Director’s Report Dear Shareholders, 

I am glad to welcome you all on behalf of the Board of Directors to this Annual General Meeting of Galfar Engineering & Contracting SAOG and to present the Annual Report for the Year ended 31st December 2009. 

Business Environment 

2009  has  been  a  demanding  year  on  the  construction  industry  as  a  whole.  The  Economic situation  in  Oman  has  weathered  the  international  financial  crisis  with  great  strength  and prudence.  This  has  attracted  several  international  players,  new  to  Oman,  which  has made competition stiffer. 

The economic activities related to development expenditure have been moving ahead steadily and the Government has been issuing tenders related to many projects continuously during the year  2009.  Initiatives  of  the  wise  Government  towards    power‐  both  generation  and transmission,  roads,  Airports,  health,  water  and  environmental  projects  including  the development of  townships will definitely continue. The  foreseeable needs  in  the port sectors are also expected to create construction related activities in the near future.  

India too has been showing a very promising future in infrastructure development Projects. The contracting models unique  to  the  local environment are rewarding and expected  to generate reasonable margins. We expect our operations to grow significantly  in the PPP models as well as cash contracts in Roads, Railway, Ports, Airports and the Oil and Gas sectors. 

The Libyan market is looking promising for Oil and Gas Projects as the country plans to enhance its oil outputs substantially. Your company is about to position itself with local joint‐ venturers, and will  look  forward  to  projects  towards  the  end  of  the  year. With  the  excellent  relations between the two countries, we expect to generate significant turnovers in the future from the North African Region and particularly Libya. These arrangements will be announced as soon as the same is finalized. 

Operations 

I  take  pride  in mentioning  that Galfar  is  the  first  ever Omani  Contracting Company  to  have crossed  the One Billion Dollar  turnover mark. This establishes our capability  to handle bigger projects and our capacity to grow. However, profit has been under pressure owing to increase in costs of Muscat Expressway Project and also the conservative policy being  followed by the Company in recognizing claims pending settlement. 

Details on the operating results of the Company for the year 2009 and outlook for the industry for 2010 are reflected in the ‘Management Discussion & Analysis’ report included in the Annual Report for the year 2009. 

Subsidiaries 

Galfar India a fully owned subsidiary started its full fledged operations during the current year.  

Messrs  Al  Khalij  Heavy  Equipment  &  Engineering  LLC,  another  subsidiary  of  the  Company, engaged in transportation and logistics business.  

The two training centers of Galfar at Sohar and Al Hail have now transformed  into a separate entity called Galfar Training  Institute LLC, as a subsidiary  fully owned by your company.   The two centers are still continue to train and qualify young Omanis to meet the growing challenges of the construction industry.  

Omanisation 

Galfar continues to be the leader in its commitment towards Omanization in the Private Sector with  over  5,000 Omani  nationals working  at  various  levels  in  the  Company. Galfar  employs Nationals  at  all  levels  as  Vice  Presidents,  Project  Managers,  Project  Engineers,  Business Development Officers, HSE advisors and many other key roles within the Organization. 

Corporate Governance 

Your  Company  follows  high  standards  of  Corporate  Governance.  A  detailed  Corporate Governance Report is included in the Annual Report for the year ended 2009. 

Health, Safety and Environment 

Your  company  also  continues  to  be  the  leading  light when  it  comes  to  Health,  Safety  and Environment. We  also  credit ourselves  in  taking  care of our  social  responsibilities. Our  track record in Safety cannot be paralleled and over the years we have continued our endeavour to provide a safe environment to all the workforce whether they be at site or in the camps.  

The  Company  certification  has  now  been  upgraded  to  the  current  version  which  is  ISO 9001:2008  Standards  for Quality Management  System, we have  also been  recertified  to  ISO 14001:2004. Further we have also been upgraded to the current version of OHSAS 18001:2007 Standards for Environmental Protection and occupational health and safety respectively.  

During the course of the year 2009 your Company has driven 130 million kms and has worked 100 million man‐hours across all units. Our Lost Time Injury Frequency (LTIF) for the year 2009 stands at 0.49 as against 0.76 in the year 2008. In PDO contracts alone we achieved nearly 20 million safe man‐hours during the year. 

 

Outlook 

During the Year 2009 Galfar’s order‐book position registered a moderate growth, considering the delay in award of certain projects. Presently the order book stands at 465Million. 

With  numerous  projects  both  in  the Oil  and Gas  and  the  other  infrastructure  development sectors  already  in  the  tender  stage  and  likely  to be  tendered, we expect  to  consolidate and maintain our market position in 2010 and beyond. 

Galfar  will  continue  to  maintain  its  market  position  as  the  largest  National  Contracting Company  in Oman. With one of  the  regional Airports already awarded  to us we are  looking forward  to  more  such  prestigious  projects  coming  our  way.  With  the  wise  Government’s keenness  into  development  of  Roads,  Railway,  Ports,  Airports,  water  and  wastewater  and Power sectors we look forward to an optimistic future in the local construction arena.  

We are concentrating  in the  infrastructure sector  in the  Indian market with having submitted several prequalification  for Roads and Ports Projects  in the Design Build Finance Operate and transfer (DBFOT) model. This is expected to enhance the group revenue and margins in the near future. 

Galfar plans to take advantage of the existing relationship between Libya and Oman to further our business activities primarily  in  the Oil and Gas  sector. Prospects  in Libya will continue  to grow as the country expects to increase Oil production as well as the demand for infrastructure growth with increased needs of its population. 

On Record 

We are grateful to His Majesty Sultan Qaboos Bin Said for his visionary leadership and providing opportunities  for  the  private  and  public  sector  in  participating  in  the  development  of  the Oman’s economy.  

The  Board  would  like  to  thank  all  Ministries,  Capital  Market  Authority,  Muscat  Securities Market, Muscat  Depository  and  Security  Registration  Company, Muscat Municipality,  Royal Oman  Police,    Petroleum  Development  of  Oman  and  other  Clients  in  Oman  and  abroad, Commercial Banks and Financial Institutions in Oman and abroad where we have relationships, Consultants, Suppliers, ands Service Providers of the Company, for their generous cooperation and continued support. 

We would  also  like  to  thank  all  the  employees  of  the  Company  for  the  effort  extended  to improve the company’s turnover.  

 

Salim Said Hamad Al Fannah Al Araimi 

Chairman 

  1

Corporate Governance Report

Company’s Philosophy Galfar Engineering and Contracting SOAG, is convinced with the importance of the need for good governance and healthy corporate practices for a company to succeed in the long run, fulfill its plans and realize its objectives. The concept of governance at Galfar envisages care of the Company to enhance the value of all its stakeholders, that by adhering to proper methods of management, internal controls, accountability, corporate governance rules and high level of transparency to the extent of not affecting the competitive position of the Company. The Company continues applying a well defined Management Systems Procedures (MSPs) in accordance with ISO 9001, the adherence to such principles would be attainable.

The company is fully abiding by the corporate governance code issued by the Capital Market Authority (CMA). The company has taken all necessary steps to fulfill the objective of good corporate governance.

The Board Members having professional and/or practical experiences in their diversified fields of profession as shown as profile in the Annual Report booklet, have given great support to the Board to exercise its widest authorities in managing the Company and supervise the good performance of the Company’s business. The Board is responsible for achieving the company’s objectives. For this purpose, the Board is assisted by various committees and the higher executive management of the company. The Board has formed the executive Committee, the Audit Committee and other ad hoc committees when the need arises such as the procurement committee. In addition, there is a well-structured organization for the management executives whose duties and authorizations are defined in the manual of authority approved by the Board.

