Table
      of Contents


**As
      filed with the Securities and Exchange Commission on October
      2** **,** **2006**




**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, 2006**




**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)
            New
                York Stock Exchange, Inc.


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.**




YES  o  NO  x




**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   xNOo




**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  o  Item
      18  x




Table
          of Contents


**TABLE
        OF CONTENTS**
 **Page**


PRESENTATION
                  OF FINANCIAL
                  INFORMATION
              1SPECIAL
                  NOTE REGARDING FORWARD-LOOKING
                  STATEMENTS
              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
              34PROPERTY
                  AND EQUIPMENT
              34TELECOMMUNICATIONS
                  REGULATION IN
                  INDIA
              38Item
                  5.
              Operating
                  and Financial Review and
                  Prospects
              45OPERATING
                  RESULTS
              45LIQUIDITY
                  AND CAPITAL
                  RESOURCES
              59RESEARCH
                  AND
                  DEVELOPMENT
              61TREND
                  INFORMATION
              61Item
                  6.
              Directors,
                  Senior Management and
                  Employees
              61DIRECTORS
                  AND SENIOR
                  MANAGEMENT
              61AUDIT
                  COMMITTEE
              63COMPENSATION
                  OF DIRECTORS AND
                  OFFICERS
              64EMPLOYEES
              64TRAINING
              65SHARE
                  OWNERSHIP
              65Item
                  7.
              Major
                  Shareholders and Related Party
                  Transactions
              65MAJOR
                  SHAREHOLDERS
              65CERTAIN
                  RELATIONSHIPS AND RELATED PARTY
                  TRANSACTIONS
              66Item
                  8.
              Financial
                  Information
              67CONSOLIDATED
                  STATEMENTS AND OTHER FINANCIAL
                  INFORMATION
              67SIGNIFICANT
                  CHANGES
              68Item
                  9.
              The
                  Offer and Listing
              68MARKET
                  PRICE
                  INFORMATION
              68THE
                  INDIAN SECURITIES
                  MARKET
              69Item
                  10.
              Additional
                  Information
              75MEMORANDUM
                  AND ARTICLES OF
                  ASSOCIATION
              75MATERIAL
                  CONTRACTS
              80INDIAN
                  FOREIGN EXCHANGE CONTROLS AND
                  SECURITIES REGULATIONS
              80TAXATION
              83DOCUMENTS
                  ON DISPLAY
              87Item
                  11.
              Quantitative
                  and Qualitative
                  Disclosures about Market Risk
              87Item
                  12.
              Description
                  of Securities Other than
                  Equity Securities
              88Item
                  13.
              Defaults,
                  Dividend Arrearage and
                  Delinquencies.
              88Item
                  14.
              Material
                  Modifications to the Rights of
                  Security Holders and Use of Proceeds
              88Item
                  15.
              Controls
                  and Procedures
              88Item
                  16A.
              Audit
                  Committee Financial
                  Expert
              89Item
                  16B.
              Code
                  of Ethics
              89Item
                  16C.
              Principal
                  Accountant Fees and
                  Services
              89Item
                  16D.
              Exemptions
                  from the Listing Standards for
                  Audit Committees
              89Item
                  16E.
              Purchase
                  of Equity Securities by the
                  Issuer and Affiliated Purchasers
              90Item
                  17.
              Financial
                  Statements
              90Item
                  18.
              Financial
                  Statements
              90Item
                  19.
              Exhibits
              90Index
                  to Consolidated Financial
                  Statements
              F-1




i
 Table
          of Contents




**PRESENTATIONOF
        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, 2004, 2005 and
        2006
        and our balance sheets as of March 31, 2005 and 2006. 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, 2006 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 31, 2006 was Rs.44.48
        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.
  **SPECIALNOTE
        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 “Key Information—Risk Factors.” 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.
  **Item
        1.**  **Identityof
        Directors, Senior Management and
        Advisers**
  Not
        applicable.
  **Item
        2.**  **OfferStatistics
        and Expected
        Timetable**
  Not
        applicable.
  1
 Table
            of Contents




**Item
        3.**  **KeyInformation**
  **SELECTEDFINANCIAL
        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, 2002,
        2003, 2004, 2005 and 2006.
  The
        selected statement of operations data and cash flow data for the three years
        ended March 31, 2006, and the selected balance sheet data as of March 31,
        2005
        and 2006 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, 2002 and 2003, and the selected balance sheet data
        as of
        March 31, 2002, 2003 and 2004 under US GAAP are derived from our
        consolidated audited US GAAP financial statements not included in this
        report.
  Consolidated
        financial statements for the year ended March 31, 2006 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, 2006 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 31, 2006 was Rs.44.48 per US$1.00.
  2
 Table
            of Contents




**Under
      US GAAP**




**Fiscal
                Years Ended March 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006****Statement
                  of Income Data**
              **(Rs.
                  in millions except per share data)**
              **Convenience
                  translation into millions of US$ (Unaudited)****Revenues**
              **Rs.58,735**
              
              **Rs.55,251**
              
              **Rs.61,084**
              
              **Rs.50,156**
              
              **Rs.
                  46,668**
              
              **$1,049**Total
                  costs and expense
              (46,205)
              
              (48,057)
              
              (55,850)
              
              (47,229)
              
              (47,480)
              
              1,068Operating
                  income
              12,530
              
              7,194
              
              5,234
              
              2,927
              
              (812)
              
              (18)Other
                  income / (expense), net
              1,827
              
              1,962
              
              1,714
              
              2,670
              
              2,388
              
              54**Income
                  before income taxes**
              **14,357**
              
              **9,156**
              
              **6,948**
              
              **5,597**
              
              **1,576**
              
              **35**Income
                  taxes
              (5,457)
              
              (3,951)
              
              (2,570)
              
              (2,124)
              
              (437)
              
              (10)Equity
                  in (losses) of affiliate
              (4)
              
              (4)
              
              (20)
              
              (67)
              
              (73)
              
              (2)**Net
                  Income**
              **Rs.8,896**
              
              **Rs.5,201**
              
              **Rs.4,358**
              
              **Rs.3,406**
              
              **Rs.1,066**
              
              **$24**Weighted
                  average equity shares outstanding
              630
              
              630
              
              630
              
              630
              
              630EPS
                  - Basic & diluted
              Rs.14.12
              
              Rs.8.26
              
              Rs.6.92
              
              Rs.5.41
              
              Rs.1.69
              
              $0.04Basic
                  and diluted earnings per GDR/ADS
              Rs.28.24
              
              Rs.16.52
              
              Rs.13.84
              
              Rs.10.82
              
              Rs.3.38
              
              $0.08Dividends
                  paid per equity share
              Rs.4.5
              
              Rs.4.5
              
              Rs.4.5
              
              Rs.6.5
              
              Rs.6.21
              
              $0.14Dividends
                  paid per equity share
              $0.09
              
              $0.10
              
              $0.10
              
              $0.15
              
              $0.14Dividends
                  paid per GDR/ADS
              Rs.9.0
              
              Rs.9.0
              
              Rs.9.0
              
              Rs.13.0
              
              Rs.12.42
              
              $0.28Dividends
                  paid per GDR/ADS
              $0.18
              
              $0.20
              
              $0.20
              
              $0.30
              
              $0.28




**As
                of March 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006****Balance
                  Sheet Data**
              **(Rs.
                  in millions except per share data)**
              **Convenience
                  translation into millions of US$ (Unaudited)**Cash
                  and Cash equivalents
              Rs.19,466
              
              Rs.9,910
              
              Rs.9,891
              
              Rs.7,561
              
              Rs.1,641
              
              $37Investment
                  in bank deposits
              5,000
              
              8,260
              
              15,654
              
              17,732
              
              19,020
              
              428Dues
                  from Related Parties
              38,241
              
              29,644
              
              23,588
              
              27,789
              
              23,818
              
              535Total
                  Assets
              166,149
              
              160,666
              
              168,023
              
              177,172
              
              170,151
              
              3,829Dues
                  to Related Parties
              9,016
              
              18,885
              
              12,084
              
              11,339
              
              6,091
              
              137Total
                  Liabilities
              85,118
              
              77,269
              
              83,466
              
              93,839
              
              89,703
              
              2,020Total
                  Shareholders equity
              Rs.81,031
              
              Rs.83,397
              
              Rs.84,557
              
              Rs.83,333
              
              Rs.80,448
              
              $1,809Capital
                Stock1
              Rs.12,949
              
              Rs.12,949
              
              Rs.12,949
              
              Rs.12,949
              
              Rs.12,949
              
              $291






1
        Includes capital stock and additional paid-in capital.


3
 Table
          of Contents




**Fiscal
                Years Ended March 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006****Cash
                  flow data:**
              **(Rs.
                  in millions except per share data)**
              
              **Convenience
                  translation into millions of US$ (Unaudited)**Net
                  cash from operating activities
              Rs.17,164
              
              Rs.23,456
              
              Rs.19,885
              
              Rs.15,006
              
              Rs.6,006
              
              $135Net
                  cash used in investing activities
              Rs.(14,945)
              
              Rs.(18,001)
              
              Rs.
                  (16,706)
              
              Rs.
                  (12,706)
              
              Rs.(7,976)
              
              $(179
                  )Net
                  cash from financing activities
              Rs.(7,591)
              
              Rs.(15,011)
              
              Rs.
                  (3,198)
              
              Rs.
                  (4,630)
              
              Rs.(3,951)
              
              $(89)




**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**2002
                48.83
                47.82
                48.83
                46.582003
                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 (through
                  September
                  22, 2006)
                45.77
                45.95
                46.83
                44.39
  (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
                    2006
                45.09
                44.39May
                    2006
                46.22
                44.69June
                    2006
                46.25
                45.50July
                    2006
                46.83
                45.84August
                    2006
                46.61
                46.32September
                    2006 (through September 22, 2006)
                46.38
                45.74
  On
          September 22, 2006, the noon buying rate was Rs. 45.77 = US$1.00.
  4
 Table
              of Contents




**RISKFACTORS**
  *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. 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 62.52% of our call
        units having come from approximately 18.39% 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.
  5
 Table
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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 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. We have extensive commercial and regulatory
          relationships with the DOT, BSNL and VSNL, most of which were established
          at the
          time when there was no corporate separation between the DOT, BSNL and MTNL.
          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). 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 of 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 MTNL 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. 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.
  ***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, 2006, our disclosure controls and procedures were not effective
          due
          to material weaknesses related to our 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. We will need to improve our internal controls
          over
          financial reporting and have consulted with our audit committee and board
          of
          directors, and are planning to undertake remedial measures to make improvements
          as soon as practicable. However considering the above our independent auditors
          may be unable to issue unqualified attestation reports on management’s
          assessment on the operating effectiveness of our internal controls over
          financial reporting, which would adversely impact the Company’s operations,
          reputation and profitability.
 ***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.3.2 billion in sales tax for fiscal 1989-2000 on
        certain
        telecommunications revenues, mainly telephone rental charges, and 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
        at issue in Delhi is significantly less.
  MTNL
        has
        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
        believes that the sales tax departments
 7
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 would
        have to withdraw their demands of sales tax on basic telephony and that an
        adverse outcome in respect of the above is remote.
  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.


***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.
  8
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 **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.***


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
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 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 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
 10
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 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;  ·
              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.**  **Informationon
        the
        Company**
  **HISTORYAND
        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.
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 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.
  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, 2006, there were approximately 82.4 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
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 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.
  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.
  The
        following chart illustrates the current operational and regulatory structure
        of
        India’s telecommunications services industry:
  13
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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 not made a decision as to whether
        to
        secure a Unified Access License. For
        more
        information on regulation of the Indian telecommunications industry, see
“
-Telecommunications Regulation in India” below.
  14
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**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 2006 our fixed-line telecommunications networks in Delhi
        and
        Mumbai had an aggregate of approximately 3.83 million working lines, or access
        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 1.94 million subscribers as of March 31, 2006. 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 2006 had approximately
        105,665 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 1.19 million Internet
        access subscribers at the end of fiscal 2006. 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 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
        22.14% from March 31, 2000 to March 31, 2006. In fiscal 2006 these lines
        increased by 14.96%, primarily due to cellular services. At March 31, 2006,
        our
        network included approximately 1.62 million access lines in service in Delhi
        and
        approximately 2.26 million access lines in service in Mumbai. In addition,
        our
        access lines in service per employee increased from 66 at March 31, 2000
        to 116
        at March 31, 2006.
  We
        derive
        our revenue primarily from local, domestic long distance and international
        calls
        that originate on our network. In fiscal 2006, approximately 36% of our revenue
        was derived from call revenue, 43% 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 service providers for calls made into our network,
        accounted for 8% of our revenues in fiscal 2006. 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 carry 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 offices are 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 ended March 31, 1991. The term
        of the
        license has been extended for a 25-year period ending March 31, 2013 for
        basic
        services.
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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 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, currently have an installed capacity of1,750,000GSM cellular connections in each of those cities.
                  We believe that current penetration rates in Mumbai and Delhi remain
                  attractive for continued high growth in subscriber base. MTNL this
                  year
                  has floated a tender offer further adding 2 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, currently have 105,665subscribers and have awarded contracts to achieve an installed
                  capacity of
                  998,230 CDMA connections (most of which are to employ the more
                  advanced
                  CDMA 2000 1X technology) in each city. We believe that this
                  newlimitedmobile service enables 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.
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 ·
              *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 employing 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. MTNL has floated a tender to add
                  24K
                  tandem capacity based on NGN - next generation network, in Delhi
&
                  Mumbai each. Also, MTNL is installing state of the art IP-MPLS
                  Core in its
                  network so as to give MPLS enabled data service with better quality
                  of
                  service to its esteemed customers. This MPLS core network will
                  also
                  aggregate all the next generation network switching, data broadband
                  and
                  video traffic so as to enable MTNL to have an efficient utilization
                  of its
                  bandwidth. Further, MTNL is replacing its old PDH transmission
                  network
                  with synchronous digital hierarchy technology. MTNL is 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 onADSL2+,
                  capable of providing triple play services (video broadcast,
                  video-on-demand, voice over IP), 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% interest, has
                  commenced
                  wireless in local loop services as the first private-sector
                  telecommunications operator in that country. 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 August 31, 2006 we have approximately
                  10,400 fixed mobile customers and 4700 international long distance
                  customers. We are examining other international opportunities.
  ·
              *Enter
                  the Market for International Long Distance Services*.We have obtained a letter of intent from theIndian
                  licensor for a license to provide international long distance service.
                  Once the license is received, we will have roll-out obligations
                  requiring
                  rapid deployment, and intend to deploy the services as rapidly
                  as
                  possible.We
                  intend, subject to satisfactory completion of our analyses and
                  Board
                  approval, to lay 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 trafficwith
                  the 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, 2006, we had approximately
                    1.19
                    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 and a  17
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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.




