Contents

Vision
Company Information
Governing Board of Directors
Management of the Exchange
Chairman's Review
Directors' Report
Market Performance Indicator
General Administrative Review
Balance Sheet
Income Statement
Cash Flow Statement
Notes to the Financial Statements
Operational and Administrative Review
ISE Family Members
Investors Education/Services
Auditors' Report to the Members
Notice of Annual General Meeting ISE Family Members

VISION

MISSION

CORE VALUES

• Highest standards of commercial honour and integrity.
• Just and equitable principles of trade and business.

We shall work to:

• Regulate our market in accordance with international best practices.
• Settle and decide points of dispute arising out of investors' complaints.

We have confidence in our ability to:

• Lead through the strengths of our commitments and willingness to excel. 
• Continuously respond to the changing needs of internal and external environments.

COMPANY INFORMATION

Board of Directors

Company Secretary

Mr. Yousuf H. Makhdum Legal Advisors

M/s. Hassan & Hassan Advocates

M/s. Hassan Kaunain Nafces Legal Practitioners & Advisers

Bankers

MCB Bank Limited PICIC Commercial Bank Limited Allied Bank of Pakistan Limited Saudi Pak Commercial Bank Limited Fiasal Bank Limited

Auditors

M/s. TaseerHadi Khalid & Co., Chartered Accountants Registered Office

Stock Exchange Building 101-E,Fazal-uI-HaqRoad Islamabad, Pakistan UAN: (92-51) 111-600-800

PABX: (92-51)2275045-48 Telefax: (92-51)2275044 E-mail: ise@ise.com.pk Website: www.ise.com.pk

GOVERNING BOARD OF DIRECTORS

	Mr. Abdul Waheed Jan Mr. Abdul Waheed is the Chairman of the Board of Directors. He is an eminent Economist andbyprofcssionheisaBrokcr of the Islamabad Stock Exchange running his brokerage house since 1992. Mr. Abdul Waheed is also a member of the Board of National Commodity Exchange.		Mr.Aftab Ahmad Ch. Mr. Aftab Ahmad Ch. is the Managing Director/Chief Executive Officer of the slamabad Stock Exchange. He is a graduate of Nicholls State University, LA, USA with an MBA degree. Mr. Aftab is also a member on the Board of JCR-VIS Credit Rating Company.
	Mr.Alisan liiiiin/Bhatty Mr. Ahsan Imtiaz Bhatly is the chief executive of Millennium Securities (PvtJ Limited, corporate member Islamabad Stock Exchange since 2000. He is a graduate from State University of New York. He possesses rich experience of brokerage business.		Mr.AlyRatansey Mr. Aly Ratansey is a nominee of the SKCP on the Board oflslamabad Stock Exchange since 2004. He is a senior Chartered Accountant and a partner of A.F. Ferguson & Co, the leading professional accountancy firm in the country.
	Ch.ljazAhmed Ch. Ijaz Ahmed was appointed as Director on the Board of the 1SE on August 22. 2005 on the casual vacancy occurring on account of transfer of membership by Mr. Iskander M Khan. Mr. Ijaz runs a brokerage house under his own name and has been a member of ISE since 1997.		Mr.MohsinKhaiid Mr. Molisin Khalid is a nominee Director of SECP on the Board of the Islamabad Stock Exchange since 2004. He is a graduate from Boston University, USA in Economics and International Relations. He is the executive director of Ittehad Steel Re-Rolling Mills. He has been the President of Islamabad Chamber of Commerce for the term 2000-01.
	Mr. Muhammad Usman Mr. Muhammad Usman is the chief executive of SAFE Securities (Pvt) Limited, corporate member Islamabad Stock Exchange. He is a commerce graduate from University of Punjab. He holds vast experience in securities business.		Mr. Shaharyar Ahmad Mr, Shaharyar Ahmad is the SECP's nominee on the Board of the ISE. Having vast exposure of capital and money market operations as part of his banking career both at national and international levels, he is presently serving as SEVPand Group Head corporate banking and financial institutions in Askari Commercial Bank.
	Mr. Zahid Lalif Khan Mr. Zahid Latif Khan is the chief executive of Zahid Latif Khan Securities (Pvt) Limited, corporate member of the Islamabad Stock Exchange. He possesses vast experience in the field of banking and finance besides stock brokerage business.		SyedKaukab Mo hy lidding Syed Kaukab Mohyudding is the SECP's nominee on the Board of the Islamabad Stock Hxchangesince2003. Achemical engineer by profession, he is the Managing Director of Wah Nobel Group of Companies since 1997. He is also member of various engineering as well as professional bodies in Pakistan.

