Table
      of Contents




**As
      filed with the Securities and Exchange Commission on October 15,
      2007**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.**




**FORM
      20-F**




**ANNUAL
      REPORT PURSUANT TO**


**SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the fiscal year ended March 31, 2007**




**Commission
      file number 1-15252**




**Mahanagar
      Telephone Nigam Limited**


(Exact
      name of Registrant as specified in its charter)




**N/A**


(Translation
      of Registrant’s name into English)




**The
      Republic of India**


(Jurisdiction
      of incorporation or organization)




**12th
      Floor, Jeevan Bharati Tower-1**


**124
      Connaught Circus**


**New
      Delhi 110 001**


**India**


**(Address
      of principal executive offices)**




Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act:




Title
                of each class
            Name
                of each exchange on which registeredAmerican
                Depositary Shares,
              each
                representing two equity shares.
              Equity
                Shares (Not for trading, but only in connection
              with
                the registration of the American Depositary Shares)
            The
                New York Stock Exchange




Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act.




**None**




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.




**None**




Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report.




**630,000,000
      Equity Shares**




**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405**


**of
      the Securities Act of 1933, or the Securities Act.**


YESoNOx




**If
      this report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to**


**Section 13
      or 15(d) of the Securities Exchange Act of 1934.**


YES   o        NO   x.




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




YES   x        NO   o.






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**Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):**





Large
                accelerated
                filer
            
            x
            
            Accelerated
                filer
            
            
            
            Non-accelerated
                filer







Indicate
      by check mark which financial statement item the registrant has elected to
      follow.




Item
      17
oItem
      18 x




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**TABLE
      OF CONTENTS**


**Page**





PRESENTATION
                OF FINANCIAL
                INFORMATION
            1SPECIAL
                NOTE REGARDING FORWARD-LOOKING
                STATEMENTS
            1


PART
                  I
              
              1Item
                  1.
              Identity
                  of Directors, Senior Management and
                  Advisers
              1Item
                  2.
              Offer
                  Statistics and Expected Timetable
              1Item
                  3.
              Key
                  Information
              2SELECTED
                  FINANCIAL AND OPERATING
                  DATA
              2EXCHANGE
                  RATES
              4RISK
                  FACTORS
              5Item
                  4.
              Information
                  on the Company
              11HISTORY
                  AND DEVELOPMENT OF THE
                  COMPANY
              11BUSINESS
                  OVERVIEW
              18LEGAL
                  PROCEEDINGS
              30ORGANIZATIONAL
                  STRUCTURE
              33PROPERTY
                  AND EQUIPMENT
              33TELECOMMUNICATIONS
                  REGULATION IN
                  INDIA
              37Item
                  4A.
              Unresolved
                  Staff Comments
              45Item
                  5.
              Operating
                  and Financial Review and
                  Prospects
              45OPERATING
                  RESULTS
              45LIQUIDITY
                  AND CAPITAL RESOURCES
              60RESEARCH
                  AND DEVELOPMENT
              62TREND
                  INFORMATION
              62Item
                  6.
              Directors,
                  Senior Management and Employees
              62DIRECTORS
                  AND SENIOR MANAGEMENT
              62AUDIT
                  COMMITTEE
              64COMPENSATION
                  OF DIRECTORS AND
                  OFFICERS
              64EMPLOYEES
              64TRAINING
              66SHARE
                  OWNERSHIP
              66Item
                  7.
              Major
                  Shareholders and Related Party
                  Transactions
              66MAJOR
                  SHAREHOLDERS
              66CERTAIN
                  RELATIONSHIPS AND RELATED PARTY
                  TRANSACTIONS
              66Item
                  8.
              Financial
                  Information
              68CONSOLIDATED
                  STATEMENTS AND OTHER FINANCIAL
                  INFORMATION
              68SIGNIFICANT
                  CHANGES
              68Item
                  9.
              The
                  Offer and Listing
              69MARKET
                  PRICE INFORMATION
              69THE
                  INDIAN SECURITIES MARKET
              70Item
                  10.
              Additional
                  Information
              76MEMORANDUM
                  AND ARTICLES OF
                  ASSOCIATION
              76MATERIAL
                  CONTRACTS
              81INDIAN
                  FOREIGN EXCHANGE CONTROLS AND SECURITIES
                  REGULATIONS
              81TAXATION
              84DOCUMENTS
                  ON DISPLAY
              88Item
                  11.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              88Item
                  12.
              Description
                  of Securities Other than Equity
                  Securities
              89PART
                  II
              
              89Item
                  13.
              Defaults,
                  Dividend Arrearage and
                  Delinquencies
              89Item
                  14.
              Material
                  Modifications to the Rights of Security Holders and
                  Use of Proceeds
              89Item
                  15.
              Controls
                  and Procedures
              89Item
                  16A.
              Audit
                  Committee Financial Expert
              93Item
                  16B.
              Code
                  of Ethics
              93


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Item
                  16C.
              Principal
                  Accountant Fees and Services
              93Item
                  16D.
              Exemptions
                  from the Listing Standards for Audit
                  Committees
              94Item
                  16E.
              Purchase
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
              94PART
                  III
              
              94Item
                  17.
              Financial
                  Statements
              94Item
                  18.
              Financial
                  Statements
              94Item
                  19.
              Exhibits
              94
  SignaturesIndex
                      to Consolidated Financial
                      Statements
                  F-1


ii
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          of Contents




**PRESENTATION
      OF FINANCIAL INFORMATION**




The
      financial information in this report has been prepared in accordance with US
      GAAP with respect to our consolidated statements of operations, shareholders’
equity and cash flow for the fiscal years ended March 31, 2005, 2006 and 2007
      and our balance sheets as of March 31, 2006 and 2007.  Our fiscal year
      ends on March 31 of each year, so all references to a particular fiscal year
      are
      to the year ended March 31 of that year.  The consolidated financial
      statements, including the notes to those financial statements, are set forth
      at
      the end of this report.




Although
      we have translated in this report certain rupee amounts into dollars for
      convenience, this does not mean that the rupee amounts referred could have
      been,
      or could be, converted into dollars at any particular rate, the rates stated
      below, or at all.  All translations from rupees to dollars with
      respect to financial data as of March 31, 2007 are based on the noon buying
      rate
      in the City of New York for cable transfers in rupees on such
      date.  The Federal Reserve Bank of New York certifies this rate for
      customs purposes on each date the rate is given.  The noon buying rate
      on March 30, 2007 was Rs. 43.10 per US$1.00.




Information
      contained in our website,www.mtnl.net.in,  is not part of this
      annual report.




Reference
      to “we,” “us,” “our,”  “MTNL,” and the “Company” refer to Mahanagar
      Telephone Nigam Limited.






**SPECIAL
      NOTE REGARDING FORWARD-LOOKING
      STATEMENTS**




This
      report contains “forward-looking statements”, as defined in Section 27A of the
      U.S.  Securities Act of 1933, as amended, and Section 21E of the
      U.S.  Securities Exchange Act of 1934, as amended, that are based on
      our current expectations, assumptions, estimates and projections about our
      company and our industry.  The forward-looking statements are subject
      to various risks and uncertainties.  Generally, these forward-looking
      statements can be identified by the use of forward-looking terminology such
      as
“may,” “will,” “will likely result,” “believe,” “expect,” “will continue,”
“anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,”
“objective,” “goal,” “project,” “should,” and similar expressions or variations
      of these expressions.  We caution you that reliance on any
      forward-looking statement involves risks and uncertainties, and that although
      we
      believe that the assumptions on which our forward-looking statements are based
      are reasonable, any of those assumptions could prove to be inaccurate, and,
      as a
      result, the forward-looking statements based on those assumptions could be
      incorrect.  The uncertainties in this regard include, but are not
      limited to, those identified in the risk factors discussed elsewhere in this
      report.  See Item 3 “Key Information—Risk Factors” and Item 5
“Operating and Financial Review and Prospects.”  In light of these and
      other uncertainties, you should not conclude that we will necessarily achieve
      any plans and objectives or projected financial results referred to in any
      of
      the forward-looking statements.  We do not undertake to release the
      results of any revisions of these forward-looking statements to reflect future
      events or circumstances.




**PART
      I**




**Item
      1. Identity of
      Directors, Senior Management and Advisers**




Not
      applicable.




**Item
      2. Offer Statistics and
      Expected Timetable**




Not
      applicable.




1
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          of Contents




**Item
      3. Key
      Information**




**SELECTED
      FINANCIAL AND OPERATING DATA**




You
      should read the following selected financial and operating data in conjunction
      with our consolidated financial statements and the related notes, and Item
      5
“Operating and Financial Review and Prospects” and the other financial
      information included elsewhere in this report and our other reports filed with
      the SEC.




Our
      selected financial and operating data included in this report are presented
      in
      Indian rupees and are derived from our consolidated financial statements
      prepared in accordance with Generally Accepted Accounting Principles in the
      United States of America (US GAAP) for the fiscal years ended March 31, 2003,
      2004, 2005, 2006 and 2007.




The
      selected statement of operations data and cash flow data for the three years
      ended March 31, 2007, and the selected balance sheet data as of March 31, 2006
      and 2007 under US GAAP have been extracted or derived from our consolidated
      audited US GAAP financial statements which are included elsewhere in this
      report. The selected statement of operations data and cash flow data for the
      years ended March 31, 2003 and 2004, and the selected balance sheet data as
      of
      March 31, 2003, 2004 and 2005 under US GAAP are derived from our consolidated
      audited US GAAP financial statements not included in this report.  Our
      historical results do not necessarily indicate our results expected for any
      future period.  You should read the following information in
      conjunction with “Item 5.  Operating and Financial Review and
      Prospects,” and our consolidated financial statements included elsewhere in this
      annual report.




Consolidated
      financial statements for the year ended March 31, 2007 have been translated
      for
      convenience into US dollars (although we have translated certain rupee amounts
      in this report into US dollars for convenience, this does not mean that the
      rupee amounts referred to could have been, or could be, converted into US
      dollars at any particular rate, the rates stated below, or at
      all).  All translations from rupees to dollars with respect to
      financial data as of March 31, 2007 are based on the noon buying rate in the
      City of New York for cable transfers in rupees on such date.  The
      Federal Reserve Bank of New York certifies this rate for customs purposes on
      each date the rate is given.  The noon buying rate on March 30, 2007
      was Rs. 43.10 per US$1.00.




2
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**Under
                US GAAP**




**Fiscal
                  Years Ended March 31,****2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2007**
              
              **2007****Statement
                  of Income Data**
              **(Rs.
                  in millions except per share data)**
              **Convenience
                  translation into millions of US$ (Unaudited)****Revenues**
              **Rs.55,251**
              
              **Rs.61,084**
              
              **Rs.50,156**
              
              **Rs.46,668**
              
              **Rs.45,475**
              
              **$1,055**Total
                  costs and expense
              (48,057)
              
              (55,850)
              
              (47,229)
              
              (47,480)
              
              (48,927)
              
              (1,135)Liability
                  for post retirement medical benefits written back
              0
              
              0
              
              0
              
              0
              
              5,794
              
              134Operating
                  income
              7,194
              
              5,234
              
              2,927
              
              (812)
              
              2342
              
              54Other
                  income / (expense), net
              1,962
              
              1,714
              
              2,670
              
              2,388
              
              7,894
              
              183**Income
                  before income taxes**
              **9,156**
              
              **6,948**
              
              **5,597**
              
              **1,576**
              
              **10,236**
              
              **237**Income
                  taxes
              (3,951)
              
              (2,570)
              
              (2,124)
              
              (437)
              
              1073
              
              25Equity
                  in (losses) of affiliate
              (4)
              
              (20)
              
              (67)
              
              (73)
              
              (7)
              
              (0)**Net
                  Income**
              **Rs.5,201**
              
              **Rs.4,358**
              
              **Rs.3,406**
              
              **Rs.1,066**
              
              **Rs.11,302**
              
              **$262**Weighted
                  average equity shares outstanding
              630
              
              630
              
              630
              
              630
              
              630
              
              --EPS
                  – Basic & diluted
              Rs.8.26
              
              Rs.6.92
              
              Rs.5.41
              
              Rs.1.69
              
              Rs.17.94
              
              $0.42Basic
                  and diluted earnings per GDR/ADS
              Rs.16.52
              
              Rs.13.84
              
              Rs.10.82
              
              Rs.3.38
              
              Rs.35.88
              
              $0.84Dividends
                  paid per equity share
              Rs.4.5
              
              Rs.4.5
              
              Rs.6.5
              
              Rs.6.21
              
              Rs.4.56
              
              $0.11Dividends
                  paid per equity share
              $0.10
              
              $0.10
              
              $0.15
              
              $0.14
              
              $0.11
              
              --Dividends
                  paid per GDR/ADS
              Rs.9.0
              
              Rs.9.0
              
              Rs.13.0
              
              Rs.12.42
              
              Rs.9.12
              
              $0.21Dividends
                  paid per GDR/ADS
              $0.20
              
              $0.20
              
              $0.30
              
              $0.28
              
              $0.21
              
              --






**As
                at March 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2007****Balance
                Sheet Data**
            **(Rs.
                in millions except per share data)**
            **Convenience
                translation into millions of US$ (Unaudited)**Cash
                and Cash equivalents
            Rs.9,910
            
            Rs.9,891
            
            Rs.7,561
            
            Rs.1,641
            
            Rs.1,660
            
            $ 39Investment
                in bank deposits
            8,260
            
            15,654
            
            17,732
            
            19,020
            
            17,102
            
            397Dues
                from Related Parties
            29,644
            
            23,588
            
            27,789
            
            23,818
            
            23,659
            
            548Total
                Assets
            160,666
            
            168,023
            
            177,172
            
            170,151
            
            178,937
            
            4,152Dues
                to Related Parties
            18,885
            
            12,084
            
            11,339
            
            6,091
            
            5,729
            
            133Total
                Liabilities
            77,269
            
            83,466
            
            93,839
            
            89,703
            
            90,060
            
            2,090Total
                Shareholders equity
            Rs.83,397
            
            Rs.84,557
            
            Rs.83,333
            
            Rs.80,448
            
            Rs.88,877
            
            $2,062Capital
                Stock1
            Rs.12,949
            
            Rs.12,949
            
            Rs.12,949
            
            Rs.12,949
            
            Rs.12,949
            
            $300




1
        Includes capital
        stock and additional paid-in capital.




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**Fiscal
                Years Ended March 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2007****Cash
                flow data:**
            **(Rs.
                in millions except per share data)**
            
            **Convenience
                translation into millions of US$ (Unaudited)**Net
                cash from operating activities
            Rs.23,456
            
            Rs.19,885
            
            Rs.15,006
            
            Rs.6,006
            
            Rs.9,672
            
            $225Net
                cash used in investing activities
            Rs.(18,001)
            
            Rs.
                (16,706)
            
            Rs.
                (12,706)
            
            Rs.(7,976)
            
            Rs.(6,780)
            
            $(158)Net
                cash from financing activities
            Rs.(15,011)
            
            Rs.
                (3,198)
            
            Rs.
                (4,630)
            
            Rs.(3,951)
            
            Rs.(2,873)
            
            $(67)





**EXCHANGERATES**




The
      following table sets forth, for the fiscal years indicated, information
      concerning the number of Indian rupees for which one US dollar would be
      exchanged based on the noon buying rate in the City of New York for cable
      transfers of Indian rupees, as certified for customs purposes by the Federal
      Reserve Bank of New York.




**Year
                Ended March 31,**
            **At
                end of**
              **period**
            **Average**
              **rate
                (1)**
            **High**
            **Low**2003
            47.53
            48.36
            49.07
            47.532004
            43.40
            45.78
            47.46
            43.402005
            43.62
            44.86
            46.45
            43.272006
            44.48
            44.21
            46.26
            43.052007
            43.10
            45.06
            46.83
            42.782008
                (through September 25, 2007)
            39.55
            40.39
            41.15
            39.5




(1)The
      average rate is the
      average of the exchange rates on the last business day of each month during
      the
      period.




The
      following table sets forth the high and low exchange rates for the previous
      six
      months and is based on the noon buying rate in the City of New York during
      the
      period for cable transfers in Indian rupees as certified for customs purposes
      by
      the Federal Reserve Bank of New York:




**Month**
            **High**
            **Low**April
                2007
            43.05
            40.56May
                2007
            41.04
            40.14June
                2007
            40.90
            40.22July
                2007
            40.42
            40.12August
                2007
            41.15
            40.25September
                2007 (through September 25, 2007)
            40.81
            39.50




On
      September 25, 2007, the noon buying rate was Rs.39.55 = US$1.00.




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**RISK
      FACTORS**




*You
      should carefully consider the following risk factors as well as the other
      information contained in this report in evaluating us and our
      business.  The market price of our equity shares or ADSs could decline
      due to any of these risks.*




**Risks
      Relating to Our Business**




***We
      expect to continue to encounter increased competition in each of our markets,
      which could reduce our revenues.***




The
      Indian government is rapidly liberalizing the telecommunications industry in
      India.  The Department of Telecommunications (DOT) may license, at its
      discretion, multiple additional service providers in any service area, with
      respect to both basic telecommunications services and cellular
      services.  In November 2003, the Department issued guidelines for
      Unified Access Licenses, which cover both basic and cellular services within
      a
      service area.  In the Indian context, “basic telecommunications
      services” or “basic services” include basic fixed-line access service and a
      number of other telecommunications services, other than long distance services,
      cellular service and Internet access.  Basic services also include
      CDMA-based fixed wireless and mobile services (without roaming).  Tata
      Teleservices Limited and Reliance Infocomm Limited are currently competing
      with
      us in the market for basic services in both Mumbai and Delhi, and Bharti
      Tele-Ventures Limited is also competing with us in the basic services market
      in
      Delhi and Mumbai.  All of these companies already have significant
      telecommunications infrastructure in Delhi and Mumbai, including, with respect
      to Tata Teleservices and Reliance Infocom, low-cost CDMA mobile and fixed
      wireless technology.  With approximately 67.33% of our call units
      having come from approximately 18.75%  of our access lines in service,
      we are particularly vulnerable to losing market share if these or other new
      operators aggressively target our largest subscribers.  Some of our
      largest customers have already migrated to other basic service
      operators.




We
      experience significant and growing competition in the market for GSM cellular
      and Internet services.  Many of these service providers enjoy
      significant penetration in these markets, have established brand names and
      have
      more experience operating a cellular network than we do.  Cellular
      operators also face competition from rapidly growing CDMA-based mobile services,
      which are priced considerably lower than GSM cellular services.




Increased
      competition has kept and will likely continue to keep downward pressure on
      prices and has required and will likely continue to require us to increase
      our
      capital investment to improve and expand our services.  These
      developments, in turn, have had and may continue to have a negative impact
      on
      our profitability.




***Our
      Business is Subject to Substantial Regulation by the
      Government.***




The
      DOT
      retains the right to revoke our license after giving one month’s notice to
      us.  The DOT also retains the right, after giving notice to us, to
      modify the terms and conditions of our license at any time if in their opinion
      it is necessary or expedient to do so in the interest of the general public
      or
      for the proper operation of the telecommunications sector.  A
      revocation of the license or a change in significant terms of the license,
      such
      as its duration, the amount of license fee payable, the range of services
      permitted and the scope of exclusivity could limit our ability to operate
      particular lines of our business or result in increased costs in the form of
      increased license fees or costs associated with applying for new licenses,
      or
      contesting limitations on our licenses.




***Regulations
      applicable to public sector enterprises in India governing certain personnel
      matters, procurement, capital expenditure and the issuance of securities may
      affect our ability to compete effectively.***




As
      long
      as the Indian government’s shareholding in us equals or exceeds 51%, we are
      deemed to be an Indian government company.  As such, we are subject to
      laws and regulations generally applicable to public sector enterprises in
      India.  These laws and regulations govern, among other things,
      personnel matters, procurement, budgeting and capital expenditures and the
      generation of funds through the issuance of securities.




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          of Contents




Under
      our
      articles of association, the President of India, on behalf of the Indian
      government, may also issue directives with respect to the conduct of our
      business and affairs, and certain matters with respect to our business,
      including the appointment and remuneration of our Chairman-cum-Managing Director
      and the declaration of dividends.  None of our shareholders,
      management or board of directors may take action in respect of any matter
      reserved for the President of India without his approval.  If the
      President of India does not allow us to  make capital expenditures
      pursuant to our business plan, we may be unable to compete effectively or
      maintain profitability.  Government formalities, including
      requirements that many of our purchases be made through a competitive bidding
      process, often cause delays in our equipment and product procurement; these
      delays can place us at a disadvantage relative to private sector
      competitors.




***The
      Indian government, our controlling shareholder, when considering matters
      pertaining to us, often also considers the interests of the largest
      government-owned telecommunications company, Bharat Sanchar Nigam Limited
      (BSNL).  The Indian government is evaluating the possibility of a
      merger of our Company with BSNL.***




The
      Indian government, through the DOT, holds 56.25% of our outstanding equity
      shares and 100% of BSNL’s equity shares.  Consequently, the DOT
      controls both of us.  The DOT has the power to determine the outcome
      of most actions requiring approval of our board of directors or shareholders,
      including proposed expansion of our basic and cellular services into new areas
      in which we may compete with BSNL, transactions with BSNL or the assertion
      of
      claims against BSNL.  When considering many of these matters, the
      DOT may also take into account the interests of BSNL.  Failure by the
      DOT to resolve conflicts involving us and BSNL in an equitable manner could
      have
      a material adverse effect on our business prospects.




India’s
      Ministry of Communications has appointed private sector banks to act as
      consultants to advise on restructuring BSNL and us.  We understand
      that these consultants have submitted their reports.  There have been
      media reports about consideration of a merger of our companies or the transfer
      by the DOT of their shares in us to BSNL or to a holding company that would
      control both us and BSNL.  There are no further announcements on
      this.  We cannot assess the likelihood of such a transaction, or the
      impact of such a transaction on our business or the value of our shares or
      ADSs.




***We
      have significant related party transactions.***




The
      Indian Government is our controlling shareholder and hence we are deemed to
      be
      an Indian government company. As such, we are subject to laws and regulations
      generally applicable to public sector enterprises in India. These laws and
      regulations govern, among other things, personnel matters, procurement,
      budgeting and capital expenditures and the generation of funds through the
      issuance of securities.  We have extensive commercial and regulatory
      relationships with the DOT and BSNL, most of which were established at the
      time
      when there was no corporate separation between the DOT, BSNL and
      us.  Also the Indian Government when considering matters pertaining to
      us, often also considers the interests of the largest government-owned
      telecommunications company, Bharat Sanchar Nigam Limited (BSNL).  We
      have significant amounts due from related party and our inability to collect
      them or change in the terms of our arrangements with our related parties could
      adversely affect our revenues and profitability.  See Notes [3, 4, 19
      and 25] to our consolidated financial statements.




***We
      do not have title to property, and we cannot sell our properties without payment
      of stamp duties and registering properties in our
      name.***




In
      1987,
      the assets and properties of the DOT located in Delhi and Mumbai were
      transferred to us by an order of the Government of India (the “Government”) and
      a deed of sale was executed by the Government in our favor representing an
      irrevocable transfer.  Indian law generally requires that to perfect
      the transfer or lease of real property, the transfer should be evidenced by
      a
      formal, duly stamped deed of transfer and registered with the Central Land
      Registrar within a specified period after the execution of the deed of transfer
      or lease. A formal transfer deed for real property of the DOT, transferred
      by
      the Government to us has been executed but has not been registered with the
      appropriate municipal authorities.  The formal transfer deed and
      physical delivery of possession of the DOT’s non-real estate assets has resulted
      in the transfer of such non-real estate assets of the DOT to us in Delhi and
      Mumbai.




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Indian
      law also requires payment of stamp duty (at rates which vary among states)
      on
      instruments, which effect transfer of title to real estate or in respect of
      leases of real estate.  We have not paid stamp duty in respect of any
      of the acquired or leased properties.  Accordingly, we may be liable
      for stamp duty and penalties thereon if a deed is registered by us in the future
      (other than with respect to the DOT properties acquired from the Government
      as
      at March 30, 1987). All liabilities for stamp duties in respect of the DOT
      properties acquired by us from the Government as at March 30, 1987 are to
      be borne by the Government.  We have been advised by our counsel that
      although we have valid possession including the risks and rewards of ownership
      and title to all of our property to enable us to perfect and thereby acquire
      marketable title to real property in our possession, we would need to have
      relevant documents relating to transfer or lease of real property duly
      registered and stamped.  Accordingly, we cannot sell our properties
      without payment of stamp duties and registering the properties in our
      name.




***Compliance
      with new and changing corporate governance and public disclosure requirements
      adds uncertainty to our compliance policies and increases our costs of
      compliance.***




Changing
      laws, regulations and standards relating to accounting, corporate governance
      and
      public disclosure, including the Sarbanes-Oxley Act of 2002, new U.S. Securities
      and Exchange Commission, or SEC, regulations, the NYSE, rules, Securities and
      Exchange Board of India, or SEBI, rules, and Indian stock market listing
      regulations are creating uncertainty for companies like ours. These new or
      changed laws, regulations and standards may lack specificity and are subject
      to
      varying interpretations. Their application in practice may evolve over time,
      as
      new guidance is provided by regulatory and governing bodies. This could
      result in continuing uncertainty regarding compliance matters and higher costs
      of compliance as a result of ongoing revisions to such corporate governance
      standards.




In
      particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act
      of
      2002 and the related regulations regarding our required assessment of our
      internal controls over financial reporting and our external auditors’ audit of
      that assessment requires the commitment of significant financial and managerial
      resources. We consistently assess the adequacy of our internal controls over
      financial reporting, remediate any control deficiencies that may be identified,
      and validate through testing that our controls are functioning as documented.
      As
      of  March 31, 2007, our disclosure controls and procedures were
      made effective.  We have improved our internal controls over financial
      reporting and have consulted with our audit committee and board of directors,
      and are planning to undertake remedial measures for further
      improvements.




***We
      have received a demand to pay sales tax in respect of certain historical
      telecommunications revenues, mainly telephone rental charges.  We are
      not yet able to estimate our potential aggregate liability, but it could be
      large and have a material adverse effect on our results of operations, financial
      condition and cash flow.***




We
      have
      received a demand from the state government of Maharashtra, of which Mumbai
      is a
      part, for payment of Rs.1.9 billion in sales tax for fiscal 1989-2000 on certain
      telecommunications revenues, mainly telephone rental charges.




We
      have
      challenged the demands raised before the respective high courts and we have
      been
      granted interim stays against enforcement of the demand. However this stay
      order
      is subject to the outcome of the Supreme Court judgment on the
      issue.  During the year ended March 31, 2006, the Supreme Court of
      India has concluded in the BSNL Vs Union of India case that rendering basic
      services does not amount to a “transfer of right to use the telephone
      system”.  Hence the imposition of the sales tax on any facility of the
      telecommunication services is untenable in law.  Based on opinion
      received from legal counsel and drawing reference to the judgment of the Supreme
      Court of India in the abovementioned case, management believes that the sales
      tax departments would have to withdraw their demands of sales tax on basic
      telephony and that an adverse outcome in respect of the above is
      remote.  The legal case filed in the Sales Tax Tribunal Maharashtra
      has been remanded to the Commissioner to reconsider the issue in light of the
      above Supreme Court judgment.




If
      we
      were required to pay sales tax in respect of certain historical revenues,
      including telephone rentals, such payments could have a material adverse effect
      upon our results of operations, financial condition and cash flow.  At
      this time, we cannot estimate potential aggregate actual liability associated
      with sales tax.




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***We
      have and may continue to implement Voluntary Retirement Schemes that will
      affect our profitability.***




We
      have
      and continue to offer voluntary retirement to certain of our employees with
      a
      view to reducing our workforce.  While we believe the long-term effect
      to our financial performance will be beneficial, the cost of such programs
      will
      affect our profitability over the next few years.




**Risks
      Relating to Investments in Indian Companies**




***There
      are Risks of Political Uncertainty in India that could affect our
      business.***




During
      the past decade, the government of India has pursued policies of economic
      liberalization, including significantly relaxing restrictions on the private
      sector. Nevertheless, the role of the Indian central and state governments
      in
      the Indian economy as producers, consumers and regulators has remained
      significant. A coalition government is in power. We cannot assure that these
      liberalization policies will continue in the future. The rate of economic
      liberalization could change, and specific laws and policies affecting foreign
      investment, currency exchange rates and other matters affecting investment
      in
      our securities could change as well. A significant change in India’s economic
      liberalization and deregulation policies could disrupt business and economic
      conditions in India generally and could adversely affect the telecommunications
      licensing and regulatory framework in which we operate our
      business.




***Financial
      instability in other countries, particularly emerging market countries in Asia,
      could adversely affect the Indian economy and cause our business and the market
      for our equity shares and ADSs to suffer.***




Financial
      turmoil in Asia, Russia and elsewhere in the world in the late 1990s affected
      different sectors of the Indian economy in varying degrees.  Although
      economic conditions are different in each country, investors’ reactions to
      developments in one country can have adverse effects on the securities of
      companies in other countries, including India.  A loss of investor
      confidence in the financial systems of other emerging markets may cause
      increased volatility in Indian financial markets and, indirectly, in the Indian
      economy in general.  Any worldwide financial instability could
      influence the Indian economy and could have a material adverse effect on the
      market for securities of Indian companies, including our equity shares and
      ADSs.




***Social
      conflict, terrorism and related military activity may adversely affect the
      Indian economy or world economic activity, either of which could adversely
      affect our business and the prices of our equity shares and
      ADSs.***




India
      and
      other parts of the world have recently experienced significant social conflict
      and/or terrorist acts.  In India, social conflict, including religious
      and regional/separatist conflicts, has been an ongoing problem, which
      occasionally includes significant acts of terrorism.  To the extent
      that the Indian economy is adversely affected by such conflict, terrorism or
      military activity, our business may also be adversely affected, resulting in
      a
      decline in revenue, and the prices of our equity shares and ADSs may
      decline.




**Risks
      Relating to the ADSs and Equity Shares**




***Ability
      to withdraw equity shares from the depositary facility is uncertain and may
      be
      subject to delays.***




India’s
      restrictions on foreign ownership of Indian companies limit the number of shares
      that may be owned by foreign investors and generally require government approval
      for foreign ownership.  The maximum foreign ownership permitted in us
      without prior governmental approval is 49% under the sectoral caps currently
      provided for by the government of India and the Reserve Bank of
      India.  Investors who withdraw equity shares from the depositary
      facility will be subject to Indian regulatory restrictions on foreign ownership
      of equity shares upon withdrawal.  It is possible that this withdrawal
      process may be subject to delays.




***Ability
      to sell in India any equity shares withdrawn from the depositary facility may
      be
      subject to delays.***




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Persons
      seeking to sell in India any equity shares withdrawn upon surrender of an ADS
      will require Reserve Bank of India approval for each such
      transaction.  Because of possible delays in obtaining necessary
      approvals, holders of equity shares may be prevented from realizing gains during
      periods of price increases or limiting losses during periods of price
      declines.




***Ability
      to withdraw and redeposit shares in the depositary facility is limited, which
      may cause our equity shares to trade at a discount or premium to the market
      price of our ADSs.***




Because
      of Indian legal restrictions, despite recent relaxations, the supply of ADSs
      may
      be limited.  Under procedures recently adopted by the Reserve Bank of
      India, the depositary will be permitted to accept deposits of our outstanding
      equity shares and deliver ADSs representing the deposited equity shares to
      the
      extent, and limited to the number, of ADSs that have previously been
      converted into underlying equity shares.  Under these new procedures,
      if you elect to surrender your ADSs and receive equity shares, you may be unable
      to re-deposit those outstanding equity shares with our depositary and receive
      ADSs because the number of new ADSs that can be issued cannot, at any time,
      exceed the number of ADSs converted into underlying equity shares or result
      in
      foreign equity in us exceeding 49%.  This may restrict your ability to
      re-convert the equity shares obtained by you to ADSs.  Also, investors
      who exchange ADSs for the underlying equity shares and are not holders of record
      will be required to declare to us details of the holder of
      record.  Any investor who fails to comply may be liable for a fine of
      up to Rs.1,000 for each day such failure continues.  See “Additional
      Information—Indian Foreign Exchange Controls and Securities
      Regulations.”




The
      restrictions described above may cause our equity shares to trade at a discount
      or premium to our ADSs.




***Conditions
      in the Indian securities market may affect the price or liquidity of the equity
      shares and the ADSs.***




The
      Indian securities markets are generally smaller and more volatile than
      securities markets in the world’s major financial centers.  Indian
      stock exchanges have also experienced problems that have affected the market
      price and liquidity of the securities of Indian companies.  These
      problems have included temporary exchange closures, the suspension of stock
      exchange administration, broker defaults, settlement delays and strikes by
      brokers.  In addition, the governing bodies of the Indian stock
      exchanges have from time to time imposed restrictions on trading in certain
      securities, limitations on price movements and margin
      requirements.  Further, from time to time, disputes have occurred
      between listed companies and stock exchanges and other regulatory bodies, which,
      in some cases, may have had a negative effect on market
      sentiment.  Similar problems could happen in the future and, if they
      do, they could affect the market price and liquidity of our equity shares and
      our ADSs.




***Because
      there may be less company information available in Indian securities markets
      than securities markets in more developed countries, the price of our equity
      shares could fluctuate unexpectedly.***




There
      is
      a difference between the level of regulation and monitoring of the Indian
      securities market and the activities of investors, brokers and other
      participants and that of markets in the United States and other developed
      economies.  The Securities and Exchange Board of India is responsible
      for improving disclosure and other regulatory standards for the Indian
      securities markets.  The Securities and Exchange Board of India has
      issued regulations and guidelines on disclosure requirements, insider
      trading and other matters.  There may, however, be less publicly
      available information about Indian companies than is regularly made available
      by
      public companies in developed economies.  As a result, shareholders
      could act on incomplete information and cause the price of our equity shares
      to
      fluctuate unexpectedly.




***ADS
      holders may be unable to exercise preemptive rights available to shareholders
      and therefore may suffer future dilution of their ownership
      position.***




A
      company
      incorporated in India must offer its holders of equity shares preemptive rights
      to subscribe and pay for a proportionate number of shares to maintain their
      existing ownership percentages prior to the issuance of any new equity shares,
      unless these rights have been waived by at least 75% of the company’s
      shareholders present




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and
      voting at a shareholders’ general meeting.  Holders of our ADSs as
      well as our shareholders located in the United States may be unable to exercise
      preemptive rights for our equity shares underlying our ADSs unless a
      registration statement under the Securities Act is effective with respect to
      those rights or an exemption from the registration requirements of the
      Securities Act is available.  Our decision to file a registration
      statement will depend on the costs and potential liabilities associated with
      any
      such registration statement, as well as the perceived benefits of enabling
      investors in our ADSs to exercise their preemptive rights and any other factors
      we consider appropriate at the time.  We do not commit that we would
      file a registration statement under these circumstances.  If we issue
      any such rights in the future, the rights would be issued to the depositary,
      which may sell the rights in the securities markets in India for the benefit
      of
      the holders of our ADSs.  There can be no assurance as to the
      value, if any, the depositary would receive upon the sale of the
      rights.  To the extent that holders of our ADSs as well as our
      shareholders located in the United States are unable to exercise preemptive
      rights, their proportional interests in us would be reduced.




***ADS
      holders may be subject to potential losses arising out of exchange rate risk
      on
      the Indian rupee and risks associated with the conversion of rupee proceeds
      into
      foreign currency.***




Holders
      of ADSs as well as our shareholders located outside India will be subject to
      currency fluctuation risks and convertibility risks, since our equity shares
      are
      quoted in rupees on the Indian stock exchanges on which they are
      listed.  Dividends on our equity shares will also be paid in rupees,
      and then converted into US dollars for distribution to ADS
      holders.  Holders that seek to convert the rupee proceeds of a sale of
      equity shares withdrawn upon surrender of ADSs into foreign currency and export
      the foreign currency will need to obtain the approval of the Reserve Bank of
      India for each transaction.  In addition, holders that seek to sell
      equity shares withdrawn from the depositary facility will have to obtain
      approval from the Reserve Bank of India, unless the sale is made on a stock
      exchange or in connection with an offer made under the regulations regarding
      takeovers.  Holders of rupees in India may also generally not purchase
      foreign currency without general or special approval from the Reserve Bank
      of
      India.




***ADS
      holders may be subject to Indian taxes arising out of capital
      gains.***




Generally,
      capital gains, whether short-term or long-term, arising on the sale of the
      underlying equity shares in India are subject to Indian capital gains
      tax.  For the purpose of computing the amount of capital gains subject
      to tax, Indian law specifies that the cost of acquisition of the equity shares
      will be deemed to be the share price prevailing on The Stock Exchange, Mumbai
      or
      the National Stock Exchange on the date the depositary advises the custodian
      to
      deliver equity shares upon surrender of ADSs.  The period of holding
      of equity shares, for determining whether the gain is long-term or short-term,
      commences on the date of the giving of such notice by the depositary to the
      custodian.




Investors
      are advised to consult their own tax advisers and to consider carefully the
      potential tax consequences of an investment in our ADSs.




***ADS
      holders may not be able to enforce a judgment of a foreign court against
      us.***




We
      are a
      limited liability company incorporated under the laws of India.  All
      our directors and executive officers are residents of India and almost all
      of
      our assets and the assets of such persons are located in India.  India
      is not a party to any international treaty in relation to the recognition
      or enforcement of foreign judgments.  We have been advised by counsel
      that recognition and enforcement of foreign judgments is provided for on a
      statutory basis and that foreign judgments shall be conclusive regarding any
      matter directly adjudicated upon except where:




·
            the
                judgment has not been pronounced by a court of competent
                jurisdiction;




·
            the
                judgment has not been given on the merits of the
                case;




·
            it
                appears on the face of the proceedings that the judgment is founded
                on an
                incorrect view of international law or a refusal to recognize the
                law of
                India in cases in which Indian law is
                applicable;




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·
            the
                proceedings in which the judgment was obtained were opposed to natural
                justice;




·
            the
                judgment has been obtained by fraud;
                or




·
            the
                judgment sustains a claim founded on a breach of any law in force
                in
                India.




It
      may
      not be possible for holders of our ADSs or our shareholders to effect service
      of
      process upon us or our directors and executive officers and experts named in
      the
      report that are residents of India outside India or to enforce judgments
      obtained against us or them in foreign courts predicated upon the liability
      provisions of foreign countries, including the civil liability provisions of
      the
      federal securities laws of the United States.




Moreover,
      it is unlikely that a court in India would award damages on the same basis
      as a
      foreign court if an action is brought in India.  Furthermore, it is
      unlikely that an Indian court would enforce foreign judgments if it viewed
      the
      amount of damages as excessive or inconsistent with Indian
      practice.  An Indian court may not enforce a foreign judgment
      involving more than actual and quantifiable damages.




***Although
      announced policy indicates there is no intention to do so, possible sales of
      our
      equity shares by the government of India could affect the value of our
      ADSs.***




The
      government of India holds approximately 56.25% of our outstanding equity
      shares.    There have been no indications that the current
      government of India plans to further reduce its shareholding in us through
      a
      sale of equity.




Any
      future disposal of equity shares by the Indian government could adversely affect
      the trading price of our equity shares and ADSs.




**Item
      4. Information on the
      Company**




**HISTORY
      AND DEVELOPMENT OF THE COMPANY**




**History
      and Development of the Indian Telecommunications Industry**




Until
      the
      mid-1980s, the telecommunications sector in India was a monopoly controlled
      by
      the government of India through the Department of Posts and Telegraphs of the
      Ministry of Communications, providing all telecommunications services, both
      domestic and international.  The Indian Telegraph Act of 1885
      established the government of India’s monopoly in the sector and, together with
      the Indian Wireless Telegraphy Act of 1933, provided the legal framework
      for the regulation of the Indian telecommunications industry.




Development
      of the telecommunications sector historically was seen as a relatively low
      priority and received limited budgetary support from the government of
      India.  As a result, the telecommunications infrastructure in India
      grew relatively slowly.  In the mid-1980s, faced with rapidly
      increasing demand for telecommunications services and equipment, the government
      of India commenced a reorganization of the sector designed to facilitate the
      rapid introduction of new technology, stimulate the growth of the
      telecommunications industry and tap the resources of the private sector in
      facilitating such technological innovation and growth.  The
      reorganization included the division of the Department of Posts and Telegraphs
      into the DOT and the Department of Posts.




As
      part
      of the reorganization, we were incorporated on February 28, 1986 under the
      Companies Act as a wholly-owned government of India company and, on April 1,
      1986, assumed responsibility for the control, management and operation of the
      telecommunications networks in Delhi and Mumbai, two of the largest metropolitan
      areas in India.  VSNL was established at the same time to provide
      international telecommunications services and the DOT retained responsibility
      for providing all other telecommunications services throughout
      India.  The DOT also assumed regulatory authority over the Indian
      telecommunications industry.  Simultaneously, the Telecom Commission
      was established in 1986 as an executive body under the Ministry of
      Communications to make policy decisions and to accelerate the development of
      all
      aspects of the telecommunications sector and the implementation of new
      telecommunications policies.




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In
      December 1991, with a view to fulfilling its objective of facilitating the
      rapid
      introduction of new services and technology, the DOT invited bids from Indian
      companies with a maximum of 49% foreign ownership for two non-exclusive GSM
      cellular licenses in each of the cities of Kolkata (formerly called Calcutta),
      Chennai (formerly called Madras), Delhi and Mumbai.  The private
      operators commenced cellular services in late 1995.  In October 1997
      we were permitted to provide GSM cellular service in Mumbai and
      Delhi.  Beginning in 1995, the DOT also invited tenders and awarded
      cellular licenses for the regional “circles” established for the purpose of
      licensing cellular services in the rest of India.  We believe that as
      of July 31, 2007, there were approximately 136 million cellular subscribers
      in
      India.




Since
      1992, as part of its general policy of gradually reducing its holdings in public
      sector enterprises, the Indian government sold a portion of its equity holdings
      in us and VSNL to certain mutual funds, banks and financial institutions
      controlled by the government of India.  In our 1997 global depositary
      receipt offering, the Indian government sold 40 million of our equity shares
      represented by 20 million global depositary receipts, constituting 6.3% of
      our
      then outstanding equity shares.  Additionally, in 1997 and 1999, the
      Indian government sold additional equity shares of VSNL in the form of global
      depositary receipts, thereby reducing its equity interest in the company to
      51%.  In February 2002, the government of India divested an additional
      25% interest in VSNL to the Tata Group through a competitive bidding
      process.




In
      May
      1994, the government of India announced its National Telecom Policy, which
      was
      aimed at achieving accelerated telecommunications growth and network
      expansion.  The broad objectives of this policy were higher national
      telephone penetration, reduction of waiting lists, improvement in the quality
      of
      networks, improved rural access to telecommunications services, introduction
      of
      value-added services and private sector participation in the provision of
      basic and cellular services.




In
      order
      to achieve these objectives, the Indian government decided to permit private
      sector involvement in basic telecommunications services, which, in the Indian
      context, includes basic fixed-line access service and a number of other
      telecommunications services (including CDMA-based fixed wireless and mobile
      services (without roaming)), other than long distance services, cellular service
      and Internet access.  Accordingly, in September 1994 the Indian
      government announced its “Guidelines for Private Sector Entry into Basic Telecom
      Services,” and beginning in 1995 began to invite tenders from companies with no
      more than 49% foreign ownership for basic service licenses for the regional
      “circles” established for licensing basic telecommunications
      services.  After a period of consolidation, the most prominent
      private-sector providers of basic telecommunications services currently include
      Bharti Tele-Ventures Limited, Tata Teleservices and Reliance Infocomm, each
      of
      which operates in multiple circles.  Tata Teleservices and Reliance
      Infocomm both operate in the circles that include Mumbai and Delhi, and hence
      now compete with us in those areas.  Bharti Tele-Ventures Limited also
      provides basic services in Delhi.




In
      February 1997, a multilateral agreement on basic telecommunications services
      was
      agreed to among member governments of the World Trade
      Organization.  As part of this agreement, the Indian government has
      reaffirmed its commitment to further liberalize the Indian telecommunications
      sector through the licensing of new basic and cellular service
      providers.




In
      March
      1997, the government established the Telecom Regulatory Authority of India
      (TRAI), an independent regulatory authority with broad regulatory powers over
      the telecommunications industry in India, including the power to set rates
      on
      domestic and international telecommunications services and determine the terms
      and conditions of interconnect arrangements between service
      providers.  These regulatory powers had previously been vested in the
      DOT, which controls us and is part of the Ministry of
      Communications.  However, the power to grant, renew or revoke licenses
      remains with the DOT.




In
      November 1998, the government of India announced its Internet policy, which
      aims
      to increase Internet usage by, among other things, allowing up to 49% foreign
      ownership of Internet service providers (ISPs) and declaring a license fee
      moratorium for five years (Currently the foreign ownership limit for ISPs is
      up
      to 74% in most cases.)




In
      March
      1999, the government of India announced its New Telecom Policy 1999 which sets
      forth as one of its central goals the fostering of increased competition in
      the
      Indian telecommunications industry and the liberalization of government
      telecommunications regulation.




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Additionally,
      effective May 1, 1999, the TRAI implemented the 1999 tariff order pursuant
      to
      which the TRAI seeks to align tariffs charged by service providers with the
      corresponding costs associated with such services so as to limit
      cross-subsidization of services by a provider while allowing providers to set
      tariffs at any level below certain maximum levels.  The TRAI has since
      adjusted tariffs several times under the tariff order.




In
      October 1999, the DOT, which had both performed the role of licensor and policy
      maker for the Ministry of Communications and operated as India’s domestic long
      distance service provider and basic service provider (except for the areas
      of
      Delhi and Mumbai, which are covered by us), was bifurcated into two
      departments.  The DOT/Telecom Commission, or the DOT, now performs the
      role of licensor and policy maker, and the Department of Telecom Services,
      functions as the government of India’s local and long distance network service
      provider.  In October 2000, the Department of Telecom Services’ local
      and long distance business was corporatized into a new company named
      BSNL.  The Indian government has also recently established an
      independent Information Technology Department within the Ministry of
      Communications (now formally known as the Ministry of Communications and
      Information Technology).  The IT department will, among other things,
      promote the Internet, e-commerce and knowledge based
      industries.  Internet licensing functions will remain with the
      DOT.  The DOT controls the equity shares in us that are held by the
      Indian government and appoints all of the directors on our 12-seat
      board.  Two of our board seats are for DOT officers.




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The
      following chart illustrates the current operational and regulatory structure
      of
      India’s telecommunications services industry:











In
      November 2003, the DOT issued guidelines for Unified Access License which cover
      within a service area both basic telecommunications services and cellular
      services.  In the Indian context, “basic telecommunications services”
or “basic services” include basic fixed-lined access service and a number of
      other telecommunications services, other than long distance services, cellular
      service and Internet access.  Basic services also include CDMA-based
      fixed wireless and mobile services (without roaming).  We have
      submitted a request to the DOT to migrate to UAS Licenses for our service area
      under mobile licenses for Delhi and Mumbai to be able to provide services at
      par




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with
      other operators in these areas.  In September 2006, our request for
      migration of our CMTS Licenses to UAS Licenses as our operating cellular service
      in the licensed area was not accepted by the DOT.  In October 2006, we
      sought reconsideration and grant of permission for migration to UAS
      Licenses.




On
      November 22, 2006, the DOT issued the instructions that “The licensee shall
      ensure adequate verification of each and every customer before enrolling him
      as
      a subscriber.  Instructions issued by the licensor in this regard from
      time to time shall be scrupulously followed.”




For
      ensuring that the complete subscriber information is available with all the
      service providers and the same is duly verified, the DOT also decided that
      each
      licensee shall take up re-verification of the existing subscribers on priority
      and ensure that the re-verification of the existing subscribers is completed
      by
      March 31, 2007.  By re-verification, it is meant that there shall be
      100% check of CAF/SAF documentary proof of identity and documentary proof of
      address and it would be ensured that the subscriber information available in
      service provider’s database matches with that in CAF/SAF and associated
      documents.  Further the licensee company would cross-verify the
      information from the actual user by calling the respective
      subscriber.  There shall not be any connection working after March 31,
      2007 in licensee’s network without having the subscriber information duly
      verified.




After
      March 31, 2007, if any subscriber number is found working without proper
      verification, a minimum penalty of Rs. 1000 per violation of subscriber number
      verification would be levied on the licensee apart from immediate disconnection
      of the subscriber number by the licensee.




In
      response of the above DOT instructions, our GSM subscriber base reduced from
      approximately 2.7 million to 2.5 million during the period March 2007 to April
      2007.




**Mahanagar
      Telephone Nigam Limited**




Mahanagar
      Telephone Nigam Limited is the principal provider of fixed-line and other basic
      telecommunications services in Delhi and Mumbai.  Delhi and Mumbai are
      two of the largest, most densely populated and wealthiest metropolitan areas
      in
      India.  At the end of fiscal 2007 our fixed-line telecommunications
      networks in Delhi and Mumbai had an aggregate of approximately 3.80 million
      fixed lines in service.  In February 2001, we launched our cellular
      services using global system for mobile communications, or GSM, technology
      in
      Delhi and Mumbai and had approximately 2.75 million subscribers as of March
      31,
      2007.  GSM is the European and Asian standard for digital mobile
      telephone networks.  We launched CDMA-based services in 1997, and at
      the end of fiscal 2007 had approximately 1.19 lakh limited mobile subscribers
      in
      Mumbai and Delhi.  CDMA is a digital wireless technology that
      increases network capacity by allowing more than one user to simultaneously
      occupy a single radio frequency band with reduced interference.  We
      began providing Internet service in both Delhi and Mumbai in February 1999
      and
      had approximately 1.29 million Internet access subscribers at the end of fiscal
      2007.  We obtained a national long distance license in May 2006 and
      began to carry our own traffic between Mumbai and Delhi.




We
      believe that the size of the markets in Delhi and Mumbai, the economic
      environment, the Indian government’s ongoing liberalization of the
      telecommunications industry and the still low level of penetration of
      fixed-line, mobile and cellular services in these two areas and the low level
      of
      penetration of Internet services in India provide opportunities for future
      industry growth.




The
      number of our access lines in service grew at a compound annual growth rate
      of
      6.34% from March 31, 2000 to March 31, 2007.  In fiscal 2007, these
      lines increased by 12.54%, due to cellular services.  In the year
      2007, our network included approximately 3.72 million access lines in service
      in
      Delhi and approximately 3.71 million access lines in service in
      Mumbai.  In addition, our access lines in service per employee
      increased from 66 at March 31, 2000 to 137 at March 31, 2007.




We
      derive
      our revenue primarily from local, domestic long distance and international
      calls
      that originate from our network.  In fiscal 2007, approximately 33% of
      our revenue was derived from call charges, 49% from rentals of telephones,
      access lines and other telecommunications equipment and use of our value-added
      services and 13% from public call offices.  Interconnect revenue,
      which is revenue derived from other telecommunications




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service
      providers for calls made into our network, accounted for 5% of our revenues
      in
      fiscal 2007.  Local calls are carried on our network, unless the
      termination point is in the network of one of the cellular operators or one
      of  the new private-sector basic service providers in the
      locality.  We have been carrying our own traffic between Delhi and
      Mumbai since May 2006. Other domestic long distance calls continue to be passed
      from our network to the domestic telecommunications network operated by BSNL,
      although we have entered into interconnect agreements with the new
      private-sector domestic long distance service providers and intend to pass
      such
      domestic long distance calls also through such other providers.  In
      addition, currently all international outgoing calls continue to be passed
      from
      our network to international gateways operated by VSNL, India’s former
      government-controlled international long distance carrier, although we have
      entered into interconnect agreements with other private-sector international
      long distance carriers and have plans for joint development with BSNL of
      submarine cable to connect the east and west coasts of India with Malaysia
      and
      the Middle East (and ultimately Europe and the USA).




We
      expect
      competition to continue to increase in all major sectors of the Indian
      telecommunications industry, as both government and private-sector companies
      continue to invest in capacity expansion and seize opportunities to enter new
      geographical areas and lines of business.  See “— Business
      Overview—Competition” below.




Our
      principal executive office is located at 12th floor, Jeevan Bharati Tower—1, 124
      Connaught Circus, New Delhi—110001, India, and our telephone number is
      +91-11-2374-2212.




**Licenses/License
      Areas**




We
      provide all of our telecommunications services, other than Internet, under
      a
      single, general, non-exclusive license.  The license initially granted
      to us in 1986 was effective for a five-year period that ended on March 31,
      1991.  The term of the license has been extended for a 25-year period
      ending March 31, 2013 for basic services.




In
      October 1997, our license was amended to explicitly include cellular services
      and radio paging, and our license for such additional services currently extends
      to October 2017.  The license is not specific as to the type of
      cellular technology that we may use.  The license covers areas within
      the territorial jurisdiction of the State of Delhi and the areas covered by
      the
      municipalities of Mumbai, Navi Mumbai and Thane.  The DOT has extended
      the scope of our license to allow us to provide cellular services in certain
      surrounding areas of Delhi and Mumbai covered by other cellular operators in
      those cities.  The license specifies that we may provide local,
      domestic long distance access (through interconnection with domestic long
      distance operators) and international long distance access (through
      interconnection with networks of international long distance operators), as
      well
      as telex and leased line services.  Specifically, our license permits
      us to originate, terminate and transit domestic and international long distance
      calls.  However, we believe that our license would need to be amended
      if we wanted to enter the market for domestic long distance utilizing our
      network.  We expect to be licensed to provide for full international
      long distance service in the near future.




The
      DOT
      retains the right to revoke our license after giving one month’s notice to
      us.  The DOT also retains the right, after giving notice to us, to
      modify the terms and conditions of our license at any time if in their opinion
      it is necessary or expedient to do so in the interest of the general public
      or
      for the proper operation of the telecommunications sector.  A
      revocation of the license or a change in significant terms of the license,
      such
      as its duration, the amount of license fee payable, the range of services
      permitted and the scope of exclusivity could limit our ability to operate
      particular lines of our business or result in increased costs in the form of
      increased license fees or costs associated with applying for new licenses,
      or
      contesting limitations on our licenses.




We
      provide our Internet services in Delhi and Mumbai under separate non-exclusive
      license agreements.  These licenses were granted in November 1998, and
      currently extend to September 7, 2017.  In addition, our wholly owned
      subsidiary, Millennium Telecom Limited, provides Internet access services
      throughout India under a license granted in 2000 for an initial period of 15
      years.




*Delhi.*According
      to the government of India’s provisional 2001 population census data, Delhi had
      a total population of approximately 12.8 million.  In addition to
      being India’s political capital, Delhi has the highest per capita income of all
      the states in India.  Delhi has a high concentration of service and
      manufacturing industries and




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houses
      the central government, the head offices for many major public sector
      enterprises, embassies, high commissions and various government missions and
      development agencies.




*Mumbai*.  The
      city of Mumbai, the financial capital of India and the capital of the State
      of
      Maharashtra, is India’s most populous city, with a population of approximately
      16.4 million according to the 2001 census data.  Mumbai accounted for
      36% of India’s income tax contributions in fiscal 2000.




**Strategy**




Key
      elements of our strategy include the following:




·
            *Expand
                GSM Cellular and CDMA Mobile Services in Delhi and
                Mumbai*.  We launched our cellular services using GSM
                technology in Delhi and Mumbai in February 2001, and currently have
                an
                installed capacity of 10.25 lakh lines in Delhi and 13.25 lakh lines
                in
                Mumbai. We believe that current penetration rates in Mumbai and Delhi
                remain attractive for continued high growth in subscriber
                base.  We have been awarded a tender for further adding two
                million lines of GSM based on 2G/3G in each of Mumbai and
                Delhi.  In addition, we have launched lower-cost CDMA-based
                limited mobility mobile services in each of Mumbai and Delhi, and
                currently have 118,648 subscribers with an installed capacity of
                1,098,230
                CDMA connections (most of which are to employ the more advanced CDMA
                2000
                1X technology) in each city.  We believe that this newlimited
                mobile service will enable us to target a wider customer base that
                is more
                price sensitive than GSM customers and that does not require India-wide
                and international roaming facilities.  We intend to compete
                effectively in these growing markets by providing high quality service
                at
                affordable rates.




·
            *Focus
                on Customer Service*.  In order to strengthen the loyalty of
                our customers, attract cellular subscribers and improve our competitive
                position, we have a program to improve customer service and become
                more
                responsive to the needs of our subscribers.  We have introduced
                improved bill collection and payment procedures (including bill payment
                over the Internet and via credit card), opened Tele-marts at which
                most
                subscriber services are available, introduced telephone directories
                on the
                Internet and on CD-ROM and implemented a customer service management
                system.  Our customer service management system enables our
                staff to provide customers with access to a range of “on-line” services,
                including registration for new telephone lines, changes of address
                and
                issuances of bills, and allows us to monitor complaints from a single
                point of contact.  We have identified high usage “commercially
                important persons” and are making all efforts to strengthen our
                relationship with these
                subscribers.




·
            *Further
                Develop and Modernize our Network*.  We intend to continue
                to invest in expanding and upgrading our network to improve the quality
                of
                service.  We have placed an APO (Advance Purchase Order) to add
                24K tandem capacity based on NGN – next generation network, in Delhi and
                Mumbai.  Also, we are installing state of the art IP-MPLS Core
                in our network so as to give MPLS enabled data service with better
                quality
                of service to our esteemed customers.  This MPLS core network
                will also aggregate all the next generation network switching, data
                broadband and video traffic so as to enable us to have an efficient
                utilization of our bandwidth.  Further, we are replacing our old
                PDH transmission network with synchronous digital hierarchy
                technology.  We are also planning to introduce DWDM technology
                to further increase the capacity of our optical fiber in
                network.  We are continuing to implement fiber-in-local-loop and
                wireless-in-local-loop technologies where appropriate.  We have
                introduced broadband technology based on ADSL2+, capable of providing
                triple play services (video, voice and data), in a significant
                way.  Through expansion and modernization of our network, we
                seek to improve the capacity of our network, reduce network failure
                rates,
                improve call completion rates and decrease average waiting time for
                new
                lines as well as support our Internet and value-added
                services.




