Segment total assets and liabilities have not been allocated, in the absence of a meaningful basis to allocate assets and liabilities between segments. Fixed assets are used interchangeably between segments.

Liquidity and Capital Resources

            The Company’s principal capital resources are primarily generated from its operations. In addition, the Company borrows funds for short-term requirements from time to time in order to meet temporary working capital needs. While the Company anticipates significant liquidity requirements in the near future, the Company believes, based on its current financial condition and market outlook, that its cash and cash equivalents and ability to borrow will be sufficient to meet such requirements.

The Company generated Rs.9,862 million, Rs.13,140 million and Rs. 3,069 million (US$ 70.36 million) in cash flows from its operations for fiscals 2003, 2004 and 2005, respectively. Net cash provided by operations consisted primarily of net income as increased by depreciation, impairment of property, plant and equipment, share of loss in affiliates, reduction in trade and other receivables, other assets and increase in trade payables and accrued expenses and other liabilities. Cash flow from operations in fiscal 2004 increased significantly over fiscal 2003 as a

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result of favorable changes in advance taxes paid, accounts payables, accrued expenses and other current liabilities. Cash flow from operations in fiscal 2005 was reduced by the net gain on the sale of investments, mainly Intelsat and New Skies Satellite, of Rs.5,523 million. The significant decrease in the cash provided by operating activities during fiscal 2005 was on account of unfavorable changes in accounts receivables, advance taxes paid, accrued expense and other current liablilites as compared to the previous fiscal year.

The Company used Rs.11,697 million, Rs. 7,262 million and Rs.1,010 million (US$ 23.15 million) of its cash flows during fiscals 2003, 2004 and 2005, respectively, in its investing activities. Net cash used in investing activities that involved the acquisition of additional property, plant and equipment was Rs.2,868 million, Rs.4,783 million and Rs.12,708 million (US$ 291.33 million) for fiscal 2003, 2004 and 2005, respectively. In fiscal 2003 and fiscal 2005, there was an increase in short term deposits of Rs.5,845 million and Rs.3,627 million respectively whereas in fiscal 2004 there was a withdrawal of Rs.13,149 million to invest in mutual funds. In all, during fiscal 2005 the Company invested Rs.40,729 million (US$ 933.72 million) in mutual funds and sold investments amounting to Rs.50,319 million (US$1,153.58 million). During fiscal 2005, the Company made investments of Rs.2,354 million (US$ 53.97 million) in TTSL and its subsidiaries. In August 2005, the Company made a further investment of Rs.1,755 million (US$ 40.23 million) in TTSL by subscribing to their rights issue. The Company realized Rs. Nil, Rs. 1,393 million and Rs. 7,375 million (US$169.07 million) during fiscal years 2003, 2004 and 2005 respectively from the sale if its investments in satellite companies, including Intelsat, New Skies Satellite and Inmarsat.

The Company used Rs.5,774 million, Rs.5,963 million and Rs.1,913 (US$ 43.86 million) of its cash flows for its financing activities for fiscal 2003, 2004 and 2005 respectively. This primarily consisted of repayment of short term borrowings of Rs.2,211 million and Rs.3,540 in fiscal 2003 and fiscal 2004 respectively, together with the dividend paid of Rs.3,563 million and Rs.2,423 million during fiscal 2003 and 2004, respectively. In fiscal 2005, the Company repaid the Rs.630 million (US$ 14.44 million) loan assumed from DishnetDSL Limited on acquiring its broadband division. The Company paid dividends amounting to Rs.1,283 million (US$ 29.41 million) during fiscal 2005.

As of March 31, 2005, the Company’s cash and cash equivalents were Rs. 339 million (US$7.77 million) as against Rs.187 million as of March 31, 2004.

The Company’s working capital, which the Company defines as the excess of current assets over current liabilities, increased from Rs.14,215 million as of March 31, 2004 to Rs.18,855 million (US$ 432.25 million) as of March 31, 2005. This increase was primarily due to the following reasons:

The Company’s cash and cash equivalents along with short term deposits with banks as of March 31, 2005 was Rs. 14,131 million (US$323.96 million). Other than the normal business capital expenditures related to its existing businesses and related working capital requirements, the known and likely commitments of the Company towards acquisitions and new ventures, which are discussed below, are approximately Rs.30 billion. This expenditure could be staggered over fiscals 2006 and 2007. The Company will have to explore options to raise financial resources either in the domestic or global markets or both to meet its likely commitments. The terms and conditions under which financing will be available cannot be determined and are subject to fluctuations and uncertainties. Any problems in obtaining favorable credit ratings and access to the financial markets can be detrimental to the Company’s liquidity position and can cause delays and cost escalations in the Company’s business plans.