MTNL
        has
        launched Wi-Fi service and has also floated a tender of Wi Max so as to enable
        it to give wireless broadband and connectivity to its customers.
  MTNL
        has
        further added fibre in its access network and is introducing FTTH based on
        PON
        so as to provide all of its important customers with fiber connectivity to
        their
        homes in order to meet their further increased bandwidth requirement to both
        data and video applications.
  **BUSINESSOVERVIEW**
  **Services**
  Our
        primary business is providing basic telecommunications services in Delhi
        and
        Mumbai, which include:
 ·
              basic
                  fixed-line access (including phone plus facilities) in Mumbai and
                  Delhi;
 ·
              public
                  call offices, which consist of both manned offices where people
                  can make
                  local, long distance and international calls, and coin operated
                  telephone
                  booths; ·
                value-added
                    telephone in GSM cellular services 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 and
                    WAP;
 ·
                phone
                    plus facilities in basic fixed-line such as abbreviated dialing,
                    call
                    transfer, hotline facility, three party conferencing, absentee
                    facility,
                    CLIP facility, call hunting, call alert, morning alarm. These
                    facilities
                    are free;  ·
                mobile
                    and fixed-wireless services based on CDMA
                    technology;  ·
                high
                    speed data transmission;  ·
                interconnection
                    with domestic international long distance carriers and with basic
                    and
                    cellular operators in Delhi and Mumbai; ·
                  leased
                      line services;
 ·
                  telex;
                      and  ·
                  Intelligent
                      Network services.  We
              also
              provide:
  ·
                  GSM
                      cellular services (including value-added services) in Delhi
                      and
                      Mumbai;  ·
                  Internet
                      access services; and  ·
                  Broadband
                      services.  Basic
              Access .
              Our
              subscribers are provided basic fixed-line access, which consists of
              installation
              and provision of basic voice telephony services. Rental charges include
              maintenance of connections between a
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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).
  Local,
        Domestic Long Distance and International Calls .
        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. We carry our own traffic
        between Delhi and Mumbai since May 2006. 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 units 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, subject to satisfactory completion of our analyses
        and
        Board approval, to lay 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.
  Public
        Call Offices .
        In
        addition, we provide both coin-operated and franchised public call offices.
        At
        March 31, 2006, public call offices accounted for 4.71% 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. For coin-operated public call
        offices, our tariff for local calls is fixed at Rs. 1.0 per pulse, which
        is
        lower than our highest rate of Rs.1.20 per pulse charged to our fixed-line
        customers. We plan to continue to increase the number of public call offices
        in
        the future.
  Value-Added
        and Other Services .
        We
        provide our subscribers with value-added services such as:
 ·
              call-waiting
                  (for free);  ·
              voice
                  mail (for free);  ·
              call-forwarding
                  (for a monthly charge);  ·
              wake-up
                  calls (for a per-call charge);  ·
              absent
                  subscriber services (for a monthly
                  charge);  ·
              caller
                  identification;  ·
              voice
                  mail (for a monthly charge or per message
                  charge);  ·
              call
                  conference (for a monthly charge);  ·
              WAP
                  (for free);  ·
              friends
                  & family (for a monthly charge or per message);
                  and  ·
              night
                  talk (for a monthly charge or per message
                  charge)
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These
        services are available over approximately 95% of our network. We also earn
        revenues from:
  ·
            the
                transfer of registration of a telephone connection from one subscriber
                to
                another;  ·
            shifting
                a subscriber’s telephone connection upon a change of
                address;  ·
            reconnecting
                a subscriber’s telephone connection that had been
                disconnected;  ·
            operator-assisted
                calls; and  ·
            directory
                services on CD-ROM.  We
        have
        been introducing our Intelligent Network services over our entire network
        which,
        at present, include:
  ·
            calling
                card services;  ·
            a
                toll-free calling service;  ·
            a
                premium rate “0900” number service; and  ·
            a
                televoting service.  GSM
        Cellular Services .
        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, 2006 we had 1,941,155
        GSM
        cellular subscribers. We provide national roaming facilities for our GSM
        cellular customers through the networks of BSNL outside Mumbai and Delhi
        and
        international roaming facilities with 45 operators in around 40 countries,
        and
        we have established roaming facilities for our customers in a total of around
        200 countries. As of March 31, 2006 we had installed networks with a capacity
        of
        1.75 million GSM cellular connections in each of Delhi and Mumbai. MTNL
        this
        year has floated a tender offer further adding 2 million lines of GSM based
        on
        2G/3G in each of Mumbai and Delhi .
  CDMA
        Fixed Wireless and Mobile Services *.* 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 for “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, 2006, we had approximately 105,665
        operational CDMA mobile connections and approximately 26,306 operational
        fixed
        wireless connections. We have awarded contracts to expand our CDMA capacity
        by
        an additional 400,000 in each of Delhi and Mumbai. These new connections
        will
        employ the more advanced CDMA 2000 1X technology, which can provide subscribers
        high-speed data transmission capabilities and greater access to value-added
        services. 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.
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Our
        CDMA
        mobile service is marketed under the brand name Garuda. We believe that our
        GSM
        cellular and CDMA mobile services businesses currently complement each other
        more than they conflict with each other. Our GSM cellular subscribers are
        able
        to use their mobile phone throughout India and much of Asia and Europe. Our
        CDMA
        mobile services are targeted at a different group of subscribers, who seek
        only
        limited mobility and few if any value-added services. Because usage charges
        for
        CDMA mobile services are generally significantly lower than for GSM services,
        we
        believe that our CDMA mobile services allow us to capture the market for
        subscribers that benefit from limited mobility but that are unwilling or
        unable
        to pay the higher GSM fees for wider roaming privileges and access to
        value-added services.
  There
        is
        currently a dispute between TRAI and the providers of CDMA fixed wireless
        service (including us). TRAI is seeking to classify the service as a mobile
        rather than fixed line service, with the effect of adding charges to the
        cost of
        calls, reducing the price advantage that the CDMA service currently offers
        over
        the GSM service.
  In
        November 2003, the government issued guidelines for unified access licensing.
        We have not made a decision as to whether to secure a Unified Access
        License.
  Internet
        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. We plan to expand our capacity in each city in
        fiscal
        2006. As of March 31, 2006, we provided our Internet services to a total
        of
        approximately 1.19 million subscribers in Delhi and Mumbai.
  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.
  We
        have
        formed a subsidiary, Millennium Telecom Limited, which was granted a license
        to
        provide Internet access services throughout India for an initial period of
        15
        years.
  High
        Speed Data Transmission .
        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 conferences 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, 2006, we had approximately 14,335 subscribers to this service.
  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.
        The
        services include triple play of video (which we are just beginning to test),
        data and voice. Further, we plan to commission, an MPLS (Multi Protocol Label
        Switching) based core network to provide VPN (virtual private network) services
        to corporate users across the country”. 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 educational institutions. We launched broadband services using ADSL 2+
        in
        January 2005. High speed internet access, video on demand and IPTV services
        shall be offered to broadband customers. The customer base as on March 31,
        2006
        is 211,935. The installed capacity to broadband ports as on March 31, 2006
        is
        458,380. MTNL has plans to install additional 500,000 broadband ports in
        fiscal 2007.
  Additional
          plans include- deploying broadband DLC 100 each in Delhi and Mumbai in
          the 2007
          fiscal year; deploying FTTH (fiber to the home) in Delhi and Mumbai in
          the 2007
          fiscal year; and deploying DWDM (dense wave division multiplex) system
          in Delhi
          and Mumbai.
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  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 between 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 and cellular operators 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 authority’s
          interconnection usage charges regulation, interconnect charges have been
          established for all major types of interconnection based on a “calling party
          pays” principle. See “—License Fees and Network Utilization/Interconnection
          Arrangements” and “—Telecommunications Regulation in India.”
  Leased
          Line Services .
          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,
          2006, we
          had approximately 49,685 leased line subscribers. We have experienced increased
          demand for these services and expect demand to increase further in the
          near
          future.
  **Recently
          Introduced Services**
  ·
              MTNL
                  launched broadband service in ADSL2+ state-of-art technology, capable
                  of
                  providing triple-play services (video broadcast, video-on-demand,
                  VOIP).  ·
              We
                  have launched a “Certification Authority” business under the brand name
                  “MTNL Trustline” with a capacity to issue 500,000 Certificates. With this,
                  MTNL has become an important public key infrastructure service
                  provider.  ·
              Wi-fi
                  based [wi-fine] service launched to provide internet connectivity
                  to
                  inaccessible and hot spots in the Delhi
                  area.  ·
              MTNL
                  expanded its GSM network by 400,000 lines in each city of Delhi
                  and
                  Mumbai.  ·
              Since
                  May 2006 we carry our own national long distance traffic between
                  Delhi and
                  Mumbai.  Services
          Under Development .
          MTNL
          has set a target to start its international long distance operations this
          fiscal
          year with a budgetary support of Rs.300 million. Further, MTNL would be
          adding
          one million lines in net switching capacity including capacity for WLL
          and GSM
          and 18,000 Kms. of optical fiber in Delhi and Mumbai. MTNL’s other plans include
          offering corporate networking MPLS-VPN services, setting up 300-seater
          unified
          call center and deploy next generation network of 24,000 lines in Delhi
          and
          Mumbai each.
  We
          are in
          the process of installing enhanced billing systems supplied by
          Covergence.
  **Telecommunications
          Services in Other Countries**
  We
          are
          selectively targeting expansion opportunities outside India where we can
          leverage our expertise and relationships. MTNL is keen in expanding its
          overseas
          operations, currently it is 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.
 22
 Table
            of Contents
  **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;
 23
 Table
            of Contents
 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.
  ·
              national
                  roaming;  ·
              WAP
                  (for Rs. 0.80 per minute through circuits switch
                  Data)  ·
              voice
                  mail (for Rs. 0.50 perminute
                  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); ·
                content-based
                    Short Message Service (Rs.1.00 per message for regular
                    service);
 ·
                call
                    conference (for Rs.50 per month; free for corporate
                    booking);
 GPRS
            & MMS Service
 **GPRS**
                **Option
                    - I**
                **Option
                    - II**
                **Option
                    - III**
                  **(Zero
                    Rental)**Activation
                    charges (one time only)
                Rs.50/-
                Rs.50/-
                Rs.50/-Monthly
                    Rental (Rs)
                Rs.
                    199/-
                  (GPRS
                    only)
                Rs.
                    349/-
                  (GPRS
                    + MMS)
                NilFree
                    usage up to
                50
                    MB
                Unlimited
                NilVolume
                    based usage charges beyond
                  Free
                    usage (rupees per Kilo Bits)
                0.01
                    per KB
                Free
                0.02
                    per KB**MMS**i)
                    P2P (calling party or sender to pay
                  (Rs.
                    Per MMS)
                3/-
                3/-
                3/-ii)
                    M2P (Down loader to pay)
                As
                    per rate fixed by the content provider
                As
                    per rate fixed by the content provider
                As
                    per rate fixed by the content
                    provider
  (i) 
          Three Optional plans are also available: (i) for local calls to any Cellular
          numbers (for Rs.49/- per month and charges Rs. 0.60 per minute);
  (ii) 
          Free Number Plan (maximum three Dolphin or Trump nos.) (for Rs.50 per month
          and
          local call charges NIL to Free number); and
  (iiii) 
          Night talk Plan Local call to any network (10 p.m. to 9 a.m.) (for Rs.49
          per
          month and local call charges Rs. 0.60).
  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.
  MTNL
            launched “One India Tariff” in January 2006 @Rs. 1.00 per minute for all India
            on all network. However, calls from fixed line/CDMA to fixed lined/CDMA
            within
            own network are @Rs. 1.00 for three minutes.
 24
 Table
            of Contents
  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.
  MTNL
          implemented Leased line tariff at par with BSNL in May 2005 under revised
          tariff
          ceilings prescribed by 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 & Navi Mumbai, other value added services are provided such
          as:
  ·
              SMS:
                  Local Rs.0.40 per message and national Rs. 0.80 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;  ·
              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 of Rs.15,000. 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.
 25
 Table
              of Contents
  **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 MTNL 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 upto 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 is 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 01, 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 services also include CDMA-based
          fixed wireless and mobile services (without roaming). We have
          not
          made a decision as to whether to secure a Unified Access
          License.
  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 6th January 2005 and implemented
          from
          1st February 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. Methodology of imposing ADC per minute charge kept unchanged.
          Only
          the Access Deficit Charge has been changed, ADC on long distance calls
&
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 28th February, 2006 and implemented
          from 1st March 2006. In this IUC amendment, 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.
  26
 Table
              of Contents
  Network
          Utilization—Bharat Sanchar Nigam Limited. 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 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 and Basic 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 TRAI asking BSNL, MTNL to frame
          their
          own interconnect offer which was proposed to be signed with other operators
          for
          establishing new interconnections. Several changes were desired by TRAI
          in the
          Interconnect Offer document of BSNL, MTNL and both the operators challenged
          the
          proposed changes in TDSAT. As per directions of TDSAT, several rounds of
          talks
          were held by TRAI with MTNL and BSNL and most of the issues were resolved.
          TDSAT
          has now given judgment and accordingly MTNL has posted its interconnect
          offer on
          the website incorporating the changes already agreed with TRAI during
          discussions.
  Customers
          and Customer Service .
          We
          classify our subscribers by use level and estimate that in the last
          three months of fiscal 2006, approximately 18.39% of our access lines in
          service
          accounted for 62.52% of our call units. The following table sets forth
          certain
          information with respect to our subscribers for the final three months
          of fiscal
          2006:
 27
 Table
                of Contents
  **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
                  25.43
                  0.80101-500
                  36.36
                  15.73501-1,000
                  19.81
                  20.941,001-2,000
                  12.01
                  24.682,001-5,000
                  5.38
                  23.32Greater
                      than 5,000
                  1.01
                  14.53


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 2004, 2005
        or
        2006. 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 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, 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. MTNL
        has
        also introduced a loyalty scheme where incentive points are earned by its
        customers for redemption against assured gifts.
  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.
  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
  28
 Table
            of Contents




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, primarily buildings and equipment and the market value of our
        inventories. Our insurance is held under policies, which are renewable annually.
        The majority of our insurance policies are renewed in April 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.
  **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, etc., 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 62.52% of our call units having
        been derived from approximately 18.39% of our access lines in service (last
        three months of fiscal 2006), 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 2006 we had approximately 16.3% and 18% 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, BPL Mobile acquired by Hutchinson and Bharti (AirTel)
        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 395 licenses for providing Internet services issued
          as of
          January 31, 2006.
  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. Hutch has acquired BPL, another one of the telecom operators
          in India; however, this takeover is disputed in Court.
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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. **** In
        consultation with DOT, Millenium Telecom Limited (MTL), a subsidiary of MTNL,
        has been entrusted with the work of laying international under-sea cables
        for
        use by both the PSUs, viz. MTNL and BSNL with joint ownership of MTL. We
        intend, subject to satisfactory completion of our analyses and Board approval,
        to lay 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.
  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 attention to customer service.
        An inability to compete effectively would also damage our longer-term business
        prospects through loss of customers and market share.
  **LEGALPROCEEDINGS**
  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 (“CIT”) had historically disallowed the
        license fee paid by the Company to DOT for the years ended March 31, 1994
        till
        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. 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 current 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. License fees
            have also
            been allowed as a deduction by CIT (A) for assessment year 2004-05. Management
            believes that ITAT following its favourable judgments of earlier years
            will
            eventually decide in favour of the Company for the years in dispute.
            Based on
            the above stated favourable Orders, the Company has not accrued the tax
            charge
            on the license fee in the financial statements. The Company will receive
            interest on deposits paid under protest to the tax authorities and the
            refunds
            against the years decided in favour of the Company. In the absence of
            detailed
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calculations
        from the ITAT the refunds and the interest thereon have not been recognized
        in
        the statement of income for the year ended March 31, 2006.
  **Sales
        Tax**
  The
        Company has received a demand to pay sales tax in respect of certain historical
        telecommunications revenues, mainly telephone rental charges. The Company
        has
        received a demand from the state government of Maharashtra, of which Mumbai
        is a
        part, for payment of Rs. 3.2 billion 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 at issue in Delhi is significantly
        less. In furtherance of the notice issued by the Delhi government for payment
        of
        sales tax on certain telecommunications devices, the matter was taken up
        in the
        apex court to decide the question of legal validity of such attempts by the
        Delhi government in matters which are under the jurisdiction of central
        government and for which license was issued by the Government of India. In
        view
        of this, no demand or order has been passed by the Delhi tax department.
  The
        department made these demands based on a recent 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, in spite 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
        has
        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
        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.
  **Disputes
          with BSNL**
  In
          accordance with the Inter Connect Usages Regulations, the Company has 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
          (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.
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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 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.2,678 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 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, as 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. 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.