In general the board exercises its primary functions and duties in line with the powers stipulated in article 35 of the Articles of Association of the company.

Board of Directors

The First Board of Directors which was duly elected by the Constitutive General Meeting of the Shareholders on October 9th, 2007 comprises of nine members. During the year, Sheikh Salim Abdullah Said Al Rawas, was appointed as member of member of the board and member of Executive Committee to replace representative of A’maar United Investment & Projects LLC. The board also decided seconding of Vice Chairman Dr. P. Mohammed Ali to hold the office of the Managing Director. The board comprises of nine Directors, eight non executive and one executive. Six of the non executive directors are independent.

The Members of the Board are all having professional and practical experience in their respective corporate fields ensuring proper direction and control of company’s activities. No director is a member of more than 4 joint stock public companies whose shares are listed on the Muscat Securities Market (MSM) and no director is chairman of more than 2 public companies whose principal office is in the Sultanate of Oman. None of the directors is a member of a Board of Directors of a joint stock public or closed company which carries out similar business and whose principal office is in the Sultanate of Oman.

  2

Sr. No.

Name of Directors & Representatives

Designation Category Directorship in other Joint Stock Companies

1. Sheikh .Salim Said Hamed Al Fannah Al Araimi

Chairman Non-Executive

Bank Sohar S.A.O.G Oman Medical College S.A.O.C

2. Dr. P. Mohamed Ali Vice Chairman & Managing Director

Executive Tabreed Oman S.A.O.C Oman Medical College S.A.O.C

3. Dr.Hamed Hashim Mohamed Al Dhahab Al Ghailani

Member Non-Executive Independent

Majan Electricity Company S.A.O.C

4. Dr.Adil Abdulaziz Yahya Al Kindy Member Non-Executive Independent

Nil

5. Dr.Hatem Bakheit Saeed Al Shanfari Member

Non-Executive Independent

Gulf Investment Services Co. S.A.O.G Gulf Baader Capital Markets Co. S.A.O.C

6 Sheikh Salim Abdullah Al Rawas Member ( w.e.f. 13/5/2009)

Non-Executive Independent

Oman Oil Marketing Company S.A.O.G Oman Oil Company S.A.O.C

6. Sheikh Yahya Abdullah Salim Al Fannah Al Araimi

Member Non-Executive Independent

Nil

7. Engr.Ali Mohamed Ali Al Mahrouqi Member Non-Executive Independent

A’Sharqiya Investment Holding Co. S.A.O.G

8.

Ms.Budoor Mohamed Rashid Al Fannah Al Araimi (Representing Al Siraj Investments & Projects LLC)

Member

Non-Executive

Gulf Plastic Industries Co. S.A.O.G A’Sharqiya Investment Holding Co. S.A.O.G Oman Medical College S.A.O.C

  3

Board Meetings:

During the year 2009, the Board held 7 meetings. The following table shows details of the same.

Remuneration to the Board of Directors: The total amount of remuneration proposed to be paid to the Directors including sitting fees for the year 2009 is RO.76,840/-

Board Secretary Mr.Abdelbagi Daffalla, of a legal profession career, was appointed secretary of the Board. The secretary records minutes of the Board meetings as well as the resolutions passed. He handles liaison works between the Board, Board committees and follow-up actions to be taken and informing concerned parties.

1st

Meeting 2nd

Meeting 3rd

Meeting 4th

Meeting 5th

Meeting 6th

Meeting 7th

Meeting

Name 11 12 13 14 15 16 16

Contd 22/01/09 26/02/09 13/05/09 13/08/09 5/11/2009 24/12/09 30/12/09

Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi

√ √ √ X √ √ √

Dr.P. Mohamed Ali X √ √ √ √ √ √

Dr.Hamed Hashim Mohamed Al Dhahab √ √ √ X √ √ √

Sheikh Yahya Abdullah Al Fannah Al Araimi

X √ X √ X √ X

Dr.Adil Abdulaziz Al Kindy √ √ √ X √ √ √

Dr.Hatem Bakheit Saeed Al Shanfari X √ X √ √ √ √

Engr.Ali Mohamed Ali Al Mahrouqi √ √ √ √ √ √ √

Ms.Budoor Mohamed Rashid Al Fannah Al Araimi

√ √ √ X √ √ X

Engr.Majid Salim Said Al Fannah Al Araimi

X X

N/A

N/A

N/A

N/A

N/A

Sheikh Salim Abdullah Saeed Badr Al Rawas ( w.e.f 13/05/09)

N/A

N/A √ √ √ √ √

  4

Other Committees: Executive Committee: The Board has formed, an Executive Committee which consists of 4 members, to oversee in general, setting of business and strategic plans, policies of the Company, review decisions taken on various matters concerning the operation of the company and any other matters assigned by the Board. The Executive Committee exercises its functions in accordance with the Executive Committee Charter. During the year, Board Member Sheikh Salim Abdullah Said Badr Al Rawas was appointed as member of the Executive Committee (EXCOM) to succeed the former EXCOM member Engr. Majid Salim Said Al Fannah Al Araimi. In a later date, board member Dr. Adil Abdulaziz Yahya Al Kindy assumed chairmanship of the Excom in succession to Dr. P. Mohamed Ali who held office of Managing Director. The committee held seven meetings during the year 2009 Sr. No. Name of Members of the Committee Designation

1. Dr. P. Mohamed Ali Chairman ( former)

2. Dr. Adil Abdulaziz Yahya Al Kindy Chairman ( present)

3. Engr. Ali Mohamed Ali Al Mahrouqi Member

4 Engr.Majid Salim Said Al Fannah Al Araimi Member ( former)

4. bis Sheikh Salim Abdullah Said Badr Al Rawas Member ( present) Excom-Attendance Sheet

1st

Meeting 2nd

Meeting3rd

Meeting4th

Meeting5th

Meeting 6th

Meeting 7th

MeetingMeeting No. 10 11 12 13 14 15 16

Date 9-Feb-

09 12-Apr-

0928-May-

0920-Aug-

0917-Oct-

09 22-Nov-

09 9-Dec-

09Dr P Mohamed Ali √ √ √ √ √ √ √

Dr. Adil Al Kindy √ √ √ √ √ √ x Eng Mohamed Ali Al Mahrouqi √ √ √ √ √ √ √

Engr.Majid Salim Said Al Fannah Al Araimi

X 

 

X  N/A N/A N/A N/A N/A

Sheikh Salim Abdullah Said Badr Al Rawas

N/A 

N/A  x √ √ √ √

  5

Audit Committee The audit committee is appointed by the board of directors to assist the board in discharging its oversight responsibilities. The audit committee will oversee the financial reporting process to ensure the balance, transparency and integrity of published financial information. The audit committee will also review: the effectiveness of the company’s internal financial control and risk management system; the effectiveness of the internal audit function; the independent audit process including recommending the appointment and assessing the performance of the external auditor; the company’s process for monitoring compliance with laws and regulations affecting financial reporting and code of business conduct. In performing its duties, the committee will maintain effective working relationships with the board of directors, management, and the external and internal auditors. To perform its role effectively, each committee member will need to develop and maintain his skills and knowledge, including an understanding of the committee’s responsibilities and of the company’s business, operations and risks. The Committee held six meetings during the year.

