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Directors Report of Neuland Laboratories Ltd.

Mar 31, 2014

The Directors have pleasure in presenting the Thirtieth Annual Report of your Company and the audited statement of accounts for the year ended March 31, 2014.

Financial Results

Rs. in crores

2013-2014 2012-2013

Profit before Depreciation and Tax 49.16 30.12

Less: Depreciation 14.94 14.62

Profit before Tax 34.22 15.50

Prior period adjustments - -

Provision for current tax and deferred tax 7.55 1.86

Profit after Tax 26.67 13.64

Add: Balance brought forward from the previous year 21.93 8.22

Add: Adjustments to Opening Reserves - 1.48

Profit available for appropriation 48.60 23.34

Appropriation 5.34 1.41

Balance carried forward to Balance Sheet 43.26 21.93

For the financial year ended March 31, 2014, while there was a marginal growth in revenues, the EBIDTA grew by 17.16% to reach Rs. 72.80 crores and Profit after tax (PAT) increased to Rs. 26.67 crores from Rs. 13.64 crores in the previous financial year, recording a growth of 95.51%.

Business Review

Your Company continued to take key initiatives on product mix changes, scaling up new processes and improving manufacturing processes, which enabled the Company to improve the profitability.

Your Company has completed all necessary modifications to enable manufacturing and sales as envisaged in the Joint Business arrangement with API Corporation, Japan, which is part of the Mitsubishi Chemical for manufacturing and selling of APIs and Intermediates to Japan, it is anticipated that actual sales would commence by end of Q1 FY2015.

Your Company is in the process of taking further systemic improvements, like product mix changes, cost optimisation and process improvements, which are expected to have a positive impact on the profit margins, efficiencies and overall profitability. The management is working with a focus to build a sustainable business model which would add value to all stakeholders over the years to come.

During the year under review, your Company also successfully completed inspections by various regulatory authorities including USFDA, EMA (Europe), ANVISA (Brazil) and Cofepris (Mexico).

Dividend

The Board of Directors has recommended a final dividend of Rs. 3.00 per share (30% dividend, i.e., 15% dividend plus a special dividend of 15%) to the members for their approval. The dividend, if approved, will be paid to members within the period stipulated by the Companies Act, 2013. The outflow on account of dividend (inclusive of corporate tax on dividend distribution) will be Rs. 2.67 crores.

Outlook

Your Company is in a competitive environment, however its portfolio mix provides it with opportunities for growth and your Company is building on that potential by scaling up a further 9 products in the next year which will add to the pipeline and could boost growth prospects.

Your Company''s quest for growth has been further aided by the significant custom manufacturing opportunities received by your Company. The research and development work done in the past has helped your Company to become a significant competitor in the custom manufacturing market as the Company has gained a better understanding of its customers'' needs. Your Company''s forays in this segment have yielded considerable success in the form of securing contracts for manufacturing commercial compounds as well as clinical development candidates.

Your Company has the requisite capabilities to build on its success so far and use the momentum for driving further growth.

Consolidated Financial Statements

The reports and accounts of the subsidiary companies are not annexed to this Report. The Board of Directors of the Company have approved and passed a resolution in this regard. A statement pursuant to Section 212(8) of the Companies Act, 1956 is annexed.

Annual accounts of the subsidiary companies are kept for inspection by any investor at the Registered Office of the Company as well as at the Registered Offce of the respective subsidiary companies. Any investor interested in a copy of the accounts of the subsidiaries may write to the Company Secretary at the Registered Office of the Company.

Subsidiaries

Your Company''s subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, are working on market development. The efforts of the subsidiaries have been to build Neuland''s business by being close to the customers and market the products as well as respond immediately to their needs. Your Company sees long term sustainable opportunities in these regions and has strengthened the organizational resources.

Joint Venture

The Regulatory environment with regard to Clinical Trials continues to be evolving and there are significant challenges in this area due to evolving regulations, Cato Research Neuland India Private Limited formed in collaboration with Cato Research Israel Limited, a wholly owned subsidiary of Cato Research Limited, a global contract research and development organization based in USA. The members are aware that your Company''s share in the joint venture is 70% as per the Share Subscription and Shareholder Agreement.

Your Company is optimistic with the prospects for the business, primarily in clinical research in India. Publicly available information suggests that global health care companies have been reaching out to competent research- led companies to bring innovative drugs to the market, using high quality and cost-effective resources available in India.

Holding Company

Your Company is a Subsidiary Company of Neuland Health Sciences Private Limited (Formerly Sucheth and Saharsh Holdings Private Limited).

Research & Development

The Research and Development ("R&D") team of your Company is venturing to ensure that identified products are scaled up at the appropriate time such that there is a steady stream of new products.

During the year under review, the R&D team focused on creating a portfolio of niche as well as in-demand products so as to enable customers to launch new products. This focused analysis led to a healthy product development portfolio of 22 molecules/ APIs that were created for an anticipated launch between 2013 and 2016. The R&D team took care to ensure that each of the products in the portfolio underwent a rigorous test of preliminary analysis, market and customer feedback.

During the year under review, six of the existing products were taken up for process improvement involving cycle time reduction, recovery and reuse of solvents, adoption of green chemistry, yield improvement and backward integration of key starting material.

The increase in the Custom Manufacturing Solutions ("CMS") business coupled with customer satisfaction is significantly on account of your team showing utmost importance to the customer needs without compromising on the quality and timelines.

R&D has set a few key focus areas apart from creating new molecules and process improvements with intent on quality and optimization for competitiveness. Significant success was evident in such areas including designing and developing manufacturing processes, route scouting as per customer requirement, fling of DMF/CEP for the API and patent protection for non-infringing processes.

Environment, Health & Safety

Your Company is committed to excellence in environment, health and safety ("EHS") and considers environmental protection, prevention of occupational illness and prevention of work injuries as pillars of corporate responsibility. As a responsible corporate citizen, your Company continuously strives to serve the society through responsibly managing EHS related expectations of internal and external customers. To achieve this, we ensure that all our activities, products and services are carried out considering appropriate EHS related concerns and addressing same by involving employees at all levels.

Your Company recognizes EHS stewardship as an integral part of everything it does to run its business and continually evaluates EHS related aspects and risks as part of organizational decision making process. EHS management systems drive the initiatives in areas of resource conservation, pollution prevention and prevention of work related ill health and injury. EHS management has been integral part of the business of your Company. EHS division has been set up at units and corporate levels with competent team members for facilitating various EHS initiatives all across the organization.

To address the EHS related concerns, your Company has formulated an EHS Policy, which is implemented in a continual and systematic manner through ISO 14001:2004 and BS OHSAS 18001:2007 management systems. EHS Policy communicates collective intentions of all Neulanders in key areas of EHS compliance, environment, health, safety, continual improvement and community development. All employees of your Company are expected to take personal responsibility for meeting the requirement of the EHS management systems and required competencies are developed and performances are monitored. EHS policy acts as a guiding principle for identifying, analyzing and mitigating any environmental impacts and/or safety and health risks arising from our activities, products and services.

Your Company takes utmost care for health and safety of all persons working with the Company and is committed to protect health of persons and protect environment and actively seek to identify means and ways to minimize resource consumptions and waste generations. While developing processes at R&D, we adopt concept of "Green Chemistry". Through this method, input materials like various chemicals, solvents, water, energy and process conditions are selected aiming at minimization of potential environmental aspects and safety and health hazards. Once processes are developed, process improvement initiatives are taken up continuously to optimize consumption of raw materials, solvents, water and energy in manufacturing processes to make them sustainable.

In occupational health front, your Company has established a full-fledged occupational health center with physician, support staff and required infrastructure. The occupational health team is spearheading initiatives like exposure assessment, work place monitoring, health awareness campaigns and medical surveillance program aiming to make our work environment comfortable, safe and healthy for employees. Pre-employment, periodical and product specific health checkups have been custom made for nature of work to strengthen our medical surveillance program.

Hazard & Operability (HazOp) and Hazard Identification & Risk Assessment (HIRA) studies are carried out for processes and activities to minimize health and safety risks from such processes and activities. Any incident are followed up through a structured incident investigation process and the recommendations on corrective and preventive actions shared and implemented in all locations aiming to prevent recurrence of similar incidents.

The manufacturing units of your Company are equipped with adequate pollution control facilities like stripper, multi- effect evaporators, vertical thin film dryer and reverse osmosis facilities. Effluents generated in our units are treated in these effluent treatment facilities and such treated effluents are fully recycled, thus helping us to achieve our aim to become Zero Liquid Discharge units. Your Company continually invests in pollution control and safety related infrastructures depending on need and invested Rs. 5.77 crores equal to 1.2% of revenue in FY 2014. Your Company has spent Rs. 6.14 crores equal to 1.3% of revenue in FY 2014 towards operation and maintenance of these infrastructures.

Your Company has implemented co-processing of certain hazardous wastes as fuel substitutes in authorized cement plants in their kilns to support energy resource conservation and reduce greenhouse gas emissions. This beneficial use of hazardous wastes has helping environment in conserving precious energy resources and reducing greenhouse gas emissions. Regular pollution monitoring is carried out to ensure compliance with permitted norms.

The employees of your Company are encouraged to promote EHS actively through various platforms made available in the organization viz., Akshaya, Samanvay, S-Connect, NeuLeaders, NeuRisers and Neu Excellence. Employees also take part in celebrations like the National Safety Day, World Environment Day, World Water Day, etc. as part of promoting EHS. The manufacturing facilities of your Company have successfully completed the re-certification audits as part of continued compliance with the ISO 14001:2004 and BS OHSAS 18001:2007 management systems.