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**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
      (11% for leave salary and 14% for pension contribution). 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 the
      MTNL
      has abided by 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. 5,415 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 Rs. 2,000 million. The Company
      has made claims of Rs. 4,169 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. 121.21 million
      (including interest from 1997 till date on the claims made Rs 79.91 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. 308.6 million (March 2005 Rs. 279
      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 against 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.40 million and
      Rs.452.52 million as of March 31, 2005 and 2006 respectively (including interest
      arising during the course of proceedings amounting to Rs.157 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 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.1,190
      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.




33
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**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.1,040 millon with MTNL. Management
      believes that it is remote that it will have to refund these amounts; however,
      pending the final resolution from a court of law these amounts have not been
      recognized as income.




**ORGANIZATIONALSTRUCTURE**




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




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




**PROPERTYAND
      EQUIPMENT**




**Infrastructure**




We
      believe that we have created one of the most technologically advanced networks
      in India. Our network capacity has grown rapidly in the ten-year period ended
      March 31, 2006 by 3.878 million additional access lines in service.




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.




**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 193 nodes in Mumbai
      as
      of March 31, 2006. Each node consists of either one or more remote line units
      or
      exchanges, or a combination of the two. Each node has a capacity of between
      1,000 and 100,000 lines.




At
      March
      31, 2006, there were 93 main exchanges and 243 remote line units in Delhi and
      85
      main exchanges and 108 remote line units in Mumbai. Because one or more main
      exchanges in each node are connected




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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.
  **Overview
        of Our Network**
  **At
                    March 31,****2002**
                **2003**
                **2004**
                **2005**
                **2006***Delhi*Access
                    lines in service (access lines in service) (thousands)
                2,065
                2,155
                2,003
                1,719
                1,621Equipped
                    capacity (thousands)(1)
                2,775
                2,967
                3,154
                3,737
                4,219Number
                    of exchanges:TAXs(2)
                3
                4
                4
                4
                4Main
                    exchanges and RLUs(3)
                251
                309
                329
                339
                336Digital
                    lines (thousands)(1)
                2,775
                2,967
                3,154
                3,737
                4,219Digitalization
                    rate(4)
                100%
                100%
                100%
                100%
                100%*Mumbai*Access
                    lines in service (access lines in service) (thousands)
                2,431
                2,445
                2,408
                2,355
                2,256Equipped
                    capacity (thousands)(1)
                2,876
                2,886
                2,806
                3,657
                4,217Number
                    of exchanges:TAXs(2)
                4
                4
                4
                4
                4Main
                    exchanges and RLUs(3)
                180
                183
                183
                183
                193Digital
                    lines (in thousands)(1)
                2,876
                2,886
                2,806
                3,657
                4,217Digitalization
                    rate(4)
                100%
                100%
                100%
                100%
                100%
  (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.
  Our
          modernization and expansion program has been funded primarily from cash
          flow
          from operations.
  **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. We also plan to deploy wave length division multiplexing,
          or
          WDM, technology to further increase the capacity of our transmission network.
          WDM is the next generation standard for digital signal
          transmission.
  **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.
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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, we added
      48
      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.




**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****(inception)**Fault
                rate/100(1)
              Telephones/month:Delhi
            34.9
            21.4
            18.7
            12.3
            11.1
            10.7Mumbai
            21.2
            11.80
            9.8
            8.8
            9.0
            8.4Call
                completion rate(2)DelhiLocal
                calls
            77.3%
            51.0
            52.25
            57.0
            57.6
            47.3Domestic
                long distance calls
            30.0%
            41.07
            28.0
            28.0
            30.0
            33.6MumbaiLocal
                calls
            93.0%
            58.15
            58.0
            50..3
            58.3
            55.1Domestic
                long distance calls
            23.9%
            45.9
            33.94
            36.6
            37.4
            36..6




(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.




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**GSM
        Cellular and CDMA Networks**
  In
        order
        to build out our GSM cellular service infrastructure, we have purchased,
        on an
        installed turn-key basis, mobile switching centers and mobile base stations.
        We
        have had to upgrade and modify our customer service and support operations
        to
        support these services and have incurred additional costs in the form of
        rent
        for the placement of base stations, employee training expenses and other
        operating and installation costs. In fiscal 2006, we have installed
        infrastructure providing for an additional 200,000 GSM cellular connections
        in
        each of Mumbai and Delhi, to be deployed upon completion of
        testing.
  We
        have
        similarly built out our CDMA network through purchases, on an installed turn-key
        basis, of wireless base stations and associated network elements. We have
        incurred other expenditures related to the establishment and operation of
        our
        CDMA wireless in local loop network. We have awarded contracts for
        infrastructure providing for an additional 400,000 connections in each of
        Mumbai
        and Delhi employing the more advanced CDMA 2000 1X technology, which can
        provide
        subscribers high-speed data transmission capabilities and greater access
        to
        value-added services. We are expecting deployment of these connections by
        December 2005. Our CDMA network supports both CDMA fixed wireless services
        and
        CDMA mobile services, and a CDMA connection can be employed for either
        service.
  **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 2007 is 22,980 million
        Rs.;
        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,****2004**
                  
                  
                  **2005**
                  
                  
                  **2006**Local
                      switching and access lines (including CDMA)/
                    Transmission/Network
                      Modernization/Expansion Abroad
                  
                  
                  7,227
                  
                  
                  5,748
                  
                  
                  4,241Information
                      technology
                  
                  
                  98
                  
                  
                  426
                  
                  
                  124Land,
                      buildings and vehicles
                  
                  
                  1,511
                  
                  
                  1,143
                  
                  
                  881Build-out
                      of GSM cellular networks
                  
                  
                  824
                  
                  
                  3,068
                  
                  
                  1,608Total
                  
                  
                  9,660
                  
                  
                  10,385
                  
                  
                  6,854
  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.
  37
 Table
                of Contents
 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 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.
  **TELECOMMUNICATIONSREGULATION
                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  38
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  ·
                    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:
  ·
                    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.
  39
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**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.




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 for consistent decline in tariffs to give
      sustained boost to subscriber growth and teledensity. Methodology of imposing
      ADC per minute charge kept unchanged. Only the Access Deficit Charge has been
      changed, ADC on long distance calls & 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 the
      receipts of MTNL on account of ADC will reduce drastically after the
      implementation of this amended regulation. Accordingly, MTNL had challenged
      the
      regulation in TDSAT and the case was under consideration. The TDSAT did not
      grant any stay and the regulation has been implemented from 1st February
      2005 . TDSAT
      on
      July 27, 2006 dismissed the same with no orders as to costs . The
      TRAI
      has issued IUC Regulation (1 of 2006) dated 28 th February, 2006 which was implemented from 1 st March
      2006. In this IUC amendment, methodology of imposing ADC was changed from a
      'per minute basis' charge to a '% of AGR basis' charge.  The ADC is
      now payable by MTNL @ 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.




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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.




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 not made
      a decision as to whether to secure a Unified Access License.




**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.




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




**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.




**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 record/communication through digital signature and eliminates
      uncertainties over writing and signature requirements.




We
      believe that as of January 31, 2006 there were approximately 395 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.




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MTNL
      has
      reduced drastically the ISD tariff with effect from October
      2, 2004.  MTNL
      is
      offering different STD rates for different locations. Call from Mumbai to
      Maharashtra & Goa @Rs. 1.65 per minute. MTNL has increased the pulse rate
      between Delhi & Mumbai for Basic to Basic of MTNL network from 37.8 sec. to
      180 sec. uniform for all plans excluding One India Plan. For all other places STD
      rate
      is flat Rs. 2.40 per minute from Fixed, WLL(M) & Cellular service. ISD rates
      in two category as under:




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





**Country**
            **From
                Basic & WLL**
              **(M)**
            **From**
              **Cellular**
              **Postpaid**
            **From**
              **Cellular**
              **Prepaid****Delhi**
            **Mumbai**USA,
                UK, Canada and all countries with 001 access, Singapore, Malaysia,
                Hong
                Kong, Indonesia, Thailand
            Rs.
                8.00
            Rs.
                9.00
            Rs.
                9.00
            Rs.
                6.67Europe,
                Gulf, Asia, SAARC & Africa
            Rs.
                12.00
            Rs.
                18.00
            Rs.
                18.00
            Rs.
                10.00Rest
                of World
            Rs.
                36.00
            Rs.
                18.00
            Rs.
                18.00
            Rs.
                30.00




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 6 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.




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





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**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)
            ForISPs
                with gateways, radio paging and end-to-end bandwidth, FDI is permitted
                up
                to 74% with FDIbeyond 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 5 years,
                if these
                companies are listed in other parts of the
                world;




(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.**  **Operatingand
      Financial Review and
      Prospects**




*You
      should read the following discussion in conjunction 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.*




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**OPERATINGRESULTS**




**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:


·
            recent
                regulatory changes such as the May 1999 tariff order and several
                further
                reductions in long distance call charges;  ·
            adoption
                of the comprehensive interconnection usage charges regulation based
                on the
                calling party pays principle, with effect from May 1,
                2003;  ·
            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;
                and  ·
            revised
                basis of calculation of license fee and networking charges with effect
                from April 1, 2001.  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
                retroactively;  ·
            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;  45
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  ·
            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 2006, we have prepared the consolidated financial statements
        in
        accordance with US GAAP, and the financial statements for the
        years ended March 31, 2004 and March 31, 2005 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 the Company’s 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 TRAI. TRAI regulation specifies per minute rates for metered call units
      (MCU)
      of traffic terminated on the Company’s 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 DOT and TRAI. Since, interconnect and access
      charges are presently governed by IUC regime, the Company has 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.




For
      the
      year ended March 31, 2006, 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.2,874 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.513 million for the year ended March 31, 2006 respectively.
      Further, a 5% increase or decrease in rental charges would have increased or
      decreased the total revenue by approximately Rs.845 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.14
      million.




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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, 2006, 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.714 million and Rs.793
      million, respectively. During
      the year ended March 31, 2006, the Company has accounted for a reversal of
      license fees amounting to Rs 3,408 million. Refer discussion in the ‘Comparison
      of Year Ended March 31, 2006 with Year Ended March 31, 2005’ under analysis of
      Results of Operation below.




Network
      Charges .
      Charges
      associated with access to and interconnection to other operators’ network by the
      Company for local, national long distance and international long distance calls
      are recognized in accordance with the Interconnect Usage Charges Regulation
      released by 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.
      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. Refer discussion in the ‘Comparison of Year Ended March 31, 2006 with
      Year Ended March 31, 2005’ 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 100 basis point decrease or increase in the
      discount rate would increase or decrease the projected pension and
      postretirement benefit obligations by approximately Rs.7,418 million and Rs.
      5,709 million respectively.




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 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 the Company was 33.66% during the year ended
      March 31, 2006. 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.
      42million .




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




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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, 2006,
      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 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 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.297 million and Rs.412 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 2006 triggered by reduction in our revenues and increased
      competition. Based on our review, the expected future cash flows
      directly




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associated
        with the asset groups exceed their carrying amount and hence there is no
        impairment of long lived assets in 2006.


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 MTNL a right to set off amounts receivable in
        respect of principal outstanding from the dues 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.
  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.
  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.321 million as at March 31, 2006 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.
  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, 2006.


**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
      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 2006, 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. 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 MTNL 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.
      From
      March 31, 2000 to March 31, 2006 growth in our call office revenue, telephone
      and other rentals and public call revenue was driven primarily by growth in
      the
      number of access lines in service, the increased rental per line with effect
      from February 1, 2001, and the number of public call offices in operation.
      While
      the volume of traffic we have been carrying has been increasing, the increase
      in
      certain periods has been more than offset by declining tariffs. Growth in
      interconnect revenue was driven primarily by growth in the number of access
      lines in service and the volume of traffic coming into our network.




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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.




We
      expect
      that call revenue and revenue from public call offices will 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, medical benefits for themselves and certain
      members of their immediate families and post-retirement medical benefits for
      retired employees. The increase in our staff costs was primarily due to the
      enhancement of post-retirement medical benefits and an increase in retirement
      benefit charges on account of a fall in the discount rate used to value our
      post
      retirement obligations to employees. This is in line with the general fall
      in
      interest rates in the economy over the same period. The increase is also
      attributable to a rise in average pay as a result of a rise in annual increments
      and accrual of cost for executives who have opted to become our employees on
      higher revised pay and also due to charge on absorption of Group B employees
      (executive employees) into the company with retroactive effect from October
      1,
      2000.




In
      fiscal
      2000, substantially all of our non-executive employees originally employed
      by
      the DOT decided to terminate their services with the department 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 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, MTNL is discharging all such liabilities.




Approximately
      97% 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.




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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 voluntarilty 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, 2006, a
        total of 3,947 employees retired under this scheme.




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
      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. 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
      subsequent to March 31, 2006. MTNL’s obligation amounted to Rs. 227 million for
      those who exercised their option before March 31, 2006. In addition, the
      curtailment loss in the gratuity and pension plan on account of the VRS amounted
      to Rs. 17 million and Rs. 49 million respectively for the year ended March
      31, 2006.




License
      fees and network utilization 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. 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.




51
 Table
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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.
  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.”


52
 Table
          of Contents





**Inflation**




Inflation
      in India, as measured by the Indian consumer price index, was 4.1% in fiscal
      2003, 5.5% in fiscal 2004 and 5.01% in
      2005. 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.




**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.33.35 million in fiscal 2004 on the Nepal venture, and in respect of the
      Mauritius operations, Rs.167.71 million in fiscal 2005 and Rs.212.59 million
      in
      fiscal 2006.




