United States Securities and Exchange Commission

Washington, DC 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006

Commission File Number 000-27663

SIFY LIMITED

(Translation of registrant’s name into English)

Tidel Park, Second Floor
No. 4, Canal Bank Road, Taramani
Chennai 600 113, India
(91) 44-254-0770
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20F þ Form 40 F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1). Yes o No þ

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7). Yes o No þ

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes o No þ

If “Yes” is marked, indicate below the file number assigned to registrant in connection with Rule 12g3-2(b). Not applicable.

Sify Limited is incorporating by reference the information and exhibits set forth in this Form 6-K into its registration statements on Form S-8 (Registration Nos. 333-101322, 333-107938 and 333-135804) and on Form F-3 (Registration Nos. 333-101915 and 333-121047).

The number of equity shares of the Registrant outstanding as of September 30, 2006 was 42,712,480.

 

 

Table of Contents

SIFY LIMITED

FORM 6-K

For the Quarter ended September 30, 2006

INDEX

Part I Financial Information
Item 1. Financial Statements
a) Unaudited Condensed Consolidated Balance Sheets
b) Unaudited Condensed Consolidated Statements of Income
c) Unaudited Condensed Consolidated Statements of Cash Flows
d) Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income
e) Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits

Currency of Presentation and Certain Defined Terms

     Unless the context otherwise requires, references herein to “we,” “us,” the “company” or “Sify” are to Sify Limited, a limited liability company organized under the laws of the Republic of India. References to “U.S.” or the “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. Until December 2002, we were a majority-owned subsidiary of Satyam Computer Services Limited (“Satyam Computer Services”), a leading Indian information technology services company which is traded on the New York Stock Exchange and the major Indian stock exchanges. In January 2003, we changed the name of our company from Satyam Infoway Limited to Sify Limited. “Sify,” “SifyMax.in,” “satyamonline.com” and “Satyam iway” are trademarks used by us for which we have registration applications pending in India. All other trademarks or trade names used in this quarterly report are the property of their respective owners.

     In this report, references to “$,” “US$,” “Dollars” or “U.S. dollars” are to the legal currency of the United States, and references to “Rs.,” “rupees” or “Indian Rupees” are to the legal currency of India. References to a particular “fiscal” year are to our fiscal year ended March 31 of that year.

     For your convenience, this report contains translations of some Indian rupee amounts into U.S. dollars which should not be construed as a representation that those Indian rupee or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the case may be, at any particular rate, the rate stated below, or at all. Except as otherwise stated in this report, all translations from Indian rupees to U.S. dollars contained in this report have been based on the noon buying rate in the City of New York on September 30, 2006 for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate on September 30, 2006 was Rs.45.95 per $1.00.

     Our financial statements are prepared in Indian rupees and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. In this report, any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

     Information contained in our websites, including our principal corporate website, www.sifycorp.com, is not part of this report.

Forward-looking Statements May Prove Inaccurate

     IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED “RISK FACTORS” AND ELSEWHERE IN THIS REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE OF THIS REPORT. IN ADDITION, YOU SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS WEBSITE, WWW.SEC.GOV.

Part I. Financial Information
Item 1. Financial Statements

SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and as otherwise stated)

		As at March 31,				As at September 30,
		2006				2006				2006
		Rs.				Rs.				$
ASSETS
Current assets:
Cash and cash equivalents		Rs.	2,822,501			Rs.	2,315,552			$	50,393
Accounts receivable			838,433				1,052,468				22,905
Due from employees			23,818				3,633				79
Inventories			30,462				30,803				670
Prepaid expenses			91,158				130,777				2,846
Net investment in leases			10,776				16,003				348
Other current assets			212,696				286,100				6,226
Total current assets			4,029,844				3,835,336				83,467
Cash restricted			1,000				1,000				22
Net investment in leases			10,842				17,311				377
Property, plant and equipment-net			1,423,246				1,610,736				35,054
Goodwill and other intangible assets			62,436				156,056				3,396
Investments in affiliated companies			233,060				256,954				5,592
Other assets			191,343				194,153				4,225
Total assets		Rs.	5,951,771			Rs.	6,071,546			$	132,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of capital lease obligations			2,759				2,418				53
Trade accounts payable			440,841				184,395				4,013
Accrued liabilities			584,264				667,252				14,521
Deferred revenue			444,333				473,786				10,311
Due to employees			1,300				1,200				26
Advances from customers			112,512				108,719				2,366
Other current liabilities			74,174				112,803				2,455
Total current liabilities			1,660,183				1,550,573				33,745
Capital lease obligations, excluding current installments			2,546				2,684				58
Other liabilities			234,533				240,006				5,223
Total liabilities			1,897,262				1,793,263				39,026
Stockholders’ equity
Common stock, Rs 10 par value; 50,000,000 equity shares authorized (as of March 31, 2006 : 50,000,000) ; Issued and outstanding: 42,712,480 shares as of September 30,2006 and 42,389,514 shares as of March 31, 2006			423,895				427,125				9,295
Additional paid-in capital			16,238,413				16,286,073				354,430
Deferred compensation — employee stock offer plan			(41,925	)			—				—
Accumulated deficit			(12,565,874	)			(12,434,915	)			(270,618	)
Total stockholders’ equity			4,054,509				4,278,283				93,107
Total liabilities and stockholders’ equity		Rs.	5,951,771			Rs.	6,071,546			$	132,133

See accompanying notes to unaudited condensed consolidated financial statements

SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data and as otherwise stated)

		Quarter ended September 30,												Six Months ended September 30,
		2005				2006				2006				2005				2006				2006
		Rs.				Rs.				$				Rs.				Rs.				$
Revenue
Products		Rs.	79,655			Rs.	128,905			$	2,805			Rs.	147,648			Rs.	248,950			$	5,418
Services			1,039,199				1,254,193				27,295				1,977,259				2,452,529				53,374
		Rs.	1,118,854			Rs.	1,383,098				30,100			Rs.	2,124,907			Rs.	2,701,479				58,792
Revenue from related parties
Products			41,191				—				—				43,879				—				—
Services			12,848				—				—				25,382				—				—
			54,039				—				—				69,261				—				—
Total Revenue			1,172,893				1,383,098				30,100				2,194,168				2,701,479				58,792
Cost of revenue
Products			103,497				111,327				2,423				165,378				212,676				4,628
Services			556,245				594,712				12,943				1,076,339				1,188,679				25,869
			659,742				706,039				15,366				1,241,717				1,401,355				30,497
Selling, general and administrative expenses			473,098				478,794				10,420				898,171				959,574				20,883
Provision for doubtful receivables and advances			16,827				50,579				1,101				33,045				73,664				1,603
Depreciation			97,893				105,090				2,287				197,705				200,126				4,355
Amortisation of intangible assets			16,826				12,133				264				38,864				28,630				623
Amortisation of deferred stock compensation expense			813				5,527				120				1,970				41,470				903
Foreign exchange (gain) / loss			(2,853	)			(302	)			(7	)			(2,633	)			(44,339	)			(965	)
Total operating expenses			1,262,346				1,357,860				29,551				2,408,839				2,660,480				57,899
Operating profit / (loss)			(89,453	)			25,238				549				(214,671	)			40,999				893
Other income, net			9,340				35,192				766				25,527				66,066				1,438
Profit / (loss) before taxes and equity in profit of affiliate			(80,113	)			60,430				1,315				(189,144	)			107,065				2,331
Equity in profit of affiliate			18,526				8,106				176				29,408				23,894				520
Profit / (loss) before income tax			(61,587	)			68,536				1,491				(159,736	)			130,959				2,851
Taxes			—				—				—				—				—				—
Net profit / (loss) after tax		Rs.	(61,587	)		Rs.	68,536			$	1,491			Rs.	(159,736	)		Rs.	130,959			$	2,851
Net profit / (loss) per   share — Basic			(1.74	)			1.60				0.03				(4.51	)			3.07				0.07
Net profit / (loss) per   share — Diluted			(1.74	)			1.60				0.03				(4.51	)			3.06				0.07
Weighted average equity shares — Basic			35,380,278				42,704,756				42,704,756				35,380,278				42,644,682				42,644,682
Weighted average equity   shares — Diluted			35,380,278				42,851,406				42,851,406				35,380,278				42,840,081				42,840,081

See accompanying notes to unaudited condensed consolidated financial statements

SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and as otherwise stated)

