**As
      filed with the Securities and Exchange Commission on October 20,
      2005**




**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, 2005**




**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
            New
                York Stock Exchange, Inc.
              
              New
                York Stock Exchange, Inc.*




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




**None**


(Title
      of
      Class)




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




**None**


(Title
      of
      Class)




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 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.




X    
      Yes  No




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




Item
      17  XItem
      18




*
      Not for
      trading, but only in connection with the registration of the American Depositary
      Shares.







**TABLEOF
      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
            9RISK
                FACTORS
            9Item
                4.
            Information
                on the Company
            15HISTORY
                AND DEVELOPMENT OF THE COMPANY
            15BUSINESS
                OVERVIEW
            21LEGAL
              PROCEEDINGS
            32ORGANIZATIONAL
                STRUCTURE
            35PROPERTY
                AND EQUIPMENT
            35TELECOMUNICATIONS
                REGULATION IN
                INDIA
            39Item
                5.
            Operating
                and Financial Review and
                Prospects
            45OPERATING
                RESULTS
            45LIQUIDITY
                AND CAPITAL RESOURCES
            57RESEARCH
                AND DEVELOPMENT
            58TREND
                INFORMATION
            58Item
                6.
            Directors,
                Senior Management and
                Employees
            59DIRECTORS
                AND SENIOR MANAGEMENT
            59AUDIT
                COMMITTEE
            61COMPENSATION
                OF DIRECTORS AND
                OFFICERS
            61EMPLOYEES
            61TRAINING
            62SHARE
                OWNERSHIP
            63Item
                7.
            Major
                Shareholders and Related Party
                Transactions
            63MAJOR
                SHAREHOLDERS
            63CERTAIN
                RELATIONSHIPS AND RELATED PARTY
                TRANSACTIONS
            63Item
                8.
            Financial
                Information
            65CONSOLIDATED
                STATEMENTS AND OTHER
                FINANCIAL INFORMATION
            65SIGNIFICANT
                CHANGES
            65Item
                9.
            The
                Offer and Listing
            66MARKET
                PRICE INFORMATION
            66THE
                INDIAN SECURITIES MARKET
            67Item
                10.
            Additional
                Information
            73MEMORANDUM
                AND ARTICLES OF
                ASSOCIATION
            73MATERIAL
                CONTRACTS
            78INDIAN
                FOREIGN EXCHANGE CONTROLS AND SECURITIES
                REGULATIONS
            78TAXATION
            81DOCUMENTS
                ON DISPLAY
            85Item
                11.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            85Item
                12.
            Description
                of Securities Other than Equity
                Securities
            86Item
                13.
            Defaults,
                Dividend Arrearage and
                Delinquencies.
            86Item
                14.
            Material
                Modifications to the Rights of Security Holders
                and Use of Proceeds
            86Item
                15.
            Controls
                and Procedures
            86Item
                16A.
            Audit
                Committee Financial Expert
            87Item
                16B.
            Code
                of Ethics
            87Item
                16C.
            Principal
                Accountant Fees and Services
            87Item
                16D.
            Exemptions
                from the Listing Standards for Audit
                Committees
            88Item
                16E.
            Purchase
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            88Item
                17.
            Financial
                Statements
            88Item
                18.
            Financial
                Statements
            88Item
                19.
            Exhibits
            88Index
                to Consolidated Financial
                Statements
            F-1




i
 Table
          of Contents




**PRESENTATION
      OF FINANCIAL
      INFORMATION**






The
      financial information in this report has been prepared in accordance with US
      GAAP with respect to our consolidated statements of operations, shareholders’
      equity and cash flow for the fiscal years ended March 31, 2003, 2004 and 2005
      and our balance sheets as of March 31, 2004 and 2005. 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, 2005 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, 2005 was Rs.43.62 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.







**Item1.**  **Identity
      of Directors, Senior Management and Advisers**




Not
      applicable.




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




Not
      applicable.


1
 Table
          of Contents




**Item
      3.**  **Key
      Information**




**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. We have adjusted shareholders’ equity, retained earnings and net
      income as of and for the years ended March 31, 2001, 2002, 2003 and
      2004 to
      reflect the impact of adjustments in the Company’s accounting for employee
      benefits and income taxes. The nature and impact of these adjustments are
      described in Note 3 "Restatement of Financial Statements" to our consolidated
      financial statements and in Item 3 and Item 5 in this Form 20F.




Our
      consolidated financial statements included in this report are prepared in Indian
      rupees and in accordance with Generally Accepted Accounting Principles in the
      United States of America (US GAAP) for the fiscal years ended March 31, 2003,
      2004 and 2005. Up to March 31, 2003, we had presented consolidated financial
      statements prepared in accordance with International Accounting Standards (IAS)
      and reconciled to US GAAP. During fiscal 2004, we changed our basis of
      preparation and presentation from IAS to US GAAP.




The
      selected statement of operations data and cash flow data for the three years
      ended March 31, 2005, and the selected balance sheet data as of March 31, 2004
      and 2005 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
      year ended March 31, 2002, and the selected balance sheet data as of March
      31,
      2002 and 2003 under US GAAP are derived from our consolidated audited US GAAP
      financial statements not included in this report.




Supplementally,
      we have also presented selected financial data in accordance with IAS,
      reconciled to US GAAP, to maintain the consistency in presentation followed
      in the previous periods. The selected balance sheet data, statement of operation
      data and cash flow data as of and for the year ended March 31, 2001, which
      are
      presented in accordance with IAS and reconciled to US GAAP have been extracted
      or derived from our audited consolidated financial statements not included
      in
      this report.




The
      selected balance sheet data, statement of
      operation data and cash flow data as of and for the years ended March 31, 2002,
      2003 and 2004 under US GAAP and the selected balance sheet data, statement
      of
      operation data and cash flow data as of and for the year ended March 31, 2001
      under IAS and reconciled to US GAAP are as restated.




Consolidated
      financial statements for the year ended March 31, 2005 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, 2005 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, 2005 was Rs.43.62 per US$1.00.




2
 Table
          of Contents





**Under
      US GAAP**


**Fiscal
                    Years Ended March 31,****2002**
                
                **2003**
                
                **2004**
                
                **2005**
                
                **2005****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**
                  
                  **$
                      1,150**Total
                      costs and expense
                  (46,205)
                  
                  (48,057)
                  
                  (55,850)
                  
                  (47,229)
                  
                  (1,083)Operating
                      income
                  12,530
                  
                  7,194
                  
                  5,234
                  
                  2,927
                  
                  67Other
                      income / (expense), net
                  1,827
                  
                  1,962
                  
                  1,714
                  
                  2,670
                  
                  61**Income
                      before income taxes**
                  **14,357**
                  
                  **9,156**
                  
                  **6,948**
                  
                  **5,597**
                  
                  **128**Income
                      taxes
                  (5,457)
                  
                  (3,951)
                  
                  (2,570)
                  
                  (2,124)
                  
                  (49)Equity
                      in (losses) of affiliate
                  (4)
                  
                  (4)
                  
                  (20)
                  
                  (67)
                  
                  (2)**Net
                      Income**
                  **Rs.8,896**
                  
                  **Rs.5,201**
                  
                  **Rs.4,358**
                  
                  **Rs.3,406**
                  
                  **$
                      78**Weighted
                      average equity shares outstanding
                  630
                  
                  630
                  
                  630
                  
                  630
                  
                  630EPS
                      - Basic & diluted
                  Rs.14.12
                  
                  Rs.8.26
                  
                  Rs.6.92
                  
                  Rs.5.41
                  
                  $0.12Basic
                      and diluted earnings per GDR/ADS
                  Rs.28.24
                  
                  Rs.16.52
                  
                  Rs.13.84
                  
                  Rs.10.82
                  
                  $0.24Dividends paid per
                      equity share
                  Rs.4.5
                  
                  Rs.4.5
                  
                  Rs.4.5
                  
                  Rs.6.5
                  
                  $0.15Dividends
                    paid per equity share
                  $0.09
                  
                  $0.10
                  
                  $0.10
                  
                  $0.15Dividends
                      paid per GDR/ADS
                  Rs.9.0
                  
                  Rs.9.0
                  
                  Rs.9.0
                  
                  Rs.13.0
                  
                  $0.30Dividends
                    paid per GDR/ADS
                  $0.18
                  
                  $0.20
                  
                  $0.20
                  
                  $0.30
 **As
                  at March 31,****2002**
              **2003**
              **2004**
              **2005**
              
              **2005****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
              
              $
                  173Investment
                  in bank deposits
              
              5,000
              8,260
              15,654
              17,732
              
              407Dues
                  from Related Parties
              
              38,241
              29,644
              23,588
              27,789
              
              637Total
                  Assets
              
              166,149
              160,666
              168,023
              176,689
              
              4,051Dues
                  to Related Parties
              
              9,016
              18,885
              12,084
              11,339
              
              260Total
                  Liabilities
              
              85,118
              77,269
              83,466
              93,356
              
              2,141Shareholders
                  equity
              
              Rs.81,031
              Rs.83,397
              Rs.84,557
              Rs.83,333
              
              $
                  1,909
 
 **Fiscal
                  Years Ended March 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2005****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
              
              $
                  344Net
                  cash used in investing activities
              Rs.
                  (14,945)
              
              Rs.
                  (18,001)
              
              Rs.
                  (16,706)
              
              Rs.
                  (12,706)
              
              $
                  (291)Net
                  cash from financing activities
              Rs.
                  (7,591)
              
              Rs.
                  (15,011)
              
              Rs.
                  (3,198)
              
              Rs.
                  (4,630)
              
              $
                  (106)




3
 Table
          of Contents




**Under
      IAS**


**Fiscal
                  Years Ended March 31, 2001**
                **(As
                  restated)****Statement
                  of Income Data**
              **(Rs.
                  In millions except per share data)****Revenues**
              **Rs.59,358**Total
                  costs and expense
              (41,059)Operating
                  income
              18,299Other
                  income / (expense), net
              2,017**Income
                  before income taxes**
              **20,316**Income
                  taxes
              (8,240)Equity
                  in (losses) of affiliate**Net
                  Income**
              **Rs.12,076**Weighted
                  average equity shares outstanding
              630EPS
                  - Basic & diluted
              Rs.19.17Basic
                  and diluted earnings per GDR/ADS
              Rs.38.34Dividends
                  paid per equity share
              Rs.4.5Dividends
                paid per equity share
              $0.10Dividends
                  paid per GDR/ADS
              Rs.9.0Dividends
                paid per GDR/ADS
              $0.20*Amounts
                  in accordance with US GAAP:*Net
                  Income
              Rs.11,452Basic
                  and diluted EPS
              Rs.18.17
 
 
 **As
                  at March 31, 2001**
                **(As
                  restated)****Balance
                  Sheet Data**
              **(Rs.
                  In millions except per share data)**Cash
                  and Cash equivalents
              Rs.24,828Investment
                  in bank deposits
              -Dues
                  from Related Parties
              36,181Total
                  Assets
              151,216Dues
                  to Related Parties
              7,335Total
                  Liabilities
              77,999Shareholders
                  equity
              Rs.73,217*Amounts
                  in accordance with US GAAP:*Shareholders’
                  equity
              Rs.75,259
 
 
 **Fiscal
                  Years Ended March 31, 2001**
                **(As
                  restated)****Cash
                  flow data:**
              **(Rs.
                  in millions except per share data)**Net
                  cash from operating activities
              Rs.19,325Net
                  cash used in investing activities
              Rs.
                  (8,568)Net
                  cash from financing activities
              Rs.
                  (4,870)


4
 Table
          of Contents
 **Restatement
        of Previously Reported Amounts**
  MTNL
            has
            recorded an adjustment to opening retained earnings as of March 31, 2000,
            resulting in an adjustment to shareholders’ equity as at March 31, 2000
            shareholders’ equity. As a result, the Company has restated shareholders’
            equity, retained earnings and net income as of and for the years ended
            March 31,
            2001, 2002, 2003 and 2004 to reflect the impact of adjustments in the
            Company’s
            accounting for employee benefits and income taxes. The nature and impact
            of
            these adjustments are described in Note 3 “Restatement of Financial Statements”
            to our consolidated financial statements and in Item 3 and Item 5 in
            this Form
            20F.
 The
          description of the adjustments is as follows:
  **Employee
          Benefits**
  For
          defined benefit pension plans, MTNL recognizes a pension liability based
          on an
          actuarial valuation. As per the pension scheme, the benefit formula entitles
          every employee to encash up to 40% of his pension (as determined) immediately
          on
          retirement (termed as commutation). The remaining 60% balance is payable
          over
          the employee’s remaining life, as monthly pension. The Company incorrectly
          reversed 100% of the pension liability in respect of retired employees
          in prior
          years. The actuarial valuation reports have been revised for all periods
          impacted by the incorrect reversal, resulting in adjustments to accrued
          employee
          costs amounting to an increase of Rs.Nil, Rs.801 million, Rs.2,039 million
          and
          Rs.2,667 million as of March 31, 2001, 2002, 2003 and 2004 respectively.
  MTNL
          accounts for leave encashment benefits, and records a liability based on
          an
          actuarial valuation. Employees can accumulate and carry forward leave balances
          up to a maximum of 300 days, which are encashable during the tenure of
          employment, upon termination or on retirement. MTNL did not accrue for,
          or
          reverse, leave encashment benefits in accordance with the specific terms
          of the
          benefit arrangement. As a result, the actuarial valuation reports required
          significant revisions. These reports have been revised for all periods
          impacted
          by the incorrect accruals and reversals of leave accruals, resulting in
          adjustments to accrued employee costs amounting to decrease of Rs.474 million,
          Rs.280 million and Rs.209 million as of March 31, 2001, 2002 and 2003
          respectively and increase of Rs.234 million as of March 31, 2004.
  Due
          to
          the correction of the above errors, accrued employee costs have decreased
          by
          Rs.474 million as of March 31, 2001, and increased by Rs. 521 million,
          Rs. 1,830
          million and Rs. 2,901 million as of March 31, 2002, 2003 and 2004 respectively.
          The tax effect of these adjustments is to increase the net income tax liability
          by Rs.169 million as of March 31, 2001, and reduce net income tax liability
          by
          Rs. 186 million, Rs. 673 million and Rs. 1,041 million as of March 31,
          2002,
          2003 and 2004 respectively.
  **Income
          Taxes**
  In
          the
          current year, our auditors identified certain errors in its accounting
          for
          income taxes. More specifically, the errors relate to the
          following:
 ·
                The
                    Company recorded excess deferred tax liability on temporary differences
                    between the book basis and tax basis of property and equipment
                    commencing
                    in the year ended March 31, 1995.
 
 ·
                The
                    Company failed to record deferred tax assets related to capital
                    lease
                    obligations and in subsequent periods, incorrectly accounted
                    for the
                    reversals of deferred tax liabilities related to the leased assets.
  5
 Table
            of Contents
  ·
                The
                    Company did not reconcile differences (primarily related to provision
                    for
                    debtors and gratuity) between its income tax computation and
                    the actual
                    tax return filed with the tax authorities at each reporting
                    period.
 
 ·
                The
                    Company did not recognize deferred tax assets in respect of deferred
                    revenue and certain provisions, however, subsequent reversals
                    resulted in
                    the recognition of deferred tax liabilities.
 