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 years ended March 31, 2004 and 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 year ended March 31, 2006, we have disclosed the segment information for
      the
      year ended March 31, 2006 as well as 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, 2005, and March 31, 2006 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.
 53
 Table
                of Contents
 **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,****2004**
                
                **2005**
                
                **2006**Revenues
                
                
                100
                %
                
                100
                %
                
                100
                %Cost
                    of revenues (excluding depreciation shown separately below)
                
                
                (62.7
                %)
                
                (62.8
                %)
                
                (69.1
                %)Selling,
                    general and administrative expenses (excluding depreciation shown
                    separately below)
                
                
                (16.4
                %)
                
                (18.5
                %)
                
                (17.2
                %)Depreciation
                
                
                (14.2
                %)
                
                (15.4
                %)
                
                (17.1
                %)Excess
                    liabilities written back
                
                
                1.8
                %
                
                2.6
                %
                
                1.7
                %**Income
                    / (loss) from operations**
                
                
                **8.5**
                **%**
                
                **5.9**
                **%**
                
                **(1.7**
                **%)**Interest
                    and other income, net
                
                
                2.8
                %
                
                5.3
                %
                
                5.1
                %**Income
                    before income taxes and share of losses from
                    affiliate**
                
                
                11.3
                %
                
                11.2
                %
                
                3.4
                %Income
                    taxes
                
                
                (4.2
                %)
                
                (4.2
                %)
                
                (1.0
                %)Equity
                    in (losses) of affiliate
                
                
                -
                
                
                (0.1
                %)
                
                (0.1
                %)**Net
                    income**
                
                
                **7.1**
                **%**
                
                **6.9**
                **%**
                
                **2.3**
                **%**
 54
 Table
              of Contents
 **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 upto
          March
          31, 2005 have been received from MTNL In view of the above we have reversed
          excess license fees accrued in years upto March 2005.,amounting to Rs 3,408
          which accounts for over 90% of the variation in the License fees.
  55
 Table
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  The
          decrease in staff cost by 7% is a direct result of the VRS schemes offered
          by
          the Company. Approx.imately 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 debtos 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.
  56
 Table
              of Contents
 
 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, 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.
  **Comparison
        of Year Ended March 31, 2005 with Year Ended March 31,
        2004**
  The
        following comparison of our results of between 2005 and 2004 has not been
        provided on a segment basis since the results of our celluar segment for
        both
        the years were immaterial to our consolidated results of operation.
  Revenues:
        Our total revenues decreased 18% from Rs. 61,084 million for the year ended
        March 31, 2004 to Rs. 50,156 million for the year ended March 31, 2005. The
        decrease was primarily driven by a decrease in fixed line call revenue,
        including public
        call office ( PCO ) revenue,
        by 16% from Rs.29,926 million for the year ended March 31, 2004 to Rs.25,677
        million for the year ended March 31, 2005 and a decrease in interconnect
        revenue
        by 64% from Rs. 13,105 million for the year ended March 31, 2004 to Rs. 4,729
        million for the year ended March 31, 2005, offset by a 54% increase in mobile
        and wireless
        local loop ( WLL ) revenue
        from Rs.2,604 million for the year ended March 31, 2004 to Rs.3,994 million
        for
        the year ended March 31, 2005.
  Call
        revenue has gone down as a result of decrease in average number of connections
        from 4,570,452 connections during the year ended March 31, 2004 to 4,508,886
        connections during the year ended March 31, 2005. There was a net decrease
        of
        2,279 million units in billed Metered Call Units (“MCU”), from 32,367 million
        units during the year ended March 31, 2004 to 30,087 million units during
        the
        year ended March 31, 2005. Further, the call tariff rates were reduced during
        the current year due to
        increased competition in the market, resulting in a
        fall in
  57
 Table
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  average
        revenue per connection per annum from Rs.7,100
        during the year ended March 31, 2004 to Rs.6,350 during the current year,
        a
        decrease of Rs.760 per connection per annum.
 The
        reduction in the interconnect revenue is comprised of a decline in the Access
        and Call Charges from Mobile Operators by Rs.1,484 million, decrease in revenue
        from Basic/ILD/NLD operators Rs.6,848 million, and a decrease in revenue
        in case
        of Dolphin by Rs.43 million, as compared to the previous year. The reduction
        was
        on account of a decrease in the IUC rates from an average of Rs.0.60 per
        minute
        during the year ended March 31, 2004 to an average of Rs.0.30 per minute
        during
        the year ended March 31, 2005. Further, there has been a decrease in the
        transit
        charges during the current year as compared to the previous year.
  Cost
        of
        Revenues: Our total cost of revenues has reduced by 18% from Rs.38,282 million
        for the year ended March 31, 2004 to Rs.31,521 million for the year ended
        March
        31, 2005. The reduction is due to a decrease in interconnect charges by 26%
        from
        Rs.10,627 million for the year ended March 31, 2004 to Rs.7,866 for the year
        ended March 31, 2005, a decrease in license fees by 50% from Rs.9,978 million
        for the year ended March 31, 2004 to Rs.4,974 million for the year ended
        March
        31, 2005, offset by an increase in the staff cost by 10% from Rs.13,531 million
        for the year ended March 31, 2004 to Rs.14,874 million for the year ended
        March
        31, 2005.
  The
        decline in interconnect charges was on account of a reduction in the charge
        rates from Rs.3.1 per minute during the year ended March 31, 2004 to Rs 1.4
        per
        minute during the year ended March 31, 2005 in respect of national
        long distance calls.
        Also the total number of MCUs on which revenue sharing charges have been
        paid by
        the Company have gone down as compared to last year. Further, there has been
        a
        decrease in the transit charges during the year ended March 31, 2005 as compared
        to the year ended March 31, 2004, since till the previous year, the originator
        was liable to pay the whole amount of revenue share to the transitor who
        in turn
        was liable to pay the share of destination party as a result of which our
        transit costs were higher in case of arrangements where we were the transitor.
        However, from the current year, the originator is directly liable to pay
        the
        share of transitor as well as the destination party as a consequence of which
        the revenue share payable to the destination party did not get reflected
        in our
        costs during the current year. As against this reduction, during the last
        year,
        a benefit of Rs. 1,515 million was recognized as a result of reduction in
        rates
        between MTNL and BSNL with retrospective effect from April 1, 1999 till March
        31, 2003, an agreement which
        was reached during the last year.
  As
        regards license fees payable
        as a percentage of the Adjusted Gross Revenues (“AGR”), the percentage has been
        reduced by the regulatory authorities from 12% of AGR for the year ended
        March
        31, 2004 to 10% of AGR for the year ended March 31, 2005. Further, consequent
        to
        the reduction in revenue by 18% during the current year, AGR has gone down
        by 7%
        during the current year. Both these factors have resulted in a 23% reduction
        in
        expense as compared to the last year. Further, during the last year, Rs.
        3,520
        million was accrued as incremental license fee for the period beginning April
        1,
        1999 till March 31, 2003, as a result of resolution of ambiguity in the license
        fee rates, which has resulted in 27% variation in the expense as compared
        to the
        last year.
  The
        increase in the staff costs was on account of normal salary increments and
        with
        regard to post retirement benefits, on account of reduction in the rate applied
        to discount the obligation from 8.35% during the last year to 8% during the
        current year. In addition to this, approximately 1,000 Group B employees
        were
        absorbed into the Company during the current year, due to which the total
        staff
        costs have gone up as compared to the last year. Additionally, during the
        year
        ended March 31, 2005, a liability towards Voluntary Retirement Scheme amounting
        to Rs.967 million has been recognized by the Company as cost of revenues.
  Selling,
        General and Administrative Expenses: Our selling, general and administrative
        expenses have gone down by 8% from Rs.10,023 million during the year ended
        March
        31, 2004 to Rs.9,275 million during the year ended March 31, 2005. The decrease
        is primarily on account of a decrease in the provision for bad and doubtful
        debts by 53% from Rs.2,415 million for the year ended March 31, 2004 to Rs.1,137
        million for the year ended March 31, 2005, offset by an increase in the staff
        costs by 10% from Rs.5,798 million for the year ended March 31, 2004 to Rs.6,375
        million for the year ended March 31, 2005.
  The
        increase in staff costs was primarily on account of normal salary increments
        and
        with regard to post retirement benefits, on account of reduction in the rate
        applied to discount the obligation from 8.35% during the last year to 8%
        during
        the current year. In addition to this, approximately 1,000 Group B employees
        were absorbed into the Company during the current year, due to which the
        total
        staff costs have gone up as compared to the last year.
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 Table
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  Additionally,
        during the year ended March 31, 2005, a
        liability towards Voluntary Retirement Scheme amounting to Rs.414 million
        has
        been recognized by the Company as selling, general and administrative expenses.
 The
        decrease in the provision for bad and doubtful debts was on account of a
        reduction in the gross balance of accounts receivables from Rs.11,613 million
        as
        at March 31, 2004 to Rs.9,431 million as at March 31, 2005.
  Income
        from Operations: Our income from operations has fallen by 44% from Rs.5,234
        million for the year ended March 31, 2004 to Rs.2,927 million for the year
        ended
        March 31, 2005. The decrease is mainly attributable to a 18% decrease in
        revenue
        from Rs.61,084 million for the year ended March 31, 2004 to Rs.50,156 million
        for the year ended March 31, 2005, offset by a 18% reduction in the cost
        of
        revenues from Rs.38,282 million for the year ended March 31, 2004 to Rs.31,521
        million for the year ended March 31, 2005. Though there has been a decrease
        in
        the selling, general and administrative expenses during the year ended March
        31,
        2005 as compared to the year ended March 31, 2004, but the reduction has
        not
        been in proportion to the reduction in revenue. As against the 18% reduction
        in
        revenues, our selling, general and administrative expenses have gone down
        by 8%
        from Rs.10,023 million during the year ended March 31, 2004 to Rs.9,275 million
        during the year ended March 31, 2005.
  Interest
        and Other Income: During the year ended March 31, 2005, our interest and
        other
        income has increased by 56% from Rs.1,714 million for the year ended March
        31,
        2004 to Rs.2,670 million for the year ended March 31, 2005. The increase
        is
        attributable to a 52% increase in interest income from Rs.1,390 million for
        the
        year ended March 31, 2004 to Rs.2,119 million for the year ended March 31,
        2005
        and 70% increase in other income from Rs.324 million for the year ended March
        31, 2004 to Rs.552 million for the year ended March 31, 2005.
  The
        increase in interest income was mainly due to an increase of Rs.47.34 million
        in
        interest on employee loans as compared to the year ended March 31, 2004,
        driven
        by an increase in the amount of employee loans, and Rs.664 million being
        interest on income tax refund admitted by the income tax department during
        the
        year ended March 31, 2005.
  Other
        income has increased  primarily
        on account of an increase in the amounts of liquidated damages received by
        the
        Company from Rs.77 million during the year ended March 31, 2004 to Rs.201
        million during the year ended March 31, 2005.
  Income
        Taxes: The income tax expense has reduced by 18% from Rs.2,570 million for
        the
        year ended March 31, 2004 to Rs.2,124 million for the year ended March 31,
        2005.
        The decline is attributable to a decrease in the current tax expense by 36%
        from
        Rs.5,309 million for the year ended March 31, 2004 to Rs.3,399 million for
        the
        year ended March 31, 2005, offset by a decrease in the deferred tax income
        by
        54% from Rs.2,739 million for the year ended March 31, 2004 to Rs.1,275 million
        for the year ended March 31, 2005.
  The
        current tax expense has fallen due to a 37%
        reduction in the taxable income (as per the applicable tax laws) from Rs.14,798
        million for the year ended March 31, 2004 to Rs.9,278 million for the year
        ended
        March 31, 2005, which resulted in an equivalent 37% reduction in the expense.
        The same is offset by an increase in the applicable tax rate in India which
        has
        resulted in a 1% increase 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 53% as compared to the previous
        year, which has resulted in an equivalent 53% reduction in deferred tax income,
        and further by an increase in the applicable tax rate in India which has
        resulted in a 1% decrease in the deferred tax income.
  **LIQUIDITYAND
        CAPITAL
        RESOURCES**


A
          summary
          of our cash flows appears below:
 **(in
                        millions of Rs.)****Year
                        Ended March 31****2004**
                    
                    **2005**
                    
                    **2006**Net
                        cash provided by the operating activities
                    
                    
                    19,885
                    
                    
                    15,006
                    
                    
                    6,006Net
                        cash used in investing activities
                    
                    
                    (16,706
                    )
                    
                    (12,706
                    )
                    
                    (7,975
                    )Net
                        cash from financing activities
                    
                    
                    (3,198
                    )
                    
                    (4,630
                    )
                    
                    (3,951
                    )Net
                        increase/(decrease) in cash and cash equivalents
                    
                    
                    (19
                    )
                    
                    (2,330
                    )
                    
                    (5,920
                    )Cash
                        and cash equivalents at the beginning of the year
                    
                    
                    9,910
                    
                    
                    9,891
                    
                    
                    7,561Cash
                        and cash equivalents at the end of the year
                    
                    
                    9,891
                    
                    
                    7,561
                    
                    
                    1,641


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 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, 2006, 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,
          2006, we had cash and cash equivalents of Rs.1.64 billion and liquid short
          term
          investments in bank deposits of Rs. 19.02 billion. We anticipate capital
          expenditures of approximately Rs.3,923 million in fiscal 2007. 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 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.15.01 billion in fiscal 2005 and Rs
        6.06
        billion in fiscal 2006. The decrease in cash generation from operating
        activities during the current year is primarily attributable to a decrease
        in
        the 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, 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. Net
        cash
        flow from operating activities was Rs.19.9 billion in fiscal 2004 and Rs.15.01
        billion in fiscal 2005. The decrease in cash generation from operating
        activities during the year ended March 31, 2005 was primarily attributable
        to a
        decrease in the net income from Rs.4.35 billion for the year ended March
        31,
        2004 to Rs.3.41 billion for the year ended March 31, 2005, an increase in
        amounts due from related parties from Rs.23.58 billion as at March 31, 2004
        to
        Rs.27.79 billion as at March 31, 2005, a lesser increase in the accrued employee
        costs from Rs.10.51 billion during the year ended March 31, 2004 to Rs.5.47
        billion during the year ended March 31, 2005, as offset by a lesser increase
        in
        gross accounts receivable balances and unbilled revenues from Rs.11.19 billion
        during the year ended March 31, 2004 to Rs.0.34 billion during the year ended
        March 31, 2005.
  **Investing
        Activities**
  Net
        cash
        used in investing activities decreased
        from Rs.12.71 billion for fiscal 2005 to Rs.7.98 billion for fiscal 2006.
        This is
        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. Net
        cash
        used in investing activities decreased from Rs.16.71 billion for fiscal 2004
        to
        Rs.12.71 billion for fiscal 2005. This was mostly due to a decrease in the
        investment made in short term bank deposits from Rs.7.39 billion during the
        year
        ended March 31, 2004 to Rs.2.07 billion during the year ended March 31, 2005
        and
        offset by an increase in the purchase of fixed assets from Rs.9.34 billion
        during the year ended March 31, 2004 to Rs.10.71 billion during the year
        ended
        March 31, 2005.
  **Financing
            Activities**
  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.
              Net cash
              used in financing activities had increased from Rs.3.19 billion for
              fiscal 2004
              to Rs.4.63 billion for fiscal 2005. This increase was on account of
              an increase
              in the amounts of cash dividends paid from Rs.3.19 billion during the
              year ended
              March 31, 2004 to Rs.4.63 billion during the year ended March 31,
              2005.
  60
 Table
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  **Contractual
        Obligations**
  The
        following table shows our contractual payment obligations for the specified
        future periods:
 **(in
                    millions of Rs.)**
                  **Payments
                    due by period****Total**
                **Lessthan
                    1 year**
                **1-3years**
                **3-5years**
                **Morethan
                    5 years**Purchase
                    obligations (capital commitments)
                3,923
                3,923
                —
                —
                —Pension
                    and other post-retirement obligations
                31,119
                2,425
                2,176
                2,879
                23,639**Total**
                **35,042**
                **6,348**
                **2,176**
                **2,879**
                **23,639**




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 Regime. The specified percentage
        for
        license fees on fixed line services and cellular services were 12%, 10%,
        10% of
        the Adjusted Gross Revenue (“AGR”) for the years ended March 31, 2004, 2005 and
        2006 respectively.