		Six months ended September 30,
		2005				2006				2006
		Rs.				Rs.				$
Net profit / (loss)		Rs.	(159,736	)		Rs.	130,959			$	2,851
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
Depreciation, impairment and amortization of intangible assets and deferred stock compensation			238,539				270,226				5,881
Equity in profit of affiliate			(29,408	)			(23,894	)			(520	)
(Gain) / Loss on sale of property, plant and equipment			780				(261	)			(6	)
Provision for doubtful receivables and advances			33,045				73,664				1,603
Unrealized (gain) / loss on account of exchange differences			—				765				17
Translation (gain) / loss on cash and cash equivalents			(2,070	)			(11,235	)			(244	)
Gain on disposal of subsidiary			(1,595	)			—				—
Changes in assets and liabilities:
Accounts receivable			(126,441	)			(288,569	)			(6,280	)
Due from employees			(2,165	)			20,384				443
Due from related parties			(16,544	)			—				—
Inventories			(18,240	)			(341	)			(7	)
Prepaid expenses			27,441				(39,619	)			(862	)
Other assets			1,963				(76,316	)			(1,661	)
Net investment in leases			2,964				(11,696	)			(255	)
Trade accounts payable and accrued liabilities			62,264				(173,591	)			(3,778	)
Deferred revenue			99,771				29,453				641
Advances from customers			23,771				(3,771	)			(82	)
Other liabilities			(10,502	)			20,818				453
Net cash provided/(used) by operating activities		Rs.	123,837			Rs.	(83,024	)		$	(1,806	)
Cash flows from investing activities:
Expenditure on property, plant and equipment			(337,416	)			(385,908	)			(8,399	)
Proceeds from sale of property, plant and equipment			1,280				1,640				36
Expenditure on intangible assets			—				(7,278	)			(158	)
Business acquisition			—				(92,934	)			(2,023	)
Net movement in cash — restricted			21,240				—				—
Net cash used in investing activities		Rs.	(314,896	)		Rs.	(484,480	)		$	(10,544	)
Cash flows from financing activities:
Principal payments under capital lease obligations			(3,670	)			(2,025	)			(44	)
Net proceeds from issuance of common stock			—				51,345				1,117
Net cash provided by financing activities		Rs.	(3,670	)		Rs.	49,320			$	1,073
Effect of exchange rate changes on cash and cash equivalents			2,070				11,235				245
Net increase / (decrease) in cash and cash equivalents			(192,659	)			(506,949	)		$	(11,032	)
Cash and cash equivalents at the beginning of the period			1,323,912				2,822,501				61,425
Cash and cash equivalents at the end of the period		Rs.	1,131,253			Rs.	2,315,552			$	50,393
Supplementary Information
Cash paid towards interest			6,425				4,012				87
Cash paid / (refund received) towards income taxes			(19,905	)			23,766				517
Additions to property, plant and equipment represented by capital lease obligations			1,131				1,720				37

See accompanying notes to unaudited condensed consolidated financial statements

SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data and as stated otherwise)

																		Deferred
																		Compensation -								Total
		Common Stock								Additional Paid In				Comprehensive				Employee Stock Offer				Accumulated				Stockholders’
		Shares				Par Value				Capital				Income				Plan				Deficit				Equity
		Nos.				Rs.				Rs.				Rs.				Rs.				Rs.				Rs.
Balance as of March 31, 2006 (1)			42,389,514				423,895				16,238,413								(41,925	)			(12,565,874	)			4,054,509
Issue of common stock			322,966				3,230				48,115																51,345
Compensation related to stock option grants											41,470								—								41,470
Reversal of unamortized compensation cost pursuant to adoption of SFAS 123R											(41,925	)							41,925
Net profit															130,959								130,959				130,959
Comprehensive income															130,959
Balance as of September 30, 2006			42,712,480				427,125				16,286,073								—				(12,434,915	)			4,278,283
Balance as of September 30, 2006 (in US$)							9,295				354,430								—				(270,618	)			93,107

SIFY LIMITED and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data and as stated otherwise)

1. Description of business

Sify Limited (“Sify’’) together with its subsidiaries (the “Company”) and its affiliates is engaged in providing various services, such as corporate network and data services, Internet access services, online portal and content offerings, and selling products related to such services.

2. Summary of significant accounting policies

	a.		Basis of preparation of financial statements
			The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) in Indian Rupees, the national currency of India. Solely for the convenience of the reader, the financial statements as of and for the quarter and six months ended September 30, 2006 have been translated into United States dollars at the noon buying rate in New York City on September 30, 2006 for cable transfers in Indian rupees, as certified for customs purposes by the Federal Reserve Bank of New York of US$1 = Rs. 45.95. 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 at any other rate on September 30, 2006 or at any other date.
	b.		Interim Information
			Interim information presented in the condensed consolidated financial statements has been prepared by the management without audit and, in the opinion of management, includes all adjustments of a normal recurring nature that are necessary for the fair presentation of the financial position, results of operations, and cash flows for the periods shown, is in accordance with U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 20-F for the fiscal year ended March 31, 2006.
	c.		Business combinations
			Business combinations have been accounted using the purchase method under the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. Cash and amounts of consideration that are determinable at the date of acquisition are included in determining the cost of the acquired business.

3. Acquisition of Globe Travel Business

During the quarter ended June 30, 2006, the Company acquired Globe Travels which operates an online travel agency. The management believes this acquisition marks Sify’s entry into the fast growing online travel business, particularly e-ticketing, the category with highest revenues and fastest growth in online e-commerce today. The management also believes that the addition of a travel portal is in line with the Company’s strategy of providing end-to-end services to Sify users. The results of Globe Travels operations have been consolidated in the financial statements effective May 10, 2006, the date of acquisition. The purchase price in respect of the business acquisition comprises the following:

Cash price		Rs. 112,220 (USD 2,500)
Stock options (No. of options)				140,000
Earn out payments		USD 500

The Cash price of USD 2,500 includes an amount of USD 500 as holdback amount payable upon the Airlines Reporting Corporation (“ARC”) approval of the Company’s application for change of ownership of the travel portal. The said holdback amount has been included and accounted as purchase consideration since the management, based on advice, believes that the resolution of the contingency (i.e approval of ARC) is beyond reasonable doubt.

The Stock Options have been treated as compensation cost in accordance with the provisions of EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination. Further, as the Earn Out Payment is contingent upon continuing employment and achievement of specified earning levels the same will be treated as compensation cost in accordance with the provisions of EITF 95-8. As the cost of Stock Options and Contingency Earn out payments are treated as compensation cost, the cost of acquisition comprises of only cash price of Rs.112,220 and other incidental direct acquisition cost of Rs.3,999.

The Cash Price has been allocated to the estimated fair value of the assets, properties including rights at the date of purchase of business.

The following table summarizes the preliminary allocation of estimated fair value of the assets, properties including rights at the date of purchase of the business. The allocation of the purchase price is subject to obtaining third party valuation of certain intangibles.

Property and Equipment		Rs.	1,246
Intangible Assets			88,052
Goodwill			26,921
Total			116,219

The acquired intangible assets, in the opinion of the management, have a weighted average useful life of five years. The intangible assets are as follows:

Customer and Contract related intangibles		Rs.	85,797
Software			2,255

4.		IP / VPN License
		In December 2004, as per the Government of India (“GOI”) guidelines regarding Virtual Private Network(“IP-VPN”) services by Internet Service Providers (“ISPs”), the Company paid Rs.100,000 as an entry fee for a 15 year license and submitted a financial bank guarantee of Rs.10,000 . In addition, the ISP licensees were required to pay an annual fee of 8% of the adjusted gross revenues generated under the ISP license for IP-VPN services.
		On November 10, 2005, the GOI issued guidelines for obtaining National Long Distance (“NLD”) and International Long Distance (“ILD”) licenses including the terms and conditions for the licenses. These guidelines eliminated the IP-VPN license, entitling the Company to a full refund of the Rs.100,000 entry fee, and permitting existing IP-VPN license holders to migrate to the NLD and ILD service licenses effective January 1, 2006. The Company has applied for these licenses. The Company discontinued amortization of the IP-VPN license effective November 10, 2005 and reversed the amortization of the license fee.
		As per the ILD and NLD license guidelines, the Company will be required to pay Rs. 50,000 as an entry fee for the ILD and NLD licenses when approval is obtained and submit a bank guarantee of Rs. 25,000 for the ILD license and Rs. 20,000 for the NLD license. This entry fee will be evenly amortized over the license period of 20 years. In addition to the entry fee, the Company has to pay an annual license fee of 6% on the Adjusted Gross Revenue generated (AGR) as defined under the ILD and NLD licenses for IP-VPN services.
		During the quarter ended September 30, 2006, the Company has received Letters of Intent (“LOI”) from the GOI specifying certain conditions that would need to be complied with, in connection with the grant of aforesaid licenses. The Company would obtain the ILD / NLD and the license Agreements would be signed only after the compliance of such conditions and the Company is in the process of complying with the same.