Your Company has been making consistent investments in its communities focusing on three primary areas of community development, healthcare and empowerment of rural women & youth.

Information Management Systems

Your Company''s information technology platform is a key component in offering customers transparency, accountability and reliability while executing their orders. The system design and architecture is kept updated and customers are encouraged to track the progress in execution of their orders.

All employees are aware and have been sensitized that all assets of your Company generate confidential information and therefore information security is viewed with great importance. Your Company appreciates the importance of intellectual property rights and has put in place procedures to protect strictly intellectual properties.

Your Company successfully completed the ISO 27001:2005 surveillance audit Information Security Management Systems (ISMS) Audit.

Management Discussion and Analysis

Management Discussion and Analysis as required under the Listing Agreement with the stock exchanges forms part of the Annual Report.

Change in Capital Structure and Listing at Stock Exchanges

The equity shares of your Company continue to be listed and traded on the BSE Limited and National Stock Exchange of India Limited. During the year under review, 10,700 equity shares were allotted on January 21, 2014 in exercise of the options by the eligible Employees under the ESOS 2008, and admitted for trading in NSE and BSE.

Issue of Shares on Rights Basis

Pursuant to the approval of the Board of Directors on February 5, 2014, the Company has fled a Draft Letter of Offer dated March 26, 2014 with the Securities Exchange Board of India (SEBI).

Corporate Governance

The report on Corporate Governance as per Clause 49 of the Listing Agreement with the Stock Exchanges forms part of the Annual Report. Certificate from the Statutory Auditors of the Company, M/s. K.S. Aiyar & Co., Chartered Accountants confirming the compliance with Corporate Governance is attached to this report.

Directors

Mr.S.B.Budhiraja, who has been on the Board of Directors for 17 years, has resigned from the Board on May 9, 2014. The Board place son record its profound appreciation for the contribution made by Mr.Budhiraja during his tenure by providing guidance and valuable inputs as and when required for the growth of the Company from 1997 to 2014.

In accordance with the provisions of Section 152 of the Companies Act, 2013, Mr.G.V.K.Rama Rao retires by rotation and being eligible, has offered himself for re-appointment.

Mrs. Bharati Rao has been appointed as an Additional Director on May 9, 2014 and shall hold the office up to this Annual General Meeting. Your Company is in receipt of notice under section 160 of the Companies Act, 2013, for her appointment as Director of the Company. Mrs. Rao fulfils the conditions specified in the Companies Act, 2013 and the rules thereon for appointment as an Independent Director.

Pursuant to the notification of Section 149 and other applicable provisions of the Companies Act, 2013 read with Rules thereon, your Directors are seeking appointment of Dr.William Gordon Mitchell, Mr. P.V.Maiya and Mr. Humayun Dhanrajgir, as Independent Directors for five consecutive years for a term up to March 31, 2019.

The Board had at its meeting held on February 5, 2014 has, subject to the approval of the shareholders, re-appointed Dr.D.R.Rao as the Chairman & Managing Director of the Company for a further period of five years from April 1, 2014.

Details of the proposal for appointment of Mrs. Bharati Rao, Dr. William Gordon Mitchell, Mr. P.V.Maiya, Mr. Humayun Dhanrajgir and Dr.D.R.Rao, are mentioned in the Explanatory Statement under Section 102 of the Companies Act, 2013 of the Notice of the 30th Annual General Meeting.

The profiles of the Directors for appointment/reappointment are included in the Report on Corporate Governance annexed. Your Board recommends the above appointments/ reappointment of Directors in the best interest of the Company.

Directors'' Responsibility Statement

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000, your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them,

a. In preparation of the annual accounts for the year ended March 31, 2014 the applicable accounting standards have been followed;

b. Such accounting policies as mentioned in the notes to the financial statements have been selected and applied consistently and judgments and estimates that are reasonable and prudent made so as to give a true and fair view of the state of the affairs of the Company for the year ended March 31, 2014 and of the profit of your Company for the year;

c. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. The annual accounts for the year ended March 31, 2014 has been prepared on a going concern basis.

Employee Stock Option

As per the resolution passed by Annual General meeting on July 20, 2007, your Company has granted 34,500 stock options to its employees under the Employee Stock Options Scheme ("ESOS"). Your Company has allotted 10,700 equity shares to the employees on January 21, 2014 under ESOS, 2008. 16,500 vested options have been terminated by the Compensation Committee on account of retirement / resignation of the employees from the Company. The fair value as on March 31, 2014 worked out to Rs. 179.18 per share.

Details of the options granted, exercised and terminated are set out in the annexure to this report as required under Clause 12 of the Securities and Exchange Board of India (Employee Stock Options Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

Statutory Auditors

Pursuant to the provisions of Section 139(2) of the Companies Act, 2013, on rotation of audit forms, and based on the recommendation of the Audit Committee, the Board has at its meeting held on May 9, 2014 recommended the appointment of M/s. Walker Chandiok & Co., LLP, Chartered Accountants, Hyderabad, as the Statutory Auditors of the Company to hold office from conclusion of this Annual General Meeting for a period of 5 years in accordance with the Act.

Walker Chandiok & Co., LLP, Chartered Accountants, Hyderabad, have confirmed that the appointment, if made, would be within the prescribed limits under Section 141 of the Companies Act, 2013. Accordingly, the appointment of Walker Chandiok & Co., LLP, Chartered Accountants, Hyderabad, as the Statutory Auditors, is being proposed as an Ordinary Resolution.

The financial statements have been audited by M/s. K.S. Aiyar & Co., Chartered Accountants, Statutory Auditors of the Company. The Board would like to place on record its appreciation to M/s K.S. Aiyar & Co., Chartered Accountants, for giving their valuable insights and suggestions for the past eleven years, and also wishes them all success in their endeavors.

The Audit Committee of your Company meets periodically with the Statutory Auditors and Internal Auditors to review the performance of Internal Audit, to discuss the nature and scope of statutory auditor''s functions, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the statutory auditor and the internal auditor have full and free access to the Members of the Audit Committee to discuss any matter of substance.

Cost Auditors

In accordance with Section 141 of the Companies Act, 2013 (corresponding section 233B of the Companies Act, 1956) and the MCA General Circular No. 15/2011 dated April 11, 2011, (as amended vide General Circular No. 36/2012 dated November 6, 2012), subject to the approval of the Central Government, the Audit Committee has recommended and the Board of Directors had appointed M/s. Nageswara Rao & Co., Cost Accountants, Hyderabad, being eligible and having sought re-appointment, as Cost Auditors of the Company, to carry out the cost audit of the products manufactured by the Company during the financial year 2014-15.

Insurance

Your Company has taken wherever possible to mitigate risks, appropriate insurances and the Board is kept appraised of the risk assessment and minimization procedures.

The assets of the Company have been adequately covered under insurance. The policy values have been enhanced taking into consideration the expanded and upgraded facilities of the Company.

Fixed Deposits

During the year the Company has not accepted any fixed deposits from the public. There are no fixed deposits outstanding with the Company as on March 31, 2014 as the matured but unclaimed fixed deposits pertaining to earlier years have been transferred to the Investor Education and Protection Fund.

Disclosure Particulars

As required by your Company (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, the relevant information and data are given in Form - A & B to this report.

Industrial Relations

Your Company''s relations with its employees continue to be cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances.

Particulars of Employees

The particulars of employees required to be furnished under Section 217(2A) of the Companies Act, 1956, read with the Rules there under, forms part of this Report. However, as per the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to all the shareholders of the Company excluding the statement of particulars of employees. Any shareholder interested in obtaining a copy may write to the Company Secretary at the Registered Office of the Company.

Acknowledgement

Your Company acknowledges the significant contribution made by the employees. The trust reposed in your Company by its esteemed customers helped stabilize growth during the year under review. Your Company also acknowledges the support and guidance received from State Bank of India, Bank of India, Indian Overseas Bank, Export Import Bank of India, SBI Global Factors Limited and all government agencies and looks forward to their continuing support.

For and on behalf of the Board

Sd/-

Dr. D. R. Rao

Hyderabad, May 9, 2014 Chairman & Managing Director


Mar 31, 2013

The Directors have pleasure in presenting the Twenty Ninth Annual Report of your Company along with the audited statement of accounts for the year ended March 31, 2013.

FINANCIAL RESULTS

Rs.in Million

Financial year Financial year 2012-13 2011-12

Profit before Depreciation and Tax 301.15 150.73

Less: Depreciation 146.22 148.91

Profit before Tax 154.93 1.82

Prior period adjustments

Provision for current tax and deferred Tax

Profit after Tax 136.37 20.32

Add: Balance brouqht forward from 82.16 61.84 the previous year

Add: Adjustments to Opening

Reserves

Profit available for appropriation 233.32 82.16

Appropriation 14.07

Balance carried forward to Balance 219.25 82.16

Sheet

For the financial year ended March 31, 2013, standalone revenues grew by 3.10% to reach Rs.4,639.04 million. Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) recorded a growth of 27.09% to reach Rs.614.45 million and Profit after Tax (PAT) grew to Rs.136.37 million, recording a growth of 571.11% over Rs.20.32 million achieved in the previous financial year.