MANAGEMENT OF THE EXCHANGE

	Mr. Aftab Ahmad Ch. Mr. Aftab Ahmad Ch. Is the Managing Director of Islamabad Stock Exchange since October 2002. Mr. Aftab holds a MBA degree from Nichollas State University, LA, USA. He is also the director of JCR-V1S Credit Rating Company of Pakistan Limited.		Mr.YousaiH.Makhdum Mr. Makhdum is an investment banker by profession and has been the Secretary of the Board of ISE since December 1995. Mr. Makhdum holds a MBA degree from Punjab University, Lahore. He also performs the duties of Chief Administrative officer (CAO) and also manages the affaires of Department o f G eneral Adm i n i s tra ti on.
	Mr. All m ad Noman Mr. No man holds a Masters degree in Statistics. He has been associated with the Exchange since 1992. He is managing the overall trading operations and risk management functions of the Exchange. He is also a director on the board of National Clearing Company of Pakistan Limited.		Mr. Kamran Anwar Mr Kamran Anwer heads the Department of General Administration. He is a Commerce Graduate and MBA student who has been serving in ISE since 1992.
	Mr. Mohammad Waris Niazi  Mr. Waris Niazi heads the Department of Investors Relations of the Exchange. He is a Commerce Graduate and has been associated with the Exchange since 1995. He is also pursuing further studies in law.		Mr. SaqibJaiil Malik Mr Saqib Jalil heads the Department of Companies A Hairs of the Exchange. He holds Masters degree in Economics and has been associated with the Exchange since 1999
	Mr. S. M. Asghar Abbas Naqvi Mr. Asghar Naqvi serves as the Associate Manager Department of Internal Control and Head of Internal Audit. He holds the BBA (lions) degree and is a student of MBA. Mr. Naqvi has been associated with the Exchange since 2003.		Mr.BabarZahoor Mr. Babar Zahoor is serving as lncharge I.T. Section of the Exchange. Mr. Babar is a Commerce Graduate and an MCS student who has been serving in ISE since 1993.
	Ms. Sumbul Naveed Qureslii  Ms. Sumbul Naveed Qureslii has joined SAFE Secretariat as Deputy Secretary General. She is MBA and Law Graduate. She has rich experience of regulator environment by virtue of her work experience with SBCP.		Syed Nayyer Ashfaq Sycd NayyerAshfaq is working as Manager Accounts and Office Support of SAFE. He is a Commerce Graduate and pursuing further studies in Management Accounting. He also lolds sufficient experience of stock exchange's functioning.

CHAIRMAN'S REVIEW

By the grace of almighty Allah, 1 feel pleasure to present my review to the members on the eve of 16lb Annual General Meeting of the Islamabad Stock Exchange.

The Exchange earned a record revenue of Rs.56.5 million during the period under review. This land mark performance was achieved with the well focused and dedicated team efforts. After netting the administrative expenses of Rs. 39.1 million, the Exchange made a profit of Rs.17.4 million before tax. In this connection necessary details have been provided in the adjoining Directors' Report.

The period under review can be termed as most volatile era in the history of securities market in Pakistan. It was also at the same time quite challenging for the Exchange. The Exchange performed splendidly to meet all such challenges. However, the only aspect where the Exchange's performance can not be appreciated is the trading. Rather it is serious cause of concern for all of us. During this year a number of records were created in the securities market of the country especially in the perspective of growth of trading activity and many milestones were achieved but despite the ample growth of business opportunities at ISE, the volume shifting phenomena towards most liquid market continued like previous years. Although we mobilized our efforts to rectify the situation but no satisfactory results could be achieved. The prolonged issue of badla phase out was one of the major reason which affected the trade growth and attracted volatility in the market. Besides, the availability of finances at much higher rates as compared to other bourses was one of the major reasons for preferring indirect trade via other bourse's platform through counter brokers. Pre-trade hedging instrument of margin financing devised to replace the post trade financing system of COT could not get recognition amongst investors mainly due to lack of interest and participation of banks and lending institutions and secondly due to vigorous processes involved for obtaining the finances as compared to amenable procedure of COT financing. Therefore, there was a serious need to find out a mechanism which should be free of COT debilities besides being uncomplicated and unproblematic. Accordingly, after a series of high level negotiations, Continuous Fund Settlement (CFS) System has been launched. This system shall remain available for hedging buy positions all the time the during trading hours unlike the COT system which opened for a limited time period and in this small duration, the investors/badla seekers remained prone to exploitation. In addition to that all other weaknesses of COT have also been addressed properly in CFS system. With the involvement of NCSS and CDC, the issue of blank selling and refinancing shall also be catered comprehensively. Besides, the financing period has been allowed to be 30 calendar days. As such with some more distinct features, this system has proved to be a good substitute for COT system. However the system will be reviewed at the end of February 2006. The unstable rate of financing through CFS market was also one of the factors discouraging the in-house trade at ISE. Therefore, after negotiations with all participants, the maximum badla limit was capped at 24%. This initiative has not only been appreciated by the participants but the trade volumes are also tending to grow. The derivative market also remained dormant through out the year. Although the Exchange adopted similar margin schedules and norms as compared to other bourses yet, futures market could not get investors preference. Now some more developments in the futures counter are in the offing including cash settlements features and parallel three months contracts which will ensure smoothness in the system.

Now I come across the demutualization and integration issues. The ISE had endorsed the report of the Expert Committee as formed by the SECP for demutualization and integration matters in substance in the best national interest in order to remove the anomalies of the defragmented securities market of Pakistan. However, due to lack of disagreement of one of the quarter for the modalities prescribed in the report for demutualization and integration, the course defined by the Expert Committee for the emergence of Fully Integrated Demutualized Exchange could not be followed. However, after a process of negotiations, the LSE and ISE has agreed in principle to form a National Stock Exchange after merging both the existing entities into said NSE. In the meantime the SECP has now termed the integration as a commercial decision of two entities. However, necessary work has been initiated in this regard which include valuation of two Exchanges by the same valuation consultant (M/s. Ferguson & Co., Chartered Accountants). Besides, other documents like business plan, memorandum and articles of association, enabling legislation and scheme of arrangement of new exchange are in final process. The Exchange's Management is of concerted opinion that simultaneous demutualization and integration is quite imperative for long term growth of the securities market in Pakistan.

Regarding new building, I would also like to share that after inauguration of the project by honourable Prime Minister of Pakistan, the construction work of Phase-] was started in March 2005. The construction work continues round the clock, however, the work progress is behind as per schedule. Although the contractor has attributed different reasons but the Exchange's Management is constantly pursuing the contractor to complete the work in a shortest possible time frame. Besides, initial work on Phase-11 has been completed and prequalification documents have been evaluated for invitation of tenders. However, in view of the geo seismic variations, the whole exercise is being done afresh. The Exchange will focus its efforts to construct a building with most modern technology that could absorb the shocks of even high degree earthquakes. In addition to above, subsequent to the resolutions passed in the last extraordinary general meeting, the Board has allocated approximately 1000 sq. ft. office space (inclusive of proportionate service area) to each of the entitled members in a most transparent manner. After this measure, the Management will make all out focus towards the smooth construction of the building and generating cash inflows by launching the reserved spaces for outside parties.

