement on the matters
 specified in paragraphs 4 and 5 of the Order.
 
 4.  As discussed in note 4 to Schedule 23 to the financial statements,
 we report that the Company has not recognized Minimum Alternative Tax
 (MAT) credit entitlement in accordance with the Guidance Note on
 Accounting for Credit Available in Respect of Minimum Alternative Tax
 under the Income-tax Act, 1961. Consequently, the Profit for the year
 ended 31 March 2011 and 2010 is understated by Rs.131,527,145 and
 Rs.160,607,929 respectively and the balance in loans and advances and
 reserves and surplus is understated by Rs.292,135,074 and Rs.160,607,929 as
 at 31 March 2011 and 2010 respectively. This had caused us to qualify
 our audit opinion on the financial statements for the year ended and as
 at 31March 2010.
 
 5. Subject to our comments in paragraph 4 above and 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 financial statements dealt with by this report are in agreement
 with the books of account;
 
 d.  On the basis of written representations received from the
 directors, as on 31 March 2011 and taken on record by the Board of
 Directors, we report that none of the directors is disqualified as on
 31 March 2011 from being appointed as a director in terms of clause (g)
 of sub-section (1) of Section 274 of the Act;
 
 e.  In our opinion and to the best of our information and according to
 the explanations given to us, except for the affect of adjustment for
 the matters discussed in paragraph 4 above, the financial statements
 dealt with by this report comply with the accounting standards referred
 to in sub-section (3C) of Section 211 of the Act and the Rules framed
 there under and give the information required by the Act, in the manner
 so required and give a true and fair view in conformity with the
 accounting principles generally accepted in India, in the case of:
 
 i) the Balance Sheet, of the state of affairs of the Company as at 31
 March 2011;
 
 ii) the Profit and Loss Account, of the profit for the year ended on
 that date; and
 
 iii) the Cash Flow Statement, of the cash flows for the year ended on
 that date.
 
 Annexure to the Auditors'' Report of even date to the members of NATCO
 Pharma Limited, on the financial statements for the year ended 31 March
 2011.
 
 Based on the audit procedures performed for the purpose of reporting a
 true and fair view on the financial statements of the Company and
 taking into consideration the information and explanations given to us
 and the books of account and other records examined by us in the normal
 course of audit, we report that:
 
 i. (a) The Company has maintained proper records showing full
 particulars, including quantitative details and situation of fixed
 assets, except for certain plant and machinery assets where the records
 are maintained for a group of similar assets and not for each
 individual asset.
 
 (b) The Company has a regular programme of physical verification of its
 fixed assets by which fixed assets are verified in a phased manner over
 a period of three years. In our opinion, this periodicity of physical
 verification is reasonable having regard to the size of the Company and
 the nature of its assets. No material discrepancies were noticed on
 such verification.
 
 (c) In our opinion, a substantial part of fixed assets has not been
 disposed off during the year.
 
 ii. (a) The inventory has been physically verified during the year by
 management. In our opinion, the frequency of verification is
 reasonable.
 
 (b) The procedures of physical verification of inventory followed by
 the management are reasonable and adequate in relation to the size of
 the Company and the nature of its business.
 
 (c) The Company is maintaining proper records of inventory and no
 material discrepancies were noticed on physical verification.
 
 iii. (a) The Company has not granted any loan, secured or unsecured to
 companies, firms or other parties covered in the register maintained
 under section 301 of the Act.  Accordingly, the provisions of clauses
 4(iii)(b) to (d) of the Order are not applicable.
 
 (e) 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 Act.  Accordingly, the provisions of clauses
 4(iii)(f) and 4(iii)(g) of the Order are not applicable.
 
 iv. In our opinion, there is an adequate internal control system
 commensurate with the size of the Company and the nature of its
 business for purchase of inventory and for the sale of goods and
 services. In our opinion, the internal control system for purchases of
 fixed assets needs to be further strengthened to be commensurate with
 the size of the Company and the nature of its business. In our opinion,
 there is a continuing failure to correct a major weakness in certain
 aspects of internal controls for purchase of fixed assets.
 
 v. (a) In our opinion, the particulars of all contracts or arrangements
 that need to be entered into the register maintained under Section 301
 of the Act have been so entered.
 