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, 2006, we had no debt
        outstanding and no credit facilities .
  **Off-Balance
        Sheet Arrangements**
  As
        of
        March 31, 2006, 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.
  **RESEARCHAND
        DEVELOPMENT**
  We
        did
        not incur research and development expenditures in the last three fiscal
        years.
  **TRENDINFORMATION**
  For
        a
        discussion of other important trends affecting us, see “—Operating
        Results—Overview” above.
  **Item
        6. Directors,
        Senior Management and
        Employees**
  **DIRECTORSAND
        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".
  61
 Table
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 **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 seven directors, four 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 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. Five board seats are currently vacant i.e. two
        ex-officio director and three part-time directors.
  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
                55
                Director(1)
                    / Chairman-cum-Managing DirectorV.
                    Shivkumar
                57
                Director(1)
                    / Director(Personnel)Kuldeep
                    Singh
                52
                Director(1)
                    / Director (Technical)Anita
                    Soni (Ms.)
                53
                Director(1)
                    / Director (Finance)M.
                    Sahu
                52
                Joint
                    Secretary (3), Department of TelecommunicationsAnnie
                    Moraes (Ms.)
                50
                Director
                    (3) / Dy. Director General, Department of
                    TelecommunicationsS.
                    Balasubramaniam
                63
                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
            57
            Executive
                Director, OperationS.C.
                Ahuja
            59
            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 22 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.
        V.
        Shivkumar has been our Director (Human Resources) and a member of our board
        since April, 2002. He has a Post Graduate Degree in Personnel Management
&
Industrial Relations, a Post Graduate Diploma in Industrial Engineering &
Management and Bachelor of Law Degree from Jabalpur University. Prior to
        joining
        us he served as the Executive Director (HR) at Bharat Earth Movers
        Ltd.




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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 31 years experience in the field of computers &
telecommunications. Before being appointed as Director (T) on the board of
        MTNL,
        he worked as GM in MTNL for more than 4 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 28 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.




Mrs.
      Annie Moraes has been a member of MTNL board since April 25, 2006 and is
      presently working as DDG (FEB), Dept. of Telecom. She joined the Indian Post
      and
      Telecom Accounts and Finance Service in 1979. She has worked in various
      capacities in the Dept of Telecom and in the Public sector telecom companies.
      She is presently Dy. Director General (Finance and Budget) in the Dept of
      Telecom. Prior to this she has worked as General Manager (Finance) in MTNL.
      She
      is post graduate in Economics from Jawaharal Nehru Univesity, New Delhi. She
      also holds an MBA (Exec) from the University of Queensland in Brisbane,
      Australia.




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 28 years as well as Head of
      Dept
      of Economics for 15 years in Pfresidency 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.C.
      Ahuja has been our company secretary since October, 1988. Prior to joining
      us,
      Mr. Ahuja was a Dy. Comp. Secretary at Engineers India Ltd., a Government
      enterprise. Mr. Ahuja is a Fellow Member of the Institute of Company Secretaries
      of India. Mr. Ahuja has a Master of Arts (English) degree from Himachal Pradesh
      University and a Bachelor of Laws degree from Kurukshetra
      University.




**AUDITCOMMITTEE**


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
        April 25, 2006, the Boardreconstitutedthe
        Audit Committee,
        now
        comprised of Dr. Balasubramanian, Chairman, Mr. Sahu and Mrs. Moraes. Mr.
        Sahu
        and Mrs. Moraes areGovernment of India employeesandare 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


63
 Table
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  reconstitute
        our Audit Committee to include only persons who are not MTNL or government
        employees and qualify as independent under Indian standards.




**COMPENSATIONOF
      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 2006 was approximately Rs. 3.81
      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
      June
      30, 2006, we had 49,347 employees, of whom 6,701 were executive and 42,646
      were
      non-executive employees. We seek to improve employee productivity through
      continuing education and training and by 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 plan, medical benefits for themselves and certain members
      of
      their immediate families and post-retirement medical benefits for retired
      employees with 10 years of service and certain members of their immediate
      families. Substantially all of our non-executive employees have opted to
      terminate their services with the DOT and to continue as our employees,
      effective November 1, 1998. We believe that this was the result of employee
      expectations of increased wages and improved benefits and a desire to remain
      in
      Delhi or Mumbai, as the case may be. In July 2000, we entered into a new 10
      year
      wage agreement with our non-executive employees, which provided for substantial
      wage increases retroactive to November 1998 for wages and November 1999 for
      perquisites.




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* 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 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, MTNL is discharging all such liabilities.




Approximately
      97% of our executive employees have accepted absorption by us, becoming our
      permanent 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 who are yet to exercise their option for MTNL.  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




64
 Table
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access
          lines in service per employee has been increasing steadily but remains
          significantly lower than the Asian and global averages. MTNL had also launched
          Voluntary Retirement Scheme (VRS) for its executive as well as non-executives
          in
          the financial year 2004-05/2005-06 and a total of 3947 employees were relieved
          under this scheme.




The
      mandatory retirement age for all employees is 60 years of age. Upon retirement,
      employees 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.




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 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, MTNL has launched
      a
      massive training effort to train its 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
      2005-06 a total number of 3,024 non-executives and 968 executives were trained
      in subjects related to customer care, leadership, management and supervisory
      training. On IT and technology related fields, 2,808 non-executives and 1,287
      executives were trained.




In
      addition to this, highly specialized training on GSM, CDMA and Broadband also
      took place for MTNL staff both in India and abroad.




In
      addition to already existing District Telecom Training Centres (DTTC), MTNL
      has
      created state-of-the-art training facility in the form of Centre for Excellence
      in Telecom Technology and Management (CETTM) at Powai, Mumbai. Apart from
      catering to the in-house training needs of MTNL, CETTM shall provide telecom
      training to other organizations also. Recently an agreement has been reached
      between MTNL, TCIL and the Ministry of External Affairs. Under the agreement,
      training on telecom technology shall be provided to the candidates from foreign
      countries in the CETTM premises.




**SHAREOWNERSHIP**




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 DOT has indicated for closure of the issue but MTNL has again
      taken up the matter with the government.




65
 Table
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**Item
        7. MajorShareholders and
        Related Party
        Transactions**
  **MAJORSHAREHOLDERS**
  The
        following table sets forth information about the shareholders holding 5%
        or more
        of our outstanding equity shares as of March 31, 2006, 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)
            75,263,167
            11.95%The
                Bank of New York(3)
            45,656,964
            7.24%




(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:




**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




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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




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 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.




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**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. FinancialInformation**




**CONSOLIDATEDSTATEMENTS
        AND OTHER FINANCIAL
        INFORMATION**
  See
“Item
        18. Financial Statements” and pages F-1 through F-33.
  **SIGNIFICANTCHANGES**
  **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 2006, 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 on February 21, 2006.
  In
          June
          2006, 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 20,
          2006.
          This dividend has been approved by our shareholders at our annual general
          meeting held on September 26, 2006. 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 total dividend distribution tax and surcharge) on the total amount distributed as dividend . 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. TheOffer and Listing**
  **MARKETPRICE
          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:
  68
 Table
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  **Share
                          price**
                        **(Rs.)****Calendar
                          period**
                      **High**
                      **Low**
                      **Average
                          daily trading volume**2003First
                          Quarter
                      119.10
                      81.05
                      12,971,589Second
                          Quarter
                      115.40
                      85.00
                      8,489,312Third
                          Quarter
                      137
                      98.50
                      20,804,253Fourth
                          Quarter
                      141
                      105.80
                      18,238,8162004First
                          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
                      11,633,506
 2005First
                      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
                  7,890,6092006April
                      2006
                  228.85
                  181.00
                  7,489,140May
                      2006
                  226.00
                  128.80
                  5,562,732June
                      2006
                  166.95
                  132.75
                  3,680,440July
                      2006
                  157.40
                  133.50
                  1,930,216August
                      2006
                  163.00
                  138.00
                  1,813,443
  On
            September 26, 2006, the closing price of our equity shares on The Stock
            Exchange, Mumbai was Rs.154.75.
  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.
  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**
                    
                    **Low**2002
                    
                    US$7.50
                    
                    
                    US$3.632003
                    
                    6.25
                    
                    
                    3.332004
                    
                    9.27
                    
                    
                    5.402005
                    
                    8.44
                    
                    
                    5.41First
                        Quarter
                    
                    8.36
                    
                    
                    6.24Second
                        Quarter
                    
                    6.99
                    
                    
                    6.00Third
                        Quarter
                    
                    8.44
                    
                    
                    6.31Fourth
                        Quarter
                    
                    7.25
                    
                    
                    5.412006First
                        Quarter
                    
                    8.80
                    
                    
                    6.65Second
                        Quarter
                    
                    9.75
                    
                    
                    8.04April
                    
                    9.55
                    
                    
                    8.04May
                    
                    9.75
                    
                    
                    6.66June
                    
                    7.63
                    
                    
                    6.19July
                    
                    7.03
                    
                    
                    5.61August
                    
                    6.81
                    
                    
                    5.95September
                        (through September 28, 2006)
                    
                    6.91
                    
                    
                    6.45




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  On
            September 26, 2006, the closing price of our ADSs on the New York Stock
            Exchange
            was US$6.64 per ADS.
  **THEINDIAN
              SECURITIES
              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 Stock Exchange,*
  **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:
 ·
                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
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  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
  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.
  **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;  71
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·
            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 six major exchanges, The Stock Exchange, Mumbai, the stock
        exchanges at Ahmedabad, Calcutta, Chennai and Delhi, and the National Stock
        Exchange, account for more than 90.0% of the market capitalization of listed
        Indian companies. The Stock Exchange, Mumbai and the National Stock Exchange
        account for a majority of trading volumes of securities in India. The Stock
        Exchange, Mumbai 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 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
  72
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  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
  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.
  **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  73
 Table
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 ·
                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.
  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
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 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
  **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.
  **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.
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  **Item
            10. AdditionalInformation**
  **MEMORANDUMAND
            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 14.25% (inclusive of Education surcharge) of distributed
            profit
            for a relevant period is payable by us.
  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.
 **For
                        fiscal year**
                    **Dividend
                        per**
                      **equity
                        share**
                    **Dividend
                        per**
                      **ADS/GDR**
                    **Total
                        amount of**
                      **dividends
                        paid**(Rs.)
                    (Rs.)
                    (millions
                        of Rupees)2006
                    4.0
                    8.0
                    2,5202005
                    4.5
                    9.0
                    2,8352004
                    4.5
                    9.0
                    2,8352003
                    4.5
                    9.0
                    2,8352002
                    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
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  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.
  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 26, 2006.
  **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
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  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 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
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 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
  **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 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.
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 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
  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.
  **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.
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 **MATERIALCONTRACTS**
  Since
                April 1, 2006, we have not entered into any material contracts that
                were not in
                the ordinary course of business.
  **INDIANFOREIGN
                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
  **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 proceeds
              from
              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 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
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 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
  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.
 ·
                    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.
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  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, 2006 foreign direct investment in us was 17.19% 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.
  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.”
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 **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
  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 “ d ividend 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
                total
                dividend distribution tax and surcharge) on the total
                amount distributed as
                dividend .
  **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
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 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
  **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.
  **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 is subject to a service tax of 10.2%. The stockbroker is responsible
                for
                collecting the service tax and paying it to the relevant authority.
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  **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
                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—
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  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.
  **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.
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  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. Quantitativeand
                  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,
                  2005 and 2006, 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 of March
                  31, 2005 and 2006, 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, 2006,
                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, 2006 is Rs.3,601
                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, 2006 is Rs.2,208 million as compared to
                their carrying
                amount of Rs.2,406 million.
  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. Descriptionof
                Securities Other than
                Equity Securities**
  Not
                applicable.
  88
 Table
                        of Contents
 **Item
                    13. Defaults,
                    Dividend Arrearage and
                    Delinquencies.**
  None.
  **Item
                    14. MaterialModifications
                    to the Rights of
                    Security Holders and Use of Proceeds**
  None.
  **Item
                    15. Controlsand
                    Procedures**
 (a) 
                      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.
  In
                      October 2005, the Company restated its financial statements
                      as a result of
                      errors in its opening shareholders’ equity as at March 31, 2002, and
                      shareholders’ equity and net income for the years ended March 31, 2003 and
                      2004.
                      The errors were considered to be the result of deficiencies
                      in our financial
                      reporting process, and our lack of knowledge and expertise
                      in the application of
                      U.S. GAAP. These significant control deficiencies constituted
                      material
                      weaknesses in the financial statement reporting process which
                      have not yet been
                      remediated during the year ended March 31, 2006. We are planning
                      to take steps
                      to remedy the matters referred to above, 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 U.S. GAAP skills of
                      our accounting
                      staff on a regional basis and at the Corporate Center.
  We
                  have
                  consulted with our audit committee and board of directors, and
                  are planning to
                  undertake remedial measures to make improvements as soon as
                  practicable.
  (b) 
                  Internal Control Over Financial Reporting. Except as discussed
                  above, there have
                  been no significant changes in our internal control over financial
                  reporting (as
                  such term is defined in Rules 13a-15(f) and 15d-15(f) under the
                  Securities
                  Exchange Act) during the period to which this report relates that
                  have
                  materially affected, or are reasonably likely to materially affect,
                  our internal
                  control over financial reporting. We are currently in the process
                  of taking the
                  steps described above to remediate the material weaknesses. In
                  addition, we will
                  continue to evaluate the effectiveness of our disclosure controls
                  and procedures
                  and may make such changes from time to time as we consider
                  appropriate.
  There
                  are
                  inherent limitations to the effectiveness of any system of disclosure
                  controls
                  and procedures, including the possibility of human error and the
                  circumvention
                  or overriding of such controls and procedures. Accordingly, even
                  effective
                  disclosure controls and procedures can only provide reasonable
                  assurance of
                  achieving their controls objectives. Acknowledging this, we have
                  designed our
                  disclosure controls and procedures to provide such reasonable assurance.
  Beginning
                  with the year ended March 31, 2007, Section 404 of the U.S. Sarbanes-
                  Oxley Act
                  of 2002 will require us to include an internal control report by
                  management with
                  our Annual Report on Form 20-F. The internal control report must
                  contain: (1) a
                  statement of management’s responsibility for establishing and maintaining
                  adequate internal control over our financial reporting; (2) a statement
                  identifying the framework used by management to conduct the required
                  evaluation
                  of the effectiveness of its internal control over financial reporting;
                  (3)
                  management’s assessment of the effectiveness of its internal control over
                  financial reporting as of the end of its most recent fiscal year,
                  including a
                  statement as to whether or not its internal control over financial
                  reporting is
 89
 Table
                      of Contents
  effective;
                  and (4) a statement that its independent
                  auditors have issued an attestation report on management’s assessment of its
                  internal control over financial reporting. We have retained consultants
                  to
                  assist us in this process.  **Item
                    16A. AuditCommittee
                    Financial
                    Expert**
  The
                    Board
                    of Directors has identified Ms. Anita Soni, member of the Audit
                    Committee, as a
“financial expert”.
  **Item
                    16B. Codeof Ethics**
  The
                    Company has a Code of Ethics as part of its Rules of Conduct.
                    A copy of the Code
                    of Ethics may be obtained upon request addressed to the Company
                    Secretary at the
                    Company’s principal office, indicated on the cover of this report.
  **Item
                    16C. PrincipalAccountant
                    Fees and
                    Services**
  Price
                    Waterhouse, Bangalore (New Delhi office) (“Price Waterhouse”) served as our
                    independent registered public accounting firm for the year ,  ended
                    March 31, 2005 and 2006 in connection with the audit of the consolidated
                    financial statements being filed with this annual report on Form
                    20-F.
  The
                    following table sets forth the remuneration that we paid to Price
                    Waterhouse and
                    its associated entities in 2005 and 2006 in Million Rs.:
  **2005**
                        **2006**Audit
                            Fees
                        3.25
                        5.00All
                            Other Fees
                        -
                        -**Total**
                        **3.25**
                        5.00
  **Audit
                fees**
 Audit
                fees represent fees for professional services rendered for the audit
                of the
                consolidated financial statements of the Company and its subsidiaries
                prepared
                in accordance with US GAAP. Audit fees are fees agreed upon with
                Price
                Waterhouse for the fiscal years 2005 and 2006 (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 Price Waterhouse, our principal
                auditor, and its associated entities. Pursuant to the board's pre-approval
                process, each year, Price Waterhouse 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. Exemptionsfrom
                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
                are executive officers 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.
  90
 Table
                      of Contents
  **Item
                      16E. Purchaseof
                      Equity Securities by the
                      Issuer and Affiliated Purchasers**
  Not
                      applicable
  **Item
                      17. FinancialStatements**
  Not
                      applicable.
  **Item
                      18. FinancialStatements**
  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.**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 Officer12.2
                      Certification
                          of Principal Financial Officer13.1
                      Certification
                          of Chief Executive Officer13.2
                      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).
  91
 Table
                    of
                    Contents