·
            *Selectively
                Target International Opportunities*.  We plan to selectively
                target expansion opportunities outside India where we can leverage
                our
                expertise and relationships.  Our Nepal joint venture, United
                Telecom Limited, in which we hold a 26.7% equity interest, has commenced
                wireless in local loop




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services
                  as the first private-sector telecommunications operator in that
                  country
                  and has a subscriber base of 81,000 as of March 31, 2007.  We
                  have also been awarded licenses to provide basic, mobile and international
                  long distance service in Mauritius.  We launched international
                  long distance services in Mauritius in the current fiscal year.
                  We have
                  also launched a fixed wireless service in Mauritius.  As of
                  March 31, 2007, we had approximately 21,800 fixed mobile customers
                  and
                  23,000 international long distance card customers per month.  On
                  December 15, 2006, mobile services were launched under the brand
                  name
                  “MOKOZEE,” and as of March 31, 2007, we had a total of 5,885 prepaid
                  mobile customers.  We are also examining other international
                  opportunities.


·
            *Enter
                the Market for International Long Distance Services*.  We
                intend to lay submarine cable jointly with BSNL from both the east
                and
                west coasts of India to the far East and the Middle East,
                respectively,  to carry voice and data traffic, and with an
                intent to further extend to USA and
                Europe.




·
            *Expand
                Internet Services*.  We commenced our Internet service
                provider operations in February 1999 with an initial network capacity
                to
                support up to 5,000 subscribers in each of Delhi and Mumbai.  As
                of March 31, 2007, we had approximately 1.29 million Internet access
                users.  We have also started providing high speed internet
                services on broadband.




·
            *Enhance
                Value-added Services*.  We provide our subscribers with
                value-added services such as call-waiting, call-forwarding, wake-up
                calls,
                absent subscriber service and caller identification at no charge
                or for a
                nominal fee.  We also provide our Intelligent Network services
                to subscribers, which include our calling card services, a toll-free
                calling service, a premium rate “0900” number service, universal access
                service and a televoting service.  We also provide high speed
                data transmission services using integrated services digital network
                technology, which allows simultaneous high speed transmission of
                voice,
                data and images.  We expect that our value-added service
                offerings will increase use of our network, enhance overall customer
                satisfaction and provide new sources of
                revenue.




**BUSINESS
      OVERVIEW**




**Services**




Our
      primary business is providing basic telecommunications services in Delhi and
      Mumbai, which include:




1.
            **Basic
                fixed-line access (including phone plus facilities) in Delhi and
                Mumbai:**  We provide basic fixed-line access, which
                consists of installation and provision of basic voice telephony
                services.  Rental charges include maintenance of connections
                between a subscriber’s premises and our network, 60 pulses of calls per
                month as well as the use of a basic handset (although subscribers
                may
                elect to buy their own handset and have their installation charges
                reduced
                accordingly).  Phone plus facilities in basic fixed-line include
                such services as abbreviated dialing, call transfer, hotline facility,
                three party conferencing, absentee facility, CLIP facility, call
                hunting,
                call alert and morning alarm.




2.
            **Public
                Call Offices:**  Public call offices consist of both
                manned offices where people can make local, long distance and
                international calls, and coin operated telephone booths.  At
                March 31 2007, public call offices accounted for 6.84 % of our total
                wire
                lines in service. The coin-operated public call offices offer only
                local
                call service, while the franchised public call offices offer local,
                domestic long distance and international call services.  We pay
                a commission to the franchisees amounting to 40.0% of the tariffs
                charged
                by the franchisee on local calls and 20-30% of the tariffs charged
                by the
                franchisee on domestic long distance depending on the number of calls
                per
                fortnight and international calls.  The franchisees charge the
                same tariffs we do for these
                services.




3.
            **GSM
                cellular services (including value-added services) in Delhi and
                Mumbai:**  In February 2001, we launched our cellular
                mobile services using GSM technology (the European and Asian standard
                for
                digital cellular telephony) in Delhi and Mumbai under the brand name
                Dolphin.  In 2002, we introduced our prepaid cellular services
                under the brand name Trump.  As of March 31, 2007, we had 27.47
                lakh GSM cellular subscribers.  We provide national roaming
                facilities for our GSM cellular customers through the




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networks
      of BSNL outside Mumbai and Delhi and
      international roaming facilities with 45 operators in approximately 40
      countries, and we have established roaming facilities for our customers in
      a
      total of approximately 200 countries.  As of March 31, 2007, we had
      installed a eellular network with a capacity of 10.25 lakh lines in Delhi and
      13.25 lakh lines in Mumbai.  This year we decided to have a tender for
      further adding 20 lakh lines of GSM based on 2G/3G each in of Mumbai and
      Delhi.




4.
            **Value
                Added services:**  Value-added services on GSM such as
                call-waiting, call-forwarding, wake-up calls, absent subscriber service
                (informing callers that the subscriber is unavailable) and caller
                identification, friends & family, night talk, VMS call conference, WAP
                and voice mail.




5.
            **Mobile
                and fixed-wireless services based on CDMA
                technology:**  In May 1997, we began implementing
                wireless-in-local-loop services using CDMA technology for fixed wireless
                and mobile operations on a commercially experimental basis with a
                single
                exchange and capacity for 1,000 subscribers in Delhi.
                Wireless-in-local-loop services use wireless links from a local exchange
                in place of conventional cables. Two types of service are
                provided.  One type employs a handset that is fixed to a
                subscriber’s premises for “fixed wireless” service, while the other
                employs a mobile telephone -or “mobile” or “limited mobility”
                services.  We have since upgraded our CDMA equipment and
                receiving stations and, in October 1999, we opened subscriptions
                for up to
                an additional 9,000 CDMA mobile and fixed wireless connections in
                Delhi
                and dedicated 40% of these connections for fixed wireless.  The
                capacity was subsequently increased to approximately 150,000 lines
                in each
                of Delhi and Mumbai.  At March 31, 2007, we had 118,648
                operational CDMA mobile connections and 79,573 operational, fixed
                wireless
                connections.




Our
      CDMA
      mobile service offers only limited mobility within Delhi and Mumbai, and
      currently we are not permitted to offer roaming facilities on this
      service.  If we obtain the newly-available Unified Access License we
      will be able to offer full mobility.




CDMA
      fixed wireless is a substitute for fixed-line access.  Fixed wireless
      allows us to enhance basic service penetration, provide quicker installation
      and
      cover areas where the installation of cable would not be
      economical.  Our CDMA mobile service is marketed under the brand name
      Garuda.




6.
            **ISDN
                services:**We provide narrow-band ISDN services that allow
                subscribers to send high speed data make telephone calls with high
                quality
                voice transmission and hold desktop video conference over a single
                line.  In the past, the development of independent networks for
                a variety of services (such as voice, telex, packet-switched data
                and
                leased lines) made each of them relatively expensive.  ISDN
                technology allows a wide range of data services to be made available
                to
                the subscriber through a single connection and at a reduced
                cost.  We believe these high speed data transmission products
                will help us to attract high usage subscribers.  We introduced
                narrow-band ISDN services in August 1996, and, at March 31, 2007,
                we had
                approximately 24,500 subscribers to this
                service.




7.
            **Broadband
                services:**  We also offer data communications services
                through our packet switched data network.  This service allows
                the transmission of data on standard international data protocols
                and
                access via dedicated lines or dial-up facilities.  We plan to
                expand broadband services on a large scale based on the ADSL
                technology.  ADSL means asymmetric digital subscriber loop, a
                technology that allows combinations of services including voice,
                data
                technology and one-way full motion video to be compressed and delivered
                over existing copper cables.  We expect to experience
                significant demand for these high speed data services from large
                corporate, financial, media, public service and education
                institutions.  We launched broadband services using ADSL 2+ in
                January 2005.  The broadband customer base as on March 31, 2007
                is 4.69 lakh. The installed capacity of broadband ports as on March
                31,
                2007 is 4.58 lakh.  We have plans to install additional 8 lakh
                broadband ports in fiscal 2007-08.




8.
            **Internet
                access services:**  We commenced our Internet service
                provider operations in February 1999 with initial equipment capacity
                to
                support up to 5,000 subscribers in each of Delhi and Mumbai.  We
                experienced significant demand for this service and have since expanded
                our Internet services capacity to support additional subscribers
                in each
                of Delhi and Mumbai.  As of March 31, 2007, we provided our
                Internet services to a total of approximately 1.29 million subscribers
                in
                Delhi and Mumbai.




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We
      also
      enable our customers to access the Internet without having to subscribe for
      Internet service.  They can access the service and later be billed on
      the basis of calling line identification usage.  The number of
      customers who use this service is much higher than the number of Internet
      subscribers we have.




9.
            **Leased
                line service:**  We provide point-to-point leased line
                services for local, domestic long distance and international
                connectivity.  Subscribers can use our leased lines to assemble
                their own private networks between offices within Delhi and Mumbai
                or
                together with BSNL, between Delhi and Mumbai and to other Indian
                cities.  Leased line services can be used for voice and data
                transmission at various bandwidths.  In addition, we earn
                revenues from leasing circuits to cellular operators in Delhi and
                Mumbai
                to interconnect their networks to our network.  At March 31,
                2007, we had approximately 48,000 leased line
                subscribers.




10.
            **Telex
                and Intelligent Network services:**  We are introducing
                Intelligent Network services over our entire network which at present
                includes:




·
            Calling
                card service




·
            Toll
                free calling service




·
            Premium
                rate “0900”number service




·
            Televoting
                service.




11.
            **Interconnection
                with domestic international long distance carriers and with basic
                and
                cellular operators in Delhi and Mumbai**:  We provide
                local telephone services in Delhi and Mumbai as well as domestic
                and
                international long distance through our connectivity with BSNL’s domestic
                long distance network and. VSNL’s international gateways.  Since
                May 2006, we have carried our own traffic between Delhi and
                Mumbai.  We derive revenues from tariffs we collect on local
                domestic long distance and international calls that originate on
                our
                network.  Tariffs, or usage charges, consist of charges for
                local, domestic long distance and international calls.  Usage is
                measured by pulses, which are time-based limits of measure, metered
                at the
                relevant exchanges.  A set of pulse durations is established for
                each category of calls (i.e., local, domestic long distance or
                international long distance), and within each category, pulse durations
                vary depending on one or more of the following factors:  call
                distance; time of day; type of network on which the call is terminating
                (i.e. fixed, GSM cellular or CDMA mobile); destination country (for
                international long distance only); subscriber plan (for local calls
                only);
                and whether the call is within a circle or between two different
                circles
                (for domestic long distance only).  We estimate that, based on
                recent sample data, local calls constitute approximately 78% of our
                total pulses, while domestic long distance and international calls
                constitute approximately 17% and 5% of our pulses,
                respectively.  We are focused on increasing call volumes by
                promoting use of our value-added services and the use of long distance
                services.  We have received a letter of intent for a license to
                enter the international long distance service market and intend to
                launch
                this service as soon as the license is finalized.  We intend to
                lay submarine cable jointly with BSNL from both the east and west
                coasts
                of India to the far East and the Middle East, respectively, to carry
                voice
                and data traffic.




12.
            **Interconnection**.  We
                connect our network with BSNL and have entered into interconnect
                agreements with certain other licensed domestic long distance service
                carriers to provide our customers with domestic long distance service
                and
                intend to pass traffic to these other providers also (we carry our
                own
                traffic beween Delhi and Mumbai since May 2006).  We connect our
                network with VSNL and have entered into interconnect agreements with
                certain other licensed international long distance carriers to provide
                our
                customers with international long distance service.  We connect
                our network with the other basic, cellular operators and Unified
                Access
                Service Providers in Mumbai and Delhi to offer our customers comprehensive
                access in our coverage areas.  The terms and conditions of our
                interconnect arrangements are governed by regulations of the TRAI
                and
                interconnect agreements that we have with many of these other
                operators.  The TRAI is also responsible for ensuring technical
                compatibility among operators.  Effective May 1, 2003, under the
                authoirty’s interconnection usage charges regulation, interconnect charges
                have been established for all major types of interconnection based
                on a
                “calling party pays” principle.  See




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“—License
      Fees and Network
      Utilization/Interconnection Arrangements” and “—Telecommunications Regulation in
      India.”




**Recently
      Introduced Services**




·
            We
                have launched broadband service with ADSL2+ state-of-art technology,
                capable of providing triple play services (voice, video and
                data).




·
            We
                have launched a “Certification Authority” business under the brand name
                “MTNL Trustline” with a capacity to issue 500,000
                Certificates.  With this, we have become an important public key
                infrastructure service provider.




·
            We
                have launched Wi-fi service to provide internet connectivity to
                inaccessible and hot spots in the Delhi
                area.




·
            Since
                May 2006, we are carrying our own national long distance traffic
                between
                Delhi and Mumbai.




·
            We,
                in association with STPI, are setting up data centre for Web-Farming
                application.




·
            We
                have launched IPTV services in both Delhi and Mumbai on revenue sharing
                basis.




·
            We
                have also commissioned a state-of-the-art IP/MPLS core network in
                Delhi.




**Services
      Under Development**




·
            We
                would be adding two million lines in net switching capacity including
                capacity for WLL and GSM and 60,000 KMs. of optical fiber in Delhi
                and
                Mumbai.  Our other plans include - setting up 300-seater unified
                call center and deployment of Next Generation Network of 24,000 lines
                in
                Delhi and Mumbai each.




·
            A
                state of the art convergent billing and CRM system is under installation.
                This will facilitate CDR based billing, single bill for all services
                to
                the subscribers, flexibility in billing and innovative tariff packages
                for
                subscribers and thus will help in reducing billing
                complaints.




·
            We
                are further adding optical fibre in our access network and are introducing
                FTTH based on PON so as to provide all of our important customers
                with
                fiber connectivity to their homes in order to meet their further
                increased
                bandwidth requirement of both data and video
                applications.




·
            We
                have also floated an EOI for introduction of Wi-Max.  Pilot
                projects have been started in both Delhi and Mumbai for providing
                Wi Max
                services.




**Telecommunications
      Services in Other Countries**




We
      are
      selectively targeting expansion opportunities outside India where we can
      leverage our expertise and relationships.  We are keen in expanding
      our overseas operations, currently we are in the process of exploring the
      potential in a few Asian and African countries.  United Telecom
      Limited, a joint venture involving us (26.68%), Telecommunications Consultants
      India Limited (26.66%), VSNL (26.66%) and Nepal Ventures Private Limited (20%),
      commenced wireless in local loop services as the first private-sector
      telecommunications operator in Nepal.  We have also been awarded
      licenses to provide basic and international long distance service as well as
      mobile services in Mauritius.  Through a Mauritius subsidiary, we have
      begun to offer ILD services and fixed wireless services.  We intend to
      begin the build out of our network there to provide additional
      services.




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**Tariffs
      and Other Customer Charges**




Fixed-Line
      Services.  Tariffs, or usage charges, consist of charges for local,
      domestic long distance and international calls.  Usage is measured by
      pulses, which are time-based units of measure, metered at the relevant
      exchanges.  Pulses vary, depending on one or more
      factors.  Local call pulse duration depends upon the type of network
      on which the call is terminating (i.e., fixed, GSM cellular or CDMA mobile)
      and
      the subscriber plan chosen, while domestic long distance call pulse duration
      depends upon the call distance, time of day, type of network on which the call
      is terminating and whether the call is within a regional circle or between
      two
      circles.  International call pulse duration varies depending upon the
      country of destination.  For operator assisted domestic and
      international calls, a slab system of tariffs applies which differs depending
      upon the speed at which the call is completed.  The subscriber is
      billed at a fixed price per pulse that depends upon the subscriber plan chosen
      and usage volume (low usage customers are offered a lower price per
      pulse).  We currently offer several fixed-line plans, tailored to meet
      the needs of different user profiles.  One of the plans is the
      standard plan, which, under TRAI regulations, we are required to offer all
      customers and the terms of which the authority establishes.




For
      fixed-line services, customers also pay access charges consisting of a one-time
      refundable security deposit, installation charges and monthly
      subscription/rental charges.




We
      have
      adopted a policy not to reduce our basic tariffs and related charges unless
      in a
      response to tariff reductions by competitors.  However, since the 1999
      tariff order, the TRAI has in several stages significantly reduced tariffs
      on
      domestic and international long distance calls.  Effective July 20,
      2002, international long distance call rates were reduced by about 40% and
      effective October 2, 2004 national long distance call rates were
      reduced  varying up to 60% for various designations  Because
      we retain the remainder of prices of domestic and international long distance
      calls originating on our network, net of interconnect charges, by lowering
      long
      distance rates the tariff reductions have reduced the revenue we receive per
      call.  While these rate reductions have been part of a “rebalancing”
effort aimed at reducing cross-subsidization between long distance (historically
      priced at a premium) and local calls (historically subsidized) by at the same
      time phasing out subsidization of local calls, the negative impact of the long
      distance rate reductions have to date outweighed any positive impact of other
      aspects of the tariff rebalancing effort.  Also effective May 1, 2003,
      as part of its effort to reduce subsidies, the TRAI changed the standard plan
      that we must offer all customers by increasing monthly rentals for basic
      services by 12% from Rs. 250 to Rs.280, reduced the local call pulse duration
      (for calls made to fixed and fixed wireless lines) from three minutes to two
      minutes and the number of free monthly call pulses.




GSM
      Cellular Services. We offer our GSM cellular subscribers in Delhi and
      Mumbai a choice of several plans, tailored to meet the needs of different user
      profiles.  One of the plans is the standard plan, which, under TRAI
      regulations, we are required to offer all customers and the terms of which
      the
      authority establishes.  Generally, in addition to call charges for
      local and long distance calls, our plans include the following types of charges:
      refundable, non-interest bearing security deposit; installation charges; monthly
      rental charges; and airtime charges.  Effective February 1, 2004, with
      the adoption by the TRAI of the interconnection usage charge regulation and
      the
“calling party pays” principle, charges for incoming cellular calls (other than
      any roaming charges) have been eliminated.  In addition, we provide
      the following value-added services free to all our GSM cellular
      subscribers:




·
            roaming
                between Delhi and Mumbai




·
            call
                forwarding/divert




·
            call
                hold




·
            call
                waiting




·
            caller
                identification




However,
      airtime charges on use apply to these services.  In addition, we offer
      our GSM cellular subscribers the following value-added services for a
      fee.




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·
            national
                roaming;




·
            WAP
                (for Rs. 0.80 per minute through circuits switch
                Data);




·
            voice
                mail (for Rs. 0.50 per minute on message
                retrieval);




·
            Short
                Message Service;




·
            charges
                for outgoing messages – Rs.0.50.


·
            charges
                for incoming messages – free


·
            charges
                to other Services/National – Rs.1.00 per
                message


·
            charges
                to other Services/International – Rs.2.50 per
                message


·
            SMS
                Package (for Rs. 30/- per month and outgoing SMS
                local   mobile no. Rs. 0.10 per message between 10 PM to
                10AM)





·
            content-based
                Short Message Service (Rs.1.00 per message for regular service);
                and




·
            call
                conference (for Rs.50 per month; free for corporate
                booking);




GPRS
      and
      MMS Service


**FOR
                    POSTPAID**
                **FOR**
                  **PREPAID**1.
                    FOR GPRSParticulars
                GPRS-1
                  (wef
                    01.02.06)
                GPRS-2
                GPRS-3
                GPRS-4
                  (wef
                    20.03.06)
                GPRS-5Activation
                  Charges
                    (one-time)
                NIL
                NIL
                NIL
                NIL
                NIL
                    (Rs. 2/ - per SMS)Monthly
                    Rental
                Rs.
                    90/ -* per month (WAP browsing through Mobile)
                Rs.
                    399/ - per month (unlimited WAP browsing through PC)
                Rs.
                    49/ - per month
                  (unlimited
                    WAP browsing through mobile)
                NIL
                NILFree
                    usage up to
                15
                    MB
                Unlimited
                    (GPRS)
                NIL
                NIL
                NILVolume
                    based usage charges beyond free
                  usage
                    (Rs. / Kilo Bytes)
                Rs.
                    0.01 per KB
                  (10
                    paisa per KB)
                NIL
                Rs.
                    0.10 per 10 KB
                Rs.
                    0.02/KB
                Rs.
                    0.02/KB2.
                    FOR MMS1.P2P
                  (Calling
                    party or sender
                  to
                    pay)
                50
                    MMSfree.
                  Beyond
                    50 MMS,
                  Rs.3/
                    - per MMS
                200
                    MMS free.
                  Beyond
                    200 MMS,
                  Rs.
                    3/ - per MMS
                NIL
                Rs.3/
                    - per MMS
                Rs.
                    3/ - per MMS
  23
 Table
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 2.
                    M2P
                  (Downloader
                    to pay)
                Down
                    load charges as per rate fixed by the content provider


Various
      optional plans are also available to cater to the specific needs of the
      customers.




Itemized
      bill for Rs.50 per month (free for corporate booking)




In
      fiscal
      2002, we introduced pre-paid GSM cellular services under the brand name “Trump”
in Delhi and Mumbai.  This market is also highly competitive, with
      rates changing with market conditions.




In
      January 2006, we launched “One India Tariff” @Rs. 1.00 per minute for all India
      on all networks.  However, calls from fixed line/CDMA to fixed
      line/CDMA within own network are @Rs. 1.00 for three minutes.




We
      launched a new program One India Roaming Freedom Plan under Postpaid Cellular
      Services, under GSM license service effective June 3, 2007 in our service areas
      in Delhi and Mumbai.




Broadband
      Service:  We started offering Broadband service in January 2005 to
      subscribers in Delhi and Mumbai with choice of several plans, tailored to meet
      the needs of different user profiles.  Generally, in addition to usage
      charges for usage and data download, our plans include the following types
      of
      charges:  non-interest bearing security deposit; installation &
testing charges; monthly DSL usage charges, monthly rental for modem, if
      provided by us.




In
      May
      2005, we implemented leased line tariff at par with BSNL under revised tariff
      ceilings prescribed by the TRAI.




CDMA
      Services.  For CDMA mobile services, including the use of a CDMA
      handset, our subscribers are charged a refundable security deposit, a monthly
      charge and a monthly handset rental, in addition to airtime
      charges.  We have not charged users for incoming calls.  We
      offer our CDMA mobile subscribers a choice of several plans, tailored to meet
      the needs of different user profiles.  Following commissioning in July
      2006 of CDMA 20001X system in Mumbai, which has mobility between Mumbai and
      Navi
      Mumbai, other value added services are provided such as:




·
            SMS:  Local
                Rs.0.40 per message, national Rs. 0.80 per message and international
                Rs.
                2.50 per message.




·
            VMS:  Rs.
                1.20 per 3 minute




·
            Internet
                Access: Rs. 0.30 per 100 KB




In
      addition, we provide the following value added services free to all our CDMA
      subscribers:




·
            Call
                Hunting




·
            Call
                Waiting




·
            Caller
                Identification




·
            STD./ISD
                Dynamic Lock




24
 Table
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·
            Call
                Forwarding




·
            Three-party
                Conference




·
            Abbreviated
                Dialing




**Other
      Services**




For
      access to narrow-band ISDN services, we charge our subscribers a monthly rental
      and no registration fee.  Subscribers can also have primary rate
      access for an initial fee.  Usage charges for local, domestic long
      distance and international calls are the same as for the basic fixed-line
      telephone.




Tariffs
      charged by public telephone operators for telephone usage are at a fixed rate
      of****Rs.1.00 per pulse, of 60 seconds for local calls and
      long distance pulse durations varying depending upon the distance.




We
      do not
      charge any registration fees for our Internet access services.  Our
      Internet access fees have been falling considerably in response to competitive
      pressures.  Internet users do not have to subscribe for Internet
      services.  They can access the service and later be billed on the
      basis of calling line identification usage.




Subscribers
      for point-to-point leased line services are charged an annual fee based on
      the
      type of service offered, the distance between the points and the duration of
      the
      lease entered into by the subscriber.




**License
      Fees and Network Utilization/Interconnection Arrangements**




License
      Fees and Network Utilization Charges.  Under our previous arrangement
      with the DOT, the license fees for providing basic services was fixed at Rs.900
      per access line in service.  This arrangement expired on March 31,
      2000.  In the absence of any new arrangement with the DOT, we
      continued to pay license fees during fiscal 2001 on the same terms as our
      previous arrangement.  On April 9, 2001, the DOT communicated that the
      annual license fees will be revised and shall be payable at 12% of adjusted
      gross revenue from basic telephone service effective from August 1, 1999, as
      applicable to private operators from that date.  On September 5, 2001,
      the DOT amended its position and indicated that the date from which the revised
      license fees will be payable will be notified later.  However, in the
      absence of an agreement for payment of license fees and any clarification from
      DOT to date, we have paid license fees on the revised basis communicated by
      DOT
      for fiscal 2002 and 2003.  Further subsequent to the year ended March
      31, 2004, in a meeting held between DOT, BSNL and the Company to resolve the
      ambiguity with respect to license fees and networking charges it was agreed
      that
      the license fees were payable at 12% of AGR and networking charges as per TRAI
      regulations with effect from August 1, 1999. Also, the revenue sharing
      percentages earlier agreed to between us and BSNL, other than those governed
      by
      TRAI regulations, were revised with retrospective effect.  This
      resulted in an incremental charge of Rs. 3,520 million in the consolidated
      statements of income on account of license fee and a benefit of Rs 1,515 million
      on account of networking charges during the year ended March 31, 2004, in
      respect of periods up to March 31, 2003. Further license fee has been
      revised at 10% of Adjusted Gross Revenue with effect from April 1, 2004. The
      license fee for the NLD (national long distance) service license which the
      company has obtained is 6% of AGR. A license fee on internet services of 6%
      of
      AGR has been in effect since January 1, 2006.




Cellular
      License Fees and Spectrum Allocation Charges.  Each Indian cellular
      service provider operating in top-tier circles, including us, currently pays
      a
      cellular license fee of 10% of adjusted gross revenues received from its
      cellular services plus spectrum charges of 2% of adjusted gross revenues for
      up
      to 4.4 MHz of spectrum allocation and 3% of adjusted gross revenues for spectrum
      allocation of up to 6.2 MHz and 4% of Adjusted Gross Revenue for spectrum
      allocation of up to 8 MHz.  License fee has been revised from April 1,
      2004 at 10% of adjusted gross revenue.




Unified
      Access License.  In November 2003, the DOT issued guidelines for
      Unified Access Licenses which cover within a service area both basic
      telecommunications services and cellular services.  In the Indian
      context, “basic telecommunications services” or “basic services” include basic
      fixed-lined access service and a number of other telecommunications services,
      other than long distance services, cellular service and Internet
      access.  Basic




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services
      also include CDMA-based fixed wireless and mobile services (without
      roaming).  We have submitted a request to the DOT to migrate to UAS
      Licenses for our service area under mobile licenses for Delhi and Mumbai to
      be
      able to provide services at par with other operators in these
      areas.  In September 2006, our request for migration of our CMTS
      Licenses to UAS Licenses as our operating cellular service in the licensed
      area
      was not accepted by the DOT.  In October 2006, we sought
      reconsideration and grant of permission for migration to UAS
      Licenses.




New
      Interconnection Usage Charges Regulation.  Effective May 1, 2003,
      under the TRAI’s new interconnection usage charges regulation, and further
      amended and implemented since February 1, 2004, interconnect charges have been
      established for all major types of interconnection.  Under this
      regulation, we are entitled to specified interconnection revenues with respect
      to incoming calls from operators that are linked to our network, and are
      required to make specified payments in respect of outgoing calls from our
      network into another operator’s network.  For this reason,
      this regulation is said to be based on the “calling party pays”
principle.  As a result of this regulation, we are accruing
      interconnect fees payable by BSNL in respect of the domestic long distance
      calls
      that come into our network from that company’s network.  In addition, as a
      result of related tariff changes, we no longer charge cellular or CDMA-based
      mobile users for incoming calls, as we are now entitled to interconnect payments
      from the caller’s service provider.  The terms of all interconnect
      agreements are subject to the interconnect charges specified in the
      regulation.  The TRAI has issued IUC Regulation (1 of 2005) dated
      January 6, 2005 and implemented from February 1, 2005. In this IUC amendment,
      the authority emphasized lower tariffs and linked high sustained subscriber
      growth. Plans for consistent decline in tariffs to give sustained boost to
      subscriber growth and teledensity.  The methodology of imposing ADC
      per minute charge has kept unchanged. Only the Access Deficit Charge has been
      changed, ADC on long distance calls and international calls has been
      reduced.  Further, in the amended IUC regulation, BSNL only, and not
      the other fixed lines operators, will receive ADC on all incoming international
      calls and outgoing calls from Mobile/WLL (M).  The TRAI has issued IUC
      Regulation (1 of 2006) dated February 28, 2006 and implemented from March 1,
      2006.  In this IUC amendment, the methodology of imposing ADC per
      minute charge changed with AGR (adjusted gross revenue) basis @
      1.5%.  ADC on international calls has been reduced on the basis of per
      minute charge in addition to 1.5% of AGR.




The
      TRAI
      has issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented
      from
      April 1, 2007.  In this amended regulation ADC on percentage revenue
      share was reduced to 0.75% from existing 1.50% of AGR.  ADC on
      Outgoing international calls was reduced to zero from existing level of Rs.
      0.80
      per minute and on Incoming International Calls reduced to Rs. 1.00 per minute
      from existing Rs. 1.60 per minute.




Network
      Utilization—Bharat Sanchar Nigam Limited (BSNL).  Under our previous
      arrangement with BSNL, we paid network utilization charges to that company
      as a
      fixed percentage of the amount of usage and other charges billed to our
      customers for our services.  Our network utilization arrangement with
      BSNL expired on March 31, 2001.  For fiscal 2002 the interconnection
      charges on domestic long distance and international long distance calls were
      accrued on the basis of the rates payable by other basic service operators
      in
      the country, and for fiscal 2003 the interconnection charges on domestic
      long distance calls were again accrued on the basis of the rates payable by
      the
      other basic service operators in the country.  Since beginning of
      fiscal 2003, we have been accruing international long distance calls on the
      basis of interconnect agreements that we signed with VSNL and
      others.  Since the beginning of fiscal 2004, the Telecommunication
      Interconnect Usage Charges (IUC) Regulation (2 of 2003) 2003 covers arrangements
      among Service Providers for Payment of Interconnection Usage Charges for
      Telecommunication Services, Covering Basic Service which includes WLL(M)
      Services, Cellular Mobile Service Providers and Long Distance Operators
      throughout the territory of India.  The IUC Regulation (1 of 2005)
      effective from 1st February 2005 has only reduced the ADC on Domestic Long
      Distance calls and International calls keeping all other components of IUC
      unchanged. Further the ADC on incoming terminating calls on fixed network from
      mobiles and international long distance has also been made payable to BSNL
      only.




We
      are in
      the process of negotiating network utilization and domestic long distance
      agreements with BSNL.  We are responsible for collecting payments for
      calls from our subscribers and bear the risk of non-collection of these
      charges.  Until the May 1, 2003 effectiveness of the interconnection
      usage charges regulation, we did not receive any payments for calls coming
      into
      our network from BSNL’s network.  We have also signed interconnect
      agreements with several private-sector domestic long distance service providers,
      but to date still rely on BSNL for substantially all of our domestic long
      distance interconnection.  BSNL has also established its
      Trunk
      Automatic Exchanges (TAXs) at Delhi and Mumbai. All the other private
      operators of Delhi and Mumbai have established




26
 Table
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interconnection
      with these TAXs and consequently MTNL has stopped transiting their long distance
      calls to minimize the risk of bad debts.




International
      Long Distance Interconnect Arrangements.  Although we have
      signed interconnect agreements with several international long distance
      carriers, we continue to rely on VSNL for substantially all of our outgoing
      international long distance traffic.




Interconnect
      Arrangements with Other Cellular, Basic Service Providers and Unified
      Access Service Providers in Mumbai and Delhi.  We have entered
      into interconnect agreements with the other cellular, Unified Access and basic
      service providers in Mumbai and Delhi to formalize our network integration
      with
      them.  In addition to usage-based interconnect charges, each
      cellular/unified/basic service operator in Delhi and Mumbai pays us an annual
      fee for lines leased from us to connect to our network. For the
      establishment of interconnection between operators, a model Reference
      Interconnect Offer (RIO) was circulated by the TRAI asking BSNL and us to frame
      our own interconnect offer which was proposed to be signed with other operators
      for establishing new interconnections.  Several changes were desired
      by the TRAI in the Interconnect Offer document of BSNL and us, and BSNL and
      we
      challenged the proposed changes in TDSAT.  As per directions of
      TDSAT,  several rounds of talks were held by the TRAI with BSNL and
      most of the issues were resolved. TDSAT has now given judgment and accordingly
      we have posted our interconnect offer on the website incorporating the changes
      already agreed with the TRAI during discussions.




Customers
      and Customer Service.  We classify our subscribers by use level
      and estimate that in the last three months of fiscal 2007, approximately 14.73%
      of our access lines in service accounted for 57.80% of our call
      units.  The following table sets forth certain information with
      respect to our subscribers for the final three months of fiscal
      2007:




**Average
                number of**
              **subscribers
                per segment as**
              **a
                percentage of total**
              **subscribers**
            **Average
                call units**
              **per
                segment as a**
              **percentage
                of all**
              **metered
                calls****Subscriber
                  segments**(use
                of pulses on a bi-monthly basis)0-100
            28.83
            1.07101-500
            38.50
            18.68501-1,000
            17.94
            22.451,001-2,000
            9.92
            24.182,001-5,000
            4.07
            20.65Greater
                than 5,000
            0.74
            12.97




Our
      general marketing strategy is to stimulate demand for telephone services in
      order to increase average usage and revenue per line in service.  We
      have identified high usage subscribers as “commercially important persons” and
      are taking initiatives to strengthen our relationship with these
      individuals.  These initiatives include regular visits and conducting
      surveys to obtain feedback and determine client-specific needs and introduce
      value-added services tailored to commercially important
      persons.  Also, in certain areas we have constructed a digital local
      loop network with better quality transmission dedicated for use by commercially
      important persons.  Some of the commercially important persons are
      also being connected to our network via fiber-in-local-loop
      technology.  We also use print advertising to educate the general
      public about our telephone services and other
      value-added services.




No
      single
      subscriber accounted for more than 5% of our revenues in fiscal, 2005, 2006
      or
      2007.  Government of India entities in the aggregate constitute the
      largest user of our services.  We deal, however, with the various
      departments and agencies of the government of India as separate subscribers
      and
      the provision of services to any one department or agency does not constitute
      a
      material part of our revenue.




Our
      subscribers are billed by mail or courier once every billing
      period.  Subscribers with access to long distance service are billed
      monthly; subscribers with access to local services only are billed
      bi-monthly.  We have introduced four billing cycles in respect of each
      billing period which enables us to bill different subscribers at




27
 Table
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different
      times in the billing period.  Cycle billing reduces the burden on the
      billing system at any particular time of the month and provides more consistent
      cash flow.




Billing
      is computerized and processing takes place at decentralized bill processing
      facilities in Delhi and Mumbai for ease of operation and better handling of
      customer complaints.  A subscriber can inquire by an automated
      telephone service or at one of our customer service centers to determine the
      amount of his bill.  Payment may be made by mail or at a
      collection center such as a national bank or a customer service
      center.  Payments may also be made under our voluntary deposit scheme,
      where customers set up an interest bearing deposit with us, or under our
      electronic clearance system, where payment is directly debited from the
      subscriber’s bank account.  We have also introduced a program through
      which subscribers can pay bills through the Internet or at any of our Tele-mart
      centers.  We allow subscribers to pay bills using a credit card and at
      the post office, and plan to allow subscribers to pay bills at local merchants
      and through other mechanisms to improve bill collection and
      remittance.




We
      have
      developed our billing system jointly with Tata Consultancy Services in Delhi
      and
      Mumbai.  This billing system is a part of a customized software
      program known as a “customer service management system.” The billing system is
      an integrated revenue billing system, which includes pre-connection and
      post-connection services, accounting, billing collection and access to
      subscriber records.  Other benefits of this system are one point data
      capture for all subscribers, increased efficiency and reduction of lead time
      to
      process queries.  This system enables our staff to handle, at a single
      point of contact, various activities “on-line such as registration of a new
      telephone connection, change of address and category, issuance of work orders,
      issuance of duplicate bills, requests for transfer of telephone for domestic
      long distance and international connectivity, collection of payments of bills,
      status of outstanding bills, and monitoring of subscriber
      complaints.




Payment
      is due within 21 days from the date of issue of the bill.  If the
      charges are not paid on time, we generally give a reminder by telephone after
      the due date, cut off all services after 35 days from the date of issue of
      the
      bill.  Subscribers with large amounts overdue may have their
      telecommunications services terminated earlier.  Subscribers are
      charged a surcharge on amounts overdue after 21 days (with maximum surcharge
      being Rs.4,000) and a reinstatement fee of Rs.100.  This reinstatement
      fee has been suspended in our Delhi unit for the one year ending September
      1,
      2007.




We
      provide operator assisted services, including value-added products such as
      wake-up calls, as well as operator connected and reverse charge calls to all
      of
      our subscribers.  In addition, we provide free operator assisted
      directory services.  Our strategy is to continue to enhance the level
      of subscriber satisfaction by increasing access to operators and improving
      the
      quality of subscriber interface, while also improving operational efficiency
      and
      productivity.  In March 1999, we published a Delhi directory, and we
      published a Mumbai directory in February 2000.  Both of these
      directories are available free of charge on our website.  We have
      recently introduced directory information on CD-ROMs, which are available for
      Rs.50 each, as well as an on-line directory inquiry service which is available
      to telephone users with personal computers and communication
      software.




In
      order
      to address subscriber disputes more quickly, we regularly hold telephone
“adalats,” or courts.  These adalats are presided over by our senior
      management and, although their judgments are non-binding, we have resolved
      a
      large number of disputes at these adalats.  We also hold “open house”
sessions to obtain feedback from subscribers, enabling us to take steps to
      improve customer service.  Our service centers also provide various
      types of services such as registration for new connections, shifting telephone
      connections, billing information and collection of bill payments.  We
      have customer service centers in many locations in both Delhi and in
      Mumbai.  Generally, three to five employees provide these services in
      each center.




**Insurance**




We
      maintain comprehensive insurance for our assets under a single comprehensive
      policy renewable annually.  The policy is renewed in July of each
      year.  We do not anticipate having any difficulty in renewing our
      insurance policies and believe our insurance coverage is reasonable and
      consistent with industry standards in India.




28
 Table
          of Contents




**Competition**




One
      of
      the primary objectives of the 1999 telecom policy is to encourage competition
      within India’s telecommunications industry.  Accordingly, we will
      encounter increased competition in each of our markets as existing and
      additional service providers actively seek to penetrate these markets through
      the introduction of high quality products and services.




The
      1999
      telecom policy allows the DOT to license, at its discretion, multiple additional
      basic and cellular service providers in any service area.  Under a
      Unified Access Service License, such competitors as
      Reliance  Infocom,  Bharti Airtel, Tata Teleservices Limited
      and Idea Cellular Ltd., are currently competing with us in the market for basic
      services in both Mumbai and Delhi.  All of these companies already
      have significant telecommunications infrastructure in Delhi and Mumbai,
      including, with respect to Tata Teleservices and Reliance Infocom, low-cost
      CDMA
      mobile and fixed wireless technology.  With approximately 67.33% of
      our call units having been derived from approximately 18.75% of our access
      lines
      in service (last three months of fiscal 2007), we are particularly vulnerable
      to
      losing market share if these or other new operators aggressively target our
      largest subscribers.




We
      experience significant competition in the market for GSM cellular
      services.  As of March 2007, we had approximately 16.26% and 20.78% of
      the mobile subscribers in Delhi and in Mumbai, respectively.  Our
      largest competitors in Delhi are Bharti AirTel, Idea Cellular and Hutchinson
      Essar (Hutch).  In Mumbai, Bharti (AirTel) and Vodafone have the
      largest share in the market.  Cellular operators also face significant
      competition from rapidly growing CDMA-based mobile services, which are priced
      considerably lower than GSM cellular services.




We
      commenced providing our Internet services in Delhi and Mumbai in February
      1999.  The competition among Internet service providers throughout
      India is intense with approximately 507 licenses for providing Internet services
      issued as of March 20, 2007.




There
      has
      been significant consolidation in the telecommunications industry in
      India.  For example, the Birla Group, the Tata Group and AT&T have
      combined their interests in GSM cellular operators into one business, and the
      Tata Group, which controls Tata Teleservices, acquired a controlling interest
      in
      India’s dominant international long distance carrier, VSNL, and Tata
      Teleservices has acquired Hughes Tele.com, a basic service provider in
      Mumbai.  We expect the trend toward consolidation to continue,
      resulting in larger, more diversified competitors in the Indian
      market.  Vodafone Essar Mobile Services Limited has acquired
      Hutchinson Essar Mobile Services Limited, another one of the telecom operators
      in India.




Our
      revenues from international calls are adversely affected by competition from
      “call-back” services.  Call-back services were officially declared
      illegal by the Ministry of Communications in July 1995.  Nevertheless,
      the volume of international calls made from India through call-back services
      has
      continued to grow.




We
      have
      also applied for a license to enter the international long distance business
      and
      the licensor has acted by issuing us a letter of intent to license us for that
      service.****




Increased
      competition has kept and will likely continue to keep downward pressure on
      prices and has required and will likely continue to require us to increase
      our
      capital investment to improve and expand our services.  These
      developments, in turn, have had and may continue to have a negative impact
      on
      our profitability.  In the tariff order, no minimum tariff levels are
      specified and service providers have the flexibility to determine the
      tariff below the maximum levels.  Our board of directors has
      determined not to reduce fixed line tariffs unless such a reduction is in
      response to a tariff reduction by a competitor.  However, the TRAI may
      prescribe minimum tariffs or prohibit providers from reducing tariffs in
      response to competition.  Additionally, the tariff order prescribes
      tariffs based on the estimated cost to provide particular
      services.  These estimates and corresponding tariffs may not
      accurately reflect our actual costs.




In
      order
      to compete with other basic and cellular operators and Internet service
      providers, we are increasingly focused on the timely introduction of new and
      improved products and services and pay increased




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attention
      to customer service.  An inability to compete effectively would also
      damage our longer-term business prospects through loss of customers and market
      share.




**LEGAL
      PROCEEDINGS**




Except
      as
      described below and except with respect to regulatory proceedings described
      elsewhere, we are not currently a party to any material legal or arbitration
      proceedings or disputes.




**Deductibility
      of License Fees**




The
      Central Income Tax Authority of India (“CITA”) had historically disallowed the
      license fee paid by us to DOT for the years ended March 31, 1994 through March
      31, 2005 as a tax deductible expense and had raised a demand for payment of
      taxes on increased taxable income relating to such expenses.  We had
      contested these demands.  As part of the appeals process, we had paid
      deposits under protest, amounting to Rs. 13,427 million as of March 31, 2005.
      These deposits have been classified as part of restricted assets on our
      consolidated balance sheets




During
      the year ended March 31, 2005, we had obtained favorable decisions from the
      Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee
      disallowed for the assessment years 1997-98 and 2001-2002.  Further in
      respect of assessment years 1995-96 and 1996-97, the Committee of Disputes
      (“COD”), on the recommendations of the Ministry of Law, decided not to give
      clearance to either the Central Board of Direct Taxes or us to file appeals
      in
      the Hon’able High Court, making the decision of the ITAT binding on both the
      parties. Subsequent to the COD’s decision, we applied to ITAT to restore the
      appeal and decide in our favor.




During
      the current year ended March 31, 2006, based on the judgments passed in the
      previous years, the ITAT has allowed deduction of license fees as a tax
      deductible item for assessment years 1998-99 to 2000-01 and 2002-03. License
      fees have also been allowed as a deduction by the CITA for assessment year
      2004-05.




During
      the year ended March 31, 2007, based on the judgments passed in the
      previous years, the  ITAT has allowed deduction of license fees as tax
      deductible item for the assessment years 1995-96 and 1996-97
      also.  Management believes that the ITAT following its favorable
      judgments of earlier years will eventually decide in favor of the Company for
      the years in dispute and an adverse outcome in respect of the above is not
      probable.  Based on the abvove stated favorable orders, we have not
      accrued the tax charge on the license fee in our financial
      statements.  We have received interest on deposits paid under protest
      to the tax authorities and the refunds for the years decided in our favor,
      i.e.
      1995-96, 1996-97, 1998-99, 1999-00, 2000-01, 2002-03, and 2004-05 in the year
      2007-08.  The refunds and the interest thereon have been recognized in
      our statement of income for the year ended March 31, 2007.




**Deduction
      of Claim of Benefit U/S 801A for New Undertakings.**




As
        per
        section 80IA of the Indian Income Tax Act, 1961 a Company, which starts to
        operate telecommunication services at any time on or after April 1, 1995,
        but
        before March 31, 2000, is entitled to a tax holiday for a period of 10 years
        beginning with the year in which such services are started. As per the tax
        holiday, 100% of the profits derived from such services are exempt from tax
        in
        the first 5 years, and 30% of such profits are exempt from tax for the next
        5
        years. MTNL on the basis of advice from its legal counsel has historically
        claimed such benefit. The Company’s claim have been rejected at the first
        appellate level and the case has been referred to the Committee of Disputes,
        which is a body formed by the Government to settle disputes between Government
        controlled undertakings and the Government. The Committee has referred the
        case
        to the Tax appellate authorities for reconsideration. During the year ended
        March 31, 2006, the case has been set aside by the Income Tax Appellate
        Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03
        and has
        referred the matter back to the Assessing Officer for a fresh assessment
        after
        hearing the case again. For the years ending upto and including March 31,2006
        ,considering that the benefit claimed by MTNL in the above years may not
        be
        ultimately allowed by tax authorities, the provision for current taxes in
        these
        years had been accounted in the basis of normal tax rates. During the year
        2006-07 assessing officer has made fresh assessment for calculation of deduction
        u/s 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to
        MTNL.**MTNL has filed appeals against that partial allowance to the
        higher authority.




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**Sales
      Tax**




We
        received a demand to pay sales tax
        in respect of certain historical telecommunications revenues, mainly telephone
        rental charges.  We received a demand from the state government of
        Maharashtra, of which Mumbai is a part, for payment of Rs.
        3,200  million in sales tax for fiscal 1989-2000. Further, we also
        received notice from the Delhi state government seeking further information
        in
        aid of an investigation into whether a similar demand should be made
        upon us.  The amount of issue in Delhi is significantly
        less.
 
 The
        department made these demands based
        on a case involving the Uttar Pradesh Trade Tax Department (UPTTD) and the
        DOT,
        wherein the Supreme Court of India ruled that a telephone connection along
        with
        a telephone set provided by a company rendering basic services amounts to
        a
        "transfer of right to use the telephone system" and the rentals collected
        by DOT
        towards this right to use should suffer sales tax.  Subsequent to the
        passing of this order, both the cellular and basic operators filed a petition
        before the Supreme Court under Article 32 of the Constitution in respect
        of the
        above.  The Honorble Supreme Court admitted the Petitions, inspite of
        its own judgment, and vide orders dated September 25, 2003 referred the matter
        to a larger bench for determination of dispute on merits and further directed
        that in future there shall be no coercion for recovery of any
        dues.  The Hon?ble Supreme Court further directed that the operators
        should file statutory appeals against the assessment orders for assessments
        already completed as on September 25, 2003.  Following
        the  Supreme Court order in the UPTTD case, the sales tax
        departments across the country have raised demands on basic and cellular
        mobile operators.
 
 We
        have challenged the demands raised
        before the respective high courts and we have been granted interim stays
        against enforcement of the demands. However this stay order is subject to
        the
        outcome of the Supreme Court judgment on the issue.  During the year
        ended March 31, 2006, the Supreme Court of India has concluded in the BSNL
        Vs
        Union of India case that rendering basic services does not amount to a "transfer
        of right to use the telephone system". Hence the imposition of the sales
        tax on
        any facility of the telecommunication services is untenable in
        law.  Based on opinion received from legal counsel and drawing
        reference to the judgment of the Supreme Court of India in the abovementioned
        case, management believed that the sales tax departments would have to withdraw
        their demands of sales tax on basic telephony and that an adverse outcome
        in
        respect of the above is remote.
 
 During
        the current year the case
        relating to Delhi has been settled. The amount of demand pertaining to Mumbai
        outstanding is Rs. 1,900 million.




**Disputes
      with BSNL**




In
      accordance with the Inter Connect Usages Regulations, we had accounted for
      networking charges payable to BSNL amounting to Rs.6,924 million and Rs. 3,627
      million for the years ended March 31, 2004 and 2005,
      respectively.  However BSNL had raised a bill for the interconnection
      charges for the calls originating from


our
      network and terminating/transiting at/from BSNL amounting to Rs.12,165 million
      and Rs. 8,030 million for the years ended March 31, 2004 and 2005,
      respectively.  Our contention was that the claim was not adequately
      supported by BSNL and hence not accepted by us.




In
      the
      absence of an interconnection agreement, we had provided NLD/ILD access charges
      for the period ended March 31, 2002 at the rates lower than those demanded
      by
      BSNL. Subsequent to the year ended March 31, 2004, in a meeting held among
      the
      DOT, BSNL and us, the rates for NLD calls for the year ended March 31, 2002
      were
      agreed, and accordingly we have accounted additional liability of Rs. 233
      million during the year ended March 31, 2004.  We may be required to
      pay ILD access charges amounting to Rs. 195 million for the period April 1,
      2001
      to January 31, 2002 on the settlement of the dispute with BSNL in this
      regard.




During
      the year ended March 31, 2006, the DOT had constituted a three member committee
      from its Telecommunications Department comprising the Member (Production),
      Member (Finance), and Deputy Director General (Business Solution) to resolve
      the
      issues relating to networking charges. Based on the recommendations of the
      Committee in their minutes dated January 2006, the networking charges payable
      to
      BSNL for the years March 31, 2004 and March 31, 2005 have been settled at
      Rs.14,078 million as against Rs.10,551 million.  Further, the
      Committee has also settled networking charges for the years 2000 to 2003 in
      the
      meeting held in January 2006. Accordingly, an amount of Rs. 3,809 million
      (including the incremental charge of Rs. 3,527 million for the years 2004 and
      2005) has been accounted as networking charges in the statement of operations
      for the year ended March 31, 2006.




Subsequent
      to the year end March 31, 2006, meetings have been held between BSNL and us
      wherein BSNL has raised additional claims for the year up to March 31, 2005
      aggregating Rs.2,678 million and claims  amounting to Rs.5,256 million
      for the year ended March 31, 2006 on account of networking  and others
      charges. As against these claim for the year ended March 31, 2006 we have
      accounted Rs. 4,040 million for networking charges payable to BSNL.




Our
      contention is that since all claims relating to networking and other charges
      for
      the period up to March 31, 2005 have already been settled in
      accordance with the minutes of the DOT committee held on January 2006 and the
      claims for the year ended March 31, 2006, are not adequately supported by the
      BSNL  and hence not accepted by the us.  Further, as we are
      in the process of discussing/reconciling their claims for the year ended March
      31, 2006 with BSNL and may be required to pay an additional amount based on
      the final settlement, however such payments will not have a material adverse
      effect upon our results of operations, financial condition and cash
      flows.  Management believes that an adverse outcome in respect of the
      above is not probable.




During
      the year ended March 31, 2006, we had raised claims against BSNL for duct
      charges, TAX claims and reciprocal service claims amounting to Rs. 2,116
      million, Rs. 2,482 million and Rs. 320 million, respectively.  The
      duct charges pertain to annual usage of infrastructure (ducts) for the period
      October 1, 2000 to March 31, 2006, the TAX claims pertain to our Trunk Automatic
      Exchange (“TAX”) used by BSNL for the period from February 1, 2004 to March 31,
      2006 and the reciprocal service claims are on account of Reciprocal Service
      Connections provided to BSNL employees for the period October 1, 2000 to March
      31, 2006.  Management has not recognized these claims as income in the
      statement of operations considering the history of other disputed claims with
      BSNL  the fact that currently there is no separate agreement for these
      services, and that BSNL has not accepted these claims.




During
      the year ended March 31, 2007, we had raised claims against BSNL for duct
      charges and TAX uses charges amounting Rs. 478 million and Rs. 1251 million,
      respectively.  We have not recognized these claims as




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income
        in
        the statement of operations considering the history of other disputed claims
        with BSNL, that currently there is no separate agreement for these services,
        and
        that BSNL has not accepted these claims.




**Disputes
      with DOT**




On
      the
      formation of the Company, employees were deputed to us on deemed deputation
      status from the DOT and we were required to contribute for the Leave Salary
      and
      Pension Contribution (“LSPC”) as per the rates prescribed by the Government (11%
      for leave salary and 14% for pension contribution).  We had accrued
      for these expenses amounting to Rs. 2,885 million for the period 1986 to 1998,
      and subsequently paid them to the DOT.




During
      the year ended March 31, 2006, a Committee was set up to examine the amount
      of
      LSPC contributions payable by us to the DOT. The Committee concluded that an
      additional amount of Rs.656 million was payable on account of short payment
      of
      the LSPC contribution and an amount of Rs.1,738 million is payable on account
      of
      interest payable on delayed payment of the LSPC contributions.  We
      accepted the claim of the DOT for Rs.656 million and we had expensed it in
      our
      statement of income for the year ended March 31, 2006.  In respect of
      Rs.1,738 million, we have contested the claim from the DOT on the contention
      we
      had abided by the DOT’s decision at all stages and deposited substantial sums as
      required.  Management believes that an adverse outcome in respect of
      the above is not probable.




**Other
      Disputes**




In
        1998,
        M&N Publication made claims for Rs 5415 million against the Company. These
        claims arise out of contracts for the printing of telephone directories for
        Delhi and Mumbai. Each of these claims includes claims for loss of reputation
        and loss of business opportunities aggregating to Rs. 2000 million. The Company
        has made claims of Rs. 4169 million against M&N Publications for failure to
        perform the contracts. These claims are pending before a sole arbitrator.
        The
        Company believes that it has valid defenses to these claims and based on
        opinion
        received from legal counsel, management believes that an adverse outcome
        is not
        probable.
  In
        the
        year 2004-2005, Alcatel brought claims aggregating to Rs. 129.20 million
        (including interest from 1996 till date on the claims made Rs 87.91 million)
        (March 2006 Rs. 121.21 million) against the Company. These claims arise out
        of
        contract for supply of digital local telephone exchange equipment. These
        claims
        include claims for loss of reputation and loss of business opportunity
        aggregating to Rs 20 million. The Company believes it has a valid defense
        to
        these claims and based on opinion received from legal counsel, management
        believes that an adverse outcome is not probable.
  The
        Company has received claims aggregating Rs. 336.95 million (March 2006 Rs
        308.60
        million) from various PRM service providers (World Phone, Voice Infotech
        and
        ITC). These claims arise from the contract for PRM services, which were started
        in the year 1999-2000. MTNL has not paid commission payable for these services
        to these providers, as the amount was subsequently not recovered from the
        subscribers. The claims include Rs 119 million towards loss of profit and
        wasteful expenditure incurred by the parties.The Company believes it has
        a valid
        defense to these claims and based on opinion received from legal counsel,
        management believes that an adverse outcome is not probable.
  The
        Company has received claims from CMC limited aggregating to Rs. 497.52
        million.(March 2006 Rs 452.52 Million).  These claims arise out of
        usage of leased circuits for which MTNL has charged them rental for CUG services
        as per the revised tariff plan which is disputed by CMC Limited. These claims
        include claims for loss of reputation, business opportunity and undue harassment
        aggregating to Rs. 220 million.  The Company believes it has a valid
        defense to these claims and based on opinion received from legal counsel,
        management believes that an adverse outcome is not probable.
  Additionally
        the Company is also involved in law suits and claims amounting to Rs. 1967.11
        million pending at various authorities which arise in the ordinary course
        of the
        business. Management believes that it has a valid defense against these claims
        and an adverse outcome is not probable. These would not have a material adverse
        effect upon the Company’s results of operations, financial condition and cash
        flows.


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**Dispute
        with Other Operator**
  During
        the year ended March 31, 2005, we noticed that a very large number of calls
        were
        received from certain levels of another operator’s network.  On
        further investigation/analysis, it came to our notice that these were actually
        ILD calls, which were being received on Local/NLD trunks and that the CLIs
        (Caller line Identification) of these calls had been tampered by the other
        operator.  We raised a demand on the other operator based on the
        relevant penal
        clauses of its agreement aggregating Rs.3,412 million for a period of six
        months
        beginning April 2004. The other operator has disputed the above claim and
        under
        repeated threats of disconnection, obtained a stay order from High Court
        of
        Delhi. In the year ended March 31, 2005 during the course of the hearings,
        the
        honorable High Court directed the other operator to pay Rs.2,368 million
        to
        us.  During the year ended March 31, 2006, the other operator under
        directions from the honorable High Court has further deposited Rs.1,040 million
        with us.  During the year ended March 31, 2007, the petition filed by
        the other operator before the High Court has been dismissed as withdrawn
        with
        the liberty to take such in accordance with law.  Management believes
        that it is a remote possibility that these amounts will have to be
        refunded.  However, these amounts have not been recognized as
        income.




**ORGANIZATIONAL
      STRUCTURE**




We
      are
      controlled by the Indian government and are not part of any group.




We
      have
      no subsidiaries, which are considered “significant subsidiaries”.




**PROPERTY
      AND EQUIPMENT**




**Infrastructure**




We
      believe that we have created one of the most technologically advanced networks
      in India.  Our network capacity is growing rapidly, and as of March
      31, 2007 we had a total capacity of 9.10 million lines.




We
      operate entirely separate but similar networks in each of Delhi and
      Mumbai.  Each network comprises a switching and transmission network,
      which we refer to as our “switching network” and a local loop
      network.  The local loop network principally consists of copper wire
      based lines, connecting subscribers to the main exchanges or the remote line
      units.  A number of subscribers are connected to the switching network
      via fiber-optic cable and wireless-in-local-loop technology.  The
      switching network includes the trunk automatic exchanges, which are used for
      routing domestic long distance and international calls, the main switching
      exchanges, through which all calls are routed, and remote line units, which
      are
      connected to the main exchanges.  The local loop network comprises all
      connections between the main exchanges or the remote line units and the
      subscriber.  Subscribers are either connected directly to the main
      exchanges or, depending upon the distance from the main exchanges, via remote
      line units.  All domestic long distance traffic, including traffic
      between Delhi and Mumbai, is routed through BSNL’s network.