Another remarkable event of the year was the organization of South Asian Federation of Exchanges (SAFE) AGM and Theme Conference by the TSE. Participants from the Exchanges of almost all the countries from South Asian region participated in this Conference. This conference provided a good opportunity to the Exchanges of the region to share the experiences of each other. This event gave a boost to the image of the IS E. In addition to that the IS E al so succeeded after a course of strict competition to have the secretariat of the SAFE at Islamabad from Bangladesh. Here I would like to especially thank Mr. Muhammad Yasin Lakhani, Chairman KSE and Syed Asim Zafar, Chairman LSE for their full support in this connection. The undersigned was also honoured to be elected as the Vice Chairman of the SAFE in this Conference.

I would like to thank Mr. Shaukat Aziz, honourable Prime Minister of Pakistan for his special interest for the development of capital market. I would also like to record my gratitude for Mr. Omer Ayub, Minister of State for Finance, Dr. Salman Shah, Adviser to the Prime Minister for Finance and Revenues and for their keen interest for resolving the issues pertaining to securities market. I would also thank Dr. Tariq Hasan, Chairman SECP and Mr. Shahid Ghaffar, Commissioner (SMD) SECP whose valuable suggestions guided us to perform our responsibilities more objectively. I also record my appreciation for Mr. Shaukat Tareen and his Committee for paving a way for a befitting resolution of the chronic issue of COT.

In the end, I would also like to thank my all colleagues on the Board of the TSE and all the members for their confidence shown in Extraordinary General Meeting without which it would have been impossible to have resolved the issue of allotment of offices in the new building. While endorsing the contents of the Directors' Report, I now conclude with the pray for the bright future of our Exchange.

DIRECTORS' REPORT

General

The financial statements were discussed and approved by the Audit Committee of the Board in its meeting held on October 3, 2005 and also by the entire Board in its meeting held on October 10,2005. The Governing Board of Directors recommends that the members of the Islamabad Stock Exchange adopt the enclosed financial statements for FY 2004-2005 at the Annual General Meeting of the Exchange to be held on October 31,2005.

Overview of the Economy

As a result of successful implementation of successive reform measures, the capital market also grew by leaps and bounds and emerged as one of the important pillars of the economy. During the outgoing FY, the total profit before taxation for the most sectors listed on the stock market showed impressive growth. Together with the improvements in corporate profits, good economic performance of the country continued to provide a very positive environment for the development of the stock market.

Stock Market Performance

Financial Highlights

Business Analysis

On the inactive membership fee side, although the Exchange had levied inactive membership fee in order to motivate them to activate their business at ISE yet the objective of the Exchange to increase the participation level could not be achieved. The newly inducted members despite having desired financial strength also failed to play any vibrant role for the uplift of trade growth. The first quarter's state of trading income of the Exchange for FY 2005-06 reveals that if the ongoing tendency prevails, the inactive membership fee income magnitude would be much more than the trading revenue which will off course be a sorrowful situation.

On the Listings side, the situation was also not encouraging as only six companies with net paid-up capital of Rs. 19,802.22 million got listed at the ISE during the outgoing financial year. As a result of listing of new companies, the number of listed companies at ISE increased to 236. This year the additional listing fee dominated all other sources of revenue by recording an amount of Rs.21.86 million which was 35% more as compared to last year. Although there is a great potential for the new listings and expansion of existing companies particularly in the scenario of inflating interest rates, yet the flow of revenue can be termed as discreet and continuous. The income from listed companies' source constituted 54%. However, as a diversification measure, the revenue generation from trading income is very vital. In the prevailing scenario, if the lack of participation continues from the broker's side, it may affect the viability of the Exchange and would eliminate its chances to emerge as a vibrant secondary market. There is no lack of potential for growth but this is just the commitment from all the members of the Exchange, which can accelerate the trading activities of the ISE.

Future Outlook

On the other hand, in the medium to long term strategy, the ISE is focusing heavily

 on its proposed merger/integration plans with LSE. It is felt that the integration would create an added depth and liquidity in our combined market. The Integrated Stock Exchange would have its branches in all the major cities of the country including Karachi thereby leading to attracting more small investors towards the shares investment.

As far as particular progress on the merger plan of the ISE is concerned, the Board is pleased to inform the members that the ISE had appointed M/s. First International Investment Bank as its Financial Adviser and M/s. Hassan and Hassan as Legal Adviser for the sake of having advices pertaining to Demutualization and Integration etc in February 2005. Through concerted negotiations, both the IS E and LSE have agreed in principle to merge into a New Stock Exchange to be formed under the name and style of National Stock Exchange. In this connection, both Exchanges formed a Joint Demutualization and Integration Committee (JDIC) to pursue the objectives. In order to have uniform valuation on same terms/parameters, the exercise of valuation has been assigned to M/s. A F. Ferguson, Charted Accountants (Lahore Chapter) by both the Exchanges. This valuation exercise is expected to be completed by mid October this year. The Legal Adviser has prepared an enabling draft legislation, memorandum and articles of association and scheme of arrangements which are under process of finalization by both the Exchanges. The Financial Adviser has also prepared an initial joint Business Plan for National Stock Exchange in the merged scenario of ISE and LSE and the discussions on the improvement thereof are presently continuing. In view of the existing business scenario, the ISE is committed to Demutualization and Integration in a shortest possible time frame.