BUSINESS REVIEW

Your Company recorded its highest ever revenue of Rs.4,639.04 million. This was the third consecutive instance of the Company scaling record revenue benchmark. While the Compounded Annual Growth Rate (CAGR) of revenue for three years was 8%, the Profit before Taxes (PBT) has grown at a CAGR of 82% over the same period to reach Rs.154.93 million.

Your Company had taken several initiatives (product mix changes, scaling up new processes and improving existing manufacturing processes) that enabled it to improve the profitability. Your Company also successfully completed inspections by various regulatory authorities including USFDA, ANVISA (Brazil), KFDA (Korea), AIFA (Italy) and ANSM (France).

Your Company also undertook a major re-organisation of businesses aimed at de-leveraging on one hand and on the other hand narrowing the focus on core activities: APIs, Intermediates and Contract Manufacturing. Consequently, the Company divested its

R&D activities by selling its Land and Building and some identified intellectual properties to Neuland Pharma Research Private Limited and its Peptides Research activities along with identified intellectual properties to Neuland Health Sciences Private Limited.

The above re-organisation enabled the Company to improve the cash flow by Rs.363 million during the year. This, coupled with Rs.101.18 million raised through the Rights Issue, enabled the Company to de-leverage and also improve its Credit Rating, a key objective of the re-organisation exercise.

In another strategic move, your Company entered into a Joint Business Arrangement with API Corporation, Japan - a part of Mitsubishi Chemical, for manufacturing and sale of APIs and Intermediates. The benefits of this arrangement are likely to start accruing towards the last quarter of FY 2014.

Your Company has self-identified itself all the Manufacturing facilities with US FDA in compliance with the Generic Drug Users Fee Act 2012 (GDUFA) and also registered with the Central Drugs Standard Control Organisation (CDSC0) in compliance with the EU directive on standards for import of bulk drugs to EU.

Your Company remains steadfast on continuous systemic improvements, with an aim to enhance efficiencies, profit margins and overall profitability. The management is striving to build a sustainable business model that should enhance value for all our stakeholders over coming years.

DIVIDEND

The Board of Directors has recommended a final dividend of Rs.1.20 per share (i.e., 12 per cent) to the members for their approval. The dividend, if approved, will be paid to members within the period stipulated by the Companies Act, 1956. The outflow on account of dividend (inclusive of corporate tax on dividend distribution) will be Rs.10.66 million.

OUTLOOK

Your Company continues to see traction for its existing products with the momentum built over the past few years. There are nine more products that are expected to be scaled up commercially in FY14 supplementing your Company''s offerings to the market. With your Company being perceived as a preferred and reliable supplier by its customers, the order flow remains encouraging and is being met with improved manufacturing efficiencies of both intermediates and active pharmaceutical ingredients through process improvements and developments.

There is very significant potential for your Company as a contract manufacturing organization. The development work done in earlier years has helped your Company understand the needs of the customers and, in recent times your Company has broken new ground by securing projects for commercial compounds and Late phase clinical development candidates.

HOLDING COMPANY

Your Company has become a Subsidiary Company of Neuland Health Sciences Private Limited (Formerly Sucheth and Saharsh Holdings Private Limited), in terms of section 4(l)(b)(ii) of the Companies Act, 1956, pursuant to the reorganization of shareholding of the Promoter Group.

REORGANIZATION

During the year under review, your Company as part of its strategic plan, decided to discontinue the operations in Contract Research and Peptide Research activities to de-leverage the Company''s balance sheet and improve profitability, focus on new product development and improve its credit rating.

Your Company sought approval of the members vide resolution dated May 30, 2012, through Postal Ballot and pursuant to the approval of the members, your Company has completed the business set out in the Postal Ballot Notice: Sale of Land together with the Building thereon and the fixtures thereto pertaining to Research and Development, along with identified Intellectual Property rights to Neuland Pharma Research Private Limited ("NPRPL"). Your Company has transferred its Peptide Research activities along with identified Intellectual Property rights to Neuland Health Sciences Private Limited ("NHSPL"). Your Company has also leased certain identified movable assets to NPRPL.

Also, Trade Marks and Copyrights have been licensed to NHPSL and NPRPL on a non-exclusive basis.

Your Company would be the exclusive contract manufacturer for both NHSPL and NPRPL for their manufacturing requirements. Further, your Company has entered into a Research Services Agreement for its Lab Scale research with NPRPL.

The above changes became effective from December 1, 2012. NHSPL is the Holding Company and NPRPL is a Fellow Subsidiary Company.

CONSOLIDATED FINANCIAL STATEMENTS

The reports and accounts of the subsidiary companies are not annexed to this Report. The Board of Directors of the Company has approved and passed a resolution in this regard. A statement pursuant to Section 212(8) of the Companies Act, 1956 is annexed.

Annual accounts of the subsidiary companies are kept for inspection by any investor at the Registered Office of the Company as well as at the Registered Office of the respective subsidiary companies. Any investor interested in a copy of the accounts of the subsidiaries may write to the Company Secretary at the Registered Office of the Company.

SUBSIDIARIES

Your Company''s subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, are working aggressively on market development. Efforts continue to build Neuland''s business by being close to the customers and market the products as well as respond immediately to their needs. Your Company sees long term sustainable opportunities in these regions andis further strengthening the organizational resources.

JOINT VENTURE

The outlook is positive for the joint venture, Cato Research Neuland India Private Limited formed in collaboration with Cato Research Israel Limited, a wholly owned subsidiary of Cato Research Limited, a global contract research and development organization based in USA. The members are aware that your Company''s share in the joint venture is 70% as per the Share Subscription and Shareholder Agreement.

Currently, there are no significant activities in this JV, however your Company is optimistic with the prospects for the business, primarily in clinical research in India. Global healthcare companies have been reaching out to competent research-led companies to bring innovative drugs to the market in the shortest possible time span, using high-quality and cost-effective resources available in India. Neuland is confident for the long-term since it has the best available partner in Cato Research.

RESEARCH & DEVELOPMENT

The proactive and results-oriented Research and Development team of your Company is endeavouring to ensure that there is a continuous flow of new products. The team works in anticipation of emerging opportunities as well as in improving processes for existing products and customer needs.

During the year under review, the R&D team focused on creating a portfolio of niche, in-demand products to enable customers to launch new products. This focused analysis led to a healthy product development portfolio of 19 molecules/ APIs that were created for launch between 2013 and 2016. The R&D team took care to ensure that each of the products in the portfolio underwent a rigorous test of preliminary analysis, market and customer feedback, and was determined to be a best fit with respect to our chemistry expertise.

Further, nine existing products were taken up for process improvement involving cycle time reduction, recovery and reuse of solvents, adoption of green chemistry and yield improvement. R&D realized savings and enhanced quality in all nine. The teams are working on 27 products for such enhancements/savings in 2013-14.

As part of the services in the area of the process development and scale-up, R&D is supporting innovator and generic companies. R&D has expertise in developing the cutting-edge technologies suited for the each phase of new drug discovery and development programs. This covers the milligram-scale synthesis to multi-ton scale production.

R&D has set a few key focus areas apart from creating new molecules and process improvements with intent on quality and optimization for competitiveness. Significant success was evident in such areas including designing and developing manufacturing processes, route scouting as per customer requirement, filing of DMF/CMC for the API and patent protection for non-infringing processes.

ENVIRONMENT, HEALTH & SAFETY

Your Company views EHS as an integral part of everything it does to run its business. It continually evaluates EHS related aspects and risks as part of organizational decision making as one of the best in the sector in terms of its EHS performance.

The EHS Policy communicates the collective intentions in key areas of compliance, environment, health, safety, continual improvement and community development. Your Company has implemented its EHS Policy through a systemic approach with visible top management commitment and rigorous implementation, measurement and reporting with various programs to maintain a high level of awareness and conformity with best-in-class industry standards. There has been significant progress over the past five years in improving the systems, training and participative responses from all Neulanders.

Your Company has taken utmost care for safety and health of every person working with the Company and provided them a safe and healthy workplace. Every person is provided with need based training program on EHS for awareness and competency development. Your Company is committed to protecting the environment and actively seek to identify means and ways to minimize resource consumptions and waste generations. It is adopting the concept of Green Chemistry by carefully selecting the raw materials to minimize potential hazards. To achieve this, a number of process improvement initiatives are being undertaken to minimise consumption of raw materials, solvents, water and energy in the manufacturing processes, thus making them less consumptive and sustainable. Your Company stands committed to resource usages in an environmentally sound, operationally safe and socially responsible manner. Company''s units are equipped with pollution control devices: stripper, multi-effect evaporators, agitated thin film dryer, reverse osmosis facilities for treating effluent generated in the processes and recycling the treated effluent within the plant premises.

Occupational health surveillance study has been carried out with the support of external experts. Quantitative exposure assessment and work place monitoring has been carried out to monitor industrial hygiene exposure levels and ensure environments are comfortable, safe and healthy for the employees. Hazard Identification and Risk Assessment (HIRA) and Hazard and Operability (HazOp) studies have also been carried out in the units targeted to minimize health and safety risks from manufacturing activities. Any incident has been followed up through a structured incident investigation process and the recommendations on corrective and preventive actions shared across all locations for learning from past incidents and to avert recurrence of similar incidents.

Employees are encouraged to actively take part in the promotion of EHS through ''Akshaya'' a suggestion scheme, regular EHS inspections and celebration of National Safety Day, World Environment Day, World Water Day, etc.

Company''s manufacturing facilities located at Bonthapally (Unit-I) and Pashamylaram (Unit-II) have successfully completed the periodical surveillance audits as part of continued compliance with the ISO 14001:2004 and BS 0HSAS 18001:2007 management system certifications.