 The
          correction of these errors has resulted in adjustments to reduce income
          tax
          liabilities by Rs. 4,870 million, Rs. 5,257 million, Rs. 5,573 million
          and Rs.
          5,583 million as of March 31, 2001, 2002, 2003 and 2004
          respectively.
  The
          following table presents the impact of the restatement adjustments on net
          income
          for the years ended March 31, 2002, 2003 and 2004, as well as the impact
          on
          various line items within the statement of operations under US
          GAAP:
  ***(Rs.
          in millions except per share
          data)***
 **Statements
                    of Income**
                **For
                    the year ended March 31,****2002**
                **2003**
                **2004****Net
                    income as previously reported**
                **Rs.
                    9,662**
                **Rs.
                    5,707**
                **Rs.
                    5,052**AdjustmentsIncome
                    Taxes on property and equipment
                (300)
                82
                (68)Income
                    Taxes on capital lease obligation
                (92)
                25
                (21)Income
                    Taxes on reconciliation between income tax computation and actual
                    tax
                    return filed with the tax authorities
                332
                186
                118Income
                    Taxes on deferred revenue and certain provisions
                (84)
                23
                (19)Leave
                    encashment
                (195)
                (71)
                (445)Pension
                (801)
                (1,238)
                (628)Tax
                    effect of adjustment for employee benefits
                374
                487
                369**Net
                    income as restated**
                **8,896**
                **5,201**
                **4,358****Cost
                    of revenues as previously reported**
                **(30,729)**
                **(30,092)**
                **(37,531)**Adjustment:
                    Employee benefits
                (697)
                (916)
                (750
                    )**Cost
                    of revenues as restated**
                **(31,426)**
                **(31,008)**
                **(38,282)****Selling,
                    general and administrative expenses as previously
                    reported**
                **(7,799)**
                **(8,405)**
                **(9,701
                    )**Adjustment:
                    Employee benefits
                (299)
                (393)
                (322)**Selling,
                    general and administrative expenses as restated**
                **(8,098)**
                **(8,798)**
                **(10,023
                    )****Income
                    tax expense as previously reported**
                **(5,687)**
                **(4,754)**
                **(2,949)**Adjustments:
                    Income tax
                (144)
                317
                10Tax
                    effect of adjustment for employee benefits
                374
                486
                369**Income
                    tax expense as restated**
                **(5,457)**
                **(3,951)**
                **(2,570)****Basic
                    and diluted Earning per Share as previously
                    reported**
                **15.34**
                **9.06**
                **8.02**Adjustments
                (1.22)
                (0.80)
                (1.10)**Basic
                    and diluted Earning per Share as restated**
                **Rs.
                    14.12**
                **Rs.
                    8.26**
                **Rs.
                    6.92**
 6
 Table
            of Contents
  The
          following table presents the impact of the restatement adjustments on net
          income
          for the year ended March 31, 2001, as well as the impact on various line
          items
          within the statement of operations under IAS:
  ***(Rs.
          in millions except per share data)***
 **Statements
                    of Income**
                **For
                    the year ended March 31,****2001****Net
                    income as previously reported**
                **12,293**AdjustmentsIncome
                    Taxes on property and equipment
                (300)Income
                    Taxes on capital lease obligation
                (92)Income
                    Taxes on reconciliation between income tax computation and actual
                    tax
                    return filed with the tax authorities
                (47)Income
                    Taxes on deferred revenue and certain provisions
                (83)Leave
                    encashment
                474PensionTax
                    effect of adjustment for employee benefits
                (169)**Net
                    income as restated**
                **12,076****Total
                    operating expenses as previously reported**
                **(41,533)**Adjustment:
                    Employee benefits
                474**Total
                    operating expenses as restated**
                **(41,059)****Income
                    tax expense as previously reported**
                **(7549)**Adjustments:
                    Income tax
                (522)Tax
                    effect of adjustment for employee benefits
                (169)**Income
                    tax expense as restated**
                **(8,240)****Basic
                    and diluted Earning per Share as previously
                    reported**
                **19.51**Adjustments
                (0.35)**Basic
                    and diluted Earning per Share as restated**
                **19.16**
  The
            following table presents in greater detail the impact of the restatement
            adjustments on MTNL’s previously reported shareholders’ equity as at March 31,
            2002, 2003 and 2004 under US GAAP:
  ***(Rs.
            in millions except per share data)***
 **As
                      of March 31,****2002**
                  **2003**
                  **2004****Shareholder’s
                      equity as previously reported**
                  **Rs.
                      76,109**
                  **Rs.
                      78,981**
                  **Rs.
                      80,834**Adjustments:Income
                      Taxes on property and equipment
                  2,787
                  2,869
                  2,801Income
                      Taxes on capital lease obligation
                  854
                  879
                  858Income
                      Taxes on reconciliation between income tax computation and
                      actual tax
                      return filed with the tax authorities
                  844
                  1,030
                  1,148Income
                      Taxes on deferred revenue and certain provisions
                  772
                  795
                  776Leave
                      encashment liability
                  280
                  209
                  (234)Pension
                      liability
                  (801)
                  (2,039)
                  (2,667)Tax
                      effect of adjustment for employee benefits
                  186
                  673
                  1,041**Shareholder’s
                      equity as restated**
                  **Rs.
                      81,031**
                  **Rs.
                      83,397**
                  **Rs.
                      84,557**
 7
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  The
          following table presents in greater detail the impact of the restatement
          adjustments on MTNL’s previously reported shareholders’ equity as at March 31,
          2001 under IAS:
  ***(Rs.
          in millions except per share data)***
 **As
                    of March 31, 2001****Shareholder’s
                    equity as previously reported**
                **Rs.68,042**Adjustments:Income
                    Taxes on property and equipment
                2,787Income
                    Taxes on capital lease obligation
                854Income
                    Taxes on reconciliation between income tax computation and actual
                    tax
                    return filed with the tax authorities
                457Income
                    Taxes on deferred revenue and certain provisions
                772Leave
                    encashment liability
                474Tax
                    effect of adjustment for employee benefits
                (169)**Shareholder’s
                    equity as restated**
                **Rs.
                    73,217**
  The
          following table presents
          the impact of the restatement adjustments on balance sheet line items as
          of
          March 31, 2002, 2003 and 2004 under US GAAP:
  ***(Rs.
          in millions except per share data)***
 **As
                    of March 31,****Balance
                    sheet data**
                **2002**
                **2003**
                **2004****As
                    previously reported**
                **As
                    restated**
                **As
                    previously reported**
                **As
                    restated**
                **As
                    previously reported**
                **As
                    restated**Deferred
                    tax asset - current
                Rs.3,643
                Rs.4,829
                Rs.3,675
                Rs.4,964
                Rs.5,325
                Rs.6,430Other
                    receivables
                9,734
                9,643
                3,313
                3,111
                3,999
                4,067Current
                  assets
                89,270
                90,365
                65,274
                66,361
                67,879
                69,052Total
                  assets
                165,054
                166,149
                159,579
                160,666
                166,850
                168,023Deferred
                    tax liability - non current
                13,836
                9,487
                14,801
                9,642
                13,822
                8,370Accrued
                    employee cost
                Rs.9,110
                Rs.9,631
                Rs.10,957
                Rs.12,787
                Rs.20,404
                Rs.23,306Current
                  liabilities
                53,953
                53,953
                42,642
                42,642
                39,764
                39,764Total
                  liabilities
                88,945
                85,118
                80,598
                77,269
                86,015
                83,466
 
 The
          following table presents the
          impact of the restatement adjustments on balance sheet line items as of
          March
          31, 2001, under IAS:
  ***(Rs.
          in millions except per share data)***
 **As
                    of March 31,****Balance
                    sheet data**
                **2001****As
                    previously reported**
                **As
                    restated**Current
                    assets
                Rs.57,482
                Rs.57,432Total
                  assets
                151,267
                151,216Deferred
                    tax liability - non current
                12,011
                7,259Other
                    long term liabilities
                Rs.13,549
                Rs.13,075Current
                  liabilities
                31,264
                31,264Total
                  liabilities
                83,225
                77,999
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**EXCHANGERATES**




The
      following table sets forth, for the fiscal years indicated, information
      concerning the exchange rates between Indian rupees and US dollars 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**2001
            46.85
            45.88
            47.47
            43.632002
            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
            43.27




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




The
      following table sets forth the high, low and period-end buying rates for the
      Indian rupee for each of the previous six months.




**Month**
            **High**
            **Low**April
                2005
            43.72
            43.48May
                2005
            43.62
            43.21June
                2005
            43.71
            43.44July
                2005
            43.55
            43.32August
                2005
            44.00
            43.37September
                2005
            43.75
            43.98




On
      September 30, 2005, the noon buying rate was Rs. 43.94 = US$1.00.




**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 65.18% of our call units having
      come from approximately 17% 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.




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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.




There
      has
      been significant consolidation in the telecommunications industry in India.
      We
      expect the trend toward consolidation to continue, resulting in larger, more
      diversified competitors in the Indian market.




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.




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.




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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 report. 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. 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 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.




The
      Indian trade tax department has similarly demanded that BSNL, a 100%
      government-owned company, make sales tax payments in respect of certain
      historical telecommunications revenues. We have been implicated as a party.
      BSNL
      challenged the demand in the state’s High Court and won. The state government
      has since appealed to the Supreme Court of India, which held in favor of the
      state government. BSNL has filed a writ petition with the Supreme Court seeking
      another review. This petition was admitted on September 25, 2003. 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.




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




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




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




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




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




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




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.




12
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***Conditions
        in the Indian securities market may affect the price or liquidity of the
        equity
        shares and the ADSs.***
  The
        Indian securities markets are generally smaller and more volatile than
        securities markets in the world’s major financial centers. Indian stock
        exchanges have also experienced problems that have affected the market price
        and
        liquidity of the securities of Indian companies. These problems have included
        temporary exchange closures, the suspension of stock exchange administration,
        broker defaults, settlement delays and strikes by brokers. In addition, the
        governing bodies of the Indian stock exchanges have from time to time imposed
        restrictions on trading in certain securities, limitations on price movements
        and margin requirements. Further, from time to time, disputes have occurred
        between listed companies and stock exchanges and other regulatory bodies,
        which,
        in some cases, may have had a negative effect on market sentiment. Similar
        problems could happen in the future and, if they do, they could affect the
        market price and liquidity of our equity shares and our ADSs.


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




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




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




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




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


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




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




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


·
              the
                  judgment has not been pronounced by a court of competent
                  jurisdiction;
  ·
              the
                  judgment has not been given on the merits of the
                  case;
  ·
              it
                  appears on the face of the proceedings that the judgment is founded
                  on an
                  incorrect view of international law or a refusal to recognize the
                  law of
                  India in cases in which Indian law is
                  applicable;
  ·
              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.




14
 Table
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**Item
      4.**  **Information
      on 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.




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, 2005, there were approximately 59.83 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.




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




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




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




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




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




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




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




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










In
      November 2003, the DOT issued guidelines for Unified Access License which cover
      within a service area both basic telecommunications services and cellular
      services. In the Indian context, “basic telecommunications services” or “basic
      services” include basic fixed-lined access service and a number of other
      telecommunications services, other than long distance services, cellular service
      and Internet access. Basic services also include CDMA-based fixed wireless
      and
      mobile services (without roaming). We are considering the conditions imposed
      by
      the DOT for issuance of such license.




For
      more
      information on regulation of the Indian telecommunications industry, see “
      -Telecommunications Regulation in India” below.




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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 2005, our fixed-line telecommunications networks in Delhi
      and
      Mumbai had an aggregate of approximately 4.1 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 881,696 subscribers as of March 31, 2005. 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 2005 had approximately
      196,447 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 172,038 Internet access subscribers at
      the
      end of fiscal 2005. We also seek to enter the market for domestic long distance
      service, which has been opened for competition.




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
      8.3% from March 31, 2000 to March 31, 2004. In fiscal 2005 these lines declined
      by 6.68% primarily due to migration of subscribers to cellular services. At
      March 31, 2005, our network included approximately 1.72 million access lines
      in
      service in Delhi and approximately 2.36 million access lines in service in
      Mumbai. In addition, our access lines in service per employee increased from
      66
      at March 31, 2000 to 70 at March 31, 2005.




We
      derive
      our revenue primarily from local, domestic long distance and international
      calls
      that originate on our network. In
      fiscal
      2005, approximately 38% of our revenue was derived from call revenue, 23% from
      rentals of telephones, access lines and other telecommunications equipment
      and
      use of our value-added services and 21% from public call offices. Interconnect
      revenue, which is revenue derived from other telecommunications service
      providers for calls made into our network, accounted for 15% of our revenues
      in
      fiscal 2005. 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, while all 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. In addition, 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.




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.




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**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.




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 of 625,000
                  GSM
                  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. In addition, we have launched lower-cost
                  CDMA-based limited mobility mobile services in each of Mumbai and
                  Delhi,
                  currently have approximately 196,447 subscribers and have awarded
                  contracts to achieve an installed capacity of 550,000 CDMA connections
                  (most of which are to employ the more advanced CDMA 2000 1X technology)
                  in
                  each city. We believe that this new limited mobile 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. We also plan to add tandem switches
                  based
                  on NGN - next generation network in Delhi and Mumbai, expand an
                  overlay
                  data network, implement synchronous digital hierarchy technology
                  and
                  improve local access in both markets. We are continuing to implement
                  fiber-in-local-loop and wireless-in-local-loop technologies where
                  appropriate. We have introduced broadband technology based on ADSL2+,
                  capable of providing triple play services (video 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 are examining other international
                  opportunities.
  ·
              *Enter
                  the Market for International Long Distance Services.*We
                  have obtained a letter of intent from the Indian 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.
  ·
              *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, 2005, we had approximately
                  172,038 Internet access subscribers. Our other telephone customers
                  also
                  have access to our network on a per minute basis. We have approximately
                  732,519 such users. We intend to further increase capacity in each
                  city in
                  fiscal 2006. 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 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. We plan to expand our intelligent
                  network
                  (IN) platform in both Delhi and Mumbai in the current year. These
                  are for
                  free phone service and other similar applications, which require
                  special
                  routing.
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**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 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).




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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 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.


Public
      Call Offices .
      In
      addition, we provide both coin-operated and franchised public call offices.
      At
      March 31, 2005, public call offices accounted for 6.96% 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.1.00 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)


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;
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  ·
                  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, 2005 we had 881,696 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, 2005 we had installed networks with a capacity
      of
      625,000 GSM cellular connections in each of Delhi and Mumbai.




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, 2005, we had approximately 196,447
      operational CDMA mobile connections and approximately 30,636 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.




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.




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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
      are considering obtaining a Unified Access License that will permit full
      mobility depending on the financial terms on which such licenses will be
      available to us.




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, 2005, we provided our Internet services to a total of
      approximately 172,038 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, 2005, we had approximately 21,458 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 have launched broadband services using ADSL
      2+
      in the month of January 2005. High speed internet access, video on demand and
      IPTV services shall be offered to broadband customers. The customer base as
      on
      31.3.2005 is 7,193. The installed capacity to broadband ports as on 31.3.2005
      is
      350,000. MTNL has plan to install additional 800,000 broadband ports in year
      2005-06.




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. 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.” The
      IUC regulation has since been amended twice as per details given in subsequent
      paragraph.




24
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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, 2005,
      we
      had approximately 46,526 leased line subscribers. We have experienced increased
      demand for these services and expect demand to increase further in the near
      future.




Telex
      Service .
      At
      March 31, 2005, we had approximately 1,011 telex subscribers. With the expansion
      and modernization of our network, telex is being replaced by facsimile,
      currently the most frequently used means of text communication in Delhi and
      Mumbai. Although we expect to continue to provide telex services in the future,
      we expect total demand to continue to decline.




**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.


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
      10 Lac 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.




**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. We intend to begin the
      build-out of our network there to provide additional services.




**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.




25
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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% a nd
      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;
  ·
              caller
                  identification (for Rs.50 per month).


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 (for Rs.30 per month);
  ·
              WAP
                  (for Rs. 0.80 per minute through circuits switch
                  Data)
  ·
              voice
                  mail (for Rs.
                  0.50per minute on message retrieval);
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 ·
              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
                  Night Plan (for Rs. 25/- per month and outgoing SMS charges to
                  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);
  ·
              call
                  conference (for Rs.50 per month);
  ·
              Optional
                  plan for local call to Cellular (for Rs. 49/- per month & charges Rs.
                  0.60 per minute);
  ·
              friends
                  & family for a maximum of any two local numbers (for Rs.30 per month
                  and local call charges Rs.0.60);
                  and
  ·
              night
                  talk (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.




Other
      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. 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
      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.1.20
      per pulse, with long distance pulse durations varying depending upon the
      distance, the time of the day and whether it is a holiday. Tariffs for coin
      payphones are set at a flat rate of Rs.1.00 per call for local
      calls.




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




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




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




License
      Fees and Network Utilization Charges .
      Under
      our previous arrangement with the DOT, the license fees for providing basic
      services was fixed at Rs.900 per access line in service. This arrangement
      expired on March 31, 2000. In the absence of any new arrangement with the DOT,
      we continued to pay license fees during fiscal 2001 on the same terms as our
      previous arrangement. On April 9, 2001, the DOT communicated that the annual
      license fees will be revised and shall be payable at 12% of adjusted gross
      revenue from basic telephone service effective from August 1, 1999, as
      applicable to private operators from that date. On September 5, 2001, the DOT
      amended its position and indicated that the date from which the revised license
      fees will be payable will be notified later. However, in the absence of an
      agreement for payment of license fees and any clarification from DOT to date,
      we
      have paid license fees on the revised basis communicated by DOT for fiscal
      2002
      and 2003. Further, subsequent to the year ended March 31, 2004, in a meeting
      held between DOT, BSNL and the Company to resolve the ambiguity with respect
      to
      license fees and networking charges it was agreed that the license fees were
      payable at 12% of AGR and networking charges as per TRAI regulations with effect
      from August 1, 1999. Also,
      the
      revenue sharing percentages earlier agreed to between 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.




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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 are considering the conditions imposed
      by
      the DOT for such issuance.




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, for the first time, 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).




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.




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 Table
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  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 2005, approximately 17.4% of our access lines in service accounted
      for
      65.18% of our call units. The following table sets forth certain information
      with respect to our subscribers for the final three months of fiscal
      2005:




**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
            25.40
            0.90101-500
            39.00
            16.66501-1,000
            18.20
            20.301,001-2,000
            10.90
            23.752,001-5,000
            5.60
            26.00Greater
                than 5,000
            0.90
            12.39




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.




29
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No
        single subscriber accounted
        for more than 5% of our revenues in fiscal 2003, 2004 or 2005. 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 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.


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**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. Adoption of Unified
      Access License guidelines in November 2003 facilitates this. 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
      65.18% of our call units having been derived from approximately 17.4% of our
      access lines in service (last three months of fiscal 2005), 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 2005 we had approximately 9.8% and 12.1% of the mobile subscribers
      in
      Delhi and in Mumbai respectively. Our largest competitors in Delhi are Bharti
      Tele-Ventures Limited (AirTel) and Hutchinson Essar (Hutch). In Mumbai, BPL
      Mobile recently 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 183 licenses for providing Internet services issued as of
      December 31, 2004.




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 .
      Recently Hutch has acquired BPL, another one of the telecom operators in
      India.




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




We
      have
      also applied for a license to enter the international long distance business
      and
      the regulator has acted by issuing us a letter of intent to license us for
      that
      service. **** We
      expect to experience significant competition in the international long distance
      market from VSNL and from private operators such as Bharti Tele-Ventures Limited
      and the Reliance Group, which has announced its intention to enter this
      market.




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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”) has disallowed the license fee
      paid by the Company to DOT for the years ended March 31, 1994 till March 31,
      2004 as a tax deductible expense and has raised a demand for payment of taxes
      on
      increased taxable income relating to such expenses.





The
      amounts demanded, including interest on account of such disallowance, for the
      years ended March 31, 1994 to March 31, 1996, March 31, 1998 to March 31, 2001
      and March 31, 2002 to March 31, 2004 are Rs 15,988 million. As part of the
      appeals process the Company has paid deposits under protest, amounting to Rs
      11,877 million and Rs 13,427 million as of March 31, 2004 and 2005. These
      deposits have been classified as part of restricted assets on the Company’s
      consolidated balance sheets. Penalty proceedings have also been initiated
      against the Company for the years ended March 31, 1997 to March 31, 2003. In
      December 2000, the appellate authority upheld the Company’s appeal and cancelled
      the penalty for the year ended March 31, 1996. However, the penalty proceedings
      for the year ended March 31, 1997 to March 31, 2003 have not yet been
      concluded.




The
      Company has contested all these claims and believes that it has a valid defense
      to the disallowance of license fees paid to DOT as a tax-deductible expense.
      During the year ended March 31, 2005, the Company 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 and MTNL has received
      refunds for these two years on the basis of the decision of the ITAT. The said
      ITAT decisions have not yet been contested by the revenue
      authorities.




Further
      in respect of assessment years 1995-96, 1996-97 and 2001-2002, the Committee
      of
      Dispute (“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 of India, making the decision of the
      ITAT binding on both the parties. Subsequent to the COD’s decision, the Company
      has applied for refund claims with the Income Tax authorities for the assessment
      years 1995-96 and 1996-97.




Management
      believes that all claims will eventually be decided in favour of the Company
      and
      an adverse outcome in respect of the above is not probable. However, if the
      Company is ultimately unsuccessful in its defense it would be required to pay
      tax including interest amounting to Rs. 1,784 million in addition to Rs 15,988
      million. The Company has not accrued the tax charge on license fee in the
      financial statements. The Company will receive interest on deposits paid under
      protest to the tax authorities if the case is decided in our favor.