Audit Committee Meeting & Attendance Details - Year 2009

Audit Committee Members

Meeting Date / Attendance

1st Meeting

2nd Meeting

3rd Meeting

4th Meeting

5th Meeting 6th Meeting

11/2/2009 25-02-09 12/5/2009 12/8/2009 4/11/2009 7/12/2009 Dr Hamed Hashim Al Dhahab

√ √ √ X √ √

HE Yahya Al Fannah Al Araimi

√ √ √ √ X X

Dr Hatem Bakhit Al Shanfari

X √ X √ √ √

Ms. Budoor Al Fannah Al Araimi

√ √ √ X √ √

Sr. No.

Name of Members of the Committee Designation

1. Dr. Hamed Hashim Mohamed Al Dhahab Al Ghailani

Chairman

2. Sheikh Yahya Abdullah Salim Al Fannah Al Araimi

Member

3. Dr. Hatem Bakheit Saeed Al Shanfari Member 4. Ms. Budoor Mohamed Rashid Al Fannah Al

Araimi Member

  6

Procedure for Standing as a Candidate for the Board:

The right to stand as a candidate for membership of the Board of Directors of the Company is open to shareholders and non shareholders.

In case of a shareholder, whether in personal capacity or representing a juristic person, he must have a minimum equity of not less than 10000 shares.

Remuneration:

Total remuneration during the financial year 2009 to top Management (top 5) was RO 1.099 Million.

Compliance with Rules and Regulations:

The Company has been compliant with all the applicable rules and regulations issued by MSM, CMA and that stipulated in the Commercial Companies Law 1974 as amended. An Audit Team from Capital Market Authority (CMA) conducted a general audit over the Year 2009, to ensure the company’s commitment to the Corporate Governance Code of SAOG companies and other regulations and laws issued by the CMA. Their respective report, commended the Company’s commitment towards Corporate Governance and other regulations and laws. During the year, a fine of RO 1300/- was imposed on the company, for delay in disclosure of the unaudited Financial Statements for the second quarter on the Company’s webpage at the website of Muscat Securities Market (MSM). The delay was due to a technical fault in the Company’s Internal Network System. Communication with Shareholders and Investors:

The company maintains good communication relations with the shareholders and Investors and responds as much as possible to their queries and requests in line with the disclosures rules. The company, during the period, conducted several phone interviews with financial analysts and investors.

The company publishes its un-audited financial results in the newspapers on a quarterly basis and the audited financial statements annually. Detailed financial statements are sent to shareholders on request. The company publishes its quarterly and annual results in MSM website. Detailed financial statements are sent to shareholders on request. The company posts its quarterly and annual results on MSM website, and also on the Company’s website: www.galfar.com. All the Company’s announcements are posted on MSM’s website.

The Management discussions and analysis report forms an integral part of the Annual Report.

  7

Statement on Market Price and distribution of Holdings: High / Low price during each month

Month High Low Close Jan-09 0.585 0.360 0.534Feb-09 0.5770 0.4500 0.5350Mar-09 0.6160 0.4300 0.4410Apr-09 0.7470 0.4250 0.6770May-09 0.7220 0.5800 0.6000Jun-09 0.6370 0.5900 0.6280Jul-09 0.7040 0.5800 0.6630Aug-09 0.6950 0.6000 0.6590Sep-09 0.6980 0.6200 0.6490Oct-09 0.7250 0.6150 0.6500Nov-09 0.6600 0.5600 0.5970Dec-09 0.6150 0.5430 0.5780

Distribution of Share ownership between shareholders holding 5% or more. (Including Shares having preferential voting rights) Sr. No.

Category No. of Shareholders

No. of Shares % Shareholding

1 Less than 5% 6,110 127,757,645 42.592 5% to 10% 2 45,000,000 15.003 Above 10% 3 127,242,355 42.41 Total 6,115 300,000,000 100

There are no Securities / Convertible Financial Instruments as on the Balance Sheet date which will have an impact on the Shareholders’ equity. Profile of the Statutory Auditors Ernst and young are the statutory Auditors of the Company .Ernst & Young is one of Oman’s oldest established accounting firms, having had a permanent office in the country since 1974. The practice comprises of one hundred and sixty professionals, and is working under the direction of three partners.

The Oman office forms part of Ernst & Young’s Middle East practice, with over 135 partners and nearly 5,700 other professionals in 23 offices in 17 countries throughout the region.

The Middle East practice is member firm of Ernst & Young Global, operating in more than 140 countries with approximately 130,000.

  8

Audit Fees of the Company and subsidiaries and fees for other services paid to the Auditor:

Sr. No.

Particulars Amount (In RO)

1 Statutory Audit Fees (Parent) 16,000 2 Statutory Audit Fees (Subsidiary) 5,000

The Board of Directors acknowledges as at December 31, 2009:

The Board of Directors acknowledges:

With its liability for the preparation of financial statements in accordance with the applicable standards and rules.

Review of the efficiency and adequacy of internal control systems of the Company and that it complies with internal rules and regulations. In order to enhance and strengthen the efficiency of the internal control systems, the Company has appointed a chief internal auditor and also recruited technical auditors in the Internal Audit Department.

That there is no material matter that affects the continuation of the Company and its ability to continue its production and operations during the next financial year.

Salim Said Hamed Al Fannah Al Araimi Chairman

Management Discussion and Analysis Report

Overview

Galfar Engineering and Contracting SAOG, continues to be one of the largest multi-disciplined engineering & contracting companies in the Sultanate of Oman.

Galfar’s turnover showed an improvement of 14 % over the previous year..

A majority of our projects performed within the established industry standard margins. The complicated projects which caused erosion of the margins are moving towards completion and formal closeout are being planned .

The year 2010 has seen the award of six contracts till date to Galfar, with a total value RO 64 Million. The major amongst these is Ras Al Hadd Airport package 2 comprising of Runway, Taxiway and Aprons etc. with a contract value in excess of 40 Million. Another significant award is for the upgrading of Birkat Al Mouz- Sayq Road in the Jabel Aktar region of which the contract value is over RO 11 Millions. We have also beem awarded with another prestigious contract worth around RO 9.9 Million from the ministry of Health for the New Accident Emergency & Burns department at Khoula Hospital. Other jobs among the new awards include the 33/11 Kv Substation at Airport Heights and Refurbishment and O&M jobs for various Sewage Treatment Plants

Main Objectives and Operational Results

During the end of 2008 Galfar had begun its initiative to restructure the organization. This came into effect in 2009, and has helped in improving the functional and operational effectiveness of the organization.

In our endeavor to continue to meet the future challenges, we have now built a capability to take up much larger EPC projects in order to serve our client’s upcoming projects. Already this team has begun its work and we are expecting some major projects to come our way in the near future.

Our experience in the three major sectors of Oil & Gas, Roads & Bridges and Civil & Utilities remains unparalleled by any other competitor. The turnover of the Company increased to RO 411.773 Million in 2009 from RO 363 Million in 2008. All segments of business increased their turnover with Oil &Gas and Civil & Utilities units in particular being the main contributors to the growth.

We are committed to substantially complete the Muscat Expressway project as per the revised target dates, while we continue to make every effort with the Clients and the Engineers to resolve the pending issues.