The following factors are expected to impact the Company’s liquidity and capital resources:

Integration and operations of the Tyco Global Network

The acquisition of the undersea cable network was completed on July 1, 2005. The acquisition consideration of US$130 million in cash (excluding related expenses of the transaction) was funded initially entirely by the Company. Subsequently, the acquiring subsidiary, VSNL Singapore Pte. Ltd, borrowed bridge loans amounting to US$120 million and repaid the Company. The bridge loans are to be repaid by the subsidiary on December 30, 2005. The bridge loans may be converted into a long-term loan facility. The Company expects that it will be required to fund the working capital needs of the Tyco business until they become cash positive.

Completion of the Teleglobe International Holdings Ltd. acquisition

The Company announced on July 25, 2005, that it had agreed to acquire Teleglobe. The acquisition remains subject to Teleglobe shareholder approval and government consents in various countries. The Company along with its subsidiary, VSNL Telecommunications (Bermuda) Ltd., entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”) with Teleglobe International Holdings Ltd. (“Teleglobe”) pursuant to which Teleglobe

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will be amalgamated with VSNL Telecommunications (Bermuda) Ltd and the resulting company will be a wholly owned subsidiary of the Company. The acquisition consideration of US $239 million comprises a payment of $ 4.50 per share to Teleglobe shareholders amounting to approximately US$178 million and assumption of debt of approximately US$61 million. Following the proposed amalgamation, Teleglobe will cease to exist as a publicly held company and the amalgated company will be a privately held, wholly owned subsidiary of VSNL. As a result of the amalgamation, each issued and outstanding common share of Teleglobe will be cancelled. The completion of this transaction, which could occur during fiscal 2006, could cause the Company to borrow in the Indian or international markets. For the six months ended June 30, 2005, Teleglobe reported EBITDA of US$14 million in its quarterly 10-Q filing dated August 10, 2005 with the SEC.

Completion of the Tata Broadband acquisition

The Company has agreed to acquire Tata Power Broad band Limited (“TPBB”) from Tata Power Company Ltd. The acquisition is expected to be completed in fiscal 2006 and will require the payment of acquisition consideration of Rs. 2,390 million (US$ 57 Million) in cash.

Capital commitments in South Africa

VSNL has been allotted a 26 percent stake in a South African company which is intended to become the second national telecommunications operator in South Africa. The equity capital contribution for the project is expected to be approximately US$900 million, of which the Company’s share will be approximately US$234 million. The Company expects that the investment will be made during fiscals 2006 and 2007 but cannot predict the actual timing or the sources of financing of the investment.

Planned capital expenditure and cash requirements for each of the Company’s operating segments

The Company has forecast total capital expenditure of approximately Rs.36 billion (US$ 816 million) in its annual operating plan for fiscal 2006. Other than approximately Rs.14 billion for some of the above-mentioned acquisitions and investments in fiscal 2006, the rest would involve capital expenditure for upgrading facilities and setting up new networks and facilities.

In terms of the segments of the Company, the Company expects to incur limited capital expenditure in respect of its wholesale business. Certain other components of the capital expenditure would include expenditure on information technology assets, sustenance capital expenditure and enhancement of infrastructure. The bulk of the investments of the balance approximately 22 billion (US $ 504 million) is towards enhancing the transmission capacities and last mile connectivities of the Company, both inland and offshore. Such enhancements are primarily to be used by the data and internet products offered by the Company. Accordingly the enterprise segment and certain other Internet products such as retail broadband which have been classified under “Other” services would entail substantial capital expenditure. Further the Company expects to incur capital expenditure on infrastructure development such as “Centralized Network Management Systems” which are common to all the segments of the Company.

Fall in revenues from enterprise business services

The Company is facing pressure from the Government to agree to tariff reductions of between 29 and 64 percent for its IPLC services. Further, the entry into the enterprise business of at least two other major carriers who have capacities on international cables has caused prices of many of our enterprise businesses to decline. These factors could cause revenues and profits to decline in fiscal 2006 and future periods, which would adversely affect the working capital of the Company.

Decline in revenues from outgoing international telephony revenues

The Indian telecommunications sector is intensely competitive and we face competition in each of our businesses. However, ILD services continue to be the largest contributor to the Company’s revenues. Our competitors in the ILD business have resorted to steep rate cuts that we have had to match to remain competitive. Though these rate cuts stabilized in the last year, they have affected our traffic minutes, revenues and market share adversely. However, the Company’s share of the market continues to fall especially with regard to outgoing calls due to the dependence on MTNL/BSNL. BSNL has already started its own ILD operations and MTNL is likely to start such operations in fiscal 2006, further reducing the Company’s traffic. This could cause the Company’s revenues and profits to decline, affecting the Company’s working capital.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet financing arrangements.

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The Company is not involved in any trading activities.

Capital Expenditures

Subsequent to the privatization of the Company in February 2002, the Company is no longer required to follow the Governmental system of five year plans to implement capital expenditure programs.