5.		Sale of 26% holding in Sify Communications Limited
		The new guidelines issued by the GOI for ILD/NLD licenses limit foreign direct investment (“FDI”) for the telecom sector to 74% of the equity shares outstanding. As the foreign shareholding in Sify is more than the threshold limit, Sify would not be eligible for the NLD/ILD licenses. Accordingly, the Company determined to provide the IP-VPN services through Sify Communications Limited (formerly Safescrypt Limited), a subsidiary of Sify. On December 19, 2005 Sify contributed Rs.700,000 as additional equity in Sify Communications Limited to make the net worth of the Sify Communications positive. On December 20, 2005, the Company entered into an agreement to divest 26% of its holding in Sify Communications Limited, or 4,680,000 shares, to M/s Infinity Satcom Universal (P) Ltd, a related party, for a sale consideration of Rs.139,810 . M/s Infinity Satcom Universal (P) Ltd is owned by Anand Raju, who is the brother of Raju Vegesna. Raju Vegesna is the Chairman of Sify’s Board of Directors and the principal of Infinity Capital Ventures, LP (“Infinity Capital”). Infinity Capital owns approximately 41.92 % of Sify’s outstanding equity shares. Sify Communications Limited has applied for the ILD/NLD license to provide IP-VPN services.
		The Company will be transferring the IP VPN business from Sify Limited to Sify Communications Limited upon the latter receiving the ILD / NLD license. Pending transfer of business as at September 30, 2006, the amount received against the sale proceeds is included under other liabilities. Further, Sify will carry on the business of IP VPN Services, until the business is transferred to Sify Communications Limited.
6.		Cash and cash equivalents
		Cash and cash equivalents as on September 30, 2006 amounted to Rs. 2,315,552 (Rs 2,822,501 as at March 31, 2006) and restricted cash included in non-current assets of Rs. 1,000 (Rs.1,000 as at March 31, 2006) representing deposits held under lien against bank guarantees given by the Company towards future performance obligations and letters of credit given to suppliers of the Company against purchase obligations.
7.		Goodwill and other intangible assets
		At September 30, 2006, the Company’s goodwill and other intangible assets amounted to Rs. 41,516 and Rs. 114,540 respectively (Rs 14,596 and Rs.47,840, as at March 31, 2006 respectively). The following are the details of other intangible assets:

										As at March 31, 2006								As at September 30, 2006
		Weighted				Gross								Weighted				Gross
		Average				carrying				Accumulated				average				carrying				Accumulated
		Life				amount				Amortization				life				amount				Amortization
Technical know how fees			5.00			Rs.	82,753			Rs.	79,240				5.00				82,753				82,753
Portals and web content			4.91				52,730				50,065				4.91				52,730				52,670
Customer contracts and others			4.04				56,084				39,119				4.62				141,883				48,762
Software			2.90				222,119				197,422				2.91				231,649				210,290
Total						Rs.	413,686			Rs.	365,846							Rs.	509,015			Rs.	394,475

The aggregate amortization expense for the quarter ended September 30, 2006 was Rs. 12,133 (Rs. 16,826 for the quarter ended September 30, 2005) and for the six months ended September 30, 2006 was Rs. 28,630 (Rs. 38,864 for the six months ended September 30, 2005).

Estimated amortization expense

For the year ending March 31,
2007		Rs.	48,241
2008			31,540
2009			25,647
2010			18,237
2011			17,610
2012			1,894

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill but tests it for impairment on an annual basis. The Company has not recognized any impairment of goodwill during the year ended March 31, 2006 or the six months ended September 30, 2006.

8. Employee Stock Options

Prior to March 31, 2006, the Company applied the intrinsic value based method of accounting prescribed by the Accounting Principles Board (APB) Opinion (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25”, issued in March 2000 to account for fixed Stock Option Plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.

SFAS 123, “Accounting for Stock Based Compensation”, established accounting and disclosure requirements using a fair value based method of accounting for Stock based employee compensation plans. As allowed by SFAS 123, the Company elected to continue to apply the intrinsic value based method of accounting described above, and adopted the disclosure requirements of SFAS 148, “Accounting for Stock based Compensation – Transition and Disclosure”, and amendment of FASB Statement 123. All Stock options issued to date have been accounted as fixed stock option plan.

The following table illustrates the effect on net income and earnings per share if the Company has applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation”, to account for stock based employee compensation.

		Quarter ended September 30,				Six months ended September 30,
		2005				2005
Net loss — as reported		Rs.	(61,587	)		Rs.	(159,736	)
Add: Stock based compensation expense included in reported net loss			813				1,970
Less: Stock based compensation expense determined under fair value method			(7,756	)			(21,154	)
Pro forma net loss		Rs.	(68,530	)		Rs.	(178,920	)
Loss per share:
Basic and diluted — reported		Rs.	(1.74	)		Rs.	(4.51	)
Basic and diluted — proforma		Rs.	(1.94	)		Rs.	(5.06	)

On April 01, 2006,the Company adopted FASB Statement No.123 (revised 2004), Share-Based Payment using the modified prospective approach .The Company recorded amortization of stock compensation expense of Rs. 5,527 for the quarter ended September 30, 2006 and Rs.41,470 for six months ended September 30, 2006

During the half year ended September 30, 2006, the Company has issued 275,600 shares under Associate stock option plan 2005 and has been accounted under SFAS 123R.

The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions:

		Quarter ended September 30,								Six months ended September 30,
		2005				2006				2005				2006
Dividend Yield			—				—				—				—
Assumed volatility			103.4%-116.6	%			58.13%–95.45	%			103.4%-116.6	%			58.13%–95.45	%
Risk-free interest rate			7.5	%			4.52%-4.84	%			7.5	%			4.52%-4.84	%
Expected Term		12-36 months				18-40 months				12-36 months				18-40 months

9. Gratuity

The Company provides for gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering all employees. The Gratuity Plan commenced on April 1, 1997. The plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee’s salary and the years of employment with the Company. The Company provides the gratuity benefit through annual contributions to a fund managed by the Life Insurance Corporation of India (“LIC”). Under this scheme, the settlement obligation remains with the Company, although the LIC administers the scheme and determines the contribution premium required to be paid by the Company. The Gratuity Plan is accounted for in accordance with SFAS No. 87, Employers’ Accounting for Pensions.

The following table sets out the funded status of the Gratuity Plan and the amounts recognized in the Company’s financial statements.

		Quarter ended September 30,								Six months ended September 30,
		2005				2006				2005				2006
Service cost		Rs.	1,701			Rs.	1,904			Rs.	3,403			Rs.	3,808
Interest cost			348				417				696				833
Expected returns on plan assets			(134	)			(41	)			(269	)			(81	)
Amortization			—				—				—				—
Recognized net actuarial (gain)/ loss			(123	)			(117	)			(245	)			(234	)
Net gratuity costs		Rs.	1,792			Rs.	2,163			Rs.	3,585			Rs.	4,326

		Quarter ended September 30,								Six months ended September 30,
		2005				2006				2005				2006
Principal actuarial assumptions:
Discount rate			8.0	%			8.0	%			8.0	%			8.0	%
Long-term rate of compensation increase			6.0	%			6.0	%			6.0	%			6.0	%
Rate of return on plan assets			7.5	%			7.5	%			7.5	%			7.5	%

The Company estimates the long term return on Gratuity Plan assets at 7.5% based on the average long term rate of return expected to prevail over the next 15 to 20 years on the type of investments held with LIC.

The Company’s best estimate of contributions expected to be paid to the Gratuity Plan during fiscal 2007 amounts to Rs.2,500. Further, the benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are:

For the year ending March 31,
2007		Rs.	1,827
2008			1,948
2009			2,748
2010			4,310
2011			6,942
2012-2016			38,558

10. Deferred revenue:

Deferred revenue includes the following amounts of unearned income:

	•		for the Company’s corporate network / data services division, revenue relating to the connectivity / hosting charges and from provision of digital certificates;
	•		for the Company’s Internet access services and online portal services divisions, revenue relating to the internet access charges and the advertisement charges respectively; and
	•		for the Company’s other service division, revenue relating to development of e- learning software.