During the year 2009 the cost for quality manpower and the corresponding recruitment costs were on an unprecedented increasing trend which is due to the shortage of quality manpower in our main source area that is the Indian Subcontinent. This along with the increase in material costs and sub contract have built up significant cost pressures on the Company on the major cost heads.

The growth achieved by the company in the last five years is summarized below:

Contract Income in RO’000

The subsidiary company which specializes in hiring out of equipments achieved a turnover of RO 2.089 Million (2008- RO 2.534 Million) .

Human Resources

With the increase in the volume of business for the Company, the employee strength has also increased from 24500 in 2008 to 27500 in 2009. The company is committed to Omanisation and employs one of the largest Omani workforce in the private sector.

98,344

164,492

267,464

362,976 411,773

2005 2006 2007 2008 2009

Quality, Health, Safety and Environment

Health, Safety & Environmental Protection has always been a core value in Galfar with focus and visible commitment from Management to protect its employees and other stakeholders from injuries & ill health, prevent damages to assets and minimize impact on the environment in the course of its business.

During the year 2009, Occupational Health & Safety Management Systems certification of Galfar has been upgraded to its current version i.e., OHSAS 18001:2007 & Environment Management System recertified to ISO 14001:2004 standards.

Your Company has recorded several significant achievements in terms of safe manhours worked in projects during the year. Most important among those achievements were 7 Million safe manhours in Harweel project, 10 Million safe manhours in Off Plot Delivery Contract and 17 Million safe manhours collectively in all PDO contracts. Galfar performances in Non-PDO contracts were equally commendable with several achievements, the recent ones being the 5 Million safe manhours in civil projects and 3 Million safe manhours each in Bank Muscat HQ project, Hasik – Shuwaimiyah Road project and Muscat Express Way project.

These achievements are all the more significant, considering the diversity of our operations and the fact that we are spread over the whole of the Sultanate of Oman. Galfar has worked for 100 Million manhours and driven 130 Million kms during the year across its operations.

We hold prestigious memberships of various international institutions such as, British Safety Council, Royal Society of Prevention of Accidents, and National Safety Council.

Risks

Management of Risks through suitable mitigation processes and careful planning continues to be of great importance in our existence in the construction industry.

The volume of work available in the market makes it attractive for new players to enter the market. Also the decline of developmental activities in the neighboring countries due to the global economic slowdown has positioned Oman as an attractive place for business.

Notwithstanding this we expect our 2010 results to be better than 2009.

Our resource mobilization capability continue to be our major strength. The equipment spread available within Galfar remains unparalleled in the local market. Augmenting this periodically has been an ongoing exercise and Galfar continues to invest a significant sum in adding equipment to the fleet.

The Company has a policy of reviewing its Fixed Assets needs either to add new capacity or to replace Plant and Equipment. During the current year the addition to fixed assets was RO 27 Million.

Internal Controls Systems

The Board assures that there is a detailed delegation of authority to the various levels of management and adequate corporate control of the organization. The Management is also fully aware of its responsibility towards all the stakeholders. The Company addresses these issues by maintaining clearly defined operating procedures which are updated as and when necessary.

The process of implementation of the new ERP system is well underway with the phase 1 already rolled out and running.

Outlook

The Oman market continues to remain upbeat with the announcement of several projects in the Roads, Airports, Water & Wastewater and the Power generation and transmission sectors. Galfar has the capability to meet this demand and the challenges posed by the competition.

The Company remains confident of growing. Galfar’s Order Book stood at RO 465 Million at the beginning of the year 2010. This along with anticipated orders where Galfar is well placed will call for increased resource requirements for which Galfar remains adequately prepared.

The appreciably healthy order book during the beginning of the year is indicative of further significant order booking prospects for the year and we are confident of acquiring many more contracts during the year.

EPC segment will remain one of the key focus areas for growth in the coming years. With the enhanced capabilities to handle large scale EPC jobs, and being well placed technically and commercially in few of the contracts under negotiations ,we have reasons to believe that in this year Galfar will accomplish significant achievements in the EPC business sector .

We have active presence in all the sectors namely Oil& Gas, Roads & Bridges, Civil, Utilities and Services including Operation and Maintenance, and have the preparedness to take up any challenge whether in Roads, Ports, Airports, Power, Water and Wastewater Sectors. We have establishments in every part of Oman, be it Jabal Akhdar, Musandam, Hasik, Sohar, Sur, Duqm or Salalah to start up projects swiftly.

Galfar’s execution experience in prestigious large scale jobs with high end technological challenges like Kauther Gas plant, Harweel Cluster Project and contracts & EPC in Lakhwair and Qarn Alam etc. have placed us in a unique position amongst all our competitors.

With the delivery of high quality buildings ,hotels, museums, large show rooms etc. we have added to our credentials evidences of high level workmanship coupled with quality execution and management capabilities. The Bank Muscat Head Quarters would also stands out as a great example after completion.

This kind of versatility in operations and the wide logistic base are difficult for others to establish thus making Galfar a trusted one stop solution provider for our esteemed customers.

Galfar’s Indian operations have taken off with two projects already being awarded to the Galfar consortia. We expect these operations to grow significantly in the Public Private Participation (PPP) models as well as cash contracts in Roads, , Ports, Airports and the Oil and Gas sectors.

We are now exploring the North African region and in particular Libya with a view to acquire projects in the Oil and Gas sectors. We also expect to be involved with the infrastructure projects in this region, however all such projects are likely to materialize towards the last quarter of this year.

 

Dr. P Mohamed Ali

Managing Director

Galfar Engineering and Contracting SAOG and Subsidiary

STATEMENT OF FINANCIAL POSITION At 31 December 2009

3

Parent company Consolidated 2009 2008 2009 2008 Notes RO RO RO RO ASSETS Non-current assets Property, plant and equipment 4 131,003,254 126,933,280 134,401,799 130,061,397 Goodwill 5 - - 275,006 Investments in subsidiary 5 748,500 600,000 - - Investments in associate 6 1,066,573 - 1,066,573 - Avaliable –for-sale investments 7 125,000 125,000 145,000 145,000 Retentions receivable 25,299,837 15,992,660 25,299,840 15,992,660 ────────── ────────── ────────── ──────────Total non-current assets 158,243,164 143,650,940 160,913,212 146,474,063 ────────── ────────── ────────── ──────────Current assets Inventories 8 23,185,222 46,215,858 23,244,741 46,295,137 Trade receivables 9 121,776,670 101,954,283 122,122,155 102,746,511 Work in progress 10 45,449,611 47,740,081 45,449,611 47,740,081 Prepayments, advances and other receivables

11 11,644,319

13,540,427

11,967,524

13,588,468

Deposits with banks 12 2,756,366 12,414,543 2,759,006 12,417,183 Cash and bank balances 13 1,644,473 1,880,460 1,797,461 1,884,433 ────────── ────────── ────────── ──────────Total current assets 206,456,661 223,745,652 207,340,498 224,671,813 ────────── ────────── ────────── ──────────TOTAL ASSETS 364,699,825 367,396,592 368,253,710 371,145,876 ────────── ────────── ────────── ──────────EQUITY AND LIABILITIES Capital and reserve Share capital 14 30,000,000 25,000,000 30,000,000 25,000,000 Share premium 15 17,502,842 19,169,509 17,502,842 19,169,509 Statutory reserve 17 10,000,000 8,333,333 10,000,000 8,333,333 Retained earnings 18 24,402,861 30,358,004 24,513,083 30,826,294 ───────── ───────── ───────── ─────────Equity attributable to equity holders of the parent company 81,905,703 82,860,846 82,015,925 83,329,136 Non controlling interests - - 651,036 727,292 ───────── ───────── ───────── ─────────Total equity 81,905,703 82,860,846 82,666,961 84,056,428 ───────── ───────── ───────── ─────────Non-current liabilities Term loans 19 25,580,433 27,078,006 26,728,950 27,078,006 Provision for employees’ end of service indemnity 20 6,050,869 5,084,380 6,147,266 5,181,698 Deferred tax liability 23 6,987,486 6,410,958 7,219,652 6,526,584 Creditors for purchase of property, plant and equipment 3,909,088 5,834,341 3,992,105 5,834,341 Non-current portion of finance lease liability