**Overview
      of Our Network**




**At
                    March 31,****2002**
                **2003**
                **2004**
                **2005**
                **2006**
                **2007***Delhi*Access
                    lines in service (access lines in service) (thousands)
                2,065
                2,155
                2,003
                1,719
                1,621
                2,999Equipped
                    capacity (thousands) (1)
                2,775
                2,967
                3,154
                3,737
                4,219
                4,385Number
                    of exchanges:TAXs
                    (2)
                3
                4
                4
                4
                4
                4Main
                    exchanges and RLUs (3)
                251
                309
                329
                339
                336
                336Digital
                    lines (thousands) (1)
                2,775
                2,967
                3,154
                3,737
                4,219
                4,385Digitalization
                    rate (4)
                100%
                100%
                100%
                100%
                100%
                100%*Mumbai*Access
                    lines in service (access lines in service) (thousands)
                2,431
                2,445
                2,408
                2,355
                2,256
                3,668Equipped
                    capacity (thousands) (1)
                2,876
                2,886
                2,806
                3,657
                4,217
                4,717Number
                    of exchanges:TAXs
                    (2)
                4
                4
                4
                4
                4
                4Main
                    exchanges and RLUs (3)
                180
                183
                183
                183
                193
                202Digital
                    lines (in thousands) (1)
                2,876
                2,886
                2,806
                3,657
                4,217
                4,717Digitalization
                    rate (4)
                100%
                100%
                100%
                100%
                100%
                100%




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(1)
              Represents
                  lines that are connected to digital
                  switches.
  (2)
              TAX
                  means trunk automatic exchange, a switch that routes calls to BSNL’s
                  domestic fixed-line network and VSNL’s international
                  gateways.


(3)
            RLU
                means remote line units, which are switches that connect a subscriber
                to
                the main exchange.




(4)
            Percentage
                of total equipped capacity that consists of digital
                lines.




**Switching
      Equipment**




All
      of
      our exchanges are fully automated and our switching capacity is 100%
      digital.  Our switching network consisted of 336 nodes in Delhi and
      202 nodes in Mumbai as of March 31, 2007.  Each node has a capacity of
      between 1,000 and 100,000 lines.




At
      March
      31, 2007, there were 90 main exchanges and 246 remote line units in Delhi and
      89
      main exchanges and 113 remote line units in Mumbai.  Because one or
      more main exchanges in each node are connected to one or more main exchanges
      in
      every other node, traffic is routed in a “mesh” configuration.  We
      have also installed high capacity tandem switches in Delhi and Mumbai to more
      efficiently route traffic between exchanges.  A majority of calls to
      our main exchanges are now being routed through the tandem switch to another
      node.  This has resulted in a more integrated network and has reduced
      the amount of capital expenditure required to install additional capacity in
      our
      switching network.




Each
      node
      is connected to each trunk automatic exchange.  Interconnection to
      basic service providers, private cellular operators and Internet service
      providers is provided by dedicated access to the main exchanges or tandem
      switches.  Our entire switching network is connected by fiber optic
      links.




**Transmission**




Our
      transmission network consists largely of plesiochronous digital hierarchy,
      or
      PDH, and synchronous digital hierarchy, or SDH, optical fiber.  PDH
      and SDH are transmission standards for digital signal
      transmission.  We plan to continue to deploy SDH optical fiber and
      synchronous transfer mode terminals to improve network efficiency.




**Access
      Network**




We
      construct our access network with copper cable, which is extended to
      distribution points to terminate connections.  We have commenced
      deploying five pair underground cable into subscribers’ premises where an
      internal distribution point is installed.  We believe this access
      network will reduce the number of telephone poles and improve reliability of
      the
      service.




We
      have
      also implemented fiber-to-the-curb/building access and offer increased bandwidth
      for business and high usage subscribers.  Fiber-to-the-curb/building
      is also intended to supplement existing copper wire with optic
      fiber.  We have provided digital loop carriers, or DLCs, for this
      purpose.  In fiscal 2006-07, we added 45 access terminals in our
      network.




We
      have
      installed wireless-in-local-loop services using CDMA technology where feasible
      in Delhi and Mumbai as a substitute for fixed-line access to enhance basic
      service penetration, provide quicker installation and cover areas where the
      installation of cable would not be economical.




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**Quality
        of Our Network**
  We
        are
        conducting an ongoing program to improve the quality of services
        offered.  Our principal quality measures are call completion rate and
        fault rate.  The table below shows the quality improvements we have
        made since our inception in 1986.  We achieved this primarily by
        focusing on improvements to our switching network.  Part of our local
        loop network is comprised of old paper core copper cables, which are a principal
        cause of network faults.  We are in the process of upgrading and
        replacing copper access lines and believe that this will have a positive
        impact
        on call completion rates and fault rates.




**Year
                      Ended March 31,****1986**
                  **2002**
                  **2003**
                  **2004**
                  **2005**
                  **2006**
                  **2007****(inception)**Fault
                      rate/100 (1)
                    Telephones/month:Delhi
                  34.9
                  21.4
                  18.7
                  12.3
                  11.1
                  10.7
                  9.4Mumbai
                  21.2
                  11.80
                  9.8
                  8.8
                  9.0
                  8.4
                  10.5Call
                      completion rate (2)DelhiLocal
                      calls
                  77.3%
                  51.0
                  52.25
                  57.0
                  57.6
                  47.3
                  48.3Domestic
                      long distance calls
                  30.0%
                  41.07
                  28.0
                  28.0
                  30.0
                  33.6
                  38.5MumbaiLocal
                      calls
                  93.0%
                  58.15
                  58.0
                  50.3
                  58.3
                  55.1
                  56.7Domestic
                      long distance calls
                  23.9%
                  45.9
                  33.94
                  36.6
                  37.4
                  36.6
                  37.0


(1)
            The
                fault rate is calculated by dividing the total number of verified
                customer
                complaints of malfunctioning telephone equipment and services by
                the total
                number of access lines in service and multiplying the result by
                100.




(2)
            For
                dates covering years after 1986, the call completion rate was measured
                on
                the basis of actual calls completed.  Call completion rates
                measured on this basis are lower than if measured on a free-to-free
                test
                basis since calls that are not answered because the recipient’s line is
                engaged or where the network cannot complete the call because of
                congestion are deemed incomplete.  Call completion rates
                measured on different bases are not
                comparable.




**Suppliers**




In
      carrying out our development program, we have used a core group of international
      equipment suppliers to purchase key switching equipment in order to maintain
      technological compatibility while simultaneously decreasing dependence on any
      one vendor.  We believe that we have developed stable relationships
      with our suppliers.




**Development
      Activities**




Development
      activities are carried out by a planning group in each of the Delhi and Mumbai
      operations, with overall planning activity coordinated at the corporate office
      in Delhi.  The main focus of each planning group is the expansion of
      existing services, the development of new services and the introduction of
      new
      technologies that are tested for their reliability, compliance with internal
      and
      DOT technical specifications and compatibility with our network.




**GSM
      Cellular and CDMA Networks**




We
      launched our cellular services using GSM technology in Delhi and Mumbai in
      February 2001, currently have an installed capacity of 10.25 lakh linesin
      Delhi and 13.25 lakh lines in Mumbai.  We believe that current
      penetration rates in Mumbai and Delhi remain attractive for continued high
      growth in subscriber base.  MTNL this year has awarded a tender for
      further adding 2 million lines of GSM basedon 2G/3G each in Mumbai and Delhi
      in
      phase-I PO for 750 K 2G lines each in Delhi and Mumbai has been
      placed.




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In
        addition, we have launched lower-cost CDMA-based limited mobility services
        each
        in Mumbai and Delhia, and presently have a total of 1,18,648 subscribers
        with an
        installed capacity of 10,98,230 most of which are based on more advanced
        CDMA
        2000 1X technology).  We believe that this new limited mobile service
        will enable us to target a wider customer base that is more price sensitive
        than
        GSM customers and that does not require India-wide and international roaming
        facilities.  We intend to compete effectively in these growing markets
        by providing high quality service at affordable rates.  Our CDMA
        mobile service offers only limited mobility within Delhi and Mumbai, and
        currently we are not permitted to offer roaming facilities on this
        service.  If we obtain the newly-available Unified Access License we
        will be able to offer full mobility.  CDMA fixed wireless is a
        substitute for fixed-line access.  Fixed wireless allos us to enhance
        basic service penetration, provide quicker installation and




**Network
      Modernization**




We
      have
      historically planned our capital expenditures on five-year programs that are
      subject to approval by the DOT and the Planning Commission of the Indian
      government.  The Ninth MTNL Plan was the five-year investment plan
      covering the period from April 1, 1997 to March 31, 2002, and the Tenth MTNL
      Plan covers the five-year period from April 1, 2002 to March 31,
      2007.  Generally, five-year plan investment targets are much
      higher than actual investment levels.  Additionally, rapid changes in
      communications technology and customer preferences render detailed investment
      planning for five years impossible.




Our
      current estimate for capital expenditures for fiscal 2008 is Rs 23,090 million;
      however, based on our experience in past years, we expect that the actual amount
      of capital expenditures for the year will be less than our
      estimate.




The
      following table shows our network-related capital expenditures for the periods
      indicated.




**(Rs.
                  in millions)**
                **Year
                  Ended March 31,****2005**
              
              **2006**
              
              **2007**Local
                  switching and access lines (including CDMA)/
                Transmission/Network
                  Modernization/Expansion Abroad
              5,748
              
              4,241
              
              4,460Information
                  technology
              426
              
              124
              
              1,730Land,
                  buildings and vehicles
              1,143
              
              881
              
              817Build-out
                  of GSM cellular networks
              3,068
              
              1,608
              
              951Total
              10,385
              
              6,854
              
              7,958




We
      have
      funded our recent capital expenditures to the extent incurred, and intend to
      fund the remaining capital expenditures, primarily from cash flow from
      operations and existing cash balances.  Our capital expenditures may
      be higher as we introduce international long distance service, if demand for
      our
      GSM cellular service or CDMA-based mobile service is higher than anticipated
      or
      if we otherwise enter new markets or provide additional services.




**Properties**




Our
      principal executive offices are located in Delhi and are leased from the Life
      Insurance Corporation of India.  We have interests in various
      properties in Delhi and Mumbai that consist of land and buildings for offices,
      administrative centers and technical facilities.  We believe that all
      of our owned and leased properties are well maintained and adequate for their
      present use.




In
      1987,
      the assets and properties of the DOT located in Delhi and Mumbai were
      transferred to us by an order of the government of India and a deed of
      sale.  Indian law generally requires that to perfect the transfer or
      lease of real property, the transfer should be evidenced by a formal duly
      stamped deed of transfer and registered with the Central Land Registrar within
      a
      specified period after the execution of the deed of transfer or
      lease.  A formal transfer deed for real property of the DOT
      transferred by the government of India to us has been executed but




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has
        not
        been registered with the appropriate authorities.  The formal transfer
        deed and the physical delivery of possession of the DOT’s non-real estate assets
        has resulted in the transfer of these non-real estate assets of the DOT to
        us in
        Delhi and Mumbai.  We believe that our use of these properties is not
        affected by the fact that this deed has not been registered with the appropriate
        authorities.
  Indian
        law requires payment of stamp duty (at rates which vary among states) on
        instruments, which effect transfer of title to real estate or in respect
        of
        leases of real estate.  Applicable stamp duty has not been paid in
        respect of any of the properties acquired or leased by
        us.  Accordingly, we may be liable for stamp duty and related
        penalties if a deed is executed by us in the future under the applicable
        rates
        of stamp duty and penalty payable in the state
        where the property is located (other than with respect to the DOT properties
        acquired from the government of India as at March 30, 1987).  All
        liabilities for stamp duties in respect of the DOT properties acquired by
        us
        from the government of India as at March 30, 1987 are to be borne by the
        government of India.  We have been advised by our counsel that
        although we have valid possession to all of the property, including the risks
        and rewards of ownership and title, to enable us to perfect and thereby acquire
        marketable title to real property in our possession, we would need to have
        relevant documents relating to transfer or lease of real property duly stamped
        and registered.  In preparing our financial statements, the provision
        for this stamp duty has been made on a best estimate basis.




**TELECOMMUNICATIONS
      REGULATION IN
      INDIA**




**The
      Telecom Regulatory Authority of India**




In
      March
      1997, the Indian government established the TRAI, an independent regulatory
      authority under the provisions of the Telecom Regulatory Authority of India
      Act.  The TRAI is an autonomous body comprised of a chairperson and
      not more than two full-time members and not more than two part-time members
      appointed by the Central government, and has primary responsibility
      for:




·
            making
                non-binding recommendations to the DOT, either at the request of
                the DOT
                or on its own, as to:




·
            the
                need for and the timing of the introduction of new service
                providers;




·
            the
                terms and conditions of licenses to new or existing service
                providers;




·
            revocation
                of existing licenses for
                non-compliance




·
            measures
                to facilitate competition and promote efficiency to facilitate growth
                in
                the industry;




·
            technology
                and equipment improvements in providers’ infrastructures and in the
                industry generally;




·
            ensuring
                compliance of providers with license
                terms;




·
            ensuring
                technical compatibility between
                providers;




·
            regulating
                revenue sharing between providers;




·
            establishing
                quality standards and ensuring compliance through periodic reviews
                of
                providers; and




·
            determining
                time schedules pursuant to which providers will establish inter-connection
                between their networks.




The
      TRAI
      also has the authority to, from time to time, set the rates at which domestic
      and international telecommunications services are provided in
      India.  The TRAI does not have authority to grant licenses to service
      providers or renew licenses (those functions remain with the
      DOT).  The TRAI, however, has the power to:




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·
              call
                  upon service providers to furnish information relating to their
                  operations;
  ·
              appoint
                  persons to make official inquiries;
  ·
              inspect
                  books, and
  ·
              issue
                  directions to service providers to ensure their proper
                  functioning.
  Failure
        to follow TRAI directives may lead to the imposition of
        fines.




The
      TRAI
      had previously acted in both a regulatory and an adjudicatory
      role.  The Indian government has amended the provisions of the Telecom
      Regulatory Authority of India Act providing a separate adjudicative body called
      the Telecom Disputes Settlement and Appellate Tribunal, also known as the
      Appellate Tribunal, to adjudicate disputes between




·
            a
                licensor (i.e., the DOT) and a
                licensee;




·
            regulator
                and service providers;




·
            two
                or more service providers; and




·
            between
                a service provider and consumer advocacy
                groups.




Additionally,
      the government of India, any Indian state or local government or any person
      may
      apply to the Appellate Tribunal for adjudication of any of the disputes listed
      above or appeal any order of the TRAI to the Appellate Tribunal.




**Unified
      License**




In
      July
      2003, the TRAI issued a consultation paper on, among other things, introduction
      of a unified telecommunications license, under which it would be possible for
      a
      telecommunications service provider to provide both basic services and cellular
      services.  The consultation paper also addresses the possibility of
      licensing the provision of international and national long distance services
      and
      internet services under this one unified license.




On
      October 27, 2003, the TRAI recommended that considering the vision of the
      government of India through various policies (e.g., NTP94, NTP99, Convergence
      Bill), technological development, market trends, international trends, the
      need
      to accelerate growth of telephone density, public interest and for the proper
      conduct of the Service/telegraphs, it is recommended that within six months
      “Unified Licensing” regime should be initiated for all services covering all
      geographical areas using any technology.




On
      November 15, 2003, the TRAI’s recommendations on unified licensing were accepted
      by the Government of India.  They provide for implementing Unified
      Licensing for all telecom services within a time bound manner, starting with
      Unified Access Licensing.  Based upon the TRAI’s recommendations, the
      DOT has issued guidelines for Unified Access (Basic and Cellular) Service
      License through their letter No.808-26/2003-VAS dated November 11,
      2003.




**New
      Telecom Policy 1999 and Subsequent Developments**




In
      March
      1999, the Indian government introduced its 1999 telecom policy, which sets
      forth
      a new policy framework for telecommunications regulation in
      India.  One of the stated goals of the 1999 telecom policy is to
      foster greater competition in the telecommunications industry.  To
      that end, the 1999 telecom policy liberalizes the regulation of the industry
      by
      allowing multiple basic service providers in any service area, with the number
      of new entrants and their mode of service to be determined by the government
      of
      India.  The 1999 telecom policy allows direct interconnectivity and
      sharing of infrastructure between a basic service provider and any other type
      of
      service provider in its area of operations.  Such service
      providers must negotiate the terms of any interconnection.




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In
        addition, the 1999 telecom policy provides that either the DOT (now operating
        through BSNL) or Mahanagar Telephone Nigam Limited may be licensed as an
        additional cellular operator in any service area it wishes to
        enter.  Additional cellular service operators may be licensed in the
        future, based on the recommendation of the TRAI, following its ongoing review
        (to occur at a minimum of at least once every two years) of frequency
        spectrum utilization by existing providers, the optimal use of available
        spectrum and the requirements of the market, competition and the public
        interest.
  Further,
        the 1999 telecom policy states that competition in the international long
        distance market would be reviewed and VSNL would no longer have monopoly
        in this
        field.  The Indian government opened this market for competition
        beginning April 1, 2002.  Licenses have recently been granted to a few
        companies like the Reliance Infocomm Limited, Bharti Tele-Ventures Limited,
        Data
        Access (India) Limited and BSNL for provision of international long distance
        services.  We have obtained a letter of intent from the DOT for, and
        complied with various formalities to obtain, such a license and intend to
        deploy
        this service as soon as the license is issued.




The
      1999
      telecom policy states that the Indian telecommunications industry must expand
      at
      a significantly greater pace and the Indian government must liberalize
      regulation commensurate with worldwide trends in order for the Indian
      telecommunications industry to fully develop in terms of technology, services,
      quality and market penetration.  As the teledensity in India has
      reached a level of over 10% as of August, 2005, the industry has achieved a
      major requirement of the country in terms of policy objectives.




The
      TRAI
      has issued the IUC regulation 2 of 2003, dated October 29, 2003.  The
      IUC Regulation (2 of 2003) covers arrangements among service providers for
      payment of Interconnection Usage Charges for Telecommunication Services,
      covering Basic Service, which includes WLL (M) services, Cellular Mobile Service
      Providers and Long Distance Operators throughout the territory of India &
ILD operators. The TRAI has issued IUC Regulation (1 of 2005) dated January
      6, 2005 and implemented from February 1, 2005. In this IUC amendment, the
      authority emphasized lower tariffs and linked high sustained subscriber growth,
      plans or consistent decline in tariffs to give sustained boost to subscriber
      growth and teledensity.  The methodology of imposing ADC per minute
      charge kept unchanged. Only the Access Deficit Charge has been changed, ADC
      on
      long distance calls and international calls has been
      reduced.  Further, in the amended IUC regulation, BSNL only, and not
      the other fixed lines operators, will receive ADC on all incoming international
      calls and outgoing calls from Mobile/WLL(M).  This regulation, however
      also envisages that all the operators will continue to receive the same ADC
      as
      per earlier regime but our receipts on account of ADC will reduce drastically
      after the implementation of this amended regulation.  Accordingly, we
      had challenged the regulation in the TDSAT.  The TDSAT did not grant
      any stay and the regulation has been implemented from February 1,
      2005.  In July 2006, the TDSAT dismissed the same with no orders as to
      costs.  The TRAI has issued IUC Regulation (1 of 2006) dated February
      28, 2006 which was implemented from March 1, 2006.  In this IUC
      amendment, the methodology of imposing ADC was changed from a ‘per minute
      basis’ charge to a ‘% of AGR basis’ charge. The ADC is now payable by us @ of
      1.5% of the AGR for Mobile services only. In addition, the ADC on international
      calls has also been reduced on a per minute basis.  The TRAI has
      issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented from
      April 1, 2007.  In this amended regulation ADC on percentage revenue
      share was reduced to 0.75% from existing 1.50% of AGR.  ADC on
      outgoing international calls was reduced to zero from existing level of Rs.
      0.80
      per minute and on incoming international calls reduced to Rs. 1.00 per minute
      from existing Rs. 1.60 per minute.




The
      recommendations of the 1999 telecom policy, and certain important subsequent
      developments, are as follows:




**Basic
      Services, including CDMA-based Fixed Wireless and Mobile
      Services**




The
      1999
      telecom policy permits direct interconnectivity between basic service providers
      and any other type of service provider (including another basic service provider
      or a cellular service provider) in their areas of operation and sharing of
      infrastructure with any type of service provider.  It allows the basic
      service providers to directly interconnect with VSNL after the opening up of
      national long distance service from January 1, 2000.  The basic
      service providers have been permitted to utilize last mile linkages or
      transmission links within its service area made available by other service
      providers.




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In
        accordance with the 1999 telecom policy, the TRAI undertook a review of
        interconnectivity between providers in different service areas.  In
        July 2002 the authority adopted a reference interconnect offer regulation
        which
        includes the model reference interconnect offer/draft agreement and the
        reference interconnect offer guidelines.  Pursuant to this, service
        providers are permitted to interconnect with other service providers on the
        basis that they shall not discriminate as to the terms and conditions offered
        to
        different service providers.  Effective May 1, 2003, the authority
        implemented a regulation providing a complete set of interconnect usage
        charges.  The regulation adopts a calling party pays principle, so
        that the operator responsible for origination of a call bears liability for
        payment of the interconnect fees for transmission and/or
        termination.




In
      January 2001 the DOT issued guidelines for basic services, including provisions
      for wireless access systems limited within the local area.  In April
      2001, the Indian government announced that all basic licensees, including us,
      may offer wireless-in-local loop services under their basic service
      licenses.  On August 26, 2005 the DOT clarified that Fixed wireless
      Service has the character of limited mobile service and, therefore, is
      categorized into limited mobile service within the scope of a basic service
      license.




**Cellular
      Service**




The
      1999
      telecom policy also provides for greater competition among cellular service
      providers.  The government of India proposes to review spectrum
      utilization from time to time in view of emerging spectrum availability, optimal
      use of spectrum, market requirements, competition and the public
      interest.  The TRAI will provide recommendations to the government of
      India with respect to new licenses at least every two years.




The
      1999
      telecom policy permits direct interconnectivity between licensed cellular
      service providers and any other type of service provider (including another
      cellular service provider) in their area of operation including sharing of
      infrastructure with any other type of service provider.  The cellular
      service providers have been allowed to directly interconnect with the VSNL
      after
      opening of national long distance from January 1,
      2000.  Interconnectivity between service providers in different
      service areas is now governed by the July 2002 reference interconnect offer
      regulation and the May 2003 interconnection usage charges
      regulation.  With the interconnection usage charges regulation and
      related tariff changes, the TRAI introduced the calling party pays principle,
      resulting in the elimination of customer charges (other than roaming charges)
      for incoming cellular calls.




**Unified
      Access License**




In
      November 2003, the DOT issued guidelines for the Unified Access (Basic and
      Cellular) Services License; which permit the provision of both basic and
      cellular services (with mobility) within a service area.  We have
      submitted a request to the DOT to migrate to UAS Licenses for our service area
      under mobile licenses for Delhi and Mumbai to be able to provide services at
      par
      with other operators in these areas.  In September 2006, our request
      for migration of our CMTS Licenses to UAS Licenses as our operating cellular
      service in the licensed area was not accepted by the DOT.  In October
      2006, we sought reconsideration and grant of permission for migration to UAS
      Licenses.




**Domestic
      Long Distance**




On
      August
      13, 2000, the Indian government published guidelines for the liberalization
      of
      the domestic long distance market subsequent to which applications were received
      for domestic long distance licenses.  The Bharti Group and Reliance
      Group have been awarded domestic long distance licenses.  These
      guidelines do not restrict the number of new entrants into this market, but
      entrants must satisfy a number of requirements.




In
      addition, entrants into the domestic long distance market must pay a one time
      entry fee of Rs.1 billion and provide bank guarantees of Rs.4 billion which
      will
      be refunded upon completion of their network obligations.




On
      May
      10, 2006, we were awarded a license for providing National Long distance (NLD)
      service.  Since then  we carry our own domestic long
      distance service between Mumbai and Delhi.




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**International
        Long Distance**
  The
        Indian government has recently issued licenses to several private sector
        companies for the provision of international long distance
        services.  In addition, the Tata Group, which controls Tata
        Teleservices, acquired a controlling interest in VSNL, which had been
        government-controlled.
  On
        our
        application, the government of India has issued us a letter of intent for
        an
        international Long Distance Service License.  As desired by the
        licensor, insertion of certain clauses in our Memorandum and Articles of
        Association and Shareholders Agreement is in process.  We have
        submitted our papers and required Bank Guarantee
        in this regard.  In consultation with DOT, our subsidiary MTL has been
        entrusted the work of laying submarine cable for international traffic for
        use
        by both BSNL and MTNL, with joint ownership.




**Other
      Service Providers**




New
      Telecom Policy (NTP) 1999 for providing application like tele-banking,
      telemedicine, tele-trading, tele-education, e-commerce and call
      centers.  Other Service Providers (OSPs) are allowed to operate by
      using infrastructure provided by various Access Service
      Providers.  Such OSPs are required to be registered with the
      DOT.




**Infrastructure
      Providers**




On
      June
      28, 2007, we were awarded a license for providing Infrastructure Provider
      Category-1 (IP-1).  Companies registered as IP-1 can provide assets
      such as Dark Fibre, Right of Way, Duct space and Tower.




**IPTV
      Service**




We
      have
      launched the IPTV service to our customers of our available fixed line network
      as Value Added Service in Mumbai on October 10, 2006 and in Delhi on November
      1,
      2006 under Basic Service License as Value Added Service.




**MPLS
      Services (Multi-Protocol Label Switching)**




On
      July
      23, 2007, MPLS Service was launched.  MPLS is a backbone for our
      various IP Based Services




Keeping
      our trend of introducing modern and latest technologies at affordable rates
      to
      our customers, we [usher] IP based MPLS Technology to offer world class IP
      VPN
      (Virtual Private Network) services.  MPLS was developed to provide
      faster data packet movement than traditional IP routing.




The
      technology enables secure VPN to be built and allows scalability that will
      make
      it possible for MTNL to offer assured growth to its customers without having
      to
      make significant investments.  MTNL is now geared to provide bandwidth
      on demand, IPTV, Video Conferencing, Voice Over IP (VoIP) and a host of other
      value added services that could significantly change the way a corporate
      business works.




**Internet
      Policy**




In
      November 1998, the government of India announced a new Internet policy, to
      increase the usage of the Internet.




Effective
      April 1, 2002, the Indian government adopted guidelines under which internet
      service providers could provide internet telephony services.




The
      government of India passed the Information Technology Act, 2000 to facilitate
      the development of a secure environment for electronic commerce.  This
      Act establishes a regulatory authority for electronic commerce, provides legal
      validity to information in the form of electronic records and permits, unless
      otherwise agreed, an acceptance of a contract to be expressed by electronic
      means of communication.  It facilitates electronic intercourse in
      trade and commerce by providing the legal framework for authentication and
      origin of electronic




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record/communication
        through digital signature and eliminates uncertainties over writing and
        signature requirements.
  We
        believe that as of March 20, 2007 there were approximately 507 licenses for
        providing Internet services issued in India.




**The
      Tariff Order**




Effective
      May 1, 1999, the TRAI implemented The Telecommunications Tariff Order
      1999.  The intention of the tariff order was to protect consumers by
      aligning tariffs that telecommunications providers may charge for the service
      provided while ensuring the commercial viability of the various service
      providers and so encouraging the expansion of the Indian telecommunications
      industry.  This “rebalancing” of tariffs is to take place in
      stages.  The first stage of tariff rebalancing in May 1999 reduced the
      charge per pulse from Rs.1.40 to Rs.1.20, decreased local call pulse durations
      from five to three minutes (effectively increasing local call charges),
      increased domestic and international call pulse durations (effectively reducing
      domestic long distance and international call charges) and increased monthly
      line rental rates for subscribers that generate more than 200 pulses per month
      from Rs.190 to Rs.250.  The second stage of tariff rebalance further
      reduced domestic long distance and international call charges effective October
      1, 2000 and increased monthly line rental rates to Rs.250 for all subscribers
      effective February 1, 2001.  Domestic long distance call charges were
      further reduced significantly with effect from January 14, 2002, March 7, 2003
      and May 1, 2004, and international long distance call charges were subject
      to
      further significant reduction with effect from July 20, 2002, October 21, 2003
      and April 10, 2004.  Effective May 1, 2003, as part of its effort to
      balance the effects of prior tariff reductions, the TRAI changed the standard
      plan that we must offer all customers by increasing monthly rentals for basic
      services from Rs. 250 to Rs.280, reduced the local call pulse duration (for
      calls made to fixed and fixed wireless lines) from three minutes to two minutes
      and the number of free monthly call pulses.




We
      reduced drastically the ISD tariff with effect from October 2, 2004. We are
      offering different STD rates for different locations.  Calls from
      Mumbai to Maharashtra, Goa and MTNL Delhi Network are at Rs. 1.65 per
      minute.  We increased the pulse rate between Delhi and Mumbai for
      Basic to WLL(M) of MTNL network from 30 sec. to 180 sec. uniform for all plans
      excluding One India Plan.  For all other places STD rate is flat Rs.
      2.00 per minute from Fixed, WLL(M) and STD rate for Cellular service is Rs.
      2.00/1.75 per minute for Mumbai/Delhi.  ISD rates to outside India
      are:




**Uniform
      pulse rates (per minute) across all Plans**




**Country**
            **From
                Basic & WLL**
              **(M)**
            **From**
              **Cellular**
              **Postpaid**
            **From**
              **Cellular**
              **Prepaid****Delhi**
            **Mumbai**USA,
                UK (fixed), Canada and all countries with 001 access, Singapore,
                Malaysia,
                Hong Kong, Indonesia, Thailand
            Rs.
                6.30
            Rs.
                6.30
            Rs.
                6.30
            Rs.
                6.30UK
                (Mobile), Europe, Gulf, Asia, SAARC, China, Japan, South Korea, Australia,
                Christmas Island and New Zealand
            Rs.
                9.20
            Rs.
                9.20
            Rs.
                9.20
            Rs.
                9.20Rest
                of World
            Rs.
                18.00
            Rs.
                18.00
            Rs.
                18.00
            Rs.
                18.00IMMARSAT
            Rs.
                240
            Rs.
                240
            Rs.
                240
            Rs.
                240





MTNL
      has
      introduced a new scheme One India Roaming Freedom Plan under Postpaid Cellular
      Services under GSM license service as of March 6, 2007 in the service area
      of
      MTNL Delhi and Mumbai.  The salient features are as
      under:




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  **S.
                    No.**
                **Particulars**
                **One
                    India Roaming Freedom Plan**1.
                Monthly
                    Fixed Charges in Rs.
                5502.
                Pulse
                    rate in seconds
                603.
                Roaming
                    Call charges in Rs. per minutea)
                Incoming
                    Callsi)
                Free
                    Incoming Calls in minutes
                300
                    (in minutes)ii)
                Incoming
                    Calls beyond 300 minutes
                1.00b)
                Outgoing
                    Callsi)
                Within
                    visted network
                1.00ii)
                Beyond
                    visited network (STD)
                1.004.
                International
                    Out-Roamer Charges in Rs.a)
                Fixed
                    monthly Charges
                90b)
                Charges
                    for calls made or calls received while International roaming
                    or SMS sent
                    shall be as per One India Tariff Plan.  In case foreign
                    operators do not levy any charges for incoming calls, then a
                    sum of Rs. 40
                    per minute + actual charges as applicable in the home
                    network.


**Roaming
      Charges**




**Reduction
      in tariffs for Roaming Services**




In
      compliance with the Telecommunications Tariff (Forty fourth Amendment) Order,
      2007, dated January 24, 2007, on Reduction in Tariffs for Roaming Services
      became effective from February 15, 2007 at the following rates.




**For
      Prepaid & Postpaid Service**




**PARTICULARS**
            **REVISED
                ROAMING TARIFF**
              **Rs.
                per minute**Outgoing
                calls within visited LSA (local)
            Rs.
                1.40Outgoing
                calls beyond visited LSA (STD)
            Rs.
                2.40Incoming
                calls under roaming
            Rs.
                1.75





**Notes**:


1.
            No
                fixed monthly/weekly/daily charges on national roaming subscriber
                will be
                applicable under any plan.


2.
            No
                extra surcharge.


3.
            No
                separate PSTN charges on roaming
                calls.


4.
            Receiving
                SMS is free while roaming.




The
      TRAI
      has issued the Telecommunication Tariff (28 amendments) (5 of 2003) dated July
      5, 2003.




A
      tariff
      plan once offered by an Access Provider shall be available to a subscriber
      for a
      minimum period of six months from the date of enrollment of the subscriber
      to
      that tariff plan.




Because
      we retain the remainder of prices of domestic and international long distance
      calls originating on our network, net of interconnect charges, by lowering
      long
      distance rates the tariff reductions have reduced the revenue we receive per
      call.  We believe that, to date, the tariff order has not resulted in
      significantly higher long distance usage and that, accordingly, the tariff
      order
      has had a negative impact on our revenues and earnings as the lower charges
      have
      not been offset by higher usage.




The
      tariff order prescribes a reporting requirement such that a service provider
      must report any change in tariff to the TRAI within seven days from
      implementation.




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The
        TRAI
        has issued the Telecommunication Tariff (36 amendments) Order, 2005 (3 of
        2005)
        dated April 21, 2005 regarding revised ceiling tariff for different capacities
        reduced by 3 to 70% - for higher capacities 70% less than existing market
        rate.
  Briefly,
        the Authority has fixed revised ceiling tariff for the most commonly used
        capacities/speed i.e. 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mega bits
        per
        second), DS-3 (speed of 45 Mega bits per second) and STM-1
        (speed of 155 Mega bits per second).  The revised ceiling tariffs (for
        distance slab above 500 Km) in respect of DLC are summarized in the Table
        given
        below:




Capacity
                / Speed
            Ceiling
                Tariff (Rs. in lakhs)64
                Kbps
            0.44128
                Kbps
            0.79256
                Kbps
            1.36E1
                (2 Mbps)
            8.50DS-3
                (45 Mbps)
            62STM-1
                (155 Mbps)
            165





**Foreign
      Direct Investment Controls.**




Following
      is the current Indian government policy on foreign direct investment (FDI)
      in
      the telecom sector:




(i)
            in
                basic Cellular, Value Added Services and Global Mobile Personal
                Communications by Satellite, FDI is permitted up to 49%, subject
                to
                licensing and security requirements and adherence by the companies
                (who
                are investing and the companies in which the investment is being
                made) to the license conditions for foreign equity cap and lock-in
                period for transfer and addition of equity and other license
                provisions.




(ii)
            For
                ISPs with gateways, radio paging and end-to-end bandwidth, FDI is
                permitted up to 74% with FDI beyond 49% requiring Government
                approval.  These services would be subject to licensing and
                security requirements.




(iii)
            No
                equity cap is applicable to manufacturing
                activities.




(iv)
            FDI
                up to 100% is allowed for the following activities in the telecom
                sector:




(a)
            ISPs
                not providing gateways (both for satellite and submarine
                cables).




(b)
            Infrastructure
                Providers providing dark fibre (IP Category
                I);




(c)
            Electronic
                Mail, and




(d)
            Voice
                Mail.




The
      above
      would be subject to the following conditions:




(a)
            FDI
                up to 100% is allowed subject to the condition that such companies
                would
                divest 26% of their equity in favour of Indian public in five years,
                if
                these companies are listed in other parts of the
                world;




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(b)
              The
                  above services would be subject to licensing and security requirements,
                  wherever required;
  (c)
              Proposal
                  for FDI beyond 49% shall be considered by FIPB on case to case
                  basis.


**Item
                  4A.**
              **Unresolved
                  Staff Comments**


Not
      applicable.




**Item
      5. Operating and
      Financial Review and Prospects**




*You
      should read the following discussion in con**junction with the
“**Selected Financial and Operating Data”**and our consolidated
      financial statements and the related notes, which appear elsewhere in this
      report.  Our consolidated financial statements have*been*prepared in accordance with U.S. GAAP.*




**OPERATING
      RESULTS**




**Overview**




A
      number
      of developments have significantly affected our results of
      operations.  These developments and a number of potential developments
      may affect our results of operations, liquidity, capital resources and capital
      expenditures in future periods.  These developments
      include:




·
            adoption
                of the comprehensive interconnection usage charges regulation based
                on the
                calling party pays principle, with effect from May 1, 2003 and revision
                from time to time;




·
            our
                expansion into new businesses such as providing cellular and CDMA-based
                fixed wireless and mobile services and the rapid introduction by
                several
                other operators of low-cost CDMA-based technologies that can be used
                for
                both fixed wireless and mobile
                services;




·
            growing
                competition;




·
            our
                expansion into foreign markets - to date Nepal and
                Mauritius;




·
            new
                interconnect arrangements with international long distance carriers,
                including revenue sharing on incoming
                calls;




·
            industry
                consolidation;




·
            our
                investment programs to expand and modernize our
                network.




Potential
      future developments include:




·
            increased
                competition from basic and cellular operators, including the continued
                rapid introduction by several operators of low-cost CDMA-based
                technologies that can be used for both fixed wireless and mobile
                services;




·
            continued
                consolidation in the industry;




·
            further
                rate reductions as a result of intensifying competition or tariff
                reductions;




·
            new
                interconnect agreements, including with
                BSNL;




·
            license
                fee revisions, including revisions that may be applied
                retrospectively;




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·
              our
                  procuring a unified license regime;
  ·
              the
                  benefits  of our  new National Long Distance License
                  obtained in May, 2006;


·
            our
                laying a submarine cable jointly with BSNL from both the east and
                west
                coasts of India to Malaysia and the Middle East,
                respectively,  to carry voice and data traffic with the intent
                to further extend to USA and Europe




·
            possible
                direct or reverse merger with BSNL;




·
            the
                implementation of voluntary retirement schemes for our
                employees;




·
            transfer
                of our trunk auto exchanges to BSNL on the directions of DOT;
                and




·
            further
                regulatory changes.




Our
      future results of operations are also likely to be affected by macroeconomic
      trends such as the rate of growth of the Indian economy, particularly in Delhi
      and Mumbai, and the introduction of new technologies and products by our
      competitors and us.  Many of these factors are beyond our
      control.




**Critical
      Accounting Policies and Estimates**




For
      fiscal year 2007, we have prepared the consolidated financial statements in
      accordance with US GAAP, and the financial statements for the years ended March
      31, 2005 and March 31, 2006 are also so presented.




Our
      accounting policies are described in Note 2 of the Notes to our consolidated
      financial statements. Our consolidated financial statements which are part
      of
      this Annual Report are prepared in conformity with US GAAP, which require us
      to
      make estimates and assumptions that affect the reported amounts of assets
      and liabilities and disclosures of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the year. Actual results could differ from those estimates. We consider
      the following policies to be most critical in understanding the judgments that
      are involved in preparing our financial statements and the uncertainties that
      could impact our results of operations, financial condition and cash
      flows.




Recognition
      of Revenues.  Revenues include amounts invoiced for call revenue,
      fixed monthly rental charges, roaming charges, activation fees, internet
      services, access and interconnection revenue and fees for value added services
      (‘VAS’).  Revenues for fixed line and cellular telephonic services are
      recognized based upon metered call units (MCU) of traffic
      processed.  Rental revenues and leased circuits rentals are recognized
      based upon contracted fees schedule.  Revenues from internet services
      are recognized based on usage by subscribers.  Revenues associated
      with access and interconnection for usage of our telephone network by other
      operators for local, national long distance and international long distance
      calls are recognized in accordance with the Interconnect Usage Charges
      Regulation released by the TRAI.  The TRAI regulation specifies per
      minute rates for metered call units (MCU) of traffic terminated on our
      network.  Revenues are shown net of service tax and applicable
      discounts and allowance.  Unbilled receivables represent revenues
      recognized in respect of services provided from the last bill cycle date to
      the
      end of the year.  These are billed in subsequent periods as per the
      terms of the billing plans.  Billings in advance for services to be
      rendered and amounts charged for new connections are classified in current
      liabilities under the heading “Deferred income”.  Amounts charged for
      new connections are recognized over the average life of the customer
      relationship.  A significant portion of our revenue is derived from
      interconnect and access charges for calls terminating at our
      network.  The related rules and telecommunication industry related
      policies are framed and determined by the Government of India through its
      departments and regulatory authorities such as the DOT and the
      TRAI.  Since, interconnect and access charges are presently governed
      by IUC regime, we have not entered into separate agreements with certain other
      operators.  Any subsequent amendment to the presently applicable
      guidelines with retrospective effect relating to tariff and interconnect/ access
      charges will impact our revenues significantly.




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For
        the
        year ended March 31, 2007, a 10% increase or decrease in the rates for call
        revenue, including public call office revenue, would have increased or decreased
        the total revenue by approximately Rs.2210 million. A 2% increase or decrease
        in
        metered call units in respect of fixed line call revenue, including public
        call
        office revenue, would have increased or decreased the total revenue by
        approximately Rs.442 million for the year ended March
        31,
        2007.  Further, a 5% increase or decrease in rental charges would have
        increased or decreased the total revenue by approximately Rs.618 million,
        as
        applicable, while a 5% increase or decrease in rates for interconnection
        services would have increased or decreased the total revenue by approximately
        Rs.119 million.




License
      Fees.  We are paying license fee and spectrum charges to DOT in
      accordance with conditions governing license fee for Basic Telephone Service
      and
      Cellular Telephone Service prescribed by DOT under the Revenues Sharing Regime,
      whereby license fee is computed  at a specified percentage of adjusted
      gross revenue.  The license fee is expensed as incurred.  In
      view of the uncertain political environment and the fact that the license fee
      is
      determined on the basis of guidelines prescribed by regulatory authorities,
      the
      license fees is subject to change in the event any of these guidelines are
      modified subsequently with retrospective effect. During the year ended March
      31,
      2007, the applicable percentage of license fee was 10%. A change in the
      specified percentage to 12% or 8% would have increased or decreased the license
      fee charges by approximately Rs.963 million.  Refer to the discussion
      in the ‘Comparison of Year Ended March 31, 2007 with Year Ended March 31, 2006’
under analysis of Results of Operation below.




Network
      Charges.  Charges associated with access to and interconnection to
      other operators’ network by us for local, national long distance and
      international long distance calls are recognized in accordance with the
      Interconnect Usage Charges Regulation released by the TRAI, where applicable,
      and in accordance with the terms of agreements entered into with other
      operators.  TRAI regulation specifies per minute charges for metered
      call units (MCU) of traffic terminated on the other operators’
network.  In view of the uncertain political environment and the fact
      that the network charges are determined on the basis of guidelines prescribed
      by
      regulatory authorities, the network charges are subject to change in the event
      any of these guidelines are modified subsequently with retrospective
      effect.  Refer to the discussion in the  ‘Comparison of Year
      Ended March 31, 2007 with Year Ended March 31, 2006’ under analysis of Results
      of Operation below.




Pension
      and Other Retirement Benefits.  We sponsor pension and other
      retirement plans in various forms covering substantially all employees who
      meet
      eligibility requirements. Several statistical and other factors, which attempt
      to anticipate future events, are used in calculating the expense and liability
      related to the plans.  These factors include assumptions about the
      discount rate, expected return on plan assets and rate of future compensation
      increases as determined by us, within certain guidelines.  In
      addition, we also use subjective factors such as withdrawal and mortality rates
      to estimate these factors.  The actuarial assumptions used by us may
      differ materially from actual results due to changing market and economic
      conditions, higher or lower withdrawal rates or longer or shorter life spans
      of
      participants.  These differences and the fact we have not invested
      pension and other retirement benefit funds to cover retirement liability may
      result in a significant impact to the amount of pension and other retirement
      benefit expense recorded by us.  Holding all other factors constant, a 1%
      decrease or increase in the discount rate would increase or decrease the
      projected pension and postretirement benefit obligations by approximately
      Rs.3,466 million and Rs.963 million, respectively.  The post
      retirement medical scheme for retirees expired on August 31, 2007.  By
      order dated August 24, 2007, the company elected not to renew the scheme. As
      the
      Company does not at present have any plan for a similar or an alternative
      scheme, the actuary liabilitiy of Rs.5,794 million was considered as not
      required and reversed on the Statement of Operation. The Company considers
      this
      to be a material and an unusual item.




Income
      Taxes.  In accordance with the provisions of SFAS 109,
      Accounting for Income Taxes, income taxes are accounted for under the asset
      and
      liability method.  Deferred tax assets and liabilities are recognized
      for the future tax consequences attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax bases and operating loss
      carry-forwards.  Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or
      settled.  The effect on deferred tax assets and liabilities of a
      change in tax rates is recognized in the statements of income in the period
      such
      changes are enacted.  We assess the likelihood that our deferred tax
      assets will be recovered from future taxable income and to the extent we believe
      that recovery is not likely, we establish a valuation allowance.  The
      valuation allowance is based on our estimates of taxable income and the period
      over which our deferred tax assets will be recoverable. Significant management




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judgment
      is required in determining our provision for income taxes, our deferred tax
      assets and liabilities and any valuation allowance recorded against our net
      deferred tax assets.  In the event that actual results differ from
      these estimates or we adjust these estimates in future periods we may need
      to
      establish an additional valuation allowance which could materially impact our
      financial position and results of operations.  The enacted tax
      rate applicable to us was 33.66% during the year ended March 31, 2007. A 1%
      increase or decrease in the tax rate to 34.66% or 32.66% would have increased
      or
      decreased the income tax expense for the year by Rs.106 million.




As
        per
        section 80IA of the Indian Income Tax Act, 1961 a Company, which starts to
        operate telecommunication services at any time on or after April 1, 1995,
        but
        before March 31, 2000, is entitled to a tax holiday for a period of 10 years
        beginning with the year in which such services are started. As per the tax
        holiday, 100% of the profits derived from such services are exempt from tax
        in
        the first 5 years, and 30% of such profits are exempt from tax for the next
        5
        years. MTNL on the basis of advice from its legal counsel has historically
        claimed such benefit. The Company’s claim have been rejected at the first
        appellate level and the case has been referred to the Committee of Disputes,
        which is a body formed by the Government to settle disputes between Government
        controlled undertakings and the Government. The Committee has referred the
        case
        to the Tax appellate authorities for reconsideration. During the year ended
        March 31, 2006, the case has been set aside by the Income Tax Appellate
        Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03
        and has
        referred the matter back to the Assessing Officer for a fresh assessment
        after
        hearing the case again. For the years ending upto and including March 31,2006
        ,considering that the benefit claimed by MTNL in the above years may not
        be
        ultimately allowed by tax authorities, the provision for current taxes in
        these
        years had been accounted in the basis of normal tax rates. During the year
        2006-07 assessing officer has made fresh assessment for calculation of deduction
        u/s 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to
        MTNL.**MTNL has filed appeals against that partial allowance to the
        higher authority. *(Also refer note 22 (b) (ii)).* However, during the
        year, the benefits under section 80-IA were partially allowed. Accordingly,
        excess provisions pertaining to previous years amounting to Rs.4,555 million
        were adjusted to the tax expenses during the year.


Legal
      Contingencies.  As discussed in Note 22 to the consolidated
      financial statements, legal proceedings covering a wide range of matters are
      pending or threatened against us.  We have accrued amounts as
      appropriate that represent our estimate of the probable outcome of these
      matters. The judgments we make with regard to whether to establish a reserve
      are
      based on an evaluation of all relevant factors by internal and external legal
      counsel, as well as subject matter experts and is based upon an analysis of
      potential results, assuming a combination of litigation and settlement
      strategies.  Claims are continually monitored and reevaluated as new
      information is obtained.  We may not establish a liability for a
      particular matter until long after the litigation is filed, once a liability
      becomes probable and estimable. The actual settlement of such matters could
      differ from the judgments made in determining how much, if any, to
      accrue.  We do not believe these proceedings will have a material
      adverse effect on our consolidated financial position.  While we
      believe that our accruals for these matters are adequate, if the actual loss
      from a loss contingency is significantly different than the estimated loss,
      our results of operations may be over or understated.




Recoverability
      of DOT Receivables.  We are a Government Company under the Indian
      Companies Act.  As of March 31, 2007, the Government owned 56.25% of
      our issued share capital.  Consequently, the Government, acting
      through the DOT, continues to control us and will have the power to determine
      the outcome of transactions with the DOT or the assertion of claims against
      the
      DOT.  We also provide and receive services to/from other Governmental
      departments and other public sector organizations on normal commercial
      terms.  [Refer to Notes 3, 19, 22 and 25] to the consolidated
      financial statements for a further discussion on our related party transactions
      and significant risks and uncertainties.  The receivables from DOT
      constitute a significant portion of our assets and our assessment of the
      recoverability of these assets involves critical accounting
      estimates.  The assessments reflect management’s best
      assumptions and estimates. Significant management judgment is involved in
      estimating these factors, and they include inherent
      uncertainties.  Management periodically evaluates and updates the
      estimates based on the conditions that influence these factors. The variability
      of these factors depends on a number of conditions, including uncertainty about
      future events, and thus our accounting estimates may change from period to
      period. If other assumptions and estimates had been used in the current period,
      the balances for these assets could have been materially
      impacted.  Furthermore, if management uses different assumptions or if
      different conditions occur in future periods, future operating results could
      be
      materially impacted.




Allowance
      for Accounts Receivable.  We estimate the amount of uncollectible
      receivables each period and establish an allowance for uncollectible amounts.
      The amount of the allowance is based on the age of unpaid




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amounts,
      information about the creditworthiness of customers, and other relevant
      information. Estimates of uncollectible amounts are revised each period, and
      changes are recorded in the period they become known.  Estimated
        Useful Lives of Property And Equipment.  We estimate the useful
        lives of plant and equipment in order to determine the amount of depreciation
        expense to be recorded during any reporting period.  If technological
        changes were to occur more rapidly than anticipated or in a different form
        than
        anticipated, the useful lives assigned to these assets may need to be shortened,
        resulting in the recognition of increased depreciation expense in future
        periods. Likewise, if the anticipated technological or other changes occur
        more
        slowly than expected, the useful lives could be extended. This could result
        in a
        reduction of depreciation expense in future periods.  Further,
        property and equipment are being depreciated over their useful lives which
        exceed the license term since the Company believes that its licenses will
        be
        extended beyond their current term.  A one-year decrease or increase
        in the useful life of these assets would have increased or decreased
        depreciation expense by approximately Rs.714 million and Rs.580 million,
        respectively.
  Impairment
        of Long-Lived Assets. In accordance with Statement of Financial Accounting
        Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets,” we review these types of assets for impairment whenever
        events or circumstances indicate that the carrying amount may not be recoverable
        over the remaining life of the asset or asset group. In order to determine
        if the asset or asset group is recoverable, we determine
        if the expected future undiscounted cash flows directly related to the asset
        or
        asset group are less than the carrying amount of the asset or asset
        group.  If so, we then determine if the carrying amount of the asset
        or asset group exceeds its fair value. We determine fair value using estimated
        discounted cash flows.  If impairment is indicated, the asset or asset
        group is written down to its fair value. Assets to be disposed are reported
        at
        the lower of the carrying value or the fair value less cost to
        sell.  The discounted cash flows calculation uses various assumptions
        and estimates regarding future revenue - which is a factor of the future
        subscriber base and the average revenue per subscriber, expenses, terminal
        values of the assets and the cash flows projections over the estimated remaining
        useful life of the asset or asset group. These forecasts are subject to changes
        in external factors including adverse regulatory and legal
        rulings.  We carried out an impairment review of our long lived assets
        in 2007. Based on our review, the expected future cash flows directly associated
        with the asset groups exceed their carrying amount and hence there is no
        impairment of long lived assets in 2007.




Impairment
      of Held to Maturity Securities.  We have invested Rs. 1,000
      million in 8.75% cumulative preference shares of ITI Limited (“ITI”) and Rs
      2,500 million in bonds issued by Maharashtra Krishna Valley Development
      Corporation (“MKVDC”), a wholly owned subsidiary of Government of
      Maharashtra.




The
      ITI
      share purchase agreement includes a provision for a letter of comfort from
      Department of Telecommunication (Government of India) to MTNL endorsing the
      investment and also provides us a right to set off amounts receivable in respect
      of principal outstanding from the dues payable to ITI, in connection with our
      purchase of exchanges and cable supplies.




As
      of
      September 30, 2005, ITI had not redeemed the first tranche amounting to Rs.
      200
      million as per the repayment schedule and ITI had requested an extension on
      the
      redemption dates.  However, we have not accepted ITI’s request and
      have looked to the DOT’s letter of comfort and requested settlement of the first
      repayment tranche of Rs. 200 million.




As
      of
      September 30, 2006, ITI has not redeemed both the first and second tranches
      amounting to Rs. 200 million each as per the original repayment
      schedule.




As
      of
      September 30, 2007, another tranche of Rs. 200 million became due from
      ITI.




Management
      has evaluated the investment in ITI for impairment, on the basis that the first,
      second and third tranches for repayment have not been settled by
      ITI.  Management has evaluated the financial condition and business
      outlook of ITI including the new purchase orders received by ITI for supply
      of
      GSM equipment from BSNL and us.  We currently have accounts payable to
      ITI of Rs.706 million as at March 31, 2007 which, pursuant to the share
      agreement, we can legally settle against the repayments owing under the
      cumulative preference shares.  In addition, we have the intent and
      ability to retain the debt security for a period of time sufficient to allow
      for
      anticipated recovery in value.




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Based
        on
        this evaluation and specifically considering that the share purchase agreement
        includes a provision for a letter of comfort from Department of
        Telecommunication (Government of India) to us endorsing the investment and
        also
        provides us a right to set off amounts receivable in respect of principal
        outstanding from the dues payable to ITI, management has concluded that the
        debt
        security is not impaired.
  The
        MKVDC
        bonds have a coupon rate of 11.5% per annum and are redeemable at the end
        of the
        10th year from the date of allotment (May 31, 2002).  The repayment of
        these bonds is guaranteed by the Government of Mahrashtra.  Based on
        our assessment of carrying value of investment in MKVDC bonds we believe
        that
        there is no impairment of investments as of March 31, 2007.
  **Revenue**
  We
        derive
        a substantial portion of our revenue from local, domestic long distance and
        international calls that originate on our network and from telephone
        rentals.  We realize revenue in the form of installation charges,
        ongoing subscription/rental charges and usage charges.  We also derive
        revenues from providing Internet and broadband services, our Intelligent
        Network
        services, public call office or public payphone services, interconnection with
        basic service, long distance service and cellular operators, narrow-band
        ISDN
        services, leased-line services, telex services, GSM cellular services in
        Delhi
        and Mumbai, those value-added services for which we charge a fee and, since
        December 2001, CDMA-based mobile and fixed wireless services in Delhi and
        in
        Mumbai.




We
      only
      began receiving interconnect payments in respect of incoming international
      long
      distance calls since April 1, 2002, when several interconnect agreements,
      including our agreement with VSNL, took effect. In fiscal 2003, revenue sharing
      with BSNL and other operators for incoming and outgoing domestic long distance
      or subscriber trunk dialing calls was done on the basis of the TRAI’s
      Interconnect Usage Charges Regulation 2003 (1 of 2003) implemented from May
      1,
      2003 and modified by Interconnect Usage Charges Regulation 2003 (2 of 2003)
      effective February 1, 2004.  For April 2003, these charges were
      accounted per the earlier arrangement. Call revenue is generally a function
      of
      the number of access lines in service, the volume of traffic carried and the
      level of call charges.  Telephone and other rental revenue is a
      function of the number of access lines in service and the rental tariffs we
      charge.  Public call office revenue is driven by the number of our
      public call offices, the volume of traffic carried and the level of call
      charges.  Interconnect revenue is a function of the contractual and
      legal/regulatory rates prescribed for interconnection and the level of call
      volumes originating from sources that pay interconnect fees.  For the
      year ended March 31, 2007, there has been a decrease in the number of fixed
      lines and CDMA lines that, coupled with a decrease in the related tariffs,
      has
      resulted in decreased revenues for these services. However, there has been
      an
      increase in revenue due to increased GSM lines and broadband connections,
      despite a drastic decrease in related tariffs.




The
      May
      1999 tariff order provided for a “rebalancing” of tariffs in stages to reduce
      subsidization of local calls by long distance users.  The first stage
      of tariff rebalancing in May 1999 reduced the charge per pulse from Rs.1.40
      to
      Rs.1.20, decreased local call pulse durations from five to three minutes
      (effectively increasing local call charges), increased domestic and
      international call pulse durations (effectively reducing domestic long distance
      and international call charges) and increased monthly line rental rates for
      subscribers that generate more than 200 pulses per month from Rs.190 to
      Rs.250.  The second stage of tariff rebalancing further reduced
      domestic long distance and international call charges effective October 1,
      2000
      and increased monthly line rental rates to Rs.250 for all subscribers effective
      February 1, 2001.  Domestic long distance call charges were further
      reduced significantly with effect from January 14, 2002, March 7, 2003, May
      1,
      2004, and October 2, 2004, and international long distance call charges were
      subject to further significant reduction with effect from July 20, 2002, October
      21, 2003 and April 10, 2004.  Primarily as a result of these tariff
      reductions, excluding termination revenues, our average revenue per access
      line
      in service has been declining.  Any further tariff rebalancing may
      result in lower call charges, particularly for domestic long distance and
      international calls, which might be offset by an increase in rental
      tariffs.  We are not able to assess at this time the full long-term
      impact that the tariff order will have on subscriber calling patterns or on
      revenues.  As competition intensifies, we expect call charges will
      likely decline and, to the extent that call volumes do not increase as a result
      of lower call charges, excluding termination revenues, our revenue per access
      line in service may continue to decline.




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We
        expect
        that call revenue and revenue from public call offices may decline as a
        percentage of total revenue as demand for our other products and services,
        particularly our GSM cellular services, increases and if rental charges increase
        as a result of further tariff rebalancing.
  **Cost
        of Revenues**
  Our
        operating costs include staff costs, license fees and network utilization
        charges, depreciation expenses, maintenance costs and commissions paid to
        public
        call office franchise operators.
  Staff
        costs.  In general, employees receive a base salary and
        salary-related housing and other allowances, productivity-based incentive
        payments and certain benefits, including a pension/gratuity plan and medical
        benefits for themselves and certain members of their immediate
        families.  The decrease in our staff costs was primarily due to VRS in
        previous years and also a decrease in retirement benefit charges on account
        of
        an increase in the discount rate used to value our post retirement obligations
        to employees.  This is in line with the general increase in interest
        rates in the economy over the same period.
  In
        fiscal
        2000, substantially all of our non-executive employees originally employed
        by
        the DOT decided to terminate their services with the DOT and accept employment
        with us effective November 1998.  Under the option given
        to
        them for pension benefits, most of our absorbed employees have opted for
        retaining pension benefits in accordance with the Central government pension
        rules. Some other employees have opted for retirement rules, which are
        applicable to our directly recruited employees, and opted to draw *pro rata*monthly pension until their absorption.  Accordingly, with effect
        from November 1, 1998 we started accruing for pension and gratuity for these
        employees.  In August/September 2002, the DOT indicated that the
        government would pay for the pension benefits of the government employees
        absorbed by us who opted for either the Central government scheme of pension
        or
        for the *pro rata*pension scheme for the period served with the
        DOT.  However, the terms of such payments are in the process of
        finalization.  Once these terms are finalized and the payments are
        made to the DOT for the period of employment of these employees with us,
        we
        expect that our liability for post retirement obligations would be limited
        to
        monthly contributions on the basis of the rules to be prescribed by
        the government of India.  Presently, in the absence of any
        further movement from the Government, we are discharging all such
        liabilities.