The components of deferred revenue for these segments are:

		As at
		March 31, 2006				September 30, 2006
Corporate network / data services		Rs.	305,028			Rs	358,030
Internet access services			133,613				103,457
Online portal services			623				468
Other services			5,069				11,831
Total		Rs.	444,333			Rs.	473,786

11. Advertising costs

Advertising costs incurred during the quarter have been expensed. The total amount of advertising costs expensed during the quarter ended September 30, 2006 was Rs. 9,850 (Rs. 22,340 for the quarter ended September 30, 2005) and for the six months ended September 30, 2006 was Rs. 24,109 (Rs. 29,523 for the six months ended September 30, 2005).

12. Products and services

Break-up of revenues and cost of revenues against products and services are as follows:

		Quarter ended September 30,								Six months ended September 30,
		2005				2006				2005				2006
Revenue
Services revenue		Rs.	963,711			Rs.	1,170,081			Rs.	1,828,932			Rs.	2,331,971
Initial franchisee fee			29,683				19,578				52,396				35,578
Installation services revenue			58,653				64,534				121,313				84,980
			1,052,047				1,254,193				2,002,641				2,452,529
Products revenue		Rs.	120,846			Rs.	128,905			Rs.	191,527			Rs.	248,950
		Rs.	1,172,893			Rs.	1,383,098			Rs.	2,194,168			Rs.	2,701,479

		Quarter ended September 30,								Six months ended September 30,
		2005				2006				2005				2006
Cost of revenues (excluding depreciation and amortization)
Products		Rs.	103,497			Rs.	111,327			Rs.	165,378			Rs.	212,676
Services			548,355				574,070				1,062,096				1,142,124
Annual fee on IP VPN revenue			7,890				20,642				14,243				46,555
		Rs.	659,742			Rs	706,039			Rs.	1,241,717			Rs.	1,401,355

13. Segment reporting

SFAS No 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises report information about operating segments and related disclosures about products and services, geographic areas and major customers. The Company’s operations predominantly relate to connectivity to enterprises and providing Internet access to retail subscribers (both home access and public access). The Company also operates “Portals”, “Sify.com. ,” “Samachar.com” and “SifyMax.in,” that provide a variety of India-related content to audiences both in India and abroad, and which generates revenue from advertisements and other value added services.

The primary operating segments of the Company are:

	•		Corporate network/data services, which provides private network services, messaging services and web hosting to businesses;
	•		Internet access services;
	•		Online portals services and content offerings; and
	•		Other services such as development of e-learning software.

The Chief Operating Decision Maker (“CODM”) evaluates the Company’s performance and allocates resources to various strategic business units that are identified based on the products and services that they offer and on the basis of the market served. The measure of profit/loss reviewed by the CODM was “Earnings/loss before interest, taxes, depreciation and amortization.”

Revenue in relation to segments is categorized based on items that are individually identifiable to that segment. Bandwidth costs, which form a significant part of the total expenses, are allocated primarily between the corporate network/data services and Internet access services businesses as described below:

International bandwidth refers to bandwidth that is required for access to sites and offices outside the country. For all these businesses, bandwidth is allocated based on actual utilization captured by monitoring traffic per IP pool assigned at the egress points. The Company has packet shapers in the main locations to monitor bandwidth use by each of the above categories of users. This information is used in determining norms like bandwidth per port and bandwidth per PC. The actual utilization is cross validated against assumptions / norms for each business.

National bandwidth refers to the inter-city link bandwidth implemented within the country. Inter-city link bandwidth was allocated based on the number of subscribers or iway cyber cafés at “non gateway” points and the bandwidth sold to and used by business enterprises (determined using packet shapers). However, in order to strengthen its corporate business, the Company enhanced its national backbone to carry Internet traffic to the international fibre gateways, shifting from hybrid satellite and fibre gateways to fibre only gateways for international bandwidth. National bandwidth costs are now allocated based on international bandwidth allocation ratios because most of the traffic carried on the national backbone is directed towards the international gateways. The Company believes that the resulting allocations are reasonable.

Last mile costs related to dial-up access (E1/R2 costs) and spectrum fees for wireless connectivity that can be directly identified to businesses are allocated directly. Certain expenses, such as depreciation, technology and administrative overheads, which form a significant component of total expenses, are not allocable to specific segments as the underlying services are used interchangeably. Management believes that it is not practical to provide segment disclosure of these expenses and, accordingly, they are separately disclosed as “unallocated” and adjusted only against the total income of the Company

A significant part of the fixed assets used in the Company’s business are not identifiable to any of the reportable segments and can be used interchangeably between segments. Management believes that it is not practicable to provide segment disclosures relating to total assets since a meaningful segregation of the available data is onerous. The Company’s operating segment information for the quarters ended September 30, 2005 and 2006 and for the six months ended September 30, 2005 and 2006 is presented below:

														Quarter ended September 30, 2005
		Corporate				Internet
		Network/Data				Access				Online Portal
		Services				Services				Services				Other Services				Total
Revenues		Rs.	638,150			Rs.	456,524			Rs.	41,008			Rs.	37,211			Rs.	1,172,893
Allocated expenses			(395,529	)			(462,611	)			(45,596	)			(35,009	)			(938,745	)
Equity in profits of affiliates											18,526								18,526
Segment operating income / (loss)		Rs.	242,621			Rs.	(6,087	)		Rs.	13,938			Rs.	2,202			Rs.	252,674
Unallocated corporate expenses																			(210,922	)
Foreign exchange gain / (loss), net																			2,853
Other income / (expense), net																			4,151
Depreciation and amortization																			(115,532	)
Interest income, net																			5,189
Net Profit/(loss)																		Rs.	(61,587	)

		Quarter ended September 30, 2006
		Corporate
		Network / Data				Internet Access				Online Portal
		Services				Services				Services				Other Services				Total
Revenues		Rs.	788,369			Rs.	486,601			Rs.	69,828			Rs.	38,300			Rs.	1,383,098
Allocated expenses			(476,685	)			(469,049	)			(54,701	)			(32,806	)			(1,033,241	)
Equity in profits of affiliates											8,106								8,106
Segment operating income / (loss)		Rs.	311,684			Rs.	17,552			Rs.	23,233			Rs.	5,494			Rs.	,357,963
Unallocated corporate expenses																			(205,246	)
Foreign exchange gain / (loss), net																			302
Other income / (expense), net																			451
Depreciation and amortization																			(122,750	)
Interest income, net																			37,816
Net Profit/(loss)																		Rs.	68,536

		Six months ended September 30, 2005
		Corporate
		Network / Data				Internet Access				Online Portal
		Services				Services				Services				Other Services				Total
Revenues		Rs.	1,188,789			Rs.	869,861			Rs.	74,611			Rs.	60,907			Rs.	2,194,168
Allocated expenses			(731,392	)			(891,091	)			(83,833	)			(67,782	)			(1,774,098	)
Equity in profits of affiliates											29,408								29,408
Segment operating income / (loss)		Rs.	457,397			Rs.	(21,230	)		Rs.	20,186			Rs.	(6,875	)		Rs.	449,478
Unallocated corporate expenses																			(398,835	)
Foreign exchange gain / (loss), net																			2,633
Other income / (expense), net																			7,312
Depreciation and amortization																			(238,539	)
Interest income, net																			18,215
Net Profit/ (loss)																		Rs.	(159,736	)

		Six months ended September 30, 2006
		Corporate
		Network / Data				Internet Access				Online Portal
		Services				Services				Services				Other Services				Total
Revenues		Rs.	1,541,290			Rs.	952,124			Rs.	135,741			Rs.	72,324			Rs.	2,701,479
Allocated expenses			(901,040	)			(922,616	)			(117,304	)			(66,767	)			(2,007,727	)
Equity in profits of affiliates											23,894								23,894
Segment operating income / (loss)		Rs	640,250			Rs.	29,508			Rs.	42,331			Rs.	5,557			Rs.	717,646
Unallocated corporate expenses																			(433,411	)
Foreign exchange gain / (loss), net																			44,339
Other income / (expense), net																			797
Depreciation and amortization																			(270,226	)
Interest income, net																			71,814
Net Profit/(loss)																		Rs.	130,959

14.

Leases

The Company’s leasing arrangement consist of leasing various types of routers, modems and other equipment for setting up virtual private network and providing bandwidth to its customers in corporate connectivity business. The leases are classified as Sales-Type Leases and expire after a period of three years.

The following lists the components of the net investment in sales-type leases as of September 30, 2006:

Minimum lease payments receivable		Rs.	35,822
Less: Unearned income		Rs.	2,508
Net investment in sales-type leases		Rs.	33,314

The minimum lease payments receivable for each of the fiscal years are as follows:

For the year ending March 31,
2007		Rs.	8,802
2008			16,650
2009			6,129
2010			4,242

15. Commitments and contingencies

a) The Company had received a notice from the Income-Tax Department of India for the financial years 2002 and 2003 for a sum of Rs.77,700 stating that no withholding tax has been deducted in respect of international bandwidth and leased line payments made by the Company to international bandwidth / lease line service providers.