INFORMATION MANAGEMENT SYSTEMS

Your Company''s information technology platform is a key component in offering customers transparency, accountability and reliability while executing their orders. The system design and architecture is kept updated and customers are encouraged to track the progress in execution of their orders.

All employees are aware and have been sensitized that all assets of your Company generate confidential information, therefore, information security is to be viewed with great importance. Your Company appreciates the importance of intellectual property rights and has put in place procedures to protect strictly its intellectual properties and those of customers.

Your Company has successfully completed ISO 27001:2005 second surveillance audit (ISMS Audit).

MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis as required under the Listing Agreement with the stock exchanges forms part of the Annual Report.

LISTING AT STOCK EXCHANGES

The equity shares of your Company continue to be listed and traded on the BSE Limited and National Stock Exchange of India Limited. The Annual Listing fee for the year 2013-14 has been paid to both the stock exchanges.

CORPORATE GOVERNANCE

The report on Corporate Governance as per Clause 49 of the Listing Agreement with the Stock Exchange forms part of the Annual Report.

Certificate from the Statutory Auditors of the Company, M/s. K.S. Aiyar & Co., Chartered Accountants, confirming the compliance with the Corporate Governance is attached to this report.

DIRECTORS

Mr. P.V. Maiya and Mr. Humayun Dhanrajgir retire as Directors by rotation at the forthcoming Annual General Meeting and being eligible, offer themselves for re-appointment. Your Directors recommend their appointment/ re-appointment at the ensuing Annual General Meeting.

The profiles of the Directors are included in the Report on Corporate Governance annexed.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000, your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them:

a. in preparation of the annual accounts for the year ended March 31, 2013, the applicable accounting standards have been followed;

b. such accounting policies as mentioned in the notes to the financial statements have been selected and applied consistently and judgments and estimates that are reasonable and prudent made so as to give a true and fair view of the state of the affairs of the Company for the year ended March 31, 2013, and of the profit of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. the annual accounts for the year ended March 31, 2013, has been prepared on a going concern basis.

EMPLOYEE STOCK OPTION

As per the resolution passed at the Annual General meeting on July 20, 2007, your Company has granted 34,500 stock options to its employees under the Employee Stock options Scheme.However 25,500 vested options have been terminated by the Compensation Committee on account of retirement / resignation of the employees from the Company. The fair value as on March 31,2013, worked out to Rs.38.28 per share.

Details of the options granted and terminated are set out in the annexure to this report as required under Clause 12 of the Securities and Exchange Board of India (Employee Stock Options Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

AUDITORS

The financial statements have been audited by M/s. K.S. Aiyar& Co., Chartered Accountants, the Statutory Auditors.

The Audit Committee of your Company meets periodically with the Statutory Auditors and Internal Auditors to review the performance of internal audit, to discuss the nature and scope of the statutory auditor''s functions, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the statutory auditor and the internal auditor have full and free access to the Member of the Audit Committee to discuss any matter of substance.

Cost Audit under Section 233B of the Companies Act, 1956, is a regular annual audit. The cost audit for the current financial year is under progress.

The Auditors M/s. K. S. Aiyar & Co, Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office for the financial year ended March 31, 2014.

INSURANCE

Your Company has taken reasonable steps to prevent risks and the Board is kept appraised of the risk assessment and minimization procedures.

The assets of the Company have been adequately covered under insurance. The policy values have been enhanced taking into consideration the expanded and upgraded facilities of the Company.

FIXED DEPOSITS

During the year, the Company has not accepted any fixed deposits from the public. There are no fixed deposits outstanding with the Company as on March 31, 2013, as the matured but unclaimed fixed deposits pertaining to earlier years have been transferred to the Investor Education and Protection Fund.

DISCLOSURE PARTICULARS

As required by your Company (Disclosure of Particulars in theReport of Board of Directors) Rules, 1988, the relevant information and data are given in Form - A & B to this report.

INDUSTRIAL RELATIONS

Your Company''s relations with its employees continue to be cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances.

PARTICULARS OF EMPLOYEES

The particulars of employees required to be furnished under Section 217(2A) of the Companies Act, 1956, read with the Rules thereunder, forms part of this Report. However, as per the provisions of Section 219(l)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to all the shareholders of the Company excluding the statement of particulars of employees. Any shareholder interested in obtaining a copy may write to the Company Secretary at the Registered Office of the Company.

ACKNOWLEDGEMENT

Your Company acknowledges the significant contribution made by the employees. The trust reposed in your Company by its esteemed customers helped stabilize growth during the year under review. Your Company also acknowledges the support and guidance received from State Bank of India, Bank of India, Indian Overseas Bank, Export Import Bank of India, SBI Global Factors Limited and all government agencies and looks forward to their continuing support.

For and on behalf of the board

Dr. D. R. Rao Hyderabad,

May 10, 2013 Chairman & Managing Director


Mar 31, 2012

The Directors are please to present their Twenty Eighth Annual Report of your Company and the audited statement of accounts for the year ended March 31, 2012.

FINANCIAL RESULTS Rs in Million

(Standalone financials)

2011-12 2010-11

Profit before Depreciation and Tax 150.73 201.06

Less: Depreciation 148.91 154.11

Profit/(Loss) before Tax 1.82 46.95

Prior period adjustments – –

Provision for current tax and deferred Tax (18.5) (3.74)

Profit after Tax 20.32 50.69

Add: Balance brought forward from the previous year 61.84 11.15

Profit available for appropriation 82.16 61.84

Appropriation

Balance carried forward to

Balance Sheet 82.16 61.84

Previous year figures have been regrouped wherever necessary as per the Revised

Schedule VI.

BUSINESS REVIEW

Despite the challenges of the global and domestic economy, your Company's revenue for the year was the highest ever at Rs4540.5 million, an increase of 13% over the previous year revenue of Rs4017.6 million, a record being achieved for the second consecutive year. Remarkably, the growth is on a base of 41.2% increase in the previous year.

Raw materials as a percentage of income at Rs2898.6 million constituted 64.4% of income, while it was lower at 63.3% in 2010-11. With marginal increases in manufacturing and employee costs, the operating margin was lower at 10.7% as against 12.5% reported in the previous year. The operating profit was hence lower at Rs483.5 million as against Rs499.6 million.

Members would appreciate that the year witnessed inflationary pressures which impacted raw material prices, all of which could not be passed on to the customers. The tight money policy followed by the central bank, tended to firm up the interest rates affecting finance costs. Your Company incurred finance costs of Rs332.7 million, approximately 11.5% higher than the previous year. The higher incidence was despite repayment of Rs368.3 million during the financial year, over and above an amount of Rs259.7 million repaid in the previous year.

The impact of the prevailing external challenging conditions did impact your Company's business, and despite being productivity oriented and raising the level of cost consciousness, the profit after tax was Rs20.3 million for the year, lower than Rs50.7 million reported in 2010-11.

Your Company has taken several systemic initiatives which are favourably impacting the efficiencies, profit margins and overall profitability, most of which were visible from the last quarter of the financial year 2011-12. The focus is on what adds value to the customers and optimize results for Neuland. The management is striving to make the transformation enduring while shaping the future.

DIVIDEND

Members will appreciate that in view of the liquidity situation of your Company, the Board of Directors has decided not to recommend any dividend for the year under review.

OUTLOOK

Neuland has extraordinary assets for growth: your Company's people, products, pipeline and relationship with some of the big pharma companies across the globe. The Company has a common set of values inspired by The Neuland Way and a restructured, streamlined operating model with a commitment to respond to customers, even as it is bottom line focused.

There is a increased emphasis on marketing niche products, keeping costs under control and an organization wide culture that seeks to improve the due date delivery of products and services. The high-value products have already started enhancing the revenue stream, while there is a commitment to shed products that tend to lower the contribution. The order book for API is robust with visibility of healthy earnings for several months ahead.

While growing the business, the teams are working on thoughtful, disciplined actions to streamline and improve on cost structure, realize savings and de-risk the business. There is substantial progress in increasing the strategic focus of the Company. From early 2012, there is perceptible savings from standardization initiatives, which over the ensuing quarters is likely to manifest in rising free cash flow. Higher margins, lower costs, improved cycle-time on the production floor and lowering of debt are estimated to sustainably enhance the bottom line commencing with the financial year 2012-13.

CONSOLIDATED FINANCIAL STATEMENTS

The reports and accounts of the subsidiary companies are not annexed to this Report. The Board of Directors of the Company have approved and passed a resolution in this regard. A statement pursuant to Section 212 of the Companies Act, 1956 is annexed.

The Consolidated Financial Statements for the year ended March 31, 2012 for part of the Annual Report. Annual accounts of the subsidiary companies are kept for inspection by any investor at the Registered Office of the Company as well as at the Registered Office of the respective subsidiary companies. Any investor interested in a copy of the accounts of the subsidiaries may write to the Company Secretary at the Registered Office of the Company.

SUBSIDIARIES

Your Company's subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, have come into operation and started working aggressively on market development. The efforts have been to build Neuland's business by being close to the customers and market the products as well as respond immediately to their needs. During the year under review, contract manufacturing business was given an additional thrust, with encouraging response in Japan as well as at North America. Your Company sees long term sustainable opportunities in these regions and is further strengthening the organizational resources.