Approximately
      98% of our executive employees have accepted absorption into our company and
      are
      now our direct employees.  These employees are entitled to certain
      pension and gratuity benefits from the government of India.




We
      have
      finalized a new compensation structure for our senior executive
      employees.  The new structure provides for higher salaries and
      benefits for our senior executive employees upon exercise of their option for
      MTNL absorption.




As
      a
      public sector enterprise, we abide by general DOT and Department of Public
      Sector Enterprises personnel policies that, among other things, limit our
      ability to reduce employment levels and control the amount of salaries and
      other
      remuneration that we may pay to our employees.  Our employee
      productivity measured by access lines in service per employee has been
      increasing steadily but remains significantly lower than the Asian
      and global averages.  During the year ended March 31, 2005, MTNL
      implemented a Voluntary Retirement Scheme (VRS) for executive as well as
      non-executive employees.  Under the scheme, the eligible employees
      were given an option to voluntarily take retirement from service and make their
      choice within the specified period of time.  The scheme provided for
      ex gratia payments to eligible employees opting for voluntary retirement based
      on the respective employee’s salary and term of employment.  As of
      March 31, 2007, a total of 3,947 employees retired under this
      scheme.




License
      fees and networkutilization charges.  Under our previous
      arrangement with the DOT, the license fee for providing basic services was
      fixed
      at Rs.900 per access line in service.  This arrangement expired on
      March 31, 2000.  In the absence of any new arrangement with the DOT,
      we continued to pay license fees during fiscal 2001 on the same terms as our
      previous arrangement.  On April 9, 2001, the DOT communicated that the
      annual license fee will be revised and shall be payable at 12% of adjusted
      gross
      revenue from basic telephone service effective from August 1, 1999, as
      applicable to private operators from that date.  On September 5, 2001,
      the DOT amended its position and indicated that the date from which the revised
      license fees will be payable will be notified later.




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Accordingly,
      the Company paid license fees  based on the earlier arrangement up to
      the year ended March 31, 2001 and on the revised basis from April 1, 2001
      onwards. Subsequent to the year ended March 31, 2004 in a meeting
      with  DOT it has been agreed that the license fee is payable at 12% of
      the adjusted gross revenue with effect from August 1, 1999 and the charges
      for
      the same have been accrued in the year ended March 31, 2004.  Further,
      license fee has been revised at 10% of Adjusted Gross Revenue with effect from
      April 1, 2004. Under our previous arrangement with BSNL, we paid network
      utilization charges to BSNL as a fixed percentage of the amount of usage and
      other charges billed to our customers for our services.  Our network
      utilization arrangement with BSNL expired on March 31, 2001.  To date
      no agreement for networking charges has been entered into which determines
      the
      basis of revenue sharing for incoming or outgoing domestic long distance or
      subscriber trunk dialing calls through interconnection with BSNL’s
      network.  In absence of the same, for fiscal 2003, the interconnection
      charges on domestic long distance calls have been accrued on the basis of the
      rates that were payable by other basic service operators in the
      country.  We are in the process of finalizing a new agreement with
      BSNL.  In
        fiscal
        2004, revenue sharing with BSNL and other operators for incoming and outgoing
        domestic long distance or subscriber trunk dialing calls was done on the
        basis
        of  TRAI’s Interconnect Usage Charges Regulation 2003
        (1
        of 2003) implemented from May 1, 2003 and modified by Interconnect Usage
        Charges
        Regulation 2003 (2 of 2003) effective February 1, 2004.  For April
        2003, these charges were accounted per the earlier
        arrangement.




In
      fiscal
      2005, TRAI’s IUC regulation (1 of 2003) as modified by IUC regulation 2003 (1 of
      2004) was applicable till January 2005, for February and March 2005, regulation
      as modified by amendment (1 of 2005) was applicable.




In
      fiscal
      2006, TRAI’s IUC Regulation (1 of 2006) dated February 28, 2006 was applicable
      through March 31, 2007.




In
      fiscal
      2007, TRAI has issued ADC Regulation (2 of 2007) dated March 21, 2007 and
      implemented from April 1, 2007.  In this amended regulation ADC on
      percentage revenue share was reduced to 0.75% from existing 1.50% of
      AGR.  ADC on outgoing international calls has been reduced to zero
      from an existing level of Rs. 0.80 per minute and on incoming international
      calls reduced to Rs. 1.00 per minute from existing Rs. 1.60 per
      minute.




In
      fiscal
      2007, TRAI issued the Telecommunication Tariff (Forty fourth amendment) Order,
      2007 regarding National Roaming Charges and applicable from February 15,
      2007.  The salient features are as follows:




1.
            Entry
                Fee (One time charge)
            Nil2.
            Monthly
                Access Charge for Regional or National Roaming
            Nil3.
            Composite
                charge including Public Switched Telecom
              Network
                (PSTN) charges for incoming call while Regional or
              National
                Roaming Ceiling
            Rs.
                1.75 per minute4.
            Composite
                charge including Public Switched Telecom
              Network
                (PSTN) charges for outgoing local call while
              Regional
                or National Roaming Ceiling
            Rs.
                1.40 per minute5.
            Composite
                charge including Public Switched Telecom
              Network
                (PSTN) charges for Outgoing local distance (inter
              circle)
                call while Regional or National Roaming Ceiling
            Rs.
                2.40 per minute6.
            Surcharge
                while Regional or National Roaming
            Nil7.
            Incoming
                Short Message Services (SMS) while roaming
            Nil





In
      fiscal
      2007, TRAI issued the Telecommunication Tariff (Forty fifth amendment) Order,
      2007 regarding unsolicited commercial communication and applicable from June
      5,
      2007.  The salient features are as follows:




ITEM
            TARIFF1.  Unsolicited
                commercial communication made from Basic Services (other than
                ISDN)
            Rs.500/-
                for each unsolicited commercial communication referred against item
                1.2.  Unsolicited
                commercial communication made from Cellular Mobile Telecom Service
                (CMTS)
            Rs.500/-
                for each unsolicited commercial communication referred against item
                2.





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In
        fiscal
        2007, TRAI issued the Regulation on Port Charges (1 of 2007) and applicable
        from
        April 1, 2007.  The salient features are as under:
  Coverage
        Charges for ‘Ports’ (other than the Port Charges for Internet, which are
        specified in Schedule VI of the Telecommunications Tariff Order
        1999)
  **No.
                    of ‘Ports’**
              **‘Port’
                    Charges (in Rs.) per annum**1
                  to 16 PCMs
              N*39,00017
                  to 32 PCMs
              6,24,000
                  + (N-16)*22,50033
                  to 64 PCMs
              9,84,000
                  + (N-32)*14,50065
                  to 128 PCMs
              14,48,000
                  + (N-64)*11,500  ‘Port’
        Charges covering all switches




129
                to 256 PCMs
            21,84,000
                + (N-128)*10,500





Note
      - N
      refers to the number of ‘Ports’ within the capacity ranges under the column ‘No.
      of Ports’.”




Since
      Regulation 1 of 2007 of TRAI in relation to payment of port charges is contrary
      to the judgment of the Hon’ble TDSAT, dated April 27, 2005 and March 3, 2005,
      BSNL has filed Appeal no. 4/2007 against these Regulations before the Hon’ble
      TDSAT.  MTNL has also impleaded into this case.




Until
      the
      end of fiscal 2002, all outgoing international long distance calls originating
      from our network were subject to interconnection fees payable to BSNL, and
      we
      received no revenue from incoming international long distance calls into our
      network.  We paid interconnect fees to BSNL in respect of outgoing
      international long distance calls pursuant to the network utilization
      arrangement with BSNL until March 31, 2001 and for fiscal 2002 on the basis
      of
      the rates that were payable by other basic service operators in the
      country.  Beginning April 1, 2002, we recorded incoming and outgoing
      international long distance traffic pursuant to interconnect agreements we
      have
      signed with several international carriers, most importantly,
      VSNL.  As a result of these agreements, we no longer make payments to
      BSNL in respect of international long distance traffic.  In addition,
      our agreements with the international carriers provide for income in respect
      of
      incoming calls, in addition to payments in respect of outgoing calls originating
      from our networks.




For
      more
      information on license fees and network utilization charges, please see
“Information on the Company—Business Overview.”




**Inflation**




Inflation
      in India, as measured by the Indian consumer price index, was 5.5% in fiscal
      2004, 5.01% in 2005, and 4.6% in 2006.  Energy price spikes may affect
      this in the current year.  We do not believe that inflation in India
      has had a material impact on our results of operations in recent
      years.  However, the TRAI has been granted the authority to determine
      tariffs, and we are therefore restricted in our ability to increase tariffs
      to
      compensate for inflation.  As a result, inflation could adversely
      affect our results of operations.  See “Information on the
      Company—Business Overview—Tariffs and Other Charges.”




**Effect
      of New Accounting Pronouncements**




There
      are
      a number of new accounting standards that have been issued that will affect
      our
      information presented in accordance with US GAAP.  For a description
      of these recent pronouncements, please see Note 2 to our consolidated financial
      statements included elsewhere in this form.




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**Other
        Matters**
  See
        “Information on the Company—Business Overview—Legal Proceedings” and Note 22 to
        our consolidated financial statements for information on our contingent
        liabilities.
  We
          are
          selectively targeting expansion opportunities outside India where we can
          leverage our expertise and relationships.  We have investments in
          Nepal and Mauritius and are currently examining several other
          opportunities.  We invested Rs.233.45 million up to fiscal 2004 and
          Rs.56.70 million in fiscal 2007 on the Nepal venture, and in respect of
          the
          Mauritius operations, Rs.425.03 million up to fiscal 2006 and Rs.170.09
          million
          in fiscal 2007.
 We
        have
        obtained a letter of intent from the Department of Telecommunication to provide
        international long distance service and we intend to deploy these services
        as
        soon as a license is issued.  We cannot determine at this time what
        impact entry into these markets will have on our revenues and results of
        operations.




**Segment
      Information**




We
      have
      identified basic and cellular as the two operating segments of
      MTNL.  Basic services segment consists of voice, data through local
      calls, domestic long distance and international long distance calls on fixed
      line services in the cities of Delhi and Mumbai in India. Further, it includes
      revenues from Code Division Multiple Access, or CDMA, based cellular services
      and internet access services.  Cellular consists of providing cellular
      services in cities of Delhi and Mumbai using Global System for Mobile
      communications, or GSM, technology.




During
      the year ended March 31, 2005, we had not considered cellular services to be
      a
      reportable segment since it did not meet the thresholds of
      significance.  However as the cellular services have met the
      thresholds of significance during the years ended March 31, 2006 and 2007,
      we
      have disclosed the segment information for the year ended March 31, 2007 as
      well
      as for the prior years.




During
      the previous year we started operations in Mauritius.  However, as the
      operations are insignificant as compared to our overall business, the same
      have
      not been considered for separate segment disclosure.




During
      the years ended March 31, 2006 and 2007, no single customer has contributed
      for
      revenue in excess of 10% of total revenue.




The
      amounts reviewed by the CODM are based on internal accounting policies of the
      Company which are different from US GAAP.




**Results
      of Operations**




The
      following table sets forth selected income statement data expressed as a
      percentage of revenue for the period indicated, derived from financial
      statements that are prepared in accordance with US GAAP, included on pages
      F-1
      to F-33  of this annual report.




**Fiscal
                Years Ended March 31,****2005**
            
            **2006**
            
            **2007**Revenues
            
            100%
            
            100%
            
            100%Cost
                of revenues (excluding depreciation shown separately
                below)
            
            (62.8%)
            
            (69.1%)
            
            (71.5%)Selling,
                general and administrative expenses (excluding depreciation shown
                separately below)
            
            (18.5%)
            
            (17.2%)
            
            (19.2%)Depreciation
            
            (15.4%)
            
            (17.1%)
            
            (18.7%)Postretirement
              medical benefit liability written back
            
            -
            
            -
            
            12.7%Excess
                liabilities written back
            
            2.6%
            
            1.7%
            
            1.8%**Income
                / (loss) from operations**
            
            **5.9%**
            
            **(1.7%)**
            
            **(5.2%)**Interest
                and other income, net
            
            5.3%
            
            5.1%
            
            17.4%**Income
                before income taxes and share of losses from
                affiliate**
            
            **11.2%**
            
            **3.4%**
            
            **22.5%**Income
                taxes
            
            (4.2%)
            
            (1.0%)
            
            2.4%Equity
                in (losses) of affiliate
            
            (0.1%)
            
            (0.1%)
            
            0.0%




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 Table
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**Fiscal
                  Years Ended March 31,****2005**
              
              **2006**
              
              **2007****Net
                  income**
              
              **6.9%**
              
              **2.3%**
              
              **24.9%**
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 Table
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**Comparison
      of Year Ended March 31, 2007 with Year Ended March 31,
      2006**




Revenues:
      Basic services: Our revenues
      from basic services decreased by 7.84% from Rs.41,219 million for the year
      ended
      March 31, 2006 to Rs.37,989 million for the year ended March 31, 2007. The
      decrease was primarily driven by a decrease in fixed line call revenue,
      including public call office (“PCO”) revenue, by 2.36% from Rs.22,637 million
      for the year ended March 31, 2006 to Rs.22,103 million for the year ended March
      31, 2007 and a decrease in interconnect revenue by 14.98% from Rs.2,809 million
      for the year ended March 31, 2006 to Rs.2,388 million for the year ended March
      31, 2007.  However, revenue from telephone and other rentals and
      broadband services increased 4.90% from Rs.15,338 million for the year ended
      March 31, 2006 to Rs.16,320 million for the year ended March 31,
      2007.




Call
      revenue has gone down as a result of a decrease in the average number of
      connections from 4,127,530 connections during the year ended March 31, 2006
      to
      3,723,104 connections during the year ended March 31, 2007. There was also
      a net
      decrease of 3,901 million units in billed Metered Call Units (“MCU”), from
      29,006 million units during the year ended March 31, 2006 to 25,105 million
      units during the year ended March 31, 2007. Further, the call tariff rates
      were
      reduced during the current year due to increased competition in the market,
      resulting in a fall in average revenue per connection per month from Rs.805
      during the year ended March 31, 2006 to Rs.770 during the current year, a
      decrease of Rs.35 per connection per month.




Cellular
        services: Our revenues from
        cellular services increased by 37.38% from Rs. 5,449 million for the year
        ended
        March 31, 2006 to Rs.7,486 million for the year ended March 31, 2007. The
        increase was primarily driven by an increase of 600,918 in the average number
        of
        cellular subscribers from 1,411,425 as of March 31, 2006 to 2,012,343 as
        of
        March 31, 2007. Due to the increase in subscribers, our income from roaming
        and
        prepaid trump also increased by Rs.1,143 million from Rs.3,847 million for
        the
        year ended March 31, 2006 to Rs.4,990 million for the year ended March 31,
        2007.
  Cost
        of Revenues: Basic services: Our
        cost of revenues has decreased from Rs.29,595 million for the year ended
        March
        31, 2006 to Rs.28,910 million for the year ended March 31, 2007. The decrease
        is
        due to a decrease in interconnection charges by 35% from Rs 12,173 million
        for
        the year ended March 31, 2006 to Rs.7,973 million for the year ended March
        31,
        2007. The decrease is offset by an increase in license fees by 6,834% from
        Rs.62
        million for the year ended March 31, 2006 to Rs.4,237 million for the year
        ended
        March 31, 2007.
  Interconnect
        charges have decreased
        during the current year primerely because an amount of Rs.3,809 million had
        been
        accounted for as network charges in the previous year. This amount was on
        account of a settlement by DOT of the disputes with BSNL related to the
        networking charges for the period of 2000-2005.
  The
        increase in the licence fee is
        primerely on account of the fact that in the fiscal year ended March 31,
        2006 we
        had reversed excess licence fee Rs.3408 million accounted for years upto
        March
        31, 2005, which reduced the charges for previous year.


Cellular
      services: Our cost of revenues
      has increased by Rs.914 million from Rs.2,673 million for the year ended March
      31, 2006 to Rs.3,587 million for the year ended March 31, 2007. The increase
      is
      due to (i) an increase in interconnect charges by Rs.708 million from Rs.1,343
      million for the year ended March 31, 2006 to Rs.2,051 million for the year
      ended
      March 31, 2007, and (ii) an increase in license fees by Rs.327 million from
      Rs.491 million for the year ended March 31, 2006 to Rs.818 million for the
      year
      ended March 31, 2007. However, staff costs
        decreased by Rs.22 million from Rs.219 million for the year ended March 31,
        2006
        to Rs.197 million for the year ended March 31, 2007.




As
        regards license fees payable as a
        percentage of the Adjusted Gross Revenues (“AGR”), the increase is basically due
        to a 37.38% increase in cellular revenue as compared to the prior
        year.
  **Selling,
        General and Administrative
        Expenses (SG&A)**
  Basic
        services: Our selling, general and administrative expenses went up by 26%
        from
        Rs.6,529 million during the year ended March 31, 2006 to Rs.8,224 million
        during
        the year ended March 31, 2007. The increase is




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mainly
        on
        account of an increase in the charges accrued for provisions required against
        potential bad debt. During the current year the changes for provision for
        doubtful debtors was Rs.1023 millions. Advertisement costs increased by 19%
        from
        Rs.333 million during the year ended March 31, 2006 to Rs.396 million during
        the
        year ended March 31, 2007.


Cellular
      Services: Our selling, general
      and administrative expenses went down by Rs.629 million from Rs.1,158 million
      during the year ended March 31, 2006 to Rs.529 million during the year ended
      March 31, 2007. The decrease is primarily on account of an decrease in charges
      accrued for provisions required against potential bad debt by Rs.600 million
      from Rs.780 million for the year ended March 31, 2006 to Rs.180 million for
      the
      year ended March 31, 2007and decrease in advertisement expenses by Rs.31 million
      from Rs.82 million for the year ended March 31, 2006 to Rs.51 million for the
      year ended March 31, 2007.




**Income
      from
      Operations**




Basic
        Services: Our loss from
        operations has decreased by Rs.1,076 million from a loss from operations
        of
        Rs.1,426 million for the year ended March 31, 2006 to a loss from operations
        of
        Rs.350 million for the year ended March 31, 2007. The decrease in operating
        loss
        is mainly attributable to medical benefits written back amounting to Rs.
        5,794
        million and the same is offset by (i) a 7.84% decrease in revenue from Rs.41,219
        million for the year ended March 31, 2006 to Rs.37,989 million for the year
        ended March 31, 2007, (ii) an increase in the selling, general and
        administrative expenses from Rs.6,529 million for the year ended March 31,
        2006
        to Rs.8,224 million for the year ended March 31, 2007, and (iii) an increase
        in
        depreciation by Rs.384 million from Rs.7,454 million for the year ended March
        31, 2006 to Rs.7,838 million for the year ended March 31, 2007


Cellular
      Services: Our income from
      operations has increased by 180% from Rs.963 million for the year ended March
      31, 2006 to Rs. 2,692 million for the year ended March 31, 2007. The increase
      is
      mainly attributable to a 37.38% increase in revenue from Rs.5,449 million for
      the year ended March 31, 2006 to Rs.7,486 million for the year ended March
      31,
      2007, and a decrease in our selling, general and administrative expenses by
      54%
      from Rs.1,158 million for the year ended March 31, 2006 to Rs.529 million for
      the year ended March 31, 2007. However, it is offset to some extent due to
      increases in the cost of revenues from Rs.2,673 million for the year ended
      March
      31, 2006 to Rs.3,587 million for the year ended March 31, 2007.




Interest
      and Other Income: During the
      year ended March 31, 2007, our interest and other income has increased by 231%
      from Rs.2,388 million for the year ended March 31, 2006 to Rs.7,894 million
      for
      the year ended March 31, 2007. The increase is attributable to an 702% increase
      in interest and other income from Rs.787million for the year ended March 31,
      2006 to Rs.6,310 million for the year ended March 31, 2007, offset by a 1.06%
      decrease in interest from bank deposits from Rs.1,601 million for the year
      ended
      March 31, 2006 to Rs.1,584 million for the year ended March 31,
      2007.




The
      increase in interest and other
      income was mainly due to the recognition of interest on income tax for the
      year
      ended March 31, 2006 amounting to Rs. Nil million as compare to the Rs.5,216
      million for the year ended March 31, 2007.




Income
      Taxes: Income tax expense
      decreased from Rs.437 million for the year ended March 31, 2006 to
      Rs.(1,073) million for the year ended March 31, 2007. The decline is
      attributable to a decrease in the current tax expense from Rs.1,253 million
      for the year ended March 31, 2006 to Rs.(1,171) million for
      the
      year ended
      March 31, 2007.  Deferred tax expense also increased from
      Rs.(816) million for the year ended March 31, 2006 to Rs.98 million for the
      year
      ended March 31, 2007.




The
        current tax expense has decreased mainly due to adjustments arising from
        completion of tax assessment of previous years.
 The
          deferred tax assets have decreased
          largely on account of lower charges in the financial statements in respect
          of
          provision for post retirement medical benefits. The deferred tax liability
          has
          decareased due to reduction in the amount of excess depreciation allowance
          on
          tax in the current year as compared to earlier year.




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**Comparison
      of Year Ended March 31, 2006 with Year Ended March 31,
      2005**




Revenues:
      Basic services: Our revenues from basic services decreased by 13% from Rs.
      47,269 million for the year ended March 31, 2005 to Rs.41,219 million for the
      year ended March 31, 2006. The decrease was primarily driven by a decrease
      in
      fixed line call revenue, including public call office (PCO) revenue, by 12
      %
      from Rs 26,024 million for the year ended March 31, 2005 to Rs.22,637 million
      for the year ended March 31, 2006 and a decrease in interconnect revenue by
      41%
      from Rs. 4,729 million for the year ended March 31, 2005 to Rs.2,809 million
      for
      the year ended March 31, 2006 and a 1.5% decrease in telephone and other rentals
      and broadband revenue from Rs.15,557 million for the year ended March 31, 2005
      to Rs.15,338 million for the year ended March 31, 2006.




Call
      revenue has gone down as a result of decrease in average number of connections
      from 4,372,862 connections during the year ended March 31, 2005 to 4,127,530
      connections during the year ended March 31, 2006. There was also net decrease
      of
      2,855 million units in billed Metered Call Units (“MCU”), from 30,087 million
      units during the year ended March 31, 2005 to 29,006 million units during the
      year ended March 31, 2006.  Further, the call tariff rates were
      reduced during the current year due to increased competition in the market,
      resulting in a fall in average revenue per connection per month from Rs.819
      during the year ended March 31, 2005 to Rs.805 during the current year, a
      decrease of Rs.14 per connection per month.




The
      interconnect revenue has declined due to reduction of Access deficit charges
      (ADC) w.e.f February 2005, ADC regime has changed and ADC payments to MTNL
      were
      discontinued in the year 2005-06.




Cellular
      services: Our revenues from cellular services increased by 89% from Rs. 2,874
      million for the year ended March 31, 2005 to Rs.5,449 million for the year
      ended
      March 31, 2006. The increase was primarily driven by an increase of 790,302
      in
      the average number of cellular subscribers from 621,123 as of March 31, 2005
      to
      1,411,425 as of March 31, 2006. Due to increase in subscribers, our income
      from
      roaming and prepaid trump also increases by Rs.1,986 million from Rs.1,861
      million for the year ended March 2005 to Rs.3,847 million for the year ended
      March 2006.




Cost
      of
      Revenues: Basic services: Our cost of revenues has decreased from Rs.30,128
      million for the year ended March 31, 2005 to Rs.29,595 million for the year
      ended March 31, 2006. The decrease is due to a decrease in license fees by
      100%
      from Rs.4,665 million for the year ended March 31, 2005 to Rs.62 million for
      the
      year ended March 31, 2006 and a decrease in the staff cost by 7% from Rs.14,806
      million for the year ended March 31, 2005 to Rs.13,828 million for the year
      ended March 31, 2006.  The decrease is offset by an increase in
      interconnect charges by 66% from Rs.7,321 million for the year ended March
      31,
      2005 to Rs.12,173 million for the year ended March 31, 2006.




The
      interconnect charges have increased during the current year mainly on account
      of
      the settlement reached with BSNL for the periods up to and including March
      31,
      2005  In the earlier years we had disputed the interconnect charges
      claimed by BSNL on account of being not adequately supported . However, during
      the year ended March 31, 2006, the DOT had constituted a three member committee
      from its Telecommunications Department comprised of  the Member
      (Production), Member (Finance), and Deputy Director General (Business Solutions)
      to resolve the various disputes relating to networking charges. Based on the
      recommendations of the Committee vide their minutes dated January 2006, DOT
      has
      settled the disputes on the networking charges for the period from 2000 to
      2005.
      Accordingly, an amount of Rs.3,809 million has been accounted as networking
      charges in the statement of income for the year ended March 31,
      2006.




The
      license fee as discussed earlier is a factor of
      the Adjusted Gross Revenues (“AGR”) which in turn is affected by the revenues
      for the year and the interconnect charges which are allowed as one of the
      deductions from the revenue to arrive at AGR. Thus the decrease in license
      fee
      is directly correlated to the increased interconnect charges which we have
      accrued during the year as part of the settlement with BSNL and DOT. An 7%
      decrease in the revenue for the year has decreased the AGR by 24%. Further,
      during the year we have received an NLD license from the DOT.  One of
      the prerequisites for obtaining an NLD license is the absence of any dues
      towards DOT on account of License fees for one’s existing services. We have also
      received a provisional assessment letter from DOT confirming that all amounts
      demanded as of and for the periods up to March 31, 2005 have been received
      from
      MTNL In view of the above we have reversed excess license fees accrued in years
      up to March 2005.,amounting to Rs 3,408 which accounts for over 90% of the
      variation in the License fees.




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The
      decrease in staff cost by 7% is a direct result of the VRS schemes
      offered  by the Company. Approximately 2,000 employees had opted for
      VRS during the year ended March 31, 2005 resulting in a charge of Rs 1,381
      million. A further 1000 employees have opted for VRS during the current year.
      The charge for the current year is Rs 666 million thus leading to a 5% downward
      variation as compared to last year Also during the current year approximately
      950 employees have retired due to normal age retirement. All these factors
      have
      resulted in a lower wage/salary outgo and also entailed lower charges for the
      current year viz-a-viz last year.  The expense for medical benefits
      has reduced from Rs 2605 million to Rs 2,043 million for the current year
      accounting for 3% of the total variation in the staff cost




Cellular
      services: Our cost of revenues has increased by Rs.1,280 million from Rs.1,393
      million for the year ended March 31, 2005 to Rs.2,673 million for the year
      ended
      March 31, 2006. The increase is due to a increase in interconnect charges by
      Rs.798 million from Rs.545 million for the year ended March 31, 2005 to Rs.1,343
      million for the year ended March 31, 2006, increase in license fees by Rs.182
      million from Rs.309 million for the year ended March 31, 2005 to Rs.491 million
      for the year ended March 31, 2006 and increase in the staff cost by Rs 148
      million from Rs.71 million for the year ended March 31, 2005 to Rs.219 million
      for the year ended March 31, 2006.




As
      regards license fees payable as a percentage of the Adjusted Gross Revenues
      (“AGR”), the increase is  basically due to 100% increase in cellular
      revenue as compared to the last year.




**Selling,
      General and Administrative Expenses (SG&A)**




Basic
      services: Our selling, general and administrative expenses have gone down by
      25%
      from Rs.8,715 million during the year ended March 31, 2005 to Rs.6,529 million
      during the year ended March 31, 2006. The decrease is mainly on account of
      decrease in the charge accrued for provision required against potential bad
      debt. This accounts for 22% of the overall the 25% fall in SG&A expenses.
      Company reassessed its provision against doubtful debtors and concluded that
      we
      had been proactive in our doubtful debtor’s provisioning in the previous years
      .During the current year the Company has written back Rs 248 million of this
      provision as against a charge of Rs 1,137million last year. The fall in the
      staff cost from Rs 6,405 million to Rs 5,792 million accounts further for
      a  7% fall in the SG&A. expenses.




Cellular
      Services: Our selling, general and administrative expenses have gone up by
      Rs
      712 million from Rs.446 million during the year ended March 31, 2005 to Rs.1,158
      million during the year ended March 31, 2006. The increase is primarily on
      account of a increase in charge accrued for provision required against potential
      bad debt by Rs 589 million from Rs 191 million for the year ended March 31,
      2005
      to Rs.780 million for the year ended March 31, 2006, increase  in the
      staff cost by Rs 42 million from Rs.37 million for the year ended March 31,
      2005
      to Rs.79 million for the year ended March 31, 2006 and increase in advertisement
      expenses by Rs.52 million from Rs.30 million for the year ended March 31, 2005
      to Rs.82 million for the year ended March 31, 2006.




**Income
      from Operations**




Basic
      Services: Our income from operations has fallen by Rs.3,985 from income from
      operation of Rs.2,559 million for the year ended March 31, 2005 to loss from
      operation of Rs.1,426 million for the year ended March 31, 2006. The decrease
      is
      mainly attributable to a 12% decrease in revenue from Rs.47,269 million for
      the
      year ended March 31, 2005 to Rs.41,219 million for the year ended March 31,
      2006, increase in the cost of revenues from
      Rs.30,128 million for the year ended March 31, 2005 to Rs.29,595 million for
      the
      year ended March 31, 2006. There has also been decrease in the selling, general
      and administrative expenses by 25% from Rs.8,715 million for the year ended
      March 31, 2005 to Rs.6,529 million for the year ended March 31, 2006. As against
      the 12% reduction in revenues, our selling, general and administrative expenses
      have gone down by 25%. Further excess liability written back has declined by
      Rs.
      470 million from Rs.1,291 million for the year ended March 31, 2005 to Rs.
      821
      for the year ended March 31, 2006.




Cellular
      Services: Our income from operations
      has increased by 88% from Rs.510 million for the year ended March 31, 2005
      to
      Rs.963 million for the year ended March 31, 2006. The increase is mainly
      attributable to 99% increase in revenue from Rs.2,874 million for the year
      ended
      March 31, 2005 to Rs.5,449 million for the year ended March 31, 2006, offset
      by
      increase in the cost of revenues from Rs.1,393 million for the year ended March
      31,




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2005
      to
      Rs.2,673 million for the year ended March 31, 2006. As against the 99%
      increase in revenues, our selling, general and administrative expenses have
      gone up by 159% from Rs.446 million for the year ended March 31, 2005 to
      Rs.1,158 million for the year ended March 31, 2006.




Interest
      and Other Income: During the year ended March 31, 2006, our interest and other
      income has decreased by 11% from Rs.2,670 million for the year ended March
      31,
      2005 to Rs.2,388 million for the year ended March 31, 2006. The decrease is
      attributable to a 41% decrease in interest and other income from Rs.1,329
      million for the year ended March 31, 2005 to Rs.787 million for the year ended
      March 31, 2006, offset by 19% increase in interest from bank deposit from
      Rs.1,341 million for the year ended March 31, 2005 to Rs.1,601 million for
      the
      year ended March 31, 2006.




The
      decrease in interest and other income was mainly due to an recognition of
      interest on income tax for the year ended march 31, 2005 amounting to Rs. 665
      million as compare to the nil for the year ended March 31, 2006.




Income
      Taxes: The income tax expense has reduced by 79% from Rs.2124 million for the
      year ended March 31, 2005 to Rs.437 million for the year ended March 31, 2006.
      The decline is attributable to a decrease in the current tax expense by 171%
      from Rs.3,400 million for the year ended March 31, 2005 to Rs.1,253 million
      for
      the year ended March 31, 2006, further deferred tax income decreased by 88%
      from
      Rs.1,276 million for the year ended March 31, 2005 to Rs.861 million for the
      year ended March 31, 2006.




The
      current tax expense has fallen due to a 60% reduction in the taxable income
      (as
      per the applicable tax laws) from Rs.9,278 million for the year ended March
      31,
      2005 to Rs.3,722 million for the year ended March 31, 2006, which resulted
      in an
      equivalent 37% reduction in the expense. Further applicable tax rate in
      India which has decreased resulted in a 8% decrease in the current tax
      expense.




The
      decrease in the deferred tax income during the current year is driven by a
      decrease in deductible temporary differences by 125% as compared to the previous
      year, which has resulted in an equivalent 125% reduction in deferred tax income,
      and further by a decrease in the applicable tax rate in India which has resulted
      in a 8% decrease in the deferred tax income.




**LIQUIDITY
      AND CAPITAL RESOURCES**




A
      summary
      of our cash flows appears below:




**(in
                millions of Rs.)****Year
                Ended March 31****2005**
            
            
            **2006**
            
            
            **2007**Net
                cash provided by the operating activities
            
            
            15,006
            
            
            
            6,006
            
            
            
            9,672Net
                cash used in investing activities
            
            
            (12,706
            )
            
            
            (7,975
            )
            
            
            (6,780
            )Net
                cash from financing activities
            
            
            (4,630
            )
            
            
            (3,951
            )
            
            
            (2,873
            )Net
                increase/(decrease) in cash and cash equivalents
            
            
            (2,330
            )
            
            
            (5,920
            )
            
            
            19Cash
                and cash equivalents at the beginning of the year
            
            
            9,891
            
            
            
            7,561
            
            
            
            1,641Cash
                and cash equivalents at the end of the year
            
            
            7,561
            
            
            
            1,641
            
            
            
            1,660




We
      have historically met our working
      capital and capital expenditure requirements principally from cash flows
      generated from operations.  We have also from time to time undertaken
      external borrowings.  As of March 31, 2007, we had no
      borrowings.  We expect to meet our planned capital requirements for
      the next two years primarily from cash flow generated from operations, together
      with existing cash balances and supplemented by market borrowings, whenever
      required.  At March 31, 2007, we had cash and cash equivalents of
      Rs.1.66 billion and liquid short-term investments in bank deposits of Rs.17.10
      billion.  We anticipate capital expenditures of approximately Rs.6,17
      billion in fiscal 2008.  We do not expect to have any liquidity
      problem in regard of possible adverse results in our pending litigations, as
      we
      would expect to discharge any obligations from cash on hand.  We have
      significant amounts due from related parties, which if not settled, would
      significantly impact cash flow from operations.  We believe that
      existing cash and cash equivalents and funds generated from operations will
      be
      sufficient to meet these requirements. However, we may significantly alter
      our
      proposed capital expenditures plans and accordingly, may




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require
      additional financing to meet our requirements. In either case, we cannot assure
      you that additional financing will be available at all or, if available, that
      such financing will be obtained on terms favorable to us or that any additional
      financing will not be dilutive to our shareholders.




**Operating
      Activities**




Net
      cash
      flow from operating activities was Rs.6.01 billion in fiscal 2006 and Rs 9.67
      billion in fiscal 2007. The increase in cash generation from operating
      activities during the current year is primarily attributable to an increase
      in
      net income from Rs.1.07 billion for the year ended March 31, 2006 to Rs.11.30
      billion for the year ended March 31, 2007, an increase in depreciation from
      Rs.8.00 billion as at March 31, 2006 to Rs.8.52 billion as at March 31, 2007,
      and an increase in deferred taxes from Rs.(.82) billion as at March 31, 2006
      to
      Rs.0.10 billion as at March 31, 2007.  Net cash flow from operating
      activities was Rs.15.01 billion in fiscal 2005 and Rs 6.01 billion in fiscal
      2006. The decrease in cash generation from operating activities during the
      year
      ended March 31, 2006 was primarily attributable to a decrease in net income
      from
      Rs.3.41 billion for the year ended March 31, 2005 to Rs.1.07 billion for the
      year ended March 31, 2006, a decrease in the amounts due to related parties
      from
      Rs.11.33 billion as at March 31, 2005 to Rs.6.09 billion as at March 31, 2006,
      and an increase in the other receivables from Rs.4.05 as at March 31, 2005
      to
      Rs.8.8 billion as at March 31, 2006.




**Investing
      Activities**




Net
      cash
      used in investing activities decreased from Rs.7.98 billion for fiscal 2006
      to
      Rs.6.78 billion for fiscal 2007. This is mostly due to a withdrawal of the
      investment made in short term bank deposits of Rs.1.92 billion during the year
      ended March 31, 2007.  However, Rs.1.29 billion was deposited during
      the year ended March 31, 2006. Offsetting the above amount to some extent was
      an
      increase in the purchase of fixed assets from Rs.6.72 billion during the year
      ended March 31, 2006 to Rs.8.70 billion during the year ended March 31,
      2007.  Net cash used in investing activities decreased from Rs.12.71
      billion for fiscal 2005 to Rs.7.98 billion for fiscal 2006. This was mostly
      due
      to a decrease in the investment made in short term bank deposits from Rs.2.08
      billion during the year ended March 31, 2005 to Rs.1.29 billion during the
      year
      ended March 31, 2006 and a decrease in the purchase of fixed assets from
      Rs.10.71 billion during the year ended March 31, 2005 to Rs.6.72 billion during
      the year ended March 31, 2006.




**Financing
      Activities**




Net
      cash used in financing activities has decreased from Rs.3.95 billion for fiscal
      2006 to Rs.2.87 billion for fiscal 2007. This decrease is on account of a
      decrease in the amounts of cash dividends paid from Rs.3.95 billion during
      the
      year ended March 31, 2006 to Rs.2.87 billion during the year ended March 31,
      2007. Net cash used in financing activities has decreased from Rs.4.63 billion
      for fiscal 2005 to Rs.3.95 billion for fiscal 2006. This decrease is on account
      of a decrease in the amounts of cash dividends paid from Rs.4.63 billion during
      the year ended March 31, 2005 to Rs.3.95 billion during the year ended March
      31,
      2006.




**Contractual
      Obligations**




The
      following table shows our contractual payment obligations for the specified
      future periods:




**(in
                  millions of Rs.)**
                **Payments
                  due by period****Total**
              **Less
                  than 1 year**
              **1-3
                  years**
              **3-5
                  years**
              **More
                  than 5 years**Purchase
                  obligations (capital commitments)
              6,166
              6,166
              —
              —
              —Pension
                  and other post-retirement obligations
              23,435
              1,284
              3,236
              3,929
              14,986**Total**
              **29,601**
              **7,450**
              **3,236**
              **3,929**
              **14,986**


MTNL
      is obligated to pay license
      fees and spectrum charges to DOT in accordance with conditions governing license
      fees for Basic Telephone Service and Cellular Telephone Service under the
      Revenue Sharing




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Regime.
      The specified percentage for license fees on fixed line services and cellular
      services was 10% of the Adjusted Gross Revenue (“AGR”) for each of the years
      ended March 31, 2005, 2007 and 2007.






We
      do not
      expect to have any difficulty repaying such amounts, and may do so entirely
      from
      cash flow generated from operations.  As of March 31, 2007, we had no
      debt outstanding and no credit facilities.




**Off-Balance
      Sheet Arrangements**




As
      of
      March 31, 2007, we were not a financial guarantor of obligations of any
      unconsolidated entity, and we were not a party to any similar off-balance sheet
      obligation or arrangement.




**Capital
      Expenditure**




See
      “Property, Plant and Equipment – Network Modernization” for a discussion of our
      capital requirements for capital expenditures.




**RESEARCH
      AND DEVELOPMENT**




We
      did
      not incur research and development expenditures in the last three fiscal
      years.




**TREND
      INFORMATION**




For
      a
      discussion of other important trends affecting us, see “—Operating
      Results—Overview” above.




**Item
      6. Directors, Senior
      Management and Employees**




**DIRECTORS
      AND SENIOR MANAGEMENT**




The
      government of India controls us and has the power to elect all of our directors
      and to determine the outcome of almost all actions requiring approval of our
      board of directors or shareholders.  The Department
      of  Telecommunications, as the representative of our majority
      shareholder, the government of  India, also has the authority to
      exercise the special powers granted to the President of  India under
      our articles of association.  These include the right to appoint our
      Chairman-cum-Managing Director and to issue directives with respect to our
      business.  See “Additional Information- Memorandum and Articles of
      Association-Powers of the President of India”.




**Directors**




The
      Board
      of Directors has ultimate responsibility for the administration and management
      of our affairs, except for certain matters that are reserved by our articles
      of
      association for the approval of  the President of
      India.  Our articles of association provide for a board of not less
      than four and not more than 18 directors.  The directors are appointed
      by the government of India.  The President of India is empowered by
      Article 66A of our articles of association to appoint one-third of the total
      number of our directors sitting at any time for an indefinite term and to
      designate our Chairman-cum-Managing Director.  Our remaining directors
      are also appointed by the Govt. of  India and non-official part time
      directors serve for three-year terms.  As per the provisions of the Indian
      Companies Act,  one-third of these set term directors retire each year
      at our annual general meeting.




We
        currently have six directors, three of whom are our most senior
        officers.  We refer to these directors as “full-time
        directors”.  Our Executive Director, Mumbai and our Executive
        Director, Delhi are normally ex-officio members of the Board.  Two of
        our directors are officers of the DOT. Finally, there is one director who
        is
        neither our employee nor employee of the DOT.  We refer to these
        directors as “part-time” directors”.  All of our directors were
        appointed by the DOT.  Six board seats are currently vacant i.e. two
        ex-officio director and three part-time directors.




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The
      business address of each of the directors is our registered
      office.  The names of our current directors, their ages and their
      positions as at the date of this report appear below:




Name
            Age
            PositionR.S.P.
                Sinha
            56
            Director(1)
                / Chairman-cum-Managing DirectorKuldeep
                Singh
            53
            Director(1)
                / Director (Technical)Anita
                Soni (Ms.)
            54
            Director(1)
                / Director (Finance)M.
                Sahu
            53
            Joint
                Secretary (3), Department of TelecommunicationsA.S.
                Bhola
            50
            Director
                (3) / Dy. Director General, Department of
                TelecommunicationsS.
                Balasubramaniam
            64
            Director(4)




(1)
      Full-time director; (2) Director ex-officio; (3) Government director; (4)
      part-time directors




**Other
      Principal Executive Officers**




The
      business address of each of our principal executive officers is our registered
      office.  In addition to those officers who are members of the board of
      directors, our principal executive officers and their ages and positions as
      at
      the date of this report are as follows:




**Name**
            **Age**
            **Position**K.C.
                Gupta
            58
            Executive
                Director, OperationS.R.
                Sayal
            44
            Company
                Secretary




Mr.
      R.S.P. Sinha has been our Chairman and Managing Director since November 2003
      and
      a member of our board as Director (Fin) since April, 2002.  Prior to
      joining us, he was Director (Finance) of Videsh Sanchar Nigam Ltd.  He
      is a Fellow Member of the Institute of Cost & Works Accountants of
      India.  Mr. Sinha has 23 years experience in senior financial
      positions both in the private sector and the public sector, including 11 years
      experience as full-time director of the board of Public Sector
      Undertakings.  Mr. Sinha worked as Director (Finance) on the board of
      VSNL from January 1999 to February 2002 and Director (Finance), MTNL from April,
      2002 to October 2003.




Mr.
      Kuldeep Singh has been our Director (Technical) and a member of our Board since
      December 9, 2004. He is an Engineering graduate with master in business
      administration. Mr. Singh joined the Indian telecom services in 1979. He has
      more than 32 years experience in the field of computers and telecommunications.
      Before being appointed as Director (T) on the board of MTNL, he worked as GM
      in
      MTNL for more than four years.  Prior to this, he worked in DOT,
      Overseas Communication Services and National Informatic Centre in various
      responsible positions.




Ms.
      Anita
      Soni has been our Director (Finance) since April 26, 2005.  Mrs. Soni
      joined Indian Postal Telecommunications finance services of the Government
      of
      India in 1977. She has Master of Arts (Economics Honours) from Punjab
      University.  She has more than 29 years experience as a senior finance
      Executive in Indian P & T (Finance & Accounts)
      Service.  Before joining MTNL as Director (Finance), she held
      positions in DOT, MTNL, and BSNL and has experience in all aspects of telecom
      finance.  She is on the panel of experts of the International Telecom
      Union (ITU), and has participated in various ITU projects.




Mr.
      M.
      Sahu has been a member of our Board since September 16, 2005, and is presently
      working as Joint Secretary in the Department of
      Telecommunications.  After obtaining the degree of Bachelor of
      Electrical Engineering in 1977, Mr. Sahu has done Post-Graduation Degree in
      Development Administration from the University of Birmingham, U.K. in 1993-94
      with focus on Industrial Development and re-location of
      Industries.  Prior to this, Shi Sahu worked in UNIDO as Project
      Director.  He was working as Joint Secretary in Ministry of
      Environment & Forests and worked in different departments in Government of
      Gujarat in various capacities.  He has more than 24 years of
      experience in Civil Service and 15 years practical experience in industries
      including that of more than 6 years in Government of India.


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Mr.
      A.S.
      Bhola has been a member of our Board since June 2007 and is presently working
      as
      DDG (FEB), Dept. of Telecom.  He joined the Indian Post and Telecom
      Accounts and Finance Service in 1980.  He has worked in various
      capacities in the Department of Telecom, Department of Posts, Department of
      Central Excise and Customs, and in the public sector telecom
      companies.  He is presently Dy. Director General (Finance and Budget)
      in the Department of Telecom.  Prior to this, he had worked as General
      Manager (Finance) in BSNL.  He holds a degree in English literature
      from Kurukshetra University and an MBA (Finance) from the IGNOU.




Dr.
      S.
      Balasubramanian has been a member of MTNL Board since November 25, 2005 as
      Non
      Official part time Director.  He holds an M.A. (Economics) degree, M.
      Phil (Economics) degree, Ph.D. (Eco.) and DDS from University of
      Madras.  He served as professor of Economics in Madras University for
      29 years as well as Head of Dept of Economics for 16 years in Presidency
      College, Chennai.  He has published several publications in
      Socio-Economics thoughts, etc.  He has also served as a member of
      Tamilnadu Public Service Commission.




Mr.
      K.C.
      Gupta has been our Executive Director, Operation, since December
      2004.  Mr. Gupta joined the Indian Telecommunication Service in 1972
      and has held various posts in different parts of India including service with
      Telecommunications Consultants India Limited from 1996-2000. Mr. Gupta holds
      an
      engineering degree from Delhi College of Engineering, Delhi.




Mr.
      S.R.
      Sayal has been our Company Secretary since October 2006, having previously
      served as Dy. Company Secretary since August 1997.  Prior to
      joining us as Dy. Company Secretary in 1997, Mr. Sayal worked for National
      Fertilizers Ltd. (Government of India Enterprises) and other private sector
      companies.  Mr. Sayal is a Fellow Member of the Institute of Company
      Secretaries of India.  Mr. Sayal has a Bachelor of Commerce (Hons.)
      Master of Arts (English) degree from Delhi University and a Bachelor of Laws
      degree from Agra University.




**AUDIT
      COMMITTEE**




The
      Audit
      Committee of the board of directors reviews, acts on and reports to the board
      of
      directors with respect to the various auditing and accounting matters, including
      the recommendation of our independent auditors, the scope of the annual audits,
      fees to be paid to the independent auditors, the performance of our independent
      auditors and our accounting practices.  Effective June 4, 2007, the
      Board reconstituted the Audit Committee, now comprised of Dr. Balasubramanian,
      Chairman, Mr. Sahu and Mr. A.S. Bhola.  Mr. Sahu and Mr. A.S. Bhola
      are Government of India employees and are not considered independent under
      Indian standards but under US standards we avail ourselves of an exemption
      from
      certain independence standards (See Item 16D to this Report).  We are
      following up regularly with the DOT for early appointment of additional
      directors onthe
      board so that we may reconstitute our Audit Committee to include only persons
      who are not MTNL or government employees and qualify as independent under Indian
      standards.




**COMPENSATION
      OF DIRECTORS AND OFFICERS**




The
      total
      remuneration and benefits in kind paid by us to all of our directors and
      executive officers as a group in fiscal 2007 was approximately Rs. 4.01
      million.




There
      are
      no outstanding loans, advances or guarantees of any amounts to our directors
      or
      principal officers.  There have been no transactions effected by us
      during the current or immediately preceding fiscal year, and there were no
      transactions effected during an earlier financial year that remain in any
      respect outstanding or unperformed,
      between us and any of our directors or principal officers which were unusual
      in
      their nature or conditions or significant to our business.




**EMPLOYEES**
  **Employees**
  At
        March
        31, 2007, we had 48,529 employees, of whom 6,755 were executive and 41,774
        were
        non-executive employees.  We seek to improve employee productivity
        through continuing education and training and by




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emphasizing
      the importance of quality of service and
      subscriber satisfaction.  We have placed a special emphasis on
      retraining our workforce to meet the demands of modernizing our network and
      improving customer satisfaction.




In
      general, employees receive a base salary and salary-related housing and other
      allowances, productivity based incentive payments and certain benefits,
      including a pension/gratuity plan, medical benefits for themselves and certain
      members of their immediate families and post-retirement medical benefits for
      retired employees.  The decrease in our staff costs was primarily due
      to a Voluntary Retirement Scheme (VRS) in previous years and a decrease in
      retirement benefit charges on account of an increase in the discount rate used
      to value our post retirement obligations to employees.  This is in
      line with the general increase in interest rates in the economy over the same
      period.




In
      fiscal
      2000, substantially all of our non-executive employees originally employed
      by
      the DOT decided to terminate their services with the DOT and accept employment
      with us effective November 1998.  Under the option given to them for
      pension benefits, most of our absorbed employees have opted for retaining
      pension benefits in accordance with the Central government pension rules and
      some other employees have opted for retirement rules which as applicable to
      our
      directly recruited employees, and opt to draw *pro rata* until their
      absorption.  Accordingly, with effect from November 1, 1998 we started
      accruing for pension and gratuity for these employees.  In
      August/September 2002, the DOT indicated that the government would pay for
      the
      pension benefits of the government employees absorbed by us who opted for either
      the Central government scheme of pension or for the *pro rata*pension
      scheme for the period served with the DOT.  However, the terms of such
      payments are in the process of finalization.  Once these terms are
      finalized and the payments are made to DOT for the period of employment of
      these
      employees with us, we expect that our liability for post retirement obligations
      would be limited to monthly contributions on the basis of the rules to be
      prescribed by the government of India.  Presently, in the absence of
      any further movement from the Government, we are discharging all such
      liabilities.




Approximately
      98% of our executive employees have accepted absorption by us, and are now
      our
      direct employees.  These employees are entitled to certain pension and
      gratuity benefits from the government of India.




We
      have
      finalized a new compensation structure for our senior executive
      employees.  The new structure provides for higher salaries and
      benefits for our senior executive employees upon exercise of their option for
      MTNL absorption.




As
      a
      public sector enterprise, we abide by general DOT and Department of Public
      Sector Enterprises personnel policies, which, among other things, limit our
      ability to reduce employment levels and control the amount of salaries and
      other
      remuneration that we may pay to our employees.  Our employee
      productivity measured by access lines in service per employee has been
      increasing steadily but remains significantly lower than the Asian and global
      averages.  During the year ended March 31, 2005, we implemented a
      Voluntary Retirement Scheme for our executive as well as non-executive
      employees.  Under the scheme, the eligible employees were given an
      option to voluntarily take retirement from service and make their choice within
      the specified period of time.  The scheme provided for ex gratia
      payments to eligible employees opting for voluntary retirement based on the
      respective employee’s salary and term of employment.  As of March 31,
      2007, a total of 3,947 employees had retired under this scheme.




The
      mandatory retirement age for all employees is 60 years of age.  Upon
      retirement, employees (who have opted for government pension) and their
      dependents are entitled to a pension under a defined benefit
      plan.  The pension amount is based on the employee’s years of service
      and salary level upon retirement and, in a reduced amount,
      is transferable to dependents upon the employee’s death.  We also
      provide post-retirement health care benefits to retired employees and their
      dependents.  However, we have discontinued the existing scheme of
      medical benefit for the retired employees and their dependents at a date
      subsequent to March 31, 2007.  During the year the amount provided in
      the accounts up to March 31, 2006 has been written back.  Further, no
      provision for post retirement benefit has been made in the
      accounts.  See details under “Critical Account Policies and Estimates”
above.




Almost
      all of our non-executive employees are members
      of local unions organized in each of Delhi and Mumbai.  Our executive
      employees seconded from DOT are members of national officers’ associations,
      which act




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as
      an
      informal consultative mechanism for conveying management staff’s views regarding
      personnel policies to our senior executives.




**TRAINING**




In
      order
      to deal with the new realities of competitive marketplace, we have launched
      a
      massive training effort to train our workforce.  Training design has
      been so modified to tilt the balance of training from knowledge to skill and
      attitude, which are key to succeed in a customer-driven
      marketplace.  During financial year 2006-07, a total number of 7,816
      employees were trained as against the MoU targets of
      7,000 employees.




In
      addition to this, highly specialized training was given abroad to the 29 MTNL
      officers.




In
      addition to already existing District Telecom Training Centres (DTTC), we have
      created state-of-the-art training facility in the form of Center for Excellence
      in Telecom Technology and Management (CETTM) at Powai, Mumbai.  Apart
      from catering to our in-house training needs, CETTM also provides telecom
      training to other organizations.  An agreement has been reached among
      us, TCIL and the Ministry of External Affairs providing for training on telecom
      technology to the candidates from foreign countries in the CETTM
      premises.




**SHARE
      OWNERSHIP**




None
      of
      our directors or connected persons or our principal executive officers owned
      any
      of our equity shares as of the date of this report.




On
      January 7, 2000, the Indian government offered to sell up to 14 million equity
      shares, representing approximately 2.2% of our outstanding equity shares, to
      our
      employees at a discount as compensation in connection with the restructuring
      of
      DOT.  Because the terms were not viewed as favorable, none of our
      employees accepted this offer before it expired on December 31,
      2000.  In a recent communication the DOT has indicated for closure of
      the issue but we have again taken up the matter with the
      government.  Our employees have demanded that the shares allocated to
      them, at Rs.46 per share, but the DOT has not yet responded.




**Item
      7. Major Shareholders
      and Related Party Transactions**




**MAJOR
      SHAREHOLDERS**




The
      following table sets forth information about the shareholders holding 5% or
      more
      of our outstanding equity shares as of March 31, 2007, according to our register
      of shareholders:




**Name
                of Owner**
            **Number
                of Shares**
            **Percentage**Government
                of India (1)
            354,372,740
            56.25%Life
                Insurance Corporation of India (2)
            110,265,246
            17.50%The
                Bank of New York (3)
            32,053,188
            5.09%




(1)           The
      equity shares owned by the government of India are registered in the name of
      the
      President of India or his nominees in our register of shareholders.




(2)           Life
      Insurance Corporation of India is also controlled by the government of
      India.




(3)           These
        equity shares are held by The Bank of New York as custodian for the holders
        of
        our ADSs.
  **CERTAINRELATIONSHIPS
        AND RELATED PARTY
        TRANSACTIONS**
  We
        have a
        number of distinct relationships with the government of India as outlined
        below:




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**Government
      of India as Shareholder**




The
      government of India currently owns 56.25% of our outstanding equity
      shares.  Accordingly, the government of India will continue to have
      the ability to control us, elect all of our directors and determine the outcome
      of substantially all actions requiring the approval of our board of directors
      or
      shareholders.




The
      government of India has announced its intention to divest its shareholdings
      in a
      number of government companies by offering significant equity stakes in those
      companies to strategic partners through a competitive bidding
      process.  To date, there have been no announcements that the
      government of India plans to reduce its shareholding in us through this
      process.




The
      DOT
      acts as representative of our majority shareholder, the government of
      India.  The DOT also has the authority to exercise the special powers
      granted to the President of India under our articles of
      association.  These include the right to appoint our
      Chairman-cum-Managing Director and to issue directives with respect to our
      business.  See “Additional Information— Memorandum and Articles of
      Association—Powers of the President of India.”




**Government
      of India as Regulator**




Our
      business is subject to comprehensive regulation by the Ministry of
      Communications through the Telecom Commission and the DOT pursuant to the
      provisions of the Telegraph Act and the terms of the licenses under which we
      operate.  While the Telegraph Act sets the legal framework for
      regulation of the telecommunications sector, much of our supervision and
      regulation is implemented more informally through the general administrative
      powers of the DOT, including those reserved to the DOT under our license, and
      of
      other government of India agencies.  In March 1997, an autonomous
      body, the TRAI, was established with quasi-judicial powers to regulate
      telecommunications services in India.  See “Information on the
      Company— Telecommunications Regulation in India—The Telecom Regulatory Authority
      of India.”




We
      operate all of our services under licenses granted by the DOT.  The
      licenses identify the services that we are permitted to provide, which we
      believe covers all of the services that we currently do provide.  A
      license for any additional service requires the approval of the
      DOT.  The DOT retains the right, however, after giving us appropriate
      notice, to modify the terms and conditions of our license at any time if, in
      its
      opinion, it is necessary or expedient to do so in the interest of the general
      public or for the proper operation of the telecommunications
      sector.  The DOT may also terminate our license before its scheduled
      expiration upon our breach of any of its terms.  Under the Telecom
      Regulatory Authority of India Act, the Telecom TRAI has been granted the
      authority to determine tariffs.




So
      long
      as the government of India’s shareholding in us equals or exceeds 51%, we are
      deemed to be an Indian government company under the Companies Act and are
      subject to regulations generally applicable to public sector enterprises in
      India.  These regulations concern personnel matters, including
      appointment of key management personnel and the hiring, dismissal and
      compensation of employees, as well as procurement, capital expenditures and
      the
      generation of funds through the issuance of securities.  For example,
      all appointments to our board of directors must first be recommended by the
      Public Enterprises Selection Board, a government agency, and its recommendations
      are reviewed by the government of India, although until recently all
      appointments to our board have been recommended only by the government of
      India.  All appointments to our board of directors are also approved
      by our shareholders.  Disputes between government of India enterprises
      (such as us) and government of India departments generally must be referred
      to
      the Committee on Disputes of the government of India for mediation before either
      party may bring a claim in a court of law.  A single government of
      India ministry or department is designated as the primary supervisor of each
      public sector enterprise and the DOT has been designated as our primary
      supervisor.  Our activities are also subject to review by India’s
      Parliament, and the DOT must submit an annual report to Parliament regarding
      our
      business activities.