Based on the legal opinion, withholding taxes need not be deducted if the service provider did not have any permanent establishment in India and has not installed any equipment at the Company’s premises. The Company is able to demonstrate that international service providers has neither had a permanent establishment in India nor has installed any equipment at the Company’s premises. Accordingly, the likelihood of the loss contingency is remote and no provision for the loss contingency is considered necessary.

b) The Company has outstanding financial and performance guarantees for various statutory purposes and letters of credit totalling
Rs. 343,200 and Rs. 220,731 as of September 30, 2005 and 2006, respectively. These guarantees are generally provided to governmental agencies.

c) Provident Fund contribution not provided for on leave encashment in respect of periods prior to April 01, 2005 is estimated at Rs.4,326.

16. Legal proceedings

The Company and certain of its officers and directors are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. This action, which is captioned In re Satyam Infoway Ltd. Initial Public Offering Securities Litigation, also names several of the underwriters involved in Sify’s initial public offering of American Depositary Shares as defendants. This class action is brought on behalf of a purported class of purchasers of Sify’s ADSs from the time of Sify’s Initial Public Offering (“IPO”) in October 1999 through December 2000. The central allegation in this action is that the underwriters in Sify’s IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased Sify’s ADSs in the IPO and the aftermarket. The complaint also alleges that Sify violated the United States federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 300 issuers have been named in similar lawsuits.

July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers was filed by the entire group of issuer defendants in these similar actions. In October 2002, the cases against the Company’s executive officers who were named as defendants in this action were dismissed without prejudice. In February 2003, the court in this action issued its decision on defendants’

omnibus motion to dismiss. This decision denied the motion to dismiss the Section 11 claim as to the Company and virtually all of the other issuer defendants. The decision also denied the motion to dismiss the Section 10(b) claim as to numerous issuer defendants, including the Company. On June 26, 2003, the plaintiffs in the consolidated IPO class action lawsuits currently pending against Sify and over 300 other issuers who went public between 1998 and 2000, announced a proposed settlement with Sify and the other issuer defendants. The proposed settlement provides that the insurers of all settling issuers will guarantee that the plaintiffs recover $1 billion from non-settling defendants, including the investment banks who acted as underwriters in those offerings. In the event that the plaintiffs do not recover $1 billion, the insurers for the settling issuers will make up the difference.

The Company believes that it has sufficient insurance coverage to cover the maximum amount that it may be responsible for under the proposed settlement. Although the Federal District Court has preliminarily approved the settlement, it is possible that the Federal District Court may not finally approve the settlement in whole or part. The Company believes the maximum exposure under this settlement, in the event that the plaintiffs recover nothing from the non-settling defendants, is approximately U.S. $3.9 million, an amount which the Company believes is fully recoverable from the Company’s insurer.

The Company is party to additional legal actions arising in the ordinary course of business. Based on the available information, as of September 30, 2006 Sify believes that it has adequate legal defenses for these actions and that the ultimate outcome of these actions will not have a material adverse effect on Sify.

17. Subsequent Event

Sify Communications Limited was granted NLD and ILD licenses by Government of (GOI) on November 21, 2006, which permits the company to offer and provide the IP VPN services to the customers. These licenses are valid for an initial period of 20 years from the date of grant and can be renewed for 10 years at one time, upon the request of the company, if made during the 19^th year of the license period. Sify has transferred the IP VPN business effective November 22, 2006 to Sify Communications Limited, which commenced IP VPN services from that date.

18. Reclassifications

          Certain prior period/year amounts have been reclassified to conform to the current year’s presentation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          The following discussion of the financial condition and results of operations of our company should be read in conjunction with the unaudited consolidated financial statements and the related condensed notes included elsewhere in this report and the audited financial statements and the related notes contained in our Annual Report on Form 20-F for the fiscal year ended March 31, 2006. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding these risks and uncertainties, please see the section in this report captioned “Risk Factors.”

Overview

          Our company, Sify Limited (formerly known as Satyam Infoway Limited), was organized as a limited liability company under the laws of the Republic of India pursuant to the provisions of the Indian Companies Act on December 12, 1995. Until December 2002, we were a majority-owned subsidiary of Satyam Computer Services, a leading Indian information technology services company traded on the New York Stock Exchange and the principal Indian stock exchanges. Our company was formed as a separate business unit of Satyam Computer Services to develop and offer connectivity-based corporate services allowing businesses in India to exchange information, communicate and transact business electronically. We conduct substantially all of our business in India. Our subsidiaries include Sify Communications Limited (formerly Safescrypt Limited), Indiaworld Communications Limited, Sify International Inc. and Sify Networks Private Limited. The address of our principal executive office is Tidel Park, 2nd Floor, No. 4, Canal Bank Road, Taramani, Chennai 600 113 India, and our telephone number is (91) 44-2254-0770.

          From December 1995 through 1997, we focused on the development and testing of our private data network. In 1997, we began forming strategic partnerships with a number of leading technology and electronic commerce companies, including UUNet Technologies, in order to broaden our service offerings to our corporate customers. In March 1998, we obtained network certification for conformity with Indian and international network operating standards from the Technical Evaluation Committee of India. In April 1998, we began offering private network services to businesses in India. Our initial services included electronic data interchange, e-mail and other messaging services, virtual private networks and related customer support.

          In October 1998, we initiated our online content offerings with two websites: carnaticmusic.com and indiaupdate.com. We also started development of www.sify.com, our online portal, and other related content sites for personal finance, movies and automobiles with the goal of offering a comprehensive suite of websites offering content specifically tailored to Indian interests worldwide.

          On November 6, 1998, the Indian government opened the Internet service provider market place to private competition. Capitalizing on our existing private data network, we launched our Internet service provider business, SifyOnline (formerly known as SatyamOnline), on November 22, 1998 and became the first private national Internet service provider in India. We began offering SifyOnline Internet access and related services to India’s consumer market as a complement to the network services offered to our business customers. Our SifyOnline service was the first in India to offer ready-to-use CD-ROMs enabling online registration and immediate usage.

          In March 2000, we launched our network of public Internet cafés called iways to cater to the needs of Indians who do not have access to the Internet. In September 2000, we commenced our hosting services from our Tier-I data center at Vashi, Mumbai to provide colocation and managed services to our clients. In June 2001, we obtained permission to provide wireless connectivity on the 5.7 GHz spectrum from the Wireless Planning Commission. This enabled us to convert all our iways from Integrated Services Digital Network, or ISDN, connectivity on the last mile to wireless connectivity. This technology also enabled us to commence our high-speed/broadband access to homes, which began in March 2003. To enable quicker access to homes, we developed a model of partnering with Cable Television Operators, or CTOs, who already interface with households for providing cable television facilities to millions of households in India.

          In April 2002, ISP’s were permitted to provide restricted Voice Over Internet Protocol, or VoIP, which was limited to outbound calls to International destinations and personal computer to personal computer calls in India. We started providing this service through our network of cyber cafés, and later on through VoIP booths located in large commercial areas and corporate office complexes across major cities in India.

          From the time we launched our corporate services in 1997, we have constantly upgraded our technology to provide data services to corporate clients. We were the first Internet service provider in India to make our entire network IP-based and subsequently Multi Protocol Label Switching (MPLS)-enabled, which permitted us to continue to grow our corporate customer base. As of September 30, 2006, we provide data connectivity services to more than 1,450 corporate clients in industries ranging from information technology, manufacturing, banking and financial services industry, pharmaceuticals, retail distribution and the government.

          Initial Public Offering and Subsequent Financing Transactions

          In October 1999, we completed our initial public offering on the Nasdaq Global Market and issued 4,801,250 ADSs at a price of $18.00 per ADS. We received approximately $79.2 million, net of underwriting discounts, commissions and other offering costs. In connection with our initial public offering, we received the benefit of exemptions from the Nasdaq corporate governance rules relating to shareholder meeting quorum, solicitation of proxies and shareholder approval for issue of shares other than in a public offering under Nasdaq Rules 4350(f), 4350(g) and 4350(i)(1)(D), respectively.

          In February 2000, we completed a secondary offering and issued 467,175 ADSs at a price of $320.00 per ADS. We received approximately $141.2 million, net of underwriting discounts, commissions and other costs.