Corporate Governance and Oversight Functions

met 13 times. During the year, the Board had six regular board meetings whereas seven emergent Board meetings were also held. The composition of the Board for the current year was delayed from its scheduled date of November T', 2004 to 28"1 December 2004, for want of timely nomination of the SECP appointed directors on the Board. As such, before the meeting of the full Board a meeting of the Board comprising of the elected directors only was also held during November 2004. During various Board meetings, different important agenda items related to market development, regulatory improvement, enforcement, annual budgets, staff compensation, new building project and review of the performance of Board Committees were discussed. The Board also had separate Board meetings to discuss the ISE's strategy on ongoing demutualization and mergerplans with LSE, wherein the initial business plan of the proposed National stock Exchange was also discussed. During the current term of the Board, following attendance was observed:

Remuneration and other Benefits to the Board Members: The Islamabad Stock Exchange has no policy for the remuneration of the Board members and none of the directors except the Managing Director is paid cash remuneration. The Managing Director serves as the full time Chief Executive of the Exchange and as such receives monthly salary and such entitlements as are available to other staff members like group and medical life insurance coverage etc. Besides, the MD is also authorized other non-cash benefits such as company maintained chauffer driven car, mobile telephone facility and other official domestic/foreign travel expenditures & allowances as authorized under the ISE's policies. The Exchange also provides the same non-cash benefits to the Chairman of the Board including provision of company maintained chauffer driven car, reimbursement of mobile telephone expenses and other official domestic/foreign travel expenditures & allowances.

Governance/Accounting Policies: The Board of Directors further affirm that-

0 During the period under review there has been no material departure from the best practices of corporate governance as followed at the ISE.

o Proper books of accounts, which are the indicators of the financial wholeness, have been maintained at the ISE. The financial statements for the year ended June 30, 2005, together with the notes thereon have been prepared in conformity with the Companies Ordinance 1984.

o Generally applicable and appropriate accounting policies have been consistently applied in preparation of financial statements and all accounting estimates are based on reasonable and prudent financial judgments.

o The ISE has consistently followed a uniform pattern of revenue recognition from the trading fee source. The trading fee charged from the members is divided in three parts and allocated to income account and investors and members' protection funds on such rates as approved by the Board.

■        Trading Oversight/Regulation and Risk Management

o Trading oversight and risk management functions of the Exchange are adequately sound in design and the independent management of the Exchange carries out implementation thereof on behalf of the Board.

o The system of trade verification and trading limits is sound in design and structure. Furthermore its effective implementation and monitoring is regularly ensured.

o The system audit of the members of the Exchange is being carried out regularly under the system audit regulations of the Exchange and reports thereof are regularly being sent to the SECP.

o The Exchange has an effective and tested procedure in place to investigate and dispose off the investors' complaints received by the Exchange. During the year under review, a total of 24 complaints were resolved out of total 29 complaints that were lodged with the Exchange whereas the rest are in process of settlement.

o The Department of Companies Affairs regularly monitors the overall disclosure and other accounting practices of the listed companies.

Legal Issues

Election of Directors

All members of the Board including elected and the SECP nominated directors of the Exchange shall retire on the eve of the forthcoming AGM scheduled for October 31, 2005 after the adoption of the annual accounts. Thereafter, the election of five directors for the next term's Board from amongst the contesting members of the Exchange shall take place in accordance with Article 63 of the Articles of Association of the Exchange. The formation of new Board shall be completed after the nomination of the four independent directors from the SECP in terms of the relevant provisions of the Exchange with the Managing Director being the full time ex-officio member of the Board.

Appointment of Auditors

M/s Taseer Hadi Khalid & Co. (KPMG) Chartered Accountants, auditors of the Exchange for the FY 2004-2205, retire in the forthcoming AGM and being eligible offer themselves again for re-appointment

Expression of Appreciation

The Board of Directors of the Exchange places on record its appreciation for the wholehearted support that it received from all the stakeholders' community including the Ministry of Finance, Securities and Exchange Commission of Pakistan, State Bank of Pakistan, Central Board of Revenue and other government functionaries/departments/agencies for their guidance in all matters related to the Exchange through out the year.

The Board also takes this opportunity to thank all the members of the Exchange for their continued support and valuable contribution throughout the year. The Board welcomes the new entrants of the Exchange and wishes its best to the outgoing members of the Exchange whose association greatly helped in building our institution. The Board also recommends that the list of incoming members by virtue of transfer of memberships as mentioned at the end of operational and administrative review may be endorsed by the general body as per Article 82 of the Articles of Association of the Exchange.

The Board also records its appreciation for the management and the entire staff of the Exchange, who enabled the Exchange to function efficiently on day to day basis. The Board is confident that all the old and new staff members of the Exchange will

continue to serve the Exchange with their characteristic zeal, devotion and loyalty.

The Board also places on record its appreciation for the support of the representatives of all those staff members of the print and electronic media who were responsible for covering and reporting the 1SE trading activities. Their coverage about the 1SE greatly helped in promoting the image of our institution and in promoting the confidence of our investors.

For and on behalf of the Board of Directors.

MARKET PERFORMANCE INDICATOR

KEY FINANCIAL DATA

OPERATIONAL AND ADMINISTRATIVE REVIEW

Risk Management

During the year, the major focus of the apex regulator was to check the derivative and leverage trading practices of the members in which the stock exchange played a major role. The phasing out of COT remained quite critical issue during the later half of the financial year which caused shambles in the market from time to time. The alternative system of margin financing could not prove to be a real substitute for COT. The position limits in the major scrips in COT were frozen and mechanism of gradual reduction was started but this mechanism could not prove worthwhile and later-on the week reduction system was done away with by the regulator. Finally the Continuous Fund Settlement (CFS) system replaced the COT. However, a few modalities of CFS are in process of finalization. The 1SE Management was quite supportive to the risk management initiatives of the SECP. Besides COT phase out, the change in circuit breakers was initiated whereby the upper limit was harmonized with the lower limit that is both were prescribed to be 5% of Re.l/- whichever is higher as compared to last close of scrip's price. The editing or deletion of orders (either bid or offer) in early hours of trading which was proving a tool for manipulation of the market was also disallowed. The netting across T+3 and Future was eliminated. On the Futures counter, the Exchange adopted the identical exposure margin slabs as advised by the SECP to three bourses. Besides, a minimum free float barrier was prescribed which was to be Rs.50 million for a scrip to be eligible for futures trade. On the trading side, a member was allowed to trade only upto a maximum of 3% of the free float. In addition to that, a member's exposure in Future Market was restricted to 10 times of the respective Net Capital Balance. Although, the 1SE adopted all the necessary measures in harmony with the other Exchanges, however, the Futures counter could not attract any activity whatsoever.