The
      government of India plays an important role in
      the preparation of our financial statements.  Under Indian
      regulations, as a government of India company, our annual accounts are audited
      by statutory auditors and branch auditors which are independent chartered
      accountants appointed each year by the government of India at the direction
      of
      the Comptroller and Auditor General of India.  See “Additional
      Information—Memorandum and




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Articles
      of Association—Audit and Annual Report.” In accordance with the government of
      India’s practice with respect to government of India companies, auditors have
      generally not been permitted to serve as our branch or statutory auditors for
      more than three consecutive years.  In addition, the Comptroller and
      Auditor General conducts an independent review of our financial statements
      that
      are audited by the statutory and branch auditors.  The annual report
      submitted to the Parliament includes a copy of our audit report and any comments
      upon or supplements to the audit report made by the Comptroller and Auditor
      General.




**The
      Government of India as Customer**




The
      government of India purchases our services on a commercial basis, and government
      entities, in the aggregate, constitute the single largest user of our
      services.  The DOT sets the tariffs for these services, which are the
      same as our tariffs to our other customers.  However, certain limited
      categories of high-level government of India officials may not have their
      telephone connections disconnected for non-payment of bills.




**Our
      Financing of the Department of Telecommunications**




As
      a
      department of the government of India, the DOT cannot raise funds through
      external borrowings from non-government of India entities, and has historically
      depended on us to raise funds on its behalf for use in its telecommunications
      business.  By restructuring us as a corporation, the DOT was able to
      create a company, which could raise debt in the capital markets to be used
      to
      fund its telecommunications operations.  The Indian government
      guaranteed these borrowings and we on-lent the proceeds of the borrowings on
      terms substantially similar to the terms of the original loan.  As a
      result of the corporatization of the Department of Telecom Services into BSNL
      in
      October 2000, we no longer borrow funds on behalf of the
      DOT.  All external borrowings that had made on behalf of the DOT/BSNL
      have been repaid by us.




**Related
      Party Transactions**




In
      addition to the transactions and circumstances described above in this Item
      7,
      we enter into numerous business relationships with entities that have varying
      degrees of government control, as well as with the government itself and
      subdivisions of the government.  For example, as discussed elsewhere
      in this report, our principal interconnect arrangements are with
      BSNL.  For more information on our relationships and transactions with
      the government of India and its subdivisions and entities controlled by the
      government, see [Note 4 and Note 19] to our consolidated financial statements,
      which appear elsewhere in this report.




**Item
      8. Financial
      Information**




**CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL
      INFORMATION**




See
“Item
      18.  Financial Statements” and pages F-1 through F-33.




**SIGNIFICANT
      CHANGES**




**Recent
      Developments**




Dividends.  Under Indian law, a company pays dividends upon a
      recommendation by its board of directors and approval of a majority of the
      shareholders at the annual general meeting of shareholders held within six
      months of the end of each fiscal year.  Shareholders have the right to
      decrease but not increase the dividend amount recommended by the board of
      directors.  Dividends may be paid out of company profits for the
      fiscal year in which the
      dividend is declared after transfer to the reserves of a percentage of our
      profits for that year of not less than 2.5%.  The Companies Act
      further provides that, in the event of inadequacy or absence of profits in
      any
      year, a dividend may be declared for that year out of our accumulated profits,
      subject to certain limitations.




In
        February 2007, our board of directors recommended the payment of interim
        divided
        of Rs. 3.00 per share, amounting to a total of Rs. 1890 million to record
        holders of equity shares in February 2007.




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In
      July
      2007, our board of directors recommended the payment of a dividend of Rs.4.0
      per
      share, amounting to a total of Rs.2520 million, including interim dividend
      of  Rs. 3/- per share, to record holders of equity shares on September
      19, 2007.  This dividend is to be approved by our shareholders at our
      annual general meeting to be held on September 28, 2007.  We must pay
      a “dividend distribution tax” at the rate of 12.50% (plus a surcharge of 10% and
      an add-on tax at the rate of 2% of the interim dividend) and dividend
      distribution tax on final dividend of Rs.1.00 per share at the rate of 15%
      (plus
      a surcharge of 10% and an add-on tax at the rate of 3%).  Currently,
      there is no Indian tax payable by shareholders in respect of dividends
      received.




For
      a
      description of the tax consequences of dividends paid to our shareholders,
      see
“Additional Information—Taxation—Indian Taxation—Taxation of
      Distributions.”




**Item
      9. The Offer and
      Listing**




**MARKET
      PRICE INFORMATION**




**Equity
      Shares**




Our
      outstanding equity shares are listed on several Indian stock exchanges and
      were
      first quoted on The Stock Exchange, Mumbai on May 13, 1993.  Our
      equity shares are also traded on the National Stock Exchange in
      India.  The following table sets forth the high and low closing prices
      and average daily trading volume on The Stock Exchange, Mumbai for our equity
      shares for the periods indicated:


**Share
                  price**
                **(Rs.)****Calendar
                  period**
              **High**
              **Low**
              **Average
                  daily trading volume**2004First
                  Quarter
              157.15
              121.25
              1,426,035Second
                  Quarter
              166.45
              92.90
              23,242,184Third
                  Quarter
              142.00
              117.80
              15,787,985Fourth
                  Quarter
              165.10
              120.00
              11,633,5062005First
                  Quarter
              170.05
              110.25
              13,424,191Second
                  Quarter
              127.00
              110.00
              5,379,978Third
                  Quarter
              142.40
              116.20
              9,053,279Fourth
                  Quarter
              150.35
              108.00
              7,890,6092006First
                  Quarter
              221.80
              165.50
              1,576,895Second
                  Quarter
              157.00
              157.50
              475,677Third
                  Quarter
              157.50
              144.85
              456,811Fourth
                  Quarter
              167.70
              152.00
              609,8102007April
                  2007
              168.00
              141.90
              15,950,119May
                  2007
              159.00
              145.55
              11,661,918June
                  2007
              169.40
              148.60
              14,733,267July
                  2007
              171.00
              147.60
              11,273,564August
                  2007
              149.65
              129.00
              8,020,192





On
      September 21, 2007, the closing price of our equity shares on The Bombay Stock
      Exchange was Rs.155.65.




Our
        global depositary receipts were listed on the London Stock Exchange and quoted
        on SEAQ International until we terminated our global depositary receipt program
        following the completion of our exchange offer in which we exchanged global
        depositary receipts of tendering holders for New York Stock Exchange-listed
        American Depositary Shares, or ADSs.  The commencement of our ADS
        program and the termination of our global depositary receipt program both
        occurred in the fourth quarter of calendar year 2001.




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The
      table
      below shows the high and low closing prices on the New York Stock Exchange
      for
      our ADSs for the period indicated.




**ADS
                price****Calendar
                period**
            **High
                US$**
            **Low
                US$**2003
            
            6.25
            
            3.332004
            
            9.27
            
            5.402005
            
            8.44
            
            5.412006First
                Quarter
            
            8.80
            
            6.65Second
                Quarter
            
            9.75
            
            8.04Third
                Quarter
            
            6.97
            
            5.61Fourth
                Quarter
            
            7.18
            
            5.702007January
            
            7.80
            
            7.52February
            
            7.62
            
            5.90March
            
            6.80
            
            5.65April
            
            7.75
            
            6.38May
            
            7.71
            
            7.03June
            
            8.21
            
            7.45July
            
            8.29
            
            7.10August
            
            7.61
            
            5.90September
                (through September 21, 2007)
            
            7.80
            
            7.06




On
      September 21, 2007, the closing price of our ADSs on the New York Stock Exchange
      was US$ 7.85 per ADS.  Our NYSE symbol is MTE.




**THE
      INDIANSECURITIES MARKET**




*The
      information in this section has been extracted from publicly available documents
      from various sources, including officially prepared materials from the
      Securities and Exchange Board of India, The Bombay Stock Exchange, and the
      National Stock Exchange, and has not been prepared or independently verified
      by
      us or any of our affiliates or advisers.*




**The
      Indian Securities Market**




India
      has
      a long history of organized securities trading.  In 1875, the first
      stock exchange was established in Mumbai.




**The
      Securities and Exchange Board of India**




India’s
      stock exchanges are regulated by the Securities and Exchange Board of India
      under the Securities and Exchange Board of India Act, 1992, the Securities
      Contracts (Regulation) Act, 1956, and the Securities Contracts (Regulation)
      Rules, 1957.  The Securities Contracts (Regulation) Rules regulate the
      recognition of stock exchanges, the qualifications for membership and the manner
      in which contracts are entered into and enforced between members.




The
      main
      objective of the Securities and Exchange Board of India, which was established
      by the government of India in February 1992, is to promote the development
      of
      and regulate the Indian securities markets and protect the interests of
      investors.  The Securities and Exchange Board of India may make or
      amend an exchange’s by-laws and rules, overrule an exchange’s governing body and
      withdraw recognition of an exchange.  In the
      past,
      the Securities and Exchange Board of India’s regulation of market practices was
      limited.  The Securities and Exchange Board of India Act, 1992 granted
      the Securities and Exchange Board of India powers to regulate the business
      of
      Indian securities markets, including stock exchanges and other financial
      intermediaries, promote and monitor self-regulatory organizations, prohibit
      fraudulent and unfair trade practices and insider trading, and regulate
      substantial acquisitions of shares and takeovers of companies.  The
      Securities and Exchange Board of India has also issued:




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·
            guidelines
                concerning minimum disclosure requirements by public
                companies;




·
            rules
                and regulations concerning:




·
            investor
                protection, insider trading, substantial acquisitions of shares and
                takeovers of companies, buybacks of securities, employee stock option
                schemes, foreign capital market issues, derivative instruments and
                sweat
                equity; and




·
            debenture
                trustees, depositaries, development financial institutions, venture
                capital funds, foreign institutional investors, stockbrokers,
                underwriters, merchant bankers, portfolio managers, mutual funds,
                credit
                rating agencies and other capital market participants;
                and




·
            rules
                and regulations regarding the prohibition of fraudulent and unfair
                trade
                practices relating to the securities
                market.




The
      Securities Contracts (Regulation) Act has been amended to include derivatives
      of
      securities and instruments of collective investment in the definition of
“securities.” This has been done with a view to develop and regulate the markets
      for derivatives.  Trading in index-linked futures currently takes
      place on the National Stock Exchange and The Stock Exchange,
      Mumbai.  Trading in individual stock futures that have been notified
      by Securities and Exchange Board of India is now permitted.  The
      Securities and Exchange Board of India also set up a committee for the review
      of
      Indian securities laws, which has proposed a draft Securities
      Bill.  The draft Securities Bill, if accepted, will result in a
      substantial revision in the laws relating to securities in India.




**Public
      Company Regulation**




Under
      the
      Companies Act, a public offering of securities in India must generally be made
      by means of a prospectus, which must contain information specified in the
      Companies Act and be filed with the Registrar of Companies having jurisdiction
      over the place where a company’s registered office is situated.  A
      company’s directors and promoters may be subject to civil and criminal liability
      for misstatements in a prospectus.  The Companies Act also sets forth
      procedures for the acceptance of subscriptions and the allotment of securities
      among subscribers and establishes maximum commission rates for the sale of
      securities.




The
      Securities and Exchange Board of India has issued detailed guidelines concerning
      disclosures by public companies and investor protection.  Prior to the
      repeal of certain rules in mid-1992, the Controller of Capital Issues of the
      government of India regulated the prices at which companies could issue
      securities.  The Securities and Exchange Board of India guidelines now
      permit existing listed companies to price freely their issues of securities,
      though the pricing of initial public offerings is subject to certain
      restrictions.  All new issues governed by the Securities and Exchange
      Board of India guidelines are conditional upon a minimum subscription
      requirement of 90.0% of the securities being issued.  Promoters of
      companies are required to retain a certain minimum certified holding of equity
      share capital, which is subject to a lock-in for three
      years.  Further, existing shareholders of the company, who are not
      promoters, are subject to a lock-in of one year from the date of the initial
      public offering.  No issuance of bonus shares is permitted within 12
      months of any public issue or rights issue.




Public
      limited companies are required under the Companies Act to prepare, file with
      the
      Registrar of Companies and circulate to their shareholders audited annual
      accounts, which comply with the Companies Act’s disclosure requirements and
      regulations governing their manner of presentation.  In addition, a
      listed company is subject to continuing disclosure requirements pursuant to
      the
      terms of its listing agreement with the relevant stock
      exchange.  Listed companies are now required to publish quarterly
      unaudited financial results that are reviewed by an
      outside auditor in accordance with a prescribed standard for non-audit
      reviews.  The Securities and Exchange Board of India has recently
      notified amendments to the listing agreement tightening the continual disclosure
      standards by corporations and corporate governance measures to be adopted by
      listed companies.




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**Listing**




The
      listing of securities on a recognized Indian stock exchange is regulated by
      the
      Securities Contract Rules.




Under
      the
      standard terms of stock exchange listing agreements, the governing body of
      each
      stock exchange is empowered to suspend trading of or dealing in a listed
      security for breach of the company’s obligations under such agreement, subject
      to the company receiving prior notice of the intent of the
      exchange.  In the event that a suspension of a company’s securities
      continues for a period in excess of three months, the company may appeal to
      the
      Securities and Exchange Board of India to set aside the
      suspension.  The Securities and Exchange Board of India has the power
      to veto stock exchange decisions in this regard.




The
      Securities and Exchange Board of India has issued the Securities and Exchange
      Board of India (Delisting of Securities) Guidelines, 2003, which sets forth
      the
      procedure for delisting of securities in the following
      circumstances:




·
            voluntary
                delisting sought by the promoters of a
                company;




·
            any
                acquisition of shares of the company or a scheme or arrangement,
                by
                whatever name referred to, consequent to which the public shareholding
                falls below the minimum limit specified in the listing conditions
                or
                listing agreement that may result in delisting of
                securities;




·
            promoters
                of the company who voluntary seek to delist their securities from
                all or
                some of the stock exchanges;




·
            cases
                where a person in control of management is seeking to consolidate
                his
                holdings in a company, in a manner which would result in the public
                shareholding in the company falling below the limit specified in
                the
                listing conditions or in a listing agreement that may have the effect
                of
                the company being delisted; and




·
            compulsory
                delisting by stock exchanges (e.g., upon failure by a company to
                pay
                required listing fees).




**Indian
      Stock Exchanges**




There
      are
      24 stock exchanges in India.  Most of the stock exchanges have their
      own governing board for self-regulation.




It
      is
      estimated that the two major exchanges, The Bombay Stock Exchange and the
      National Stock Exchange, account for more than 90.0% of the market
      capitalization of listed Indian companies.  The Bombay Stock Exchange
      and the National Stock Exchange account for a majority of trading volumes
      of securities in India.  The Bombay Stock Exchange and National Stock
      Exchange together hold a dominant position among the stock exchanges in terms
      of
      number of listed companies, market capitalization and trading
      activity.




There
      are
      generally no restrictions on price movements of any security on any given
      day.  However, to restrict abnormal price volatility, the Securities
      and Exchange Board of India has instructed stock exchanges to apply daily
      circuit breakers, which do not allow transactions at prices different by more
      than 8.0% of the previous closing price for shares quoted at Rs.20 or
      more.  The Securities and Exchange Board of India has instructed stock
      exchanges to relax the circuit breakers by a further 8.0% after half an
      hour from the time prices reach the limit of 8.0%.  It has allowed
      stock exchanges to fix circuit breakers for shares quoted at prices up to
      Rs.20.  There is no circuit filter applicable for trading in shares on
      rolling settlement and for which derivative instruments are
      available.  There is, however, a dummy circuit filter applicable in
      case of a 20% movement on share prices in order to prevent accidental
      trades.  There is a 20% circuit filter applicable for trading in
      shares on rolling settlement and for which derivative instruments are not
      available.  There is also an index based circuit filter based on the
      BSE SENSEX and NSE S&P CNX Fifty indices wherein trading in the entire
      market is halted for a specific period depending upon whether the index
      fluctuates in excess of 10%, 15% or 20%.  Further, margin requirements
      are also imposed by




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stock
      exchanges that are required to be paid at rates fixed by the stock
      exchanges.  The Indian stock exchanges can also exercise the power to
      suspend trading during periods of market volatility.




A
      settlement cycle is an account period for the securities traded on a stock
      exchange.  At the end of the period, obligations are settled, i.e.,
      buyers of securities pay for and receive securities while sellers give
      securities and receive payment for them.  The obligations are settled
      on a net basis, i.e., if some security is both purchased and sold in the same
      settlement cycle then only the net quantity of securities is delivered or
      received and the net amount of funds paid or received.  Typically, the
      length of the settlement period is two business days.  The Securities
      and Exchange Board of India has specified certain shares to be settled by
      rolling settlement.  Under rolling settlement, the length of the
      settlement period is one day.  All stocks trading under the rolling
      settlement system are settled on a T+2-day basis; trades executed on a Monday
      are typically settled on the following Monday.  Stocks that are not
      under the rolling settlement system follow the account period settlement
      system.




In
      December 1993, the Securities and Exchange Board of India announced a ban on
      forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and The
      Stock Exchange, Mumbai in order to contain excessive speculation, protect the
      interests of investors and regulate the stock market.  All
      transactions thereafter were required to be for payment and
      delivery.




In
      October 1995, the Securities and Exchange Board of India announced the
      introduction of a modified forward trading system to enable buyers and sellers
      to defer the settlement of their obligations to the following settlement
      cycle.  This system began on The Stock Exchange, Mumbai in January
      1996 for select shares.  The new system segregates trades into
      different categories, namely, carry-forward, delivery and jobbing, with
      different identification numbers of the various trades.  The
      Securities and Exchange Board of India has appointed a committee to recommend
      modalities for a carry forward mechanism under the rolling
      settlement.  Once the revised carry forward mechanism is
      approved, rolling settlement will be applicable also for shares in the carry
      forward list.




In
      May
      2001, the Securities and Exchange Board of India announced that all shares
      included in the new system will trade only in the compulsory rolling settlement
      system from July 2, 2001.  All outstanding deferred positions under
      the earlier system would have to be compulsorily liquidated by September 3,
      2001.




In
      1992,
      the Securities and Exchange Board of India promulgated rules and regulations
      that prescribe conditions for registration of stockbrokers.  A
      stockbroker may not buy, sell or deal in securities except pursuant to a
      certificate granted by the Securities and Exchange Board of
      India.  The regulations also prescribe a broker code of conduct and
      rules for the fair treatment of investors by brokers, the procedures for
      registration, the payment of registration fees, maintenance of appropriate
      books
      and records and the right of inspection of the books of the stockbrokers by
      the
      Securities and Exchange Board of India.  Broker liability in cases of
      default extends to suspension or cancellation of the broker’s
      registration.  The Securities and Exchange Board of India has issued
      registration certificates to over 9,000 stockbrokers who are members of
      various stock exchanges in India.  Before these regulations,
      stockbrokers were required to be registered only with the stock exchanges of
      which they were members.  The Securities and Exchange Board of India
      regulations introduced the concept of dual registration of stockbrokers with
      the
      Securities and Exchange Board of India and the stock exchanges, and brought
      the
      brokers under regulation for the first time.




The
      Securities and Exchange Board of India has enforcement powers over secondary
      market participants for violation of any provisions of the Securities and
      Exchange Board of India Act, 1992, the rules and regulations of the Securities
      and Exchange Board of India, the Securities Contracts (Regulation) Act, 1956,
      or
      the rules and regulations made thereunder.  The Securities and
      Exchange Board of India may also take enforcement actions for violations of
      the
      Securities Contract Act or rules made thereunder and rules, regulations and
      by-laws of the stock exchanges.




The
        Securities and Exchange Board of India has also announced SEBI Regularization
        Scheme, 2002, under which parties who are guilty of violating the SEBI
        (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, will
        be
        granted general amnesty on the payment of a fine for each default during
        the
        prescribed period of time.




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**Internet-Based
      Securities Trading and Services**




The
      Securities and Exchange Board of India has recently allowed Internet-based
      securities trading under the existing legal framework.  The
      regulations seek to allow the Internet to be used as an order routing system
      through stock brokers registered with the Securities and Exchange Board of
      India
      on behalf of clients for executing trades on a recognized stock exchange in
      India.  Stock brokers interested in providing this service are
      required to apply for permission to the respective stock exchange and also
      have
      to comply with certain minimum conditions stipulated by the Securities and
      Exchange Board of India.  Given the limited life of these new
      regulations to date, it is possible that these regulations will continue to
      evolve in the future.




**Takeover
      Code**




Disclosure
      and mandatory bid obligations under Indian law are governed by the Securities
      and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
      Regulations, 1997 (Takeover Code) which prescribes certain thresholds or trigger
      points that give rise to these obligations.  The Takeover Code is
      under constant review by the Securities and Exchange Board of India and was
      most
      recently amended in December 2002.




The
      most
      important features of the Takeover Code, as amended, are as
      follows:




·
            Any
                acquirer (meaning a person who, directly or indirectly, acquires
                or agrees
                to acquire shares or voting rights in a company, either by himself
                or with
                any person acting in concert) who acquires shares or voting rights
                that
                would entitle him to more than 5.0% of the shares or voting rights
                in a
                company is required to disclose the aggregate of his shareholding
                or
                voting rights in that company to the company (which in turn is required
                to
                disclose the same to each of the stock exchanges on which the company’s
                shares are listed) within two working days of (a) the receipt of
                allotment
                information; or (b) the acquisition of shares or voting rights, as
                the
                case may be.




·
            A
                person has to make a three-stage disclosure when he acquires 5%,
                10% and
                14% of the shares and/or voting rights in a company, of his holdings
                to
                that company (which in turn is required to disclose the same to each
                of
                the stock exchanges on which the company’s shares are
                listed).




·
            Promoters
                or persons in control of a company are also required to make annual
                disclosure of their holdings in the same
                manner.




·
            An
                acquirer cannot acquire shares or voting rights which (taken together
                with
                existing shares or voting rights, if any, held by him or by persons
                acting
                in concert with him) would entitle such acquirer to exercise 15.0%
                or more
                of the voting rights in a company, unless such acquirer makes a public
                announcement offering to acquire a further 20.0% of the shares of
                the
                company.




·
            An
                acquirer who, together with persons acting in concert with him, holds
                between 15.0% and 75.0% of the shares cannot acquire additional shares
                or
                voting rights that would entitle him to exercise a further 5.0% of
                the
                voting rights in the period of a financial year unless such acquirer
                makes
                a public announcement offering to acquire a further 20.0% of the
                shares of
                the company.




·
            Any
                further acquisition of shares or voting rights by an acquirer who
                holds
                75.0% of the shares or voting rights in a company triggers the same
                public
                announcement requirements.




·
            In
                addition, regardless of whether there has been any acquisition of
                shares
                or voting rights in a company, an acquirer acting in concert cannot
                directly or indirectly acquire control over a company (for example,
                by way
                of acquiring the right to appoint a majority of the directors or
                to
                control the management or the policy decisions of the company) unless
                such
                acquirer makes a public announcement offering to acquire a minimum
                of
                20.0% of the shares of the company




The
        Takeover Code sets out the contents of the required public announcements
        as well
        as the minimum offer price.




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The
      Takeover Code permits conditional offers and provides specific guidelines for
      the gradual acquisition of shares or voting rights.  Specific
      obligations of the acquirer and the board of directors of the target company
      in
      the offer process have also been set out.  Acquirers making a public
      offer are also required to deposit in an escrow account a percentage of the
      total consideration which amount will be forfeited in the event that the
      acquirer does not fulfill his obligations.  In addition, the Takeover
      Code introduces the “chain principle” by which the acquisition of a company will
      obligate the acquirer to make a public offer to the shareholders of each
      subsidiary company which is listed.




The
      general requirements to make such a public announcement do not, however, apply
      entirely to bailout takeovers when a promoter (i.e., a person or persons in
      control of the company, persons named in any offer document as promoters and
      certain specified corporate bodies and individuals) is taking over a financially
      weak company but not a “sick industrial company” pursuant to a rehabilitation
      scheme approved by a public financial institution or a scheduled
      bank.  A “financially weak company” is a company which has at the end
      of the previous financial year accumulated losses, which have resulted in
      erosion of more than 50.0% but less than 100.0% of the total sum of its paid
      up
      capital and free reserves at the end of the previous financial
      year.  A “sick industrial company” is a company registered for more
      than five years which has at the end of any financial year accumulated losses
      equal to or exceeding its entire net worth.




The
      Takeover Code does not apply to certain specified acquisitions including the
      acquisition of shares (1) by allotment in a public and rights issue, (2)
      pursuant to an underwriting agreement, (3) by registered stockbrokers in the
      ordinary course of business on behalf of clients, (4) in unlisted companies,
      (5)
      pursuant to a scheme of reconstruction or amalgamation or (6) pursuant to a
      scheme under Section 18 of the Sick Industrial Companies (Special Provisions)
      Act, 1985.  Certain exemptions have also been provided for acquisition
      of shares pursuant to exercise of a put option or call option in the subsequent
      stage of a disinvestment, subject to the prior existence of such put option
      or
      call option having been disclosed in the open offer document.  The
      Takeover Code does not apply to acquisitions in the ordinary course of business
      by public financial institutions either on their own account or as a
      pledge.  In addition, the Takeover Code does not apply to the
      acquisition of ADSs so long as they are not converted into equity
      shares.




In
      case
      of creeping acquisitions/consolidations of holdings, the ceiling has been
      reduced from 10% to 5% of equity shareholding of the target company with effect
      from October 1, 2002.  No exemptions are available to *inter se*transfers among promoters, in the event that the transfers take place
      at
      25% premium to the market price of equity shares of the
      company.  Change in control is, however, allowed in the event a
      special resolution is passed (in addition to the filing of the postal
      ballots).




**Insider
      Trading**




The
      Securities and Exchange Board of India has recently adopted the new Insider
      Trading Regulations which require significantly greater disclosure by the
      company with regard to the trading of the company’s shares.




Under
      the
      Insider Trading Regulations, an insider is as a person who is or was connected
      with the company or is deemed to have been connected with the company, and
      who
      is reasonably expected to have access, by virtue of such connection, to
      unpublished price sensitive information in respect of securities of the company,
      or who has received or has had access to such unpublished price sensitive
      information.




Further,
      under the Regulations, no insider may, either on his own behalf or on behalf
      of
      any other person, deal in securities of a company listed on a stock exchange
      on
      the basis of any unpublished price sensitive information, or communicate any
      unpublished price sensitive information to any person, with or without his
      request for
      such
      information, except as required in the ordinary course of business or under
      any
      law, or counsel or procure any other person to deal in securities of any company
      on the basis of unpublished price sensitive information.




In
        accordance with Regulations, the company has promulgated an internal code
        of
        conduct which is applicable to the directors and designated employees of
        the
        company for dealings in shares of the company by the directors and designated
        employees of the company, and with regard to access to unpublished price
        sensitive information that the directors or the designated employees might
        have.  The Regulations also require the company to follow strict
        information disclosure requirements on a need to know basis.




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**Depositories**




In
      August
      1996, the Indian Parliament enacted the Depositaries Act, 1996 which provides
      a
      legal framework for the establishment of depositaries to record ownership
      details and effectuate transfers in book entry form.  The Securities
      and Exchange Board of India passed the Securities and Exchange Board of India
      (Depositories and Participants) Regulations, 1996 which provides for the
      formation of such depositaries, the registration of participants as well as
      the
      rights and obligations of the depositaries, participants and the
      issuers.  Every depositary has to register with the Securities and
      Exchange Board of India.  Pursuant to the Depositories Act, the
      National Securities Depository Limited was established by the Unit Trust of
      India, the Industrial Development Bank of India and the National Stock Exchange
      in 1996 to provide electronic depositary facilities for trading in equity and
      debt securities.  The National Securities Depository Limited, which
      commenced operations in November 1996, was the first depositary in
      India.  Another depositary, the Central Depository Services (India)
      Limited, established by The Stock Exchange, Mumbai has commenced operations
      since July 15, 1999.  The depositary system has significantly improved
      the operations of the Indian securities markets.




**Item
      10. Additional
      Information**




**MEMORANDUM
      AND ARTICLES OF ASSOCIATION**




Set
      forth
      below is certain information relating to our share capital, including certain
      provisions of our articles of association and the Companies Act.  The
      information is not complete and is qualified in its entirety by reference to
      our
      articles of association.




**General**




Our
      authorized share capital is Rs.8,000,000,000, divided into 800,000,000 equity
      shares with a par value of Rs.10 each.  At the date of this report,
      630,000,000 shares were issued and fully paid.




Our
      equity shares are in registered form.  The shares are the only class
      of share capital currently outstanding.  There are no convertible
      debentures or warrants currently in existence.




**Dividends**




Our
      shareholders, acting at the annual general meeting, may declare a dividend
      upon
      the recommendation of the board of directors.  The amount of the
      dividend declared may not exceed the amount recommended by the board of
      directors, although a lesser amount may be declared.  Dividends are
      distributed and paid within 30 days of the declaration by the
      shareholders.  Our board of directors also is authorized under our
      articles of association to declare and pay interim dividends to
      shareholders.




If
      any
      dividend remains unclaimed at the end of 30 days, the amount of the dividend
      will be transferred to a separate account belonging to us.  If it
      still remains unclaimed at the end of seven years, this amount will be
      transferred to government of India and cannot be claimed by the relevant
      shareholder.  Dividends are payable only in cash to registered holders
      on a record date fixed prior to the relevant annual general
      meeting.




Dividends
      may be paid only out of our profits for the relevant year, after transfer to
      our
      reserves of a percentage of our profits for that year of not less than
      2.5%.  The Companies Act further provides that, in the
      event of
      inadequacy or absence of profits in any year, a dividend may be declared for
      that year out of our accumulated profits, subject to certain
      limitations.  A dividend tax of approximately 14.025% (inclusive of
      Education surcharge) of distributed profit for a relevant period is payable
      by
      us.  As of April 1, 2007, the dividend tax was increased to
      16.955%.  The
          following table sets forth, for the periods indicated, the dividend per
          equity
          share and per global depositary receipt and the total amount of dividends
          paid
          on the equity shares, both exclusive of dividend tax.




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**For
                fiscal year**
            **Dividend
                per**
              **equity
                share**
            **Dividend
                per**
              **ADS/GDR**
            **Total
                amount of**
              **dividends
                paid****(Rs.)**
            (Rs.)
            (millions
                of Rupees)2007
            4.0
            8.0
            2,5202006
            4.0
            8.0
            2,5202005
            4.5
            9.0
            2,8352004
            4.5
            9.0
            2,8352003
            4.5
            9.0
            2,835




The
      Ministry of Finance has adopted non-binding guidelines regarding the payment
      of
      dividends by “public sector undertakings (PSUs) “ which apply to
      us.  According to the guidelines, profit-making public sector
      undertakings which are commercial enterprises should generally declare a minimum
      dividend each fiscal year of 20% of the higher of paid-up share capital as
      of
      year-end or profit after tax for the year.  In the case of
      telecommunications, oil, petroleum, chemical and other infrastructure
      industries, profit making PSUs should declare a minimum dividend for each fiscal
      year of 30% of profit after tax for the year or 30% on equity, whichever is
      higher.




Future
      dividends will depend upon our revenues, cash flow, financial condition and
      other factors.  As an owner of ADSs, holders will be entitled to
      receive dividends payable in respect of the equity shares represented by our
      ADSs.  The equity shares represented by our ADSs rank equally with
      our existing shares.  At present, we have equity shares issued in
      India.




**Free
      Distribution of Equity Shares**




In
      addition to permitting dividends to be paid out of current or retained earnings,
      the Companies Act permits us to distribute bonus shares to
      shareholders.  Upon any distribution of bonus shares, an amount equal
      to the face value of the bonus shares to be distributed is transferred from
      the
      general reserve or share premium account to share capital.  The bonus
      shares must be distributed to shareholders in proportion to the number of equity
      shares owned by them.




**Preemptive
      Rights and Issue of Additional Shares**




Subject
      to the approval of the President of India, we may by ordinary resolution
      increase our share capital by the issue of new shares or create a new class
      of
      shares.  In addition, the rights attached to the shares of any class
      may be varied with the consent of not less than three-fourths of the issued
      shares of that class.  The Companies Act gives shareholders the right
      to subscribe for new shares in proportion to their existing shareholdings unless
      otherwise determined by a special resolution to that effect adopted at a general
      meeting of shareholders.  Such a resolution was adopted with respect
      to the equity shares offered by us in the global depositary receipt offering
      at
      an extraordinary general meeting held on November 19, 1997.  We must
      offer shares to existing shareholders by notice specifying the number of shares
      offered and the date, within 30 days from the date of offer, by which the offer
      must be accepted.  The board of directors is entitled to distribute
      the shares in respect of which preemptive rights have not been exercised in
      the
      manner that it deems most beneficial to us.




**General
      Meetings of Shareholders**




We
      are
      required to convene an annual general meeting of our shareholders within six
      months after the end of each financial year (subject to extensions which may
      be
      granted by the competent authorities) and may convene an
      extraordinary general meeting of shareholders when necessary or at the request
      of a shareholder or shareholders holding not less than 10% of our paid-up
      capital on the date of the request.  The annual general meeting of the
      shareholders is generally convened by the Company Secretary in accordance with
      a
      resolution of the board of directors.  Written notice setting out the
      agenda of the meeting must be given at least 21 days (excluding the day of
      service) prior to the date of the general meeting to the shareholders whose
      names are on the register at the record date.  Those shareholders who
      are registered as shareholders on the date of the general meeting are entitled
      to attend or vote at such meeting.




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The
      annual general meeting of shareholders must be held at our registered office
      or
      at such other place within the city in which the registered office is located;
      meetings other than the annual general meeting may be held at any other place
      determined by the board of directors.




Our
      articles of association provide that a quorum for a general meeting is the
      presence of at least five shareholders, including a representative of the
      President of India.




This
      year’s annual general meeting is scheduled for September 28, 2007.




**Voting
      Rights**




At
      any
      general meeting, voting is by show of hands (where each shareholder has one
      vote) unless a poll is demanded by at least 10% of those entitled to vote on
      the
      resolution or those holding shares with a paid-up value of at least
      Rs.50,000.  Upon a poll, every shareholder entitled to vote and
      present in person or by proxy has one vote for every share held by the
      shareholder.  The Chairman has a deciding vote in the case of any
      tie.  Our articles of association do not allow shareholders to
      cumulate their votes.




Any
      shareholder may appoint a proxy.  The instrument appointing a proxy
      must be lodged with us at least 48 hours before the time of the
      meeting.  A corporate shareholder may appoint an authorized
      representative who may vote in all respects as if a shareholder, both on a
      show
      of hands and upon a poll.




Ordinary
      resolutions may be passed by simple majority of those present and voting at
      any
      general meeting for which the required period of notice has been
      given.  However, certain resolutions such as those relating to the
      alteration of our articles of association, the commencement of a new line of
      business, the issue of further shares without preemptive rights and a reduction
      of share capital require a three-fourth majority of the votes cast in favor
      of
      the resolution (whether by show of hands or upon a poll).  The
      Companies Act has been amended to require that certain shareholder resolutions
      only be passed through postal ballot.




**Register
      of Shareholders, Record Dates and Transfer of Shares**




Our
      share
      transfer agents maintain registers of our shareholders and beneficial owners
      of
      shares held through depositaries.  For the purpose of determining
      equity shares entitled to annual dividends, the register is closed for a
      specified period prior to the annual general meeting.  The Companies
      Act and our listing agreement with The Stock Exchange, Mumbai (and the other
      Indian Stock Exchanges) permit us, according to a resolution of the Board and
      upon at least 15 days’ advance notice to The Stock Exchange, Mumbai (and such
      other stock exchanges), to set the record date and upon seven days’ public
      notice to close the register of shareholders for not more than 30 days at a
      time, and not more than 45 days in a year, in order for us to determine which
      shareholders are entitled to certain rights relating to the
      shares.  Trading of shares may, however, continue while the register
      of shareholders is closed.




Following
      introduction of the Depositories Act, 1996, and the repeal of Section 22A of the
      Securities Contracts (Regulation) Act, 1956, which enabled companies to refuse
      to register transfers of shares in certain circumstances, the shares of a
      company are freely transferable, subject only to the provisions of Section
      111A
      of the Companies Act.  Pursuant to Section 111A, if the transfer of
      shares is in contravention of any of the provisions of the Securities and
      Exchange Board of India Act, 1992 or the regulations issued thereunder or the
      Sick Industrial Companies (Special Provisions) Act, 1985, the Company Law Board
      (a statutory body which administers the Companies Act) may, on application
      made
      by an investor, the Securities and Exchange Board of India or certain other
      parties, direct the rectification of the register of members.  The
      Company Law Board may, in its discretion, issue an interim order suspending
      the
      voting rights attached to the relevant shares, before making or completing
      its inquiry into the alleged contravention.  Pending the inquiry, the
      rights of a holder to transfer the shares would not be restricted, although
      the
      voting rights attached to the shares may remain suspended by an order of the
      Company Law Board.




The
      Indian Companies Act, 1956, has been recently
      amended to provide for the constitution of a National Company Law Tribunal
      and
      dissolution of the Company Law Board.  The National Company Law
      Tribunal shall




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exercise
      all powers that had been conferred on the Company Law Board or the High Courts
      by the Indian Companies Act, 1956.  This amendment has not yet been
      brought into force.




Shares
      held through depositories are transferred in the form of book entries or in
      electronic form in accordance with the rules and procedures laid down by
      Securities and Exchange Board of India.  These regulations provide the
      regime for the functioning of the depositaries and the participants and set
      out
      the manner in which the records are to be kept and maintained and the safeguards
      to be followed in this system.  Transfers of beneficial ownership of
      shares held through a depositary are exempt from stamp duty.




The
      Securities and Exchange Board of India has notified our equity shares for
      trading and settlement only in book-entry form for all investors, except for
      transactions made outside and which are not required to be reported to the
      stock
      exchange.  Transfers of equity shares in book-entry form require both
      the seller and the purchaser of the equity shares to establish accounts with
      depositary participants appointed by depositaries established under the
      Depositaries Act, 1996.  Charges for opening an account with a
      depositary participant, transaction charges for each trade and custodian charges
      for securities held in each account vary depending upon the practice of each
      depositary participant.  Upon delivery, the equity shares shall be
      registered in the name of the relevant depositary on our books in book-entry
      form and this depositary shall enter the name of the investor in
      its records as the beneficial owner.  The transfer of beneficial
      ownership shall be effected through the records of the
      depositary.  The beneficial owner shall be entitled to all rights and
      benefits and subject to all liabilities in respect of his securities held by
      a
      depositary.




The
      requirement to hold our equity shares in book-entry form will apply to the
      ADS
      holders when the equity shares are withdrawn from the depositary facility upon
      surrender of the global depositary receipts.  In order to trade our
      equity shares in the Indian market, the withdrawing ADS holder will be required
      to comply with the procedures described above.




We
      have
      entered into a listing agreement with each of the other Indian stock exchanges
      on which the shares are listed.  Clause 40A of the listing agreements
      provides that if an acquisition of a listed company’s equity shares results in
      the acquirer and its associates holding 5% or more of the company’s outstanding
      equity shares, the acquirer must report its holding to the relevant
      stock exchanges.  If an acquisition would result in the acquirer
      and its associates holding equity shares which carry 10% or more of the voting
      rights, then the acquirer must notify the relevant stock
      exchanges.  If an acquisition is deemed a takeover, the acquirer must,
      before acquiring shares, offer (in accordance with Clause 40B of the listing
      agreements) on a uniform basis to all remaining shareholders of the company
      to
      acquire a minimum of a further 20% of the total shares of the company at a
      prescribed price.  The acquisition of shares of a company listed on an
      Indian stock exchange beyond certain threshold amounts is subject to regulations
      governing takeovers of Indian companies.  See “The Offer and
      Listing—The Indian Securities Market—Takeover Code.” Clauses 40A and 40B and
      such regulations will not apply to shares so long as they are represented by
      ADSs.




**Shareholder
      Access to Corporate Records**




Under
      the
      Companies Act, the shareholder register and index, the register and index of
      debenture holders and copies of all annual returns together with copies of
      certificates and documents required to be annexed thereto, must be kept at
      our
      registered office for inspection by any share or debenture holder free of charge
      and by any other person on payment of a fee.  The minute books of the
      general meetings of our shareholders must be kept at our registered office
      and
      be made available for inspection by our shareholders regardless of the size
      of
      their shareholding.




**Disclosure
        of Ownership Interest**
  Section
        187C of the Companies Act generally requires beneficial owners of shares
        of
        Indian companies who are not holders of record to declare to the company
        details
        of the holder of record and holders of record to declare details of the
        beneficial owner.  While it is unclear whether Section 187C applies to
        holders of ADSs of a company, investors who exchange ADSs for shares are
        subject
        to this Section.  Failure to comply with Section 187C would not affect
        the obligation of a company to register a transfer of shares or to pay
        any dividends to the registered holder of any shares in respect of which
        such declaration has not been made, but any person who fails to make the
        required declaration may be liable for a fine of up to Rs.1,000 for each
        day the
        failure continues.  Furthermore, any




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charge,
      promissory note or any other collateral agreement created, executed or entered
      into by the registered owner of any share in respect of which a declaration
      required under Section 187C has not been made is not enforceable by the
      beneficial owner or any person claiming through him.




So
      long
      as the government of India’s shareholding equals or exceeds 51%, Section 187C
      will not apply to holders of our equity securities, including holders of our
      ADSs or equity shares.




**Audit
      and Annual Report**




At
      least
      21 days before the annual general meeting of shareholders, we must circulate
      either a detailed or an abridged version of our audited balance sheet and profit
      and loss account and the related reports of our board of directors and our
      auditors.  We are also required under the Companies Act to make
      available upon request of any shareholder a complete balance sheet and profit
      and loss account in the case of circulation of abridged accounts.




The
      Comptroller and Auditor General of India, has the power to direct the manner
      in
      which our accounts are audited by the auditors appointed pursuant to Section
      619(2) of the Companies Act, to give the auditors instructions in regard to
      any
      matter relating to the performance of their functions and to conduct a
      supplementary or test audit of our accounts by such auditors.  The
      Comptroller and Auditor General also has the right to comment on or supplement
      the audit report to the Comptroller and Auditor General which must be placed
      before our annual general meeting at the same time and in the same manner as
      the
      audit report.




**Powers
      of the President of India**




Under
      Articles 66A and 66B of our articles of association, the President of India
      is
      entitled to appoint one third of our total number of directors including our
      Chairman-cum-Managing Director as well as our whole time
      directors.  Article 69(i) requires the Chairman to reserve for the
      decision of the President of India all proposals, decisions or matters which
      raise in the opinion of the Chairman any important issue and which are, on
      that
      account, fit to be reserved for the decision of the President of
      India.  No decision on these important issues may be taken in the
      absence of the Chairman appointed by the President of India.  Article
      69(ii) lists the matters in respect of which prior approval of the
      President of India must be obtained, which include issuance of debentures and
      the sale, lease or disposal of any land or building with an original book value
      in excess of Rs.1 million.  Under Article 71, we may not take action
      in respect of any proposal or decision of the board of directors reserved for
      approval of the President until his approval is obtained.  The
      President may modify the board of directors’ proposals or
      decisions.




Article
      70 grants the President of India the power to issue directives in regard to
      the
      conduct of our business and affairs, which are binding on our board of
      directors.  These powers include the power to give directives to us as
      to the exercise and performance of our functions in matters involving
      national security or substantial public interest, power to call for
      returns, accounts and other information with respect to our properties and
      activities and to determine in consultation with the board of directors our
      financial and economic objectives.




**Acquisition
      by Us of Our Own Shares**




Until
      1998, the Companies Act did not permit a company to acquire its own equity
      shares because of the resulting reduction in the company’s
      capital.  However, the government of India amended the Companies Act
      to allow a repurchase of shares in certain circumstances.  A buy-back
      requires compliance with specific buy-back guidelines specified in the Companies
      Act and by the Securities and Exchange Board of India.




Holders
        of ADSs will be eligible to participate in a buy-back in certain
        cases.  An ADS holder may acquire shares by withdrawing from the
        depositary facility and then selling those shares back to us.
  There
        can
        be no assurance that the shares offered by an ADS holder in any buy-back
        of
        shares by us will be accepted by us.  Investors are advised to consult
        Indian legal advisers prior to participating in any buyback by us, including
        in
        relation to any tax issues relating to such buy-back.




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**Liquidation
      Rights**




Subject
      to the rights of employees, creditors and of the holders of any other shares
      entitled by their terms to preferential repayment over the shares, in the event
      of our winding up, the holders of our shares are entitled to be repaid the
      amount of capital paid up or credited as paid up on their shares.  All
      surplus assets after payments due to the holders of any preference shares belong
      to the holders of the shares in proportion to the amount paid up or credited
      as
      paid up on such shares, respectively, at the commencement of the winding
      up.




**American
      Depositary Shares**




Our
      ADSs
      were originally issued in an exchange offer during October 2001 in which we
      offered ADSs for our global depositary receipts on a one-for-one
      basis.  Our global depositary receipt program was cancelled and the
      receipts delisted from the London Stock Exchange in December 2001.  At
      the end of October 2001, our ADSs were listed and began trading on the New
      York
      Stock Exchange.  There have been no changes to the depositary
      agreement governing our ADSs since the exchange offer.




**MATERIAL
      CONTRACTS**




Since
      April 1, 2006, we have not entered into any material contracts that were not
      in
      the ordinary course of business.




**INDIAN
      FOREIGN EXCHANGE CONTROLS AND SECURITIES
      REGULATIONS**




**Restrictions
      on Conversion of Rupees**




There
      are
      restrictions on the conversion of rupees into dollars.  Before
      February 29, 1992, the Reserve Bank of India determined the official value
      of
      the rupee in relation to a weighted basket of currencies of India’s major
      trading partners.  In the February 1992 budget, a new dual exchange
      rate mechanism was introduced by allowing conversion of 60.0% of the foreign
      exchange received on trade or current account at a market-determined rate and
      the remaining 40.0% at the official rate.  All importers were,
      however, required to buy foreign exchange at the market rate except for certain
      specified priority imports.  In March 1993, the exchange rate was
      unified and allowed to float.  In February 1994 and again in August
      1994, the Reserve Bank of India announced relaxations in payment restrictions
      in
      the case of a number of transactions.  Since August 1994, the
      government of India has substantially complied with its obligations owed to
      the
      International Monetary Fund, under which India is committed to refrain from
      using exchange restrictions on current international transactions as an
      instrument in managing the balance of payments.  Effective July 1995,
      the process of current account convertibility was advanced by relaxing
      restrictions on foreign exchange for various purposes, such as foreign business
      travel, travel for education, travel for pilgrimage, medical treatment and
      others.




**Restrictions
      on Sale of the Equity Shares Underlying the ADSs and for Repatriation of Sale
      Proceeds**




ADSs
      issued by Indian companies to non-residents have free transferability outside
      India.  However, under Indian regulations and practice, the approval
      of the Reserve Bank of India is required for the sale of equity shares
      underlying the ADSs (other than a sale on a stock exchange or in connection
      with
      an offer made under the takeover regulations) by a non-resident of India to
      a
      resident of India as well as for renunciation of rights to a resident of
      India.  Investors who seek to sell in India any equity shares (other
      than a sale on a stock exchange or in connection with an offer made under the
      takeover regulations) withdrawn from the depositary facility and to convert
      the
      rupee proceedsfrom
      such
      sale into foreign currency and repatriate such foreign currency from India
      will,
      subject to the foregoing, have to obtain Reserve Bank of India approval for
      each
      such transaction.




**Limitations
        on Deposits of Equity Shares into the ADS Program**
  Under
        procedures recently adopted by the Reserve Bank of India, the depositary
        will be
        permitted to accept deposits of our outstanding equity shares and deliver
        ADSs
        representing the deposited equity shares to the extent, and limited to the
        number, of ADSs that have previously been converted into underlying equity
        shares.  Under these




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new
      procedures, if you elect to surrender your ADSs and receive equity shares,
      you
      may be unable to re-deposit those outstanding equity shares with our
      depositary and receive ADSs because the number of new ADSs that can be issued
      cannot, at any time, exceed the number of ADSs converted into underlying equity
      shares or result in foreign equity in us exceeding 49%.




Specifically,
      in February 2002, the Reserve Bank of India issued operative guidelines for
      “limited two-way fungibility.” Under the guidelines, a registered broker in
      India is now permitted to purchase equity shares of an Indian company on behalf
      of persons resident outside India for the purpose of converting the equity
      shares so purchased into ADRs or GDRs, *provided*that (i) the equity
      shares are purchased on a recognized stock exchange, (ii) the Indian company
      has
      issued ADRs or GDRs, (iii) the equity shares are purchased with the permission
      of the custodian of the ADRs or GDRs of the Indian company, and are deposited
      with such custodian, (iv) the number of equity shares so purchased to be
      converted into ADRs or GDRs do not exceed the ADRs or GDRs previously converted
      into underlying equity shares (the number of equity shares available for
      conversion into




ADRs
      or
      GDRs is dependent upon the number of equity shares arrived at after conversion
      of ADRs into equity shares will have to be checked with the custodian) and
      (v)
      the number of equity shares so purchased to be converted shall be subject to
      sectoral caps as applicable and all the concerned parties shall comply with
      the
      Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
      Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
      thereunder.




Further,
      paragraph (v) of the guidelines states that the company should not be involved
      in the process and the process should be demand driven upon the request for
      ADRs
      or GDRs emanating from overseas investors, and expenses involved in the overseas
      transaction would be borne by the investors themselves.




**Restrictions
      On Foreign Ownership Of Indian Securities**




The
      government of India regulates ownership of Indian companies by
      foreigners.  Foreign investment in Indian securities, including the
      equity shares represented by the ADSs, is generally regulated by the Foreign
      Exchange Management Act, 1999, which permits transactions including the inflow
      or outflow of foreign exchange and empowers the Reserve Bank of India to
      prohibit or regulate such transactions.




The
      Foreign Exchange Management Act permits most transactions involving foreign
      exchange except those prohibited or restricted by the Reserve Bank of
      India.  The extent of control exercised over transactions involving
      foreign exchange depends upon the type of transaction
      involved.  Transactions that alter the assets or liabilities,
      including contingent liabilities, outside India of persons resident in India
      or
      the assets and liabilities in India of persons resident outside India are known
      as capital account transactions.  Transactions other than capital
      account transactions are known as current account transactions.




The
      Foreign Exchange Management Act has eased restrictions on current account
      transactions.  However, the Reserve Bank of India continues to
      exercise control over capital account transactions.  The Reserve Bank
      of India has issued regulations under the Foreign Exchange Management Act to
      regulate various capital account transactions, including certain aspects of
      the
      purchase and issuance of shares by Indian companies.




The
      Reserve Bank of India has issued a notification under the provisions of the
      Foreign Exchange Management Act relaxing the requirement of prior approval
      for
      an Indian company making an ADS issue provided that the issuer is eligible
      to
      issue ADSs pursuant to guidelines issued by the Ministry of Finance and has
      the
      necessary approval from the Foreign Investment Promotion Board.




Under
        the
        foreign investment rules, the following restrictions are applicable on foreign
        ownership:
  ·
              under
                  the “foreign direct investment” scheme, foreign individuals may own more
                  than 49% of the equity shares of an Indian telecommunications company
                  only
                  with the approval of the Foreign Investment Promotion Board; this
                  approval
                  is granted on a case-by-case basis.  However, ISPs with
                  gateways, radio paging, and end to end bandwidth permitted up to
                  74% with
                  FDI beyond 49% requiring government
                  approval.


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·
            under
                the “depositary” scheme, foreign investors may purchase ADSs or global
                depositary receipts, subject to the receipt of all necessary government
                approvals at the time the depositary receipt program is set
                up;




·
            under
                the “portfolio investment” scheme, foreign institutional investors,
                subject to registration with the Securities and Exchange Board of
                India
                and the Reserve Bank of India, may be permitted to own, in the aggregate,
                up to an additional 24.0% of our equity shares that are not represented
                by
                ADSs or global depositary receipts (and up to 49.0% with the approval
                of
                our shareholders); no single foreign institutional investor may own
                more
                than 10.0% of our equity shares;
                and




·
            under
                the “portfolio investment” scheme, non resident Indians may own up to an
                aggregate or 10.0% of our equity shares; no single non-resident Indian
                may
                own more than 5.0% of our total equity
                shares.




We
      had
      obtained approvals from the Ministry of Finance, the Foreign Investment
      Promotion Board, the DOT and special permission from the Reserve Bank of India
      for the offering of our global depositary receipts.  Various tax
      concessions were also made available with respect to the existing global
      depositary receipt offering in accordance with the provisions of Section 115AC
      of the Indian Income-tax Act, 1961.  Since no new shares were issued
      or offered in our exchange offer and the exchange offer was related to a change
      in the form of depository receipts, the original approvals needed merely to
      be
      taken on file, noted and recorded for modification.  We obtained from
      the Ministry of Finance, Reserve Bank of India, the Foreign Investment Promotion
      Board and the DOT, modifications to the original
      approvals/special permission given by them, for our exchange
      offer.




As
      of
      June 30, 2007 foreign direct investment in us was 14.31% of our equity
      shares.




An
      investor in ADSs does not need to seek the specific approval from the government
      of India to purchase, hold or dispose of its ADSs.  However, foreign
      investment in our ADSs may not exceed 49% without prior government
      approval.




Our
      outstanding equity shares, including the equity shares underlying the ADSs,
      are
      listed and traded on the Calcutta, Delhi and Chennai Stock Exchanges, The Stock
      Exchange, Mumbai and the National Stock Exchange.  The prices for
      equity shares as quoted in the official list of each of the Indian stock
      exchanges are in Indian rupees.  The ADS are listed on the New York
      Stock Exchange.




Equity
      shares which have been withdrawn from the depositary facility and transferred
      on
      our register of shareholders to a person other than the depositary or its
      nominee may be voted by that person.  However, an ADS holder may not
      receive sufficient advance notice of shareholder meetings to enable you to
      withdraw the underlying equity shares and vote at such meetings.




Notwithstanding
      the foregoing, if a foreign institutional investor, non-resident Indian or
      non-Indian corporation were to withdraw its equity shares from the ADS program,
      its investment in the equity shares would be subject to the general restrictions
      on foreign ownership noted above and may be subject to the portfolio investment
      restrictions, including the 10-24% portfolio investment limitations, and the
      5-10% non-resident Indian limitation.  The application of these
      limitations, however, is not clear.  Secondary purchases of securities
      of Indian companies in India by foreign direct investors or investments by
      non-resident Indians, persons of Indian origin and foreign institutional
      investors above the ownership levels set forth above, require government of
      India approval on a case-by-case basis.  It is unclear whether similar
      case-by-case approvals of ownership of equity shares withdrawn from the
      depositary facility by foreign institutional investors and non-resident Indians
      would be required.




Further,
        if an ADS holder withdraws equity shares from the ADS program and its direct
        or
        indirect holding in us exceeds 15.0% of our total equity (under the Takeover
        Code), such holder would be required to make a public offer to the remaining
        shareholders.  If one withdraws equity shares from the depositary
        facility, one will not be able to redeposit them with the
        depositary.
  If
        one
        wishes to sell the equity shares withdrawn from the depositary facility,
        they
        will be required to receive the prior approval of the Reserve Bank of
        India.


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Under
      procedures approved by the Reserve Bank of India, the custodian will be
      permitted to accept deposits of our outstanding equity shares purchased on
      a
      recognized stock exchange by registered brokers in India on behalf of a foreign
      investor.  The depositary may issue ADRs evidencing ADSs representing
      the deposited equity shares to the extent, and limited to the number, of ADSs
      that have previously been converted into underlying equity shares, subject
      to
      applicable foreign ownership restrictions.  See “— Limitations on
      Deposits of Equity Shares into the ADS Program” above for more details on these
      procedures.




**Other
      Regulations**




For
      more
      information on relevant securities and related regulations, please see “The
      Offer and Listing—The Indian Securities Market.”




**TAXATION**




**Indian
      Taxation**




The
      following is a summary of the material Indian tax consequences for holders
      of
      ADSs and equity shares received upon withdrawal of such equity shares who are
      not resident in India, whether of Indian origin or not.  This
      discussion is based on the provisions of the Indian Income-Tax Act, 1961,
      including the special tax regime for ADSs contained in Section 115AC, which
      has
      been extended to cover additional ADSs that an investor may acquire in an
      amalgamation or restructuring of the company, and certain regulations
      implementing the Section 115AC regime.  The Indian Income Tax Act is
      amended every year by the Finance Act of the relevant year.  Some or
      all of the tax consequences of the Section 115AC regime may be amended or
      modified by future amendments to the Indian Income Tax
      Act.  Amendments to Section 115AC extend the special tax regime of
      Section 115AC to ADSs re-issued, in accordance with procedures established
      by
      the Indian government (operative guidelines issued under the Foreign Exchange
      Management notification dated February 13, 2002), against existing shares of
      an
      Indian company purchased by a non-resident investor in foreign currency through
      an approved intermediary.  Under these guidelines re-issuance of ADSs
      would be permitted to the extent of ADSs which have been converted into
      underlying shares.




The
      summary is not intended to constitute a complete analysis of the tax
      consequences under Indian law of the acquisition, ownership and sale of ADSs
      and
      equity shares by non-resident investors.  Potential investors should,
      therefore, consult their own tax advisers on the tax consequences of such
      acquisition, ownership and sale, including specifically the tax consequences
      under Indian law, the law of the jurisdiction of their residence, any tax treaty
      between India and their country of residence, and in particular the application
      of the regulations implementing the section 115AC regime.




**Residence**




For
      the
      purpose of the Income Tax Act, an individual is a resident of India during
      any
      fiscal year, if he (1) is in India in that year for 182 days or more or (2)
      having within the four years preceding that year been in India for a period
      or
      periods amounting in all to 365 days or more, is in India for period or periods
      amounting in all to 60 days or more in that year.  The period of 60
      days is substituted by 182 days in case of an Indian citizen or a person of
      Indian origin who being resident outside India visits India during the financial
      year or an Indian citizen who leaves India for the purposes of his employment
      during the financial year.  A company is resident in India in any
      fiscal year if it is registered in India or the control and management of its
      affairs is situated wholly in India in that year.  A firm or other
      association of persons is resident in India except where the control and the
      management of its affairs are situated wholly outside India.