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**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 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, 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 judgement on the
      issue. Any proceeding initiated now shall be subject to the interim directions
      passed by the Hon’ble Supreme Court as stated above. Based on opinion received
      from legal counsel, management believes that an adverse outcome in respect
      of
      the above is not probable, however 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 the Company’s results of
      operations, financial condition and cash flow. At this time, we cannot estimate
      potential aggregate actual liability associated with sales tax.




**Contributions
      to General Provident Fund**




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 have been retained by the Company
      pending notification from the Government.




The
      CIT
      has 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 has deposited Rs.1,166 million and Rs. 1,306
      million as of March 31, 2004 and 2005 respectively under protest to the tax
      authorities. 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 has set up an ‘MTNL GPF Trust’ and
      has applied to the Income Tax authorities for the recognition of the said Trust.
      The Company believes that the entire GPF contribution till date will be allowed
      on payment of the same to the Trust.




The
        Company believes that it has a valid defense against the addition of such
        contribution to their taxable income. Based on opinion received from legal
        counsel, management believes that an adverse outcome in respect of the above
        is
        not probable. However, if the Company is unsuccessful in its defense it would
        be
        required to pay tax including interest amounting to Rs .4,137 million on
        employee contributions retained from November 1, 1998 (the date of absorption
        of
        non executive employees) to March 31, 2005.




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Disputes
        with BSNL


In
        accordance with the Inter Connect Usages Regulations, the Company has accounted
        for interconnection usage charges payable to BSNL amounting to Rs.6,924 million
        and Rs 3,627 million for the years ended March 31, 2004 and 2005 respectively.
        However BSNL has 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 is that the claim is
        not adequately supported by BSNL and hence not accepted by the
        Company.




The
      Company has also accounted for interconnection charges receivable from BSNL
      amounting to Rs.6,236 million and Rs 1,471 million for the years ended March
      31,
      2004 and 2005 respectively. However based on correspondence received from BSNL
      (in respect of calls originating from BSNL network and terminating at MTNL)
      BSNL
      has accounted for Rs 4,862 million and Rs. Nil for the years ended March 31,
      2004 and 2005 respectively.




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.




Subsequent
      to the year ended March 31, 2005, the DOT has constituted a three member
      committee to resolve the issues relating to networking charges. The Company
      is
      in the process of reconciling their claims 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.




**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, a supplier brought claims aggregating to Rs 108 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.




In
      the
      year 2004-2005, the Company has received claims aggregating to Rs 279 million
      from various premium (PRM) service providers. 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.




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Additionally
        the Company is also involved in law suits and claims amounting to Rs. 596
        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
        flow.




**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 Mach 31, 2005 during the course of the hearings, the
      honourable High Court directed the other operator to pay Rs 2,368 million to
      MTNL. On October 4, 2005, the court directed the other operator to pay further
      Rs 530 million to 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”.






**PROPERTY
      AND 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, 2005 by 2.819 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 339 nodes in Delhi and 187 nodes in Mumbai
      as
      of March 31, 2005. 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.




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At
        March
        31, 2005, there were 97 main exchanges and 242 remote line units in Delhi
        and 84
        main exchanges and 103 remote line units in Mumbai. Because one or more main
        exchanges in each node are connected to one or more main exchanges in every
        other node, traffic is routed in a “mesh” configuration. We have also installed
        high capacity tandem switches in Delhi and Mumbai to more efficiently route
        traffic between exchanges. A majority of calls to our main exchanges are
        now
        being routed through the tandem switch to another node. This has resulted
        in a
        more integrated network and has reduced the amount of capital expenditure
        required to install additional capacity in our switching
        network.




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




**Overview
      of Our Network**




**At
                March 31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005***Delhi*Access
                lines in service (access lines in service) (thousands)
            
            
            1,980
            
            
            2,065
            
            
            2,155
            
            
            2,003
            
            
            1,719Equipped
                capacity (thousands)(1)
            
            
            2,429
            
            
            2,775
            
            
            2,967
            
            
            3,154
            
            
            3,737Number
                of exchanges:TAXs(2)
            
            
            3
            
            
            3
            
            
            4
            
            
            4
            
            
            4Main
                exchanges and RLUs(3)
            
            
            203
            
            
            251
            
            
            309
            
            
            329
            
            
            339Digital
                lines (thousands)(1)
            
            
            2,429
            
            
            2,775
            
            
            2,967
            
            
            3,154
            
            
            3,737Digitalization
                rate(4)
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %
            
            100*Mumbai*Access
                lines in service (access lines in service) (thousands)
            
            
            2,353
            
            
            2,431
            
            
            2,445
            
            
            2,408
            
            
            2,355Equipped
                capacity (thousands)(1)
            
            
            2,692
            
            
            2,876
            
            
            2,886
            
            
            2,806
            
            
            3,657Number
                of exchanges:TAXs(2)
            
            
            4
            
            
            4
            
            
            4
            
            
            4
            
            
            4Main
                exchanges and RLUs(3)
            
            
            162
            
            
            180
            
            
            183
            
            
            183
            
            
            183Digital
                lines (in thousands)(1)
            
            
            2,692
            
            
            2,876
            
            
            2,886
            
            
            2,806
            
            
            3,657Digitalization
                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 2005, we added
        384
        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**
            **2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****(inception)**Fault
                rate/100(1)
              Telephones/month:Delhi
            
            
            34.9
            
            
            20.0
            
            
            21.4
            
            
            18.7
            
            
            12.3
            
            
            11.1Mumbai
            
            
            21.2
            
            
            11.0
            
            
            11.8
            
            
            9.8
            
            
            8.8
            
            
            9.0Call
                completion rate(2)DelhiLocal
                calls
            
            
            77.3
            %
            
            50.2
            
            
            51.0
            
            
            52.25
            
            
            57.0
            
            
            57.7Domestic
                long distance calls
            
            
            30.0
            %
            
            39.5
            
            
            41.07
            
            
            28.0
            
            
            28.0
            
            
            30.0MumbaiLocal
                calls
            
            
            93.0
            %
            
            58.3
            
            
            58.15
            
            
            58.0
            
            
            50.3
            
            
            58.3Domestic
                long distance calls
            
            
            23.9
            %
            
            45.0
            
            
            45.9
            
            
            33.94
            
            
            36.6
            
            
            37.4




(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 2005, we have installed
        infrastructure providing for an additional 400,000 GSM cellular connections
        in
        each of Mumbai and Delhi.




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 2006 is Rs.18.87 billion;
      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,****2003**
              
              **2004**
              
              **2005**Local
                  switching and access lines (including CDMA)/
                Transmission/Network
                  Modernization/Expansion Abroad
              
              
              8,507
              
              
              7,227
              
              
              5,748Information
                  technology
              
              
              132
              
              
              98
              
              
              426Land,
                  buildings and vehicles
              
              
              1,169
              
              
              1,511
              
              
              1,143Build-out
                  of GSM cellular networks
              
              
              731
              
              
              824
              
              
              3,068Total
              
              
              10,539
              
              
              9,660
              
              
              10,385




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.




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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;
  ·
              determining
                  the terms and conditions of interconnection between
                  providers;
 ·
                ensuring
                    technical compatibility between
                    providers;
  ·
                  regulating
                      revenue sharing between providers;
 ·
                    establishing
                        quality standards and ensuring compliance through periodic
                        reviews of
                        providers; and
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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;
  ·
              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.




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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 has challenged the regulation in TDSAT and the
      case is under consideration. The TDSAT did not grant any stay and the regulation
      has been implemented from 1st February 2005 .




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




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




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




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




In
      January 2001 the DOT issued guidelines for basic services, including provisions
      for wireless access systems limited within the local area. In April 2001, the
      Indian government announced that all basic licensees, including us, may offer
      wireless-in-local loop services under their basic service licenses.




**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.




**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.




**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. We have submitted our papers and
      required Bank Guarantee in this regard and the license is likely to be issued
      in
      the near future. We have already planned to start providing ILD services at
      the
      earliest opportunity.




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**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 December 31, 2004 there were approximately 183 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.




MTNL
      has
      reduced drastically the ISD tariff with effect from October 2, 2004. 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**USA,
                  UK, Canada and all countries with 001 access, Singapore, Malaysia,
                  Hong
                  Kong, Indonesia, Thailand
              Rs.
                  9.00
              Rs.
                  12.00Rest
                  of World
              Rs.
                  18.00
              Rs.
                  15.00




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




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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**
              **Existing
                  Ceiling Tariff (Rs. In lakhs)**
              **Existing
                  Market Rate (Rs. In lakhs)**
              **Revised
                  Ceiling Tariff (Rs. in lakhs)**
              **Reduction
                  with respect to Market Rate (%)**64
                  Kbps
              0.96
              0.96
              0.44
              54128
                  Kbps
              1.72
              1.72
              0.79
              54256
                  Kbps
              2.97
              2.97
              1.36
              54E1
                  (2 Mbps)
              22
              8.80
              8.50
              3DS-3
                  (45 Mbps)
              462
              185
              62
              67STM-1
                  (155 Mbps)
              1386
              554
              165
              70




**Foreign
      Direct Investment Controls.**




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




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




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




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




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(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
      5.**  **Operating
      and 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.*




**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;
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  ·
                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;
  ·
                possible
                    direct or reverse merger with BSNL;
  ·
                the
                    implementation of voluntary retirement schemes for our
                    employees;
  ·
                requirement
                    to pay sales tax on certain revenues, including historical
                    revenues;
  ·
                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 2005, we have prepared the consolidated financial statements in
      accordance with US GAAP, and the financial statements for the years ended March
      31, 2003 and March 31, 2004 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.




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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, 2005, 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.3,081 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.514 million and Rs.636 million for the year ended March 31,
      2005 respectively. Further, a 5% increase or decrease in rental charges would
      have increased or decreased the total revenue by approximately Rs.708 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.236 million.




License
      Fees .
      We are
      paying license fee and spectrum charges to DOT in accordance with conditions
      governing license fee for Basic Telephone Service and Cellular Telephone Service
      prescribed by DOT under the Revenues Sharing Regime, whereby license fee is
      computed at a specified percentage of adjusted gross revenue. The license fee
      is
      expensed as incurred. In view of the uncertain political environment and the
      fact that the license fee is determined on the basis of guidelines prescribed
      by
      regulatory authorities, the license fees is subject to change in the event
      any
      of these guidelines are modified subsequently with retrospective effect. During
      the year ended March 31, 2005, 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.987 million and Rs.1000
      million, respectively.




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.




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.


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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 36.59% during the year ended
      March 31, 2005. A 1% increase or decrease in the tax rate to 37.59% or 35.59%
      would have increased or decreased the income tax expense for the year by Rs.111
      million.




Legal
      Contingencies .
      As
      discussed in Note 21 to the consolidated financial statements, legal proceedings
      covering a wide range of matters are pending or threatened against us. We have
      accrued amounts as appropriate that represent our estimate of the probable
      outcome of these matters. The judgments we make with regard to whether to
      establish a reserve are based on an evaluation of all relevant factors by
      internal and external legal counsel, as well as subject matter experts and
      is
      based upon an analysis of potential results, assuming a combination of
      litigation and settlement strategies. Claims are continually monitored and
      reevaluated as new information is obtained. We may not establish a liability
      for
      a particular matter until long after the litigation is filed, once a liability
      becomes probable and estimable. The actual settlement of such matters could
      differ from the judgments made in determining how much, if any, to accrue.
      We do
      not believe these proceedings will have a material adverse effect on our
      consolidated financial position. While we believe that our accruals for these
      matters are adequate, if the actual loss from a loss contingency is
      significantly different than the estimated loss, our results of operations
      may
      be over or understated.




Recoverability
      of DOT Receivables .
      We are
      a Government Company under the Indian Companies Act. As of March 31, 2005,
      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 4, 19 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.376 million and Rs.479 million,
        respectively.




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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 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,
      expenses and 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 2005 trigerred by reduction in
      our
      revenues and increased competition. Based on our review, the expected future
      cash flows directly associated with the asset groups exceed their carrying
      amount and hence there is no impairment of long lived assets in
      2005.




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.
      The
      repayment of the MKVDC bonds is guaranteed by the Government of Mahrashtra.
      As
      of September 30, 2005, ITI has not redeemed the first tranche amounting to
      Rs
      200 million as per the repayment schedule. ITI has requested us for an extension
      on the redemption dates. However we have not accepted ITI’s request and making
      reference to the DOT’s Comfort letter, have written to DOT to pay its dues. We
      record an investment impairment charge when we believe an investment has
      experienced a decline in value that is judged to be other than temporary. We
      monitor our 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 our assessment of carrying values of investments, we believe that there
      is no
      impairment of investments as of March 31, 2005.




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 2005, 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, 2005 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.




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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.




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 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. A total of 1,980 employees retired under this scheme. MTNL
      has also launched a VRS scheme for executives in the current year and final
      decisions about the modalities to be followed for separation of employees who
      have opted for the scheme shall be soon taken.


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.




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, the license fee has been revised at 10% of Adjusted Gross Revenue
      with effect from April 1, 2004. Under our previous arrangement with BSNL, we
      paid network utilization charges to BSNL as a fixed percentage of the amount
      of
      usage and other charges billed to our customers for our services. Our network
      utilization arrangement with BSNL expired on March 31, 2001. To date no
      agreement for networking charges has been entered into which determines the
      basis of revenue sharing for incoming or outgoing domestic long distance or
      subscriber trunk dialing calls through interconnection with BSNL’s network. In
      absence of the same, for fiscal 2003, the interconnection charges on domestic
      long distance calls have been accrued on the basis of the rates that were
      payable by other basic service operators in the country. We are in the process
      of finalizing a new agreement with BSNL.




In
      fiscal
      2004, revenue sharing with BSNL and other operators for incoming and outgoing
      domestic long distance or subscriber trunk dialing calls was done on the basis
      of TRAI’s Interconnect Usage Charges Regulation 2003 (1 of 2003) implemented
      from May 1, 2003 and modified by Interconnect Usage Charges Regulation 2003
      (2
      of 2003) effective February 1, 2004. For April 2003, these charges were
      accounted per the earlier arrangement.




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




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




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




**Inflation**




Inflation
      in India, as measured by the Indian consumer price index, 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 3 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 are making 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 Rs.167.71 million
      in
      respect of the Mauritius operations in fiscal 2005.




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.


**Restatement
          of Previously Reported Amounts**
  MTNL
          has
          recorded an adjustment to opening retained earnings as of March 31, 2000,
          resulting in an adjustment to shareholders’ equity as at March 31, 2000
          shareholders’ equity. As a result, the Company has restated shareholders’ equity,
          retained earnings and net income as of and for the years ended March 31,
          2001,
          2002, 2003 and 2004 to reflect the impact
          of adjustments in the Company’s accounting for employee benefits and income
          taxes. The nature and impact of these adjustments are described in Note
          3 -
“Restatement of Financial Statements” - to our consolidated financial
          statements.
  The
          nature of the adjustments is as follows:
  52
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              of Contents
  **Employee
            Benefits**
  For
            defined benefit pension plans, MTNL recognizes a pension liability based
            on an
            actuarial valuation. As per the pension scheme, the benefit formula entitles
            every employee to encash up to 40% of his pension (as determined) immediately
            on
            retirement (termed as commutation). The remaining 60% balance is payable
            over
            the employee’s remaining life, as monthly pension. The Company incorrectly
            reversed 100% of the pension liability in respect of retired employees
            in prior
            years. The actuarial valuation reports have been revised for all periods
            impacted by the incorrect reversal, resulting in adjustments to accrued
            employee
            costs amounting to an increase of Rs.2,039 million and Rs.2,667 million
            as of
            March 31, 2003 and 2004 respectively.
 MTNL
            accounts for leave encashment benefits, and records a liability based
            on an
            actuarial valuation. Employees can accumulate and carry forward leave
            balances
            up to a maximum of 300 days, which are encashable during the tenure of
            employment, upon termination or on retirement. MTNL did not accrue for,
            or
            reverse, leave encashment benefits in accordance with the specific terms
            of the
            benefit arrangement. As a result, the actuarial valuation reports required
            significant revisions. These reports have been revised for all periods
            impacted
            by the incorrect accruals and reversals of leave accruals, resulting
            in
            adjustments to accrued employee costs amounting to a decrease of Rs.209
            million
            as of March 31, 2003 and an increase of Rs.234 million as of March 31,
            2004.
  Due
            to
            the correction of the above errors, accrued employee costs have increased
            by Rs.
            1,830 million and Rs. 2,901 million as of March 31, 2003 and 2004 respectively.
            The tax effect of these adjustments is to reduce net income tax liability
            by Rs.
            673 million and Rs. 1,041 million as of March 31, 2003 and 2004 respectively.
  **Income
        Taxes**
 In
          the
          current year, our auditors identified certain errors in its accounting
          for
          income taxes. More specifically, the errors relate to the following:
  ·
                The
                    Company recorded excess deferred tax liability on temporary differences
                    between the book basis and tax basis of property and equipment
                    commencing
                    in the year ended March 31, 1995.
 
 ·
                The
                    Company failed to record deferred tax assets related to capital
                    lease
                    obligations and in subsequent periods, incorrectly accounted
                    for the
                    reversals of deferred tax liabilities related to the leased assets.
 
 ·
                The
                    Company did not reconcile differences (primarily related to provision
                    for
                    debtors and gratuity) between its income tax computation and
                    the actual
                    tax return filed with the tax authorities at each reporting
                    period.
 
 ·
                The
                    Company did not recognize deferred tax assets in respect of deferred
                    revenue and certain provisions, however, subsequent reversals
                    resulted in
                    the recognition of deferred tax liabilities.
 
 The
          correction of these errors has result in adjustments to reduce income tax
          liabilities by Rs. 5,573 million and Rs. 5,583 million as of March 31,
          2003 and
          2004 respectively.


53
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**Results
      of Operations**




The
      following table sets forth selected income statement data expressed as a
      percentage of revenue for the period indicated, prepared in accordance with
      US
      GAAP.