JOINT VENTURE

The outlook is positive for the joint venture, Cato Research Neuland India Private Limited formed in collaboration with Cato Research Israel Limited, a wholly owned subsidiary of Cato Research Limited, a global contract research and development organization based in USA. As already known to Members, your Company's share in the joint venture is 70% as per the Share Subscription and Shareholder Agreement.

The joint venture company commenced operation and your Company is excited with the prospects for the business, primarily in clinical research in India. Global health care companies have been reaching out to competent research-led companies to bring innovative drugs to the market in the shortest possible time span, using high quality and cost-effective resources available in India. Neuland is confident for the long term since it has the best available partner in Cato Research.

RESEARCH & DEVELOPMENT

One of the key priorities of the R&D team during the year under review was to create a portfolio of niche products that are in demand that would facilitate customers to meet their need to launch new products. A focused detailed approach to product selection led to a healthy product development portfolio. The R&D team took care to ensure that each of the products in the portfolio underwent a rigorous test of preliminary analysis, market and customer feedback and fitment with chemistry and technological profile. 20 molecules/APIs were created for launch between 2013 and 2016.

Further, existing eight products were taken up for process improvement involving cycle time reduction, recovery & reuse of solvents, adoption of green chemistry and yield improvement. Of these in seven products, R&D realized savings and enhanced quality in all eight of them. The teams are working on 24 products for such enhancements/savings in 2012-13.

R&D has set for itself a few key focus areas apart from creating new molecules and process improvements with intent on quality and optimization for competitiveness. Significant success was evident in such areas including, designing & developing manufacturing processes, route scouting as per customer requirement, filing of DMF/CMC for the API and patent protection for non-infringing processes.

ENVIRONMENT, HEALTH & SAFETY (EHS)

Your Company has a systemic approach to environment protection and employees' health and safety with rigorous implementation, measurement and reporting, with strong programs in place to maintain a high level of awareness and conformity with best-in class industry standards. Neuland has made significant progress over the past five years in improving the systems, training and participative response from all employees.

Environmental aspect and impact analysis are carried out at both manufacturing units with an aim to minimize environmental impacts from our manufacturing activities. The units are provided with pollution control facilities like stripper, multi effect evaporator, reverse osmosis facilities for treating effluent generated in our processes and recycling the treated effluent within plant premises.

Your Company has undertaken a number of process improvement initiatives, which has helped consume less raw materials, solvents, water and energy in the manufacturing processes, thus making them less consumptive and sustainable. Neuland stands committed to resource usages in environmentally sound, operationally safe and socially responsible manner.

Occupational health surveillance study was carried out with the support of external experts. Quantitative exposure assessment and work place monitoring is carried out to watch over industrial hygiene exposure levels and ensure environments are comfortable, safe and healthy for the employees. Hazard identification and risk assessment studies were carried out in the units targeted to minimize health and safety risks from the manufacturing activities.

The Companies facilities at Bonthapally facility (Unit-I) and Pashamylaram (Unit-II) have been successfully audited and certified for ISO 14001:2004 and OHSAS 18001:2007.

INFORMATION MANAGEMENT SYSTEMS

Your Company is aware that all assets of the Company generate confidential information and hence, information security is viewed with great importance. Neuland appreciates the importance of intellectual property rights and has put in place standard operating procedures to strictly protect intellectual properties.

The initiatives taken to manage risk and institutionalize them Include:

- Employees have been trained through orientation programmes, with refresher training programmes on ISMS standards on a regular basis.

- Neuland signs confidentiality disclosure agreements with all its customers, employees, suppliers and consultants.

- Neuland is certified for ISO 27001:2005 standard and has very recently completed its first surveillance audit successfully.

The IT Infrastructure is on the SAP ERP platform for effective information transfer across functions while ensuring high security standards. A robust web-based intranet application has been developed in-house and used for key business processes to infuse transparency, speedier communication and review.

MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis as required under the Listing Agreement with the stock exchanges forms part of the Annual Report.

LISTING AT STOCK EXCHANGES

The equity shares of your Company continue to be listed and traded on the BSE Limited and National Stock Exchange of India Limited. The Annual Listing fee for the year 2012-13 has been paid to both the stock exchanges.

CORPORATE GOVERNANCE

The report on Corporate Governance as per Clause 49 of the Listing Agreement with the Stock Exchange forms part of the Annual Report. Certificate from the Statutory Auditors of the Company M/s. K.S. Aiyar & Co., Chartered Accountants confirming the compliance with the Corporate Governance is attached to this report.

DIRECTORS

Mr. G.V.K. Rama Rao and Dr. Christopher M. Cimarusti retire as Directors by rotation at the forthcoming Annual General Meeting and being eligible, offer themselves for re-appointment. The profiles of the Directors are included in the Report on Corporate Governance and the Notice of the AGM.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000, your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them,

a. in preparation of the annual accounts for the year ended March 31, 2012 the applicable accounting standards have been followed;

b. such accounting policies as mentioned in the notes to the financial statement have been selected and applied consistently and judgments and estimates that are reasonable and prudent made so as to give a true and fair view of the state of the affairs of the Company for the year ended March 31, 2012 and of the profit of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. the annual accounts for the year ended March 31, 2012 has been prepared on a going concern basis.

EMPLOYEE STOCK OPTION

As per the resolution passed at the Annual General Meeting on July 20, 2007 your Company had granted 34,500 stock options to its employees under the Employee Stock Options Scheme. However 25,500 vested options have been terminated by the Compensation Committee on account of retirement/resignation of the employees from the Company. The fair value as on March 31, 2012 worked out to Rs25.44 per share.

Details of the options granted and terminated are set out in the annexure to this report as required under Clause 12 of the Securities and Exchange Board of India (Employee Stock Options Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

AUDITORS

The financial statements have been audited by M/s. K.S. Aiyar & Co., Chartered Accountants, the Statutory Auditors.

The Audit Committee of your Company meets periodically with the Statutory Auditors M/s. K.S. Aiyar & Co. and Internal Auditors, M/s. Grant Thornton & Co., to review the performance of internal audit, to discuss the nature and scope of the statutory auditor's functions, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the statutory auditor and the internal auditor have full and free access to the Members of the Audit Committee to discuss any matter of substance.

Cost Audit under Section 233B of the Companies Act, 1956, is a regular annual audit. The cost audit for the current financial year is under progress.

The Auditors M/s. K. S. Aiyar & Co, Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office for the financial year ended March 31, 2013.

INSURANCE

Your Company has taken reasonable steps to prevent risks and the Board is kept appraised of the risk assessment and minimization procedures.

The assets of the Company have been adequately covered under insurance. The policy values have been enhanced taking into consideration the expanded and upgraded facilities of the Company.

FIXED DEPOSITS

There are no fixed deposits outstanding with the Company as on March 31, 2012. The matured but unclaimed fixed deposits amounting to Rs0.07 million, which have become due for transfer to the Investor Education and Protection Fund (IEPF) have been transferred to IEPF during the year under review.

DISCLOSURE PARTICULARS

As required by your Company (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, the relevant information and data are given in Form - A & B to this report.

INDUSTRIAL RELATIONS

Your Company's relations with its employees continue to be cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances.

PARTICULARS OF EMPLOYEES

As required under the provisions of Section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of employees) Rules 1975 as amended, there are no employees drawing remuneration in excess of Rs500,000 per month during the year under review.

ACKNOWLEDGEMENT

Your Directors place on record their deep appreciation for the hard work, commitment and dedication of the employees at all levels. The Company did well on several fronts only because of their enthusiasm and efforts. The Board appreciates the support and co-operation received from the customers, vendors, business partners and others associated with the Company. The Directors take the opportunity to thank the bankers and financial institutions, regulatory and government authorities and the stock exchanges for their continued support.

For and on behalf of the board Dr. D. R. Rao

Hyderabad, May 3, 2012 Chairman & Managing Director


Mar 31, 2011

Dear Members,

The Directors are pleased to present their Twenty Seventh Annual Report of your Company and the audited statement of accounts for the year ended March 31, 2011.

FINANCIAL RESULTS Rs. in Million

2010-11 2009-10

Profit before Depreciation and Tax 201.28 24.03

Less: Depreciation 154.12 135.60

Profit/(Loss) before Tax 47.16 (111.57)

Prior period adjustments – 11.97

Provision for current tax and

deferred Tax (3.53) 29.15

Profit/(Loss) after Tax 50.69 (70.45)

Add: Balance brought forward from

the previous year 11.15 81.60

Profit available for appropriation 61.84 11.15

Appropriation

Balance carried forward to

Balance Sheet 61.84 11.15

BUSINESS REVIEW

Your Company achieved satisfactory results with growth in volumes, revenues and improved market share and reach for its major products. Investments made in earlier years to increase capacities paid off with elevated sales of high-value and niche products and by stepping up the market share in volume led markets. However the Company had a tight liquidity situation due to the burden of the repayment of loans taken for increased capacities.

During the year under review, your Company intensely focused on ramping up sales volumes for its top six products by effectively employing several initiatives including competitive bidding, volume-price optimization, emphasis on quality enhancement and aggressively helping customers to launch their generics. Simultaneously, successful efforts were made to enhance operational economies by optimizing processes and improving manufacturing efficiencies.

Raw material cost pressures continued throughout the year. Your Company managed the raw material and sourcing challenges and met production schedules with stringent quality inputs and cost advantage. The efforts to contain costs, minimize inventory, improve efficiencies together with higher capacity utilization led to favorable material variances.