**Taxation
        of Distributions**
  Dividends
        distributed by an Indian company after March 31, 2002 are not subject to
        tax in
        the hands of shareholders.  We must pay a “dividend distribution tax”
at the rate of 12.5% (plus a surcharge of 10% and an add-on tax at the rate
        of
        2% of the interim dividend) and distribution tax on the final dividend of
        Rs. 1.00 per share at the rate of 15% (plus a surcharge of 10% and an add-on
        tax
        at the rate of 3%).




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**Taxation
      on Redemption of ADSs**




The
      acquisition of equity shares upon a redemption of ADSs by a non-resident
      investor will not give rise to a taxable event for Indian tax
      purposes.




**Taxation
      on Sale of Equity Shares or ADSs**




Any
      transfer of ADSs or equity shares outside India by a non-resident investor
      to
      another non-resident investor does not give rise to Indian capital gains
      tax.




Subject
      to any relief under any relevant double taxation treaty, a gain arising on
      the
      sale of an equity share to a resident of India or where the sale is made inside
      India will generally give rise to a liability for Indian capital gains
      tax.  Such tax is required to be withheld at source.  Where
      the equity share has been held for more than 12 months (measured from the date
      of advice of redemption of the ADSs by the Depositary), the rate of tax is
      10.46% (inclusive of surcharge).  Where the equity share has been held
      for 12 months or less, the rate of tax varies and will be subject to tax at
      normal rates of income-tax applicable to non-residents under the provisions
      of
      the Indian Income Tax Act, subject to a maximum of 41.82% (inclusive of
      surcharge) in the case of foreign companies.  The actual rate depends
      on a number of factors, including without limitation the nature of the
      non-resident investor.  During the period the underlying equity shares
      are held by non-resident investors on a transfer from the Depositary upon
      redemption of ADRs, the provisions of the Avoidance of Double Taxation Agreement
      entered into by the government of India with the country of residence of the
      non-resident investors will be applicable in the matter of taxation of any
      capital gain arising on a transfer of the equity shares.  The double
      taxation treaty between the United States and India does not provide
      U.S.  residents with any relief from Indian tax on capital
      gains.




For
      purposes of determining the amount of capital gains arising on a sale of an
      equity share for Indian tax purposes, the cost of acquisition of an equity
      share
      received upon redemption of an ADS will be the price of the share prevailing
      on
      The Stock Exchange, Mumbai or the National Stock Exchange on the date on which
      the depositary advises the custodian of such redemption, not the acquisition
      cost of the ADS being redeemed.  The holding period of an equity share
      received upon redemption of an ADS will commence from the date of advice of
      redemption by the depositary.  The exact procedures for the
      computation and collection of Indian capital gains tax are not
      settled.




**Rights**




A
      distribution to non-resident holders of additional ADSs or equity shares or
      rights to subscribe for equity shares made with respect to ADSs or equity shares
      is not subject to tax in the hands of the non-resident holder.




It
      is
      unclear as to whether capital gain derived from the sale of rights by a
      non-resident holder not entitled to exemption under a tax treaty to another
      non-resident holder outside India will be subject to Indian capital gains
      tax.  If rights are deemed by the Indian tax authorities to be
      situated within India, as our situs is in India, the gains realized on the
      sale
      of rights will be subject to customary Indian taxation as discussed
      above.




**Stamp
      Duty**




A
      transfer of ADSs is not subject to Indian stamp duty.  Normally, upon
      the acquisition of equity shares from the depositary in exchange for ADSs
      representing such equity shares in physical form, an investor would be liable
      for Indian stamp duty at the rate of 0.5% of the market value of the equity
      shares at the date of registration.  Similarly, a sale of equity
      shares by an investor would be also subject to Indian stamp duty at the rate
      of
      0.5% of the market
      value of the equity shares on the trade date, although customarily such tax
      is
      borne by the transferee, that is, the purchaser.  However, our equity
      shares are mandatorily deliverable in uncertificated form and under Indian
      stamp
      law, no stamp duty is payable on the acquisition or transfer of equity
      shares in uncertificated/dematerialized form.




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**Other
      Taxes**




At
      present, there are no taxes on wealth, gifts and inheritance which may apply
      to
      the ADSs and underlying equity shares.




**Service
      Tax**




Brokerage
      or commission paid to stockbrokers in connection with the sale or purchase
      of
      shares was subject to a service tax 12.24%, however the rate was changed to
      12.36% effective May 13, 2007.  The stockbroker is responsible for
      collecting the service tax and paying it to the relevant authority.




**United
      States Federal Income Taxation**




The
      following is a summary of certain United States federal income tax
      considerations for U.S.  Holders (as defined below) of ADSs or equity
      shares who hold ADSs or equity shares as of the date hereof.  This
      summary is based upon existing United States federal income tax law which is
      subject to change, possibly on a retroactive basis.  This summary does
      not discuss all aspects of United States federal income taxation which may
      be
      important to particular holders in light of their individual investment
      circumstances, such as ADSs or equity shares held by holders subject to special
      tax rules ( e.g., financial institutions, insurance companies, broker-dealers,
      tax-exempt organizations, and non-U.S.  Holders) or to persons that
      will hold ADSs or equity shares as part of a straddle, hedge, conversion, or
      other integrated transactions for United States federal income tax purposes
      or
      that have a functional currency other than the United States dollar, all of
      whom
      may be subject to tax rules that differ significantly from those summarized
      below.  In addition, this summary does not discuss any state, local,
      or foreign tax considerations.  This summary assumes that investors
      hold, and will continue to hold, their ADSs or equity shares as “capital assets”
(generally, property held for investment) under the United States Internal
      Revenue Code of 1986, as amended (Code).  Holders are urged to consult
      their tax advisers regarding the United States federal, state, local, and
      foreign income tax considerations, including the “passive foreign investment
      company” rules described below, of the ownership and disposition of ADSs or
      equity shares.




For
      purposes of this summary, a “U.S.  Holder” is a beneficial owner of
      ADSs or equity shares that is for United States federal income tax purposes
      (i)
      an individual who is a citizen or resident of the United States, (ii) a
      corporation, partnership, or other entity created or organized in or under
      the
      law of the United States or any State or political subdivision thereof, (iii)
      an
      estate the income of which is includible in gross income for United States
      federal income tax purposes regardless of its source, or (iv) a trust (A) the
      administration of which is subject to the primary supervision of a United States
      court and which has one or more United States persons who have the authority
      to
      control all substantial decisions of the trust, or (B) that was in existence
      on
      August 20, 1996, was treated as a United States person under the Code on
      the previous day, and properly elected to continue to be so
      treated.  The tax treatment of persons who hold their ADSs or equity
      shares through a partnership (including an entity treated as a partnership
      for
      United States federal income tax purposes) will generally depend on the status
      of the partner and the activities of the partnership.




**General**




For
      purposes of United States federal income taxation, a holder of ADSs will be
      treated as the owner of his proportionate interest in the underlying equity
      shares held by the depositary.  Accordingly, no gain or loss will be
      recognized upon the exchange of ADSs for the holder’s proportionate interest in
      equity shares, a holder’s tax basis in the withdrawn equity shares will be the
      same as his tax basis in the ADSs surrendered in exchange therefor, and such
      holder’s holding period in the withdrawn equity shares will include the period
      during which the holder held the surrendered ADSs.




A
      foreign corporation will be classified as a
“passive foreign investment company” (PFIC), for United States federal income
      tax purposes, if 75% or more of its gross income or 50% or more of its assets
      are “passive” as determined under the PFIC rules.  The determination
      of whether a foreign corporation is a PFIC is a factual determination and may
      entail the resolution of certain legal issues such as the tax treatment of
      on-lending transactions involving related parties under the PFIC
      rules.  In addition, such determination is made on an annual




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basis
      and, accordingly, is subject to change from year to year.  The
      following discussion assumes that we will not be classified as a PFIC for United
      States federal income tax purposes.  For further PFIC considerations,
      see “—PFIC Considerations” below.




**U.S.  Holders**




Taxation
      of Dividends.     Any cash distributions paid by us
      out of our earnings and profits, as determined under United States federal
      income tax principles, will be subject to tax as ordinary dividend income and
      will be includible in the gross income of a U.S.  Holder upon
      receipt.  Cash distributions paid by us in excess of our earnings and
      profits will be treated as a tax-free return of capital to the extent of the
      U.S.  Holder’s adjusted tax basis in his ADSs or equity shares, and
      thereafter as gain from the sale or exchange of a capital
      asset.  Dividends paid in Indian rupees will be includible in income
      in a United States dollar amount based on the United States dollar—Indian rupee
      exchange rate prevailing at the time of receipt of such dividends by the
      depositary.  Dividends received on the ADSs or equity shares will not
      be eligible for the dividends received deduction allowed to corporations, but
      generally will qualify for the reduced income tax rate for qualified dividend
      income, provided certain holding period requirements are met.




Dividends
      paid on ADSs or equity shares will be treated, for United States federal income
      tax purposes, as foreign source income.  A U.S.  Holder may
      be eligible, subject to a number of complex limitations, to claim a foreign
      tax
      credit in respect of any Indian income tax imposed on dividends received on
      the
      ADSs or equity shares.  U.S.  Holders who do not elect to
      claim a foreign tax credit for Indian income tax withheld may instead claim
      the
      Indian income tax withheld as a deduction for United States federal income
      tax
      purposes, but only for a year in which the U.S.  Holder elects to do
      so for all creditable foreign taxes.  In certain circumstances, a
      U.S.  Holder may not claim a foreign tax credit (and instead may claim
      a deduction) for foreign taxes imposed on a dividend if the
      U.S.  Holder (i) has not held the ADSs or equity shares for at least
      16 days in the 30-day period beginning 15 days before the ex-dividend date
      during which it is not protected from risk of loss, (ii) is obligated to make
      certain payments related to such dividend, or (iii) subject to the promulgation
      of future Treasury regulations that are anticipated to be retroactively applied,
      holds the ADSs or equity shares in an arrangement in which the expected economic
      profit of the U.S.  Holder is insubstantial compared to the value
      of the foreign tax credit expected to be obtained as a result of the
      arrangement.




A
      distribution of additional shares issued by us to U.S.  Holders with
      respect to their ADSs or equity shares that is pro rata to all of our
      shareholders may not be subject to United States federal income
      tax.  In the case of such a non-taxable stock dividend, such a
      distribution will not give rise to foreign source income and a
      U.S.  Holder will not be able to use the foreign tax credit arising
      from any Indian withholding tax imposed in connection with such distribution
      unless the foreign tax credit can be applied (subject to applicable limitations)
      against United States federal income tax due on other foreign source income
      of
      the U.S.  Holder.  The tax basis of such additional shares
      will be determined by allocating the U.S.  Holder’s tax basis in the
      ADSs or equity shares between the ADSs or equity shares and the additional
      shares, based on their relative fair market values on the date of
      distribution.




Sale
      or
      Other Disposition of ADSs or Ordinary Shares.  A
      U.S.  Holder will generally recognize capital gain or loss upon the
      sale or other disposition of ADSs or equity shares in an amount equal to the
      difference between the amount realized upon the disposition and the
      U.S.  Holder’s adjusted tax basis in such ADSs or equity
      shares.  Any capital gain or loss will be long-term if the ADSs or
      equity shares have been held for more than one year and will generally be United
      States source gain or loss.  The claim for a deduction in respect of a
      capital loss is subject to limitations.




PFIC
      Considerations.     If we were to be classified as
      a PFIC in any taxable year, a U.S.  Holder would be subject to special
      rules generally intended to reduce or eliminate any benefits from the deferral
      of United States federal income tax that a U.S.  Holder could derive
      from investing in a foreign corporation that does not distribute all of its
      earnings on a current basis.  In such event, a U.S.  Holder
      of ADSs or equity shares may be subject to tax at ordinary income tax rates
      on
      (i) any gain recognized on the sale of the ADSs or equity shares and (ii) any
      “excess distribution” paid on the ADSs or equity shares (generally, a
      distribution in excess of 125% of the average annual distributions paid by
      us in the three preceding taxable years).  In addition, a
      U.S.  Holder may be subject to an interest charge on such gain or
      excess distribution.




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**DOCUMENTSON
      DISPLAY**




We
      file
      reports, including annual reports on Form 20-F, and other information with
      the
      SEC pursuant to the rules and regulations of the SEC that apply to foreign
      private issuers.  One may read and copy any materials filed with the
      SEC at the Public Reference Room at 100 F Street N.E., Room 1580, Washington,
      D.C.  20459.  You may obtain information on the operation of
      the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Since
      November 4, 2002, subject to some exceptions, we have been required to file
      our
      periodic reports electronically through the SEC’s EDGAR system.  Any
      filings we make electronically are available to the public over the Internet
      at
      the SEC’s Website at http://www.sec.gov.




In
      addition, in accordance with the requirements of the New York Stock Exchange
      (NYSE), we have disclosed on our website significant ways in which our corporate
      governance standards differ from those followed by United States domestic
      issuers under NYSE standards is available at
      http://mtnl.net.in/nyse-india.doc.




**Item
      11. Quantitative and
      Qualitative Disclosures about Market Risk**




**Credit
      Risk**




Financial
      instruments which potentially subject MTNL to concentrations of credit risk
      consist principally of periodic temporary investments of excess cash, trade
      receivables, and investments in ITI Limited preference shares and MKVDC bonds.
      The Company places its temporary excess cash in short term deposits. By their
      nature, all such financial instruments involve risk including the credit risk
      of
      non-performance by counter parties. In management’s opinion, as of March 31,
      2006 and 2007, there was no significant risk of loss in the event of
      non-performance of the counterparties to these financial instruments, other
      than
      the amounts already provided for in the financial statements.  To
      reduce credit risk, MTNL performs ongoing credit evaluation of
      customers.  As of March 31, 2006 and 2007, BSNL and DOT accounted for
      more than 10% of total receivables.




The
      risk
      in relation to investment in ITI Limited is offset by clause relating to MTNL’s
      entitlement to set off the amounts receivable in respect of principal
      outstanding from the dues payable to ITI Limited. The clause is built into
      the
      share purchase agreement.




The
      credit risk for the investment in bonds issued by MKVDC is minimized due to
      the
      payment mechanism envisaged in the prospectus, which states that any shortfall
      is to be met by the Maharashtra State Government that has undertaken to earmark
      an amount equal to interest and principal repayments out of its annual budget
      for the respective corporation. In the event of such amount not being
      transferred the trustees would be entitled to invoke the guarantee given by
      the
      state government.




**Exchange
      Rate and Interest Rate Risk**




We
      are
      not exposed to any material foreign currency exchange risk since our revenues
      and expenses are primarily in Indian rupees.  We are not exposed to
      any material interest rate risk since we do not rely on borrowings to meet
      our
      working capital and capital expenditure requirements.  As of March 31,
      2007, we had no debt.




**Fair
      Value**




The
      fair
      value of MTNL’s current assets and current liabilities approximate their
      carrying values because of their short-term maturity.  Such financial
      instruments are classified as current and are expected to be settled within
      the
      next twelve months.




The
        approximate fair value of investments in held to maturity securities, as
        determined by using current interest as of March 31, 2007 is Rs.3,430 million
        as
        compared to their carrying amount of Rs.3,500 million.
  The
        approximate fair value of loans to employees, as determined by using current
        interest as of March 31, 2007 is Rs.1,946 million as compared to their carrying
        amount of Rs.2,150 million.




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Due
      to
      the uncertainties attached to the timing of ultimate realization of restricted
      assets, it is not practicable to determine their fair values.  The
      fair value of amounts due to and from related parties cannot be determined
      given
      that the amounts are with related parties.   The terms of
      settlement are not normal commercial terms.




**Item
      12. Description of
      Securities Other than Equity Securities**




Not
      applicable.




**PART
      II**




**Item
      13. Defaults, Dividend
      Arrearage and Delinquencies.**




None.




**Item
      14. Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds**




None.




**Item
      15. Controls and
      Procedures**




**As
        at March 31, 2006:**
 
 Disclosure
        Controls and Procedures. Our management, under the supervision of and with
        the
        participation of our Chairman-cum-Managing Director, as Chief Executive Officer
        and our Director of Finance, acting as Chief Financial Officer, has evaluated
        the effectiveness of our disclosure controls and procedures (as such term
        is
        defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
        of
        1934) on March 31, 2006, the end of the period covered by this report. Based
        on
        such evaluations, our Chairman-cum-Managing Director and Director of Finance
        have concluded that as of March 31, 2006, our disclosure controls and procedures
        were not effective.  There are significant material weaknesses related
        to management’s inadequate knowledge and experience in application of U.S. GAAP,
        commensurate with our financial reporting requirements, which had led to
        the
        restatement of our financial statements for year ended March 31,
        2005.
 
 **Remediation:**
  We
        have
        remediated during 2006-07 the material weaknesses disclosed above. The
        remediation included among other things, implementation of more detailed
        financial statement review procedures, documentation of information
        technology-related controls, documentation of internal controls as part of
        the
        implementation of Section 404 of the Sarbanes-Oxley Act, and strengthening
        of
        U.S. GAAP skills of our accounting staff on a regional basis and at the
        Corporate Center.
  The
        team
        for preparation of US GAAP accounts has qualified accountants and experienced
        officials. The management had organized frequent training
        programmes  for the key  accounting officials of Delhi,
        Mumbai units and corporate office for  preparation of US GAAP
        accounts. The training sessions were successfully concluded and skills of
        the US
        GAAP team were adequately up graded. The management also engages the services
        of
        an US GAP expert for advice on need basis on various technical issues and
        specifically the effect of new US GAAP pronouncements.
  
 **As
        at March 31, 2007:**
  *(a)Disclosure
        Controls and Procedures:  O*ur management, under the supervision
        of and with the participation of our Chairman-cum-Managing Director, as Chief
        Executive Officer and our Director of Finance, acting as Chief Financial
        Officer, has evaluated the effectiveness of our disclosure controls and
        procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
        the
        Securities Exchange Act of 1934) on March 31, 2007,


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the
      end
      of the period covered by this report.  Based on such evaluations, our
      Chairman-cum-Managing Director and Director of Finance have concluded that
      as of
      March 31, 2007, our disclosure controls and procedures were not effective.  (b)
        *Management’s annual report on internal control over financial reporting.*The Board of Directors and the senior management team at MTNL are
        responsible for establishing and maintaining adequate internal controls.
        MTNL’s
        internal control framework is designed to  provide a reasonable
        assurance regarding the financial reporting and the preparation and fair
        representation of the published financial statements. Management, under the
        oversight of the Audit Committee, has conducted an assessment of the
        effectiveness of internal controls over financial reporting based on the
        criteria established in Internal Controls – Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        The
        assessment of internal controls was designed to include the Entity Level
        Controls, Process Application and Transaction Controls and Information
        Technology General Controls. The scope of the controls testing included the
        significant accounting balances mapped on materiality parameters as adopted
        by
        the Core Team and Board of Directors of MTNL.  The internal controls
        were in operations over the reporting period from April 1, 2006 to March
        31,
        2007. The Internal Controls Identified by the management were comprehensively
        tested by the core team assisted by an  independent firm of
        accountants and supported
        by the internal auditors of MTNL who are independent firms of
        accountants.




Nature
      of
      Controls assessed: 1) Entity Level Controls, which included aspects like Control
      Environment, Information & Communication, Monitoring, Risk Assessment,
      Control Activities, addressing the various important COSO attributes. 2) Process
      Application and Transactions, which included various revenue processes, and
      other processes like operating expenditures, fixed assets, inventory, cash
      disbursement, treasury, taxation and financial statement consolidation
      procedures at both Mumbai and Delhi units as well as at corporate office. 3)
      Information Technology General Controls, which include IT processes like logical
      security, End User Computing, Computer Operations, Change Management, physical
      security and Service Level Agreement, tested at both Mumbai and Delhi
      units.




Management’s
        assessment was completed on July 2, 2007. Based on this assessment, the
        management has concluded that as at March 31, 2007, the internal controls
        over
        periodical reporting were not effective due to certain material
        weaknesses.  The said deficiencies may cause a material misstatement
        in the annual financial statements which may not be prevented or
        detected.  Management’s conclusions on the material deficiencies are
        stated below:


1.           Property
      and equipment




During
      the year Management identified that there are not enough effective
      controls  over timely updation of asset registers at various
      accounting areas of the Mumbai unit. Deficiencies were also noticed in the
      process for verification of the properties and equipments and further tallying
      the verification reports with the assets registers and tallying the assets
      registers with the books of accounts. The management took appropriate measures
      to ensure that this deficiency was adequately considered while preparing the
      financial statements for the year ended March 31, 2007 .Nevertheless, Management
      has concluded that, as of March 31, 2007, the Company did not maintain effective
      controls over the accounting for properties and equipments . Specifically,
      the
      Company has ineffective controls in its Mumbai unit over physical verification
      and tallying the results thereof with the assets register as well as updating
      and reconciliation of assets register with the books of account. This control
      deficiency could result in a misstatement to the property and equipments and
      the
      corresponding depreciation expenses.




2.           Subscriber
      Deposits




The
      accounting of subscriber deposits
      was identified by the management as one of the key deficit area. Specifically
      this reconciliation of the balances of deposits obtaining in the CSMS system
      and
      the books of accounts was inadequate. The management has also identified that
      the same is largely due to the legacy inherited at the time of migration from
      manual accounts to CSMS in the earlier years and subsequent manual adjustments
      of refunds out of the system. Though the transactions for the year 2006-07
      in
      respect of Delhi unit have been tallied with the books of accounts, the same
      is
      yet to be completed in respect of Mumbai unit. The management took appropriate
      measures during the year to ensure that this deficiency was adequately
      considered while preparing the




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financial
        statements for the year ended March 31, 2007. Accordingly Management has
        concluded that, as of March 31, 2007, the Company did not maintain effective
        control over the accounting for deposits received from subscribers.
        Specifically, the Company has ineffective controls on the process of
        reconciliation of subscriber-wise listing of deposits with the control account
        balances of previous accounting periods in Delhi unit. However, Mumbai unit
        is
        in the process of reconciliation of current period as well as earlier period
        deposits. This control deficiency could result in a misstatement to the current
        and non-current portion of customer deposits.
  3.           Related
        Party Transactions
  The
        accounting of transactions of
        related parties of the company consisting of D.O.T. & B.S.N.L. is being done
        on the basis of the existing instructions issued from time to time by the
        controlling department of Govt.of India and other related guidelines as well
        as
        existing regulations and regimes. These guidelines require identification
        of
        transactions and /or issues under dispute and also lay down the methodology
        for
        resolution. There is no practice of issuing any specific confirmation requests
        of the balances outstanding in the books of accounts of the company to such
        related parties and reconciling such balances to the balances as per our
        books
        of accounts. The issues requiring confirmation and consequential resolution
        are
        retirement benefit claims of  absorbed officers and officials of
        company for the service rendered in government and their provident fund balances
        in respect of D.O.T. and
        in
        respect of B.S.N.L. the significant  transactions are the IUC related
        charges and revenue sharing charges for the usage of NLD network. These
        transactions are being booked on the basis of the set guidelines and parameters
        and the confirmation/settlement of disputed issue/transaction is a continuous
        process. However, the overall balances pertaining to these
        related  parties are not reconciled with the balances as per the books
        of account of such related parties. The management took appropriate measures
        during the year to ensure that this deficiency was adequately considered
        while
        preparing the financial statements. Accordingly, the management has concluded
        that, as of March 31, 2007, the Company did not maintain conciliatory control
        over the accounting for dues from and to related parties. Specifically the
        Company has ineffective controls on process of obtaining period end account
        balance confirmations and reconciliation thereof. This control deficiency
        could
        result in a misstatement to the balances of dues to/from related parties
        and the
        corresponding revenue and cost of revenue.




4.           Information
      Technology General Controls




During
      the course of its review of the
      company’s I.T. general controls, management has identified and concluded that,
      as of March 31, 2007, there were certain ineffective controls in the area of
      IT
      General controls. Specifically the issue related to the absence of an IT
      security policy and the resultant weak controls over granting and monitoring
      of
      user access rights to key applications and databases and weak password
      controls.  Though the management has determined that there were no
      instances of unauthorized access/events, this control deficiency could result
      in
      unauthorized access to key applications and data bases. Further there were
      ineffective controls in the area of audit trail enablement and review on the
      critical IT systems. Specifically the audit trail / logs were not enabled.
      This
      control deficiency leads to risk of breaches of security or errors remaining
      unnoticed and not rectified. The above deficiencies could lead to risk of
      financial statement being mis-stated. However the review of financial statements
      at the unit and corporate level in the FMS system preempted any such possible
      errors in preparation of financial statements in the current year




Chandabhoy
      & Jassoobhoy, the registered public accounting firm that audited our
      financial statements included in this Form 20-F, has issued an attestation
      report on management’s assessment of the Company’s internal controls over
      financial reporting.   See Item 18. “–Financial
      Statements.”




By:
              /s/
                  R.S.P.
                  SinhaName:
              Mr.
                  R.S.P. SinhaTitle:
              Chairman-cum-Managing
                  DirectorBy:
              /s/
                  Anita
                  SoniName:
              Anita
                  SoniTitle:
              Director
                  – Finance




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(c)           *Attestation
        report of the registered public accounting firm.*See Item 18. “-Financial
        Statements” for the attestation report of Chandabhoy & Jassoobhoy, the
        registered public accounting firm that audited our financial statements included
        in this Form 20-F
  (d)           *Changes
        in internal control over financial reporting*.  We have remediated
        during 2006-07 the material deficiencies disclosed in Item no. 15 of our
        Form
        20F for the financial year 2005-06 which include, among other things,
        implementation of more detailed financial statement review procedures,
        documentation of information technology-related controls, documentation of
        internal controls as part of the implementation of Section 404 of the
        Sarbanes-Oxley Act, and strengthening of US GAAP skills of our accounting
        staff
        on a regional basis and at the Corporate Center.
  The
        management had organized frequent training programmes for the key accounting
        officials of the Delhi and Mumbai units and the corporate office
        for  preparation of US GAAP accounts. The team for preparation of US
        GAAP accounts has qualified accountants and experienced officials. The training
        sessions were successfully concluded and skills of the US GAAP team were
        adequately upgraded. The management also engages the services of an US GAAP
        expert for advice on an as-needed basis on various technical issues and
        specifically the effect of new US GAAP pronouncements.




Property
      and equipments




Physical
      verification of fixed assets is being done on a rotation basis identifying
      the
      assets which are to be verified for each year by the Company in order to
      complete verification of all the assets by the end of third
      year.  Further, based on the efficiency or otherwise of the process
      the units are required to take remedial action. The corporate office advises
      the
      units on remediation steps on a case-to-case basis for matters that are
      escalated to it.  In the Mumbai unit, the accounting areas are in the
      process of updating the assets register giving full particulars of quantitative
      details and location of fixed assets. The preparation of assets registers with
      full details is being given top priority and a core team under the control
      of
      the concerned Area General Manager is carrying out this activity. This activity
      is being monitored by the General Manager (Finance) of Mumbai unit. The activity
      is scheduled to be completed by December 31, 2007.




Subscriber
      Deposits




In
      respect of the reconciliation of the subscriber deposits , the management has
      directed both the Delhi and Mumbai units to complete the reconciliation by
      December 31, 2007 in respect of the accounting period up to March 31, 2002
      and
      by the end of fiscal year 2008 in respect of subscriber deposits for the
      accounting periods after March 31, 2002. A core group has been formed for
      overall monitoring. Simultaneously it has been directed by the management to
      both the units that debtors are also to be linked to the deposits and only
      the
      reconciled data is to be migrated to the convergent billing system which is
      to
      be operational by end of the fiscal year ending March 31, 2008. The company
      has
      made substantial progress to date.




Related
      Party Transactions




The
      transactions of significance with related parties of significance are those
      with
      the Department of Telecommunication (DOT) and Bharat Sanchar Nigam Limited
      (BSNL). While DOT is the parent organization of MTNL, BSNL is fully-owned by
      the
      Government of India.




In
      respect of transactions and balances with DOT, the management has taken the
      following steps:




1.           Both
      the Mumbai and Delhi units have been directed by the management to completely
      reconcile and submit the details of DOT claims receivables and payables for
      taking up with DOT at a very high level to get the issues resolved and also
      further directed that both the units should interact with the officers of CCA
      (Control and Communication Accounts) of DOT at both places on a regular basis
      for all claims receivable and payable cropping up in the current year while
      getting detailed supporting documents for the claims receivable/payable for
      the
      period up to March 31, 2007 to enable early resolution of the issue with
      DOT.






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2.           A
        joint committee of senior officers of DOT and MTNL, is monitoring the
        progress.
  In
        respect of transactions and balances with BSNL, the management has taken
        the
        following steps:-
  1.           Both
        the units have been directed to reconcile and get the claims payable as well
        receivable as at March 31, 2007 by September 30, 2007 and subsequently claims
        up
        to September 30, 2007 by December 31, 2007.
  2.           At
        both units the officers at the level of General Managers have been specifically
        directed to interact in this regard and take up with BSNL for confirmation
        of
        balances on a periodic basis.
  3.           At
        the corporate level, a formal committee of senior officers of MTNL, BSNL
        and DOT
        is monitoring the progress.
  It
        is
        also specifically directed to send details of claims receivable and payable
        on
        quarterly basis as well on annual basis for confirmation to the related parties.
        It may be noted that there is periodic monitoring and oversight on these
        matters
        by the Public Account Committee of the Government of India through Comptroller
        and Auditor General of India Audit mechanism.




Information
      Technology General controls




A
      detailed and formal IT Security policy has been adopted by the Company after
      due
      approval by the Executive Directors of the Mumbai and Delhi units. The IT
      security policy is scheduled to be fully implemented by December 31,
      2007.  During the year the Password policy and User Access Control
      deficiencies have been remediated for all the critical applications involved
      in
      the processing of data. Audit trail enabling has been implemented in the
      comprehensive convergent billing system which is scheduled to be functional
      by
      the end of the financial year ending March 31, 2008.




**Item
                16A.**
            **Audit
                Committee Financial Expert**




The
      board
      of directors has identified Ms. Anita Soni,  member of the Audit
      Committee, as a “financial expert”.




**Item
                16B.**
            **Code
                of Ethics**




We
      have a
      Code of Ethics as part of our Rules of Conduct.  A copy of the Code of
      Ethics may be obtained upon request addressed to the Company Secretary at our
      principal executive office, indicated on the cover of this report.




**Item
                16C.**
            **Principal
                Accountant Fees and
                Services**




M/S
      Chandabhoy & Jassoobhoy, Chartered Accountants, served as our independent
      registered public accounting firm for the year ended March 31, 2007 in
      connection with the audit of the consolidated financial statements being filed
      with this report.  Price Waterhouse Bangalore (New Delhi office) had
      served as our independent registered public accounting firm for the years ended
      March 31, 2006 and 2005.




The
      following table sets forth the remuneration that we paid to M/S Chandabhoy
&
Jassoobhoy in 2007 and to Price Waterhouse and its associated entities in 2006
      in Million Rs.:




**2006**
            **2007**Audit
                Fees
            5.00
            2.90All
                Other Fees
            -
            -**Total**
            **5.00**
            **2.90**




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**Audit
        fees**
  Audit
        fees represent fees for professional services rendered for the audit of the
        consolidated financial statements prepared in accordance with US
        GAAP.  Audit fees are fees agreed upon with M/S Chandabhoy &
Jassoobhoy and Price Waterhouse for the fiscal years 2007 and 2006, respectively
        (including related expenses) for the audit of our annual consolidated financial
        statements.
  ***Audit
        committee pre-approval policies and procedures***
  Our
        board
        of directors requires management to obtain the board’s approval before engaging
        independent outside auditors to provide any audit or permitted non-audit
        services to us.  Pursuant to this policy, our board of directors
        pre-approves all audit and non-audit services provided by M/S Chandabhoy
&
Jassoobhoy, our principal auditor.  Pursuant to the board’s
        pre-approval process, M/S Chandabhoy & Jassoobhoy, prepares a detailed list
        of services that it proposes to perform during the coming year.  These
        proposed services are presented to the board of directors, which considers
        and
        approves the services.  Management is not permitted to engage our
        outside auditors for any audit or non-audit service that is not on the list
        of
        services approved by the board of directors without first returning the board
        of
        directors for approval of such additional services.
  **Item
                  16D.**
              **Exemptions
                  from the Listing Standards for Audit
                  Committees**




Two
      members of our Audit Committee (Ms. Anita Soni and Mr. M. Sahu) are employees
      of
      the government of India, our majority shareholder.  We rely on the
      exemption from the independence requirements of Rule 10A-3(b)(1)(ii)(B)
      promulgated under the Securities Exchange Act of 1934, provided by Section
      (b)(1)(iv)(E) of such rule, to comply with the listing requirements of the
      New
      York Stock Exchange.  We meet the requirements for this exemption
      as we are a foreign private issuer and neither Ms. Soni nor Mr. Sahu is an
      executive officer of the Company. We do not believe that reliance on this
      exemption from independence requirements affects the ability of the Audit
      Committee to function independently.




**Item
                16E.**
            **Purchase
                of Equity Securities by the Issuer and Affiliated
                Purchasers**




Not
      applicable




**PART
      III**




**Item
      17. Financial
      Statements**




Not
      applicable.




**Item
      18. Financial
      Statements**




See
      pages
      F-1 through F-33.




**Item
      19. Exhibits**




**Number**
            **Description
                of Exhibit**1.1
            Memorandum
                and Articles of Association of the Registrant, as amended on January
                31,
                2002.  *2.1
            Form
                of Deposit Agreement among the Registrant, The Bank of New York,
                as
                depositary, and the holders from time to time to American Depositary
                Shares issued thereunder, including as an exhibit, the form of American
                Depositary Receipt.**4.1
            Lease
                Agreement dated January 16, 1996 between Life Insurance Corporation
                of
                India and the Registrant.**4.2
            License
                Agreement for provision of Internet Services in Delhi dated November
                6,
                1998 between President of India acting through Assistant Director
                General,
                Ministry of Communications and the Registrant.**4.3
            License
                Agreement for provision of Internet Services in Mumbai dated November
                6,
                1998 between President of India acting through Assistant Director
                General,
                Ministry of Communications and the
                Registrant.**






94
 Table
          of Contents




4.4
              License
                  Agreement for provision of Internet Services dated October 6, 2000
                  between
                  President of India acting through Assistant Director General, Ministry
                  of
                  Communications and Millennium Telecom Limited.**12.1
              Certification
                  of Chief Executive Officer***12.2
              Certification
                  of Principal Financial Officer***13.1
              Certification
                  of Chief Executive Officer***13.2
              Certification
                  of Principal Financial Officer***
  *Previously
        filed on September 30, 2002, as exhibits to Annual Report on Form 20-F for
        fiscal 2002.
  **Previously
        filed on September 27, 2001, as exhibits to Registration Statement on Form
        F-4
        (file number 333-13944).
  ***Filed
        herewith




95
 Table
            of Contents





**Mahanagar
      Telephone Nigam Limited**


**INDEX
      TO THE CONSOLIDATED FINANCIAL
      STATEMENTS**


PageReport
                  of Chandabhoy & Jassoobhoy, Chartered Accountants,
                   Independent Registered Public Accounting Firm
              F-2Report
                of Price Waterhouse, Independent
                Registered Public Accounting Firm
              F-4Consolidated
                  Balance Sheets as of March 31, 2006 and
                  2007
              F-5Consolidated
                  Statements of Income for the years
                  ended March 31, 2005, 2006 and 2007
              F-6Consolidated
                  Statements of Shareholders’ Equity
                  for the years ended March 31, 2005, 2006 and
                  2007
              F-7Consolidated
                  Statements of Cash Flows for the
                  years ended March 31, 2005, 2006 and 2007
              F-8Notes
                  to the Consolidated Financial
                  Statements
              F-9
  F-1
 Table
            of Contents
 **Report
        of Independent Registered Public Accounting
        Firm**
 
 To
        the
        Board of Directors and Shareholders of Mahanagar Telephone Nigam
        Limited
 
 We
        have
        audited the accompanying consolidated balance sheet of Mahanagar Telephone
        Nigam
        Limited and its subsidiaries (“The Company”) as of March 31, 2007, and the
        related consolidated statement of operations, shareholders’ equity and cash
        flows for the year ended March 31, 2007. We also have audited Company’s
        internal control over financial reporting as of March 31, 2007, based on
        criteria established in *Internal Control – Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        (“COSO”).  Company’s management is responsible for these financial
        statements, for maintaining effective internal control over financial reporting,
        and for its assessment of the effectiveness of internal control over financial
        reporting, included in the accompanying management’s report on assessment of
        effectiveness of internal control over financial reporting.  Our
        responsibility is to express an opinion on these financial statements and
        an
        opinion on the Company’s internal control over financial reporting based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement and whether effective
        internal control over financial reporting was maintained in all material
        respects.  Our audits of the financial statements included examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements, assessing the accounting principles used and significant
        estimates made by management, and evaluating the overall financial statement
        presentation.  Our audit of internal control over financial reporting
        included obtaining an understanding of internal control over financial
        reporting, assessing the risk that a material weakness exists, and testing
        and
        evaluating the design and operating effectiveness of internal control based
        on
        the assessed risk.  Our audits also included performing such other
        procedures as we considered necessary in the circumstances.  We
        believe that our audits provide a reasonable basis for our
        opinions.
 
 A
        Company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles.  A Company’s internal
        control  over financial reporting includes those policies and
        procedures that (1) pertain to the maintenance of records that, in reasonable
        detail, accurately and fairly reflect the transactions and dispositions of
        the
        assets of the Company; (2) provide reasonable assurance that transactions
        are
        recorded as necessary to permit preparation of financial statements in
        accordance with generally accepted accounting principles, and that receipts
        and
        expenditures of the Company are being made only in accordance with
        authorizations of management and directors of the Company; and (3) provide
        reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use, or disposition of the Company’s assets that could have a
        material effect on the financial statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements.  Also, projections of any evaluation
        of effectiveness to future periods are subject to the risk that control may
        become inadequate because of changes in conditions, or that the degree of
        compliance with the policies or procedures may deteriorate.
 
 A
        material weakness is a control deficiency, or combination of control
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. The following material weaknesses have been identified and included
        in management’s assessment:
  1
              Management
                  has concluded that, as of March 31, 2007, the Company did not maintain
                  effective controls over the accounting for properties and equipments.
                  Specifically, the Company has ineffective controls in its Mumbai
                  unit over
                  physical verification and reconciling the results thereof with
                  the assets
                  register as well as updating and reconciling the assets register
                  with the books of account. This control deficiency could result
                  in a
                  misstatement to the property and equipments and the corresponding
                  depreciation expense.
 
 2
              Management
                  has concluded that, as of March 31, 2007, the Company did not maintain
                  effective control over the accounting for deposits received from
                  subscribers. Specifically, the Company has ineffective controls
                  at its
                  Mumbai unit on the process of reconciliation of subscriber-wise
                  listing of
                  deposits with the control account balance. This control deficiency
                  could
                  result in a misstatement to the current and non-current portion
                  of
                  customer deposits.
 
 3
              Management
                  has concluded that, as of March 31, 2007, the Company did not maintain
                  effective control over accounting for dues from and to related
                  parties.
                  Specifically the Company has ineffective controls over the process
                  of
                  obtaining period end account balance confirmations and reconciliation
                  thereof. This control deficiency could result in a misstatement
                  to the
                  balances of dues to/from related parties and the corresponding
                  cost of
                  revenue and revenue.
  F-2
 Table
            of Contents
  4
              Management
                  has concluded that, as of March 31, 2007, there were ineffective
                  controls
                  in the area of Information Technology (“IT”) general controls.
                  Specifically, it included absence of an IT security policy and
                  the
                  resultant weak controls over granting and monitoring of user access
                  rights
                  to key applications and databases and weak password controls. This
                  control
                  deficiency could result in unauthorized access to key applications
                  and
                  databases. Further there were ineffective controls in the area
                  of audit
                  trail enablement and review in respect of critical IT systems.
                  Specifically the audit trail / logs were not enabled. This control
                  deficiency could result in security breach and / or errors remaining
                  unnoticed and not rectified in key applications and databases.
                  The above
                  control deficiencies could lead to financial statement
                  misstatement.
 
 These
        material weaknesses were considered in determining the nature, timing, and
        extent of audit tests applied in our audit of the March 31, 2007 consolidated
        financial statements, and our opinion regarding the effectiveness of the
        Company’s internal control over financial reporting does not affect our opinion
        on those consolidated financial statements.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Company as of March 31, 2007,
        and
        the results of its operations and its cash flows for the year ended March
        31,
        2007 in conformity with accounting principles generally accepted in the United
        States of America.
 
 In
        our
        opinion, management’s assessment that the Company did not maintain effective
        internal control over financial reporting as of March 31,2007, is fairly
        stated,
        in all material respects, based on the criteria established
        in*Internal Control—Integrated Framework*  issued
        by the COSO. Also, in our opinion, because of the effects of the material
        weaknesses described above on the achievement of the objectives of the control
        criteria, the Company has not maintained effective internal control over
        financial reporting as of March 31, 2007, based on criteria established
        in*Internal Control—Integrated Framework*  issued
        by the COSO.
 
 
 
 **Chandabhoy
        & Jassoobhoy**
 **Chartered
        Accountants**
 
 
 New
        Delhi, India
 September
        28, 2007
  F-3
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
          FIRM**
    To
          the
          Board of Directors and Shareholders of
  Mahanagar
          Telephone Nigam Limited:
  
  In
          our
          opinion, the accompanying consolidated balance sheets and the related
          consolidated statements of operations, of shareholders' equity and of cash
          flows
          present fairly, in all material respects, the financial position of Mahanagar
          Telephone Nigam Limited and its subsidiaries at March 31, 2006 and 2005,
          and the
          results of their operations and their cash flows for each of the years
          in the
          three year period ended March 31, 2006, in conformity with accounting principles
          generally accepted in the United States of America. These financial statements
          are the responsibility of the Company’s management. Our responsibility is to
          express an opinion on these financial statements based on our audits. We
          conducted our audits of these statements in accordance with the standards
          of the
          Public Company Accounting Oversight Board (United States). Those standards
          require that we plan and perform the audit to obtain reasonable assurance
          about
          whether the financial statements are free of material misstatement. An
          audit
          includes examining, on a test basis, evidence supporting the amounts and
          disclosures in the financial statements, assessing the accounting principles
          used and significant estimates made by management, and evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
    As
          discussed in Note 3, 4, 19, 22 and 25, the Company has significant transactions
          with its parent company, the Department of Telecommunication, and other
          agencies
          and companies controlled by the Indian Government, all of which are related
          parties.
    Price
          Waterhouse
    /s/
          PRICE
          WATERHOUSE
    New
          Delhi, India
    September
          30, 2006
 F-4
 Table
            of Contents
  **MAHANAGAR
                TELEPHONE NIGAM LIMITED**
 **CONSOLIDATED
                BALANCE SHEETS**
 
 **As
                            of March 31,****2006**
                        
                        **2007**
                        
                        **2007****(Indian
                            Rupees  in millions, except per share data and as stated
                            otherwise)**
                        
                        **Convenience
                            translation into million of US $ (Unaudited)****ASSETS****Current
                            assets:**Cash
                            and cash equivalents
                        
                        
                        Rs.
                        1,641
                        Rs.
                        1,660
                        $
                        39Short
                            term investments in bank deposits
                        
                        
                        
                        19,020
                        
                        17,102
                        
                        397Accounts
                            receivable, net
                        
                        
                        
                        2,779
                        
                        4,566
                        
                        106Due
                            from related parties
                        
                        
                        
                        2,551
                        
                        2,476
                        
                        57Inventories
                        
                        
                        
                        1,448
                        
                        2,239
                        
                        52Unbilled
                            Revenues
                        
                        
                        
                        4,361
                        
                        4,080
                        
                        95Deferred
                            income taxes
                        
                        
                        
                        8,202
                        
                        7,359
                        
                        171Other
                            receivables
                        
                        
                        
                        8,759
                        
                        28,010
                        
                        650**Total
                            current assets**
                        
                        
                        
                        **48,761**
                        
                        **67,492**
                        
                        **1567**Investments
                            in held to maturity securities
                        
                        
                        
                        3,500
                        
                        3,500
                        
                        81Investments
                            in affiliates
                        
                        
                        
                        66
                        
                        115
                        
                        3Property
                            and equipment, net
                        
                        
                        
                        80,965
                        
                        81,040
                        
                        1880Due
                            from related parties
                        
                        
                        
                        21,267
                        
                        21,183
                        
                        491Restricted
                            assets
                        
                        
                        
                        13,427
                        
                        3,672
                        
                        85Other
                            assets
                        
                        
                        
                        2,165
                        
                        1,935
                        
                        45**Total
                            assets**
                        
                        
                        
                        **170,151**
                        
                        **178,937**
                        **$**
                        **4152****LIABILITIES
                            AND SHAREHOLDERS' EQUITY****Current
                            liabilities**:Accounts
                            payable
                        
                        
                        
                        12,129
                        
                        12,115
                        
                        281Dues
                            to related parties
                        
                        
                        
                        5,377
                        
                        5,729
                        
                        133Accrued
                            expenses and other current liabilities
                        
                        
                        
                        22,254
                        
                        27,550
                        
                        639**Total
                            current liabilities**
                        
                        
                        
                        **39,760**
                        
                        **45,394**
                        
                        **1053**Accrued
                            employee cost
                        
                        
                        
                        31,378
                        
                        28,727
                        
                        667Deferred
                            income taxes
                        
                        
                        
                        8,050
                        
                        7,305
                        
                        170Dues
                            to related parties
                        
                        
                        
                        714
                        
                        -Non
                            current portion of customer deposits
                        
                        
                        
                        9,801
                        
                        8,634
                        
                        200**Total
                            liabilities**
                        
                        
                        
                        **89,703**
                        
                        **90,060**
                        **$**
                        **2090**Contingencies
                            and commitments *(refer
                            note 22)***Shareholders’
                            equity**Equity
                            shares, 800,000,000 shares authorized, par value Rs.
                            10 per
                            share
                        
                        
                        
                        6,300Issued
                            and outstanding –  630,000,000 and 630,000,000 shares as of
                            March 31, 2006 and 2007 respectively
                        
                        
                        
                        
                        
                        6,300
                        
                        146Additional
                            paid-in capital
                        
                        
                        
                        6,649
                        
                        6,649
                        
                        154Retained
                            earnings
                        
                        
                        
                        67,191
                        
                        75,620
                        
                        1755Research
                            and development reserve
                        
                        
                        
                        308
                        
                        308
                        
                        7**Total
                            shareholders' equity**
                        
                        
                        
                        **80,448**
                        
                        **88,877**
                        
                        **2062****Total
                            liabilities and shareholders' equity**
                        
                        
                        Rs.
                        **170,151**
                        Rs.
                        **178,937**
                        $
                        **4152**
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
 Table
            of Contents
 
 **MAHANAGAR
                        TELEPHONE NIGAM LIMITED****CONSOLIDATED
                        STATEMENTS OF
                        OPERATIONS****Year
                        ended March 31,****2005**
                    
                    **2006**
                    
                    
                    **2007**
                    
                    **2007****(Indian
                        Rupees  in millions, except per share data and as stated
                        otherwise)**
                    
                    **Convenience
                        translation into
                        million of US$ (Unaudited)**Revenues,
                        net
                    
                    Rs.
                    50,156
                    Rs.
                    46,668
                    Rs.
                    
                    45,475
                    $
                    1,055Cost
                        of revenues  (excluding depreciation shown
                      separately
                        below)
                    
                    
                    (31,521)
                    
                    (32,268)
                    
                    
                    (32,497)
                    
                    (754)Selling,
                        general and administrative expenses
                    
                    
                    (9,275)
                    
                    (8,034)
                    
                    
                    (8,753)
                    
                    (203)Depreciation
                    
                    
                    (7,724)
                    
                    (7,999)
                    
                    
                    (8,516)
                    
                    (198)Liability
                        for Post retirement medical
                      benefits written back *(Refer note
                        24)*
                    
                    
                    
                    
                    
                    
                    
                    5,794
                    
                    134Excess
                        liabilities written back
                    
                    
                    1,291
                    
                    821
                    
                    
                    839
                    
                    20**Income/
                        (loss) from operations**
                    
                    
                    **2,927**
                    
                    **(812)**
                    
                    
                    **(2,342)**
                    
                    **(54)**Interest
                        from short term bank deposit
                    
                    
                    1,341
                    
                    1,601
                    
                    
                    1,584
                    
                    37Interest
                        and other income,net *(
                        Refer note 15)*
                    
                    
                    1,329
                    
                    787
                    
                    
                    6,310
                    
                    146-**Income
                        before Income taxes,**
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -**and
                        share of losses of affiliates**
                    
                    
                    **5,597**
                    
                    **1,576**
                    
                    
                    **10,236**
                    
                    **237**-Income
                        taxes *(Refer
                        note
                        17)*
                    
                    
                    (2,124)
                    
                    (437)
                    
                    
                    1073
                    
                    25Equity
                        in (losses) of affiliates
                    
                    
                    (67)
                    
                    (73)
                    
                    
                    (7)
                    
                    (0)**Net
                        income**
                    
                    Rs.
                    **3,406**
                    Rs.
                    **1,066**
                    Rs.
                    
                    **11,302**
                    $
                    **262****Earnings
                        per equity share**Basic
                        and diluted
                    
                    Rs.
                    5.41
                    Rs.
                    1.69
                    Rs.
                    
                    17.94
                    $
                    0.42**Weighted
                        average number of equity shares used in computing earnings
                        per equity
                        share**
                    
                    
                    630
                    
                    630
                    
                    
                    630
                    
                    630
 
 The
        accompanying notes form an integral part of these consolidated financial
        statements.
  F-6
 Table
            of Contents
   **MAHANAGAR
                          TELEPHONE NIGAM LIMITED****CONSOLIDATED
                          STATEMENTS OF SHAREHOLDERS’
                          EQUITY****Common
                          stock**
                      
                      
                      
                      **Additional**
                      
                      
                      
                      **Research
                          and**
                      
                      
                      **Total****Equity
                          shares**
                      
                      
                      
                      **paid-in**
                      
                      **Retained**
                      
                      **development**
                      
                      
                      **stockholders'****No.
                          of shares**
                      
                      **Amount**
                      
                      **Capital**
                      
                      **earnings**
                      
                      **reserve**
                      
                      
                      **equity****(Indian
                          Rupees  in millions, except per share data and as stated
                          otherwise)****Balance
                          as on**
                        **March
                          31, 2004**
                      **630,000,000**
                      
                      **6,300**
                      
                      **6,649**
                      
                      **71,300**
                      
                      **308**
                      
                      
                      **84,557****Net
                          income**
                      
                      
                      
                      
                      
                      
                      3,407
                      
                      
                      
                      
                      3,407Cash
                          dividend paid at the rate of Rs. 6.50 per share
                      
                      
                      
                      
                      
                      
                      (4,630)
                      
                      
                      
                      
                      (4,630)**Balance
                          as on**
                        **March
                          31, 2005**
                      **630,000,000**
                      **Rs.**
                      **6,300**
                      **Rs.**
                      **6,649**
                      **Rs.**
                      **70,076**
                      **Rs.**
                      **308**
                      
                      **Rs.**
                      **83,333****Net
                          income**
                      
                      
                      
                      
                      
                      
                      **1,066**
                      
                      
                      
                      
                      1,066Cash
                          dividend paid at the rate of Rs. 6.27 per share
                      
                      
                      
                      
                      
                      
                      **(3,951)**
                      
                      
                      
                      
                      (3,951)**630,000,000**
                      **Rs.**
                      **6,300**
                      **Rs.**
                      **6,649**
                      **Rs.**
                      **67,191**
                      **Rs.**
                      **308**
                      
                      **Rs.**
                      **80,448****Balance
                          as on**
                        **March
                          31, 2006****Net
                          income**
                      
                      
                      
                      
                      
                      
                      **11,302**
                      
                      
                      
                      
                      11,302Cash
                          dividend paid at the rate of Rs. 4.56 per share
                      
                      
                      
                      
                      
                      
                      **(2,873)**
                      
                      
                      
                      
                      (2,873)**Balance
                          as on**
                        **March
                          31, 2007**
                      **630,000,000**
                      **Rs.**
                      **6,300**
                      **Rs.**
                      **6,649**
                      **Rs.**
                      **75,620**
                      **Rs.**
                      **308**
                      
                      **Rs.**
                      **88,877****Convenience
                          translation into million of US $ (Unaudited)**
                      
                      $
                      146
                      $
                      154
                      $
                      1,755
                      $
                      7
                      
                      $
                      2,062
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-7
 Table
            of Contents
  **MAHANAGAR
          TELEPHONE NIGAM LIMITED**
 **CONSOLIDATED
          STATEMENTS OF CASH
          FLOWS**
 **2005**
                    
                    **2006**
                    
                    **2007**
                    
                    **2007****(Indian
                        Rupees  in millions, except per share data and as stated
                        otherwise)**
                    
                    
                    
                    **Convenience
                        translation into US $ (Unaudited)****Cash
                        flows from operating activities****Net
                        income**
                    
                    
                    **3,406**
                    
                    **1,066**
                    
                    **11,302**
                    
                    **262***Adjustments
                        to reconcile net income to net cash provided by operating
                        activities:*Depreciation
                    
                    
                    7,724
                    
                    7,999
                    
                    8,516
                    
                    197(Profit)/loss
                        on sale of fixed assets
                    
                    
                    197
                    
                    93
                    
                    50
                    
                    1Deferred
                        taxes
                    
                    
                    (1,276)
                    
                    (816)
                    
                    98
                    
                    2Provision
                        for bad and doubtful debts
                    
                    
                    1,137
                    
                    (248)
                    
                    1180
                    
                    27Excess
                        liabilties written back
                    
                    
                    (1,291)
                    
                    (821)
                    
                    (839)
                    
                    (19)Equity
                        in (losses) of equity affiliates, net of taxes
                    
                    
                    67
                    
                    73
                    
                    7
                    
                    0*Changes
                        in assets and liabilities, net*(Increase)
                        / decrease in accounts recievables and unbilled revenue
                    
                    
                    (345)
                    
                    748
                    
                    (2,686)
                    
                    (62)(Increase)
                        / decrease in Inventory
                    
                    
                    (875)
                    
                    418
                    
                    (792)
                    
                    (18)(Increase)/
                        decrease in dues from related parties
                    
                    
                    (4,201)
                    
                    3,971
                    
                    158
                    
                    4(Increase)/
                        decrease in other receivables
                    
                    
                    70
                    
                    (4,368)
                    
                    (19,021)
                    
                    (441)(Increase)
                        / decrease in restricted assets
                    
                    
                    (1,690)
                    
                    1,306
                    
                    9,755
                    
                    226Increase/
                        (decrease) in trade payables
                    
                    
                    3,942
                    
                    (439)
                    
                    (13)
                    
                    (0)Increase/
                        (decrease) in dues to related parties
                    
                    
                    (745)
                    
                    (5,249)
                    
                    (362)
                    
                    (8)Increase/
                        decrease in accrued employee cost
                    
                    
                    4,128
                    
                    3,944
                    
                    (2,652)
                    
                    (61)Increase
                        / (decrease) in accrued expenses and other payables
                    
                    
                    4,758
                    
                    (1,671)
                    
                    4,971
                    
                    115**Net
                        cash provided by the operating activities**
                    
                    
                    **15,006**
                    
                    **6,006**
                    
                    **9,672**
                    
                    **225****Cash
                        flows from investing activities**Purchase
                        of property and equipment
                    
                    
                    (10,707)
                    
                    (6,713)
                    
                    (8,697)
                    
                    (202)Proceeds
                        from property and equipment
                    
                    
                    79
                    
                    26
                    
                    56
                    
                    1Investment
                        in affiliates
                    
                    
                    -
                    
                    -
                    
                    (56)
                    
                    (1)Investments  in
                        short term bank deposits
                    
                    
                    (2,078)
                    
                    (1,288)
                    
                    1,917
                    
                    44**Net
                        cash used in investing activities**
                    
                    
                    **(12,706)**
                    
                    **(7,975)**
                    
                    **(6,780)**
                    
                    (158)**Cash
                        flows from financing activities**Dividends
                        paid ( including tax)
                    
                    
                    (4,630)
                    
                    (3,951)
                    
                    (2,873)
                    
                    (67)**Net
                        cash from financing activities**
                    
                    
                    **(4,630)**
                    
                    **(3,951)**
                    
                    **(2,873)**
                    
                    **(67)**Net
                        increase/(decrease) in cash and cash equivalents
                    
                    
                    (2,330)
                    
                    (5,920)
                    
                    19
                    
                    0Cash
                        and cash equivalents at the beginning of the period
                    
                    
                    9,891
                    
                    7,561
                    
                    1,641
                    
                    38**Cash
                        and cash equivalents at the end of the period**
                    **7,561**
                    **1,641**
                    **1,660**
                    
                    38**Supplemental
                        cash flow information**Cash
                        paid for interest
                    
                    
                    361
                    
                    244
                    
                    20
                    
                    0Cash
                        paid/(received) from income taxes
                    
                    
                    4,732
                    
                    2,475
                    
                    5,278
                    
                    349
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-8
 Table
            of Contents
  **MAHANAGAR
        TELEPHONE NIGAM LIMITED**
 **Notes
        to the consolidated financial
        statements**
 ______________________________________________________________________________
  **1.**
              **DESCRIPTION
                  OF
                  BUSINESS**
 Mahanagar
        Telephone Nigam Limited (“MTNL" or “the Company”) was incorporated in New Delhi,
        India as a limited liability company under the Indian Companies Act, 1956.
        MTNL
        is the principal provider of basic or fixed line telecommunications services
        in
        Delhi and Mumbai. MTNL also provides internet and cellular services in both
        Delhi and Mumbai. MTNL’s license for fixed line services which covers the state
        of Delhi and the municipalities of Mumbai, Navi Mumbai and Thane (which are
        in
        the state of Maharashtra) is valid up to March 31, 2013 and MTNL’s licenses for
        internet and cellular services are valid up to September 7, 2017 and October
        9,
        2017 respectively. With effect from May 10, 2006 MTNL has obtained a National
        Long Distance license for Delhi and the municipalities of Mumbai, Navi Mumbai
        and Thane valid up to May 9, 2026.
 
 Millennium
        Telecom Limited (hereinafter referred to as “MTL”), a wholly owned India based
        subsidiary of MTNL, is engaged in providing capacity building in international
        bandwidth and web based tendering portal solutions.
 