The Company now prepares and modifies as necessary its annual capital expenditure plans to reflect the changing competitive market. The Company envisages major investments in construction and acquisition of undersea cables during fiscal 2005. The Company also intends to invest in the NLD business and in acquiring last mile access for its broadband and enterprise data businesses. The Company also expects to incur major capital expenditures to upgrade and implement state-of-the-art systems in information technology such as Internet data facilities, billing mediation systems and customer relationship management systems. The Company expects its capital expenditure in fiscal 2006 to be approximately Rs.21.52 billion (US$ 493 million) excluding its investments in new ventures and acquisitions of approximately Rs.14 billion.

The details of the Company’s known and likely commitment towards acquisitions and new ventures are discussed above.

Research and Development, Patents and Licenses

The Company conducts its own internal research activity in order to achieve its strategic goals and to participate in current technological advancements. The Company plans to invest in internal research and development. The main focus of the Company’s internal research and development activity is the exploration of suitable technologies that enable the Company to best serve its customers, gain competitive advantage in the telecommunications market and reduce its cost of operations. The research and development the Company has focused, in recent years on access technologies, content delivery systems, tools for network optimization, graphic user interface applications for network inventory systems and Internet applications.

In accordance with the accounting policy on research and development adopted by the Company in fiscal year 2000, all costs incurred on research and development by the Company are charged to the income statement under the relevant line items.

Trend Information

The Company expects the intense competitive pressures on its core ILD business to continue, with further decreases in ILD tariffs and settlement rates. The Company expects that these pressures will continue to adversely affect its revenues and margins in fiscal 2006 and beyond.

While the Company generated approximately 49 percent of its revenues from its ILD telephony business in fiscal 2005, this could change significantly in the future. This is because the opening of this business to competition from April 2002 has continued to result in increased competitive pressure for volumes. Simultaneously, prices have also dropped steeply since then because inbound carriers now have the choice of sending traffic through several operators. The Company’s “most favored customer” status over traffic from BSNL and MTNL, which together control a major portion of the outgoing traffic, came to an end in February 2004. Although the Company retained the outgoing traffic of BSNL and MTNL during fiscal 2005 after competing with other ILD operators, the Company’s gross revenues as well as its margins from such traffic declined. The latest tendering by BSNL saw the Company lose out on sectors with significant volumes to competitors. Furthermore, BSNL has been granted operating licenses for international telephony services by the Government and has started ILD operations. In March 2004, the Company and BSNL signed an agreement pursuant to which BSNL commenced utilizing the Company’s infrastructure during fiscal 2005. This agreement is valid until October 2005. It has been widely reported that BSNL is building its own network for carrying ILD traffic. There have also been reports that MTNL would be granted an ILD license in the current fiscal year. Any of the above aforementioned events could negatively affect the revenues of the Company.

The Company’s success in the ILD and NLD business also depends on the ability to access retail customers who choose the Company’s service. A key element in this process is the implementation of the Carrier Access Code system, which will enable customers to choose the ILD and NLD operators of their choice. The pace of implementation of the Carrier Access Code depends on Government policy, which is currently unclear.

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The BPO and IT markets in India have been growing rapidly and the trend is expected to continue, which could result in significant growth in the Company’s corporate data transmission business. However, the presence of new competitors with large amounts of bandwidth is reducing prices for these services. Many of the Company’s competitors have acquired large amounts of bandwidth, and the Company is repositioning itself to compete effectively in bandwidth intensive businesses. The Company hopes that the introduction of innovative pricing, differentiated packages and diverse offerings will enable it to compete effectively in these businesses.

The Company is one of the largest Internet service providers in the country. However, the Internet services market in the future may move towards other bandwidth intensive applications, such as video on demand, gaming, interactive education, etc. The Company is planning a major broadband initiative to offer integrated voice, data and video services and is laying down the infrastructure to support a range of information, entertainment and telecom services.

The Company has made significant investments in international businesses mainly through acquisitions. The acquired businesses are prone to uncertainties with respect to the revenues and profit margins. These acquisitions also involve a range of other risks like those related to execution and integration risks and regulatory issues. Further, these ventures could entail the Company to incur or assume debt, or assume contingent liabilities.

Trends affecting liquidity and working capital are discussed above.

Financial and Management Accounting and Reporting Systems

The Company continued to be subject to various laws and Government policies in respect of public sector enterprises and to follow procedures appropriate for a public sector entity until its privatization in 2002. Consequently, the Company’s financial and management accounting and reporting systems are not as developed as those of certain comparable companies outside India. In addition, the Company’s procedures for preparing budgets and appraising and monitoring capital expenditure projects could be less precise than those used by comparable private sector companies. In order to address certain of these deficiencies, the Company continues to improve data input for its traffic accounts, has increased the number and quality of its financial and accounting personnel, and has, in fiscal 2005, commissioned an integrated financial accounting and budgeting system.