The Exchange also assigned the task for the development of a system based on a value at risk volatility model to National Commodities Exchange which has a high level of expertise in that respect. The development of the system is under process and it will be put to commissioning subject to satisfactory performance after parallel testing with the existing system. Following the introduction of value at risk model, this critical job will be administered on statistical basis.

Surveillance and Monitoring

The Exchange's Management remained on the forefront to ensure effective controls and check malpractices through price and position monitoring of the participants. The most significant step from the surveillance and monitoring point of view during this year was abolition of group accounts facility by the Central Depository Company of Pakistan at the direction of the SECP. This initiative would go far away for effective monitoring and surveillance. However, the most crucial development is in the offing which relates to unique/global client identification. Once adopted by the Exchanges, this system would bring healthy change from the monitoring and surveillance point of view. Its mechanism is being developed by the CDC and the same is expected to be in place by November 30,2005.

Enforcement and System Audit of Brokers

The Exchange continued its earlier practice of system audit of the brokers of the Exchange this year on vigorous basis. The job was provided regulatory cover during the year 2004. The Regulations Governing System Audit of the Brokers containing diversified scope of the system audit helped in creating a uniform system for auditing the functional systems of the brokers. The said Regulations also contain enforcement powers and penalties for deviations from the systems. The Exchange constituted a panel of system auditors comprising 12 chartered accountant audit firms out of the ICAP's QCR auditors list. Under the said Regulations, the system audit of the following Brokers was completed since January 2005:

At the moment, the system audit of the following brokers is under progress:

The job of system audit of all the functioning Brokers is required to be completed within a time frame of two years as provided under the Regulations. As such, new schedules has already been chalked out by the Exchange in this regard in compliance with the Regulations.

Elimination of Badla System and Adoption of Continuous Fund Settlement System

ISE Index

Listing Performance

The total listed paid-up capital showed an increase of 15% while starting from Rs.293.151 billion on July 01,2004 to close at Rs.337.037 billion on June 30,2005. On the other hand market capitalization recorded remarkable surge of 43% during this period. Market capitalization was Rs. 1,089.08 billion as on July 01, 2004 whereas it was Rs. 1,558.43 billion on June 30,2005 thereby showing an increase of Rs. 469.35 billion during the span of financial year under review. Like ISE-10 Index, the market capitalization was at its peak on March 15, 2005 when it was recorded as Rs.2197.94 billion.

The Department of Companies Affairs of the Exchange remained vigilant from the enforcement perspective. The regulatory compliance by the listed companies was the major focus of the Exchange. The ISE is concentrating to further strengthening the regulatory regime.

The OTC market also remained dormant during entire year and no company approached for listing at this counter.

 This year two companies were de-listed, one as a consequence of merger into another company and other on account of buy back of shares from minority shareholders in accordance with the laid down criteria.

Expansion of Stock Market Outreach

Investors Education

In addition, the students from the following institutions were imparted knowledge of stock market functions at ISE during different training sessions held separately during the year:

Installation of Investors' Hotline

The use of hotline facility is increasing day by day and many a times it has been

appreciated by the investors.

Student Internship Program

Investors Complaints

Following is the status of investors' complaints for 2005-06 (as on September 30,05)

General Administrative Review

Human Resource Development

New Building Progress

Apart from the construction, the Board has also completed the rooms allotments to the members in pursuance of the resolutions passed in the last extraordinary general meeting of the Exchange. The rooms were allotted after a course of transparent balloting process and every member was quite satisfied over the transparency of the matter. Regarding soft launching of second floor, the Exchange has got good response. In addition to that enthusiastic response has also received for the ground floor from different banks and financial institutions to set up the bank branches for which the Exchange is in the process of setting modalities.

South Asian Federation of Exchanges (SAFE) Conference

 for the first time, representatives of the concerned capital market regulators were also invited in the Conference. This conference provided a good opportunity to the Exchanges of the region to share the experiences of each other. Besides, representation of the regulators also paved the way for the establishment of the South Asian Forum of the Regulators. This development would harmonize the coordination of the regulators and regulatees for achieving the objectives of the SAFE. Cross border listings and trading in the region and investors education were the topics of the theme conference. This event gave a boost to the image of the ISE. In addition to that the TSE also succeeded after a course of strict competition to have the Secretariat of the SAFE at Islamabad from Chittagong, Bangladesh. By virtue of this development, Islamabad would become the hub of the SAFE activities and ISE would be greatly benefitted from such activities.

Change in the Membership

Subsequent to the reporting of the changes in membership seats in the last annual report, the following changes occurred in the membership register of the Exchange till September 2005 which are being presented for endorsement by the members in the general meeting in terms of Articles 82 of the Articles of Association of the ISE:

 The case of M/s. Soneri Bank Limited whose bid was qualified in February 2004 for a new membership seat is pending as yet subject to completion of formalities.