**Mahanagar
        Telephone Nigam Limited**
  **INDEXTO
        THE CONSOLIDATED FINANCIAL STATEMENTS**
 
 PageReport
                  of Independent Registered Public
                  Accounting Firm
              F-1Consolidated
                  Balance Sheets as of March
                  31, 2005 and 2006
              F-2Consolidated
                  Statements of Income for the years
                  ended March 31, 2004, 2005 and 2006
              F-3Consolidated
                  Statements of
                  Shareholders’ Equity for the years ended March 31, 2004, 2005 and
                  2006
              F-4Consolidated
                  Statements of Cash Flows for
                  the years ended March 31, 2004, 2005 and 2006
              F-5Notes
                  to the Consolidated Financial Statements
              F-6
  Table
            of Contents
  **REPORTOF
        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
  Page
            F-1
 Table
            of Contents
  **MAHANAGAR
        TELEPHONE NIGAM LIMITED**
 **ConsolidatedBalance
        Sheets**
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****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.7,561
              
              Rs.1,641
              
              $ 
                  37Short
                  term
                  investment in bank deposits
              
              17,732
              
              19,020
              
              428Accounts
                  receivable, net
              
              2,637
              
              2,779
              
              62Due
                  from related
                  parties
              
              8,250
              
              2,551
              
              57Inventories
              
              1,866
              
              1,448
              
              33Unbilled
                  revenue
              
              5,002
              
              4,361
              
              98Deferred
                  income
                  taxes
              
              7,288
              
              8,202
              
              184Other
                  receivables
              
              4,052
              
              8,759
              
              197**Total
                  current assets**
              
              **54,388**
              
              **48,761**
              
              **1,096**Investments
                  in held
                  to maturity securities
              
              3,500
              
              3,500
              
              79Investment
                  in
                  affiliate
              
              138
              
              66
              
              1Due
                from related parties
              
              19,539
              
              21,267
              
              478Property
                  and
                  equipment, net
              
              82,369
              
              80,965
              
              1820Restricted
                  assets
              
              14,733
              
              13,427
              
              302Other
                  assets
              
              2,505
              
              2,165
              
              49**Total
                  assets**
              
              **177,172**
              
              **170,151**
              
              **3,825****LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              12,568
              
              12,129
              
              273Due
                  to related
                  parties
              
              10,594
              
              5,377
              
              121Accrued
                  expenses
                  and other current liabilities
              
              24,209
              
              22,254
              
              500**Total
                  current liabilities**
              
              **47,371**
              
              **39,760**
              
              **894**0Accrued
                  employee
                  cost
              
              27,434
              
              31,378
              
              705Due to related parties
              
              745
              
              714
              
              16Deferred
                  income
                  taxes
              
              7,952
              
              8,050
              
              181Non
                  current portion
                  of customer deposits
              
              10,337
              
              9,801
              
              220**Total
                  liabilities**
              
              **93,839**
              
              **89,703**
              
              **2,016**Contingencies
                  and commitments (refer note 22)**Shareholders’
                  equity**Equity
                  shares, 800,000,000 shares authorized, par
                value
                  Rs.10 per
                  share, issued and outstanding -
                630,000,000
                  shares
                  as of March 31, 2005 and 2006
              
              6,300
              
              6,300
              
              142Additional
                  paid-in
                  capital
              
              6,649
              
              6,649
              
              149Retained
                  earnings
              
              70,076
              
              67,191
              
              1511Research
                  and
                  development reserve
              
              308
              
              308
              
              7**Total
                  shareholders' equity**
              
              **83,333**
              
              **80,448**
              
              1,809**Total
                  liabilities and shareholders’ equity**
              
              **Rs.177,172**
              
              **Rs.170,151**
              
              **$3,825**
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  Page
            F-2
 Table
            of Contents
  **MAHANAGAR
        TELEPHONE NIGAM LIMITED**
 **ConsolidatedStatements
        of
        Operations**
 
 **Years
                  ended March 31,****2004**
              
              **2005**
              
              **2006**
              
              **2006****Indian
                  Rupees in millions, except per share data and**
                **as
                  stated otherwise**
              
              **Convenience
                  translation into million of US$ (Unaudited)**Revenues,
                  net
              Rs.61,084
              
              Rs.50,156
              
              Rs.46,668
              
              $1049Cost
                  of revenues (excluding depreciation
                shown separately below)
              (38,282)
              
              (31,521)
              
              (32,268)
              
              (725)Selling,
                  general and administrativeexpenses
              (10,023)
              
              (9,275)
              
              (8,034)
              
              (181)Depreciation
              (8,675)
              
              (7,724)
              
              (7,999)
              
              (180)Excess
                  liabilities written back
              1,130
              
              1,291
              
              821
              
              18**Income/(loss)
                  from operations**
              **5,234**
              
              **2,927**
              
              **(812)**
              
              **(19)**Interest
                  from short term bank deposit
              1,.322
              
              1,341
              
              1,601
              
              36Interest
                  and other income, net
              392
              
              1,329
              
              787
              
              18**Income/
                  before income taxes,**
                **and share of losses from affiliate**
              **6,948**
              
              **5,597**
              
              **1,576**
              
              **35**Income
                  tax expense
              (2,570)
              
              (2,124)
              
              (437)
              
              (10)Equity
                  in (losses) of affiliate
              (20)
              
              (67)
              
              (73)
              
              (1)**Net
                  income**
              **Rs.4,358**
              
              **Rs.3,406**
              
              **Rs.1,066**
              
              **$24****Earnings
                  per equity share**-Basic and diluted
              Rs.6.92
              
              Rs.5.41
              
              Rs.1.69
              
              $0.04**Weighted
                  average number of equity**
                **shares used in computing earnings**
                **per equity share (in million)**
              630
              
              630
              
              630
              
              630
 
 The
        accompanying notes form an integral part of these consolidated financial
        statements.
 
 Page
            F-3
 Table
            of Contents
 **MAHANAGAR
        TELEPHONE NIGAM LIMITED**
 **ConsolidatedStatements
        of Shareholders’
Equity**
 **Common
                      Stock**
                    
                    **No. of****Par
                      Value**
                    **Shares**
                  **Additional
                      paid-in capital**
                  **Retained
                      earnings**
                  **Research**
                    **and
                      development reserve**
                  **Total
                      Shareholders'**
                    **Equity****Indian
                      Rupees in millions except per share data and as stated
                      otherwise****Balance
                      as of March 31, 2003**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.6,649**
                  **Rs.70,140**
                  **Rs.308**
                  **Rs.83,397****Net
                      income**
                  -
                  -
                  -
                  4,358
                  -
                  **4,358**Cash
                      dividend paid
                      at the rate of Rs.4.50 per share
                  -
                  -
                  -
                  (3,198)
                  -
                  (3,198)**Balance
                      as of March 31, 2004**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.6,649**
                  **Rs.71,300**
                  **Rs.308**
                  **Rs.84,557****Net
                      income**
                  -
                  -
                  -
                  3,406
                  -
                  **3,406**Cash
                      dividend paid
                      at the rate of Rs.6.50 per share
                  -
                  -
                  -
                  (4,630)
                  -
                  (4,630)**Balance
                      as of March 31, 2005**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.6,649**
                  **Rs.70,076**
                  **Rs.308**
                  **Rs.83,333****Net
                      Income**
                  -
                  -
                  -
                  1,066
                  -
                  **1,066**Cash
                      dividend paid
                      at the rate of Rs.6.27 per share
                  -
                  -
                  -
                  (3,951)
                  -
                  (3,951)**Balance
                      as of March 31, 2006**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.6,649**
                  **Rs.67,191**
                  **Rs.308**
                  **Rs.80,448****Balance
                      as of March 31, 2006 - Convenience translation into million
                      of US$
                      (unaudited)**
                  **630,000,000**
                  **$142**
                  **$149**
                  **$1,511**
                  **$7**
                  **$1,809**
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  Page
            F-4
 Table
            of Contents
  **MAHANAGAR
        TELEPHONE NIGAM LIMITED**
 **ConsolidatedStatements
        of Cash
        Flows**
 
 **Year
                  ended March 31,****2004**
              
              **2005**
              
              **2006**
              
              **2006****Indian
                  Rupees in millions except per share data**
                **and
                  as stated otherwise**
              
              **Convenience
                  translation into million of US $ (Unaudited)****Cash
                  flows from operating activities****Net
                  income**
              
              **Rs.4,358**
              
              **Rs.3,406**
              
              **Rs.1,066**
              
              **$
                  24***Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:*
              
              
              
              
              
              
              
              -Depreciation
              
              8,675
              
              7,724
              
              7,999
              
              180Loss
                  on sale of fixed assets
              
              107
              
              197
              
              93
              
              2Deferred
                  taxes
              
              (2,739)
              
              (1,276)
              
              (816)
              
              (18)Excess
                  liabilities written back
              
              (1,130)
              
              (1,291)
              
              (821)
              
              (18)Allowances
                  for accounts receivables
              
              2,425
              
              1,137
              
              (248)
              
              (6)Equity
                  in losses of equity affiliate
              
              20
              
              67
              
              73
              
              2*Changes
                  in assets and liabilities*
              
              
              
              
              
              
              
              -(Increase)/
                  decrease in accounts receivables, net and unbilled
                  revenues
              
              (11,188)
              
              (345)
              
              748
              
              17(Increase)/
                  decrease in inventories
              
              425
              
              (875)
              
              418
              
              9(Increase)/
                  decrease due from related parties
              
              6,056
              
              (4,201)
              
              3971
              
              89(Increase)/
                  decrease in other receivables
              
              1,100
              
              70
              
              (4,368)
              
              (98)(Increase)/
                  decrease in restricted assets
              
              (3,973)
              
              (1,690)
              
              1,306
              
              29Increase/(decrease)
                  in accounts payable
              
              9,985
              
              3,942
              
              (439)
              
              (10)(Increase)/
                  decrease due to related parties
              
              (6,801)
              
              (745)
              
              (5,249)
              
              (118)Increase/
                  (decrease) in accrued employee costs
              
              10,519
              
              4,128
              
              3,944
              
              89Increase/
                  (decrease) in accrued expenses and other payables
              
              2,046
              
              4,758
              
              (1,671)
              
              (38)**Net
                  cash provided by operating activities**
              
              **19,885**
              
              **15,006**
              
              **6,006**
              
              **135****Cash
                  flows from investing activities**
              
              
              
              
              
              
              
              -Investments
                  in short term bank deposits, net
              
              (7,394)
              
              (2,078)
              
              (1,288)
              
              (29)Purchase
                  of property and equipment
              
              (9,337)
              
              (10,707)
              
              (6,713)
              
              (151)Proceeds
                  from sale of property and equipment
              
              58
              
              79
              
              26
              
              1Investment
                  in affiliate
              
              (33)
              
              -
              
              -
              
              -**Net
                  cash used in investing activities**
              
              **(16,706)**
              
              **(12,706)**
              
              **(7,975)**
              
              **(179)****Cash
                  flows from financing activities**
              
              
              
              
              
              
              
              -Cash
                  dividends paid ( including dividend tax)
              
              (3,198)
              
              (4,630)
              
              (3,951)
              
              (89)**Net
                  cash used in financing activities**
              
              **(3,198)**
              
              **(4,630)**
              
              **(3,951)**
              
              **(89)****Net
                  decrease in cash and cash equivalents**
              
              **(19)**
              
              **(2,330)**
              
              **(5,920)**
              
              **(133)**Cash
                  and cash equivalents at the beginning of the year
              
              9,910
              
              9,891
              
              7,561
              
              170**Cash
                  and cash equivalents at the end of the year**
              
              **Rs.9,891**
              
              **Rs.7,561**
              
              **Rs.1,641**
              
              **$37*****Supplementary
                  information***Cash
                  paid during the year for interest
              
              Rs.331
              
              Rs.361
              
              Rs.244
              
              $
                  5Cash
                  paid during the year for income taxes
              
