Kernex Microsystems (India) Ltd

To

The Members,

Kernex Microsystems (India) Ltd.

Your Directors present herewith, the Twentieth Annual Report together with the auditedaccounts of the company for the year ending 31 March 2012.

Financial Results

Rs in Lakhs

Dividend

Your Directors are pleased to recommend a dividend of 10 % on the paid up capital ofthe company for the financial year 2011-2012. The dividend if approved at the ensuingAnnual General Body Meeting, will be paid to those share holders, whose names appear onthe register of members of the company as on September 27th , 2012 as per the rulesapplicable at that time.

The Company’s Business and Operational Results

1. Your company has exclusive license for Manufacturing, Installing and Commissioningof the Networked ACD System "Raksha Kavach", the IP Rights of which are held byKonkan Railway Corporation, CBD Belapur, Navi Mumbai, with whom Kernex has Agreements andMOU.

2. After being commissioned in April 2007, ACD System is deployed over 2480 KMS, thatis approx. 1750 KMS in NF Railway and 730 KMS in Konkan Route. Presently the systemdeployed in NF Railway is being provided Operational and Annual maintenance services byyour company.

3. As regards the deployment of ACD System in the rest of Indian Railways, Railwayshave tested the product and suggested a few changes. These changes and improvements arebeing implemented in NF Railway as Version 1.1.1 while advanced Version 2.0 is also readyfor final trials.

4. Railways are awaiting further study and validation before it is deployed in the restof the country. IR wants to remove unnecessary breakings and improve maintainability andoperability. At present, the advanced version of ACD subject to evaluation and validationawaits release of orders over 8 Railway zones.

5. CMC operations for the year 2011-2012 have been successfully carried out in NFRailways. Over 300 installations which were affected due to theft and vandalism have beenrestored at a cost of over Rs.6.00 crores to make the system fully functional.

6. As part of CMC, over 1000 ACDs were repaired and recycled into the system andthereby ACD safety system was maintained uninterrupted.

7. Your company’s R&D work is reaching its potential with the development ofLx Gates for Egyptian Railway Project, development of new version ACD System 2.0 andimproved version of Multi-section Digital Counters.

8. In Software division we have successfully closed version 1.0 and developed a specialversion for NF Railway Ver 1.1.1. and an improved version 2.0 which is under evaluation.

Cross Approvals, New Designs and Indigenization

Your company was involved in the designs of Lx Gates with Safety Integrity level IIIfor Egyptian National Railways. This has since been approved by Cairo UniversityConsultants and ENR (Egyptian Railways) authorities, The Altpro Multi-section Digital AxleCounters, which have a major market in India, have been gone through trials in Hosur nearBangalore and Piparsand near Lucknow and have performed well. Certain clarifications havebeen sought by RDSO which work is in progress. The cross approvals are expected shortly.

International Operations and Exports

Your company has completed development, manufacture, testing and factory acceptancetests of all 136 Lx Gates. All the Gates have also been shipped to Egypt. It is to thecredit of our Engineers that an Indian product with SIL 3 standard has been accepted byEgypt. It is likely that Egypt may increase the number of Gates to be supplied by Kernexeither by procurement by ENR or subcontracts from other contracting MNC's for EgyptianRailways. We may also bid for a share of the orders.

Your Company has been rigorously scanning for international markets in Malaysia,Thailand, Indonesia and Vietnam, Cambodia, Loas and Srilanka for Lx Gates market and alsoMulti-section Axle Counter. It has also participated in Interim tenders in some of thesecountries.

New areas of business in India

Your company will be participating in all related Railways tenders like TPWS or ascomponent suppliers or Installation & Commissioning agency. Your company is alsoexamining the scope for developing components for Defence needs and also for RDSO, likeTCAS 3.10 etc.

Domestic Market

Depending upon the progress of ACD trials and acceptance, new zones like South East,East Coast, Eastern and East Central zone and three zones in the South may be authorizedto deploy ACD System during 2012-2013.

Multi-section Digital Axle Counter, if approved, by Railways could provide a growingmarket for the Company.

The company has since completed development of Version 2.1 ACD System with software andalso Lx Gates, Multi-section Digital Axle Counter System, ACD Survey software and ACDReporting System software except for a few changes or upgradation, if required by clients.

Research & Development

You are aware that your Company’s strengths are strong R&D, professionalism aswell as opportunities in related technologies which are in demand.