**Fiscal
                Years Ended March 31,****2003**
            
            **2004**
            
            **2005**Revenues
            
            100%
            
            100%
            
            100%Cost
                of revenues (excluding depreciation shown separately below)
            
            (56.1%)
            
            (62.7%)
            
            (62.8%)Selling,
                general and administrative expenses (excluding depreciation shown
                separately below)
            
            (15.9%)
            
            (16.4%)
            
            (18.5%)Depreciation
            
            (15.4%)
            
            (14.2%)
            
            (15.4%)Excess
                liabilities written back
            
            0.4%
            
            1.8%
            
            2.6%**Income
                / (loss) from operations**
            
            **13.0%**
            
            **8.5%**
            
            **5.9%**Interest
                and other income, net
            
            3.6%
            
            2.8%
            
            5.3%**Income
                before income taxes and share of losses from
                affiliate**
            
            16.6%
            
            11.3%
            
            11.2%Income
                taxes
            
            (7.2%)
            
            (4.2%)
            
            (4.2%)Equity
                in (losses) of affiliate
            
            -
            
            -
            
            (0.1%)**Net
                income**
            
            **9.4%**
            
            **7.1%**
            
            **6.9%**




Comparison
        of Year Ended March 31, 2005 with Year Ended March 31, 2004 (as
        restated)
  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 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.




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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. 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.




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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.
  Comparison
        of Year Ended March 31, 2004 (as restated) with Year Ended March 31, 2003
        (as
        restated)
  Revenues .
        Our
        total revenues increased by 11% from Rs.55,251 million for the year ended
        March
        31, 2003 to Rs. 61,084 million for the year ended March 31, 2004. This was
        driven primarily due to 115% increase in interconnection revenues from Rs.6,083
        million in fiscal 2003 to Rs.13,105 million in fiscal 2004 due to implementation
        of IUC regime by TRAI with effect from May 1, 2003, as from that date we
        started
        receiving call termination income from BSNL.
  Cost
        of Revenues .
        Our
        total cost of revenues increased by 23% from Rs.31,008 million for the year
        ended March 31, 2003 to Rs.38,282 million for the year ended March 31, 2004.
        This was driven primarily by increase in staff costs, license fee and
        interconnection charges. The increased staff costs relate primarily to charges
        for pension, gratuity, leave encashment and arrears of pay, on absorption
        of
        Group “B” employees (executive employees) into the company with retroactive
        effect from October 1, 2000. The increase in license fee and interconnection
        charges is primarily due to resolution of the ambiguity with respect to
        applicability date of TRAI regulations whereby license fee charges have been
        accrued at 12% of AGR with effect from August 1, 1999. The interconnection
        charges increased following the implementation of the IUC regime, which required
        us to make payments to other operators beginning May 1, 2003
  Selling,
        General and Administrative Expenses .
        Our
        Selling, General and Administrative Expenses increased by 14% from Rs.8,798
        million for the year ended March 31, 2003 to Rs.10,023 million for the year
        ended March 31, 2004. This was driven primarily by a 17% increase in allowances
        for doubtful accounts accounted in fiscal 2004 and increase in other expenses
        due to higher levels of activities. Please also refer to “Risk Relating to Our
        Business” section in this document.




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Income
      from Operations . **** Intensive
      competition, gradual decrease in tariff and increase in cost has resulted in
      lower income from operations over the past two years. We have implemented a
      strategy of increasing volume and undertaken various cost reduction measures
      to
      mitigate the impact of competition and reduction in tariff.




Our
      Income from Operations decreased by 27% from Rs.7,194 million for the year
      ended
      March 31, 2003 to Rs.5,234 million for the year ended March 31, 2004 due to
      reasons explained above.




Interest
      and Other Income .
      Our
      Interest and other income decreased by 13% from Rs.1,962 million for the year
      ended March, 31, 2003 to Rs.1,714 million for the year ended March 31, 2004.
      This was driven primarily by higher interest income due to an increase of 41%
      in
      cash and cash equivalents and also due to taking into income unlinked credits,
      which date back for several years.




Income
      Taxes .
      Our
      Income Taxes decreased by 35% from Rs.3,951 million for the year ended March
      31,
      2003 to Rs.2,570 million for the year ended March 31, 2004. This was driven
      primarily due to 27% decline in income from operations.




**Segment
      Information**




We
      have
      identified basic and cellular as the two operating segments of MTNL. However,
      during fiscal 2004 and fiscal 2005, we did not consider cellular services to
      be
      a reportable segment because it does not meet the thresholds of significance.
      Our business in conducted exclusively in India, which for reporting purposes
      is
      considered a single geographic area.




**LIQUIDITYAND
      CAPITAL RESOURCES**




A
      summary
      of our cash flows appears below:




**(in
                millions of Rs.)****Year
                Ended March 31****2003**
              **Restated**
            
            
            **2004
                Restated**
            
            
            **2005**Net
                cash provided by the operating activities
            
            
            23,456
            
            
            19,885
            
            
            15,006Net
                cash used in investing activities
            
            
            (18,001
            )
            
            (16,706
            )
            
            (12,706
            )Net
                cash from financing activities
            
            
            (15,011
            )
            
            (3,198
            )
            
            (4,630
            )Net
                increase/(decrease) in cash and cash equivalents
            
            
            (9,556
            )
            
            (19
            )
            
            (2,330
            )Cash
                and cash equivalents at the beginning of the year
            
            
            19,466
            
            
            9,910
            
            
            9,891Cash
                and cash equivalents at the end of the year
            
            
            9,910
            
            
            9,891
            
            
            7,561




We
      have
      historically met our working capital and capital expenditure requirements
      principally from cash flow generated from operations. We have also from time
      to
      time undertaken external borrowings. As of March 31, 2005, 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,
      2005, we had cash and cash equivalents of Rs.7.56 billion and liquid short
      term
      investments in bank deposits of Rs.17.73 billion. 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.




**Operating
      Activities**




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 current year is 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.




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**Investing
      Activities**




Net
      cash
      used in investing activities decreased from Rs.16.71 billion for fiscal 2004
      to
      Rs.12.71 billion for fiscal 2005. This is 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 increased from Rs.3.19 billion for fiscal
      2004
      to Rs.4.63 billion for fiscal 2005. This
      increase is 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.




**Contractual
      Obligations**




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




**(in
                millions of Rs.)**
              **Payments
                due by period****Total**
            
            
            **Less
                than**
              **1
                year**
            
            
            **1-3**
              **years**
            
            
            **3-5**
              **years**
            
            
            **More
                than**
              **5
                years**Purchase
                obligations (capital commitments)
            
            
            2,177
            
            
            2,177
            
            
            —
            
            
            —
            
            
            —Pension
                and other post-retirement obligations
            
            
            15,908
            
            
            728
            
            
            2,342
            
            
            2,414
            
            
            10,424**Total**
            
            
            **18,085**
            
            
            **2,905**
            
            
            **2,342**
            
            
            **2,414**
            
            
            **10,424**




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, 2005, we had no debt
      outstanding and no credit facilities.




**Off-Balance
      Sheet Arrangements**




As
      of
      March 31, 2005, 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 make 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.




58
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**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".




**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 are four directors
      who are neither our employees nor employees 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. one ex-officio director and
      four
      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
            54
            Director(1)
                / Chairman-cum-Managing DirectorV.Shivkumar
            56
            Director(1)
                / Director(Personnel)Kuldeep
                Singh
            51
            Director(1)
                / Director (Technical)Anita
                Soni (Mrs.)
            52
            Director(1)
                / Director (Finance)Kuldeep
                Goyal
            55
            Director(2)
                / Executive Director, MumbaiM.
                Sahu
            51
            Joint
                Secretary (3), Department of TelecommunicationsA.C.Padhi
            50
            Director
                (3) / Dy. Director General, Department of
                Telecommunications




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




**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
            56
            Executive
                Director, OperationS.C.
                Ahuja
            59
            Company
                Secretary




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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 21 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.




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 30 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 27 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.
      Kuldeep Goyal has been our Executive Director (Mumbai) in charge of the entire
      Mumbai network and a member of our Board since January, 2005. He is an
      Engineering Graduate from IIT, Roorkee. He has more than 32 years’ experience in
      the field of Telecommunications. He has vast experience in all disciplines
      such
      as planning, installation, operation of line lime, wireless and Value Added
      Service. While in DOT, he was also deputed to foreign telecom project at Yemen.
      He belongs to Indian Telecom Service 1971 batch. Before being appointed as
      ED
      (Mumbai) and director on the board of MTNL, he was in charge of Mobile Services
      at MTNL, Delhi.




Mr.
      Shri
      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, Shri
      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 23 years of experience in Civil Service
      and
      15 years practical experience in industries including that of more than 5 years
      in Government of India.




Mr.
      A.C.
      Padhi has been a member of our board since Jan. 16, 2001. Mr. Padhi joined
      Indian Posts & Telegraphs Accounts and Finance Service in 1981. Currently he
      is the Dy. Director General (Finance) in DOT. Before that, he served as General
      Manager (Telecommunications), Finance Advisor of Telecom Factory, Mumbai and
      Joint Secretary in the Union Public Service Commission. Mr. Padhi holds a degree
      in Zoology from Utkal University and a postgraduate degree in
      Education.




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.




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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. T he
      Audit
      Committee had ceased to exist during the course of the year because all posts
      of
      part time directors on the Board of MTNL except one had fallen vacant from
      the
      AGM held on September 29, 2004. Effective September 29, 2005, the Board
      reconstituted the Audit Committee, comprised of Mr. Sahu and Mr. Padhi, who
      are Government of India employees and are considered independent under
      NYSE
      standards but not under Indian standards. We are following up regularly with
      the
      DOT for early appointment of additional directors on  the
      board
      so that we may reconstitute our Audit Committee to include only persons who
      are
      not MTNL or government employees and qualify as independent under Indian
      standards.




**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 2005 was approximately Rs. 2.59
      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, 2005, we had 52,604 employees, of whom 7,261 were executive and 45,343
      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.




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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
      exmployees 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 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 non-executives in the
      financial year 2004-05 and a total of 1,980 employees were retired under this
      scheme. MTNL has also launched VRS scheme for executives in the current year
      and
      final decisions about the modalities to be followed for separation of employees
      who have opted for the scheme shall be soon taken.




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
      2004-05 a total number of 6,186 non-executives and 1,112 executives were trained
      in subjects related to customer care, leadership, management and supervisory
      training. On IT and technology related fields, 3,371 non-executives and 3,008
      executives were trained.




In
      addition to this, highly specialized training on GSM, CDMA and Broadband was
      also connected by MTNL both in India and abroad. In all total, 83 officers
      were
      imparted training 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.




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**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.




**Item
      7.    Major Shareholders 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, 2005, 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)
            
            
            78,932,424
            
            
            12.53
            %The
                Bank of New York(3)
            
            
            45,819,768
            
            
            7.27
            %




(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.”




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**Government
      of India as Regulator**




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




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




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





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




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**Our
      Financing of the Department of Telecommunications**




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




**Related
      Party Transactions**




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




**Item
      8.    Financial
      Information**




**CONSOLIDATEDSTATEMENTS
      AND OTHER FINANCIAL
      INFORMATION**




See
“Item
      18. Financial Statements” and pages F-1 through F-35.




**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
      January 2005, our Board of Directors recommended the payment of interim divided
      of Rs. 2.00 per share, amounting to a total of Rs. 1260 million to record
      holders of equity shares on February 22, 2005.




In
      June
      2005, our board of directors recommended the payment of a dividend of Rs.4.5
      per
      share, amounting to a total of Rs.2,835 million, including interim dividend
      of
      Rs. 2/- per share, to record holders of equity shares on September 16, 2005.
      This dividend has been approved by our shareholders at our annual general
      meeting held on September 28, 2005. 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.”




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**Item
      9.    The Offer 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:




**Share
                price**
              **(Rs.)****Calendar
                period**
            
            **High**
            
            **Low**
            
            **Average daily trading
                volume**2002First
                Quarter
            
            
            177
            
            
            109
            
            
            776,374Second
                Quarter
            
            
            165
            
            
            121
            
            
            471,509Third
                Quarter
            
            
            154
            
            
            107
            
            
            504,800Fourth
                Quarter
            
            
            115
            
            
            89
            
            
            331,6432003First
                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
            
            
            11,633,5062005First
                Quarter
            
            
            170.05
            
            
            110.25
            
            
            13,424,191April
                2005
            
            
            124.40
            
            
            110.30
            
            
            20,297,675May
                2005
            
            
            122.45
            
            
            112.25
            
            
            16,691,289June
                2005
            
            
            126.70
            
            
            115.00
            
            
            14,215,040July
                2005
            
            
            142.25
            
            
            116.10
            
            
            40,340,551Aug
                2005
            
            
            134.90
            
            
            120.85
            
            
            19,473,425




On
      September 25, 2005, the closing price of our equity shares on The Stock
      Exchange, Mumbai was Rs.130.05.




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.




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**ADS
                  price****Calendar
                  period**
              **High**
              
              **Low**2002First
                  Quarter
              
              US$7.50
              
              
              US$4.75Second
                  Quarter
              
              6.60
              
              
              4.85Third
                  Quarter
              
              6.45
              
              
              4.35Fourth
                  Quarter
              
              4.87
              
              
              3.632003First
                  Quarter
              
              4.57
              
              
              3.33Second
                  Quarter
              
              4.82
              
              
              3.72Third
                  Quarter
              
              5.75
              
              
              4.10Fourth
                  Quarter
              
              6.25
              
              
              4.772004First
                  Quarter
              
              9.27
              
              
              6.30Second
                  Quarter
              
              8.85
              
              
              5.40Third
                  Quarter
              
              7.53
              
              
              6.10Fourth
                  Quarter
              
              8.88
              
              
              7.00


2005First
                  Quarter
              
              8.36
              
              
              6.24April
              
              6.66
              
              
              6.02May
              
              6.68
              
              
              6.00June
              
              6.99
              
              
              6.28July
              
              8.44
              
              
              6.40August
              
              7.87
              
              
              6.50


On
      September 20, 2005, the closing price of our ADSs on the New York Stock Exchange
      was US$6.82 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, Mumbai and the
      National Stock Exchange, and has not been prepared or independently verified
      by
      us or any of our affiliates or advisers.*





**The
      Indian Securities Market**




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




**The
      Securities and Exchange Board of India**




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




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


·
              guidelines
                  concerning minimum disclosure requirements by public
                  companies;
  ·
              rules
                  and regulations concerning:
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  ·
              investor
                  protection, insider trading, substantial acquisitions of shares
                  and
                  takeovers of companies, buybacks of securities, employee stock
                  option
                  schemes, foreign capital market issues, derivative instruments
                  and sweat
                  equity; and
  ·
              debenture
                  trustees, depositaries, development financial institutions, venture
                  capital funds, foreign institutional investors, stockbrokers,
                  underwriters, merchant bankers, portfolio managers, mutual funds,
                  credit
                  rating agencies and other capital market participants;
                  and
  ·
              rules
                  and regulations regarding the prohibition of fraudulent and unfair
                  trade
                  practices relating to the securities
                  market.


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




**Public
      Company Regulation**




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




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




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




The
      Companies (Amendment) Bill, 2003, which was recently introduced before the
      Indian Parliament, provides for, among other things, the following with respect
      to public companies: a change in the number of directors and the composition
      board, the requirement of having a minimum number of independent directors,
      introduction of maximum age for directors, restrictions on the powers of the
      board of directors to dispose of corporate assets, additional disqualifications
      of auditors and the prohibition of certain non-audit services by the
      auditors.




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**Listing**




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




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




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


·
              voluntary
                  delisting sought by the promoters of a
                  company;
  ·
              any
                  acquisition of shares of the company or a scheme or arrangement,
                  by
                  whatever name referred to, consequent to which the public shareholding
                  falls below the minimum limit specified in the listing conditions
                  or
                  listing agreement that may result in delisting of
                  securities;
  ·
              promoters
                  of the company who voluntary seek to delist their securities from
                  all or
                  some of the stock exchanges;
  ·
              cases
                  where a person in control of management is seeking to consolidate
                  his
                  holdings in a company, in a manner which would result in the public
                  shareholding in the company falling below the limit specified in
                  the
                  listing conditions or in a listing agreement that may have the
                  effect of
                  the company being delisted; and
  
 ·
              compulsory
                  delisting by stock exchanges (e.g., upon failure by a company to
                  pay
                  required listing fees).


**Indian
      Stock Exchanges**




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




It
      is
      estimated that the 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. These two stock exchanges handle over
      1.4
      million trades per day with volumes in excess of Rs.20 billion.




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.




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




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




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




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




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




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




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




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**Internet-Based
      Securities Trading and Services**




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




**Takeover
      Code**




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




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


·
              Any
                  acquirer (meaning a person who, directly or indirectly, acquires
                  or agrees
                  to acquire shares or voting rights in a company, either by himself
                  or with
                  any person acting in concert) who acquires shares or voting rights
                  that
                  would entitle him to more than 5.0% of the shares or voting rights
                  in a
                  company is required to disclose the aggregate of his shareholding
                  or
                  voting rights in that company to the company (which in turn is
                  required to
                  disclose the same to each of the stock exchanges on which the company’s
                  shares are listed) within two working days of (a) the receipt of
                  allotment
                  information; or (b) the acquisition of shares or voting rights,
                  as the
                  case may be.
  ·
              A
                  person has to make a three-stage disclosure when he acquires 5%,
                  10% and
                  14% of the shares and/or voting rights in a company, of his holdings
                  to
                  that company (which in turn is required to disclose the same to
                  each of
                  the stock exchanges on which the company’s shares are
                  listed).
  ·
              Promoters
                  or persons in control of a company are also required to make annual
                  disclosure of their holdings in the same
                  manner.
  ·
              An
                  acquirer cannot acquire shares or voting rights which (taken together
                  with
                  existing shares or voting rights, if any, held by him or by persons
                  acting
                  in concert with him) would entitle such acquirer to exercise 15.0%
                  or more
                  of the voting rights in a company, unless such acquirer makes a
                  public
                  announcement offering to acquire a further 20.0% of the shares
                  of the
                  company.
  ·
              An
                  acquirer who, together with persons acting in concert with him,
                  holds
                  between 15.0% and 75.0% of the shares cannot acquire additional
                  shares or
                  voting rights that would entitle him to exercise a further 5.0%
                  of the
                  voting rights in the period of a financial year unless such acquirer
                  makes
                  a public announcement offering to acquire a further 20.0% of the
                  shares of
                  the company.
  ·
              Any
                  further acquisition of shares or voting rights by an acquirer who
                  holds
                  75.0% of the shares or voting rights in a company triggers the
                  same public
                  announcement requirements.
  ·
              In
                  addition, regardless of whether there has been any acquisition
                  of shares
                  or voting rights in a company, an acquirer acting in concert cannot
                  directly or indirectly acquire control over a company (for example,
                  by way
                  of acquiring the right to appoint a majority of the directors or
                  to
                  control the management or the policy decisions of the company)
                  unless such
                  acquirer makes a public announcement offering to acquire a minimum
                  of
                  20.0% of the shares of the company.