The strong performance in the market translated in robust financials with highest ever revenues of Rs.3985.41 million, an improvement of 41.7% over Rs.2812.53 million in the previous year. Better customer relationships, strong demand for products and operational efficiencies enabled your Company to report profit after tax of Rs.50.69 million. Members would recall the

Company had incurred a loss of Rs.70.45 million in 2009-10. The earnings per share for the year under review is Rs.9.38.

As Members are aware, your Company's foray into synthetic peptide realm has been distinguished by successfully developing technologies that meet the highest standards of multinational companies. The strategic alliance with a global pharmaceutical company has improved visibility of earnings and your Company responded during the year by producing 28 Fluorenylmethyloxycarbonyl (Fmoc)-pseudoproline dipeptide building blocks in kilogram quantities.

It is gratifying to report that the ability to produce pseudoproline building blocks helped in the procurement of DSIR (Department of Scientific and Industrial Research, Government of India) funding of Rs.25 million for scale up of technology for generic peptide APIs. Your Company has also initiated steps to build a suitable peptide plant to meet the future needs of the business.

DIVIDEND

Members will appreciate that given the liquidity situation, your Company needs to conserve resources and hence your Board of Directors recommend that no dividend be declared for the year under review.

OUTLOOK

Your Company continues to see traction for its existing products with the momentum built over the past few years. There are eleven more products that are expected to be scaled up commercially in 2011-12, supplementing your Company's offers to the market. With Neuland being perceived as a preferred & reliable source by its customers, the order flow remains encouraging and is being met with scaling up of production volume and manufacturing efficiencies of both intermediates and active pharmaceutical ingredients.

There is immense potential for your Company as a contract manufacturing organization. The development work done in earlier years has helped Neuland understand the needs of the customers and in recent times your Company has made breakthrough to secure projects for commercial compounds and late phase execution.

The peptide business has its platform ready for non-linear growth, currently this business contributes to less than 1% of total revenues. Your Company currently produces about 70 high value building blocks encompassing 28 pseudoprolines, 32 isoacyl dipeptides, several dimethoxybenzyl-amino acids and dipeptides, Fmoc-amino acids, and side chain modified Fmoc-Lysine derivatives. Neuland intends to increase this offering to include 20-Fmoc-N-Methyl amino acids during 2011-12. Sales of USP and EP grade generic peptide APIs are expected to commence in the second half of 2011-12 both to the domestic and international customers.

CONSOLIDATED FINANCIAL STATEMENTS

The Ministry of Corporate Affairs (MCA) vide Circular No.2/2011 dated February 8, 2011 has granted general exemption under Section 212(8) of the Companies Act, 1956 to companies from attaching the accounts of their subsidiaries in their annual reports subject to fulfillment of certain conditions prescribed.

Accordingly the reports and accounts of the subsidiary companies are not annexed to this Report. The Board of Directors of your Company has approved and passed a resolution in this regard. The Consolidated Financial Statements for the year ended March 31, 2011 form part of the Annual Report. A summary of key financials of the Company's subsidiaries is also annexed.

Annual accounts of the subsidiary companies are kept for inspection by any investor at the Registered Office of the Company as well as at the Registered Office of the respective subsidiary companies. Any investor interested in a copy of the accounts of the subsidiaries may write to the Company Secretary at the Registered Office of the Company.

SUBSIDIARIES

Your Company's subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, continue the market development efforts in respective geographies, and being close to customers has enabled to improve the customer responsiveness and given significant thrust for the contract manufacturing business.

JOINT VENTURE

Cato Research Neuland India Private Limited formed in collaboration with Cato Research Israel Limited, a wholly owned subsidiary of Cato Research Limited, a global contract research and development organization based in USA. The joint venture company has recruited its initial team and is now working on creating business in collaboration with the JV Partner.

RESEARCH & DEVELOPMENT

Your Company has a proactive and result oriented research and development team to ensure that there is a continuous flow of products that are in demand amongst Neuland's customers. The team has been able to bring complex molecules with efficient processes to market in anticipation of emerging opportunities as well as in improving processes for existing products and customer needs.

The in-house R&D team has identified 11 new products for development in 2011-12 based on Neuland Product Development Funnel. Development of cost effective processes for existing products is another area which would favorably impact productivity and yield.

The team ensures that the processes so developed meet customer needs, stringent regulatory requirements and environmental challenges.

Custom synthesis is one area where Neuland has been focusing and is undertaking several projects. Your Company has been working in close association with clients, under strict confidentiality conditions to bring products early to markets. The R&D team offers services, know-how, and technology comparable with industry standards.

ENVIRONMENT, HEALTH & SAFETY

The Pashamylaram facility (Unit-II) has been successfully audited and is certified in 2010 for ISO 14001:2004 and OHSAS 18001:2007. As Members are already aware, the Bonthapally facility (Unit-I) already stands certified. The certifications demonstrate Neuland's commitment and care towards environment protection and health and safety management systems.

As in earlier years, both facilities maintained their zero accident record and in April 2011, the Department of Factories, Government of Andhra Pradesh conferred the Zero Accident Special Category award on Neuland in recognition of its achievement.

Safety release valves and automated systems form part of the systemic improvements incorporated to minimize the possibility of accidents. Training of employees and contract workers to elevate their awareness levels is a major cause of continuous improvement in securing better health and safety standards.

Your Company continues to maintain zero effluent discharge and has kept the particulate matter emissions within prescribed norms. A firm of reputed consultants was employed to study the industrial hygiene in both units during the year. Their report is being acted upon and corrective and preventive actions have been initiated.

INFORMATION MANAGEMENT SYSTEMS

Neuland's information technology platform is a key component in offering customers transparency, accountability and reliability while executing their orders. The system design and architecture is kept updated and customers are encouraged to track the progress in execution of their orders.

All employees are aware and have been sensitized that all assets of the Company generate confidential information and therefore information security is viewed with great importance. Neuland appreciates the importance of intellectual property rights and has put in place procedures to protect strictly intellectual properties.

Your Company has successfully completed ISO 27001:2005 second surveillance audit (ISMS Audit).

REPORT ON CORPORATE GOVERNANCE AND MANAGEMENT DISCUSSION AND ANALYSIS

The report on Corporate Governance and Management Discussion and Analysis as required under the Listing Agreement with the stock exchange forms part of the Annual Report.

LISTING AT STOCK EXCHANGES

The equity shares of your Company continue to be listed and traded on the Bombay Stock Exchange Limited and National Stock Exchange of India Limited. The annual listing fees for the year 2011-12 have been paid for the both exchanges.

DIRECTORS

Dr. Will Mitchel and Mr. S. B. Budhiraja retire as Directors by rotation at the forthcoming Annual General Meeting and being eligible, offer themselves for re-appointment.

The EXIM Bank has appointed Mr. Nadeem Panjetan as Nominee Director in the place of Mrs. Daya Chandrahas effective from April 29, 2011. The Board places on record its appreciation for the services rendered by Mrs. Daya Chandrahas during her tenure as Director of the Company.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to Section 217 (2AA) of the Companies (Amendment) Act, 2000 your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them,

a. in preparation of the annual accounts for the year ended March 31, 2011 the applicable accounting standards have been followed;

b. such accounting policies as mentioned in Schedule M of the Notes to the financial statement have been selected and applied consistently and judgments and estimates that are reasonable and prudent made so as to give a true and fair view of the state of the affairs of the Company for the year ended March 31, 2011 and of the profit of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. the annual accounts for the year ended March 31, 2011 has been prepared on a going concern basis.

EMPLOYEE STOCK OPTION

As per the resolution passed by Annual General meeting on July 20, 2007, your Company has granted 34,500 stock options to its employees under the Employee Stock Options Scheme. Of the above, 6,000 (Previous year 5,500) options have lapsed on account of resignation of the employees from the Company which has been noted by the Remuneration Committee. Details of the options and other disclosures as required under Clause 12 of the Securities and Exchange Board of India (Employee Stock

Options Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 are set out in the annexure to this report.

AUDITORS

The financial statements have been audited by M/s. K.S. Aiyar & Co., Chartered Accountants, the statutory auditors.

The Audit Committee of your Company meets periodically with the Statutory Auditors M/s. K.S. Aiyar & Co. and Internal Auditors, M/s. Grant Thornton & Co., to review the performance of internal audit, to discuss the nature and scope of the statutory auditor's functions, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the statutory auditor and the internal auditor have full and free access to the Members of the Audit Committee to discuss any matter of substance.

Cost audit under Section 233B of the Companies Act, 1956, is a regular annual audit. The cost audit for the current financial year is under progress.

The Auditors M/s. K. S. Aiyar & Co, Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office for the financial year ended March 31, 2012.

The Statutory Auditors have in the Annexure to the Auditors' Report arising out of the requirements of the Companies (Auditor's Report) Order, 2003 (CARO) have recommended further strengthening of controls in the ERP system and also to adhere to the planned audit program. The company has initiated appropriate steps to comply with the same.

Further the auditors have stated that an amount of Rs.0.07 Million are amounts payable against unclaimed matured fixed deposits which are to be deposited to Investor Education and Protection Fund (IEPF) related to and due on various dates. The steps initiated by the Company to further strengthen the control mechanism are intended to enhance the effectiveness of compliance management and avoid any unintended and inadvertent omissions. The Company has made necessary arrangements to transfer the said amount to IEPF forthwith.

The delays in repayments of certain installments of loans could not be avoided on account of liquidity issues due to rapid growth of business. Your Company is making arrangements to make good these installments at the earliest.