ISE Family Members

AUDITORS' REPORT TO THE MEMBERS

It is the responsibility of the Company's management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and significant estimates made by the management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

a)         in our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance, 1984;

b)         in our opinion:

(i) the balance sheet and the income and expenditure account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and arc in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the Company's business; and

(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Company;

c)         in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, income and expenditure account and cash flow statement together with the notes forming part thereof conform with the approved accounting standards as applicable in Pakistan, and give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at 30 June 2005 and of the surplus and its cash flows for the year then ended; and

d)         in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

The financial statements of the Company as of 30 June 2004 were audited by another auditor whose report dated 08 October 2004, expressed an unqualified opinion on those statements.

BALANCE SHEET

AS AT 30 JUNE 2005

The annexed notes 1 to 27 form an integral part of these financial statements

These financial statements were approved by the Board of Directors in their meeting held on October 10,2005.

INCOME AND EXPENDITURE ACCOUNT

FOR THE YEAR ENDED 30 JUNE 2005

The annexed notes 1 to 27 form an integral part of these financial statements.

CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 JUNE 2005

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1   THE COMPANY AND ITS OPERATIONS

Islamabad Stock Exchange (Guarantee) Limited ("the Company") was incorporated in Islamabad, Pakistan on October 25, 1989, under the Companies Ordinance, 1984, as a company limited by guarantee. The principal activity of the company is to conduct, regulate and control the trade and business of stocks, shares, securities, bonds, government papers, loans and other investments or securities of like nature. The registered office of the Company is situated in Islamabad.

Pursuant to the Federal Government's de-mutualization process, both Islamabad Stock Exchange and Lahore Stock Exchange have agreed in principle to merge into a new stock exchange to be formed under the name and style of National Stock Exchange. Both Exchanges have formed a Joint Demutualization and Integration Committee to pursue the objectives. In this connection the valuation exercise has commenced and legal and financial advisors have also been appointed.

2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1    Statement of compliance

These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984. Approved accounting standards comprise of such International Accounting Standards as notified under the provisions of the Companies Ordinance, 1984. Wherever, the requirements of the Companies Ordinance, 1984 or directives issued by the Securities and Exchange Commission of Pakistan differ with the requirements of these standards, the requirements of the Companies Ordinance, 1984 or the requirements of the said directives take precedence.

2.2    Accounting convention

These financial statements have been prepared under the historical cost convention.

2.3    Staff gratuity

The Company maintains an unfunded gratuity scheme for all of its employees on the basis of one gross salary per year of each year of service, who have completed one year of service other than those hired on contract basis. Gratuity is paid at the time of retirement or resignation. Provision for the year is charged to the income and expenditure account.

2.4 Taxation

Current

Provision for current taxation is based on taxable income at the current rates of taxation after taking into account tax credits and tax rebates, if any.

Deferred

Deferred tax is accounted for using the balance sheet liability method in respect of all taxable temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilised. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse, based on tax rates that have been enacted.

During the year, the Company has recognised deferred tax asset amounting to Rs. 4.13 million in accordance with the provisions of International Accounting Standard-12 "Income Taxes". Had the deferred tax asset not been recognised, surplus for the year and total assets would have been lower by Rs. 4.13 million.

2.5 Investments

Available for sale

Long term investments classified as available for sale represents investments which are not held for trading or held to maturity. All investments are initially recognized at cost, being the fair value of the consideration given. Subsequent to initial recognition for investments traded in active market, fair value is determined by reference to quoted market price and investments for which quoted market price is not available, or the fair value cannot be reasonably calculated, are measured at cost, subject to areview for impairment at each balance sheet date.

Investment in associates

Investments in associates are initially recognised at cost. At subsequent reporting dates, the recoverable amounts are estimated in order to determine the extent of impairment losses, if any, and carrying amounts of investments are adjusted accordingly. Impairment losses/ reversal of impairment losses are recognised in the income and expenditure account.

Investments held to maturity

Investments with fixed or determinable payments and fixed maturity, which the Company has the positive intent and ability to hold to maturity, are carried at amortised cost, using the effective interest rate method less impairment losses, if so determined.

2.6    Fixed assets and capital work in progress

These are stated at cost less accumulated depreciation except capital work in progress which is stated at cost. Depreciation is charged to income applying diminishing balance method at the rates specified in note 10 to write off the cost of assets over their remaining useful lives whereas leasehold land is being amortized equally over the lease term. Full year's depreciation is charged on fixed assets acquired during the year whereas no depreciation is charged on fixed assets in the year of their disposal. Normal repairs are charged to income as and when incurred, however major renewals are capitalized. Gains and losses on disposal of fixed assets, if any, are taken to income currently.

2.7    Foreign currencies

Transactions in foreign currencies are converted into Pak rupees at the rates ruling on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Pak rupees at the rate ruling on the balance sheet date. All exchange differences are included in the income and expenditure account for the year.

2.8    Allocation of trading fee (LAGA)

Pursuant to the approval of the Board of Directors, trading fee (LAGA) received from members during the year is allocated in the following manner after deduction of the share of the Securities and Exchange Commission of Pakistan and National Clearing Company of Pakistan Limited.

2.9    Revenue recognition

Income arising from trading, initial listing and other similar activities are recorded as income on accrual basis.

Rental income is recognised on accrual basis.

Dividend income on equity investment is recognized when the Company's right to receive the dividend is established.

Income from bank deposits is recognized on a time proportion basis.

2.10  Provisions

Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an out flow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation.

2.11  Financial instruments

Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. The Company derecognises the financial assets and liabilities when it ceases to be a party to such contractual provisions of the instruments. The particular recignition methods adopted are disclosed in the individual policy statements associated with each item.

Trade and other payables

Liabilities for trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received.

Trade and other receivables

Trade and other receivables are recognised and carried at original invoice amount / cost less an allowance for any uncollectible amounts.

Cash and bank balances

Cash in hand and at banks are carried at cost.

2.12  Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet if the Company has a legally enforceable right to setoff the recognised amounts and the Company intends to settle either on a net basis or realise the asset and settle the liability simultaneously.