33 2,897,155

5,333,287 2,897,155 5,333,287

Advances on contracts 9,785,060 24,184,407 9,785,060 24,184,407 ───────── ───────── ───────── ─────────

Total non-current liabilities 55,210,091 73,925,379 56,770,188 74,138,323 ───────── ───────── ───────── ─────────

Current liabilities Bank borrowings 21 22,878,879 38,821,410 22,962,434 38,874,491 Short term loans 22 22,499,920 17,671,692 22,499,920 17,671,692 Term loans - current portion 19 20,000,616 14,639,713 20,796,479 14,639,713 Current portion of finance lease liability 33 2,648,431 3,957,264 2,648,431 3,957,264 Trade and other payables 23 159,556,185 134,642,145 159,909,297 136,929,822 Provision for taxation 24 - 878,143 - 878,143 ────────── ────────── ────────── ──────────Total current liabilities 227,584,031 210,610,367 228,816,561 212,951,125 ────────── ────────── ────────── ──────────Total liabilities 282,794,122 284,535,746 285,586,749 287,089,448 ────────── ────────── ────────── ──────────TOTAL EQUITY AND LIABILITIES 364,699,825 367,396,592 368,253,711 371,145,876 ────────── ────────── ────────── ──────────Net assets per share 0.273 0.331 0.273 0.333 ────────── ────────── ────────── ──────────

Chairman Chief Financial Officer The attached notes 1 to 38 form part of these consolidated financial statements.

Galfar Engineering and Contracting SAOG and Subsidiary

STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2009

2

Parent company Consolidated 2009 2008 2009 2008 Notes RO RO RO RO Contract income 410,275,008 362,976,252 410,275,008 362,976,252 Contract costs 25 (394,690,271) (327,750,902) (394,099,542) (326,607,278) ──────── ───────── ───────── ─────────Profit on contracts 15,584,737 35,225,350 16,175,466 36,368,974 Hire revenue - - 1,498,428 1,390,584 Hire operating costs 26 - - (2,003,688) (2,056,228)General and administrative expenses 27 (8,751,212) (7,882,156) (8,751,212) (7,882,156) ──────── ───────── ───────── ─────────Profit from operations 6,833,525 27,343,194 6,918,994 27,821,174 Net financing costs 28 (4,133,892) (3,862,088) (4,303,552) (3,977,720)Other income 29 1,921,752 2,308,468 1,993,243 2,355,970 ──────── ───────── ───────── ───────── 4,621,385 25,789,574 4,608,685 26,199,424 Impairment of goodwill of subsidiary - - (164,778) - ──────── ───────── ───────── ─────────Profit for the year before tax 4,621,385 25,789,574 4,443,907 26,199,424 Income tax expense 24 (576,528) (3,090,434) (689,643) (3,090,434) ──────── ───────── ───────── ─────────PROFIT AND COMPREHENSIVE INCOME FOR THE YEAR

4,044,857 22,699,140 3,754,264 23,108,990

──────── ───────── ───────── ─────────Profit and comprehensive income attributable to :

Equity shareholders of the parent 4,044,857 22,699,140 3,830,520 22,912,959 Non-controlling interests - - (76,256) 196,031 ──────── ───────── ───────── ───────── 4,044,857 22,699,140 3,754,264 23,108,990 ──────── ───────── ───────── ─────────Basic earnings per share attributable to the 30 Equity shareholders of the parent 0.013 0.091 0.013 0.092 The attached notes 1 to 38 form part of these consolidated financial statements.

Galfar Engineering and Contracting SAOG and Subsidiary

CASH FLOW STATEMENTS Year ended 31 December 2009

4

Parent company Consolidated 2009 2008 2009 2008 RO RO RO RO OPERATING ACTIVITIES Profit for the year before tax 4,621,385 25,789,574 4,608,685 26,199,424 Adjustments for: Depreciation of property, plant and equipment 22,136,893 17,571,398 22,837,017 18,171,281 Gain on disposal of property, plant and equipment (62,997) (398,540) (124,638) (398,540)Net transfer to employees’ end of service indemnity

966,489 1,258,585 965,568 1,276,500

Provision for impaired debt - Provision for slow moving - - 4,052 - Finance costs 4,719,288 3,980,245 4,888,948 4,095,877 Interest income (585,396) (118,157) (585,396) (118,157) ─────── ─────── ─────── ─────── Operating profit before changes in working capital 31,795,662 48,083,105 32,594,236 49,226,385 Changes in working capital: Trade receivables (17,531,917) (52,949,511) (17,106,495) (54,100,924)Prepayments, advances and other receivables 1,896,108 (4,219,077) 1,468,394 (3,098,590)Inventories 23,030,636 (24,517,958) 23,037,501 (24,533,537)Trade and other payables 24,914,040 29,978,789 23,132,021 31,056,873 ─────── ─────── ─────── ─────── Net cash generated from operations 64,104,529 (3,624,652) 63,125,657 (1,449,793) Change in retentions receivable-long term (9,307,179) (4,324,137) (9,307,179) (4,324,507)Change in advances on contracts-long term (14,399,347) 18,775,424 (14,399,347) 18,775,424 Changes in creditors for property plant and equipment (1,925,253) (4,584,882) (1,842,236) (4,584,882)Change in margin deposits - 94,767 - 99,766 Income tax paid (878,143) (1,521,437) (878,143) (1,521,437)Advance tax paid - (1,453,853) - (1,459,883) ─────── ─────── ─────── ─────── Net cash from operating activities 37,594,607 3,361,230 36,698,752 5,534,688 INVESTING ACTIVITIES Payments for purchase of property, plant and (27,791,851) (47,752,771) (28,775,188) (48,863,333)Equipment Proceeds from sale of property, plant and equipment

1,647,982 1,267,335 1,722,497 1,636,277

Change in term deposits 9,658,177 1,293,987 9,658,177 1,293,987 Interest received 585,396 118,157 585,396 118,157 Investment in Associates (1,215,073) - (1,066,573) - ─────── ─────── ─────── ─────── Net cash used in investing activities (17,115,369) (45,073,292) (17,875,691) (45,814,912) FINANCING ACTIVITIES Share capital raised - Change in bank borrowings (15,942,531) 24,617,531 (15,912,057) 24,586,179 Change in term loans 118,367 15,654,037 2,062,745 14,369,718 Change in short term loans 4,828,228 13,471,692 4,828,228 13,471,692 Interest paid (4,719,288) (3,980,245) (4,888,948) (4,095,877)Dividend paid (5,000,000) (10,000,000) (5,000,000) (10,000,000) ─────── ─────── ─────── ─────── Net cash used in financing activities (20,715,225) 39,763,015 (18,910,033) 38,331,712 ─────── ─────── ─────── ─────── NET CHANGE IN CASH AND CASH (235,987) (1,949,047) (86,972) (1,948,512)EQUIVALENTS Cash and cash equivalents, at the beginning of the year 1,880,460 3,829,507 1,884,433 3,832,945 ─────── ─────── ─────── ─────── CASH AND CASH EQUIVALENTS, AT THE END OF THE YEAR 1,644,473 1,880,460 1,797,461 1,884,433 ═══════ ════════ ════════ ═════════The attached notes 1 to 38 form part of these consolidated financial statements.