INSURANCE

Your Company has taken reasonable steps to prevent risks and the Board is kept appraised of the risk assessment and minimization procedures.

The assets of the Company have been adequately covered under insurance. The policy values have been enhanced taking into consideration the expanded and upgraded facilities of the Company.

FIXED DEPOSITS

There are no fixed deposits outstanding as on March 31, 2011.The provisions of Section 58A of the Companies Act, 1956 have been complied with.

The matured but unclaimed fixed deposits relating to eight deposit holders amounting to Rs.0.07 million have become due for transfer to the Investor Education and Protection Fund (IEPF) established by the central government. This amount having remained unclaimed for a period of over seven years from the date they became due for payment is being transferred to the IEPF.

DISCLOSURE PARTICULARS

As required by your Company (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, the relevant information and data are given in Form - A & B to this report.

INDUSTRIAL RELATIONS

Your Company's relations with its employees continue to be

cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances.

PARTICULARS OF EMPLOYEES

During the year under review, there were no employees drawing salary in excess of the prescribed limit and whose particulars is required to be given under Section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of employees) Rules 1975 as amended.

ACKNOWLEDGEMENT

Your Company acknowledges the significant contribution made by the employees. The trust reposed in your Company by its esteemed customers helped stabilize growth during the year under review. Your Company also acknowledges the support and guidance received from State Bank of India, Bank of India, Indian Overseas Bank, Export Import Bank of India, SBI Global Factors Limited and all government agencies and looks forward to their continuing support.

For and on behalf of the board

Dr. D. R. Rao Hyderabad, May 20, 2011 Chairman & Managing Director


Mar 31, 2010

The Directors submit their Twenty Sixth Annual Report of your Company and the audited statement of accounts for the year ended March 31, 2010.



FINANCIAL RESULTS Rs. in Million

2009-2010 2008-2009

Profit before Depreciation and Tax 24.03 217.81

Less: Depreciation 135.60 73.70

Profit/(Loss) before Tax (111.57) 144.11

Prior period adjustments 11.97 0.00 Provision for current tax and

deferred Tax 29.15 26.21

Profit/(Loss) after Tax (70.45) 117.89 Add: Balance brought forward from

the previous year 81.60 74.22

Profit available for appropriation 11.15 192.11

Appropriation

General Reserve - 88.42

Dividend (including Tax on Dividend) - 22.10

Balance carried forward to

Balance Sheet 11.15 81.60





BUSINESS REVIEW



The financial year 2009-10 was a challenging year for the global economy and for several players in the pharmaceutical industry with drop in selling prices, reduced margins and liquidation of inventories. These had a cascading effect on several suppliers, including your Company. The circumstances in the market place coupled with your Companys recent investments in new assets created a situation where your Company has posted a net loss for the financial year.

There are three major factors that have contributed to the wide gap between expected performance and actual results. First, couple of product launches into the market fell significantly short of expectations. These products were developed for several of the leading players in the generic space and was expected to contribute significantly to the sales and profitability of your Company in the financial year 2009-10. A new production facility was commissioned in Q3 of 2008-09 to support the manufacture of the active ingredients. Members are aware, it is not possible to obtain alternative customers or substitute markets immediately since regulatory and customer approvals entail long lead times. However, your Company sees this as a temporary setback and has stepped up its marketing thrust to regain ground, modified its production facilities, established alternative products and created new revenue streams for the future. Also, the facilities that have been commissioned for this product were multi-product facilities and are being utilized for other current and future products.

Second, during the year under review, almost all products witnessed added and unanticipated price erosion, margin compression and competitive risks. The situation was compounded with a stiff mark up in costs of raw materials, especially from China. The product mix underwent a change with demand growth for low value products, while in the previous year, the sales mix had larger quantities of high value products. In the best interest of its customers, your Company worked at tighter margins and offered competitive prices, enabling them to compete better in their markets.

Third, the currency market remained volatile and the rupee tended to weaken intermittently throughout the year against the US$. Rupee which was around Rs.51.50 in March 2009, closed the year ending March 2010 at approximately Rs.44.90. It was challenging to manage the forex transactions and in the year under review your Company reported a loss on foreign exchange of Rs.22.34 million (debited to Administrative, Selling & Other Expenses). In contrast, there was a net foreign exchange gain of Rs.60.65 million in the year ended March 2009.

Overall, your Company reported lower revenues at Rs.2812.53 million which was a 9.8% decline over Rs.3120.26 million achieved in the previous year. Neuland attempted to improve productivity and yield in a bid to contain the costs. Despite cost optimization steps initiated throughout the value chain, better sourcing of materials and effective risk management, your Company recorded lower Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of Rs.280.76 million in 2009-10 as compared to Rs.361.41 million in 2008-09.

Members would recall, your Company has been steadily investing for its future growth. In the past three years, your Company has added to its gross block with fresh investment of Rs.1547 million, which is approximately twice the total investment made in the first 23 years. Your Company has invested in products, product pipeline, R&D, regulatory and compliance standards, manufacturing capabilities and environmental systems and is now better equipped to offer higher volume of a larger number of products and services.

In the pharmaceutical industry, additional capacities, regulatory and customer approvals are the primary steps in commercializing products, and invoicing takes 18 to 24 months. In the initial period, the Return on Investment takes time and effort, with skewed cash flows.

During the year, with additional borrowing for capital expenditure as well as working capital, your Company incurred interest costs of Rs.256.73 million. Depreciation accounted for another Rs.135.60 million. In the previous year, interest cost was Rs.143.59 million, while depreciation amounted to Rs.73.70 million. Neuland ended the financial year 2009-10 with a loss of Rs.70.45 million as compared to profit after tax of

Rs.117.90 million in the previous year. The loss per share in 2009-10 was Rs.13.03.

DIVIDEND

Considering the need to conserve resources, your Board has recommended skipping of dividend for the financial year under review.

OUTLOOK

Investments made in capacities are now paying off, with your Company better placed to offer high-value and niche products as well as service volume led markets. While several initiatives taken in 2009-10 are likely to positively impact revenues and net income, incremental gains are more likely to be visible from around the quarter ending September, 2010. The newly created manufacturing facilities are now being utilized for APIs with higher demands as well as for executing contract manufacturing projects.

Your Company has started ramping up selling volumes for its active pharmaceutical ingredients, especially its top six products. Simultaneously, seven new active ingredients are being scaled up and commercialized during 2010-11. Another eight active pharmaceutical ingredients are ready for scale up activity. The order book is robust and the endeavor is to achieve 30% incremental growth in revenues.

Your Company has also recently made a foray into the area of peptides. As a first step, your Company has been able to develop economical manufacturing processes for multi-kilogram production of high value peptide building blocks called pseudoproline dipeptides. Your Companys high quality standards together with competitive prices have been recognized and would be leveraged to offer these high quality peptide building blocks to other pharmaceutical companies that are active in the area of peptides. In order to fully exploit the market opportunity in this area, Neuland has entered into a commercial manufacturing agreement with one of the leading global biotechnology companies, a pioneer in developing and making available high-value building blocks, to be their exclusive producer of pharmaceutical grade pseudoproline dipeptides. This is a high-value high-growth segment and your Company is technically equipped and has the skill sets to create a niche for itself in a growing market. Neuland has commenced commercializing its products, and expects to ramp up volumes in calendar year 2011. Success in commercializing the peptide building blocks will lead to expansion of your Companys interests into other area in peptides such as generic peptide APIs, etc.

Today your Company offers contract manufacturing services to innovator companies and presently executes projects for pharmaceutical companies in Europe, North America and Japan.

Neulands execution capabilities have been recognized and this is a segment that is showing encouraging signs of growth.

Your Company has a robust platform for growth and perceives several opportunities to ramp up the business in each of its verticals. Aggressive efforts are being made to improve revenues, offer more products and leverage on customer relationships. At the same time, Neuland is working to improve manufacturing processes, optimize costs, reduce waste and operational expenses, increase cash flow, rationalize manpower, protect margins, report positive earnings, and derisk the business.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements for the year ended March 31, 2010 form part of the Annual Report.

The reports and accounts of the subsidiary companies and joint venture entity are not annexed to this Report. The Company has obtained in writing an exemption in this regard from the Ministry of Corporate Affairs vide its letter No. 47/478/2010- CL-III dated June 8, 2010. A statement pursuant to Section 212(8) of the Companies Act, 1956 is annexed. Annual accounts of the subsidiary companies and the joint venture entity are kept for inspection by any investor at the Registered Office of your Company as well as at the Registered Office of the respective companies. Any investor interested in a copy of the accounts of the subsidiaries or joint venture entity may write to the Company Secretary at the Registered Office of the Company.

SUBSIDIARIES

Your Companys subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, have come into operation and started working aggressively on market development. The efforts have been to build Neulands business by being close to the customers and market the products as well as respond immediately to their needs. In 2009-10, contract manufacturing business was given an additional thrust, with encouraging response in Japan as well as at North America. Your Company sees long term sustainable opportunities in these regions and is further strengthening the organizational resources.

JOINT VENTURE

The outlook is positive for the joint venture, Cato Research Neuland India Private Limited formed in collaboration with Cato Research Israel Limited, a wholly owned subsidiary of Cato Research Limited, a global contract research and development organization based in USA. As already known to Members, your Companys share in the joint venture is 70% as per the Share Subscription and Shareholder Agreement.