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




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




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




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




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




**Insider
      Trading**




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




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




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




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




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**Depositories**




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




**Item
      10.    Additional
      Information**




**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 13.07% (inclusive of 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.




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**For
                fiscal year**
            **Dividend per**
              **equity
                share**
            **Dividend per**
              **ADS/GDR**
            **Total amount of**
              **dividends
                paid****(Rs.)**
            **(Rs.)**
            **(millions of Rupees)**2005
            4.5
            9.0
            2,8352004
            4.5
            9.0
            2,8352003
            4.5
            9.0
            2,8352002
            4.5
            9.0
            2,8352001
            3.0
            6.0
            1,890




The
      Ministry of Finance has adopted non-binding guidelines regarding the payment
      of
      dividends by “public sector undertakings” 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, the minimum dividend for each fiscal year is to
      be
      30% of profit after tax for the year. These guidelines have not been complied
      with by a substantial number of public sector undertakings, including us. For
      fiscal 1998 and fiscal 1999, we retained a greater portion of our earnings
      than
      provided in the guidelines in order to fund our capital expenditures and we
      expect to continue to do so in the future.




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




**Free
      Distribution of Equity Shares**




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




**Preemptive
      Rights and Issue of Additional Shares**




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




**General
      Meetings of Shareholders**




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




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




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




This
      year’s annual general meeting was held on September 29, 2005.




**Voting
      Rights**




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




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




Ordinary
      resolutions may be passed by simple majority of those present and voting at
      any
      general meeting for which the required period of notice has been given. However,
      certain resolutions such as those relating to the alteration of our articles
      of
      association, the commencement of a new line of business, the issue of further
      shares without preemptive rights and a reduction of share capital require a
      three-fourth majority of the votes cast in favor of the resolution (whether
      by
      show of hands or upon a poll). The Companies Act has been amended to require
      that certain shareholder resolutions only be passed through postal ballot.
      We
      have not yet amended our articles of association to provide for written postal
      ballots.




**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.




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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 participant. Upon delivery,
      the equity shares shall be registered in the name of the relevant depositary
      on
      our books in book-entry form and this depositary shall enter the name of the
      investor in its records as the beneficial owner. The transfer of beneficial
      ownership shall be effected through the records of the depositary. The
      beneficial owner shall be entitled to all rights and benefits and subject to
      all
      liabilities in respect of his securities held by a
      depositary.




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




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




**Shareholder
      Access to Corporate Records**




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




**Disclosure
      of Ownership Interest**




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




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




**Audit
      and Annual Report**




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




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




**Powers
      of the President of India**




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




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




**Acquisition
      by Us of Our Own Shares**




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




Holders
      of ADSs will be eligible to participate in a buy-back in certain cases. An
      ADS
      holder may acquire shares by withdrawing from the depositary facility and then
      selling those shares back to us.




There
      can
      be no assurance that the shares offered by an ADS holder in any buy-back of
      shares by us will be accepted by us. Investors are advised to consult Indian
      legal advisers prior to participating in any buyback by us, including in
      relation to any tax issues relating to such buy-back.




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**Liquidation
      Rights**




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




**American
      Depositary Shares**




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




**MATERIALCONTRACTS**




Since
      April 1, 2005, 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 rate and the remaining 40.0% at the
      official rate. All importers were, however, required to buy foreign exchange
      at
      the market rate except for certain specified priority imports. In March 1993,
      the exchange rate was unified and allowed to float. In February 1994 and again
      in August 1994, the Reserve Bank of India announced relaxations in payment
      restrictions in the case of a number of transactions. Since August 1994, the
      government of India has substantially complied with its obligations owed to
      the
      International Monetary Fund, under which India is committed to refrain from
      using exchange restrictions on current international transactions as an
      instrument in managing the balance of payments. Effective July 1995, the process
      of current account convertibility was advanced by relaxing restrictions on
      foreign exchange for various purposes, such as foreign business travel, travel
      for education, travel for pilgrimage, medical treatment and others.




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




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




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Specifically,
      in February 2002, the Reserve Bank of India issued operative guidelines for
      “limited two-way fungibility.” Under the guidelines, a registered broker in
      India is now permitted to purchase equity shares of an Indian company on behalf
      of persons resident outside India for the purpose of converting the equity
      shares so purchased into ADRs or GDRs, *provided* that
      (i)
      the equity shares are purchased on a recognized stock exchange, (ii) the Indian
      company has issued ADRs or GDRs, (iii) the equity shares are purchased with
      the
      permission of the custodian of the ADRs or GDRs of the Indian company, and
      are
      deposited with such custodian, (iv) the number of equity shares so purchased
      to
      be converted into ADRs or GDRs do not exceed the ADRs or GDRs previously
      converted into underlying equity shares (the number of equity shares available
      for conversion into ADRs
      or
      GDRs is dependent upon the number of equity shares arrived at after conversion
      of ADRs into equity shares will have to be checked with the custodian) and
      (v)
      the number of equity shares so purchased to be converted shall be subject to
      sectoral caps as applicable and all the concerned parties shall comply with
      the
      Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
      Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
      thereunder.




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




**Restrictions
      On Foreign Ownership Of Indian Securities**




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




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




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




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




Under
      the
      foreign investment rules, the following restrictions are applicable on foreign
      ownership:


·
              under
                  the “foreign direct investment” scheme, foreign individuals may own more
                  than 49% of the equity shares of an Indian telecommunications company
                  only
                  with the approval of the Foreign Investment Promotion Board; this
                  approval
                  is granted on a case-by-case basis. However, ISPs with gateways,
                  radio
                  paging, and end to end bandwidth permitted up to 74% with FDI beyond
                  49%
                  requiring government approval.
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  ·
              under
                  the “depositary” scheme, foreign investors may purchase ADSs or global
                  depositary receipts, subject to the receipt of all necessary government
                  approvals at the time the depositary receipt program is set
                  up;
  ·
                under
                    the “portfolio investment” scheme, foreign institutional investors,
                    subject to registration with the Securities and Exchange Board
                    of India
                    and the Reserve Bank of India, may be permitted to own, in the
                    aggregate,
                    up to an additional 24.0% of our equity shares that are not represented
                    by
                    ADSs or global depositary receipts (and up to 49.0% with the
                    approval of
                    our shareholders); no single foreign institutional investor may
                    own more
                    than 10.0% of our equity shares;
                    and
  ·
                under
                    the “portfolio investment” scheme, non resident Indians may own up to an
                    aggregate or 10.0% of our equity shares; no single non-resident
                    Indian may
                    own more than 5.0% of our total equity
                    shares.


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




As
      of
      June 30, 2005 foreign direct investment in us was 21.68% of our equity
      shares.




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




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




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




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




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




If
      one
      wishes to sell the equity shares withdrawn from the depositary facility, they
      will be required to receive the prior approval of the Reserve Bank of
      India.




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




**Other
      Regulations**




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




**TAXATION**




**Indian
      Taxation**




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




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




**Residence**




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




**Taxation
      of Distributions**




Dividends
      distributed by an Indian company after March 31, 2002 are not subject to tax
      in
      the hands of shareholders. We must pay a “dividend distribution tax” at the rate
      of 12.5% (plus a surcharge of 10% and an add-on tax at the rate of 2% of the
      total dividend distribution tax and surcharge) on the total amount distributed
      as dividend.




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**Taxation
      on Redemption of ADSs**




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




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


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




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




**Rights**




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




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




**Stamp
      Duty**




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




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**Other
      Taxes**




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




**Service
        Tax**
  Brokerage
        or commission paid to stockbrokers in connection with the sale or purchase
        of
        shares 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.




**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.




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




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




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




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




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




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**DOCUMENTSON
      DISPLAY**




We
      file
      reports, including annual reports on Form 20-F, and other information with
      the
      SEC pursuant to the rules and regulations of the SEC that apply to foreign
      private issuers. One may read and copy any materials filed with the SEC at
      the
      Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20459. You
      may
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-800-SEC-0330. Since November 4, 2002, subject to some exceptions,
      we
      have been required to file our periodic reports electronically through the
      SEC’s
      EDGAR system. Any filings we make electronically are available to the public
      over the Internet at the SEC’s Website at http://www.sec.gov.




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


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




**Credit
      Risk**




Financial
      instruments which potentially subject MTNL to concentrations of credit risk
      consist principally of periodic temporary investments of excess cash, trade
      receivables, and investments in ITI Limited preference shares and MKVDC bonds.
      The Company places its temporary excess cash in short term deposits. By their
      nature, all such financial instruments involve risk including the credit risk
      of
      non-performance by counter parties. In management’s opinion, as of March 31,
      2004 and 2005, 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, 2004 and 2005, 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, 2005, 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 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, 2005 is Rs 3,842 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, 2005 is Rs.2,541 million as compared to their carrying
      amount of Rs. 2,654 million.




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Due
      to
      the uncertainties attached to the timing of ultimate realization of restricted
      assets, it is not practicable to determine their fair values.




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




Not
      applicable.




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




None.




**Item
        14.    Material Modifications to the Rights
        of Security Holders and Use of Proceeds**
  None.


**Item
      15.    Controls and
      Procedures**


(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,
        2005, 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,
        because of the restatement described below (which has been identified as
        a
        material weakness in our internal controls over financial reporting), the
        Company’s disclosure controls and procedures were not effective as of March 31,
        2005 to ensure that material information relating to the Company was made
        known
        to them by others within the Company.
  In
        connection with the audit of our consolidated financial statements the year
        ended March 31, 2005, our auditors identified certain errors in our consolidated
        financial statements that required us to restate our financial statements
        prepared in accordance with U.S. GAAP for prior years. As a result of these
        identified errors, we have restated our March 31, 2004 and 2003 consolidated
        financial statements that are presented as comparatives in our consolidated
        financial statements for the year ended March 31, 2005, included in this
        annual
        report on Form 20-F. We have also restated our selected financial data that
        is
        presented for March 31, 2001, 2002, 2003 and 2004.
  The
        restatements relate to our accounting for employee benefits and income taxes.
        More specifically, our pension liability was incorrectly reversed in prior
        years
        upon the retirement of individuals in the pension plan, which impacted
        subsequent actuarial valuations and the accounting treatment. In addition,
        there
        were errors identified in the accounting for the leave encashment plan resulting
        in an underaccrual of the leave liability in prior years. In respect of income
        taxes, we incorrectly recognized deferred tax assets and deferred tax
        liabilities relating to book to tax basis differences for property and
        equipment, capital lease obligations and certain other assets and liabilities.
  We
        are in
        the process of ensuring that we dedicate additional resources with sufficient
        knowledge and understanding of U.S. GAAP in these accounting areas. We are
        also
        in the process of implementing additional internal controls in these accounting
        areas and further strengthen our overall internal control environment around
        U.S. GAAP reporting.
  (b) *Internal
        Control Over Financial Reporting.* 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. However, in light of the restatement,
        which we have identified as a material weakness in internal control, we are
        currently in the process of taking the steps described above to remediate
        the
        material weakness.
  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.




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**Item
        16A.   Audit Committee Financial Expert**
  The
        Board
        of Directors has not identified any member of the Audit Committee as a
“financial expert”. The Board is awaiting the appointment by the Government of
        India of directors who will qualify as such.
  **Item
        16B.   Code of 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.    Principal Accountant 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, 2004 and 2005 in connection with the audit of the audited 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 2004 and 2005 in Million Rs.:




**2004**
            **2005**Audit
                Fees
            3.1
            3.25All
                Other Fees
            2.43
            -**Total**
            **5.53**
            3.25




**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 2004 and 2005 (including related expenses)
      for
      the audit of our annual consolidated financial statements.




**Others**




Consultancy
      services provided for obtaining license from Certification Authority and other
      consultancy work.




***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.




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**Item
        16D.    Exemptions from the Listing Standards for Audit
        Committees**
  Not
        applicable.
  **Item
        16E.    Purchase of Equity Securities by the Issuer
        and
        Affiliated Purchasers**
  Not
        applicable.
  **Item
        17.    Financial Statements**
  Not
        applicable.
  **Item
        18.    Financial Statements**
  See
        pages
        F-1 through F-30.




**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).


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**MAHANAGAR
      TELEPHONE NIGAM LIMITED**




**INDEXTO
      THE CONSOLIDATED FINANCIAL
      STATEMENTS** ****




**Page**Report
                of Independent Registered Public Accounting
                Firm
            F-1Consolidated
                Balance Sheets as of March 31, 2004 and
                2005
            F-2Consolidated
                Statements of Income for the years ended March 31,
                2003, 2004 and 2005
            F-3Consolidated
                Statements of Shareholders’ Equity for the years
                ended March 31, 2003, 2004 and 2005
            F-4Consolidated
                Statements of Cash Flows for the years ended March
                31, 2003, 2004 and 2005
            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 income, 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, 2005 and 2004, and
      the
      results of their operations and their cash flows for each of the years in the
      three year period ended March 31, 2005, 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
        described in Note 3 to the consolidated financial statements, the accompanying
        consolidated financial statements of Mahanagar Telephone Nigam Limited as
        at
        March 31, 2004 and for the years ended March 31, 2004 and 2003 have been
        restated.
  As
        discussed in Note 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


October
      20, 2005





F-1
 Table
          of Contents




**MAHANAGARTELEPHONE
      NIGAM LIMITED**


**Consolidated
      Balance Sheets**








**As
                of March 31,****2004**
              **Restated
                (Note 3)**
            
            **2005**
            
            **2005****Indian
                Rupees in millions, except per share data and as stated
                otherwise**
            
            **Convenience
                translation into millions of US $ (Unaudited)****ASSETS****Current
                assets:**Cash
                and cash
                equivalents
            
            Rs.
                9,891
            
            Rs.
                7,561
            
            $
                173Short
                term
                investment in bank deposits
            
            15,654
            
            17,732
            
            407Accounts
                receivable, net
            
            3,052
            
            2,637
            
            60Due
                from related
                parties
            
            23,588
            
            27,789
            
            637Inventories
            
            991
            
            1,866
            
            43Unbilled
                revenue
            
            5,379
            
            5,002
            
            115Deferred
                income
                taxes
            
            6,430
            
            6,805
            
            156Other
                receivables
            
            4,067
            
            4,052
            
            93**Total
                current assets**
            
            **69,052**
            
            **73,444**
            
            **1,684**Investments
                in held
                to maturity securities
            
            3,500
            
            3,500
            
            80Investment
                in
                affiliate
            
            205
            
            138
            
            3Property
                and
                equipment, net
            
            79,664
            
            82,369
            
            1,888Restricted
                assets
            
            13,043
            
            14,733
            
            339Other
                assets
            
            2,559
            
            2,505
            
            57**Total
                assets**
            
            **168,023**
            
            **176,689**
            
            **4,051****LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                liabilities**:Accounts
                payable
            
            8,626
            
            12,568
            
            287Due
                to related
                parties
            
            12,084
            
            11,339
            
            260Accrued
                expenses
                and other current liabilities
            
            19,054
            
            22,865
            
            525**Total
                current liabilities**
            
            **39,764**
            
            **46,772**
            
            **1,072**Accrued
                employee
                cost
            
            23,306
            
            28,778
            
            660Deferred
                income
                taxes
            
            8,370
            
            7,469
            
            171Non
                current portion
                of customer deposits
            
            12,026
            
            10,337
            
            238**Total
                liabilities**
            
            **83,466**
            
            **93,356**
            
            **2,141**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, 2004 and 2005
            
            6,300
            
            6,300
            
            144Additional
                paid-in
                capital
            
            6,649
            
            6,649
            
            152Retained
                earnings
            
            71,300
            
            70,076
            
            1,607Research
                and
                development reserve
            
            308
            
            308
            
            7**Total
                shareholders' equity**
            
            **84,557**
            
            **83,333**
            
            **1,910****Total
                liabilities and shareholders’ equity**
            
            **Rs.
                168,023**
            
            **Rs.
                176,689**
            
            **$
                4,051**




The
      accompanying notes are an integral part of these consolidated financial
      statements





F-2
 Table
          of Contents


**MAHANAGARTELEPHONE
      NIGAM LIMITED**


**Consolidated
      Statements of Income**








**Years
                ended March 31,****2003**
              **Restated**
              **(Note
                3)**
            
            **2004**
              **Restated**
              **(Note
                3)**
            
            **2005**
            
            **2005****Indian
                Rupees in millions, except per share data and as stated
                otherwise**
            
            **Convenience
                translation into millions of US$ (Unaudited)**Revenues,
                net
            Rs.
                55,251
            
            Rs.
                61,084
            
            Rs.
                50,156
            
            $
                1,150Cost
                of revenues (excluding depreciation
              shown
                separately
                below)
            (31,008)
            
            (38,282)
            
            (31,521)
            
            (723)Selling,
                general and administrative
              expenses
            (8,798)
            
            (10,023)
            
            (9,275)
            
            (213)Depreciation
            (8,507)
            
            (8,675)
            
            (7,724)
            
            (177)Excess
                liabilities written back
            256
            
            1,130
            
            1,291
            
            30**Income
                from operations**
            **7,194**
            
            **5,234**
            
            **2,927**
            
            **67**Interest
                from short term bank deposit
            1,295
            
            1,.322
            
            1,341
            
            31Interest
                and other income, net
            667
            
            392
            
            1,329
            
            30**Income
                before income taxes,**
              **and
                share of losses
                from affiliate**
            **9,156**
            
            **6,948**
            
            **5,597**
            
            **128**Income
                tax expense
            (3,951)
            
            (2,570)
            
            (2,124)
            
            (49)Equity
                in (losses) of affiliate
            (4)
            
            (20)
            
            (67)
            
            (2)**Net
                income**
            **Rs.
                5,201**
            
            **Rs.
                4,358**
            
            **Rs.
                3,406**
            
            **$
                77****Earnings
                per equity share**-Basic
                and
                diluted
            Rs.
                8.26
            
            Rs.
                6.92
            
            Rs.5.41
            
            $
                0.12**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.




