Infosys Technologies (INFY)

Liquidity and Capital Resources

Our growth has been financed largely by cash generated from operations and, to a lesser extent, from the proceeds from the sale of equity. In 1993, we raised approximately $4.4 million in gross aggregate proceeds from our initial public offering of equity shares in India. In 1994, we raised an additional $7.7 million through private placements of our equity shares with foreign institutional investors, mutual funds, Indian domestic financial institutions and corporations. On March 11, 1999, we raised $70.4 million in gross aggregate proceeds from our initial public offering of ADSs in the United States.

As of December 31, 2004, we had $389 million in cash and cash equivalents, $244 million invested in liquid mutual fund units, $762 million in working capital and no outstanding bank borrowings. We believe that a sustained reduction in IT spending, a longer sales cycle, and a continued economic downturn in any of the various industry segments in which we operate, could result in a decline in our revenue and negatively impact our liquidity and cash resources.

Net cash provided by operating activities was $268 million and $270 million for the nine months ended December 31, 2004 and 2003. Net cash provided by operations consisted primarily of net income adjusted for depreciation and increases in unearned revenue, provision for income taxes and other accrued liabilities, offset in part by an increase in accounts receivable and unbilled revenue and a decrease in client deposits.

Trade accounts receivable increased by $85 million during the nine months ended December 31, 2004. Accounts receivable as a percentage of last 12 months revenues represented 16.7% and 15.7% as of December 31, 2004 and 2003. Other accrued liabilities increased by $13 million during the nine months ended December 31, 2004, compared to an increase of $29 million during the nine months ended December 31, 2003.

There has been an increase in unbilled revenues of $5 million during the nine months ended December 31, 2004. Unbilled revenues represent revenues that are recognized but not yet invoiced. Client deposits decreased by $7 million during the nine months ended December 31, 2004. Unearned revenues increased by $11 million during the nine months ended December 31, 2004 compared to an increase of $5 million during the nine months ended December 31, 2003. Unearned revenue resulted primarily from advance client billings on fixed-price, fixed-timeframe contracts for which related efforts have not been expended. Revenues from fixed-price, fixed-timeframe contracts and from time-and-materials contracts represented 30.3% and 69.7% of total services revenues for the nine months ended December 31, 2004, as compared to 35.0% and 65.0% for the nine months ended December 31, 2003.

Net cash used in investing activities was $164 million and $187 million for the nine months ended December 31, 2004 and 2003. Net cash used in investing activities, relating to our acquisition of additional property, plant and equipment, for the nine months ended December 31, 2004 and 2003, was $130 million and $49 million. During the nine months ended December 31, 2004 we invested $56 million in liquid mutual funds, $11 million in non-current deposits with corporations, and redeemed mutual fund investments of $32 million. During the nine months ended December 31, 2003, we invested $131 million in liquid mutual fund units.

We provide various loans primarily to employees in India who are not executive officers or directors, including car loans, home loans, personal computer loans, telephone loans, medical loans, marriage loans, personal loans, salary advances, education loans and loans for rental deposits. All of these loans, except for the housing and car loans, are available to all of our employees, who are not executive officers or directors, in India. Housing and car loans are available only to mid-level managers and senior managers. The loan program is designed to assist our employees and increase employee satisfaction. These loans are generally collateralized against the assets of the loan and the terms of the loans range from 1 to 100 months. In the aggregate, these loans represented approximately $27 million and $26 million as of March 31, 2004 and December 31, 2004. During fiscal 2004, we discontinued fresh disbursements under several of these loan schemes including housing and car loans.

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Net cash used in financing activities for the nine months ended December 31, 2004 was $155 million. This primarily comprises $67 million of cash raised by issuance of common stock on exercise of stock options by employees, offset by dividend payments of $222 million. Dividend payments include a special one-time dividend of Rs. 25 ($0.55) per equity share paid in June 2004. Net cash used in financing activities for nine months ended December 31, 2003 primarily comprised $47 million of dividend payments. As of December 31, 2004, we had contractual commitments for capital expenditure of $59 million. These commitments include approximately $50 million in domestic purchases and $9 million in imports and overseas commitments for hardware, supplies and services to support our operations generally, which we expect to be significantly completed by June 2005.

We have provided information to the public regarding forward-looking guidance on our business operations. This information is consistent with market expectations.