The joint venture company commenced operation and your Company is excited with the prospects for the business, primarily in clinical research in India. Global health care companies have been reaching out to competent research-led companies to bring innovative drugs to the market in the shortest possible time span, using high quality and cost-effective resources available in India. Neuland is confident for the long term since it has the best available partner in Cato Research.

RESEARCH & DEVELOPMENT

Your Company has made organizational changes and strengthened its research and development team during the year under review. The in-house R&D team has identified 13 new products for development in 2010-11 and focused efforts are being made to develop processes for new bulk drugs of various therapeutic categories identified after an extensive analysis of the market. Development of cost effective processes for the existing products is another area which would favorably impact productivity and yield.

ENVIRONMENT, HEALTH & SAFETY

Effluent treatment capacities have been enhanced during the year, considering the larger volume of business being undertaken. Multiple effect evaporator has been installed and all regulatory norms are being met. The effort now is to go beyond compliant standards and actively reduce consumption of resources.

The Bonthapally Unit (Unit I) has been successfully audited and is certified for ISO 14001:2004 and 0HSAS 18001:2007. As Members are aware, ISO 14001 is a series of International Standards on environment management system and 0HSAS 18001 is an Occupational Health & Safety Assessment Series for health & safety management system. These certifications are a testimony to Neulands commitment towards environment protection and health and safety management along with the quality of products.

At the Pashamylaram Unit (Unit-II), Stage-1 and Stage-2 audits have been successfully completed and formal certification is awaited.

INFORMATION MANAGEMENT SYSTEMS

Information technology is a critical component in data management and decision making at Neuland. Your Company offers a uniquely transparent facility to its customers to update themselves on the progress of their orders. The system is updated on an on-going basis, and a few of the initiatives taken up during the year under review are as follows:

a. Both hardware and applications were upgraded to enhance the performance of the SAP platform, create robust back- up solutions, and augment connectivity across Neulands locations;

b. Users dealing with various projects from across the locations can submit their analytical related tests or tasks, using AR&D scheduling application. These tasks/requests are automatically scheduled as per the load and assigned to the analyzer of A R&D Department. Upon completion of the task/request, the end results are generated through the system for the benefit of the end user;

c. In order to monitor contract research projects, a new version of software has been launched with facilities such as customer reviews, category based analysis, category monitoring services, customer interaction process and analysis dash board;

d. Given the expansion of operational resources at the production facilities, a new logic for due date calculation has been implemented taking both the locations, alternative and consequent resources into consideration. By implementing this new logic, the due date derived is realistic and helps improve production control;

e. Based on the estimated quarterly/half yearly sales plan, reports are generated to estimate the load on the reactors to help the production team in scheduling/execution of plans;

f. The vendor/customer outstanding report provides information about the payables and receivables with aging. This report helps the finance team to plan for funds and helps to follow up with customers for release of payments due to Neuland;

g. In order to support supply chain and logistics team, daily/ conditional mail alerts have been enabled for quotation approval beyond 48 hours, procurement of top 20 raw materials and month closing alerts.

Every process is focused towards providing updated information to the operations team, to significantly add to transparency in operations and improve delivery mechanisms. The customer has been at the core of the initiatives and has been a beneficiary with improved due date performance.

MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis as required under the Listing Agreement with the stock exchanges forms part of the Annual Report.

LISTING AT STOCK EXCHANGES

The equity shares of your Company continue to be listed and traded on the Bombay Stock Exchange Limited and National Stock Exchange of India Limited. The annual listing fees for the financial year 2010-11 have been paid to both the exchanges.

CORPORATE GOVERNANCE

Your Company has an eminent Board which insists on following the highest standards of Corporate Governance in its deliberations. There is clear accountability at various management levels and care is taken to ensure compliance with statutory requirements and to adhere to the highest standard of business ethics.

Your Company has engaged a professional team to assess its corporate governance practices. The assignment is in progress.

Managerial remuneration as per paragraph (1) (B) IV (2) of Section II of Part II of Schedule XIII to Companies Act, 1956 is mentioned below:

S. No. Particulars Managerial Persons Dr.D.Rao Mr. D. Sucheth Rao Mr. D. Sahars Rao

1 Salary (Rs.) 3,50,000 p.m. 3,50,000 p.m. 3,00,000 p.m.

2 Perquisites (Rs.) 50,000 p.m. 50,000 p.m. 50,000 p.m.

3 Contract period 3 years 3 years 3 years

4 Notice Period 12 months 12 months 12 months

5 Fixed component and performance

linked incentives along with the Nil Nil Nil

performance criteria

6 Stock option with details if any and

whether issued at discount as well as Nil Nil Nil

the period over which accrued and over which exercisable.

7 Severance fees Nil Nil Nil

Including of the above, each managerial person is entitled for remuneration not exceeding the overall limit of 5% of the net profits of the Company for each financial year, payable by way of salary, deamess allowance, bonus, commission, perquisites or any other allowances subject to overall ceiling of 10% of the net profit of the Company for all of them together.

DIRECTORS

Or. Russell E. Kaufman resigned on January 25, 2010 from the directorship of the Company. The Board placed on record its appreciation of the valuable services rendered by Dr. Russell E. Kaufman during his tenure as Director of the Company.

Mr. H. Dhanrajgir and Mr. P. V. Maiya retire as Directors by rotation at the forthcoming Annual General Meeting and being eligible, offer themselves for re-appointment.

Dr. Christopher M. Cimarusti was co-opted as a member of the Board at their meeting held on October 20, 2009. Your Company has received a notice under Section 257 of the Companies Act, 1956 from a Member proposing to appoint Dr. Christopher M. Cimarusti as a Director retiring by rotation, subject to the approval of Members. Appropriate resolutions are being placed before the Members at the ensuing Annual General Meeting.

The profiles of the Directors are included in the Report on Corporate Governance annexed.

DIRECTORS RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000, your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them,

a. in preparation of the annual accounts for the year ended March 31, 2010 the applicable accounting standards have been followed;

b. such accounting policies as mentioned in Schedule N of the notes of the financial statement have been selected and applied consistently and judgments and estimates that are reasonable and prudent made so as to give a true and fair view of the state of the affairs of the Company for the year ended March 31, 2010 and of the loss of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. the annual accounts for the year ended March 31, 2010 has been prepared on a going concern basis.

EMPLOYEE STOCK OPTION

As per the resolution passed by Annual General meeting on July 20, 2007, your Company has granted 34,500 stock options to its employees under the Employee Stock options Scheme. However 5,500 unvested options have been terminated by the Compensation Committee on account of resignation of the employees from the Company. The fair value as on March 31, 2010 worked out to Rs.44.67 per share.

Details of the options granted and terminated are set out in the annexure to this report as required under Clause 12 of the Securities and Exchange Board of India (Employee Stock Options Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

AUDITORS

The financial statements have been audited by M/s. K.S. Aiyar & Co., Chartered Accountants, the statutory auditors.

The Audit Committee of your Company meets periodically with the Statutory Auditors M/s. K.S. Aiyar & Co. and Internal Auditors, M/s. Grant Thornton & Co., to review the performance of internal audit, to discuss the nature and scope of the statutory auditors functions, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the statutory auditor and the internal auditor have full and free access to the Members of the Audit Committee to discuss any matter of substance.

Cost audit under Section 233B of the Companies Act, 1956, is a regular annual audit. The cost audit for the current financial year is under progress.

The Auditors M/s. K. S. Aiyar & Co, Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office for the financial year ended March 31, 2011.

The Statutory Auditors in their report on the accounts for the year ended March 31, 2010 stated that although internal control system is commensurate with the size of the Company and nature of business, further strengthening is recommended in the environment of E R P with reference to all the key areas of control. The Company has implemented E R P package of S A P in September 2007. We are now revisiting the areas of control where ever required so that the system becomes robust and further strengthened.

Further, they stated that the Company has defaulted in repayments of dues to the banks and fund raised on short-term basis aggregating to Rs.66.52 million have been utilized for financing long term investments including repayments of loans taken for fixed assets and capital work in progress. In order to honor the repayment of term loans apart from providing the margin money for expansion of facilities, the Company had to utilize short term funds due to insufficient internal accruals. The Company has expanded its facilities to avail the market opportunities for Ciprofloxacin and to comply with certain statutory requirements.

INSURANCE

Your company has taken reasonable steps to prevent risks and the Board is kept appraised of the risk assessment and minimization procedures.

The assets of the Company have been adequately covered under insurance. The policy values have been enhanced taking into consideration the expanded and upgraded facilities of the Company. *

FIXED DEPOSITS

There are no fixed deposits outstanding as on March 31, 2010. There are matured but unclaimed fixed deposits amounting to Rs.0.07 million being the deposit amount, which may come up for repayments. The provisions of Section 58A of the Companies Act, 1956 have been complied with.

DISCLOSURE PARTICULARS

As required by your Company (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, the relevant information and data are given in Form - A & B to this report.

INDUSTRIAL RELATIONS

Your Companys relations with its employees continue to be cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances.

PARTICULARS OF EMPLOYEES

As required under the provisions of Section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of employees) Rules 1975 as amended, the names and other particulars of employees are set out in Annexure to this report.

ACKNOWLEDGEMENT

Your Company acknowledges the significant contribution made by the employees. The trust reposed in your Company by its esteemed customers helped stabilize growth during the year under review. Your Company also acknowledges the support and guidance received from State Bank of India, Bank of India, Indian Overseas Bank, Export Import Bank of India and all government agencies and looks forward to their continuing support.

For and on behalf of the board Dr.D.R.Rao Hyderabad,May 29,2010 Chairman &Managing Director