F-3
 Table
          of Contents


**MAHANAGARTELEPHONE
      NIGAM LIMITED**


**Consolidated
      Statements of Shareholder’s Equity**


**Common
                    Stock**
                  __________________
                  **No.
                      of Par
                      Value**
                    **Shares**
                **Additional
                    paid-in capital**
                **Retained
                    earnings**
                  **Restated
                    (Note 3)**
                **Research
                    and development reserve**
                **Total
                    Shareholders'**
                  **Equity**
                  **Restated
                    (Note
                    3)**


**Indian
                      Rupees in millions except per share data and as stated
                      otherwise****Balance
                      as of March 31, 2002 (As previously reported)**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.
                      6,649**
                  **62,852**
                  **308**
                  **76,109**Prior
                      period adjustments (Refer Note 3)
                  -
                  -
                  -
                  4,922
                  -
                  4,922**Balance
                      as of March 31, 2002 (Restated - Note 3)**
                  **630,000,000**
                  **Rs.6,300**
                  **Rs.
                      6,649**
                  **Rs.67,774**
                  **Rs.308**
                  **Rs.81,031****Net
                      income**
                  -
                  -
                  -
                  5,201
                  -
                  5,201Cash
                      dividend paid at the rate of Rs. 4.50 per share
                  -
                  -
                  -
                  (2,835)
                  -
                  (2,835)**Balance
                      as of March 31, 2003 (Restated - Note 3)**
                  **630,000,000**
                  **6,300**
                  **6,649**
                  **70,140**
                  **308**
                  **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 (Restated - Note 3)**
                  **630,000,000**
                  **6,300**
                  **6,649**
                  **71,300**
                  **308**
                  **84,557****Net
                      income**
                  -
                  -
                  -
                  3,406
                  -
                  3,406Cash
                      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****Balance
                      as of March 31, 2005 - Convenience translation into millions
                      of US$
                      (Unaudited)**
                  
                  **$
                      144**
                  **$
                      152**
                  **$
                      1,607**
                  **$
                      7**
                  **$
                      1,910**




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-4
 Table
          of Contents




**MAHANAGARTELEPHONE
      NIGAM LIMITED**


**Consolidated
      Statements of Cash Flow**





**Year
                ended March 31,****2003**
              **(Restated
                -**
              **Note
                3)**
            
            **2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****Indian
                Rupees in millions except per share data and as stated
                otherwise**
            
            **Convenience
                translation into millions of US $ (Unaudited)****Cash
                flows from operating activities****Net
                income**
            
            **Rs.
                5,201**
            
            **Rs.
                4,358**
            
            **Rs.
                3,406**
            
            **$
                77***Adjustments
                to reconcile net income to net cash provided by operating
                activities:*Depreciation
            
            8,507
            
            8,675
            
            7,724
            
            177Loss
                / (profit) on sale of fixed assets
            
            (75)
            
            107
            
            197
            
            5Deferred
                taxes
            
            (41)
            
            (2,739)
            
            (1,276)
            
            (29)Excess
                liabilities written back
            
            (256)
            
            (1,130)
            
            (1,291)
            
            (30)Allowances
                for accounts receivables
            
            2,074
            
            2,425
            
            1,137
            
            26Equity
                in losses of equity affiliate
            
            4
            
            20
            
            67
            
            2*Changes
                in assets and liabilities*(Increase)/
                decrease in accounts receivables, net and unbilled
                revenues
            
            16,756
            
            (11,188)
            
            (345)
            
            (8)(Increase)/
                decrease in inventories
            
            1,477
            
            425
            
            (875)
            
            (20)Due
                from related parties
            
            (17,593)
            
            6,056
            
            (4,201)
            
            (96)(Increase)/
                decrease in other receivables
            
            (5,365)
            
            1,100
            
            70
            
            2(Increase)/
                decrease in restricted assets
            
            (769)
            
            (3,973)
            
            (1,690)
            
            (39)Increase/(decrease)
                in accounts payable
            
            (9,197)
            
            9,985
            
            3,942
            
            90Due
                to related parties
            
            9,869
            
            (6,801)
            
            (745)
            
            (17)Increase/
                (decrease) in accrued employee costs
            
            3,004
            
            10,519
            
            5,472
            
            125Increase/
                (decrease) in accrued expenses and other payables
            
            9,860
            
            2,046
            
            3,414
            
            79**Net
                cash provided by operating activities**
            
            **23,456**
            
            **19,885**
            
            **15,006**
            
            **344****Cash
                flows from investing activities**Investments
                in short term bank deposits
            
            (3,263)
            
            (7,394)
            
            (2,078)
            
            (48)Purchase
                of property and equipment
            
            (12,196)
            
            (9,337)
            
            (10,707)
            
            (245)Proceeds
                from sale of property and equipment
            
            141
            
            58
            
            79
            
            2Investments
                in held to maturity securities
            
            (2,500)
            
            -
            
            -Investment
                in affiliate
            
            (183)
            
            (33)
            
            -**Net
                cash used in investing activities**
            
            **(18,001)**
            
            **(16,706)**
            
            **(12,706)**
            
            **(291)****Cash
                flows from financing activities**Repayment
                of loan from DOT
            
            (12,176)
            
            -
            
            -Cash
                dividends paid ( including dividend tax)
            
            (2,835)
            
            (3,198)
            
            (4,630)
            
            (106)**Net
                cash from financing activities**
            
            **(15,011)**
            
            **(3,198)**
            
            **(4,630)**
            
            **(106)****Net
                increase/(decrease) in cash and cash equivalents**
            
            **(9,556)**
            
            **(19)**
            
            **(2,330)**
            
            **(53)**Cash
                and cash equivalents at the beginning of the year
            
            19,466
            
            9,910
            
            9,891
            
            226**Cash
                and cash equivalents at the end of the year**
            
            **Rs.
                9,910**
            
            **Rs.
                9,891**
            
            **Rs.
                7,561**
            
            **$
                173*****Supplementary
                information***Cash
                paid during the year for interest
            
            Rs.
                3,014
            
            Rs.
                331
            
            Rs.
                361
            
            $
                8Cash
                paid during the year for income taxes
            
            Rs.
                8,447
            
            Rs.
                8,327
            
            Rs.
                4,732
            
            $
                108





The
      accompanying notes are an integral part of these consolidated financial
      statements





F-5
 Table
            of Contents
 **MAHANAGAR
            TELEPHONE NIGAM LIMITED**
 Notes to the consolidated financial statements




**1.**
              **Descriptionof
                  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.





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 has not started operations till March 31,
      2005.




**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 have
      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”) 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,
      2005, have been translated into United States dollars at the noon buying rate
      in
      New York city on March 31, 2005, for cable transfers in Indian rupees, as
      certified for customs purposes by the Federal Reserve Bank of New York of $1=
      Rs.43.62. 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, 2005 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 for 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.




F-6
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




*(d)* *Revenue
      recognition*







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.




Revenues
      for fixed line and cellular telephone services are recognized based upon metered
      call units (“MCU”) 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 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 metered call units (MCU) of 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 classified in current liabilities under the heading “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 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
      were
      12%, 12%, 10% of the Adjusted Gross Revenue (“AGR”) for the years ended March
      31, 2003, 2004 and 2005 respectively. License fees and spectrum charges charged
      to income amounted to Rs. 6,100 million, Rs. 9,978 million and Rs. 4,974 million
      for the years ended March 31, 2003, 2004 and 2005
      respectively.




*(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 MCU’s of traffic terminated on
      the other operators’ network.




*(g)* C *ash
      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 six months.
      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.




F-7
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




*(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 amortised cost using
      the
      effective yield method, adjusted for the amortization or accretion of premiums
      or discounts, if any. Costs include transaction cost.  Currently
      all the investments classified as HTM were acquired at face value, without
      paying any premium or discount or incurring any transaction cost. Realized
      gains
      and losses on sale of HTM securities are included in earnings . Dividends
      and interest on securities are recognized when earned and included in other
      income.




MTNL
      records an investment impairment charge on held-to-maturity securities when
      management believes an investment has experienced a decline in value that is
      judged to be other than temporary. For securities where quoted market prices
      are
      not available, fair value is determined using pricing techniques such as
      discounted cash flow analysis. In order to determine whether a decline in value
      is other than temporary, the Company evaluates, among other factors, the
      duration and extent to which the value has been less than the carrying value,
      the financial condition and business outlook of the investee including 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 labour. 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


F-8
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




*(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)* *Leases*




***Assets
      given under capital lease***




MTNL
      provides finance leases on handsets to its customers under a scheme. Assets
      given under capital lease are recognized as receivables at an amount equal
      to
      the net investment in the leased assets. The finance income is recognized based
      on periodic rate of return on the net investment of the lessor outstanding
      in
      respect of the finance lease.




***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. 702 million, Rs. 645 million and Rs. 677 million
      for the years ended March 31, 2003, 2004 and 2005
      respectively.




*(n)* *Retirement
      benefits*




***Company's
      employees***




The
      Company has two sets of retirement schemes for its employees based on the option
      exercised by them. Under one scheme, the employees are eligible for provident
      fund, gratuity, leave encashment and medical benefits and in the other scheme,
      the employees are eligible for pension, general provident fund, gratuity, leave
      encashment and medical benefits.




*Pension*




The
      pension scheme is a defined benefit retirement plan (the “Pension Plan”). Under
      the pension plan , after retirement, employees are eligible for monthly payments
      including dearness allowance based on the last drawn salary. MTNL provides
      for
      the Pension Plan on the basis of an actuarial valuation. The entire Pension
      Plan
      of MTNL is unfunded.




*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.




F-9
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 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




*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. MTNL is providing
      interest at the statutorily applicable rate of 8% per annum. The Scheme also
      allows participants to take interest free loans up to 90% of the amount
      contributed by them towards the GPF.




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.




***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 recognised when it is more likely than not
      that some portion or all of such deferred tax asset will not be
      realized.




*(p)* *Start-up-costs*





*Cost
      of start-up activities including organization costs are expensed as
      incurred.*




*(q)* *Advertisement
      expenses*




Advertising
      and business promotion costs are expensed as incurred and amounted to Rs. 298
      million, Rs. 257 million and Rs. 199 million for the years ended March 31,
      2003,
      2004 and 2005 respectively.




*(r)* *Dividends*




Dividends
      are recorded in the consolidated financial statements in the period in which
      they are approved by the shareholders.




*(s)* *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.




*(t)* *Recently
      issued accounting pronouncements*




In
      November, 2004, the Financial Accounting Standards Board issued
      FAS No. 151, Inventory Costs — an amendment of ARB No. 43,
      Chapter 4 (FAS 151).This statement requires abnormal amounts
      of idle
      facility expense, freight, handling costs, and wasted material
      (spoilage) to be recognized as current-period charges. It also requires
      that allocation of fixed production overheads to the costs of conversion be
      based on the normal capacity of the production facilities. FAS 151 will
      be
      effective for inventory costs incurred during fiscal years beginning after
      June 15, 2005. The adoption of this standard will not have a material
      impact on MTNL’s consolidated financial statements.




In
      March
      2005, FASB issued FIN 47 “Accounting for Conditional Asset Retirement
      Obligations”. FIN 47 clarifies the term conditional asset retirement obligation
      as used in FAS 143, “Accounting for Asset Retirement Obligations”, and that an
      entity is required to recognize the liability for fair value of a conditional
      asset retirement obligation if the fair value can be reasonably estimated.
      FIN
      47 is effective for fiscal years ending after December 15, 2005. The adoption
      of
      this standard will not have a material impact on MTNL’s consolidated financial
      statements.





F-10
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements






In
      May
      2005, FASB Issued FAS No. 154, “Accounting Changes and Error Corrections -- a
      replacement of APB No. 20 and FAS No. 3”. FAS 154 provides guidance on the
      accounting for and reporting of accounting changes and error corrections. It
      establishes, unless impracticable, retrospective application as the required
      method for reporting a change in accounting principle in the absence of explicit
      transition requirements specific to the newly adopted accounting principle.
      FAS
      154 also provides guidance for determining whether retrospective application
      of
      a change in accounting principle is impracticable and for reporting a change
      when retrospective application is impracticable. The correction of an error
      in
      previously issued financial statements is not an accounting change. However,
      the
      reporting of an error correction involves adjustments to previously issued
      financial statements similar to those generally applicable to reporting an
      accounting change retrospectively. Therefore, the reporting of a correction
      of
      an error by restating previously issued financial statements is also addressed
      by FAS 154. FAS 154 shall be effective for accounting changes and corrections
      of
      errors made in fiscal years beginning after December 15, 2005. The adoption
      of
      this standard will not have a material impact on MTNL’s consolidated financial
      statements.




*(u)* *Reclassifications*




Certain
      items previously reported in specific financials statements captions have been
      reclassified to conform to the current year’s presentation.




F-11
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**3.**
            **RESTATEMENT
                OF FINANCIAL STATEMENTS**




MTNL
        has
        restated opening retained earnings as of March 31, 2002, and the results
        of
        operations for the years ended March 31, 2003 and 2004 to reflect
        the
        correction of errors in prior periods. The nature of the adjustments are
        as
        follows:
 
 **Employee
        Benefits**
 
 For
        defined benefit pension plans, MTNL recognizes a pension liability based
        on an
        actuarial valuation. As per the pension scheme, the benefit formula entitles
        every employee to encash up to 40% of his pension (as determined) immediately
        on
        retirement (termed as commutation). The remaining 60% balance is payable
        over
        the employee’s remaining life, as monthly pension. The Company incorrectly
        reversed 100% of the pension liability in respect of retired employees in
        prior
        years. The actuarial valuation reports have been revised for all periods
        impacted by the incorrect reversal, resulting in adjustments to accrued employee
        costs amounting to increase of Rs.801 million, Rs.2039 million and Rs.2667
        million as of March 31, 2002, 2003 and 2004.
 
 MTNL
        accounts for leave encashment benefits, and records a liability based on
        an
        actuarial valuation. Employees can accumulate and carry forward leave balances
        up to a maximum of 300 days, which are encashable during the tenure of
        employment, upon termination or on retirement. MTNL did not accrue for, or
        reverse, leave encashment benefits in accordance with the specific terms
        of the
        benefit arrangement. As a result, the actuarial valuation reports required
        significant revisions. These reports have been revised for all periods impacted
        by the incorrect accruals and reversals of leave accruals, resulting in
        adjustments to accrued
        employee costs amounting to decrease of Rs.280 million and Rs.209 million
        as of
        March 31, 2002 and 2003 and increase of Rs.234 million as of March 31, 2004.
 
 Due
        to
        the correction of the above errors, accrued employee costs have increased
        by Rs.
        521 million, Rs. 1,830 million and Rs. 2,901 million as of March 31, 2002,
        2003
        and 2004 respectively. The tax effect of these adjustments is to reduce net
        income tax liability by Rs. 186 million, Rs. 673 million and Rs. 1,041 million
        as of March 31, 2002, 2003 and 2004 respectively.
 
 **Income
        Taxes**
 
 In
        the
        current year, our auditors identified certain errors in its accounting for
        income taxes. More specifically, the errors relate to the following:
 
 ·
              The
                  Company recorded excess deferred tax liability on temporary differences
                  between the book basis and tax basis of property and equipment
                  commencing
                  in the year ended March 31, 1995.
 ·
              The
                  Company failed to record deferred tax assets related to capital
                  lease
                  obligations and in subsequent periods, incorrectly accounted for
                  the
                  reversals of deferred tax liabilities related to the leased assets.
 ·
              The
                  Company did not reconcile differences (primarily related to provision
                  for
                  debtors and gratuity) between its income tax computation and the
                  actual
                  tax return filed with the tax authorities at each reporting
                  period.
 ·
              The
                  Company did not recognize deferred tax assets in respect of deferred
                  revenue and certain provisions, however, subsequent reversals resulted
                  in
                  the recognition of deferred tax liabilities.
 
 The
        correction of these errors has result in adjustments to reduce income tax
        liabilities by Rs. 5,257 million, Rs. 5,573 million and Rs. 5,583 million
        as of
        March 31, 2002, 2003 and 2004 respectively.




F-12
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




The
        following table presents the impact of the restatement adjustments on net
        income
        for the years ended March 31, 2003 and 2004, as well as the impact on various
        line items within the statement of operations:
  ***(Rs.
        in millions except per share data)***
 **Statements
                  of Income**
              **For
                  the year ended March 31,****2003**
              
              **2004****Net
                  income as previously reported**
              **Rs.
                  5,707**
              
              **Rs.
                  5,052**Adjustments:Income
                  Taxes on property and equipment
              82
              
              (68)Income
                  Taxes on capital lease obligation
              25
              
              (21)Income
                  Taxes on reconciliation between income tax computation and actual
                  tax
                  return filed with the tax authorities
              186
              
              118Income
                  Taxes on deferred revenue and certain provisions
              23
              
              (19)Leave
                  encashment
              (71)
              
              (445)Pension
              (1,238)
              
              (628)Tax
                  effect of adjustment for employee benefits
              487
              
              369**Net
                  income as restated**
              **5,201**
              
              **4,358****Cost
                  of revenues as previously reported**
              **(30,092)**
              
              **(37,531)**Adjustment:
                  Employee benefits
              (916)
              
              (751
                  )**Cost
                  of revenues as restated**
              **(31,008)**
              
              **(38,282)****Selling,
                  general and administrative expenses as previously
                  reported**
              **(8,405)**
              
              **(9,701
                  )**Adjustment:
                  Employee benefits
              (393)
              
              (322)**Selling,
                  general and administrative expenses as restated**
              **(8,798)**
              
              **(10,023
                  )****Income
                  tax expense as previously reported**
              **(4,754)**
              
              **(2,949)**Adjustments:
                  Income tax
              316
              
              10Tax
                  effect of adjustment for employee benefits
              487
              
              369**Income
                  tax expense as restated**
              **(3,951)**
              
              **(2,570)****Basic
                  and diluted Earning per Share as previously
                  reported**
              **9.06**
              
              **8.02**Adjustments
              (0.80)
              
              (1.10)**Basic
                  and diluted Earning per Share as restated**
              **Rs.
                  8.26**
              
              **Rs.
                  6.92**
  The
          following table presents in greater detail the impact of the restatement
          adjustments on MTNL’s previously reported shareholders’ equity as at March 31,
          2002, 2003 and 2004:
  ***(Rs.
          in millions except per share
          data)***
 **As
                    of March 31,****2002**
                **2003**
                **2004****Shareholder’s
                    equity as previously reported**
                **Rs.
                    76,109**
                **Rs.
                    78,981**
                **Rs.
                    80,834**Adjustments:Income
                    Taxes on property and equipment
                2,787
                2,869
                2,801Income
                    Taxes on capital lease obligation
                854
                879
                858Income
                    Taxes on reconciliation between income tax computation and actual
                    tax
                    return filed with the tax authorities
                844
                1,030
                1,148Income
                    Taxes on deferred revenue and certain provisions
                772
                795
                776Leave
                    encashment liability
                280
                209
                (235)Pension
                    liability
                (801)
                (2,039)
                (2,667)Tax
                    effect of adjustment for employee benefits
                186
                673
                1,042**Shareholder’s
                    equity as restated**
                **Rs.
                    81,031**
                **Rs.
                    83,397**
                **Rs.
                    84,557**




The
      following table
      presents the impact of the restatement adjustments on balance sheet line items
      as of March 31, 2003 and 2004:




F-13
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements


***(Rs.
          in millions except per share
          data)***
 **As
                    of March 31,****Balance
                    sheet data**
                **2003**
                **2004****As
                    previously reported**
                **As
                    restated**
                **As
                    previously reported**
                **As
                    restated**Deferred
                    tax asset - current
                Rs.3,675
                Rs.4,964
                Rs.5,325
                Rs.6,430Other
                    receivables
                3,313
                3,111
                3,999
                4,067Deferred
                    tax liability - non current
                14,801
                9,642
                13,822
                8,370Accrued
                    employee cost
                Rs.10,957
                Rs.12,787
                Rs.20,404
                Rs.23,306
 ***4.***
              **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 a
                fellow subsidiary of MTNL as the Government, acting through the DOT,
                holds
                100% of the issued share capital of BSNL VSNL is an equity investee
                of the
                Government of India.