 Mahanagar
        Telephone Mauritius Limited (hereinafter referred to as “MTML”), a wholly owned
        subsidiary of MTNL was registered in Mauritius in November 2003, MTML was
        granted a license by the Government of Mauritius on January 27, 2004 to provide
        public switched telecom services, public land mobile services and international
        long distance services for a period of 15 years with service obligation within
        18 months of grant of license. MTML commenced operations during the year
        ended
        March 31, 2006.
 
 **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 *(a)*
              *Principles
                  of Consolidation and Basis of
                  Presentation*
 The
        consolidated financial statements include all controlled subsidiaries. In
        addition, we review our relationships with other entities to assess if we
        are
        the primary beneficiary of a variable interest entity. If the determination
        is
        made that we are the primary beneficiary, then that entity is consolidated.
        All
        significant inter-company balances and transactions are eliminated in
        consolidation.
 
 MTNL’s
        investments in business entities in which it does not have control, but has
        the
        ability to exercise significant influence over operating and financial policies
        (generally 20-50 percent ownership), are accounted for under the equity method
        of accounting.
 
 The
        accompanying consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles applicable in the United States
        (“U.S. GAAP”) and presented in Indian rupees, the national currency of India
        which is also the functional currency of the Company. Solely for the convenience
        of the readers, these consolidated financial statements as of and for the
        year
        ended March 31, 2007, have been translated into United States dollars at
        the
        noon buying rate in New York city on March 31, 2007, for cable transfers
        in
        Indian rupees, as certified for customs purposes by the Federal Reserve Bank
        of
        New York of $1= Rs.43.10. No representation is made that the Indian rupee
        amounts have been, could have been or could be converted into United States
        dollars at such a rate or any other rate on March 31, 2007 or at any other
        date.
 
 *(b)*
              *Use
                  of estimates*
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the results of operations during the reporting periods. Actual results could
        differ materially from these estimates. Significant estimates and assumptions
        are used when accounting for certain items, such as but not limited to,
        allowances for uncollectible accounts receivable, future obligations under
        employee benefit plans, useful lives of property and equipment, valuation
        allowances for deferred taxes and contingencies.
 
 *(c)*
              *Foreign
                  currency translation*
 The
        Indian rupee is the functional currency of MTNL and its domestic
        subsidiaries and equity affiliates. Transactions in foreign currency are
        recorded at the exchange rate prevailing on the date of transaction. Monetary
        assets and liabilities denominated in foreign currencies are expressed in
        the
        functional currency at the exchange rates in effect at the balance sheet
        date.
        Revenues, costs and expenses are recorded using average exchange rates
        prevailing during the reporting periods. Gains or losses resulting from foreign
        currency transactions are included in results of operations.
 
 *(d)*
              *Revenue
                  recognition*
 Revenues
        include amounts invoiced for call revenue, fixed monthly rental charges,
        roaming
        charges, activation fees, internet and broadband services, access and
        interconnection revenue and fees for value added services.
 Revenues
        for fixed line are recognized based upon metered call units (“MCU”) of traffic
        processed and cellular telephone services are recognized based on call data
        records (“CDR”) of traffic processed. Rental revenues and leased circuits
        rentals are recognized based upon contracted fee schedules. Revenues from
        internet and broadband services are recognized based on
  F-9
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  usage
        by
        subscribers. Revenues associated with access and interconnection for usage
        of
        the Company’s network by other operators for local, national long distance and
        international long distance calls are recognized gross in accordance with
        the
        Interconnect Usage Charges Regulation released by Telecom Regulatory Authority
        of India (“TRAI”) and contracted fee schedules. TRAI regulation specifies the
        maximum per minute rates for traffic terminated on the Company’s network.
        Revenues are recorded net of applicable discounts, allowances and service
        tax.
 
 Amounts
        included in the financial statements, which relate to services provided from
        the
        last billing cycle date upto the end of the reporting period, are classified
        in
        current assets as “Unbilled revenue”. These are billed in subsequent periods as
        per the terms of the billing plans.
 
 Billings
        in advance for services to be rendered and amounts charged for new connections
        are included in accrued expenses and other current
        liabilities’ under the caption Deferred income. Amounts charged for new
        connections are recognized over the average life of the customer
        relationship.
 
 *(e)*
              *License
                  fee*
 MTNL
        is
        required to pay license fees and spectrum charges to Department Of
        Telecommunications (“DOT”) in accordance with conditions governing license
        fees for Basic Telephone Service and Cellular Telephone Service under the
        Revenue Sharing Regime. The license fees and spectrum charges are expensed
        as
        incurred and computed using specified percentages as prescribed by DOT. The
        specified percentage for license fees on fixed line services and cellular
        services were 10% of the Adjusted Gross Revenue (“AGR”) for the years ended
        March 31, 2005, 2006 and 2007. With effect from January 1, 2006 the Company
        is
        required to pay license fee at the rate of 6% of the AGR on the internet
        and
        broadband services (including internet telephony). License fees and spectrum
        charges charged to income as part of cost of revenues amounted to Rs.4,974
        million, Rs. 552 million and Rs. 4843 million (including license fee on Internet
        services) for the years ended March 31, 2005, 2006 and 2007
        respectively.  The
        license fees and spectrum charges for the year ended March 31, 2006 amounting
        to
        Rs.552 million are net of the reversal of  Rs.3,408 million of excess
        license fees that the Company had accrued up to March 31, 2005, which are
        no
        longer due to be paid to the DOT *(Refer Note 4)*
 
 *(f)*
              *Network
                  charges*
 MTNL
        recognizes charges associated with access to and interconnection to other
        operators’ network for local, national long distance and international long
        distance calls in accordance with the Interconnect Usage Charges Regulation
        released by Telecom Regulatory Authority of India (“TRAI”), where applicable, or
        in accordance with the terms of agreements entered into with other operators.
        TRAI regulation specifies per minute charges for traffic terminated on the
        other
        operators’ network.
 
 *(g)*
              *Cash
                  and cash equivalents*
 MTNL
        considers all highly liquid investments, with an original maturity or remaining
        maturity of three months or less at the date of purchase to be cash equivalents.
        Cash equivalents are stated at cost, which approximates their fair value
        due to
        the short maturity of the investments.
 
 *(h)*
              *Investment
                  in short term bank deposits*
 Investment
        in bank deposits represents term deposits placed with banks earning fixed
        rate
        of interest with maturities ranging from more than three months to one year.
        Interest on investment in bank deposits is recognized on accrual
        basis.
 
 *(i)*
              *Inventories*
 Inventories
        are stated at the lower of cost or market value. Cost is determined using
        the
        weighted average method for all categories of inventories. Inventories comprise
        of handsets, cables, exchange equipment and other stores and spares which
        are
        used in operating and maintaining networks. MTNL reviews its inventories
        on a
        periodic basis to identify and provide for inventory obsolescence and
        inventories with carrying values in excess of realizable values based on
        its
        assessment of the future demands and market conditions. These write-downs
        are
        included in cost of revenues.
 
 *(j)*
              *Investment*
 MTNL
        has
        evaluated its investments in debt and equity securities in accordance with
        SFAS
        115, “Accounting for Certain Investments in Debt and Equity Securities” and
        determined that all of its debt securities are to be classified as
        held-to-maturity (“HTM”). Debt securities are classified as held-to-maturity
        since management has the positive intent and ability to hold the securities
        to
        maturity. Held-to-maturity investments are carried at amortized cost using
        the
        effective yield method, adjusted for the amortization or accretion of premiums
        or discounts, if any. Costs include transaction cost.  Currently all the
        investments classified as HTM were acquired at face value, without paying
        any
        premium or discount or incurring any transaction cost. Realized gains and
        losses
        on sale of HTM securities are included in earnings. Dividends and interest
        on
        securities are recognized when earned and included in other income.
 
 MTNL
        records an investment impairment charge on held-to-maturity securities when
        management believes an investment has experienced a decline in value that
        is
        judged to be other than temporary. For securities where quoted market prices
        are
        not available, fair value is determined using pricing techniques such as
        discounted cash flow analysis. In order to determine whether a decline in
        value
        is other than temporary, the Company evaluates, among other factors, the
        duration and extent to which the value has been less than the carrying value,
        the financial condition and business outlook of the investee including
  F-10
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  cash
        flow
        indicators, current market condition and trends in the industry or the ability
        of the Company to retain the investment for a period of time sufficient to
        allow
        for any anticipated recovery in value.
 
 *(k)*
              *Property
                  and equipment*
 Property
        and equipment are stated at cost less accumulated depreciation. Assets acquired
        under capital leases are stated at the present value of minimum lease payments
        less accumulated depreciation.
 
 Cost,
        in
        the case of the network, comprises all expenditure up to and including cabling
        and wiring within customers’ premises, contractor’s charges, materials and
        direct labor. Employees’ remuneration and benefits are capitalized based on
        technical assessment of actual staff costs directly related to such capital
        expenditure. Interest cost incurred for qualifying assets during construction
        period is capitalized based on actual investment and average cost of funds
        or
        specific rate of borrowings. Interest capitalized is included as a part of
        asset
        cost and is depreciated over the estimated useful life of the asset. Maintenance
        and repair costs are charged to expense as incurred. Major overhauls that
        extend
        the useful lives of existing assets are capitalized. The cost and the
        accumulated depreciation for property and equipment sold, retired or otherwise
        disposed off are removed from the stated values and the resulting gains and
        losses are included in the statement of income.
 
 Advances
        paid towards the acquisition of property and equipment outstanding at each
        balance sheet date and expenditures for construction of network systems and
        other projects (prior to the asset being ready for its intended use) are
        reflected as Capital Work in Progress.
 
 Depreciation
        is computed using the straight-line method over the estimated useful lives.
        Assets under capital leases and leasehold improvements are amortized
        straight-line over their estimated useful life or the lease term, as
        appropriate. Property and equipment are being depreciated over their useful
        lives, which exceed the license term since the Company believes that its
        licenses will be extended beyond their current term.
 
 The
        Company has adopted the provisions of FASB statement no. 143 “Asset Retirement
        Obligations”. At present the Company does not have any material asset retirement
        obligation.
 
 MTNL
        has
        established the estimated useful lives of assets for depreciation purposes
        as
        follows:
 
 Land
                  - leasehold
              Over
                  the period of the leaseBuildings
              30
                  to 60 YearsCable
                  and related equipment
              20
                  to 25 YearsExchanges
                  and related Equipment
              10
                  YearsOther
                  fixed assets
              5
                  to 10 Years
 
 *(l)*
              *Impairment
                  of long lived assets*
 MTNL
        has
        adopted the provisions of SFAS 144 “Accounting for the Impairment or Disposal of
        Long-Lived Assets”. MTNL reviews long-lived assets, for impairment whenever
        events or changes in business circumstances indicate the carrying amount
        of
        assets may not be fully recoverable. Each impairment test is based on a
        comparison of the undiscounted cash flows expected to be generated from the
        use
        of the asset to its recorded value. If impairment is indicated, the asset
        is
        written down to its fair value. Assets to be disposed are reported at the
        lower
        of the carrying value or the fair value less cost to sell.
 
 *(m)*
              *Operating
                  Leases*
 MTNL
        has certain cancelable operating
        leases for office premises. Rental expenses for operating leases are accounted
        for on a straight line method. Rental expense amounted to Rs. 677 million,
        Rs.
        612 million and Rs.610million,
        for the years ended
        March 31, 2005, 2006 and 2007 respectively.
  *(n)*
              *Retirement
                  benefits*
 
 ***Company's
        employees***
 The
        Company has two sets of retirement schemes for its employees based on the
        option
        exercised by them. Under one scheme, the employees are eligible for provident
        fund, gratuity, leave encashment and medical benefits and in the other scheme,
        the employees are eligible for pension, general provident fund, gratuity,
        leave
        encashment and medical benefits.
 
 *Pension*
 The
        pension scheme is a defined benefit retirement plan (the “Pension Plan”). Under
        the pension plan, after retirement, employees are eligible for monthly payments
        including dearness allowance based on the last drawn salary. MTNL provides
        for
        the Pension Plan on the basis of an actuarial valuation. The entire Pension
        Plan
        of MTNL is unfunded.
 
 F-11
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            of Contents
 
 *Gratuity*
 MTNL
        has
        a defined benefit retirement plan (the “Gratuity Plan”) covering eligible
        employees. The Gratuity Plan provides a lump sum payment to vested employees
        at
        retirement or termination of employment based on the respective employee’s
        salary and years of employment. MTNL provides for the Gratuity Plan on the
        basis
        of actuarial valuation.
 
 *Medical*
 The
        medical scheme is a defined benefit retirement plan (the “Medical Plan”). In
        accordance with the Medical Plan, retirees are entitled to receive
        reimbursements limited to half of the monthly salary drawn by the employee
        on
        the date of retirement and reimbursement of hospitalization charges in any
        year.
*(Also refer note 24(b))*
 
 *Leave
        encashment*
 Leave
        encashment benefit comprises of encashment of leave balances accrued by
        employees. These balances can be accumulated and carried forward up to a
        maximum
        of 300 days and are encashable during the tenure of employment or on the
        employee leaving the Company or on retirement. Leave encashment is being
        provided for on the basis of actuarial valuation.
 
 *Provident
        fund*
 Under
        Indian law, employees are entitled to receive benefits under the Provident
        Fund,
        which is a defined contribution plan. Both, the employee and the employer
        make
        monthly contributions to the plan at a predetermined rate (presently 12.0%)
        of
        the employees’ salary (basic and dearness allowance). The contributions are paid
        to the Provident Fund Trust established by MTNL. MTNL is obligated to make
        contributions when there are shortfalls in statutorily assured rates of return
        on the assets of the trust. Currently, MTNL has no further obligation under
        the
        provident fund beyond its contribution, which is expensed when
        accrued.
 
 *General
        provident fund*
 The
        General Provident Fund scheme (the “GPF”) is a retirement scheme applicable to
        employees who have opted for the Government pension scheme. Under the scheme,
        employees contribute between 6% to 100% of their basic pay to GPF. The employer
        is not required to make any contributions towards the fund. The Scheme also
        allows participants to withdraw up to 90% of the amount contributed by them
        towards the GPF.
 
 During
        the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’ (“GPF
        Trust”) and had applied to the Income Tax authorities for the recognition of the
        said Trust. During the year ended March 31, 2006, the GPF Trust has been
        recognized by the Income Tax authorities and the Company has funded the GPF
        Trust by transferring the accumulated GPF contribution till the date of
        formation of the GPF Trust. The Company has also provided interest at the
        statutorily applicable rate of 8% per annum on the employee contributions
        upto
        the date of formation of the GPF Trust. MTNL is obligated to make contributions
        when there are shortfalls in statutorily assured rates of return on the assets
        of the GPF Trust. Currently, MTNL has no further obligation under the General
        Provident Fund.
 
 Pension,
        gratuity, medical benefits and leave encashment are defined benefit retirement
        plans. The liability thereof is provided based on an actuarial valuation.
        All
        actuarial gains and losses are expensed off in the year, in which they arise.
        Prior service cost of medical benefits are being amortized over the average
        remaining service period. The gratuity plan is funded plan while medical,
        pension and leave encashment are unfunded plans.
 
 ***Employees
        on secondment from DOT***
 The
        employees who are seconded from DOT are entitled to pension, gratuity and
        leave
        encashment from the Government. MTNL makes contributions, to fund the
        Government’s pension, gratuity and leave encashment liability in respect of
        seconded employees, in accordance with the rates prescribed by the Government.
        MTNL has no further liability in respect of these employees. Additionally,
        these
        employees are covered under eligible Government medical schemes.
 
 *(o)*
              *Income
                  taxes*
 In
        accordance with the provisions of SFAS 109, *“Accounting for Income Taxes”*income taxes are accounted for under the asset and liability method.
        Deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities of a change in tax rates is recognized in the statements
        of income in the period such changes are enacted. Based on management’s
        judgment, a valuation allowance against any deferred tax asset is recognized
        when it is more likely than not that some portion or all of such deferred
        tax
        asset will not be realized.
 
 *(p)*
              *Advertisement
                  expenses*
 Advertising
        and business promotion costs are expensed as incurred and amounted to Rs.
        199
        million,  Rs.414 million and Rs. 447 million for the years ended March
        31, 2005, 2006 and 2007 respectively.
 
 *(q)*
              *Dividends*
 Dividends
        are recorded in the consolidated financial statements in the period in which
        they are approved by the shareholders.
  F-12
 Table
            of Contents
  *(r)*
              *Earnings
                  per share*
 In
        accordance with SFAS No. 128, Earnings Per Share (EPS), basic earnings per
        share
        is computed using the weighted average number of equity shares outstanding
        during the period. MTNL does not have any dilutive securities and hence the
        basic and diluted earnings per share are the same.
 
 *(s)*
              *Recently
                  issued accounting
                  pronouncements*
 In
        July
        2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
        Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). The
        Interpretation clarifies the accounting for uncertainty in income taxes
        recognized in a Company's financial statements and prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        The
        Interpretation also provides guidance on de-recognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition. FIN 48 is effective for fiscal years beginning after December
        15,
        2006, which is April 1, 2007 for us. The differences, if any between the
        amounts
        recognized in the statements of financial position prior to the adoption
        of FIN
        48 and the amounts reported after adoption will be accounted for as a
        cumulative-effect adjustment recorded to the beginning balance of retained
        earnings. The Company is in the process of evaluating the impact this new
        standard will have on the Company’s financial position and results of
        operations.
 
 In
        September 2006, the FASB issued FAS 157, *Fair Value Measurements*, which
        establishes a framework for measuring fair value in generally accepted
        accounting principles, and expands disclosures about fair value measurements.
        This Statement applies under other accounting pronouncements that require
        or
        permit fair value measurements. FAS 157 is effective for fiscal years beginning
        after November 15, 2007, therefore the Company will begin to apply the standard
        in the fiscal year commending April 1, 2008. The Company is in the process
        of
        evaluating the impact FAS 157 will have on the Company’s financial position,
        results of operations and liquidity and its related disclosures.
  In
          September 2006, the SEC staff issued Staff Accounting Bulletin No. 108
          ("SAB
          108") to add Section N, "Considering the Effects of Prior Year Misstatements
          when Quantifying Misstatements in Current Year Financial Statements," to
          Topic
          1, Financial Statements, of the Staff Accounting Bulletin Series. Section
          N
          provides guidance on the consideration of the effects of prior year
          misstatements in quantifying current year misstatements for the purpose
          of a
          materiality assessment. Registrants electing not to restate prior periods
          should
          reflect the effects of initially applying the guidance in Topic 1N in their
          annual financial statements covering the first fiscal year ending after
          November
          15, 2006. The cumulative effect of the initial application should be reported
          in
          the carrying amounts of assets and liabilities as of the beginning of that
          fiscal year, and the offsetting adjustment should be made to the opening
          balance
          of retained earnings for that year. Registrants should disclose the nature
          and
          amount of each individual error being corrected in the cumulative adjustment.
          The disclosure should also include when and how each error being corrected
          arose
          and the fact that the errors had previously been considered immaterial.
          Early
          application of the guidance in Topic 1N is encouraged in any report for
          an
          interim period of the first fiscal year ending after November 15, 2006,
          filed
          after the publication of this Staff Accounting Bulletin. For the year ending
          March 31,2007,there were no such misstatements
  In  September
          2006, The FASB issued FAS 158, *Employer’s accounting for defined benefit
          pension & other post retirement plans*,  requiring an employer
          to recognize the over funded or under funded status of defined postretirement
          plan ( other than a multiemployer plan ) as an asset or liability in its
          statement of financial position and to recognize changes in that funded
          status
          in the year in which the changes occur through comprehensive income of
          a
          business entity. This statement  also improves financial reporting by
          requiring an employer to measure the funded status of a plan as of the
          date of
          its year- end  statement of financial positions. An employer with
          publicly traded equity security shall initially apply the requirement to
          recognize the funded status of benefit plan and the disclosure requirement
          as of
          the end of the fiscal year after December 15, 2006. The company is compliant
          with this requirement. The requirement to measure planned assets and benefit
          obligations as of the date of the employers fiscal year end statement of
          financial positions shall be effective for fiscal year ending after December
          15,
          2008 and shall not be applied retrospectively. . The Company
          is  evaluating the impact this new standard will have on the Company’s
          financial position, results of operations and liquidity.
  In
        February 2007, the Financial Accounting Standards Board (‘FASB’) issued SFAS
        159, The Fair Value Option for Financial Assets and financial Liabilities
–
including an amendment of FASB Statement No. 115 (“FAS 115”). This statement
        permits entities to choose to measure any financial instruments and certain
        other items at fair value. The objective is to improve financial reporting
        by
        providing entities with the opportunity to mitigate volatility in reported
        earning caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. It applies to all entities,
        including not-for-profit organizations; however, the amendment to FAS 115
        applies to all entities with available for sale and trading securities. This
        statement is effective for fiscal year beginning after November 15, 2007.
        MTNL
        is currently reviewing this issue to measure the potential impact on the
        consolidated results of operations, financial positions and cash
        flows.
  *(t)*
              *Reclassifications*
 Certain
        items previously reported in specific financials statements captions have
        been
        reclassified to conform to the current year’s presentation.
 
 ***3.***
              **RELATIONSHIP
                  BETWEEN DOT/BSNL/VSNL AND THE COMPANY**( ***Also refer
                  note 19)***
 The
        relationships between the Department of Telecommunication (“DOT”) / Bharat
        Sanchar Nigam Limited (“BSNL”) / Videsh Sanchar Nigam Limited (“VSNL”) and MTNL
        are as follows:
 
 a.
                  MTNL is a subsidiary of the Government of India which owns 56.25%
                  of MTNL
                  through DOT. DOT is a department of the Government of India. BSNL
                  is an
                  affiliate among common control with MTNL as the Government, acting
                  through
                  the DOT, holds 100% of the issued share capital of BSNL. VSNL is
                  an equity
                  investee of the Government of
                  India.
 
 b.
                  DOT has granted licenses to MTNL to operate fixed line, cellular
                  and
                  internet services. The licenses for fixed line, cellular and internet
                  services are valid until March 31, 2013, October 9, 2017 and September
                  7,
                  2017 respectively. DOT has also granted to MTNL, with effect from
                  May 10,
                  2006 a National Long Distance License for Delhi and the municipalities
                  of
                  Mumbai, Navi Mumbai and Thane valid up to May 9, 2026. DOT retains
                  the
                  right to revoke these licenses after giving one month's notice
                  to
                  MTNL.
 
 c.
                  In October 1999, the DOT which had performed the role of both licensor
                  and
                  policy maker for the Ministry of Communication and operated as
                  India’s
                  domestic long distance service provider and fixed-line service
                  provider
                  (except for the areas of Delhi and Mumbai), was split into two
                  departments
                  DOT and the Department of Telecom Services (DTS). DOT/ Telecom
                  Commission,
                  or DOT, now performs the role of licensor and policy maker. The
                  Department
                  of Telecom Services, or DTS, functioned as the Government of India's
                  local
                  and long distance network service provider till September 30, 2000.
                  On
                  October 1, 2000, DTS was incorporated as BSNL and carries out the
                  functions of DTS including the determination of the networking
                  charges
                  payable for access to its network.
  F-13
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  d.
                  Until March 31, 2001, BSNL was the sole service provider for carriage
                  of
                  NLD (National Long Distance) calls. Further it was also carrying
                  ILD calls
                  up to the gateway provided by VSNL, India’s former government-controlled
                  international long distance carrier. However, carriage of NLD and
                  ILD
                  (International Long Distance) calls has been opened to other operators
                  with effect from April 1, 2001 and April 1, 2002 respectively.
                  MTNL
                  continues to use BSNL network for the carriage of NLD calls, and
                  has
                  entered into arrangements with other ILD operators for carriage
                  of ILD
                  calls with effect from April 1, 2002. However, international calls
                  continue to be passed from MTNL’s network to international gateways
                  operated by VSNL. MTNL pays the negotiated per minute charge to
                  VSNL for
                  carriage and termination of international calls which varies depending
                  on
                  the country of destination. Subsequent to the year ended March
                  31, 2006,
                  MTNL has started using its NLD license and has entered into a contract
                  with VSNL for a lease line to carry MTNL’s call traffic between Delhi and
                  Mumbai.
 
 The
        following table gives details in respect of the Company’s significant revenues
        and (expenses) related to carriage of ILD calls, NLD calls License
        Fees,  Spectrum Charges and inter connect usage charges with the above
        mentioned related parties:
 
 **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**VSNL
                  - Expenses for carriage of ILD calls originating on MTNL’s
                  network
              
              
              (684
              )
              
              
              (583
              )
              
              
              (492
              )
              
              
              (11
              )VSNL
                  - Revenues for ILD/NLD calls terminating on MTNL’s network
              
              
              516
              
              
              
              46
              
              
              
              65
              
              
              
              2DOT
                  - License fees and spectrum charges *(Refer note
                  4)*
              
              
              (4,974
              )
              
              
              (552
              )
              
              
              (5055
              )
              
              
              (117
              )BSNL
                  - Networking charges for NLD calls *(Refer note 4)*
              
              
              (3,627
              )
              
              
              (8,217
              )
              
              
              (3087
              )
              
              
              (72
              )BSNL
                  - Revenues for interconnect usage charges as per TRAI
                  Regulation
              
              
              1,471
              
              
              
              2,442
              
              
              
              754
              
              
              
              18
 
 **4.**
              **LICENSE
                  FEES AND NETWORK CHARGES**
 On
        April
        9, 2001, the DOT communicated that the annual license fee will be revised
        and
        shall be payable at 12% (same as the rate applicable to private operators)
        of
        Adjusted Gross Revenue (“AGR”) for Basic Telephone Service effective from August
        1, 1999, (as against Rs.900 per direct exchange line under the earlier
        arrangement). On September 5, 2001, the DOT, amended its position and informed
        MTNL that the date from which the revised license fees will be payable will
        be
        notified later. The DOT also informed the Company that the network charges
        payable to BSNL will also be revised, and the license fee and network charges
        would be reviewed with effect from the same date.
 
 Accordingly,
        license fee and networking charges on revised basis were not to be paid till
        the
        DOT communicated the effective date for such revision. The earlier license
        fee
        and networking arrangement expired on March 31, 2000 and March 31, 2001
        respectively. No agreement had been entered for payment of  networking
        charges for the fiscal years ended March 31, 2002, 2003 and 2004. In the
        absence
        of any agreement,  networking charges for these years have been
        accrued on the same basis as applicable to that of private operators. In
        the
        fiscal 2001, the Company paid license fee based on the earlier
        arrangement.
  Subsequent
        to the March 31, 2004, a meeting was held between DOT, BSNL and MTNL to resolve
        the ambiguity with respect to license fee and networking charges. The parties
        agreed that the license fees were payable at 12% of AGR and networking charges
        as per TRAI regulations with effect from August 1, 1999. Also, the revenue
        sharing percentages earlier agreed to between MTNL and BSNL, other than those
        governed by TRAI regulations, were revised with retrospective effect. This
        had
        resulted in an incremental charge of Rs.3,520 million on account of license
        fee
        and a benefit of Rs.1,515 million on account of networking charges for periods
        upto March 31, 2003, which had been accounted for in the year ended March
        31,
        2004.
  F-14
 Table
            of Contents
  During
        the year ended March 31, 2006, the Company has accounted for a reversal of
        license fees amounting to Rs 3,408 million. The Company has received a
        confirmation from DOT stating that provisional assessment of license fees
        upto
        the financial year 2004-05 in respect of MTNL has been completed and that
        MTNL
        has fully paid all license fee dues upto March 31, 2005. Subsequent to the
        year
        ended March 31, 2006, the Company has also received an NLD license from DOT.
        One
        of the pre-requisites for obtaining an NLD license is the absence of any
        dues
        towards DOT on account of license fees. In view of the above and after obtaining
        an opinion from a legal counsel the Company has concluded that there is no
        longer any ambiguity regarding the license fees payable for the period upto
        March 31, 2003 (Rs.3,520 million) and for the years ended March 31, 2004
        and
        2005. The Company has accounted for Rs.3,408 million (net) the additional
        amounts accrued upto March 31, 2005 as a reduction in license fees in the
        statement of income as part of cost of revenues for the year ended March
        31,
        2006.
 
 During
        the year ended March 31, 2006, the DOT had constituted a three-member committee
        comprising of Member (Production), Telecommunications, Member (Finance),
        Telecommunications and Deputy Director General (Business Solutions) to resolve
        the various disputes relating to networking charges. Based on the
        recommendations of the Committee vide their minutes dated January 2006, DOT
        has
        settled the disputes on the networking charges for the period from 2000 to
        2005.
        Accordingly, an additional amount of Rs.3,809 million has been accounted
        as
        networking charges in the statement of income as part of cost of revenues
        for
        the year ended March 31, 2006.
 
 **5.CASH &
                  CASH EQUIVALENTS DETAILS******
              **2006**
              
              
              ****
              **2007**
              
              
              ****
              **2007****(Millions
                  of Rupees)**
              
              
              **(Millions
                  of Dollars) Unaudited**Cash
                  at bank and in hand
              
              
              1,641
              
              
              
              1,660
              
              
              
              39Cash
                  and cash equivalents
              
              ****
              **1,641**
              
              
              ****
              **1,660**
              
              
              ****
              **39**
 
 **6.**
              **INVESTMENTS
                  IN BANK DEPOSITS**
 Investments
        in bank deposits represents term deposits placed with banks earning fixed
        rate
        of interest and amounted to Rs.19,020 million and Rs17,102 millions as of
        March 31, 2006 and 2007 respectively with maturities from more than three
        months to one year . Interest on investments in bank deposits is recognized
        on
        accrual basis.
 
 **7. PROPERTY
&
                  EQUIPMENT****2006**
              
              
              **2007**
              
              
              **2007****(Millions
                  of Rupees)**
              
              
              **(Millions
                  of Dollars) Unaudited**Land
                  & buildings
              
              
              13,890
              
              
              
              14,781
              
              
              
              343Cable
                  and related equipment
              
              
              73,129
              
              
              
              74,149
              
              
              
              1,720Exchanges
                  and
                  related Equipment
              
              
              65,480
              
              
              
              66,778
              
              
              
              1,549Other
                  fixed assets
              
              
              5,421
              
              
              
              5,638
              
              
              
              131Capital
                  work in progress
              
              
              5,281
              
              
              
              8,044
              
              
              
              187163,201
              
              
              
              169,390
              
              
              
              3,930Accumulated
                  depreciation and amortization
              
              
              (82,236
              )
              
              
              (88,350
              )
              
              
              (2,050
              )Property
                  and
                  equipment, net
              
              **Rs.80,965**
              
              
              **Rs.81,040**
              
              
              **$**
              **1,880**
 
 In
        1987,
        the assets and properties of the DOT located in Delhi and Mumbai were
        transferred to MTNL by an order of the Government of India (the "Government")
        and a deed of sale was executed by the Government in favor of MTNL representing
        an irrevocable transfer. Indian law generally requires that to perfect the
        transfer or lease of real property, the transfer should be evidenced by a
        formal, duly stamped deed of transfer and registered with the Central Land
        Registrar within a specified period after the execution of the deed of transfer
        or   lease. A formal transfer deed for real property of the DOT,
        transferred by the Government to MTNL has been executed but has not been
        registered with the appropriate municipal authorities. The
  F-15
 Table
            of Contents
  formal
        transfer deed and physical delivery of possession of the DOT's non-real estate
        assets has resulted in the transfer of such non-real estate assets of the
        DOT to
        MTNL in Delhi and Mumbai.
 
 Indian
        law also requires payment of stamp duty (at rates which vary among states)
        on
        instruments, which effect transfer of title to real estate or in respect
        of
        leases of real estate. MTNL has not paid stamp duty in respect of any of
        the
        acquired or leased properties. Accordingly, MTNL may be liable for stamp
        duty
        and penalties thereon if a deed is registered by MTNL in the future (other
        than
        with respect to the DOT properties acquired from the Government as at March
        30,
        1987). All liabilities for stamp duties in respect of the DOT properties
        acquired by MTNL from the Government as at March 30, 1987 are to be borne
        by the
        Government. The Company has been advised by its counsel that although the
        Company has valid possession including the risks and rewards of ownership
        and
        title to all of its property, to enable MTNL to perfect and thereby acquire
        marketable title to real property in its possession, it would need to have
        relevant documents relating to transfer or lease of real property duly
        registered and stamped. Accordingly, MTNL cannot sell its properties without
        payment of stamp duties and registering the properties in its name. In preparing
        these consolidated financial statements, MTNL has capitalized provision for
        stamp duty based on its best estimate amounting to Rs.794 million and Rs.859
        million as of March 31, 2006 and 2007 respectively. MTNL does not intend
        to sell
        any of these properties. In terms of its Articles of Association MTNL has
        to
        obtain prior approval of the President of India in respect of sale or disposal
        of any land or building costing more than Rs.1 million.
 
 **8.**
              **INVESTMENTS
                  IN HELD TO MATURITY SECURITIES**
                Investments
                  of MTNL consist of held-to-maturity
                  securities (“HTM”).
 **As
                  of March 31,****2006**
              
              **2007**
              
              **2007****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Held-to-maturity
                  securities**8.75%
                  Redeemable
                  Cumulative Preference Shares of ITI Limited
              
              Rs.1,000
              
              Rs.1,000
              
              
              2311.5%
                  Bonds of
                  Maharashtra Krishna Valley Development Corporation
              
              
              2,500
              
              Rs.2,500
              
              
              58**Investments
                  -
                  Non-current**
              
              **Rs.3,500**
              
              **Rs.3,500**
              
              **$**
              **81**
 
 ***8.75%
        Redeemable Cumulative Preference Shares of ITI
        Limited***
 On
        February 14, 2003, MTNL invested Rs. 1,000 million in 8.75% cumulative
        preference shares of ITI Limited (“ITI”) on a private placement basis. ITI is a
        government company in the telecommunication equipment and distribution business.
        ITI also supplies exchanges and cables to MTNL. These preference shares are
        redeemable in five equal annual installments commencing from March 30,
        2005.
 
 The
        share
        purchase agreement between ITI and MTNL includes a provision for a letter
        of
        comfort from Department of Telecommunication (DOT) to MTNL endorsing the
        investment and also provides MTNL a right to set off principal payments owing
        under the terms of these Cumulative Preference Shares against amounts payable
        to
        ITI, in connection with MTNL’s purchase of exchanges and cable
        supplies.
 
 As
        of
        September 30, 2005, ITI had not redeemed the first tranche amounting to Rs.
        200
        million as per the repayment schedule and ITI had requested MTNL for an
        extension on the redemption dates. However MTNL had not accepted ITI’s request
        and has looked to the DOT’s letter of comfort and requested settlement of the
        first repayment tranche of Rs. 200 million.
 
 As
        of
        September 30, 2007, ITI has not yet redeemed any of the first, second and
        the third tranches amounting to Rs. 200 million each as per the original
        repayment schedule.
 
 Management
        has evaluated the investment in ITI for impairment, on the basis that the
        first
        and second tranches for repayment have not been settled by ITI. Management
        has
        evaluated the financial condition and business outlook of ITI including the
        new
        purchase orders received by ITI for supply of GSM equipment from BSNL and
        the
        Company. The Company currently has account payable to ITI of Rs.706
        million as at March 31, 2007 which, pursuant to the share agreement, the
        Company can legally settle against the repayments owing under the cumulative
        preference shares. In addition, the Company has the intend and ability to
        retain
        the debt security for a period of time sufficient to allow for anticipated
        recovery in value.
 
 Based
        on
        this evaluation and specifically considering that the share purchase agreement
        includes a provision for a letter of comfort from Department of
        Telecommunication (Government of India) to MTNL endorsing the investment
        and
        also provides MTNL a right to set off amounts receivable in respect of principal
        outstanding from the dues payable to ITI, management has concluded that the
        debt
        security is not impaired.
 
 ***11.5%
        Bonds issued by Maharashtra Krishna Valley Development
        Corporation***
 MTNL
        has
        also invested Rs. 2,500 million in bonds issued by Maharashtra Krishna Valley
        Development Corporation (“MKVDC”), a wholly owned subsidiary of Government of
        Maharashtra. MKVDC allotted these bonds to MTNL on May
  F-16
 Table
            of Contents
  31,
        2002.
        The bonds have a coupon rate of 11.5% per annum and are redeemable at the
        end of
        the 10thyear
        from the
        date of allotment. The repayment of these bonds is guaranteed by the Government
        of Mahrashtra.
 
 Interest
        income has been recognized and realized on the bonds held in MKVDC.
 
 MTNL
        records an investment impairment charge when management believes an investment
        has experienced a decline in value that is judged to be other than temporary.
        MTNL monitors its investments for impairment by considering current factors
        including economic environment, market conditions and the operational
        performance and other specific factors relating to the business underlying
        the
        investment. Based on its assessment of its carrying values of the above
        investments, management believes that there is no impairment of investments
        as
        of March 31, 2007.
 
 **9.**
              **INVESTMENT
                  IN EQUITY AFFILIATE**
  On
        July
        21, 2001 MTNL, in consortium with Telecommunications Consultants India Limited,
        VSNL and Nepal Venture Private Limited entered into a joint venture arrangement
        to form United Telecom Limited (UTL). UTL was formed to provide wireless
        in
        local loop (“WLL”) services in Nepal. As at March 31, 2003, MTNL had invested
        Rs. 200 million in UTL in proportion to its 26.7% holding. In 2004, MTNL
        invested Rs. 33 million in UTL in proportion to its 26.7%
        holding.  During the year ended March 31, 2007 MTNL has further
        invested Rs.56 million. MTNL’s equity in losses of the affiliate amounted to Rs.
        67 million, Rs.73 million and Rs.7 million for the years ended March 31,
        2005,
        2006 and 2007 respectively. The carrying value of investment in UTL is Rs.
        66
        million and Rs 115 million  as of March 31, 2006 and
        2007  respectively .
 
 **10.INVENTORIES**
 
 **2006**
              
              
              **2007**
              
              
              **2007****(Millions
                  of Rupees)**
              
              
              
              
              
              **(Millions
                  of Dollars) Unaudited**Cabling
              
              
              881
              
              
              
              858
              
              
              
              20Exchange
                  equipment
              
              
              347
              
              
              
              568
              
              
              
              13Telephone
                  and
                  Telex Equipments
              
              
              330
              
              
              
              956
              
              
              
              22Other
              
              
              261
              
              
              
              348
              
              
              
              8Less:
                  Allowance for slow moving/obsolete stock
              
              
              (371
              )
              
              
              (491
              )
              
              
              (11
              )****
              **1,448**
              
              
              ****
              **2,239**
              
              
              ****
              **52**
  Activity
        in
        allowance for slow moving / obsolete stock is as follows:
 
 **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Balance
                  at beginning of year
              
              Rs.374
              
              
              Rs.358
              
              
              Rs.371
              
              
              
              9Charged
                  to expense
              
              
              159
              
              
              
              35
              
              
              
              126
              
              
              
              3Less:
                  amounts written off
              
              
              (175
              )
              
              
              (22
              )
              
              
              (6
              )
              
              
              0**Balance
                  at end of year**
              
              **Rs.358**
              
              
              **Rs.371**
              
              
              
              491
              
              
              $
              12
  F-17
 Table
            of Contents
  
 **11.**
              **ACCOUNTS
                  RECEIVABLE
                  AND ALLOWANCE FOR DOUBTFUL
                  DEBTS**
  Accounts
        receivable are stated net of allowance for doubtful debts. Accounts receivable
        are not collateralized. The allowance for doubtful debts is determined
        principally on the basis of past credit loss experience and an evaluation
        of
        potential losses on the outstanding receivable balances. The activity in
        allowance for uncollectible accounts is given below:
 
 **For
                  the years ended March 31,****2005**
              
              
              
              **2006**
              
              
              
              **2007**
              
              
              ****
              **2007****(Millions
                  of Rupees)**
              
              
              **(Millions
                  of Dollars) Unaudited**Balance
                  at beginning of year
              
              
              8,561
              
              
              
              6,794
              
              
              
              4,991
              
              
              
              116Charged
                  to expense
              
              
              1,137
              
              
              
              (248
              )
              
              
              1180
              
              
              
              27Less:  Amounts
                  written off
              
              
              (2,904
              )
              
              
              (1,555
              )
              
              
              20
              
              
              
              0Balance
                  at end of year
              
              **Rs.6,794**
              
              
              **Rs.4,991**
              
              
              **Rs. 6,191**
              
              
              ****
              **143**
 
 **12.**
              **RESTRICTED
                  ASSETS**
 
 Restricted
        assets include the amount paid to income tax authorities under protest (refer
        note 22 (iii) (b) (i)).
 
 **13.**
              **OTHER
                  RECEIVABLES**
 Other
        receivables consist of the following:
  **Other
        Receivables**
 **As
                  of March 31,********2006**
              ****
              ****
              **2007**
              ****
              ****
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Loans
                  to employees
              
              
              2,406
              
              
              
              2,150
              
              
              
              50Advance
                  tax (refer note below)
              
              
              4,860
              
              
              
              10,173
              
              
              
              233Accrued
                  interest
              
              
              936
              
              
              
              1,092
              
              
              
              25Others
              
              
              2,722
              
              
              
              16,530
              
              
              
              379****
              **10,924**
              
              
              ****
              **29,945**
              
              
              ****
              **687**Less:
                  Other assets
              
              
              (2,165
              )
              
              
              (1,935
              )
              
              ****
              **(44**
              **)******
              **8,759**
              
              
              ****
              **28,010**
              
              
              ****
              **643**
 
 Advance
        tax balance is net of income tax liability amounting to Rs. 44,183 million
        and
        Rs. 34127 million as of March 31, 2006 and 2007. As at March 31, 2007 ‘Others’
include refund receivable of Rs. 10,793 millions from the tax
        authorities.  The same has been subsequently received in June
        2007. Other assets include the non current portion of loans given to employees
        and capital lease receivable.
  F-18
 Table
            of Contents
  **14.ACCRUED
        EXPENSES AND
        OTHER CURRENT LIABILITIES**
  **Accrued
          expenses and other current liabilities**
 **As
                    of March 31,********2006**
                ****
                ****
                **2007**
                ****
                ****
                **2007****(Millions
                    of Rupees)**
                
                
                **(Millions
                    of**
                  **Dollars)**
                  **Unaudited******
                
                
                
                ****
                
                
                
                ****
 Interest
                  accrual
              
              
              6
              
              
              
              3
              
              
              
              0General
                  provident fund contribution of   employees
              
              
              8,517
              
              
              
              9,293
              
              
              
              216Deferred
                  income
              
              
              5,444
              
              
              
              5,518
              
              
              
              128Advance
                  received from customers and others
              
              
              697
              
              
              
              648
              
              
              
              15Customer
                  deposits
              
              
              2,456
              
              
              
              2,159
              
              
              
              50Accrued
                  employee cost
              
              
              3,718
              
              
              
              2,036
              
              
              
              47Other
                  payables and accruals
              
              1,416
              
              
              7,893
              
              
              183**Rs. 22,254**
              
              
              **Rs. 27,550**
              
              
              **$**
              **639**
 
 The
        General Provident Fund accrual represents amounts contributed by employees
        (who
        have opted for the Government pension rules), net of advances taken. Prior
        to
        the absorption (in the year 2000), this fund was being maintained by DOT.
        MTNL
        has raised claims amounting to Rs. 9,293 million on DOT upto March 31, 2007
        (2006: Rs 8,517 million) in respect of employee contributions (pre absorption)
        together with the interest accrued. An offsetting amount has been included
        in
        the non-current portion of amounts due from related parties as disclosed
        in Note
        19.
 
 Subsequent
        to absorption, in the absence of any rules available for deposit of such
        employee contributions, the amounts of employee contributions have been retained
        by MTNL. These funds are not restricted and could be used to fund the activities
        of MTNL until such time that the funds must be transferred to the GPF Trust.
        During the year ended March 31, 2006 a GPE trust had been created and Rs.
        4340
        million had been transferred to GPF Trust. The outstanding amount owing to
        the
        trust of Rs. 9,293 million continues to be a part of accrued expenses and
        other
        current liabilities, as the amount is due to be recovered by the
        DOT.
 
 **15.**
              **INTEREST
                  AND OTHER INCOME, NET**
 Interest
        and other income, net consist of the following:
  For
                  the years ended March 31,**2005**
              
              
              
              **2006**
              
              
              
              **2007**
              
              
              
              **2007**(Million
                  of rupees)Interest
                  from investment in MKVDC
              
              
              239
              
              
              
              239
              
              
              
              288
              
              
              
              7Interest
                  on loans to employees
              
              
              182
              
              
              
              173
              
              
              
              207
              
              
              
              5Interest
                  on advances and others, net
              
              
              715
              
              
              
              51
              
              
              
              324
              
              
              
              7Interest
                  paid on customers deposits
              
              
              (28
              )
              
              
              (25
              )
              
              
              (20
              )
              
              
              (0
              )Interest
                  paid General Providend Fund
              
              
              (330
              )
              
              
              (207
              )
              
              
              65
              
              
              
              1Interest
                  on Income Tax Refunds
              
              
              -
              
              
              
              -
              
              
              
              5,266
              
              
              
              122Other
                  income
              
              
              551
              
              
              
              556
              
              
              
              180
              
              
              
              4****
              **1,329**
              
              
              ****
              **787**
              
              
              ****
              **6,310**
              
              
              ****
              **146**
 
 **16.**
              **EXCESS
                  LIABILITIES WRITTEN BACK**
 The
        excess liabilities written back includes accruals being reversed to income
        and
        relates to unmatched excess cash received in respect of debtors (which, as
        per
        The Limitation Act, after a period of three years become time barred and
        become
        property of the Company), amounting to Rs.297 million Rs. 49 million and
        Rs.1million for the years ended March 31, 2005, 2006 and 2007 respectively.
        This
        line item also includes other time barred liabilities outstanding for more
        than
        3 years amounting to Rs.630 million, Rs. 674 million and Rs.100 million for
        the
        years ended March 31, 2005, 2006 and 2007 respectively, and other provisions
        no
        longer required which have been written back amounting to Rs.364 million,
        Rs. 98
        million and Rs.738 million for the years ended March 31, 2005, 2006 and
        2007 respectively.
 
 
 **17.**
              **INCOME
                  TAXES**
 Total
        income tax expense is attributable to income from continuing operations and
        consists of the following:
  **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Current
                  tax
              
              Rs.3,400
              
              
              Rs.1,253
              
              
              Rs.(1,171)
              
              
              
              (27
              )Deferred
                  tax
              
              
              (1,276
              )
              
              
              (816
              )
              
              
              98
              
              
              
              2**Aggregate
                  Taxes**
              
              **Rs.2,124**
              
              
              **Rs.437**
              
              
              **Rs.(1073)**
              
              
              $
              (25
              )
  F-19
 Table
            of Contents
  A
        reconciliation of the income tax expense to the amount computed by applying
        the
        statutory Indian income tax rate to income before income tax expense is
        summarized below:
  **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Income
                  before taxes and share from affiliates
              
              Rs.5,597
              
              
              Rs.1,576
              
              
              Rs.10.236
              
              
              
              258Average
                  enacted tax rate in India
              
              
              36.59
              %
              
              
              33.66
              %
              
              
              33.66
              %Computed
                  tax expense
              
              
              2,048
              
              
              
              531
              
              
              
              3445
              
              
              
              80Effect
                  of tax assessed for earlier years
              
              
              -
              
              
              
              71
              
              
              
              (4626
              )
              
              
              (107
              )Effect
                  of change in tax rates
              
              
              39
              
              
              
              (173
              )
              
              
              0
              
              
              
              0Permanent
                  differences
              
              
              37
              
              
              
              8
              
              
              
              108
              
              
              
              3**Income
                  taxes recognized in the statement of income**
              
              **Rs.2,124**
              
              
              **Rs.437**
              
              
              **Rs.(1073)**
              
              
              $
              (24
              )
 
 Permanent
        differences represent certain expenses, which are not allowed as deductible
        expenses under the Indian Income Tax Act, 1961.
 
 As
        per
        section 80IA of the Indian Income Tax Act, 1961 a Company, which starts to
        operate telecommunication services at any time on or after April 1, 1995,
        but
        before March 31, 2000, is entitled to a tax holiday for a period of 10 years
        beginning with the year in which such services are started. As per the tax
        holiday, 100% of the profits derived from such services are exempt from tax
        in
        the first 5 years, and 30% of such profits are exempt from tax for the next
        5
        years. MTNL on the basis of advice from its legal counsel has historically
        claimed such benefit. The Company’s claim have been rejected at the first
        appellate level and the case has been referred to the Committee of Disputes,
        which is a body formed by the Government to settle disputes between Government
        controlled undertakings and the Government. The Committee has referred the
        case
        to the Tax appellate authorities for reconsideration. During the year ended
        March 31, 2006, the case has been set aside by the Income Tax Appellate
        Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03
        and has
        referred the matter back to the Assessing Officer for a fresh assessment
        after
        hearing the case again.   For
        the
        years ending up to and including March 31, 2006, considering that the benefit
        claimed by MTNL in the above years may not be ultimately allowed by tax
        authorities, the provision for current taxes in these years had been accounted
        in the basis of normal tax rates.
  During
        the year 2006-07 assessing officer has made fresh assessment for calculation
        of
        deduction u/s 80IA of the Indian Income Tax Act, 1961 and allowed partial
        benefit to MTNL.**MTNL has filed appeals against that partial
        allowance to the higher authority. *(Also refer note 22 (b)
        (ii)).*
  Significant
        components of activities that gave rise to deferred tax assets and liabilities
        included in the financial statements are as follows:
 
 **As
                  of March 31,****2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Deferred
                  tax assets:**Allowances
                  for bad and doubtful debts
              
              Rs.1,681
              
              
              Rs.1,897
              
              
              
              44Deferred
                  settlements amount not recognized in income
              
              
              3,471
              
              
              
              3,450
              
              
              
              80Post
                  retirement benefits
              
              
              4,362
              
              
              
              3,350
              
              
              
              78Others
              
              
              2,235
              
              
              
              2,012
              
              
              
              46**Total
                  deferred tax assets**
              
              ****
              **11,749**
              
              
              ****
              **10,709**
              
              
              ****
              **248****Deferred
                  tax liabilities:**Excess
                  of tax allowance over depreciation
              
              
              (10,507
              )
              
              
              (9,643
              )
              
              
              (224
              )Interest
                  capitalized
              
              
              (1,090
              )
              
              (1,012}
              
              
              
              (23
              )**Total
                  deferred tax liabilities**
              
              ****
              **(11,597**
              **)**
              
              ****
              **(10,655**
              **)**
              
              ****
              **(247**
              **)****Net
                  deferred tax asset / (liability)**
              
              **Rs.152**
              
              
              **Rs.54**
              
              
              **$**
              **1**
  F-20
 Table
            of Contents
 
 Net
        deferred tax assets / (liabilities) included in the consolidated balance
        sheets
        are as follows:
 
 **As
                  of March 31,****2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Current:**Deferred
                  tax assets
              
              Rs.8,202
              
              
              Rs.7,359
              
              
              
              171**Non-current:**Deferred
                  tax assets
              
              
              3,547
              
              
              
              3,350
              
              
              
              77Deferred
                  tax liabilities
              
              
              (11,597
              )
              
              
              (10,655
              )
              
              
              (247
              )Total
                  non current
              
              ****
              **(8,050**
              **)**
              
              ****
              **(7,306**
              **)**
              
              ****
              **(170**
              **)****Net
                  deferred tax asset / (liability)**
              
              **Rs.
                  152**
              
              
              **Rs.
                  54**
              
              
              **$**
              **1**
 
 
 **18.**
              **RETIREMENT
                  BENEFITS**
 
 *(a)*
              *Employees
                  seconded from DOT*
 
 MTNL’s
        employees who are seconded from DOT are entitled to pension, gratuity benefits
        and leave encashment from the Government. MTNL makes contributions to the
        DOT to
        fund the liability in respect of these employees in accordance with the rates
        prescribed by the Government. MTNL’s contributions are charged to income in the
        period they are incurred. The amount for pension, gratuity and leave encashment
        recognized for such employees in the consolidated statements of income are
        as
        follows:
 
 **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Pension
                  (including gratuity)
              
              Rs.25
              
              
              Rs.9
              
              
              Rs.170
              
              
              
              4Leave
                  encashment
              
              
              13
              
              
              
              8
              
              
              
              9
              
              
              
              0**Rs.38**
              
              
              **Rs.17**
              
              
              **Rs.179**
              
              
              **$**
              **4**
 
 
 *(b)*
              *Employees
                  of MTNL*
 
 
 ***i.***
              ***Pension,
                  Gratuity and Medical
                  benefits***
 The
        pension and gratuity to the non-executives employees of MTNL are defined
        benefit
        plans, the cost and liability, for which are based on an actuarial valuation.
        Further MTNL introduced a ‘MTNL retired employees medical facility scheme’ for
        employees with effect from January 1, 2002. The scheme was initially introduced
        for a period of 12 weeks and was subsequently extended till such a time a
        new
        medical scheme was introduced. The cost and liability of the medical benefit
        plan for its retired employees till March 31, 2006 was based on an actuarial
        valuation. During the current year the medical scheme has been withdrawn
        (refer
        note 24(b)).
 
 ***ii.***  ***Absorption
        of Executive
        employees***
 The
        Company had given an option to its executive employees (B category) for
        absorption with MTNL with effect from October 1, 2000, at a revised pay scale
        that is higher than the existing pay scale. The offer for absorption provided
        that in addition to getting post retirement benefits like gratuity and leave
        encashment, the employees would have to opt for pension based on the government
        rules.
 
 During
        the year ended March 31, 2004, majority of employees had opted for absorption
        with MTNL. MTNL determined the incremental liability on account of revised
        pay
        scales and related retirement cost based on an actuarial valuation. MTNL
        has
        raised claims on DOT amounting to Rs. 2,784 million for the period upto the
        October 1, 2000, which represent amounts recoverable towards retirement benefits
        calculated at the rates prescribed by DOT for its employees on secondment.
        These
        have been included in Dues from related parties as disclosed in Note
        19.
 