 (b) Owing to the unique and specialized nature of the items involved
 and in the absence of any comparable prices, we are unable to comment
 as to whether the transactions made in pursuance of such contracts or
 arrangements have been made at prevailing market prices at the relevant
 time.
 
 vi. The Company has not accepted any deposits from the public within
 the meaning of Sections 58A and 58AA of the Act and the Companies
 (Acceptance of Deposits) Rules, 1975.  Accordingly, the provisions of
 clause 4(vi) of the Order are not applicable.
 
 vii. The Company has an internal audit system, the scope and coverage
 of which, in our opinion, requires to be further enhanced to be
 commensurate with its size and the nature of its business.
 
 viii. We have broadly reviewed the books of account maintained by the
 Company pursuant to the Rules made by the Central Government under
 section 209 (1)(d) of the Act for the maintenance of cost records and
 are of the opinion that, prima facie, the prescribed accounts and
 records have been made and maintained. However, we have not made a
 detailed examination of the records with a view to determine whether
 they are accurate or complete.
 
 ix. (a) Undisputed statutory dues including provident fund, investor
 education and protection fund, employees'' state insurance, income-tax,
 sales-tax, wealth- tax, service-tax, custom duty, excise duty, cess and
 other material statutory dues, as applicable, have generally been
 regularly deposited with the appropriate authorities, though there have
 slight delays, except in the case of tax deducted at source on payments
 to contractors. No undisputed amounts payable in respect thereof were
 outstanding at the year end for a period of more than six months from
 the date they became payable.
 
 (b) There are no amounts in respect of sales tax, income tax, customs
 duty, wealth tax, service tax, excise duty and cess that have not been
 deposited with the appropriate authorities on account of dispute, other
 than those referred below:
 
 Name of            Nature          Amount            Amount
 the statute        of dues          (Rs.)              deposited
                                                      under
                                                      protest (Rs.)
 
 The Central        Central         8,690,000         2,500,000
 Sales Tax          sales tax
 Act
 
 The Income         Income          6,245,659         –
 Tax Act,            tax
 1961                               9,346,393         9,000,000
 
                                   23,261,351         –
 
                                   25,808,520         15,485,112
 
                                   74,055,385         34,500,000
 
 
 Name of the Statute         Period to which           Forum where
                             the amount                dispute is
                             relates                   pending
 
 The Central Sales Tax Act   Financial year            Honorable
                             1997-98                   High Court of
                                                       Andhra Pradesh
 The Income Tax Act, 1961    Assessment                Income Tax
                             year 2005-06              Appellate
                                                       Tribunal,
                             Assessment                Hyderabad
                             year 2006-07
 
                             Assessment
                             year 2007-08
 
                             Assessment                Commissioner of
                             years 1989-90 to          Income Tax
                             1998-99                   (Appeals),
                                                       Hyderabad
                             Assessment
                             year 2008-09
 
 x. In our opinion, the Company has no accumulated losses at the end of
 the financial year and it has not incurred cash losses in the current
 and the immediately preceding financial year.
 
 xi. The Company has no dues payable to debenture holders during the
 year. In our opinion, the Company has not defaulted in repayment of
 dues to a financial institution or a bank 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. Accordingly, the provisions of clause 4(xii) of the Order
 are not applicable.
 
 xiii. In our opinion, the Company is not a chit fund or a nidhi/ mutual
 benefit fund/ society. Accordingly, the provisions of clause 4(xiii) of
 the Order are not applicable.
 
 xiv. In our opinion, the Company is not dealing in or trading in
 shares, securities, debentures and other investments. Accordingly, the
 provisions of clause 4(xiv) of the Order are not applicable.
 
 xv. The Company has not given any guarantees for loans taken by others
 from banks or financial
 
 institutions. Accordingly, the provisions of clause 4(xv) of the Order
 are not applicable.
 
 xvi. In our opinion, the term loans were applied for the purpose for
 which the loans were obtained, though idle/surplus funds which were not
 required for immediate utilization have been invested in liquid
 investments, payable on demand.
 
 xvii. In our opinion, no funds raised on short-term basis have been
 used for long-term investment.
 
 xviii. The Company has not made any preferential allotment of shares to
 parties or companies covered in the register maintained under Section
 301 of the Act. Accordingly, the provisions of clause 4(xviii) of the
 Order are not applicable.
 
 xix. The Company has neither issued nor had any outstanding debentures
 during the year.
 
 Accordingly, the provisions of clause 4(xix) of the Order are not
 applicable.
 
 xx. The Company has not raised any money by public issues during the
 year. Accordingly, the provisions of clause 4(xx) of the Order are not
 applicable.
 
 xxi. No fraud on or by the Company has been noticed or reported during
 the period covered by our audit.
 
                                             For Walker, Chandiok & Co
 
                                                 Chartered Accountants
 
                                         Firm Registration No: 001076N
 
                                                      per Sanjay Kumar 
 
 Place: Hyderabad                                             Partner
 
 Date: 30 May 2011                              Membership No. 207660