(b)
            DOT
                has granted licenses to MTNL to operate fixed line, cellular and
                internet
                services. The licenses for fixed line, cellular and internet services
                are
                valid until March 31, 2013, October 9, 2017 and September 7, 2017
                respectively. DOT retains the right to revoke the license 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/ 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 thenetworking
                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. Though
                MTNL
                continues to use BSNL network for the carriage of NLD calls, it has
                entered into arrangements with other ILD operators as well 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.





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,****2003**
            
            **2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**VSNL
                - Expenses for carriage of ILD calls originating on MTNL’s
                network
            (2,002)
            
            (1,206)
            
            (684)
            
            (16)VSNL
                - Revenues for ILD calls terminating on MTNL’s network
            1,677
            
            1,015
            
            516
            
            12DOT
                - License fees and spectrum charges*(Refer**note
                5)*
            (6,100)
            
            (9,978)
            
            (4,974)
            
            (114)BSNL
                - Networking charges for NLD calls
              *(Refer**note
                5)*
            (7,023)
            
            (6,922)
            
            (3,627)
            
            (83)BSNL
                - Revenues for interconnect usage charges as per TRAI
                Regulation
            -
            
            6,236
            
            1,471
            
            34




F-14
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements


**5.**
              **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% 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). Twelve percent was the rate applicable
      to
      private operators. 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 has 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 these
      years
      have been accrued on the same basis as applicable to that of private operators.
      In the fiscal 2001, the Company paid license fee based on the earlier
      arrangement.





Subsequent
      to the March 31, 2004, a meeting was held between DOT, BSNL and MTNL to resolve
      the ambiguity with respect to license fee and networking charges. The parties
      agreed that the license fees were payable at 12% of AGR and networking charges
      as per TRAI regulations with effect from August 1, 1999. Also, the revenue
      sharing percentages earlier agreed to between MTNL and BSNL, other than those
      governed by TRAI regulations, were revised with retrospective effect. This
      had
      resulted in an incremental charge of Rs. 3,520 million on account of license
      fee
      and a benefit of Rs 1,515 million on account of networking charges for periods
      upto March 31, 2003, which have been accounted for as of March 31,
      2004.





**6.**
            **CASH
                AND CASH EQUIVALENTS**





The
      cost
      and fair values for cash and cash equivalents are as follows:




**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of Dollars)**
              **Unaudited**Cash
                and bank balances
            
            2,291
            
            1,918
            
            44Cash
                equivalents
            
            7,600
            
            5,643
            
            129**Cash
                and cash equivalents**
            
            **9,891**
            
            **7,561**
            
            **173**





**7.**
            **PROPERTY
                AND EQUIPMENT**





**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of US $)**
              **Unaudited**Land
                and buildings
            
            11,490
            
            12,687
            
            291Cable
                and related equipment
            
            70,143
            
            71,752
            
            1,645Exchanges
                and related equipment
            
            58,598
            
            62,126
            
            1,424Other
                fixed assets
            
            4,566
            
            5,296
            
            121Capital
                work in progress
            
            4,313
            
            6,024
            
            138149,110
            
            157,885
            
            3,619Accumulated
                depreciation
            
            (69,446)
            
            (75,516)
            
            (1,731)**Property
                and equipment, net**
            
            **79,664**
            
            **82,369**
            
            **1,888**








F-15
 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. 614 million and Rs.
      703
      million as of March 31, 2004 and 2005 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,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of Dollars)**
              **Unaudited****Held-to-maturity
                securities**8.75%
                Redeemable Cumulative Preference Shares of ITI Limited
            
            1,000
            
            1,000
            
            2311.5%
                Bonds of Maharashtra Krishna Valley Development
                Corporation
            
            2,500
            
            2,500
            
            57**Investments
                - Non-current**
            
            **3,500**
            
            **3,500**
            
            **80**




***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 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.




As
      of
      September 30, 2005, ITI has not redeemed the first tranche amounting to Rs.
      200
      million as per the repayment schedule. ITI has requested MTNL for an extension
      on the redemption dates. However MTNL has not accepted ITI’s request and making
      reference to the DOT’s Comfort letter, has written to DOT to pay its
      dues.





F-16
 Table
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 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements







***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.




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 investments,
      management believes that there is no impairment of investments as of
      March 31, 2005





**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 agreement
      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. 4 million, Rs. 4 million, Rs. 20
      million and Rs. 67 million for the years ended March 31,2002, 2003, 2004 and
      2005 respectively. The carrying value of investment in UTL is Rs. 205 million
      and Rs. 138 million as of March 31, 2004 and 2005 respectively.




**10.**
            **INVENTORIES**




Inventories
      are comprised of the following:





**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of US $)**
              **Unaudited**Cables
            
            445
            
            1,060
            
            25Exchange
                equipment
            
            578
            
            495
            
            11Telephone
                and telex instruments
            
            128
            
            492
            
            11Others
            
            214
            
            177
            
            4Less:
                allowance for slow moving / obsolete stock
            
            (374)
            
            (358)
            
            (8)**Inventories,
                net**
            
            **991**
            
            **1,866**
            
            **43**




Activity
      in allowance for slow moving / obsolete stock is as follows:


**Years
                        ended March 31,****2003**
                    
                    
                    **2004**
                    
                    
                    **2005**
                    
                    
                    **2005****(Millions
                        of Rupees)**
                    
                    **(Millions
                        of**
                      **US
                        $)**
                      **Unaudited**Balance
                        at beginning of year
                    
                    
                    369
                    
                    
                    353
                    
                    
                    374
                    
                    
                    9Charged
                        to expense
                    
                    
                    22
                    
                    
                    48
                    
                    
                    159
                    
                    
                    3Less:
                        amounts written off
                    
                    
                    (38
                    )
                    
                    (27
                    )
                    
                    (175
                    )
                    
                    (4
                    )**Balance
                        at end of year**
                    
                    
                    **353**
                    
                    
                    **374**
                    
                    
                    **358**
                    
                    
                    **8**


F-17
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**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,****2003**
            
            **2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**Balance
                at beginning of year
            6,493
            
            6,144
            
            8,561
            
            196Charged
                to expense
            2,074
            
            2,425
            
            1,137
            
            26Less:
                amounts written off
            (2,423)
            
            (8)
            
            (2,904)
            
            (67)**Balance
                at end of year**
            **6,144**
            
            **8,561**
            
            **6,794**
            
            **155**





**12.**
            **RESTRICTED
                ASSETS**





Restricted
      assets include the amount paid to income tax authorities under protest (refer
      note 22).





**13.**
            **OTHER
                RECEIVABLES**




Other
      receivables consist of the following:





**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of US $)**
              **Unaudited**Loans
                to employees
            
            2,765
            
            2,654
            
            61Advance
                tax (refer note below)
            
            2,074
            
            1,698
            
            39Accrued
                interest
            
            609
            
            843
            
            19Others
            
            1,178
            
            1,362
            
            31**6,626**
            
            **6,557**
            
            **150**Less:
                Other assets, non-current
            
            (2,559)
            
            (2,505)
            
            (57)**Other
                receivables, current**
            
            **4,067**
            
            **4,052**
            
            **93**





Advance
      tax balance is net of income tax liability amounting to
      Rs. 41,117 million and Rs. 42,892 million as of March 31, 2004
      and
      2005. Other assets includes the non current portion of loans given to employees
      and capital lease recievable.




F-18
 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,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of US $)**
              **Unaudited**Interest
                accrual
            
            135
            
            133
            
            3General
                provident fund contribution, net
            
            8,072
            
            10,330
            
            237Deferred
                income
            
            1,982
            
            3,251
            
            75Advances
                from customers and others
            
            521
            
            778
            
            18Customers
                deposits
            
            3,006
            
            2,584
            
            59Accrued
                employee cost
            
            1,858
            
            1,950
            
            45Other
                payables and accruals
            
            3,480
            
            3,839
            
            88**Accrued
                expenses and other current liabilities**
            
            **19,054**
            
            **22,865**
            
            **525**





The
      General Provident Fund balance represents amounts contributed by employees
      (who
      have opted for the Government pension rules), net of loans taken. Prior to
      the
      absorption in the year 2000, this fund was being maintained by DOT. MTNL has
      raised claims amounting to Rs. 6,426 million on DOT upto March 31, 2005 in
      respect of employee contributions together with the interest accrued . These
      have been included in Dues from related parties as disclosed in Note
      19.





Subsequent
      to absorption, in the absence of any rules available for deposit of such
      contribution the amounts have been retained by MTNL. The outstanding balance
      of
      the fund, including claims raised on DOT, net of loans given to employees have
      been classified as part of Accrued expenses and other current liabilities as
      the
      amount will be deposited in a separate trust or with DOT as per pending
      notification from the Government. This amount is not restricted and may be
      used
      to fund the activities of MTNL till the time it is transferred to the trust
      or
      DOT.





**15.**
            **INTEREST
                AND OTHER INCOME, NET**




Interest
      and other income, net consist of the following:





**For
                the years ended March 31,****2003**
            
            **2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**Interest
                from investment in MKVDC
            239
            
            239
            
            239
            
            6Interest
                payable on DOT funding
            (2,389)
            
            -
            
            -
            
            -Interest
                recoverable from VSNL
            2,389
            
            -
            
            -
            
            -Interest
                on loans to employees
            117
            
            134
            
            182
            
            4Interest
                on advances and others
            10
            
            41
            
            715
            
            16Interest
                paid on customers deposit
            (45)
            
            (36)
            
            (28)
            
            (1)Interest
                paid on General provident fund
            (283)
            
            (310)
            
            (330)
            
            (8)Other
                income
            629
            
            324
            
            551
            
            13**Interest
                and other income, net**
            **667**
            
            **392**
            
            **1,329**
            
            **30**




F-19
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**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. nil million, Rs.322 million and
      Rs.
      297 million for the years ended March 31, 2003, 2004 and 2005 respectively.
      This
      line item also includes other time barred liabilities outstanding for more
      than
      3 years amounting to Rs. 57 million, Rs.479 million, and Rs. 630 million for
      the
      years ended March 31, 2003, 2004 and 2005 respectively, and other provisions
      (including for unpaid bonuses) no longer required which have been written back
      amounting to Rs. 199 million, Rs.329 million and Rs. 364 million for the years
      ended March 31, 2003, 2004 and 2005 respectively.





**17.**
            **INCOME
                TAXES**





Total
      income tax expense is attributable to income from continuing operations and
      consists of the following:





**Year
                ended March 31,****2003**
              **(Restated
                -**
              **Note
                3)**
            
            **2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**Current
                tax
            3,992
            
            5,309
            
            3,400
            
            78Deferred
                tax
            (41)
            
            (2,739)
            
            (1,276)
            
            (29)**Aggregate
                Taxes**
            **3,951**
            
            **2,570**
            
            **2,124**
            
            **49**





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,****2003**
              **(Restated
                -**
              **Note
                3)**
            
            **2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**Income
                before taxes and share from affiliates
            9,156
            
            6,948
            
            5,597
            
            128Average
                enacted tax rate in India
            36.75%
            
            35.88%
            
            36.59%
            
            36.59%Computed
                tax expense
            3,365
            
            2,493
            
            2,048
            
            47Effect
                of tax assessed for earlier years
            391
            
            61
            
            -
            
            -Effect
                of change in tax rates
            136
            
            (111)
            
            39
            
            1Permanent
                differences
            59
            
            127
            
            37
            
            1**Income
                taxes recognized in the statement of income**
            **3,951**
            
            **2,570**
            
            **2,124**
            
            **49**





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.




F-20
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




MTNL
      on
      the basis of advice from its legal counsel, has claimed such benefit for the
      financial years ended March 31, 2003, 2004 and 2005. The Company’s claim has
      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. 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.





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,****2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****Deferred
                tax assets:**Allowances
                for bad and doubtful debts
            
            Rs.
                3,140
            
            Rs.
                3,033
            
            $
                70Post
                retirement benefits
            
            4,034
            
            5,901
            
            135Others
            
            3,290
            
            3,772
            
            86**Total
                deferred tax assets**
            
            **10,464**
            
            **12,706**
            
            **291****Deferred
                tax liabilities:**Excess
                of tax allowance over depreciation
            
            (11,156)
            
            (12,008)
            
            (275)Interest
                capitalized
            
            (1,248)
            
            (1,362)
            
            (31)**Total
                deferred tax liabilities**
            
            **(12,404)**
            
            **(13,370)**
            
            **(306)****Net
                deferred tax asset / (liability)**
            
            **Rs.
                (1,940)**
            
            **Rs.
                (664)**
            
            **$
                (15)**





Net
      deferred tax liabilities included in the consolidated balance sheets are as
      follows:





**As
                of March 31,****2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****Current:**Deferred
                tax assets
            
            Rs.
                6,430
            
            Rs.
                6,805
            
            $
                156**Non-current :**Deferred
                tax assets
            
            4,034
            
            5,901
            
            135Deferred
                tax liabilities
            
            (12,404)
            
            (13,370)
            
            (306)Total
                non current
            
            **(8,370)**
            
            **(7,469)**
            
            **(171)****Net
                deferred tax asset / (liability)**
            
            **Rs.
                (1,940)**
            
            **Rs.
                (664)**
            
            **$
                (15)**





F-21
 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,****2003**
            
            **2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited**Pension
                (including gratuity)
            157
            
            113
            
            25
            
            1Leave
                encashment
            60
            
            55
            
            13
            
            -**217**
            
            **168**
            
            **38**
            
            **1**




*(b)* *Employees
        of MTNL*




**i.** **Pension,
      Gratuity and Medical benefits**




The
      pension and gratuity to the non-executive 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 empoyees**




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, 2003, pending finalization of the terms of absorption,
      MTNL had accrued an additional charge up to that date based on an actuarial
      determination of the incremental liability 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.




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.




The
      excess pensionary benefits accounted in the current year on account of
      absorption of B category employees, as pension and gratuity cost has been
      disclosed separately in Note 18 (b) (iii) below.





F-22
 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,****2004**
                **(Restated
                  -**
                **Note
                  3)**
              
              **2005**
              
              **2005****(Millions
                  of Rupees)**
              
              **(Millions
                  of**
                **US
                  $)**
                **Unaudited****Accumulated
                  benefit obligation**
              
              
              11,588
              
              
              15,355
              
              
              352**Changes
                  in projected benefit obligation:**Projected
                  Benefit obligation at the beginning of the year
              
              
              9,670
              
              
              15,080
              
              
              346Service
                  cost
              
              
              786
              
              
              878
              
              
              20Interest
                  cost
              
              
              1,147
              
              
              1,384
              
              
              32Actuarial
                  (gain) or loss
              
              
              1,023
              
              
              1,900
              
              
              44(Gain)/
                  Loss on curtailment
              
              
              -
              
              
              236
              
              
              5Actuarial
                  obligation assumed on account of absorption
              
              
              2,719
              
              
              841
              
              
              19Benefits
                  paid
              
              
              (265
              )
              
              (454
              )
              
              (10
              )**Projected
                  Benefit obligation at the end of the year**
              
              
              **15,080**
              
              
              **19,865**
              
              
              **456****Changes
                  in plan asset**
              
              
              -
              
              
              -
              
              
              -**Unfunded
                  status**
              
              
              **(15,080**
              **)**
              
              **(19,865**
              **)**
              
              **(456**
              **)****Accrued
                  provision for pension**
              
              
              **(15,080**
              **)**
              
              **(19,865**
              **)**
              
              **(456**
              **)**


**For
                the years ended March 31,****2003**
              **(Restated
                -**
              **Note
                3)**
            
            **2004**
              **(Restated
                -**
              **Note
                3)**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****The
                components of net pension costs are reflected
                below:**Current
                service cost
            715
            
            786
            
            879
            
            20Actuarial
                obligation assumed on account of absorption
            719
            
            551
            
            426
            
            10Interest
                cost
            676
            
            1,147
            
            1,384
            
            32(Gain)/
                Loss on curtailment
            -
            
            -
            
            236
            
            5Actuarial
                (gain) or loss
            1,224
            
            1,023
            
            1,900
            
            44**Net
                periodic pension cost**
            **3,334**
            
            **3,507**
            
            **4,825**
            
            **111**





F-23
 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****(Millions
                of Rupees)**
            **(Millions
                of US $)**
              **Unaudited**2006
            450
            102007
            517
            122008
            909
            212009
            742
            172010
            865
            202011
                - 2015
            6,892
            158




**The
      Gratuity Plan**




**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****Accumulated
                benefit obligation**
            
            
            **3,124**
            
            
            **3,510**
            
            
            **80****Changes
                in projected benefit obligation:**Projected
                Benefit obligation at the beginning of the year
            
            
            2,876
            
            
            4,175
            
            
            96Service
                cost
            
            
            289
            
            
            296
            
            
            7Interest
                cost
            
            
            319
            
            
            349
            
            
            8Actuarial
                (gain) or loss
            
            
            92
            
            
            96
            
            
            2Curtailment
                ( Gain)/ Loss
            
            
            
            
            