              Rs.8,327
              
              Rs.4,732
              
              Rs.2,475
              
              $56
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  Page
            F-5
 Table
            of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED**
 **Notesto
              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 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, 2006, have been translated into United States dollars at
        the
        noon buying rate in New York city on March 31, 2006, for cable transfers
        in
        Indian rupees, as certified for customs purposes by the Federal Reserve Bank
        of
        New York of $1= Rs.44.48. 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, 2006 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 affiliate. 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
          services are recognized based on usage by subscribers. Revenues associated
          with
          access and interconnection for usage of the Company’s network by other operators
  Page
            F-6
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  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 12%, 10%, 10% of the Adjusted Gross Revenue (“AGR”) for the years
        ended March 31, 2004, 2005 and 2006 respectively. With effect from January
        1,
        2006 the Company is required to pay license fee at the rate of 6% of the
        AGR
        even on the internet services (including internet telephony). License fees
        and
        spectrum charges charged to income as part of cost of revenues amounted to
        Rs.9,978 million, Rs.4,974 million and Rs. 552 million (including license
        fee on
        Internet services) for the years ended March 31, 2004, 2005 and 2006
        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 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,
 Page
            F-7
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            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  the
        financial condition and business outlook of the investee including 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. 645 million, Rs. 677 million and Rs. 612 million for the
          years
          ended March 31, 2004, 2005 and 2006 respectively.
 Page
            F-8
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  *(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.
  *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.
  *Leave
        encashment*
  Leave
        encashment benefit comprises of encashment of leave balances accrued by
        employees. These balances can be accumulated and carried forward upto 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.
  Page
              F-9
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
 *(p)*
              *Advertisement
                  expenses*
  Advertising
        and business promotion costs are expensed as incurred and amounted to Rs.
        257
        million, Rs. 199 million and Rs.414 million for the years ended March 31,
        2004,
        2005 and 2006 respectively.
  *(q)*
              *Dividends*
  Dividends
        are recorded in the consolidated financial statements in the period in which
        they are approved by the shareholders.
  *(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
        December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
        -
        an amendment of APB Opinion No. 29." APB Opinion No. 29 requires that
        nonmonetary exchanges of assets be recorded at fair value with an exception
        for
        exchanges of similar productive assets, which can be recorded on a carryover
        basis. SFAS No. 153 eliminates the current exception and replaces it with
        a
        general exception for exchanges of nonmonetary assets that do not have
        commercial substance. A nonmonetary exchange has commercial substance if
        the
        future cash flows of the entity are expected to change significantly as a
        result
        of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges
        that
        take place in fiscal periods beginning after June 15, 2005, which is April
        1,
        2006 for us; however, earlier application is permitted. The adoption of this
        standard will not have a material impact on MTNL’s consolidated financial
        statements.
  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 derecognition, 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, results of operations and liquidity.
 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. The Company is
          in the
          process of evaluating the impact SAB 108 will have on the Company’s financial
          position, results of operations and liquidity.
 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.
  *(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.
 Page
              F-10
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
 (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.
  (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 revenues and
        (expenses) with the above mentioned related parties:
 
 **For
                  the years ended March 31,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**VSNL
                  - Expenses for carriage of ILD calls originating on MTNL’s
                  network
              (1,206)
              
              (684)
              
              (583)
              
              (13)VSNL
                  - Revenues for ILD calls terminating on MTNL’s network
              1,015
              
              516
              
              46
              
              1DOT
                  - License fees and spectrum charges*(Refer
                  note 4)*
              (9,978)
              
              (4,974)
              
              (552)
              
              (13)BSNL
                  - Networking charges for NLD calls*(Refer
                  note 4)*
              (6,922)
              
              (3,627)
              
              (8,217)
              
              (185)BSNL
                  - Revenues for interconnect usage charges as per TRAI
                  Regulation
              6,236
              
              1,471
              
              2,442
              
              55
 
 **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 license fee and
        networking charges for the fiscal years ended March 31,2002, 2003 and 2004
        . In
        the absence of any agreement, license fee and networking charges for theseyears 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.
  Page
            F-11
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
 
 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.
  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 prerequisites 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
                  AND CASH EQUIVALENTS**
  The
        cost
        and fair values for cash and cash equivalents are as follows:
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Cash
                  and bank balances
              
              Rs.1,918
              
              Rs.1,641
              
              $37Cash
                  equivalents
              
              5,643
              
              -
              
              -**Cash
                  and cash equivalents**
              
              **Rs.7,561**
              
              **Rs.1,641**
              
              **$37**
 
 **6.**
              **INVESTMENTS
                  IN BANK DEPOSITS**
  Investments
        in bank deposits represents term deposits placed with banks earning fixed
        rate
        of interest and amounted to Rs.17,732 million and Rs.19,020 million as
        of March 31, 2005 and 2006 respectively with maturities from more than
        three months to one year . Interest on investments in bank deposits is
        recognized on accrual basis.
 
 **7.**
              **PROPERTY
                  AND EQUIPMENT**
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Land
                  and buildings
              
              Rs.12,687
              
              Rs.13,890
              
              $312Cable
                  and related equipment
              
              71,752
              
              73,129
              
              1,644Exchanges
                  and related equipment
              
              62,126
              
              65,480
              
              1,472Other
                  fixed assets
              
              5,296
              
              5,421
              
              122Capital
                  work in progress
              
              6,024
              
              5,281
              
              119157,885
              
              163,201
              
              3,669Accumulated
                  depreciation
              
              (75,516)
              
              (82,236)
              
              (1,849)**Property
                  and equipment, net**
              
              **Rs.82,369**
              
              **Rs.80,965**
              
              **$1,820**
  Page
            F-12
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  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 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. 703 million and
        Rs.794million as of March 31, 2005 and 2006 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,****2005**
              
              **2006**
              
              **2006****(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
              
              $2211.5%
                  Bonds of Maharashtra Krishna Valley Development
                  Corporation
              
              2,500
              
              2,500
              
              57**Investments
                  - Non-current**
              
              **Rs.3,500**
              
              **Rs.3,500**
              
              **$79**
  ***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.
 As
            of
            September 30, 2006, ITI has not yet redeemed both the first and second
            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
 Page
                F-13
 Table
                of Contents
 **MAHANAGAR
                TELEPHONE NIGAM LIMITED** **Notes
                  to the consolidated financial statements**
  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. 312
            million as at March 31, 2006 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 31,
        2002.
        The bonds have a coupon rate of 11.5% per annum and are redeemable at the
        end of
        the 10 th year
        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, 2006
 
 **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
        further
        invested Rs. 33 million in UTL in proportion to its 26.7% holding MTNL’s equity
        in losses of the affiliate amounted to Rs. 20 million , Rs. 67 million and
        Rs.73
        million for the years ended March 31, 2004, 2005 and 2006 respectively. The
        carrying value of investment in UTL is Rs. 138 million and Rs.66 million as
        of March 31, 2005 and 2006 respectively.
  **10.**
              **INVENTORIES**
  Inventories
        are comprised of the following:
 
 **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Cables
              
              Rs.1,060
              
              Rs.881
              
              $20Exchange
                  equipment
              
              495
              
              347
              
              8Telephone
                  and telex instruments
              
              492
              
              330
              
              7Others
              
              177
              
              261
              
              6Less:
                  allowance for slow moving / obsolete stock
              
              (358)
              
              (371)
              
              (8)**Inventories,
                  net**
              
              **Rs.1,866**
              
              **Rs.1,448**
              
              **$33**
  Page
              F-14
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  Activity
            in allowance for slow moving / obsolete stock is as follows:
  **For
                      the years ended March 31,****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006****(Million
                      of Rupees)**
                  
                  **(Million
                      of**
                    **US
                      $)**
                    **Unaudited**Balance
                      at beginning of year
                  Rs.353
                  
                  Rs.374
                  
                  Rs.358
                  
                  $8Charged
                      to expense
                  48
                  
                  159
                  
                  35
                  
                  1Less:
                      amounts written off
                  (27)
                  
                  (175)
                  
                  (22)
                  
                  (1)**Balance
                      at end of year**
                  **Rs.374**
                  
                  **Rs.358**
                  
                  **Rs.371**
                  
                  **$8**
 **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,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Balance
                  at beginning of year
              Rs.6,144
              
              Rs.8,561
              
              Rs.6,794
              
              $153Charged
                  to expense
              2,425
              
              1,137
              
              (248)
              
              (6)Less:
                  amounts written off
              (8)
              
              (2,904)
              
              (1,555)
              
              (35)**Balance
                  at end of year**
              **Rs.8,561**
              
              **Rs.6,794**
              
              **Rs.4,991**
              
              **$112**
 
 **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:
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Loans
                  to employees
              
              Rs.2,654
              
              Rs.2,406
              
              $54Advance
                  tax
              
              1,698
              
              4,860
              
              109Accrued
                  interest
              
              843
              
              936
              
              21Others
              
              1,362
              
              2,722
              
              61**6,557**
              
              **10,924**
              
              **246**Less:
                  Other assets, non-current
              
              (2,505)
              
              (2,165)
              
              (49)**Other
                  receivables, current**
              
              **Rs.4,052**
              
              **Rs.8,759**
              
              **$197**
 
 Advance
        tax balance is net of income tax liability amounting to
        Rs. 42,892 million and Rs. 44,183 million as of March 31, 2005 and
        2006. Other assets includes the non current portion of loans given to employees
        and capital lease recievable.
  Page
            F-15
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  **14.**
              **ACCRUED EXPENSES AND OTHER CURRENT
                LIABILITIES**
  Accrued
        expenses and other current liabilities consist of the following:
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Interest
                  accrual
              
              Rs.133
              
              Rs.6
              
              **$-**General
                  provident fund contribution, net
              
              10,330
              
              8,517
              
              191Deferred
                  income
              
              3,251
              
              5,444
              
              122Advances
                  from customers and others
              
              778
              
              697
              
              16Customers
                  deposits
              
              2,584
              
              2,456
              
              55Accrued
                  employee cost
              
              3,294
              
              3,718
              
              84Other
                  payables and accruals
              
              3,839
              
              1,416
              
              32**Accrued
                  expenses and other current liabilities**
              
              **Rs.24,209**
              
              **Rs.22,254**
              
              **$500**
 
 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. 8,517 million on DOT upto March 31,
          2006
          (2005: Rs 6,426 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 current year, a GPF trust has been created and Rs 4,340 million
          has
          been transferred to the GPF Trust. The outstanding amount owing to the
          trust of
          Rs. 8,517 million continues to be a part of accured 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,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Interest
                  from investment in MKVDC
              Rs.239
              
              Rs.239
              
              Rs.239
              
              $5Interest
                  on loans to employees
              134
              
              182
              
              173
              
              4Interest
                  on advances and others, net
              41
              
              715
              
              51
              
              1Interest
                  paid on customers deposit
              (36)
              
              (28)
              
              (25)
              
              (1)Interest
                  paid on General provident fund
              (310)
              
              (330)
              
              (207)
              
              (4)Other
                  income
              324
              
              551
              
              556
              
              13**Interest
                  and other income, net**
              **Rs.392**
              
              **Rs.1,329**
              
              **Rs.787**
              
              **$18**
 
 **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.322 million Rs. 297 million and
        Rs.49
        million for the years ended March 31, 2004, 2005 and 2006 respectively. This
        line item also includes other time barred liabilities outstanding for more
        than
        3 years amounting to Rs.479 million, Rs. 630 million and Rs.674 million for
        the
        years ended March 31, 2004, 2005 and 2006 respectively, and other provisions
        no
        longer required which have been written back amounting to Rs.329 million
        , Rs.
        364 million and Rs.98 million for the years ended March 31, 2004, 2005 and
        2006 respectively.
  Page
            F-16
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
 **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,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Current
                  tax
              Rs.5,309
              
              Rs.3,400
              
              Rs.1,253
              
              $28Deferred
                  tax
              (2,739)
              
              (1,276)
              
              (816)
              
              (18)**Aggregate
                  Taxes**
              **Rs.2,570**
              
              **Rs.2,124**
              
              **Rs.437**
              
              **$(10)**
  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,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited**Income
                  before taxes and share from affiliates
              Rs.6,948
              
              Rs.5,597
              
              Rs.1,576
              
              $35Average
                  enacted tax rate in India
              35.88%
              
              36.59%
              
              33.66%Computed
                  tax expense
              2,493
              
              2,048
              
              531
              
              12Effect
                  of tax assessed for earlier years
              61
              
              -
              
              71
              
              2Effect
                  of change in tax rates
              (111)
              
              39
              
              (173)
              
              (4)Permanent
                  differences
              127
              
              37
              
              8
              
              -**Income
                  taxes recognized in the statement of income**
              **Rs.2,570**
              
              **Rs.2,124**
              
              **Rs.437**
              
              **$10**
  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. *(Also
        refer note 22 iii (b) (ii)).*
  The
        benefit claimed by MTNL in the above years may ultimately not be allowed
        by the
        tax authorities and hence, the provision for current tax in these consolidated
        financial statements has been accounted on the basis of normal tax
        rates.
  Page
            F-17
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  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,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Deferred
                  tax assets:**Allowances
                  for bad and doubtful debts
              
              Rs.
                  2,486
              
              Rs.1,681
              
              $38Deferred
                  settlements amount not recognized in income
              
              866
              
              3,471
              
              78Post
                  retirement benefits
              
              5,901
              
              4,362
              
              98Others
              
              3,453
              
              2,235
              
              50**Total
                  deferred tax assets**
              
              **12,706**
              
              **11,749**
              
              **264****Deferred
                  tax liabilities:**Excess
                  of tax allowance over depreciation
              
              (12,008)
              
              (10,507)
              
              (236)Interest
                  capitalized
              
              (1,362)
              
              (1,090)
              
              (25)**Total
                  deferred tax liabilities**
              
              **(13,370)**
              
              **(11,597)**
              
              **(261)****Net
                  deferred tax asset / (liability)**
              
              **Rs.(664)**
              
              **Rs.152**
              
              **$3**
 
 Net
        deferred tax assets / (liabilities) included in the consolidated balance
        sheets
        are as follows:
 
 **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Current:**Deferred
                  tax assets
              
              Rs.7,288
              
              Rs.8,202
              
              $184**Non-current:**Deferred
                  tax assets
              
              5,418
              
              3,547
              
              80Deferred
                  tax liabilities
              
              (13,370)
              
              (11,597)
              
              (261)Total
                  non current
              
              **(7,952)**
              
              **(8,050)**
              
              **(181)****Net
                  deferred tax asset / (liability)**
              
              **Rs.
                  (664)**
              
              **Rs.
                  152**
              
              **$3**
  Page
              F-18
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  **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,****2004**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006****(Million
                      of Rupees)**
                  
                  **(Million
                      of**
                    **US
                      $)**
                    **Unaudited**Pension
                      (including gratuity)
                  Rs.113
                  
                  Rs.25
                  
                  Rs.9
                  
                  $1Leave
                      encashment
                  55
                  
                  13
                  
                  8
                  
                  -**Rs.168**
                  
                  **Rs.38**
                  
                  **Rs.17**
                  
                  **$1**
 *(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 time a new
        medical scheme was introduced. The medical benefit scheme for its retired
        employees is a defined benefit plan, the cost and liability for which is
        based
        on an actuarial valuation.
  ***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.
  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.
  Page
              F-19
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  ***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,****2005**
                    
                    **2006**
                    
                    **2006****(Million
                        of Rupees)**
                    
                    **(Million
                        of**
                      **US
                        $)**
                      **Unaudited****Accumulated
                        benefit obligation**
                    Rs.15,355
                    
                    Rs.17,379
                    
                    $391**Changes
                        in projected benefit obligation:**Projected
                        Benefit obligation at the beginning of the year
                    15,080
                    
                    19,865
                    
                    446Service
                        cost
                    878
                    
                    896
                    
                    20Interest
                        cost
                    1,384
                    
                    1,689
                    
                    38Actuarial loss
                    1,900
                    
                    1,314
                    
                    30Loss
                        on curtailment
                    236
                    
                    185
                    
                    4Actuarial
                        obligation assumed on account of absorption
                    841
                    
                    -
                    
                    -Benefits
                        paid
                    (454)
                    
                    (932)
                    
                    (21)**Projected
                        Benefit obligation at the end of the year**
                    **19,865**
                    
                    **23,017**
                    
                    **517****Changes
                        in plan asset**
                    **-**
                    
                    **-**
                    
                    **-****Unfunded
                        status**
                    **(19,865)**
                    
                    **(23,017)**
                    
                    **(517)****Accrued
                        provision for pension**
                    **Rs.(19,865)**
                    
                    **Rs.(23,017)**
                    
                    **$(517)**
 **For
                  the years ended March 31,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****The
                  components of net pension costs are reflected
                  below:**Current
                  service cost
              Rs.786
              