          In October 2002, we agreed to sell an aggregate of 7,558,140 ADSs to Investment Company Limited, or SAIF, for consideration of $13.0 million and to sell an aggregate of 2,034,884 equity shares to VentureTech Solutions Private Limited, or Venture Tech, for consideration of $3.5 million. This transaction was approved by our shareholders at our Extraordinary General Meeting held on December 9, 2002. In December 2002, we completed the sale of the ADSs to SAIF and the sale of 2,034,883 equity shares to VentureTech. In April 2003, we sold an additional 1,017,442 equity shares to VentureTech. In July 2003, we sold an additional 1,017,441 ADSs to an affiliate of Venture Tech.

          On November 10, 2005, Infinity Capital Ventures, LP or Infinity Capital, acquired 11,182,600 ADS of our Company from Satyam Computer Services Limited (“Satyam”) for US $5.60 per share in cash through a Sponsored ADR Programme arranged by the Company. The total purchase price for the Satyam shares was approximately US $62.6 million.

          In a separate transaction, also on November 10, 2005, Infinity Capital entered into a Subscription Agreement with us pursuant to which, upon the terms and subject to the conditions set forth therein, Infinity Capital agreed to purchase from us approximately 6.7 million newly-issued equity shares or ADSs at a purchase price of US $5.60 per share in cash. The total purchase price for the newly issued shares was approximately US $37.6 million. This transaction was approved by our shareholders at our Extraordinary General Meeting held on December 23, 2005. Subsequent to the quarter end, in January 2006, we completed the transaction. Also on November 10, 2005, Sify, Infinity Capital and Raju Vegesna entered into a Standstill Agreement pursuant to which, upon the terms and subject to the conditions set forth therein, Infinity Capital agreed not to purchase more than 45% of our fully diluted equity.

          In connection with the transactions, Mr. Raju Vegesna of Infinity Capital was appointed as the Chairman of our Board of Directors. We also appointed Mr. P. S. Raju as the second nominee of Infinity Capital to our Board of Directors.

          Based on our review of filings made with the SEC, we believe Infinity Capital now owns approximately 42% of our outstanding equity shares.

          Investment Strategy

          In evaluating investment opportunities, we consider important factors, such as strategic fit, competitive advantage and financial benefit, through a formal net present value evaluation. There is no significant difference in the analysis undertaken in connection with an investment in an affiliate compared to other uses of cash. Our investment strategy has not undergone major changes in the last four years.

          Globe Travels Inc.

          In April 2006, we acquired Globe Travels Inc., a company engaged in the business of online travel and travel related business, for a total consideration of USD 4.50 million . This acquisition marks Sify’s entry into the fast growing online travel business, particularly e-ticketing, the category with significant revenues and fastest growth in online e-commerce today.

Operating Results

     The primary operating segments of our company are:

	•		corporate network/data services, which include private network services, messaging services, security services, remote management services and web hosting for businesses;
	•		Internet access services;
	•		online portal services and content offerings; and
	•		other services, such as development of content for e-learning.

Revenues

     Corporate network/data services

     Corporate network service revenues primarily include connectivity services and, to a lesser extent, the revenues from the sale of hardware and software purchased from third party vendors, installation of the link, and other ancillary services such as e-mail, document management and domain registration. Generally, these elements are sold as a package consisting of all or some of the elements. These multiple element arrangements are recognized as separable elements because each element constitutes a separate earnings process, each element has a fair value that is reliable, verifiable and objectively determinable, and the undelivered element is not essential to functionality of the delivered elements. In this arrangement involving delivery of multiple elements, in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), the units of accounting are determined based on whether the delivered items have a value to the customer on a stand alone basis, whether there is objective and reliable evidence of fair value of the undelivered elements and if the arrangement includes a general right of return relative to the delivered item, whether delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The arrangement consideration is allocated to the units of accounting based on their fair values. Revenue on delivered items is recognized when the revenue recognition criteria applicable to that unit of accounting are met.

     The Company provides connectivity for a fixed period of time at a fixed rate regardless of usage. Connectivity is the last element that is provided in the case of a bundled contract. The connectivity charges are the same when sold alone or as part of a package. The revenue attributable to connectivity services is recognized ratably over the period of the contract. The hardware and software are standard products that are being freely traded in and purchased from the market, have standard specifications and are not otherwise customized for the specific needs of a customer. The software sold by the Company is off-the-shelf software, such as anti-virus utilities and firewalls. The fair value for the hardware and software is available from the market. The revenue attributable to hardware/software is recognized on delivery. Installation consists of commissioning of the last mile connectivity to the customer premises either through the Company’s wireless mode of broadband delivery or through the carrier exchange (primarily Bharat Sanchar Nigam Limited, or BSNL, a Government of India entity). However, once commissioned, this last mile connectivity can be used by the customer to access any other service provider. The installation normally takes 4-6 weeks. When the customer has such last mile connectivity, the Company does not charge any installation fee. The revenue attributable to the installation of the link is recognized on completion of the installation work. Revenue from ancillary services such as e-mail, document management and domain registration are recognized over the period such facilities are provided. All revenues are shown exclusive of sales tax and service tax and net of applicable discounts and allowances.

     Web hosting service revenues primarily include co-location services and connectivity services. On occasion, the Company also sells related hardware/software to its web hosting customers. At all times, such hardware and software belongs to the customer. This hardware and software is purchased from outside vendors and is freely traded in the market. The Company treats each element of the arrangement as a separate earnings process. The value of the hosting service is determined based on vendor specific objective evidence from similar services sold separately by the Company. When hardware and/or software is also included with hosting services and sold as a package the vendor specific objective evidence of the undelivered element is considered to arrive at the residual value of the delivered element. Revenue from hosting services is recognized over the period during which the service is provided.

     Internet access services

     Internet access services include Internet access at homes and businesses through dial-up or cable operator and Internet access through a network of cybercafés. It also includes revenues from VoIP.

     Dial-up Internet access is sold to customers either for a specified number of hours or for an unlimited usage within a specified period of time. Customers purchase a CD that allows them to access the Internet. The amounts received from customers on the sale of these CDs are not refundable. Sify recognizes revenue from sale of CDs based on usage by the customer. At the end of the specified period, the remaining unutilized hours, if any, are recognized as revenue. Revenue from unlimited Internet access is recognized ratably over the specified period.

     VoIP services are mainly provided through Internet Telephony Booths at iway cybercafés and to a smaller extent through Cable TV operators, or CTOs, and through multi-dwelling units, or MDUs. The user purchases the packs that enables them to use the Internet telephone facility through CTO and MDUs. We recognize revenue on the basis of usage by the customer. The customer uses Internet telephony facilities at the iway cybercafés and makes the payment to the extent of usage of the facility. We recognize revenue on the basis of usage.

     Internet access at homes and businesses through cable networks is provided through a franchised network of cable operators in India. Customers buy “user accounts” for a specified usage or volume of data transfer or for a specified period of time all within a contracted period. We recognize revenue on actual usage by customer (where access is for a specified quantum of usage) and based on time (where access is for a specified period of time). Any unused hours at the end of the contracted period are recognized as revenue.

     Public Internet access is provided to customers through a chain of franchisee operated cybercafé outlets and, to a lesser extent, Sify-owned cybercafés. Sify enters into an arrangement with franchisees that provides for the payment of an initial non-refundable franchisee fee in consideration for establishing the franchisee relationship and providing certain initial services.

     These initial services consist of a number of activities, including installing the broadband receiver equipment at the cybercafé and “connecting” it to one of Sify’s broadcasting towers, obtaining regulatory approvals for clearance of the site for wireless transmission at the allotted frequency range and other ancillary services.

     Initial franchisee fee revenue is recognized at the time of commencement of operations by the franchisee, in accordance with SFAS No. 45, Accounting for Franchisee Fee Revenue, because Sify believes that substantial performance for which these non-refundable payments are received is completed at the time of commencement of operations and no uncertainty exists with regard to the collection of such fees.

     Online portal services and content offerings

     Online portal services and content offerings revenues include advertising revenues from the various channels of our Internet portal, www.sify.com. We enter into contracts with customers to serve advertisements in the portal, and we are paid on the basis of impressions, click-throughs or leads. Revenues also accrue from commissions earned on products and services rendered through www.sifymall.com, and also from value-added services that are rendered using Sify’s mobile telephone short code, 4545.

     Other services

     Other services include revenue from e-learning. We develop and upload content for e-learning to facilitate web-based learning in various organizations. We provide e-learning services on a time-and-materials or on a fixed-price basis.

     In Item 15 of the condensed notes to our unaudited consolidated financial statements for the quarter ended September 30, 2006, we provided supplemental segment data, which provides separate revenue and operating income (loss) information for each of these business segments and is incorporated herein by reference.