2.13  Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of cash flow statement, cash and cash equivalents comprise cash in hand, cash with banks on current, saving and deposit accounts.

2.14  Impairment

The carrying amount of the Company's assets are reviewed at each balance sheet date to identify circumstances indicating occurrence of impairment loss or reversal of previous impairment losses. If any such indications exist, the recoverable amounts of such assets arc estimated and impairment losses or reversal of impairment losses are recognized in the income and expenditure account. Reversal of impairment loss is restricted to the original cost of the asset.

3 GENERAL ENTRANCE FEE FUND

4 MEMBERS' PROTECTION FUND

4.1  This represents the trading fee (LAGA) allocated by the Company after deducting the share of the Securities and Exchange Commission of Pakistan and National Clearing Company of Pakistan Limited . Board of Directors in their meeting held on 07 January 2004 changed the allocation of trading fee for the year ended 30 June 2005 to 21.74% from33.33%.

4.2  This represents interest on PLS savings accounts, earmarked by the Company against the outstanding balance in the Members' Protection Fund.

5 INVESTORS' PROTECTION FUND

5.1   This represents the trading fee (LAGA) allocated by the Company after deducting the share of the Securities and Exchange Commission of Pakistan and National Clearing Company of Pakistan Limited. Board of Directors in their meeting held on 07 January 2004 changed the allocation of trading fee for the year ended 30 June 2005 to 21.74% from 33.33%.

5.2   This represents interest on PLS savings accounts, earmarked by the Company against the outstanding balance in the Investors' Protection Fund.

5.3 This represents amount transferred from the members' new building fund for settling the claims of a defunct member pursuant to the approval of the Board of Directors.

6 LONG TERM ADVANCES AND DEPOSITS

6.2   These represent down payment and one installment of Rs. 15,112,500 and Rs. 4,911,563 respectively received from seven parties who were successfully qualified to acquire the floors in the ISE Towers, Blue Area, Islamabad.

7 PROVISION FOR GRATUITY

8 ADVANCES AND DEPOSITS

 8.1 This represents contributions made by the members towards cost of land for new building of the Company. However, the Board of Directors of the Company decided to refund this amount to the members and accordingly Rs. 2.5 million was refunded during the year. In addition, Rs. 0.50 million was transferred to Investors' Protection Fund pursuant to the approval of the Board of Directors of the Company.

8.2 This includes Rs. 1.35 million representing advances received from members for expenses in relation to new offices in Peshawar and Abbotabad.

 9 ACCRUED AND OTHER LIABILITIES

 9.1 This includes Rs. 3.3 million payable to Capital Development Authority on account of extension surcharge for construction of new ISE Towers, Blue Area, Islamabad.

10 Fixed Assets

 10.1 Addition during the year represents payment made to M/S S.S. Estate Developers on repurchasing the rights of land pursuant to the Decision of the Board of Directors of the Company.

11 CAPITAL WORK IN PROGRESS

This represents expenditure incurred in relation to construction of new ISE Towers located at Blue Area, Islamabad. The approximate construction cost of the said tower is Rs. 995 million.

12 LONG TERM INVESTMENTS

Investments in associated companies Unquoted-at cost

13 DEFERRED TAXATION

In view of the uncertainty about taxable profits in the foreseeable future against which the losses could be utilized, the Company did not recognize the deferred tax asset in previous year and therefore created an equivalent amount of valuation reserve against deferred tax asset amounting to Rs. 2.3 million..

14 ACCOUNTS RECEIVABLE

15 ADVANCES, DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLE

16     INVESTMENTS HELD TO MATURITY

This represents investment in Term Deposit Receipts of SaudiPak Commercial Bank Limited having six months maturity. This investment carries interest @ 8.9% p.a.

17    BANK BALANCES- FUNDS

These represent funds earmarked by the Company against the outstanding balances in the Members' Protection Fund and Investors' Protection Fund amounting to Rs. 17,365,494 (2004: Rs. Nil) and Rs. 12,892,573 (2004: Rs. 13,574,310) respectively.

18 CASH AND BANK BALANCES

19 FEES AND SUBSCRIPTION

20    OTHER INCOME

21 ADMINISTRATIVE EXPENSES

21.2 The corresponding figure includes Rs. 2,800,000 reversed on account of bad debts written off in years prior to 2004.

22 FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

The information about the Company's exposure to interest rate risk based on contractual financing agreement or maturity dates which ever is earlier is as follows:

22.2   Credit risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted.

The management believes that it is not exposed to major concentration of credit risk.

22.3   Liquidity risk

Liquidity risk reflects the Company's inability in raising funds to meet commitments. Management closely monitors the Company's liquidity and cash flow position. The Company is exposed to liquidity risk with respect to the funds. The management has developed a process in which matching funds are invested for the Members' Protection Funds and Investors' Protection Fund.

22.4   Foreign exchange risk management

The management believes that it is not exposed to any major foreign exchange risk.

22.5   Fair value of financial instruments

Fair value is the amount for which an asset can be exchanged, or liability can be settled, between knowledgeable willing parties in an arm's length transaction.

The carrying values of all financial assets and liabilities reflected in the financial statements approximate their fair value except for long term investments which are stated at cost as quoted market prices thereof are not available.

23 TAXATION

23.1 Relationship between current tax and accounting profit

24 RELATED PARTY TRANSACTIONS

Related parties include associated companies, directors and key management personnel. Investments in associated companies are disclosed in note 15 to these financial statements. Remuneration of managing director is disclosed in note 21 to these financial statements.