Progress achieved on the IPO and Company Expansion Projects

As part of IPO related company’s expansion projects, establishment of newmanufacturing centre for ACDs, ADDs and Advanced Signal System has been completed, andacquisition for Intelligent Transport Technology Centre, planned R&D Projects has beencompleted. Balance work on Intelligent Transportation Technology is in progress.International marketing office and project offices have since been set up to the extentrequired and rest will be taken up as and when required.

Overseas 100% Owned Subsidiary

Your Company has one Wholly Owned Subsidiary in USA as on 31st March 2012. The membersmay refer to the statement under section 212 of the Companies Act, 1956 for furtherinformation on this subsidiary. The Balance Sheet of the said Company is also attachedherewith as required under Section 212 of the Companies Act, 1956.

Directors’ Responsibility Statement:

As required under Section 217 (2AA) of the Companies Act, 1956 it is hereby statedthat:

a) In the preparation of the Annual Accounts for the year ended March 31, 2012 theapplicable Accounting Standards had been followed along with proper explanation relatingto material departures

b) The directors had selected such Accounting Policies and applied them consistentlyand made judgments and estimates that are reasonable and prudent so as to give a true andfair view of the state of affairs of the company at the end of the financial year and ofthe profit or loss of the company for that period.

c) The directors had taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of this Act for safeguarding theassets of the Company and for preventing and detecting fraud and other irregularities; and

d) The directors had prepared the annual accounts on a going concern basis.

Audit Committee of Board:

With the resignation of the Independent Non Executive Chairman of the Audit Committee,the Audit Committee of the company now comprises two independent Directors and will besuitably strengthened. The Chairman of the Audit Committee was present at the previousAnnual General Meeting.

Corporate Governance Report and Management Discussions and Analysis Report:

Separate reports on Corporate Governance along with Auditors’ Certificate on itscompliance as well as Management Discussion and Analysis Report forming part of thisreport is annexed.

Fixed Deposits:

The company has not accepted any deposits from the public and therefore, the provisionsof section 58A of the Companies Act, 1956 are not applicable.

Conservation of Energy, Technology Absorption, etc.:

The particulars prescribed under 217 (1) (e) of the Companies Act, 1956 read with theCompanies (Disclosure of particulars in the Report of Board of Directors) Rules 1988, inrespect of technology absorption, foreign exchange earnings and outgo are set out in theannexure forming part of this report.

Employee Relations:

Relations between the employees and the management continued to be cordial during theyear.

Particulars of Employees:

None of the employees are covered under section 217(2A) of the Companies Act, 1956 readwith the Companies (particulars of employees) Rules, 1975.

Directors:

Dr Anji Raju and Dr Janardhana Reddy Vinta, Directors retire by rotation and beingeligible, offer themselves for reappointment. Sarvashri S.V.Subba Raju and R Sankaran nonexecutive Directors have resigned from the Board on health grounds and Sri KishoreGottimukkala has resigned from the Board for personal reasons. Your Board records itsappreciation of the valuable services rendered by Sarvashri S.V.Subba Raju, R Sankaran andKishore Gottimukkala during their tenure as Directors.

Auditors:

M/s. GMK Associates, Chartered Accountants, Hyderabad, the Statutory Auditors of theCompany retire at the conclusion of this Annual General Meeting and are eligible forre-appointment.

Acknowledgements:

The Directors take this opportunity to thank all investors, business partners, clients,and technology partners, Company’s Bankers, State Bank of Hyderabad, Punjab NationalBank, Central and State Government Authorities for their continued support during theyear. Your Directors would like to place on record their appreciation of the contributionmade by employees at all levels for their commendable team work, dedicated and wholehearted efforts made during the year.

ANNEXURE TO THE DIRECTORS’ REPORT

Particulars pursuant to Companies (Disclosure of Particulars in the report of Board ofDirectors) Rules,1988

A. Conservation of Energy:

The activities of the company do not result in significant consumption of energy.However the company takes all the necessary steps to conserve energy at the offices andwork places on an ongoing basis.

B. Technology absorption Adaptation and Innovation:

There is no imported technology involved in the operation of the company. The companycontinues to focus its attention towards the rapid technological changes in the fields ofits activity and train the man power continuously to improve the productivity. Thetechnologies being used are indigenous and the company has evolved a training methodologyto measure the extent of adaptation by its personnel and training needs are identifiedaccordingly. The Company is further, in the process of establishing special R&Dprojects like Up-gradation of Anti-Collision Devices to international standards andimplementation of SPAD features in ACD system, Developing of Multi Section Digital AxleCounter and Railway Diagnostic System for Hot bearings, Vibrations and Wobbling of wheelsetc. will become import substitutes at economical prices suitable to Indian Railways andother railways working in developing countries.