              Rs.879
              
              Rs.896
              
              $20Actuarial
                  obligation assumed on account of absorption
              551
              
              426
              
              -
              
              -Interest
                  cost
              1,147
              
              1,384
              
              1,689
              
              38Loss
                  on curtailment
              -
              
              236
              
              185
              
              4Actuarial
                  loss
              1,023
              
              1,900
              
              1,314
              
              30**Net
                  periodic pension cost**
              **Rs.3,507**
              
              **Rs.4,825**
              
              **Rs.4,084**
              
              **$92**
  Page
              F-20
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  *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**2007
                    Rs.998
                    $222008
                    739
                    172009
                    815
                    182010
                    941
                    212011
                    1,077
                    242012
                        - 2016
                    8,546
                    192
 **The
        Gratuity Plan**
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Accumulated
                  benefit obligation**
              **Rs.3,510**
              
              **Rs.3,643**
              
              **$82****Changes
                  in projected benefit obligation:**Projected
                  Benefit obligation at the beginning of the year
              4,175
              
              4,853
              
              109Service
                  cost
              296
              
              283
              
              6Interest
                  cost
              349
              
              379
              
              9Actuarial
                  (gain) or loss
              96
              
              (92)
              
              (2)Curtailment Loss
              40
              
              65
              
              1Actuarial
                  obligation assumed on account of absorption
              174
              
              -
              
              -Benefits
                  paid
              (277)
              
              (490)
              
              (11)**Projected
                  Benefit obligation at the end of the year**
              **4,853**
              
              **4,998**
              
              **112****Changes
                  in plan asset**
              
              
              
              
              -Fair
                  value of the plan assets at the beginning of the Year
              645
              
              3,082
              
              69Actual
                  return on plan assets
              173
              
              237
              
              5Employer
                  contributions
              2,264
              
              299
              
              7**Plan
                  assets at the end of the year**
              **3,082**
              
              **3,618**
              
              **81**Unfunded
                  status
              (1,771)
              
              (1,380)
              
              (31)**Accrued
                  provision for gratuity**
              **Rs.(1,771)**
              
              **Rs.(1,380)**
              
              **$(31)**
 
 Page
            F-21
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  **For
                          the years ended March 31,****2004**
                      
                      **2005**
                      
                      **2006**
                      
                      **2006****(Million
                          of Rupees)**
                      
                      **(Million
                          of**
                        **US
                          $)**
                        **Unaudited****The
                          components of net gratuity costs are reflected
                          below:**Current
                          service cost
                      Rs.289
                      
                      Rs.296
                      
                      Rs.283
                      
                      $7Actuarial
                          obligation assumed on account of absorption
                      122
                      
                      46
                      
                      -
                      
                      -Interest
                          cost
                      213
                      
                      175
                      
                      142
                      
                      3Actuarial
                          (gain) or loss
                      92
                      
                      96
                      
                      (92)
                      
                      (2)Curtailment
                          (Gain)/ Loss
                      -
                      
                      40
                      
                      65
                      
                      1Net
                          periodic gratuity cost
                      **Rs.716**
                      
                      **Rs.653**
                      
                      **Rs.398**
                      
                      **$9**
 *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**2007
              Rs.478
              $112008
              248
              62009
              258
              62010
              321
              72011
              375
              82012
                  - 2016
              3,016
              68
  **The
        Medical Plan**
  **As
                  of March 31,****2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****Accumulated
                  benefit obligation**
              **Rs.9,109**
              
              **Rs.9887**
              
              **$222****Changes
                  in projected benefit obligation:**Projected
                  Benefit obligation at the beginning of the year
              7,603
              
              9109
              
              205Prior
                  service cost
              160
              
              -
              
              -Service
                  cost
              423
              
              402
              
              9Interest
                  cost
              668
              
              760
              
              17Actuarial
                  (gain) or loss
              261
              
              (360)
              
              (8)Benefits
                  paid
              (6)
              
              (24)
              
              (1)**Projected
                  Benefit obligation at the end of the year**
              **9,109**
              
              **9,887**
              
              **222****Changes
                  in plan asset**
              -
              
              -
              
              -Unfunded
                  status
              **(9,109)**
              
              **(9,887)**
              
              (222)****Unrecognised
                  prior service cost
              4,475
              
              4,069
              
              91**Accrued
                  provision for medical benefits**
              **Rs.(4,634)**
              
              **Rs.(5,818)**
              
              **$(131)**
  Page
            F-22
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  **For
                  the years ended March 31,****2004**
              
              **2005**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of**
                **US
                  $)**
                **Unaudited****The
                  components of net medical costs are reflected
                  below:**Current
                  Service cost
              Rs.289
              
              Rs.423
              
              Rs.402
              
              $9Interest
                  cost
              575
              
              668
              
              760
              
              17Actuarial
                  (gain) or loss
              472
              
              261
              
              (360)
              
              (8)Actuarial
                  obligation assumed on account of absorption
              -
              
              -
              
              -
              
              -Amortization
                  of prior service cost
              394
              
              407
              
              407
              
              9Net
                  periodic medical benefit
              **Rs.1,730**
              
              **Rs.1,759**
              
              **Rs.1,209**
              
              **$27**
  *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**2007
              Rs.45
              $12008
              53
              12009
              63
              12010
              75
              22011
              90
              22012
                  - 2016
              798
              18
  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. 881 million, Rs. 551 million and Rs 235 million
        for the
        years ended March 31, 2004, 2005 and 2006 respectively. Accrued employee
        costs
        include Rs. 2,267 million and Rs. 2,531 million leave pay obligation of MTNL
        as
        of March 31, 2005 and 2006 respectively.
 Page
              F-23
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  The
            weighted average actuarial assumptions used to determine benefit obligations
            and
            net periodic benefit cost were:
 **2004**
              **2005**
              **2006**Discount
                  rate
              8.35%
              8.00%
              8.00%Future
                  salary increases
              5%
              5%
              5%Future
                  pension increases
              5%
              5%
              5%Rate
                  of return on plan assets
              8.35%
              7.50%
              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.191 million
        Rs 203 million and Rs.263 million for the years ended March 31, 2004, 2005
        and
        2006 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.
  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. In addition, the curtailment loss in the gratuity
        and
        pension plan on account of the VRS amounted to Rs. 17 million and Rs. 49
        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,
        2006,
        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.
 Page
              F-24
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
   The
          balances
          receivable from and payable to related parties other than employees are
          summarized as follows:
  **As
                    of March 31,****2005**
                
                **2006****Receivables**
                
                **Payables**
                
                **Receivables**
                
                **Payables****(Millions
                    of rupees)**DOT
                    (note i)
                
                
                Rs.18,792
                
                Rs.4,831
                
                Rs.20,630
                
                
                Rs.1,148BSNL
                    (note ii)
                
                
                8,250
                
                5,763
                
                2,551
                
                
                4,229VSNL
                    (note ii)
                
                
                747
                
                745
                
                637
                
                
                714**Due
                    from / to Related Parties**
                
                
                **Rs.27,789**
                
                **Rs.11,339**
                
                **Rs.****23,818**
                
                
                **Rs.****6,091**Less:
                    Current Portion
                
                
                Rs.8,250
                
                Rs.10,594
                
                Rs.2,551
                
                
                Rs.5,377**Due
                    from / to Related Parties, non-current portion**
                
                
                Rs.19,539
                
                Rs.745
                
                Rs.21,267
                
                
                Rs.714**Due
                    from / to Related Parties - Current**
                  **Million
                    of US $ Unaudited**
                
                **$**
                **189**
                
                **$243**
                **$**
                **57**
                
                **$**
                **121****Due
                    from / to Related Parties - Non Current**
                  **Million
                    of US $ Unaudited**
                
                **$**
                **448**
                
                **$17**
                **$**
                **478**
                
                **$**
                **16**
  *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 Rs 8,517 million (2005: Rs 6,426
          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, 2005 and 2006
        is
        Rs.10.
 
 *Voting*
 
 Each
        holder of equity shares is entitled to one vote per share.
  *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.76,525 million,
        Rs.81,977 million and Rs.84,906 million as of March 31, 2004, 2005 and 2006
        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.
  Page
              F-25
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
 *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,
                2005and 2006, 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 of
                March 31, 2005 and 2006, 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.
  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, 2006 is Rs. 3,601 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, 2006 is Rs.2,208 million as compared to their carrying
        amount of Rs. 2,406 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. 2,177 million
        and
        Rs. 3,923 million as of March 31, 2005 and 2006 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. 459 million and
        Rs.771
        million as of March 31, 2005 and 2006 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.
  Page
              F-26
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  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 has received a demand to pay sales tax in respect of certain
              historical
              telecommunications revenues, mainly telephone rental charges. The Company
              has
              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
        has
        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
        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.
 
 *(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, 2005 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 current 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. License fees have
        also
        been allowed as a deduction by CIT (A) for assessment year 2004-05. 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 orders, the Company has not accrued the tax charge on the
        license fee in the financial statements. The Company will receive interest
        on
        deposits paid under protest to the tax authorities and the refunds against
        the
        years decided in favor of the Company. In the absence of detailed calculations
        from the ITAT the refunds and the interest thereon have not been recognized
        in
        the statement of income for the year ended March 31, 2006.
  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 current
                  year, 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
  Page
              F-27
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
  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 opinion received from legal counsel and the facts
                      above,
                      management believes that an adverse outcome in respect of the
                      above is
                      remote.
  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 current 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 current
        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
  Page
                F-28
 Table
                of Contents
 **MAHANAGAR
                TELEPHONE NIGAM LIMITED** **Notes
                  to the consolidated financial statements**
  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. 5,415 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
                  Rs.
                  2,000 million. The Company has made claims of Rs. 4,169 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. 121.21
                  million (including interest from 1997 till date on the claims made
                  Rs
                  79.91 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. 308.6 million (March
                  2005 Rs.
                  279 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 against
                  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.40
                  million
                  and Rs.452.52 million as of March 31, 2005 and 2006 respectively
                  (including interest arising during the course of proceedings amounting
                  to
                  Rs.157 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 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.1,190
                  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.1,040 million with MTNL. Management
        believes that it is remote that it will have to refund these amounts; however,
        pending the final resolution from a court of law these amounts have not been
        recognized as income.
  Page
            F-29
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  *(f)*
                  *Summary
                      of above litigations*
 The
          following table summarizes the potential exposure (excluding interest and
          penalty) of the Company of March 31, 2006 with respect to above stated
          pending
          litigations in the event the same is settled against the Company:
 **As
                  of March 31,****Also
                  refer note:**
              
              **2006**
              
              **2006****(Million
                  of Rupees)**
              
              **(Million
                  of US $)**
                **Unaudited**Dispute
                  relating to disallowance of license fee
              **22
                  (iii) (b) (i)**
              
              Rs.17,772
              
              $400Dispute
                  relating to disallowance of 80 IA deduction
              **22
                  (iii) (b) (ii)**
              
              10,677
              
              240Disputes
                  with BSNL
              **22
                  (iii) (c)**
              
              3,637
              
              81Disputes
                  with DOT
              **22
                  (iii) (d)**
              
              1,738
              
              39Arbitration
                  dispute with M & N Publications
              **22
                  (iii) (e) (i)**
              
              5,415
              
              122Arbitration
                  dispute with Alcatel
              **22
                  (iii) (e) (ii)**
              
              121
              
              3PRM
                  services
              **22
                  (iii) (e) (iii)**
              
              308
              
              7CMC
                  Services
              **22
                  (iii) (e) (iv)**
              
              452
              
              10Other
                  Lawsuits and claims
              **22(iii)
                  (e) (v)**
              
              1,190
              
              27**Rs.41,311.**
              
              **$929**
 
 **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, 2005, and March 31, 2006 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, 2004. 2005 and
        2006 are as follows. The table gives the amounts reviewed by the CODM reconciled
        to the consolidated US GAAP financial statements.
 The
          amounts reviewed by the CODM are based on internal accounting policies
          of the
          Company which are different from US GAAP.
 Page
            F-30
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  **Basic**
              **Cellular**
              **Unallocated**
                **(Corporate)**
              **Elimination**
              **Total**
              **Reconciling
                  Adjustments**
              **Consolidated
                  Totals****Millions
                  of Rupees****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**For
                  the year ended March 31, 2004**Revenue
                  — External customers
              61,826
              1,870
              -
              -
              63,696
              (2,612)
              61,084Revenue
                  — Inter-segment
              434
              -
              -
              (434)
              -
              -
              -**Total
                  Revenues**
              62,260
              1,870
              -
              (434)
              63,696
              (2,612)
              61,084Operating
                  income / (loss)
              13,944
              36
              82
              -
              14,062
              (8,829)
              5,234Interest
                  income/ (expense), net
              (209)
              1
              1,610
              -
              1,402
              9
              1,412Equity
                  in earnings/(losses) of associated companies, net of taxes
              -
              -
              -
              -
              -
              (20)
              (20)Non
                  Operating income, net
              1,369
              24
              3
              
              1,396
              (1,094)
              302Net
                  income / (loss)
              15,104
              61
              1,695
              -
              16,860
              (9,912)
              6,948Segment
                  assets
              105,663
              3,319
              97,216
              -
              206,199
              (38,176)
              168,023Depreciation
                  and amortization
              5,219
              212
              7
              -
              5,438
              3,237
              8,675Capital
                  expenditures for long-lived assets
              8,582
              833
              5
              -
              9,420
              -
              9,420
 
 Page
            F-31
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED** **Notes
              to the consolidated financial statements**
  There
        are
        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.
 
 More
        specifically, the reconciling items relate to the following:
  ·
              The
                  reconciling items pertaining to revenues amounted to Rs.8,942 million,
                  Rs.5,768 million and Rs.2,612 for the years ended March 31, 2004,
                  2005 and
                  2006. 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.2,470 million , Rs. 4,673 million and Rs. 8829 million for the
                  years
                  ended March 31, 2004, 2005 and 2006. 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, 2006 is on account of non recognition of a
                  potential
                  Income Tax refund under US GAAP since it is contingent (Refer note
                  22(iii)(b)(i)).
  ·
              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 June 21, 2006. The
                  Company
                  would be required to pay dividend tax at the rate of 14.03% of
                  the
                  dividend distributed.
  b)
              During
                  the year ended March 31, 2006 the Company had introduced another
                  VRS
                  scheme called MTNL Non Executive Retirement Scheme 2006. The employees
                  were to exercise their option from March 20, 2006 to April 10,
                  2006.. The
                  Company received1,068 applications during April 2006. All the applications
                  received after the year end were accepted. The cost to the Company
                  under
                  the said VRS scheme amounted to Rs. 785 million approximately.
  **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.
  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
 Page
              F-32
 Table
              of Contents
 **MAHANAGAR
              TELEPHONE NIGAM LIMITED** **Notes
                to the consolidated financial statements**
 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
                  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).
  Page
            F-33
 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
        Soni
 Name: Anita
        Soni
 Title: Director
        - Finance
   Date:     
        October 2 ,
        2006
  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 Officer12.2
              
              Certification
                  of Principal Financial Officer13.1
              
              Certification
                  of Chief Executive Officer13.2
              
              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).
  Table
          of Contents