 F-21
 Table
            of Contents
  During
        the year ended March 31, 2005, an additional 1,108 executive employees opted
        for
        absorption with MTNL. MTNL has determined the incremental liability on account
        of revised pay scales and related retirement cost based on an actuarial
        valuation. In respect of these employees, MTNL has raised claims on DOT
        amounting to Rs. 541 million for the period upto the October 1, 2000,which
        represent amounts recoverable towards retirement benefits calculated at the
        rates prescribed by DOT for its employees on secondment. These have been
        included in Dues from related parties as disclosed in Note 19.
  During
        the year ended March 31, 2006, the Company had given an option to its executive
        employees (Category A) for absorption with the Company with effect from October
        1, 2000, at a revised pay scale that is higher than the existing pay scale.
        Out
        of approximately 1,218 Group A employees currently working in MTNL, 65 employees
        have exercised their option as at March 31, 2006 and have been absorbed in
        MTNL.
        The offer for absorption provided that in addition to getting the post
        retirement benefits like gratuity and leave encashment subsequent to absorption,
        the employee would have to opt for either pension based on the government
        rules
        or provident fund based on the company policy. A case has been filed by the
        Indian Telecom Service Association (acting on behalf of Group A officers)
        with
        the High court appealing for the stay order against absorption of Group A
        employees on the contention that terms and conditions of absorption are not
        clear. The High Court has subsequently passed a stay order against further
        absorption of Group A employees. Pending finalization of the terms of
        absorption, the Company, during the year ended March 31, 2006, has provisionally
        accrued a charge of amounting to Rs.25.39 million on account of revised pay
        scales for the executive employees who exercised the option upto that date.
        However, no claims have been raised by the Company on DOT for the related
        retirement costs pending finalization of terms of absorption and outcome
        of the
        court case.
  ***iii.***
              ***The
                  following tables sets forth the status of the pension, gratuity
                  plan and
                  medical benefits. The measurement date used is March 31, of the
                  relevant
                  fiscal year.***
 **The Pension Plan**
 **As
                  of March 31,****2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Accumulated
                  benefit obligation**
              
              Rs.17,379
              
              
              Rs.21,989
              
              
              
              510**Changes
                  in projected benefit obligation:**Projected
                  Benefit obligation at the beginning of the year
              
              
              19,865
              
              
              
              26156
              
              
              
              607Service
                  cost
              
              
              896
              
              
              
              847
              
              
              
              19Interest
                  cost
              
              
              1,689
              
              
              2092
              
              
              
              49Actuarial loss
              
              
              1,314
              
              
              
              1167
              
              
              
              27Loss
                  on curtailment
              
              
              185
              
              
              
              -
              
              
              
              -Actuarial
                  obligation assumed on account of absorption
              
              
              -
              
              
              
              -
              
              
              
              -Benefits
                  paid
              
              
              (932
              )
              
              
              (1546
              )
              
              
              (36
              )**Projected
                  Benefit obligation at the end of the year**
              
              ****
              **23,017**
              
              
              ****
              **28716**
              
              
              **$**
              **666****Changes
                  in plan asset**
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              
              -**Unfunded
                  status**
              
              ****
              **(23,017**
              **)**
              
              ****
              **(28716**
              **)**
              
              **$**
              **(666**
              **)****Accrued
                  provision for pension**
              
              **Rs.(23,017**
              )
              
              **Rs.
                  (28716**
              )
              
              **$**
              **(666**
              **)**
   **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****The
                  components of net pension costs are reflected
                  below:**Current
                  service cost
              
              Rs.879
              
              
              Rs.896
              
              
              Rs.847
              
              
              
              20Actuarial
                  obligation assumed on account of absorption
              
              
              426
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
                  cost
              
              
              1,384
              
              
              
              1,689
              
              
              2092
              
              
              
              49Loss
                  on curtailment
              
              
              236
              
              
              
              185
              
              
              
              -
              
              
              
              -Actuarial
                  loss
              
              
              1,900
              
              
              
              1,314
              
              
              
              1167
              
              
              
              27**Net
                  periodic pension cost**
              
              **Rs.4,825**
              
              
              **Rs.4,084**
              
              
              **Rs.4106**
              
              
              **$**
              **96**
  F-22
 Table
            of Contents
 *Cash
        Flows*
 The
        Company expects to make the following benefit payments, which reflect expected
        future service, as appropriate:
 **For
                  the financial year ended March 31,**
              
              **Expected
                  contribution****(Million
                  of Rupees)**
              
              
              **(Million
                  of US $)**
                **Unaudited**2008
              
              Rs.976
              
              
              
              232009
              
              
              1020
              
              
              
              242010
              
              
              1073
              
              
              
              252011
              
              
              1184
              
              
              
              272012
              
              
              1295
              
              
              
              302013
                  - 2017
              
              
              9806
              
              
              
              228
 
 **The
        Gratuity Plan**
 
 **As
                  of March 31,****2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Accumulated
                  benefit obligation**
              
              **Rs.3,643**
              
              
              **Rs.3928**
              
              
              
              91**Changes
                  in projected benefit obligation:**Projected
                  Benefit obligation at the beginning of the year
              
              
              4,853
              
              
              
              4998
              
              
              
              116Service
                  cost
              
              
              283
              
              
              
              271
              
              
              
              6Interest
                  cost
              
              
              379
              
              
              
              400
              
              
              
              9Actuarial
                  (gain) or loss
              
              
              (92
              )
              
              
              (797
              )
              
              
              (18
              )Curtailment Loss
              
              
              65
              
              
              
              -Actuarial
                  obligation assumed on account of absorption
              
              
              -
              
              
              
              -Benefits
                  paid
              
              
              (490
              )
              
              
              (737
              )
              
              
              (17
              )**Projected
                  Benefit obligation at the end of the year**
              
              **Rs.4,998**
              
              
              **Rs.4135**
              
              
              ****
              **96****Changes
                  in plan asset**Fair
                  value of the plan assets at the beginning of the Year
              
              
              3,082
              
              
              
              3618
              
              
              
              84Actual
                  return on plan assets
              
              
              237
              
              
              
              361
              
              
              
              8Employer
                  contributions
              
              
              299
              
              
              
              737
              
              
              
              17Benefits
                  paid
              
              
              -
              
              
              
              (737
              )
              
              
              (17
              )**Plan
                  assets at the end of the year**
              
              **Rs.3,618**
              
              
              Rs.**3979**
              
              
              ****
              **92**Unfunded
                  status
              
              
              (1,380
              )
              
              
              (1568
              )
              
              
              (36
              )**Accrued
                  provision for gratuity**
              
              **Rs.(1,380**
              )
              
              **Rs.(1568**
              **)**
              
              ****
              **(36**
              **)**
  F-23
 Table
            of Contents
  **MAHANAGAR
          TELEPHONE NIGAM LIMITED**
 **Notes
          to the consolidated financial statements**
 **For
                  the years ended March 31,****2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****The
                  components of net gratuity costs are reflected
                  below:**Current
                  service cost
              
              Rs.296
              
              
              Rs.283
              
              
              Rs.271
              
              
              
              6Actuarial
                  obligation assumed on account of absorption
              
              
              46
              
              
              
              -
              
              
              
              -Interest
                  cost
              
              
              175
              
              
              
              142
              
              
              
              400
              
              
              
              9Actuarial
                  (gain) or loss
              
              
              96
              
              
              
              (92
              )
              
              
              (868
              )
              
              
              (20
              )Curtailment
                  (Gain)/ Loss
              
              
              40
              
              
              
              65
              
              
              
              (289
              )
              
              
              (6
              )Net
                  periodic gratuity cost
              
              **Rs.653**
              
              
              **Rs.398**
              
              
              **Rs.(486**
              )
              
              ****
              **(11**
              **)**
  *Cash
        Flows*
 The
        Company expects to make the following benefit payments, which reflect expected
        future service, as appropriate:
 **For
                  the financial year ended March 31,**
              
              **Expected
                  contribution****(Million
                  of Rupees)**
              
              
              **(Million
                  of US $)**
                **Unaudited**2008
              
              Rs.309
              
              
              
              72009
              
              
              623
              
              
              
              142010
              
              
              520
              
              
              
              122011
              
              
              667
              
              
              
              152012
              
              
              783
              
              
              
              182013
                  - 2017
              
              
              5,180
              
              
              
              120
  **The
          Medical Plan**
  **As
                    of March 31,****2005**
                
                
                **2006****(Million
                    of Rupees)****Accumulated
                    benefit obligation**
                
                **Rs.9,109**
                
                
                **Rs.9887****Changes
                    in projected benefit obligation:**Projected
                    Benefit obligation at the beginning of the year
                
                
                7,603
                
                
                
                9109Prior
                    service cost
                
                
                160
                
                
                
                -Service
                    cost
                
                
                423
                
                
                
                402Interest
                    cost
                
                
                668
                
                
                
                760Actuarial
                    (gain) or loss
                
                
                261
                
                
                
                (360
                )Benefits
                    paid
                
                
                (6
                )
                
                
                (24
                )**Projected
                    Benefit obligation at the end of the year**
                
                ****
                **9,109**
                
                
                ****
                **9,887****Changes
                    in plan asset**
                
                
                -
                
                
                
                -Unfunded
                    status
                
                ****
                **(9,109**
                **)**
                
                ****
                **(9,887**
                **)******Unrecognised
                    prior service cost
                
                
                4,475
                
                
                
                4,069**Accrued
                    provision for medical benefits**
                
                **Rs.(4,634)**
                
                
                **Rs.(5,818)**
   **For
                    the years ended March 31,****2004**
                  
                  **2005**
                  
                  **2006****(Million
                      of Rupees)****The
                      components of net medical costs are reflected
                      below:**Current
                      Service cost
                  Rs.289
                  
                  Rs.423
                  
                  Rs.402Interest
                      cost
                  575
                  
                  668
                  
                  760Actuarial
                      (gain) or loss
                  472
                  
                  261
                  
                  (360)Actuarial
                      obligation assumed on account of absorption
                  -
                  
                  -
                  
                  -Amortization
                      of prior service cost
                  394
                  
                  407
                  
                  407Net
                      periodic medical benefit
                  **Rs.1,730**
                  
                  **Rs.1,759**
                  
                  **Rs.1,209**
  *Cash
          Flows*
  The
          Company expects to make the following benefit payments, which reflect expected
          future service, as appropriate:
  **For
                    the financial year ended March 31,**
                **Expected**
                  **contribution****(Million
                    of Rupees)**2007
                Rs.452008
                532009
                632010
                752011
                902012
                    – 2016
                798
  The
          Company assesses these assumptions with its projected long-term plans of
          growth
          and prevalent industry standards.
  The
          following table provides the assumed health care cost trend rates for
          postretirement benefit plans:
  **As
                    of March 31,****2004**
                
                **2005**
                
                **2006**Health
                    care cost trend rate assumed throughout
                10%
                
                10%
                
                10%
  Assumed
          health care cost trend rates have a significant effect on the amounts reported
          for the health care plans. A one-percentage point increase or decrease
          in the
          assumed health care cost trend rates would have the following
          effects:
  **2005**
                
                **2006****(Million
                    of Rupees)**
                
                **(Million
                    of Rupees)**1
                    %Point Increase
                
                1
                    %Point Decrease
                
                1
                    %Point Increase
                
                1
                    %Point DecreaseEffect
                    on total of service and interest cost
                Rs.338
                
                Rs.(240)
                
                Rs.290
                
                Rs.(232)Effect
                    on accumulated postretirement benefit obligation
                2,824
                
                (2,004)
                
                2,739
                
                (2,056)
 ***iv.***  ***Leave
        Pay
        Obligation***
 Leave
        pay
        expenses amounted to Rs. 551 million, Rs. 235 million and Rs 532 million
        for the
        years ended March 31, 2005, 2006 and 2007 respectively. Accrued employee
        costs
        include Rs. 2,531 million and Rs. 2488 million leave pay obligation of MTNL
        as
        of March 31, 2006 and 2007 respectively.
 
 The
        weighted average actuarial assumptions used to determine benefit obligations
        and
        net periodic benefit cost were:
  **2005**
              **2006**
              **2007**Discount
                  rate
              8.00%
              8.00%
              8.25%Future
                  salary increases
              5%
              5%
              5%Future
                  pension increases
              5%
              5%
              5%Rate
                  of return on plan assets
              7.50%
              8.50%
              8.50%Rate
                  of hospitality incidence (% of mortality rate)
              150%
              150%
              150%Average
                  hospitalization period per year
              10
                  days
              10
                  days
              10
                  daysAverage
                  expenses per hospitalization
              Rs.
                  50,000
              Rs.
                  50,000
              Rs.
                  50,000
  ***v.***  ***Provident
        fund***
 Provident
        fund, a defined contribution plan, is being administered through trustees
        and
        MTNL’s contributions are expensed each year. MTNL has recognized, Rs.203 million
        Rs 263 million and Rs.237 million for the years ended March 31, 2005, 2006
        and
        2007 respectively in the consolidated statements of income.
 
 ***vi.***  ***Voluntary
        Retirement
        Scheme***
 During
        the year ended March 31, 2005, MTNL implemented a Voluntary Retirement Scheme
        for certain eligible employees. Under the scheme, the eligible employees
        were
        given an option to voluntarily take retirement from service and make their
        choice within the specified period of time (all prior to March 31, 2005).
        The
        scheme provided for ex-gratia payments to eligible employees opting for
        voluntary retirement based on the respective employee’s salary and term of
        employment. MTNL’s obligation amounted to Rs. 1,381 million for the year ended
        March 31, 2005. In addition, the curtailment loss in the gratuity and pension
        plan on account of the VRS amounted to Rs. 40 million and Rs. 236 million
        respectively for the year ended March 31, 2005. The Company has made actual
        payments amounting to 1,428 million as against the estimates of Rs 1381 million
        in respect of the VRS scheme implemented during the year and accordingly
        the
        additional charge of Rs. 47 million has been accounted in the year ended
        March
        31, 2006.
 
 F-24
 Table
            of Contents
  During
        the year ended March 31, 2006, MTNL implemented two more Voluntary Retirement
        Schemes for executives and non executives respectively. Under the schemes,
        the
        eligible employees were given an option to voluntarily take retirement from
        service and make their choice within the specified period of time. The schemes
        provide for ex-gratia payments to eligible employees opting for voluntary
        retirement based on the respective employee’s salary and term of employment. The
        Non executive employees were to exercise their options from March 20, 2006
        to
        April 10, 2006. Under the scheme 312 employees exercised their options till
        March 31, 2006 and 1,069 employees subsequent to March 31, 2006. MTNL’s
        obligation amounted to Rs. 227 million for those who exercised their option
        before March 31, 2006.   MTNL's obligation amounting to Rs. 792
        million for those who exercised their option after March 31, 2006.  In
        addition, the curtailment loss in the gratuity and pension plan on account
        of
        the VRS amounted to Rs. 58 million and Rs. 168 million respectively
        for the year ended March 31, 2006.
 
 The
        Executive employees exercised their options during the year ended March 31,
        2006. Under this scheme, MTNL’s obligation amounted to Rs. 677 million for the
        year ended March 31, 2006. In addition, the curtailment loss in the gratuity
        and
        pension plan on account of the VRS amounted to Rs.48 million and Rs.136 million
        respectively for the year ended March 31, 2006.
 
 **19.**
              **RELATED
                  PARTY TRANSACTIONS**
 
 MTNL
        is a
        Government Company under the Indian Companies Act. MTNL is listed on the
        major
        stock exchanges in India and the New York Stock Exchange. As of March 31,
        2007,
        the Government owns 56.25% of the issued share capital of MTNL, with the
        remaining balance owned by private investors’.
****Consequently, the Government, acting through the DOT,
        continues to control MTNL and will have the power to elect all of its Directors
        to determine the outcome of most actions requiring approval of the Board
        of
        Directors or Shareholders, including proposed expansions of MTNL's business
        (including into areas in which MTNL may compete with BSNL), transactions
        with
        the DOT or the assertion of claims against the DOT/BSNL.
 
 In
        addition, under MTNL's Articles of Association, the President of India, on
        behalf of the Government, may issue directives with respect to the conduct
        of
        the business and affairs of MTNL, and certain matters with respect to its
        business including the appointment and remuneration of the Company's Chairman
        cum Managing Director and the declaration of dividends. MTNL may not take
        action
        in respect of any matter reserved for the President of India without his
        approval. BSNL is a 100% owned subsidiary of the Government of India, and
        therefore by virtue of common control, is an affiliated sister Company of
        MTNL.  VSNL is an equity investee of the Government of
        India.
 
 As
        noted
        in Note 9, MTNL has a 26.7% holding in United Telecom Limited
        (UTL).
 
 Note
        3
        describes in more detail the nature of the relationships between the
        DOT/BSNL/VSNL and the Company as well as transactions with these parties.
        Amounts due to and from the DOT/BSNL/VSNL are disclosed separately on the
        Company’s balance sheet as amounts due to/from related parties.
  The
        balances receivable from and payable to related parties other than employees
        are
        summarized as follows:
 **As
                  of March 31,****2006**
              
              **2007****Receivables**
              
              **Payables**
              
              **Receivables**
              
              **Payables****(Millions
                  of rupees)**DOT
                  (note i)
              
              
              Rs.
                  20,630
              
              Rs.
                  1,148
              
              Rs.
                  21,181
              
              
              Rs.
                  1,696BSNL
                  (note ii)
              
              
              2,551
              
              4,229
              
              2476
              
              
              3387VSNL
                  (note ii)
              
              
              637
              
              714
              
              2
              
              
              646**Due
                  from / to Related Parties**
              
              
              **Rs.
                  23,818**
              
              **Rs.
                  6,091**
              
              **Rs.
                  23,659**
              
              
              **Rs.
                  5,729**Less:
                  Current Portion
              
              
              Rs.
                  2,551
              
              Rs.
                  5,377
              
              Rs.
                  2,476
              
              
              Rs.
                  3,387**Due
                  from / to Related Parties, non-current portion**
              
              
              Rs.
                  21,267
              
              Rs.
                  714
              
              Rs.21,183
              
              
              Rs.2,342**Due
                  from / to Related Parties - Current**
                **Million
                  of US $ Unaudited**
              
              **$**
              **57**
              
              **121**
              **$**
              **57**
              
              **$**
              **78****Due
                  from / to Related Parties - Non Current**
                **Million
                  of US $ Unaudited**
              
              **$**
              **478**
              
              **16**
              **$**
              **491**
              
              **$**
              **54**
 
 
 *Note
        i*:
 The
        amounts due from the DOT are primarily on account of pre-absorption retirement
        benefits which are recoverable by MTNL. Such retirement benefits (pre
        absorption) were calculated at the rates prescribed by DOT (Refer note 18).
        Furthermore, amounts recoverable for the General Provident Fund in respect
        of
        employee contributions (pre absorption) of
  F-25
 Table
            of Contents
  Rs
        9,293 million (2006: Rs 8,517 million) together with the interest accrued
        (Refer
        Note 14) is also included in this balance. Amounts due to the DOT represent
        license fees and spectrum charges to be paid by MTNL in accordance with
        conditions governing license fees for Basic Telephone Service and Cellular
        Telephone Service under the Revenue Sharing Regime (Refer Note 2(e) and
        3).
 
 *Note
        ii:*
 
 Amounts
        due from BSNL and VSNL represent trade receivables related to interconnect
        usage
        charges as per TRAI Regulations and the payables are on account of networking
        charges for NLD calls. (Refer Note 3).
 
 Management
        has classified the amounts due from the DOT and VSNL as non-current on the
        basis
        that there are no fixed terms for repayment from these related parties, and
        while management expects to negotiate settlement of the amounts within the
        next
        12 months, there are no assurances that this will occur.
 
 **20.**
              **EQUITY
                  SHARES**
 
 The
        Company has only one class of capital stock referred to herein as equity
        shares.
        Par value of each equity share outstanding as of March 31, 2006 and 2007
        is
        Rs.10.
 
 *Voting*
 
 Each
        holder of equity shares is entitled to one vote.
 
 *Dividends*
 
 Final
        dividends proposed by the Board of Directors are payable when formally declared
        by the shareholders, who have the right to decrease but not increase the
        amount
        of the dividend recommended by the Board of Directors. The Board of Directors
        declare interim dividends without the need for shareholders’ approval. Dividends
        payable to equity shareholders are based on the net income available for
        distribution as reported in MTNL’s unconsolidated financial statements prepared
        in accordance with Indian GAAP. Dividends are declared and paid in Indian
        rupees. Net income in accordance with US GAAP may, in certain years, either
        not
        be fully available or be additionally available for distribution to equity
        shareholders.
 
 Under
        Indian GAAP the accumulated retained earnings available for distribution
        to
        equity shareholders, subject to certain restrictions was Rs.81,977 million,
        Rs.84,906 million and Rs. 93906 million as of March 31, 2005, 2006 and 2007
        respectively.
 
 Under
        the
        Indian Companies Act, dividends may be paid out of the profits of a company
        in
        the year in which the dividend is declared or out of the undistributed profits
        of previous fiscal years. Before declaring a dividend greater than 10.0%
        of the
        par value of its equity shares, a company is required to transfer to its
        reserves a minimum percentage of its profits for that year, ranging from
        2.5% to
        10.0% or higher, depending on the dividend percentage to be declared in such
        year.
 *Liquidation*
 In
        the
        event of liquidation of the Company, the holders of equity shares shall be
        entitled to receive all of the remaining assets of the Company in proportion
        to
        the number of equity shares held, after distribution of all preferential
        amounts, if any.
 
 *Stock
        options*
 MTNL
        has
        not granted any stock options to any of its employees or to others.
 
 **21.**
              **FINANCIAL
                  INSTRUMENTS AND CONCENTRATION OF
                  RISK**
 
 *Credit
        risk*
 Financial
        instruments which potentially subject MTNL to concentrations of credit risk
        consist principally of periodic temporary investments of excess cash, trade
        receivables, and investments in ITI Limited preference shares and MKVDC bonds.
        The Company places its temporary excess cash in short term deposits. By their
        nature, all such financial instruments involve risk including the credit
        risk of
        non-performance by counter parties. In management’s opinion, as of March 31,
        2006 and 2007, there was no significant risk of loss in the event of
        non-performance of the counter parties to these financial instruments, other
        than the amounts already provided for in the financial statements. To reduce
        credit risk, MTNL performs ongoing credit evaluation of customers.  As
        on
        March 31,2006 and 2007, BSNL and DOT accounted for more than 10% of total
        receivables which has been reflected in Note 19.
 
 The
        risk
        in relation to investment in ITI Limited is offset by clause relating to
        MTNL’s
        entitlement to set off the amounts receivable in respect of principal
        outstanding from the dues payable to ITI Limited. The clause is built into
        the
        share purchase agreement.
  F-26
 Table
            of Contents
 
 The
        credit risk for the investment in bonds issued by MKVDC is minimized due
        to the
        payment mechanism envisaged in the prospectus, which states that any shortfall
        is to be met by the Maharashtra State Government that has undertaken to earmark
        an amount equal to interest and principal repayments out of its annual budget
        for the respective corporation. In the event of such amount not being
        transferred the trustees would be entitled to invoke the guarantee given
        by the
        state government.
 
 *Fair
        value*
 The
        fair
        value of MTNL’s current assets and current liabilities approximate their
        carrying values because of their short-term maturity. Such financial instruments
        are classified as current and are expected to be liquidated within the next
        twelve months.
 
 The
        approximate fair value of investments in held to maturity securities, as
        determined by using current interest as of March 31, 2007 is
        Rs.3430  million as compared to their carrying amount of Rs. 3500
        million.
 
 The
        approximate fair value of loans to employees, as determined by using current
        interest as of March 31, 2007 is Rs.1946 million as compared to their carrying
        amount of Rs. 2,150 million.
 
 Due
        to
        the uncertainties attached to the timing of ultimate realization of restricted
        assets, it is not practicable to determine their fair values.
 
 **22.**
              **CONTIGENCIES
                  AND COMMITMENTS**
 
 **i.**    **CAPITAL
        COMMITMENTS**
 
 Contractual
        commitments for capital expenditure pending execution were Rs. 3,923 million
        and
        Rs. 6166 million as of March 31, 2006 and 2007 respectively. Contractual
        commitments for capital expenditures are related to purchase of property
        and
        equipment.
 
 **ii.**   **GUARANTEES**
 
 MTNL
        has
        outstanding financial/performance bank guarantees of Rs. 771 million and
        Rs.1123
        million as of March 31, 2006 and 2007 respectively. The bank guarantees are
        essentially provided to the Government of India for financial and performance
        roll out obligations as prescribed in respective license
        agreements.
 
 **iii.**  **CONTINGENT
        LIABILITIES**
 
 MTNL
        is
        involved in tax and legal proceedings, claims and litigation arising in the
        ordinary course of business. MTNL periodically assess its liabilities and
        contingencies in connection with these matters based upon the latest information
        available. For those matters where it is probable that MTNL could have incurred
        a loss and the loss or range of loss can be reasonably estimated, the Company
        has recorded reserves in its consolidated financial statements. In other
        instances, MTNL is unable to make a reasonable estimate of any liability
        because
        of the uncertainties related to both the probable outcome and  amount or
        range of loss. As additional information becomes available, MTNL adjusts
        its
        assessment and estimates of such liabilities accordingly.
  Based
        on
        review of the latest information available, management believes that the
        ultimate liability in connection with pending tax and legal proceedings,
        claims
        and litigation will not have a material effect on the Company’s results of
        operations, cash flows or financial position, with the possible exception
        of the
        matters described below.
  (a) 
        Sales Tax
  The
            Company had received a demand to
            pay sales tax in respect of certain historical telecommunications revenues,
            mainly telephone rental charges.  The Company had received a demand
            from the state government of Maharashtra, of which Mumbai is a part,
            for payment
            of Rs. 3,200  million in sales tax for fiscal 1989-2000. Further MTNL
            has also received notice from the Delhi state government seeking further
            information in aid of an investigation into whether a similar demand
            should be
            made upon the Company.  The amount of issue in Delhi is significantly
            less.
 
 The
            department made these demands based
            on a case involving the Uttar Pradesh Trade Tax Department (UPTTD) and
            the DOT,
            wherein the Supreme Court of India ruled that a telephone connection
            along with
            a telephone set provided by a company rendering basic services amounts
            to a
            "transfer of right to use the telephone system" and the rentals collected
            by DOT
            towards this right to use should suffer sales tax.  Subsequent to the
            passing of this order, both the cellular and basic operators filed a
            petition
            before the Supreme Court under Article 32 of the Constitution in respect
            of the
            above.  The Hon?ble Supreme Court admitted the Petitions, inspite of
            its own judgment, and vide orders dated September 25, 2003 referred the
            matter
            to a larger bench for determination of dispute on merits and further
            directed
            that in future there shall be no coercion for recovery of any
            dues.  The Hon?ble Supreme Court further directed that the operators
            should file statutory appeals against the assessment orders for assessments
            already completed as on September 25, 2003.  Following
            the  Supreme Court order in the UPTTD case the sales tax
            departments  across the country, have raised demands on basic and
            cellular mobile operators.
 
 MTNL
            had challenged the demands raised
            before the respective high courts and the Company has been granted interim
            stays
            against enforcement of the demands. However this stay order is subject
            to the
            outcome of the Supreme Court judgment on the issue.  During the year
            ended March 31, 2006, the Supreme Court of India has concluded in the
            BSNL Vs
            Union of India case that rendering basic services does not amount to
            a "transfer
            of right to use the telephone system". Hence the imposition of the sales
            tax on
            any facility of the telecommunication services is untenable in
            law.  Based on opinion received from legal counsel and drawing
            reference to the judgment of the Supreme Court of India in the abovementioned
            case, management believed that the sales tax departments would have to
            withdraw
            their demands of sales tax on basic telephony and that an adverse outcome
            in
            respect of the above is remote.
 
 During
            the current year the case
            relating to Delhi has been settled. The amount of demand pertaining to
            Mumbai
            outstanding is Rs. 1,900 million.
  F-27
 Table
            of Contents
  (b) 
Income
        Taxes   i.
                The
                    Central Income Tax Authority of India (“CIT”) had historically disallowed
                    the license fee paid by the Company to DOT for the years ended
                    March 31,
                    1994 till March 31, 2006 as a tax deductible expense and had
                    raised a
                    demand for payment of taxes on increased taxable income relating
                    to such
                    expenses. These demands had been contested by the Company. As
                    part of the
                    appeals process, the Company had paid deposits under protest,
                    amounting to
                    Rs 13,427 million as of March 31, 2005. These deposits have been
                    classified as part of restricted assets on the Company’s consolidated
                    balance sheets.
 During
          the year ended March 31, 2005, the Company had obtained favorable decisions
          from
          the Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee
          disallowed for the assessment years 1997-98 and 2001-2002. Further in respect
          of
          assessment years 1995-96 and 1996-97, the Committee of Disputes (“COD”), on the
          recommendations of the Ministry of Law, decided not to give clearance to
          either
          the Central Board of Direct Taxes or the Company to file appeals in the
          Hon’
able High Court, making the decision of the ITAT binding on both the parties.
          Subsequent to the COD’s decision, the Company has applied to ITAT to restore the
          appeal and decide in favor of the Company.
 
 During
        the  year ended March 31, 2006, based on the judgments passed in the
        previous years, ITAT has allowed deduction of license fees as a tax deductible
        item for assessment years 1998-99 to 2000-01 and 2002-03. The license fees
        have
        also been allowed as a deduction by CIT (A) for assessment year
        2004-05.
 
 During
        the current year ended March 31, 2007, based on the judgements issued in
        the
        previous years, ITAT has allowed deduction of license fees as tax deductible
        item for the assessment years 1995-96 and 1996-97 also. Management believes
        that
        ITAT following its favorable judgments of earlier years will eventually decide
        in favor of the Company for the years in dispute and an adverse outcome in
        respect of the above is not probable. Based on the above stated favorable
        judgements, the Company has not accrued the tax charge on the license fee
        in the
        financial statements. The Company during the year 2006-07 has received interest
        on deposits paid under protest to the tax authorities and the refunds for
        the
        years decided in favor of the Company i.e. 1995-96, 1996-97, 1998-99, 1999-00,
        2000-01, 2002-03 and 2004-05.  The refunds and the interest thereon
        have been recognized in the statement of income for the year ended March
        31,
        2007. As part of the appeals process, the Company had paid deposits under
        protest, amounting to Rs 3,672 million as of March 31, 2007. These deposits
        have
        been classified as part of restricted assets on the Company’s consolidated
        balance sheets.
  ii.
                The
                    Income Tax authorities have historically disallowed the Company’s claim
                    for a tax holiday under section 80IA of the Indian Income Tax
                    Act, 1961
                    (Also refer note 17). For assessment years 2001-02 to 2004-05,
                    the income
                    tax authorities have demanded Rs.10,677 million as penalties
                    for the
                    deduction claimed by the Company under Section 80 IA -Income
                    Tax Act,
                    1961. The Company is contesting these disputes at various levels
                    of income
                    tax appellate authorities including the ITAT. During the year
                    ended March
                    31, 2006, the Company’s appeal to determine the applicability of section
                    80 IA has also been admitted by the High Court. Under the Indian
                    laws,
                    High Courts only admit a case, pertaining to income taxes, if
                    there is a
                    ‘question of law’ involved in the litigation and not ‘a question of
                    facts’. Under the Income tax laws no penalty can be levied if there
                    is a
                    ‘question of law’- interpretation involved. The Company has adequately
                    disclosed in its income tax filings its claims under section
                    80IA and
                    further since its appeal has also been admitted by the High Court,
                    management believes that it is ‘a question of law’ on which no penalty can
                    be levied by the income tax authorities.  Based
                    on the opinion received from the legal counsel and the facts
                    above the
                    Management believed as at March 31,2006 that an adverse outcome
                    in respect
                    of above was remote. During the year 2006-07 the ITAT has
                    restored the claim of the company u/s 80IA for the assessment
                    years
                    1998-99, 1999-00, 2000-01 and 2002-03 to the assessing
                    officer.
 
 Subsequent
                    to the year ended March 31, 2007 MTNL has received fresh orders
                    from the
                    assessing officer partially allowing the deduction u/s 80IA for
                    the
                    assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and received
                    refunds and interest thereon. For claiming full deduction of
                    claim u/s
                    80IA, the Company has filed the appeals to the higher authority.
                    The
                    Company is of the view that the orders in respect of the above
                    years have
                    reached a stage of finality and accordingly the refunds and the
                    interest
                    thereon have been recognized in the statement of income for the
                    year ended
                    March 31, 2007 under tax expense and interest income respectively.
                    However, in respect of other years it is possible that the authorities
                    may
                    take a different view as the same matters are at various stages
                    of appeals
                    or assessment. In view of this, the Company has not recognized
                    the benefit
                    of tax deduction u/s80IA for these years until a finality is
                    reached on
                    the subject matter.
  F-28
 Table
            of Contents
  iii.
                General
                    Provident Fund is a scheme applicable to the Company’s employees who have
                    opted for the Government Pension rules. In the absence of any
                    rules
                    available for deposit of such contribution the amounts had been
                    retained
                    by the Company pending notification from the
                    Government.
  The
                  CIT had considered the contributions made by the employees towards
                  the
                  General Provident Fund for the year ended March 31, 2001 to 2004,
                  as
                  taxable income of the Company. The amount of additional income
                  tax
                  demanded together with interest amounted to Rs. 1,652 million as
                  of March
                  31, 2005. As a part of the appeals process the Company had deposited
                  Rs.
                  1,306 million as of March 31,2005 under protest to the tax authorities.
                  These deposits had been classified as part of restricted assets
                  on the
                  Company’s consolidated balance
                  sheets.
 
 During
                  the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’
                  and had applied to the Income Tax authorities for the recognition
                  of the
                  said Trust. The Company believed that the entire GPF contribution
                  till
                  date will be allowed on payment of the same to the Trust. During
                  the year
                  ended March 31, 2006 the GPF Trust has been recognized by the Income
                  Tax
                  authorities and the amount deposited in the Trust has been allowed
                  as a
                  deduction in the relevant year.
  (c) 
        Disputes with BSNL
 In
        accordance with the Inter Connect Usages Regulations, the Company has accounted
        for interconnection charges payable to BSNL amounting to Rs.6,924 million
        and
        Rs. 3,627 million for the years ended March 31, 2004 and 2005 respectively
        (also
        refer note 4).  However BSNL had raised a bill for the interconnection
        charges for the calls originating from MTNL’s network and terminating/transiting
        at/from BSNL amounting to Rs.12,165 million and Rs.8,030 million for the
        years
        ended March 31, 2004 and 2005 respectively. The Company’s contention was that
        the claim was not adequately supported by BSNL and hence not accepted by
        the
        Company.
 
 In
        the
        absence of an interconnection agreement, MTNL had provided NLD/ILD access
        charges for the period ended March 31, 2002 at the rates lower than those
        demanded by BSNL. Subsequent to the year ended March 31, 2004, in a meeting
        held
        between DOT, BSNL and the Company the rates for NLD calls for the year ended
        March 31, 2002 were agreed and accordingly the Company has accounted additional
        liability of Rs. 233 million during the year ended March 31, 2004. The Company
        may be required to pay ILD access charges amounting to Rs. 195 million for
        the
        period April 1, 2001 to January 31, 2002 on the settlement of the dispute
        with
        BSNL in this regard.
 
 During
        the year ended March 31, 2006, the DOT had constituted a three members committee
        comprising the Member (Production), Telecommunications, Member (Finance),
        Telecommunications and Deputy Director General (Business Solution) to resolve
        the issues relating to networking charges. Based on the recommendations of
        the
        Committee vide their minutes dated January 2006, the networking charges payable
        to BSNL for the years March 31, 2004 and March 31, 2005 have been settled
        at
        Rs.14,078 million as against Rs.10,551 million. Further, the Committee has
        also
        settled networking charges for the years 2000 to 2003 in the meeting held
        in
        January 2006. Accordingly, an amount of Rs. 3,809 million (including the
        incremental charge of Rs. 3,527 million for the years 2004 and 2005) has
        been
        accounted as networking charges in the statement of operations for the year
        ended March 31, 2006.
 
 Subsequent
        to the year end March 31, 2006, meetings have been held between BSNL and
        MTNL
        wherein BSNL has raised additional claims for the year upto March 31, 2005
        aggregating Rs.2,007 million and claims amounting to Rs.5,670 million for
        the
        year ended March 31, 2006 on account of networking and others charges. As
        against these claim for the year ended March 31, 2006 the Company has accounted
        Rs. 4,040 million for networking charges payable to BSNL.
 
 The
        Company’s contention is that since all claims relating to networking and other
        charges for the period upto March 31, 2005 have already been settled in
        accordance with the minutes of DOT committee held on January 2006 and the
        claims
        for the year ended March 31, 2006, are not adequately supported by the BSNL
        and
        hence not accepted by the Company. Further, the Company is in the process
        of
        discussing/reconciling their claims for the year ended March 31,2006 with
        BSNL
        and may be required to pay an additional amount based on the final settlement,
        however such payments will not have a material adverse effect upon the Company’s
        results of operations, financial condition and cash flows. Management believes
        that an adverse outcome in respect of the above is not probable.
 
 During
        the year ended March 31, 2006, MTNL has raised claims on BSNL for duct charges,
        TAX claims and reciprocal service claims amounting to Rs.2,116 million, Rs.2,482
        million and Rs.320 million respectively. The duct charges pertain to annual
        usage of infrastructure (ducts) for the period October 1, 2000 to March 31,
        2006, the TAX claims pertain to the Company’s Trunk Automatic Exchange (“TAX”)
        used by BSNL for the period from February 1, 2004 to March 31, 2006 and the
        reciprocal service claims are on account of Reciprocal Service Connections
        provided to BSNL employees. for the period October 1, 2000 to March 31, 2006.
        Management has not recognized these claims as income in the statement of
        operations considering the history of other disputed claims with BSNL the
        fact
        that currently there is no separate agreement for these services, and that
        BSNL
        has not accepted these claims.
 
 F-29
 Table
            of Contents
  During
        the year ended March 31, 2007, MTNL has raised claims on BSNL for duct charges,
        TAX claims IUC charges claims amounting to Rs.477 million, Rs.1,251 million
        and
        Rs.101 million respectively. The duct charges pertain to annual usage of
        infrastructure (ducts) for the period April 1, 2006 to March 31, 2007, the
        TAX
        claims pertain to the Company’s Trunk Automatic Exchange (“TAX”) used by BSNL
        for the period from April 1, 2006 to March 31, 2007 and the IUC charges claims
        pertain to incoming calls terminated at MTNL exchange to the extent of 101
        millions not accepted by BSNL as income in the statement of operations
        considering the history of other disputed claims with BSNL the fact that
        currently there is no separate agreement for these services, and that BSNL
        has
        not accepted these claims.
  *(d) 
Disputes
        with DOT*
 On
        the
        formation of the Company, employees were deputed to MTNL on deemed deputation
        status from DOT and the Company was required to contribute for the Leave
        Salary
        and pension Contribution (“LSPC”) as per the rates prescribed by the Government.
        The Company had accrued for these expenses amounting to Rs 2,884.74 million
        for
        the period 1986 to 1998 and subsequently paid them to DOT.
 
 During
        the year ended March 31, 2006, a Committee was set up to examine the amount
        of
        LSPC contributions payable by MTNL to DOT. The Committee concluded that an
        additional amount of Rs.656 million was payable on account of short payment
        of
        the LSPC contribution and an amount of Rs.1,738 million is payable on account
        of
        interest payable on delayed payment of the LSPC contributions. The Company
        has
        accepted the claim of DOT for Rs.656 million and has expensed it in its
        statement of income for the year ended March 31, 2006. In respect of Rs.1,738
        million, the Company has contested the claim from DOT on the contention that
        MTNL has abided by DOT’s decision at all stages by depositing the amounts as
        required. Management believes that an adverse outcome in respect of the above
        is
        not probable.
  (e) 
Others
 i.
              In
                  1998, M&N Publication made claims for Rs 5415 million against the
                  Company. These claims arise out of contracts for the printing of
                  telephone
                  directories for Delhi and Mumbai. Each of these claims includes
                  claims for
                  loss of reputation and loss of business opportunities aggregating
                  to Rs.
                  2000 million. The Company has made claims of Rs. 4169 million against
                  M&N Publications for failure to perform the contracts. These claims
                  are pending before a sole arbitrator. The Company believes that
                  it has
                  valid defenses to these claims and based on opinion received from
                  legal
                  counsel, management believes that an adverse outcome is not
                  probable.
 
 ii.
              In
                  the year 2004-2005, Alcatel brought claims aggregating to Rs. 129.20
                  million (including interest from 1996 till date on the claims made
                  Rs
                  87.91 million) (March 2006 Rs. 121.21 million) against the
                  Company. These claims arise out of contract for supply of digital
                  local
                  telephone exchange equipment. These claims include claims for loss
                  of
                  reputation and loss of business opportunity aggregating to Rs.
                  20 million.
                  The Company believes it has a valid defense to these claims and
                  based on
                  opinion received from legal counsel, management believes that an
                  adverse
                  outcome is not probable.
 
 iii.
              The
                  Company has received claims aggregating Rs. 336.95 million (March
                  2006 Rs.
                  308.60 million) from various PRM service providers (World Phone,
                  Voice
                  Infotech and ITC). These claims arise from the contract for PRM
                  services,
                  which were started in the year 1999-2000. MTNL has not paid commission
                  payable for these services to these providers, as the amount was
                  subsequently not recovered from the subscribers.  The
                  claims include Rs 119 million towards loss of profit and wasteful
                  expenditure incurred by the parties.The Company believes it has a
                  valid defense to these claims and based on opinion received from
                  legal counsel, management believes that an adverse outcome is not
                  probable.
 
 iv.
              The
                  Company has received claims from CMC limited aggregating to Rs.
                  497.52
                  million (March 2006 Rs. 452.52 Million).  These claims arise out
                  of usage of leased circuits for which MTNL has charged them rental
                  for CUG
                  services as per the revised tariff plan which is disputed by CMC
                  Limited.
                  These claims include claims for loss of reputation, business opportunity
                  and undue harassment aggregating to Rs. 220 million.  The
                  Company believes it has a valid defense to these claims and based
                  on
                  opinion received from legal counsel, management believes that an
                  adverse
                  outcome is not probable.
  v.
                Additionally the Company is also involved in law suits and claims
                    amounting to Rs. 1967.11 million pending at various authorities
                    which
                    arise in the ordinary course of the business. Management believes
                    that it
                    has a valid defense against these claims and an adverse outcome
                    is not
                    probable. These would not have a material adverse effect upon
                    the
                    Company’s results of operations, financial condition and cash
                    flows.
  **iv.**  **DISPUTE
        WITH OTHER
        OPERATOR**
  During
        the year ended March 31, 2005, MTNL noticed that a very large number of calls
        were received from certain levels of another operator’s network. On further
        investigation/analysis, it came to the Company’s notice that these were actually
        ILD calls, which were being received on Local/NLD trunks and that the CLIs
        (Caller line Identification) of these calls had been tampered by the other
        operator. MTNL raised a demand on the other operator based on the relevant
        penal
        clauses of its agreement aggregating Rs.3,412 million for a period of six
        months
        beginning April 2004. The other operator has disputed the above claim and
        under
        repeated threats of disconnection, obtained a stay order from High Court
        of
        Delhi. In the year ended March 31, 2005 during the course of the hearings,
        the
        honorable High Court directed the other operator to pay Rs.2,368 million
        to
        MTNL. During the year ended March 31, 2006, the other operator under directions
        from the High Court has further deposited Rs.1040 million with
        MTNL.
 
 F-30
 Table
            of Contents
  During
          the year ended March 31, 2007, the petition filed by the other operator
          before
          the high Court has been dismissed as withdrawn with the liberty to take
          such in
          accordance with law. Management believes that it is a remote possibility
          that
          these amounts have to be refunded.  However, these amounts have not
          been recognized as income
  *(f) 
Summary
          of above litigations*
 The
        following table summarizes the potential exposure (excluding interest and
        penalty) of the Company of March 31, 2007 with respect to above stated pending
        litigations in the event the same is settled against the Company:
  **As
                  of March 31,****Also
                  refer note:**
              
              **2007**
              
              
              **2007****(Million
                  of Rupees)**
              
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Dispute
                  relating to disallowance of license fee
              **22
                  (iii) (b) (i)**
              
              Rs.3,672
              
              
              $
              85Dispute
                  relating to disallowance of 80 IA deduction
              **22
                  (iii) (b) (ii)**
              
              
              10,677
              
              
              
              248Disputes
                  with BSNL
              **22
                  (iii) (c)**
              
              
              3,637
              
              
              
              84Disputes
                  with DOT
              **22
                  (iii) (d)**
              
              
              1,738
              
              
              
              40Arbitration
                  dispute with M & N Publications
              **22
                  (iii) (e) (i)**
              
              
              5415
              
              
              
              126Arbitration
                  dispute with Alcatel
              **22
                  (iii) (e) (ii)**
              
              
              129.20
              
              
              
              3PRM
                  services
              **22
                  (iii) (e) (iii)**
              
              
              336.95
              
              
              
              8CMC
                  Services
              **22
                  (iii) (e) (iv)**
              
              
              497.52
              
              
              
              12Other
                  Lawsuits and claims
              **22(iii)
                  (e) (v)**
              
              
              1,967.11
              
              
              
              46**Rs.28,069.78**
              
              
              **$**
              **651**
 
 **23.**
              **SEGMENTAL
                  INFORMATION**
 
 The
        Chairman and Managing Director (CMD) of the Company has been identified as
        the
        Chief Operating Decision Maker (CODM) as defined by SFAS No. 131. The CODM
        of
        the Company determines its business segments based on the nature of services,
        the differing risks and returns and the organizational structure. These segments
        are basic (including CDMA) and cellular services. Basic services segment
        consists of voice, data through local calls, domestic long distance and
        international long distance calls on fixed line services in the cities of
        Delhi
        and Mumbai in India. Further, it includes revenues from Code Division Multiple
        Access, or CDMA, based cellular services and internet access services. Cellular
        consists of providing cellular services in cities of Delhi and Mumbai using
        Global System for Mobile communications, or GSM, technology. These services
        were
        launched in February 2001.
 
 During
        the years ended March 31, 2004 and 2005, the Company had not considered cellular
        services to be a reportable segment since it did not meet the thresholds
        of
        significance. However as the cellular services have met the thresholds of
        significance during the year ended March 31, 2006, the Company has disclosed
        the
        segment information. MTNL has also disclosed segment information for the
        prior
        years.
 
 During
        the current year the Company has started operations in Mauritius. However,
        as
        the operations are insignificant as compared to the overall business of the
        Company, the same have not been considered for separate segment disclosure.
        During the year ended March 31, 2006 and March 31, 2007 no single customer
        has
        contributed for revenue in excess of 10% of total revenue.
 
 MTNL’s
        operating segment information for the years ended March 31, 2005, 2006 and
        2007 are as follows. The table gives the amounts reviewed by the CODM reconciled
        to the consolidated US GAAP financial statements.
 
 F-31
 Table
            of Contents
  The
        amounts reviewed by the CODM are based on internal accounting policies of
        the
        Company which are different from US GAAP.
 **Basic**
              **Cellular**
              **Unallocated**
                **(Corporate)**
              **Elimination**
              **Total**
              **Reconciling
                  Adjustments**
              **Consolidated
                  Totals****Millions
                  of Rupees****For
                  the year ended March 31, 2007**Revenue
                  — External customers
              41,402
              7,691
              0
              0
              49,093
              (3,618)
              45475Revenue
                  — Inter-segment
              633
              51
              0
              -684
              0
              -
              0**Total
                  Revenues**
              42,035
              7,742
              0
              -684
              49,093
              (3,618)
              45475Operating
                  income / (loss)
              118
              2,606
              -1512
              
              1,212
              1,130
              2342Interest
                  income/ (expense), net
              178
              44
              5094
              
              5,316
              2,049
              7365Equity
                  in earnings/(losses) of associated companies, net of taxes
              0
              0
              0
              
              0
              (7)
              (7)Non
                  Operating income, net
              1,157
              223
              19
              
              1,399
              (870)
              529Net
                  income / (loss)
              1,453
              2,873
              3,600
              
              7,927
              2,309
              10236Segment
                  assets
              117,019
              9,454
              87,204
              
              213,677
              (34,740)
              178937Depreciation
                  and amortization
              6,152
              674
              6
              
              6,832
              1,684
              8516Capital
                  expenditures for long-lived assets
              7117
              664
              4
              
              7,788
              -
              7788**For
                  the year ended March 31, 2006**Revenue
                  — External customers
              49,883
              5,727
              -
              -
              55,610
              (8,
                  942)
              46,668Revenue
                  — Inter-segment
              744
              216
              -
              (960)
              -**Total
                  Revenues**
              50,627
              5,943
              -
              (960)
              55,610
              (8,942)
              46,668Operating
                  income / (loss)
              4,696
              1,808
              (4,846)
              -
              1,658
              (2,470)
              (812)Interest
                  income/ (expense), net
              (67)
              1
              3,831
              -
              3,765
              (1,995)
              1,770Equity
                  in earnings/(losses) of associated companies, net of taxes
              -
              -
              -
              -
              -
              (73)
              (73)Non
                  Operating income, net
              1,190
              59
              42
              -
              1,291
              (673)
              618Net
                  income / (loss)
              5,819
              1,868
              (973)
              -
              6,714
              (5,138)
              1,576Segment
                  assets
              113,195
              7,749
              83,519
              -
              204,463
              (34,312)
              170,151Depreciation
                  and amortization
              5,916
              544
              7
              -
              6,467
              1,532
              7,999Capital
                  expenditures for long-lived assets
              5,274
              1,609
              (28)
              -
              6,855
              -
              6,855**For
                  the year ended March 31, 2005**Revenue
                  — External customers
              53,050
              2,874
              -
              -
              55,924
              (5,768)
              50,156Revenue
                  — Inter-segment
              393
              -
              -
              (393)
              -
              -
              -**Total
                  Revenues**
              53,443
              2,874
              -
              (393)
              55,924
              (5,768)
              50,156Operating
                  income / (loss)
              6,450
              637
              511
              -
              7,598
              (4,671)
              2,927Interest
                  income/ (expense), net
              (174)
              1
              2,293
              -
              2,120
              -
              2,120Equity
                  in earnings/(losses) of associated companies, net of taxes
              -
              -
              -
              -
              -
              (67)
              (67)Non
                  Operating income, net
              2,387
              14
              38
              -
              2,439
              (1,889)
              550Net
                  income / (loss)
              8,663
              652
              2,842
              -
              12,157
              (6,560)
              5,597Segment
                  assets
              111,729
              6,358
              99,797
              -
              217,885
              (40,713)
              177,172Depreciation
                  and amortization
              5,533
              337
              10
              -
              5,880
              1,844
              7,724Capital
                  expenditures for long-lived assets
              7,093
              3,068
              137
              -
              10,298
              -
              10,298
 
  **MAHANAGAR
          TELEPHONE NIGAM LIMITED**
 **Notes
          to the consolidated financial statements**
 
  There
        is
        material differences between segment information internally reviewed, by
        the
        CODM, and consolidated financial statements prepared under U.S. GAAP. The
        material differences that affect us are primarily attributable to U.S. GAAP
        requirements for:
 
 ·
              Revenue
                  recognition
 ·
              Employee
                  benefits - Accounting for gratuity and pension obligations; accounting
                  for
                  leave pay obligations and curtailment benefits arising from voluntary
                  retirement scheme under US GAAP.
 ·
              Property,
                  plant and equipment - Useful lives of assets, foreign exchange
                  capitalized, interest capitalized and leases,
                  and
 ·
              Deferred
                  taxes - Accounting for deferred taxes under US
                  GAAP.
  F-32
 Table
            of Contents
  More
        specifically, the reconciling items relate to the following:
 ·
              The
                  reconciling items pertaining to revenues amounted to Rs.5,768 million,
                  Rs.8942 million and Rs.3618 million for the years ended March 31,
                  2005, 2006 and 2007. These reconciling items primarily pertain
                  to
                  non-recognition of revenues under US GAAP (Refer notes 22(iii)(c)
                  and
                  22(iv)) since the amounts are either disputed or collectibility
                  is not
                  reasonably possible and netting off of commissions from revenues
                  under US
                  GAAP.
 ·
              The
                  reconciling items pertaining to operating income / (loss) amounted
                  to Rs
                  (.4671) million , Rs.(2470) million and Rs. 1330 million for the
                  years ended March 31, 2005, 2006 and 2007. These reconciling items
                  are
                  mainly attributable to US GAAP adjustments for revenues, cost of
                  revenues
                  and selling general and administrative expenses and reclassification
                  of
                  excess liability written back. The cost of revenues and selling,
                  general
                  and administrative expenses have reconciling items on account of
                  accounting for employee benefits, depreciation, provision for doubtful
                  debts and other adjustments on account of BSNL / DOT (Refer notes
                  3 and 4)
                  under US GAAP.
 ·
              The
                  reconciling item in respect of interest income / (expense), net
                  for the
                  year ended March 31, 2007 is on account of recognition of interest
                  on
                  income tax refund under US GAAP, which was not recognized during
                  the year
                  March 31, 2006, since final assessment order was received during
                  the year
                  ended March 31, 2007 (refer note 22(b)(ii)).·
              The
                  reconciling item in respect of post retirement medical benefit
                  liability
                  written back due to events subsequent to the balance sheet date.(Refer
                  note 24 (b)).
 ·
              The
                  reconciling item in respect of non operating income / (loss) primarily
                  pertain to reclassification of excess liability written back from
                  non
                  operating income / (loss) to operating income /
                  (loss).
 ·
              The
                  reconciling adjustments for segment assets pertain primarily to
                  US GAAP
                  adjustments in respect of useful lives of assets, foreign exchange
                  capitalized, interest capitalized and depreciation
                  expense.
 
 **24.**
              **SUBSEQUENT
                  EVENTS**
 
 a)
              The
                  Board of Directors has recommended payment of final dividend at
                  10% on the
                  paid up equity capital of Rs. 6,300 million on July 17, 2007. The
                  Company
                  would be required to pay dividend tax at the rate of 17% (approx)
                  of the
                  dividend distributed.
 
 b)
              MTNL
                  vide its office order no. MTNL/CO/Pers CGHS Rules/99/440 dated
                  20.12.2001
                  had introduced a medical scheme for its retired employee’s w.e.f.
                  1.01.2002 for a initial period of 12 weeks and subsequently extended
                  the
                  scheme from time to time. The said facilities, in respect of indoor
                  treatment, were discontinued from 1.04.2006 to 1.09.2006 during
                  the
                  operation of MTNL Group Health Insurance Scheme (MTNLGHIS) service
                  by
                  ICICI Lombard General Insurance Company. However, consequent upon
                  foreclosure of MTNLGHIS during the year, the said facilities were
                  restored
                  under the scheme which had an expiry date of 31.08.2007. The Company
                  vide
                  office order no. MTNL/CO/Pers/8(1-176)/2006/1342 dated 24.08.2007,
                  decided
                  that the said facilities shall be available to the MTNL Retired
                  Employees
                  in terms of the aforesaid circular till 31.08.2007 and no further.
                  This
                  office order was widely communicated. In the earlier years, though
                  the
                  scheme in operation was subject to renewal on a  piecemeal basis
                  based on issue of orders by the competent officials, actuarial
                  valuation
                  was done on the assumption of continuity of the said scheme. The
                  Company
                  does not at present have any plans for a similar or an alternative
                  scheme.  Consequently, the provision of Rs.5794 million pertaining to
                  this matter was reversed to the statement of operations as a material
                  infrequent item.
 **25.**
              **SIGNIFICANT
                  RISKS AND UNCERTAINTIES**
 
 a)
              The
                  telecommunication industry in India is subject to substantial regulation
                  by the Government. The Company is subject to certain risks common
                  to
                  companies within the telecommunications industry in India. These
                  include,
                  but are not limited to, substantial regulation by the Government.
                  Changes
                  in the Government policies including a revocation of the license
                  or a
                  change in significant terms of the license, such as its duration,
                  the
                  amount of license fee payable, the range of services permitted
                  and the
                  scope of exclusivity may significantly affect management’s estimates and
                  the
                Company’s
                  performance. Further the Indian Government is the controlling shareholder
                  in MTNL and hence the Company is deemed to be an Indian government
                  company. As such, the Company is subject to laws and regulations
                  generally
                  applicable to public sector enterprises in India. These laws and
                  regulations govern, among other things, personnel matters, procurement,
                  budgeting and capital expenditures and the generation of funds
                  through the
                  issuance of securities. Also the Indian Government when considering
                  matters pertaining to the Company, often also considers the interests
                  of
                  the largest government-owned telecommunications company, Bharat
                  Sanchar
                  Nigam Limited (BSNL).
 
 b)
              The
                  Company operates the network under a license from the DOT that
                  is valid
                  until March 31, 2013 for fixed-line services and until October,
                  2017 for
                  cellular services. The DOT retains the right, however, to revoke
                  the
                  license after giving one month's notice to the Company. The DOT
                  also
                  retains the right, after giving notice to the Company, to modify
                  the terms
                  and conditions of the license at any time if in its opinion it
                  is
                  necessary or expedient to do so in the interest of the general
                  public or
                  for the proper operation of the telecommunications sector. A revocation
                  of
                  the license or a change in significant terms of the license, such
                  as its
                  duration, the amount of license fee payable or the range of services
                  permitted, would have a material adverse effect on the Company’s business,
                  financial condition and results of
                  operations.
  F-33
 Table
            of Contents
 c)
              Most
                  of the Company’s employees were on secondment from DOT. The non-executive
                  employees were given the option to be absorbed in the Company with
                  effect
                  from November 1, 1998. Under the option for pensionary benefits,
                  these
                  employees could opt to retain pensionary benefits in accordance
                  with the
                  Central Government pension rules or in accordance with MTNL
                  retirement rules which were applicable to its directly recruited
                  employees, and opt to draw pro rata monthly pension till their
                  absorption
                  in MTNL. Accordingly with effect from November 1, 1998, the Company
                  started accruing for pension and gratuity for these
                  employees.
  Further,
        rules relating to settlement of pensionary terms in respect of Government
        employees transferred to public undertakings, required the company to create
        a
        pension fund and provided for the Government to discharge its pensionary
        liability by paying in lump sum as a one time payment, the pro rata pension
        and
        gratuity for the service up to the date of transfer (November 1, 1998) of
        government servants from the Government to the undertaking. Accordingly on
        January 8, 2002 the Company claimed an amount of Rs.11, 700 million from
        DOT as
        DOT’s share of the liability.
 
 However
        the DOT vide their letter no. 40-29/2002 -Pen (T) on August 29, 2002 and
        September 4, 2002 has communicated that the pensionary benefits to the
        Government employees absorbed in MTNL and who have opted for either the
        Government Scheme of pension or for prorated pension scheme shall be paid
        by the
        Government. However, the terms of the settlement are yet to be finalized.
        In
        absence of details with regard to the basis required for determination of
        the
        amount payable by the company, no adjustment has been made in the cost of
        retirement benefits accrued in these financial statements for the
        above.
 
 d)
              The
                  Company had given an option to its executive employees (B category)
                  for
                  absorption with the Company with effect from October 1, 2000, at
                  a revised
                  pay scale that is higher than the existing pay scale. The offer
                  for
                  absorption provided that in addition to getting post retirement
                  benefits
                  like gratuity and leave encashment, subsequent to absorption, the
                  employees would have to opt for pension based on the government
                  rules.
                  Pending the finalization of the terms of absorption and actuarial
                  determination of incremental liability, the Company, during the
                  year ended
                  March 31, 2003, had accrued an additional charge amounting to Rs.
                  1,329
                  million on account of revised pay scales and related retirement
                  costs for
                  executive employees who exercised the option of absorption with
                  the
                  Company up to that date.
                
                During
                    the year ended March 31, 2004, majority of employees have opted
                    for
                    absorption with the Company.  The Company has determined the
                    incremental liability on account of revised pay scales and related
                    retirement cost on the basis of actuarial valuation. The amount
                    reduced
                    from actuarially determined liability, as recoverable from DOT
                    towards
                    retirement benefits for the period upto the October 1, 2000,
                    has been
                    calculated at the rates prescribed by DOT for its employees on
                    secondment.  The amounts have not been finalized between the
                    parties. Any consequent adjustment resulting from the same would
                    be
                    accounted at the time of final settlement.e)
              The
                  present arrangement of Pay and Allowance is expired on 31/12/2006
                  and, and
                  accordingly the next pay revision was due from 01/01/2007. Wage
                  board has
                  been constituted by Government for review of this aspect for all
                  Public
                  Sector Unit and the impact and financial effect of the wage revision
                  as
                  well as the form and content of such revision would be known on
                  notification by the Government. This may result in increase in
                  pay and
                  perks and Post Retirement benefits for serving and retired employees
                  respectively.
 
 f)
              The
                  Company has been advised by its counsel that although the Company
                  has
                  valid possession including the risks and rewards of ownership and
                  title to
                  all of its property, to enable MTNL to perfect and thereby acquire
                  marketable title to real property in its possession, it would need
                  to have
                  relevant documents relating to transfer or lease of real property
                  duly
                  registered and stamped. Accordingly, MTNL cannot sell its properties
                  without payment of stamp duties and registering the properties
                  in its
                  name. (Also refer note 7).


F-34
 Table
          of Contents


**SIGNATURES**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.




Mahanagar
      Telephone Nigam Limited




By:
              /s/
                  Anita SoniName:
              Anita
                  SoniTitle:
              Director
                  - Finance
   Date:       
        September 24,  2007
 Table
                of Contents


**EXHIBIT
      INDEX**





**Number**
            **Description
                of Exhibit**1.1
            Memorandum
                and Articles of Association of the Registrant, as amended on January
                31,
                2002.*2.1
            Form
                of Deposit Agreement among the Registrant, The Bank of New York,
                as
                depositary, and the holders from time to time to American Depositary
                Shares issued thereunder, including as an exhibit, the form of American
                Depositary Receipt.**4.1
            Lease
                Agreement dated January 16, 1996 between Life Insurance Corporation
                of
                India and the Registrant.**4.2
            License
                Agreement for provision of Internet Services in Delhi dated November
                6,
                1998 between President of India acting through Assistant Director
                General,
                Ministry of Communications and the Registrant.**4.3
            License
                Agreement for provision of Internet Services in Mumbai dated November
                6,
                1998 between President of India acting through Assistant Director
                General,
                Ministry of Communications and the Registrant.**4.4
            License
                Agreement for provision of Internet Services dated October 6, 2000
                between
                President of India acting through Assistant Director General, Ministry
                of
                Communications and Millennium Telecom Limited.**12.1
            Certification
                of Chief Executive
                Officer***12.2
            Certification
                of Principal Financial
                Officer***13.1
            Certification
                of Chief Executive
                Officer***13.2
            Certification
                of Principal Financial
                Officer***





*Previously
                filed on September 30, 2002, as exhibits to Annual Report on Form
                20-F for
                fiscal 2002.**Previously
                filed on September 27, 2001, as exhibits to Registration Statement
                on Form
                F-4 (file number 333-13944).***Filed
                herewith