Galfar Engineering and Contracting SAOG and Subsidiary

STATEMENT OF CHANGES IN EQUITY – PARENT COMPANY Year ended 31 December 2009

5

Share

capital( note 14)

Share premium

( note 15)

Statutory reserve

( note 17)

Retained earnings

Total

Notes RO RO RO RO RO

Balance at 1 January 2008 25,000,000 19,169,509 6,223,577 19,768,620 70,161,706 Profit for the year - - - 22,699,140 22,699,140 ──────── ──────── ──────── ──────── ────────

Total comprehensive income - - - 22,699,140 22,699,140 Transfer to statutory reserve - - 2,109,756 (2,109,756) - Dividend paid - - - (10,000,000) (10,000,000) ──────── ──────── ──────── ──────── ────────

Balance at 31 December 2008 25,000,000 19,169,509 8,333,333 30,358,004 82,860,846 ──────── ──────── ──────── ──────── ────────

Profit for the year - - - 4,044,857 4,044,857 ──────── ──────── ──────── ──────── ────────

Total comprehensive income - - - 4,044,857 4,044,857 Transfer to statutory reserve - (1,666,667) 1,666,667 - -

Dividend paid - - - (5,000,000) (5,000,000)

Stock dividend

5,000,000 - -

(5,000,000) - ──────── ──────── ──────── ──────── ──────── Balance at 31 December 2009 30,000,000 17,502,842 10,000,000 24,402,861 81,905,703 ════════ ════════ ════════ ════════ ════════ The attached notes 1 to 38 form part of these consolidated financial statements.

Galfar Engineering and Contracting SAOG and Subsidiary

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2009

6

Non-

controlling

Group Share capital

Share premium

Statutory reserve

Retained earnings

Total

Interests Total

RO RO RO RO RO RO RO Balance at 1 January 2008 25,000,000 19,169,509 6,223,577 20,023,091 70,416,177 531,261 70,947,438 Profit for the year - - - 22,912,959 22,912,959 196,031 23,108,990 ──────── ──────── ──────── ──────── ──────── ──────── ──────── Total comprehensive income - - - 22,912,959 22,912,959 196,031 23,108,990 Transfer to statutory reserve - - 2,109,756 (2,109,756) - - - Dividend paid - - - (10,000,000) (10,000,000) - (10,000,000) ──────── ──────── ──────── ──────── ──────── ──────── ──────── Balance at 31 December 2008 25,000,000 19,169,509 8,333,333 30,826,294 83,329,136 727,292 84,056,428

──────── ──────── ──────── ──────── ──────── ──────── ──────── Profit for the year - - - 3,694,092 3,694,092 (60,172) 3,633,920 Prior year adjustment for subsidiary - - - (7,303) (7,303) (16,084) (23,387) ──────── ──────── ──────── ──────── ──────── ──────── ──────── Total comprehensive income - - - 3,686,789 3,686,789 (76,256) 3,610,533

Transfer to statutory reserve - (1,666,667) 1,666,667 - - - - Stock dividend 5,000,000 (5,000,000) - - - Dividend paid - - - (5,000,000) (5,000,000) - (5,000,000) ──────── ──────── ──────── ──────── ──────── ──────── ──────── Balance at 31 December 2009 30,000,000 17,502,842 10,000,000 24,513,083 82,015,925 651,036 82,666,961

════════ ════════ ════════ ════════ ════════ ════════ ════════ The attached notes 1 to 38 form part of these consolidated financial statements.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009

1

1 CORPORATE INFORMATION The consolidated financial statements were authorised for issue in accordance with a resolution of the directors on 10 March 2010. Galfar Engineering and Contracting SAOG (“the Parent Company”) is an Omani joint stock company registered under the Commercial Companies Law of the Sultanate of Oman. The registered address of the Company is at P O Box 533, Muscat, Postal Code 113, Sultanate of Oman. The principal activities of the Company are civil and mechanical construction, public health engineering, road construction, electrical, plumbing and maintenance contracts. Statement of compliance These consolidated and parent company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), applicable requirements of the Commercial Companies Law and the Capital Market Authority of the Sultanate of Oman. 2 SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The financial statements are prepared under the historical cost convention modified to include the measurement at fair value of available for sale investments, investment carried at fair value through profit and loss, derivatives instruments and the revaluation of land and buildings.

These financial statements have been presented in Rial Omani which is the functional and reporting currency for these financial statements.

Basis of consolidation The consolidated financial statements comprise those of Galfar Engineering and Contracting SAOG and its subsidiary as at 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies which may exist. All intra-group balances, income and expenses, unrealized gains and losses and dividends resulting from intra-group transactions are eliminated in full. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction. Losses are attributed to non-controlling interests even if that results in a deficit balance The consolidated financial statements incorporate the financial statements of Galfar Engineering and Contracting SAOG and its subsidiary, Al-Khalij Heavy Equipment and Engineering LLC (together “the Group”). During the year the Parent Company established a 100% subsidiary in India “Galfar India Limited”, with a Share Capital of Indian Rupees One Million (Omani Rial Eight Thousand). The operations of Galfar India Limited are at an initial stage therefore the group has not consolidated the subsidiary, but included amounts due from the subsidiary in other receivables (note 11) The Parent Company has also established a 100 % subsidiary in Oman ‘Galfar Training Institute’ (GTI), by subscribing to the share capital of RO 148,500/- on 24th November 2009, for training to nationals in Oman. The company has yet to commence any significant activity,

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policy and disclosures The accounting policies are consistent with those used in the previous financial year except as follows: The Company has adopted the following new and amended IFRS and IFRIC interpretations as of 1 January 2009: • IFRS 7 Financial Instruments: Disclosures effective 1 January 2009 • IFRS 8 Operating Segments effective 1 January 2009 • IAS 1 Presentation of Financial Statements effective 1 January 2009 • IAS 23 Borrowing Costs (Revised) effective 1 January 2009 • IFRIC 9 Remeasurement of Embedded Derivatives and IAS 39 Financial Instruments: Recognition

and Measurement effective for periods ending on or after 30 June 2009 • FRIC 16 Hedges of a Net Investment in a Foreign Operation effective 1 October 2008 • Improvements to IFRSs (May 2008) • Improvements to IFRSs (April 2009, early adopted)