Expenses

     Corporate network/data services

     Cost of revenues for the corporate network/data services division consists of telecommunications costs necessary to provide services, customer support costs, cost of goods in respect of communication hardware and security services sold and the cost of providing network operations. Telecommunications costs include the costs of international bandwidth procured from VSNL and satellite gateway providers and are required for access to the Internet, providing local telephone lines to our points of presence, the costs of using third-party networks pursuant to service agreements, leased line costs and costs towards spectrum fees payable to the Wireless Planning Commission or WPC for provision of spectrum in the 5.7 GHz range to enable connectivity to be provided on the wireless mode for the last mile. In addition, the Government of India has imposed an annual license fee of 6% of the adjusted gross revenue generated from the provision of VPN services under the NLD/ILD license. Depreciation of plant and equipment has not been included in the cost of revenues since a significant part of the fixed assets are not directly identifiable.

     Internet access services

     Cost of revenues for the Internet access services division consists primarily of recurring telecommunications costs necessary to provide service to subscribers, direct costs paid to franchisees for running the iways and to cable television operators for providing Internet services through cable to customers. We are also subject to a 6% annual licence fee on the adjusted gross revenues of our VoIP business. Another recurring cost included in cost of revenues is the personnel and related operating expenses associated with customer support and network operations.

     Online portal services and content offerings

     Cost of revenues for the online portal and content offerings division includes the cost of procuring and managing content for the websites and cost of ring tones downloaded by using Sify’s mobile telephone short code, 4545.

     Other Services

     Cost of revenues for the eLearning division includes the cost of direct manpower that is involved in the design and uploading of content for facilitating web-based learning.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses consists of salaries and commissions for sales and marketing personnel, salaries and related costs for executives, financial and administrative personnel, sales, marketing, advertising and other brand building costs, travel costs, and occupancy and overhead costs.

     We have an Employee Stock Option Plan, which we refer to as our Associate Stock Option Plan, or ASOP. A total of approximately 3.2 million equity shares are reserved for issuance under our ASOP. As of September 30, 2006, we had an aggregate of 1,075,200 options (net of 1,952,843 options expired or forfeited by employees and 1,162,137 options exercised for equity shares) outstanding under our ASOP with a weighted-average exercise price equal to approximately Rs.362.62 per equity share.

     We depreciate our tangible assets on a straight-line basis over the useful life of assets, ranging from two to five years and, in the case of buildings, 28 years.

     We assess for impairment of long-lived assets under SFAS No. 144, Impairment and disposal of long-lived assets. The carrying values of long-lived assets are compared with the adjusted estimated future cash flows at the identifiable business segment level. If the sum of such undiscounted cash flows is less than the aggregate carrying amount, the asset is not recoverable and the impairment loss is recognized.

     In addition to our operations and those of our consolidated subsidiaries, our financial statements include our pro rata share of the financial results of Man Financial-Sify Securities India Private Limited, a company in which we have a significant, non-controlling minority interest. This investment is accounted for under the equity method of accounting.

     Since our inception till the year ended March 31, 2006, we have incurred net losses. However, we have earned net profits during the quarters ended March 31,June 30 and September 30, 2006. Our ability to generate positive cash flow from operations and achieve profitability is dependent on our ability to continue to grow our revenues base and achieve further operating efficiencies.

     For fiscal 2000 through 2003, we incurred negative cash flow from continuing operations of approximately Rs.596.9 million, Rs.1,133.4 million, Rs.775.7 million and Rs.238.3 million, respectively. During fiscal 2004, 2005 and 2006 , we generated cash from operating activities of Rs.210.0 million, Rs.451.0 million, Rs.223.1 million , respectively. For the six months ended September 30, 2006, we used cash for operating activities of Rs. 83.0 million. For fiscal 2001 through 2006, we incurred net losses of approximately Rs.2,509.0 million, Rs.7,202.5 million, Rs.1,329.4 million, Rs.371.3 million, Rs.307.6 million and Rs.149.2 million, respectively. During the quarter ended September 30, 2006 we made a net profit of Rs.68.5 million ($1.5 million) and for the six months ended September 30, 2006 we made a net profit of Rs. 131.0 million ($2.9 million). As of September 30, 2006, we had an accumulated deficit of approximately Rs.12,434.9 million ($270.6 million).

Results of Operations

Quarter ended September 30, 2006 compared to quarter ended September 30, 2005

     Revenues . We recognized Rs.1,383.1 million ($30.1 million) in revenues for the quarter ended September 30, 2006, as compared to Rs.1,172.9 million for the quarter ended September 30, 2005, representing an increase of Rs.210.2 million, or 17.9%.

     The revenues generated by our corporate network/data services businesses increased by Rs.150.2 million, or 23.5%, over the same period in the previous year. The increase is attributable to increases in connectivity revenues of Rs.150.3 million, , increase in security consultancy revenues of Rs.4.2 million and installation revenues of Rs.2.1 million. These increases were partially offset by a decrease of Rs.6.4 million from the sale of hardware and software. The corporate network/data services businesses obtained a significant number of new orders and incremental orders from customers with operations throughout India for providing IP VPN and Internet connectivity. We currently have more than 1,450 corporate customers of our connectivity services.

     The increase in consumer Internet access revenues was Rs.30.1 million, or 6.6%, over the same period of the previous year. The increase was a result of increased revenues from home-based broadband subscribers of Rs.63.8 million, or 49.5% and an increase in public Internet access revenues by Rs.1.4 million, or 0.8%. These increases were partially offset by a decrease of Rs.10.8 million or 14.6% from Voice over IP services, a decrease of 9.7 million or 29.0% in the revenues from dial up business and a decrease of 8.5 million from the sale of hardware. The franchise fees and installation fee recognized for the quarter ended September 30, 2006 were at Rs.25.6 million, compared with Rs.31.7 million for the quarter ended September 30, 2005. This decrease is on account of the decrease in the number of cybercafés added during the Quarter ended September 30, 2006 compared with the same period in the previous year. During the quarter, the number of cybercafés increased from 3,410 to 3,559 compared to 2,900 as of September 30, 2005. The number of high speed subscribers of the Sify broadband service increased from about 124,685 in September 2005 to about 208,755 in September 2006 The increase in the subscriber base was partially offset by a drop in the monthly average revenue per user or ARPU by about 15.5%. The decrease in sale of hardware during the quarter ended September 30, 2006 was primarily on account of increase in the sale of gaming PCs during the quarter ended September 30, 2005 due to the scaling up of our gaming initiatives. We experienced more than 5 Million minutes increase in VoIP calls compared with same quarter of previous year, primarily from calls made by customers in the IT/ITES sector. The average realization per minute dropped by approximately 34.5% during the above period. Our dial-up business continued to decline with a decrease in the number of subscribers as well as the usage minutes. Bundling of services offered by the public sector telephone companies resulted in a marked decline in the market share of private ISPs in the dial-up market segment.

     Our online portal and content offerings division accounted for Rs.69.8 million of revenues for the quarter ended September 30, 2006, as compared to Rs.41.0 million for the quarter ended September 30, 2005, representing an increase of Rs.28.8 million, or 70.2% growth. Partly attributable to the increase is the acquisition of Globe Travels, which has contributed revenues of Rs.10.3 million for the quarter ended September 30, 2006. Growth was witnessed across all segments, as advertisement revenues at Rs.50.2 million, grew by 32.8% compared to the same quarter of the previous year. Revenues from e-commerce initiatives has contributed to revenues of Rs.9.3 million for the quarter ended September 30, 2006 compared to Rs.3.2 million for the quarter ended September 30, 2005 representing an increase of Rs.6.1 million.

     Revenues from our other businesses increased by Rs.1.1 million, or 3.0%.

     Cost of Revenues . Cost of revenues was Rs.706.0 million ($15.4 million) for the quarter ended September 30, 2006, compared to Rs.659.8 million for the quarter ended September 30, 2005, representing an increase of Rs.46.2 million, or 7.0%. This increase was primarily on account of an increase of Rs.32.2 million in the other direct costs incurred on newer installations cost, royalty cost and direct cost in line with increase in revenues. The other reasons for the increase are Rs.12.5 million increase in direct expenses paid to franchisees and Cable Television Operators, or CTOs, for providing broadband delivery through cable, Rs.7.8 million increase in cost of goods sold and an increase of Rs.1.1 million in personnel expenses of our directly billable manpower and the technology department . These increases were partially offset by a marginal decrease of Rs.7.4 million in lease line expenses.