Following are the associated companies: 

25    NO OF EMPLOYEES

Number of permanent employees at the year end was 35 (2004:35)

26    CONTINGENCIES AND COMMITMENTS Contingencies

(i) The following legal cases involving a total claimed amount of Rs. 12 million have

been filed against the Company:

1. Ch. Muhammad Aslam Vs. Islamabad Stock Exchange (for Rs. 4.50 million)

2.  Sarmad Latif Siddiqui Vs. Islamaabd Stock Exchange (for damages of Rs. 7.50 million)

3. Sarmad Latif Siddiqui Vs. Islamaabd Stock Exchange (for injunction)

4.  Mr. Mehboob Rabbani Vs. Islamabad Stock Exchange (for arbitration matter)

The legal advisor of the Company is of the opinoin that these cases will be decided in favor of the Company and, hence, no provision has been made by the Company in the financial statements of the current year for any liability that may arise as a result of the above referred law suits.

(ii) Certain cases have been filed in which the Company is not a direct party. According to the legal advisor of the Company, the Company has no chance of loss in the above cases. In addition the defendants are the direct parties who may be held responsible for any obligation which may arise.

(iii) The Company has also filed cases involving an aggregate sumorRs. 98.32 million on behalf of the claiments/ effectees of the dafaulter members of the Company.

Commitment

Aggregate commitment for contracted capital expenditure at the end of the year amounted to Rs. 218.34 million.

27 GENERAL

27.1  Figures have been rounded to the nearest rupee.

27.2 Corresponding figures have been re-arranged/reclassificd wherever necessary. The figures have been re-arranged as these are considered more appropriate for purpose of presentation. Significant re-arrangements made arc as follows:

NOTICE OF SIXTEENTH ANNUAL GENERAL MEETING

Notice is hereby given that the Sixteenth Annual General Meeting of the Islamabad Stock Exchange (Guarantee) Limited will be held on Monday, October 31, 2005 at 4:30 P.M. at Marriott Hotel, Islamabad to transact the following business:-

Ordinary Business

1. 1)         To confirm the minutes of Fifteenth Extraordinary General Meeting held on August 01,2005.
2. 2)         To receive, consider and adopt the audited accounts for the year ended June 30,2005 together with the Directors1 and Auditors1 Reports.
3. 3)         To appoint Auditors for the ensuing year, and to fix their remuneration. The retiring Auditors, M/s. Taseer Hadi Khalid & Co., Chartered Accountants being eligible, offer themselves for re-appointment.
4. 4)         To elect five (5) directors from amongst the validly nominated candidates under Articles 63(a), 64 and 67 of the Articles of Association of the Exchange for the year 2005-06.

Special Business

1. 5)         To consider the matter of the subscription to the offer for right shares of National Commodity Exchange Limited, in the ratio of three additional shares for every two ordinary shares registered and held by the ISE, and pass the following resolution with or without any modification: "Resolved that an investment ofRs.10,125,000/- be and is hereby approved for subscription to 75,000 ordinary shares @ Rs. 13.50 per share of National Commodity Exchange Limited, (NCEL). "
2. 6)         To transact any other ordinary business with the permission of the Chair.

Notes to the Ordinary Business of the Election of Directors:-

1.       There will be no proxy for an individual Member. An entitled Member wishing to attend the meeting must attend the meeting in person. A Corporate Member may nominate a representative for the meeting with proper authorization executed in favor of such representative in terms of provisions contained in the Companies Ordinance, 1984 as per specimen enclosed along with an extract of board resolution to the effect of nominating a representative for attending the meeting. However, no authorization will be required for the Nominees to attend the said meeting who have already been appointed by the Corporate Members to represent the corporate memberships at the TSE. No authorization shall be entertained/accepted if it is submitted without the relevant board resolution. Tn order to be eligible to attend the meeting, the authorizations/proxies must be submitted with the ISE's Secretariat, 48 hours before the meeting. No authorization, therefore, shall be accepted after 04:30 p.m. on29October 2005.

2.       Pursuant to Article 61, no dis-entitled Member is allowed to be present, vote or contest for the election of Directors in the AGM.

3.       Any Member who desires to contest the election for the office of a Director shall file his nomination with the Secretary of the Exchange, not later than 15 days before the date of election i.e. on or before October 17,2005. Nomination papers must be proposed and seconded by two Members and must also indicate the consent of the candidate in writing.

4.       Pursuant to Article 65, only those members are eligible for election to the post of Director who have more than one year standing of Membership i.e the members who were elected no later than October 10,2004.

5.       The following were Directors of the Exchange during the year 2004-05 :

Except for the Managing Director who is an ex-officio member of every Board by virtue of his office in terms of Article 63a(iii) of the Articles of Association of the ISE, all the above Board Members including the Chairman would stand retired in the AGM and all are eligible for rcappointment. The SECP shall also make its nominations on the Board of the ISE afresh. Whereas the Managing Director shall be tenth Director on the Board by virtue of his office. In terms of Article 63(f), all the elected and nominated Directors shall have the equal rights and privileges.

6.      The Members will be required to elect only five (5) Directors in the AGM. The Board after the induction of non-member Directors nominated by the SECP for the corresponding term, shall elect amongst the elected Directors, a Chairman in terms of provision contained in the Articles of Association of the Exchange.

7.      The Members are requested to inform the ISE Secretariat about the change in their respective addresses, if any.

Explanatory Statement to Agenda Item No 5 under Section 160(b) of the Companies Ordinance 1984

The National Commodity Exchange Limited vide its letter dated September 14, 2005 has offered ISE the right shares in the ratio of three additional ordinary shares for every two ordinary shares registered in our name subject to certain conditions. The purpose of the present issue is to meet the liquidity requirements of the Company.

Through this right offer, the NCEL has offered 750,000 ordinary shares to the ISE against the subscription of Rs 10,125,000/-@Rs. 13.50 per share of Rs. 10/-with a premium of 35%. The Board in its meeting held on October 10, 2005 has already approved the subscription to this offer and now the matter is brought for the consideration and approval of this accepting the offer of subscription in question by the members in the instant AGM.

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