When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the group, its impact is described below: IAS 1 Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The group has elected to present two statements. IFRS 7 Financial Instruments: Disclosures The amended standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognised at fair value. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. The fair value measurement disclosures are presented in Note 36. The liquidity risk disclosures are not significantly impacted by the amendments and are presented in Note 35. IFRS 8 ‘Operating Segments’ IFRS 8 replaced IAS 14 Segment Reporting upon its effective date. The group concluded that the operating segments determined in accordance with IFRS 8 are the same as the business segments previously identified under IAS 14. IFRS 8 disclosures are not significantly impacted and are presented in note 34.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Improvements to IFRSs In May 2008 and April 2009 the IASB issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of these amendments resulting from improvements to IFRS did not have any impact on the accounting policies, financial position or performance of the group. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures

required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations. IFRS 8 Operating Segment Information: clarifies that segment assets and liabilities need only be

reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. IAS 7 Statement of Cash Flows: Explicitly states that only expenditure that results in recognising an

asset can be classified as a cash flow from investing activities. IAS 16 Property, Plant and Equipment: Replaces the term “net selling price” with “fair value less costs

to sell”. The group amended its accounting policy accordingly, which did not result in any change in the financial position. IAS 18 Revenue: The Board has added guidance (which accompanies the standard) to determine

whether an entity is acting as a principal or as an agent. The features to consider are whether the entity: (1) Has primary responsibility for providing the goods or service (2) Has inventory risk (3) Has discretion in establishing prices (4) Bears the credit risk The group has assessed its revenue arrangements against these criteria and concluded that it is acting as principal in all arrangements. IAS 20 Accounting for Government Grants and Disclosures of Government Assistance: Loans granted

with no or low interest will not be exempt from the requirement to impute interest. Interest is to be imputed on loans granted with below-market interest rates. IAS 23 Borrowing Costs: The definition of borrowing costs is revised to consolidate the two types of

items that are considered components of ‘borrowing costs’ into one – the interest expense calculated using the effective interest rate method calculated in accordance with IAS 39. IAS 36 Impairment of Assets: When discounted cash flows are used to estimate ‘fair value less cost to

sell’ additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate ‘value in use’. The amendment clarified that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in IFRS 8 before aggregation for reporting purposes. The amendment has no impact on the Group as the annual impairment test is performed before aggregation. Other amendments resulting from Improvements to IFRSs did not have any impact on the accounting policies, financial position or performance of the group.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Business combinations and goodwill Business combinations are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the date of acquisition, irrespective of the extent of any non-controlling interest. Goodwill is initially measured at cost being the excess of the cost of the business combination over the group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group’s cash generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. When the group acquires a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition unless the business combination results in a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract. Subsidiary A subsidiary is a company in which the group owns more than one half of the voting power or exercises control. The financial statements of the subsidiary are included in the consolidated financial statements. In the parent company’s separate financial statements, the investment in the subsidiary is carried at cost. Investment in an associate The group’s investment in its associates is accounted for under the equity method of accounting. An associate is an entity in which the group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post- acquisition changes in the group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment. After application of the equity method, the group determines whether it is necessary to recognise any additional impairment loss with respect to the group’s net investment in the associate. The income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the group and the associate are eliminated to the extent of the interest in the associate. The associates’ accounting policies conform to those used by the group for like transactions and events in similar circumstances. The consolidated financial statements include the group’s share of the total recognised gains or losses of associate on an equity accounted basis. The same treatment is adopted in parent company’s separate financial statements, since the management’s view is that this represents an acceptable and conservative method of measuring the fair value as per IAS 39.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Investment in Subsidaries A subsidiary is a company over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. A subsidiary is fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiary by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiary are changed, where necessary, to ensure consistency with the policies adopted by the group. In parent company’s financial statements, the investments in subsidiaries are stated at cost less impairment losses. The consolidated financial statements comprise those of the parent company and its subsidiary drawn up to 31 December each year. Non Controlling interests Minority interest represents the interests in the subsidiary, not held by the parent company. The Group applies a policy of treating transactions with minority interests as transactions with parties external to the group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Acquisitions result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. Goodwill Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash- generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill is allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. The attributable amount of goodwill is included in the determination of the profit or loss on disposal of subsidiary.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment All items of property, plant and equipment held for the use of Group’s activities are recorded at cost less accumulated depreciation and any identified impairment loss. Depreciation is charged so as to write off the cost of property , plant and equipment over their estimated useful lives, using the straight line method, on the following bases:

Years

Site accommodation 4 Ghala camp 15 Tools 4 Plant and machinery 3- 10 Lab equipment 5 Furniture and equipment 3 - 6 Software development 7 Motor vehicles and heavy equipment 3- 10

Sundry assets costing less than RO 100 are written off in the year of purchase. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the income statement. Capital work in progress Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Impairment At each balance date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

The loss arising on an impairment of an asset is determined as the difference between the recoverable amount and carrying amount of the asset and is recognised immediately in the income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount and the increase is recognised as income immediately, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised earlier. Available-for-sale investments Available-for-sale investments are initially recognised at cost, which includes transaction costs, and are, in general, subsequently carried at fair value. Available-for-sale equity investments that do not have a quoted market price in an active market, and for which other methods of reasonably estimating fair value are inappropriate, are measured at cost, as reduced by allowances for estimated impairment. Inventories Inventories are stated at the lower of cost and net realizable value. Cost comprises purchase price and all direct costs incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realizable value represents the estimated selling price less all estimated costs to be incurred in marketing, selling and distribution.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments Financial assets and financial liabilities are recognized on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. The principal financial assets are cash and bank balances and trade and other receivables. Trade and other receivables are stated at their nominal values as reduced by appropriate allowances for estimated impaired debts. The principal financial liabilities are trade payables, term loans and bank borrowings. Trade and payables are stated at their nominal value. Interest-bearing loans and borrowings are recorded at the proceeds received, net of direct issue costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to set off the recognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Provision for employees’ benefits Termination benefits for Omani employees are contributed in accordance with the terms of the Social Securities Law of 1991. Provision for non-Omani employees has been made for termination gratuities, leave pay and passage in accordance with the terms of the Labour Law of the Sultanate of Oman. Taxation Taxation is provided for in accordance with the fiscal regulations of the Sultanate of Oman. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from the initial recognition of other assets and liabilities in a transaction which affects neither the tax profit nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Provisions Provisions are recognized when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reasonably estimated. Foreign currencies Transactions denominated in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing on the balance sheet date. Gains and losses arising from foreign currency transactions are included in the profit or loss for the year.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognized by reference to the stage of completion of the construction activity at the balance sheet date, as measured by surveys of work performed. Variation in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. Work in progress Work in progress on long term contracts is calculated at cost plus attributable profit, to the extent that this is reasonably certain after making provision for contingencies, less any losses foreseen in bringing contracts to completion and less amounts received and receivable as progress payments. Cost for this purpose includes direct labour, direct expenses and an appropriate allocation of overheads. For any contracts where receipts plus receivables exceed the book value of work done, the excess is included in accounts payable and accruals. Net financing costs All interest costs incurred in connection with borrowings, net of interest received are recognised in the period in which they are incurred as net financing costs. Directors’ remuneration In accordance with the Capital Market Authority circular E/10/2009, directors’ remuneration is computed in accordance with the Article 101 of the Commercial Companies Law of 1974, as per the requirements of Capital Market Authority and is charged as an expense in the income statement. Cash and cash equivalents For the purpose of the cash flows statement, the Group considers cash on hand and bank balances with a maturity of less than three months from the date of placement as cash and cash equivalents. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. For arrangements entered into prior to 1 January 2005, the date of inception is deemed to be 1 January 2005 in accordance with the transitional requirements of IFRIC 4. Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009 2 SIGNIFICANT ACCOUNTING POLICIES (continued) Fair values For investments traded in organised financial markets, fair value is determined by reference to quoted market bid prices. For unquoted equity investments, fair value is determined by reference to the market value of a similar investment or is based on expected discounted cash flows. Fair value cannot be reliably measured for certain unquoted foreign investments. Such investments are measured at cost. The fair value of interest-bearing items is estimated based on discounted cash flows using interest rates for items with similar terms and risk characteristics. Significant accounting judgments, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of financial assets and liabilities at the date of the financial statements and the resultant provisions and changes in fair value for the year. Such estimates are necessarily based on assumptions about several factors involving varying, and possibly significant, degrees of judgment and uncertainty and actual results may differ from management’s estimates resulting in future changes in estimated assets and liabilities. 3. Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. IFRIC 17 Distributions of Non-cash Assets to Owners This interpretation is effective for annual periods beginning on or after 1 July 2009 with early application permitted. It provides guidance on how to account for non-cash distributions to owners. The interpretation clarifies when to recognise a liability, how to measure it and the associated assets, and when to derecognise the asset and liability. The Group does not expect IFRIC 17 to have an impact on the consolidated financial statements as the Group has not made non-cash distributions to shareholders in the past. IFRS 3R Business Combinations and IAS 27R Consolidated and Separate Financial Statements The revised standards were issued in January 2008 and become effective for financial years beginning on or after 1 July 2009. IFRS 3R introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. IAS 27R requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. Other consequential amendments were made to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28 Investment in Associates and IAS 31 Interests in Joint Ventures. The changes by IFRS 3R and IAS 27R will affect future acquisitions or loss of control and transactions with minority interests. IFRS 2 Share-based Payment: Group Cash-settled Share-based Payment Transactions effective 1 January 2010 IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items effective 1 July 2009 IFRIC 18 Transfers of Assets from Customers effective 1 July 2009