            40
            
            
            1Actuarial
                obligation assumed on account of absorption
            
            
            739
            
            
            174
            
            
            4Benefits
                paid
            
            
            (140
            )
            
            (277
            )
            
            (6
            )**Projected
                Benefit obligation at the end of the year**
            
            
            **4,175**
            
            
            **4,853**
            
            
            **112****Changes
                in plan asset**Fair
                value of the plan assets at the beginning of the Year
            
            
            1,855
            
            
            645
            
            
            15Actual
                return on plan assets
            
            
            106
            
            
            173
            
            
            4Employer
                contributions
            
            
            -
            
            
            2,264
            
            
            52Refund
                from trust
            
            
            (1,316
            )
            
            -**Plan
                assets at the end of the year**
            
            
            **645**
            
            
            **3,082**
            
            
            **71****Unfunded
                status**
            
            
            (3,530
            )
            
            (1,771
            )
            
            (41
            )**Accrued
                provision for gratuity**
            
            
            **(3,530**
            **)**
            
            **(1,771**
            **)**
            
            **(41**
            **)**








F-24
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**For
                    the years ended March 31,****2003**
                
                **2004**
                
                **2005**
                
                **2005****(Millions
                    of Rupees)**
                
                **(Millions
                    of**
                  **US
                    $)**
                  **Unaudited****The
                    components of net gratuity costs are reflected
                    below:**Current
                    service cost
                280
                
                289
                
                296
                
                7Actuarial
                    obligation assumed on
                  Account
                    of
                    absorption
                -
                
                122
                
                46
                
                1Interest
                    cost
                215
                
                213
                
                175
                
                4Actuarial
                    (gain) or loss
                120
                
                92
                
                96
                
                2Curtailment
                    (Gain)/ Loss
                -
                
                -
                
                40
                
                1Net
                    periodic gratuity cost
                **615**
                
                **716**
                
                **653**
                
                **15**


**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****(Millions
                of Rupees)**
            **(Millions
                of US $)**
              **Unaudited**2006
            258
            62007
            266
            62008
            571
            132009
            303
            72010
            357
            82011
                - 2015
            2750
            63





F-25
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**The
      Medical Plan**





**As
                of March 31,****2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****Accumulated
                benefit obligation**
            
            
            **7,603**
            
            
            **9,109**
            
            
            **208****Changes
                in projected benefit obligation:**Projected
                Benefit obligation at the beginning of the year
            
            
            5,606
            
            
            7,603
            
            
            174Prior
                service cost
            
            
            664
            
            
            160
            
            
            4Service
                cost
            
            
            289
            
            
            423
            
            
            10Interest
                cost
            
            
            575
            
            
            668
            
            
            15Actuarial
                (gain) or loss
            
            
            472
            
            
            261
            
            
            6Benefits
                paid
            
            
            (3
            )
            
            (6
            )
            
            -**Projected
                Benefit obligation at the end of the year**
            
            
            **7,603**
            
            
            **9,109**
            
            
            **209****Changes
                in plan asset**
            
            
            -**Unfunded
                status**
            
            
            **(7,603**
            **)**
            
            **(9,109**
            **)**
            
            **(209**
            **)******Unrecognised
                prior service cost
            
            
            4,722
            
            
            4,475
            
            
            102**Accrued
                provision for medical benefits**
            
            
            **(2,881**
            **)**
            
            **(4,634**
            **)**
            
            **(107**
            **)**







**For
                the years ended March 31,****2003**
            
            **2004**
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of**
              **US
                $)**
              **Unaudited****The
                components of net medical costs are reflected
                below:**Current
                Service cost
            281
            
            289
            
            423
            
            10Interest
                cost
            451
            
            575
            
            668
            
            15Actuarial
                (gain) or loss
            -
            
            472
            
            261
            
            6Actuarial
                obligation assumed on account of absorption
            92
            
            -
            
            -
            
            -Amortization
                of prior service cost
            644
            
            394
            
            407
            
            9Net
                periodic medical benefit
            **1,468**
            
            **1,730**
            
            **1,759**
            
            **40**








F-26
 Table
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 **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****(Millions
                of Rupees)**
            **(Millions
                of US $)**
              **Unaudited**2006
            20
            -2007
            28
            -2008
            51
            12009
            65
            12010
            82
            22011
                - 2015
            782
            17




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,****2003**
            
            **2004**
            
            **2005**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:





**2004**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of Rupees)**1
                %Point Increase
            
            1
                %Point Decrease
            
            1
                %Point Increase
            
            1
                %Point DecreaseEffect
                on total of service and interest cost
            306
            
            (229)
            
            338
            
            (240)Effect
                on accumulated postretirement benefit obligation
            2,433
            
            (1,825)
            
            2,824
            
            (2,004)




**iv.** **Leave
      Pay Obligation**




Leave
      pay
      expenses amounted to Rs. 315 million, Rs. 881 million and Rs. 551 million for
      the years ended March 31, 2003, 2004 and 2005 respectively. Accrued employee
      cost include Rs. 1,815 million and Rs. 2,267 million leave pay obligation of
      MTNL as of March 31, 2004 and 2005 respectively .




The
      weighted average actuarial assumptions used to determine benefit obligations
      and
      net periodic benefit cost were:





**2003**
            **2004**
            **2005**Discount
                rate
            8.75%
            8.35%
            8.00%Future
                salary increases
            5%
            5%
            5%Future
                pension increases
            5%
            5%
            5%Rate
                of return on plan assets
            8.75%
            8.35%
            7.50%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





F-27
 Table
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 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements


**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. 171
      million, Rs.191 million and Rs.203 million for the years ended March 31, 2003,
      2004 and 2005 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.




**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, 2005,
      the Government owned 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.




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 fellow subsidiary of MTNL as the Government, acting through
      the DOT, holds 100% of the issued share capital of BSNL. DOT is a department
      of
      the Government of India. 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
      4
      describes the relationship between DOT/BSNL/VSNL and the Company as well as
      transactions with these parties. Amounts due to and from the DOT/BSNL are
      disclosed separately under current payables and receivables
      respectively.




The
      Company provides and receives services to/from other Governmental departments
      and other public sector organizations on normal commercial terms.




The
      balances receivable from and payable to related parties other than employees
      are
      summarized as follows:





**As
                of March 31,****2004**
            
            **2005****Receivables**
            
            **Payables**
            
            **Receivables**
            **Payables****(Millions
                of rupees)**DOT
            16,420
            
            5,542
            
            18,792
            
            4,831BSNL
            6,422
            
            5,797
            
            8,250
            
            5,763VSNL
            746
            
            745
            
            747
            
            745Total
            23,588
            
            12,084
            
            27,789
            
            11,339**Million
                of US $ Unaudited**
            **541**
            
            **277**
            
            **637**
            
            **260**








F-28
 Table
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 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**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, 2004 and 2005 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.69,556 million,
      Rs.76,525 million and Rs.81,977 million as of March 31, 2003, 2004 and 2005
      respectively.





Under
      the
      Indian Companies Act, dividends may be paid out of the profits of a company
      in
      the year in which the dividend is declared or out of the undistributed profits
      of previous fiscal years. Before declaring a dividend greater than 10.0% of
      the
      par value of its equity shares, a company is required to transfer to its
      reserves a minimum percentage of its profits for that year, ranging from 2.5%
      to
      10.0% or higher , depending on the dividend percentage to be declared in such
      year.





*Liquidation*





In
      the
      event of liquidation of the Company, the holders of equity shares shall be
      entitled to receive all of the remaining assets of the Company in proportion
      to
      the number of equity shares held, after distribution of all preferential
      amounts, if any.





*Stock
      options*





MTNL
      has
      not granted any stock options to any of its employees or to others.





F-29
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements





**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,
      2004 and 2005, 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, 2004 and 2005, 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, 2005 is Rs. 3,842 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, 2005 is Rs.2,541 million as compared to their carrying
      amount of Rs. 2,654 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. 6,483 million
      and
      Rs. 2,177 million as of March 31, 2004 and 2005 respectively. Contractual
      commitments for capital expenditures are relating to purchase property and
      equipment.





**ii.**  **GUARANTEES**





MTNL
      has
      outstanding financial/performance bank guarantees of Rs. 228 million and Rs.
      459
      million as of March 31, 2004 and 2005 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.





F-30
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements




**iii.**  **CONTINGENT
      LIABILITIES**





MTNL
      is
      involved in tax and legal proceedings, claims and litigation arising in the
      ordinary course of business. MTNL periodically assess its liabilities and
      contingencies in connection with these matters based upon the latest information
      available. For those matters where it is probable that MTNL could have incurred
      a loss and the loss or range of loss can be reasonably estimated, the Company
      has recorded reserves in its consolidated financial statements. In other
      instances, MTNL is unable to make a reasonable estimate of any liability because
      of the uncertainties related to both the probable outcome and amount or range
      of
      loss. As additional information becomes available, MTNL adjusts its assessment
      and estimates of such liabilities accordingly.





Based
      on
      review of the latest information available, management believes that the
      ultimate liability in connection with pending tax and legal proceedings, claims
      and litigation will not have a material effect on the Company’s results of
      operations, cash flows or financial position, with the possible exception of
      the
      matters described below.





*(a)*
            *Sales
                tax*




The
      Company 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 at issue in Delhi is significantly
      less.





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, 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.
      Any proceeding initiated now shall be subject to the interim directions passed
      by the Hon’ble Supreme Court as stated above. Based on opinion received from
      legal counsel, management believes that an adverse outcome in respect of the
      above is not probable, however 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 the Company’s results of operations,
      financial condition and cash flow. At this time, we cannot estimate potential
      aggregate actual liability associated with sales tax





*(b)*
            *Income
                taxes*


i.
              The
                  Central Income Tax Authority of India (“CIT”) has disallowed the license
                  fee paid by the Company to DOT for the years ended March 31, 1994
                  till
                  March 31, 2004 as a tax deductible expense and has raised a demand
                  for
                  payment of taxes on increased taxable income relating to such expenses.
                  The amounts demanded, including interest on account of such disallowance,
                  for the years ended March 31, 1994 to March 31, 1996, March 31,
                  1998 to
                  March 31, 2001 and March 31, 2002 to March 31, 2004 are Rs. 15,988
                  million. As part of the appeals process the Company has paid deposits
                  under protest, amounting to Rs. 11,877 million and Rs. 13,427 million
                  as
                  of March 31, 2004 and 2005 These deposits have been classified
                  as part of
                  restricted assets on the Company’s consolidated balance sheets. Penalty
                  proceedings have also been initiated against the Company for the
                  years
                  ended March 31, 1997 to March 31, 2003. In December 2000, the appellate
                  authority upheld the Company’s appeal and cancelled the penalty for the
                  year ended March 31, 1996. However, the penalty proceedings for
                  the year
                  ended March 31, 1997 to March 31, 2003 have not yet been
                  concluded.


F-31
 Table
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 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements





The
      Company has contested all these claims and believes that it has a valid defense
      to the disallowance of license fees paid to DOT as a tax-deductible expense.
      During the year ended March 31, 2005, the Company 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 and MTNL has received
      refunds for these two years on the basis of the decision of the ITAT. The said
      ITAT decisions have not yet been contested by the revenue
      authorities.





Further
      in respect of assessment years 1995-96, 1996-97 and 2001-2002 **,** the
      Committee of Dispute (“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 of India, making the decision
      of the ITAT binding on both the parties. Subsequent to the COD’s decision, the
      Company has applied for refund claims with the Income Tax authorities for the
      assessment years 1995-96 and 1996-97.





Management
      believes that all claims will eventually be decided in favour of the Company
      and
      an adverse outcome in respect of the above is not probable. However, if the
      Company is ultimately unsuccessful in its defense it would be required to pay
      tax including interest amounting to Rs. 1,784 million in addition to Rs. 15,988
      million. The Company has not accrued the tax charge on license fee in the
      financial statements. The Company will receive interest on deposits paid under
      protest to the tax authorities if the case is decided in their
      favor.





ii.
            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 have been
                retained
                by the Company pending notification from the Government.





The
      CIT
      has 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 has deposited Rs.1,166 million and Rs. 1,306
      million as of March 31, 2004 and 2005 respectively under protest to the tax
      authorities. 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 has set up an ‘MTNL GPF Trust’ and
      has applied to the Income Tax authorities for the recognition of the said Trust.
      The Company believes that the entire GPF contribution till date will be allowed
      on payment of the same to the Trust.




The
      Company believes that it has a valid defense against the addition of such
      contribution to their taxable income. Based on opinion received from legal
      counsel, management believes that an adverse outcome in respect of the above
      is
      not probable. However, if the Company is unsuccessful in its defense it would
      be
      required to pay tax including interest amounting to Rs.4,137 million on employee
      contributions retained from November 1, 1998 (the date of absorption of non
      executive employees) to March 31, 2005.





*(c)*
            *Disputes
                with BSNL*





In
      accordance with the Inter Connect Usages Regulations, the Company has accounted
      for interconnection usage 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 has 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 is that the
      claim is 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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            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements





Subsequent
      to the year ended March 31, 2005, the DOT has constituted a three member
      committee comprising of Member (Production), Telecommunications, Member
      (Finance) , Telecommunications and Deputy Director General (Business Solution)
      to resolve the issues relating to networking charges. The Company is in the
      process of reconciling their claims 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




*(d)*
            *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. 108
                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.
            In
                the year 2004-2005, the Company has received claims aggregating to
                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.
            Additionally
                the Company is also involved in law suits and claims amounting to
                Rs. 596
                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 flow.




**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
        honourable High Court directed the other operator to pay Rs. 2,368 million
        to
        MTNL. On October 4, 2005, the court has directed the other operator to pay
        further Rs. 530 million to 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.





F-33
 Table
            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements








*(e)*
            *Summary
                of above litigations*





The
      following table summarizes the potential exposure (excluding interest and
      penalty) of the Company of March 31, 2005 with respect to above stated pending
      litigations in the event the same is settled against the Company:





**As
                of March 31,*****Also
                refer note***
            
            **2005**
            
            **2005****(Millions
                of Rupees)**
            
            **(Millions
                of US $)**
              **Unaudited**Sales
                tax demanded on the Company’s revenue
            **22
                (iii) (a)**
            
            Amount
                not ascertainable
            
            Amount
                not ascertainableDispute
                relating to disallowance of license fee
            **22
                (iii) (b) (i)**
            
            17,772
            
            407Additional
                income tax on disallowance of GPF retained by the Company
            **22
                (iii) (b) (ii)**
            
            4,483
            
            103Disputes
                with BSNL
            **22
                (iii) (c)**
            
            9,839
            
            226Arbitration
                dispute with M & N Publications
            **22
                (iii) (d) (i)**
            
            5,415
            
            124Arbitration
                dispute with Alcatel
            **22
                (iii) (d) (ii)**
            
            108
            
            2PRM
                services
            **22
                (iii) (d) (iii)**
            
            279
            
            6Other
                lawsuits and claims
            **22
                (iii) (d) (iv)**
            
            596
            
            14**38,492**
            
            **882**




**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 has not considered cellular
      services to be a reportable segment since it does not meet the thresholds of
      significance. The Company’s business is conducted exclusively in India, which
      for reporting purposes is considered a single geographical area. During the
      year
      ended March 31, 2004, and March 31, 2005 no single customer has contributed
      for
      revenue in excess of 10% of total revenue .





F-34
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            of Contents
 **MAHANAGAR
          TELEPHONE NIGAM LIMITED** Notes to the consolidated financial statements








**24.**
            **SUBSEQUENT
                EVENTS**




a)
            The
                Board of Directors has recommended payment of final dividend at 25%
                on the
                paid up equity capital of Rs. 6,300 million on June 21, 2005. 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, 2005 the Company had introduced another
                VRS
                scheme called MTNL Executive Retirement Scheme 2005. The employees
                were to
                exercise their option from June 1, 2005 to June 30, 2005. The Board
                of the
                Company reserved absolute authority in this matter and could refuse
                any
                applications received from the employees. The Company received
                approximately 800 applications however no decision has been taken
                and
                management has currently deferred acceptance of these applications.
                Management estimates that if all these applications were to be accepted,
                the cost to the Company would be Rs. 2,000 million
                approximately.




**25.**
            **SIGNIFICANT
                RISKS AND UNCERTAINTIES**




a)
            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.




b)
            Most
                of the Company’s employees were on secondment from DOT. The non-executive
                employees were given the option to be absorbed in the Company with
                effect
                from November 1, 1998. Under the option for pensionary benefits,
                these
                employees could opt to retain pensionary benefits in accordance with
                the
                Central Government pension rules or in accordance with MTNL retirement
                rules which were applicable to its directly recruited employees,
                and opt
                to draw pro rata monthly pension till their absorption in MTNL.
                Accordingly with effect from November 1, 1998, the Company started
                accruing for pension and gratuity for these employees.


Further,
      rules relating to settlement of pensionary terms in respect of Government
      employees transferred to public undertakings, required the company to create
      a
      pension fund and provided for the Government to discharge its pensionary
      liability by paying in lump sum as a one time payment, the pro rata pension
      and
      gratuity for the service up to the date of transfer (November 1, 1998) of
      government servants from the Government to the undertaking. Accordingly on
      January 8, 2002 the Company claimed an amount of Rs.11, 700 million from DOT
      as
      DOT’s share of the liability.




However
      the DOT vide their letter no. 40-29/2002 -Pen (T) on August 29, 2002 and
      September 4, 2002 has communicated that the pensionary benefits to the
      Government employees absorbed in MTNL and who have opted for either the
      Government Scheme of pension or for prorated pension scheme shall be paid by
      the
      Government. However, the terms of the settlement are yet to be finalized. In
      absence of details with regard to the basis required for determination of the
      amount payable by the company, no adjustment has been made in the cost of
      retirement benefits accrued in these financial statements for the
      above.




c)
            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.




d)
              The
                  Company has been advised by its counsel that although the Company
                  has
                  valid possession including the risks and rewards of ownership and
                  title to
                  all of its property, to enable MTNL to perfect and thereby acquire
                  marketable title to real property in its possession, it would need
                  to have
                  relevant documents relating to transfer or lease of real property
                  duly
                  registered and stamped. Accordingly, MTNL cannot sell its properties
                  without payment of stamp duties and registering the properties
                  in its
                  name. (Also refer note 7).


F-35
 Table
          of Contents


**SIGNATURES**




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




Mahanagar
      Telephone Nigam Limited





By
            /s/
                Anita SoniName:
            Anita
                SoniTitle:
            Director
                - Finance








Date:  October
      20, 2005





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).