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009

10

4 PROPERTY, PLANT AND EQUIPMENT – PARENT COMPANY

Motor Site Furniture Software vehicles & Capital

accommo- Ghala Plant and Lab and develop- heavy work in Land dation Tools camp machinery equipment equipment ment equipment progress Total

RO RO RO RO RO RO RO RO RO RO RO

Cost

1 January 2008 332,139 16,296,174 - 4,204,296 68,578,363 58,802 9,272,536 562,747 53,108,924 1,264,287 153,678,268 Additions - 3,584,808 - - 25,664,525 17,341 1,666,743 131,231 14,564,715 2,123,408 47,752,771 Disposals - (191,797) - - (1,390,764) - (31,034) - (1,957,139) - (3,570,734) Transfers - - - - 21,120 - - - (21,120) - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── At 1 January 2009 332,139 19,689,185 - 4,204,296 92,873,244 76,143 10,908,245 693,978 65,695,380 3,387,695 197,860,305

Additions - 2,647,488 129,386 2,899,653 13,690,009 47,911 2,294,889 24,664 5,487,560 570,292 27,791,852 Disposals - (725) (6,189) - (1,976,997) - (4,631) - (1,531,294) (250) (3,520,086) Transfers 190,000 (1,856,590) 1,874,229 1,874,284 62,080 - 1,892 - - (2,145,895) -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 31 December 2009 522,139 20,479,358 1,997,426 8,978,233 104,648,336 124,054 13,200,395 718,642 69,651,646 1,811,842 222,132,071

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── Depreciation 1 January 2008 - 9,684,067 - 2,271,541 24,359,426 38,162 3,792,616 207,784 15,703,970 - 56,057,566

Charge for the year - 2,649,782 - 145,484 7,535,402 17,947 1,359,225 97,506 5,766,052 - 17,571,398

Disposals - (26,037) - - (1,118,358) - (5,177) - (1,552,367) - (2,701,939) Transfers - - - - 15,499 - - - (15,499) - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 1 January 2009 - 12,307,812 - 2,417,025 30,791,969 56,109 5,146,664 305,290 19,902,156 - 70,927,025

Charge for the year - 3,183,157 227,541 606,001 9,584,226 19,381 1,539,871 103,518 6,873,198 - 22,136,893 Disposals - (489) (6,167) - (927,564) - (2,657) - (998,224) - (1,935,101) Transfers - (1,373,664) 1,373,664 - - - - - - - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 31 December 2009 - 14,116,816 1,595,038 3,023,026 39,448,631 75,490 6,683,878 408,808 25,777,130 - 91,128,817

══════ ═══════ ══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ Net book value At 31 December 2009 522,139 6,362,542 402,388 5,955,207 65,199,705 48,564 6,516,517 309,834 43,874,516 1,811,842 131,003,254

══════ ═══════ ══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ * This includes structural buildings constructed on lease land

Galfar Engineering and Contracting SAOG and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2009

11

4 PROPERTY, PLANT AND EQUIPMENT – CONSOLIDATED

Motor Site Furniture Software vehicles & Capital

accommo- Ghala Plant and Lab and develop- heavy work in Land dation Tools camp machinery equipment equipment ment equipment progress Total

RO RO RO RO RO RO RO RO RO RO RO

Cost 1 January 2008 332,139 16,296,174 - 4,204,296 72,381,494 58,912 9,352,118 562,747 57,234,639 1,264,287 161,686,806 Additions - 3,584,808 - - 26,609,673 20,241 1,672,707 131,231 14,721,265 2,123,408 48,863,333 Disposals - (191,797) - - (2,425,364) - (31,034) - (1,957,139) - (4,605,334) Transfers - - - - 21,120 - - - (21,120) - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── At 1 January 2009 332,139 19,689,185 - 4,204,296 96,586,923 79,153 10,993,791 693,978 69,977,645 3,387,695 205,944,805

Additions - 2,647,488 129,386 2,899,653 14,473,396 47,911 2,297,413 24,664 5,685,060 570,292 28,775,263 Disposals - (725) (6,189) - (1,976,997) - (4,631) - (1,746,294) (250) (3,735,086) Transfers 190,000 (1,856,590) 1,874,229 1,874,284 62,080 (3,010) 4,902 - - (2,145,895) -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 31 December 2009 522,139 20,479,358 1,997,426 8,978,233 109,145,402 124,054 13,291,475 718,642 73,916,411 1,811,842 230,984,982

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── Depreciation 1 January 2008 - 9,684,067 - 2,271,541 26,612,169 38,318 3,866,715 207,784 18,399,130 - 61,079,724 Charge for the year - 2,649,782 - 145,484 7,833,182 17,946 1,364,606 97,506 6,062,774 - 18,171,281 Disposals - (26,037) - - (1,799,515) - (5,177) - (1,536,868) - (3,367,597) Transfers - - - - 15,499 - - - (15,499) - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 1 January 2009 - 12,307,812 - 2,417,026 32,661,336 56,264 5,226,144 305,290 22,909,537 - 75,883,408

Charge for the year - 3,183,156 227,546 606,000 10,176,553 19,380 1,545,847 103,518 6,975,017 - 22,837,017 Disposals - (489) (6,166) - (927,564) - (2,657) - (1,200,350) - (2,137,226) Transfers - (1,373,664) 1,373,664 - - (156) 156 - - - -

────── ─────── ────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── 31 December 2009 - 14,116,816 1,595,044 3,023,026 41,910,325 75,488 6,769,490 408,808 28,684,204 - 96,583,199

══════ ════