     Selling, general and administrative expenses . Selling, general and administrative expenses were Rs.478.8 million ($10.4 million) for the quarter ended September 30, 2006, compared to Rs.473.1 million for the quarter ended September 30, 2005, representing an increase of Rs.5.7, million, or 1.2%. This increase was due to an increase in personnel expenses due to increase in salaries and on account of new recruits. This increase was partly offset by a decrease in marketing promotional expenses.

     Provision for doubtful receivables and advances. Provision for doubtful receivables and advances was Rs.50.6 million ($1.1 million) for the quarter ended September 30, 2006 compared to Rs.16.8 million for the quarter ended September 30, 2005 representing an increase of Rs.33.8 million.

     Depreciation. Depreciation for the quarter ended September 30, 2006 was Rs.105.1 million ($2.3 million), as compared to Rs.97.9 million for the quarter ended September 30, 2005, representing an increase of of Rs.7.2 million, or 7.4%. The increase in depreciation compared to the same period of previous year is on account of capital expenditure incurred on expansion and also on account of new hosting center set up in Bangalore.

     Amortization of intangible assets. Amortization of intangible assets was Rs.12.1 million ($0.3 million) for the quarter ended September 30, 2006, compared to Rs.16.8 million for the quarter ended September 30, 2005, representing a decrease of Rs.4.7 million, or 28.0%. This decrease is attributable to the decrease in amortization of portal and content rights of Rs.6.8 million, decrease in amortization of IP VPN license of Rs.1.7 million and decrease in amortization of system software by 0.5 million partially offset by increase in amortization of Globe’s customer and contract related intangibles of Rs. 4.3 million .

     Amortization of deferred stock compensation expenses. Amortization of deferred stock compensation expenses was Rs. 5.5million ($0.1 million) for the quarter ended September 30, 2006, compared to Rs.0.8 million for the quarter ended September 30, 2005, representing an increase of Rs.4.7 million. The increase is attributable to the charge on account of new stock options granted subsequent to October 2005 and also on account of adoption of SFAS 123-R, Accounting for Stock Based Compensation.

     Foreign exchange gain/loss. Foreign exchange gain for the quarter ended September 30, 2006 was Rs.0.3 million , compared to a foreign exchange gain of Rs.2.9 million for the quarter ended September 30, 2005, representing a change of Rs.2.6 million. During the quarter ended September 30, 2006, the dollar appreciated from Rs.45.87 to Rs.45.95, which impacted the value of our dollar denominated deposits and resulted in a marginal foreign exchange fluctuation gain, whereas during the quarter ended September 30, 2005, the dollar appreciated from Rs.43.51 as of June 30 , 2005 to Rs.43.94 as of September 30, 2005.

     Other income (net) . Other income was Rs.35.2 million ($0.8 million) for the quarter ended September 30, 2006, compared to Rs.9.2 million for the quarter ended September 30, 2005, representing an increase of Rs.26.0 million, or 282.6%. This increase is mainly on account of increase in interest income of Rs.27.3 million and a decrease in interest expense and other financial charges by Rs. 2.4 million which was partially offset by a decrease in miscellaneous income of Rs.3.7 million.

     Equity in profit of affiliates. Equity in the profit of affiliates was Rs.8.1 million ($0.2 million) for the quarter ended September 30, 2006, compared to Rs.18.5 million for the quarter ended September 30, 2005, representing a decrease of Rs.10.4 million, or 56.2%.

Six months ended September 30, 2006 compared to six months ended September 30, 2005

     Revenues . We recognized Rs.2,701.5 million ($58.8 million) in revenues for the six months ended September 30, 2006, as compared to Rs.2,194.2 million for the six months ended September 30, 2005, representing an increase of Rs.507.3 million, or 23.1%.

     The revenues generated by our corporate network/data services businesses increased by Rs.352.6 million, or 29.7%, over the same period in the previous year. The increase is attributable to increases in connectivity revenues of Rs.265.6 million, increase in revenues from hardware and software sales of Rs.33.1 million, increase in security consultancy revenues of Rs.28.2 million and installation revenues of Rs.25.7 million. The corporate network/data services businesses obtained significant number of new orders and incremental orders from customers with operations throughout India for providing IP VPN and Internet connectivity. We currently have more than 1,450 corporate customers of our connectivity services.

     The increase in consumer Internet access revenues was Rs.82.2 million, or 9.5%, over the same period of the previous year. The increase was a result of increased revenues from home-based broadband subscribers of Rs.136.8 million, or 57.7% and an increase in public Internet access revenues by Rs.8.3 million, or 2.5%. These increases were partially offset by a decrease of Rs.9.6 million or 6.8% from Voice over IP services, a decrease of 17.6 million or 25.5% in the revenues from dial up business and a decrease of 23.5 million from the sale of hardware. The franchise fees and installation fee recognized for the six months ended September 30, 2006 were at Rs.43.4 million, compared with Rs.55.6 million for the six months ended September 30, 2005. This decrease is on account of the decrease in the number of cybercafés added during the six months ended September 30, 2006 compared with the same period in the previous year. During the quarter, the number of cybercafés increased from 3,410 to 3,559, compared to 2,900 as of September 30, 2005. The number of high speed subscribers of the Sify broadband service increased from about 124,685 in September 2005 to about 208,755 in September 2006 The increase in the subscriber base was offset by a drop in the monthly average revenue per user or ARPU by about 15.5%. The decrease in sale of hardware during the six months ended September 30, 2006 was primarily on account of scaling up of gaming PCs sale during the six months ended September 30, 2005. We experienced a more than a 12 Million minutes increased in VoIP calls compared to the first six months of previous year, primarily from calls made by customers in the IT/ITES sector .The average realization per minute dropped by approximately 35% during the above period. Our dial-up business continued to decline with a decrease in the number of subscribers as well as the usage minutes. Bundling of services offered by the public sector telephone companies resulted in a marked decline in the market share of private ISPs in the dial-up market segment.

     Our online portal and content offerings division accounted for Rs.135.7 million of revenues for the six months ended September 30, 2006, as compared to Rs.74.6 million for the six months ended September 30, 2005, representing an increase of Rs.61.1 million, or 81.9%growth.Partly attributable to the increase is the acquisition of Globe Travels, which has contributed revenues of Rs.16.3 million for the six months ended September 30, 2006. Growth was witnessed across all segments, as advertisement revenues at Rs.94.7 million, grew by 37.1% compared to the same period of the previous year. Revenues from e-commerce initiatives has contributed to revenues of Rs.24.7 million for the six months ended September 30, 2006 compared to Rs.5.5 million for the six months ended September 30, 2005 representing an increase of Rs.19.2 million.

     Revenues from our other businesses increased by Rs.11.4 million, or 18.7%. During the course of the last few quarters, we have added new customers to our e-learning division, and these customers contributed to the increase in revenues.

     Cost of Revenues . Cost of revenues was Rs.1,401.3 million ($30.5 million) for the six months ended September 30, 2006, compared to Rs.1,241.9 million for the six months ended September 30, 2005, representing an increase of Rs.159.4 million, or 12.8%. This increase was primarily on account of an increase of Rs.75.7 million in the cost of goods sold. The other reasons for the increase are a Rs.36.1 million increase in direct expenses paid to franchisees and Cable Television Operators, or CTOs, for providing broadband delivery through cable, a Rs.47.8 million increase in other direct costs and an increase of Rs. 21.2 million in personnel expenses of our directly billable manpower and the technology department . These increases were partially offset by a decrease of Rs.21.4 million in lease line expenses.

     Selling, general and administrative expenses . Selling, general and administrative expenses were Rs.959.6 million ($20.9 million) for the six months ended September 30, 2006, compared to Rs.898.2 million for the six months ended September 30, 2005, representing an increase of Rs.61.4 million, or 6.8%. This increase was due to an increase in personnel expenses due to increase in salaries and on account of new recruits. This increase was partly offset by a decrease in marketing promotional expenses.

     Provision for doubtful receivables and advances. Provision for doubtful receivables and advances was Rs.73.7 million ($1.6 million) for the six months ended September 30, 2006 compared to Rs.33.0 million for the six months ended September 30, 2005 representing an increase of Rs.40.7 million.

     Depreciation. Depreciation for the six months ended September 30, 2006 was Rs.200.1 million ($4.4 million), as compared to Rs.197.7 million for the six months ended September 30, 2005, representing an increase of of Rs.2.4 million, or 1.2%. There was a significant purchase of assets during the period March to September 2000. Since most of the assets are depreciated over a 5-year period on the straight line method, these assets would have been fully depreciated by September 2005, and have not contributed to the depreciation charge during the six months ended September 30, 2006.This reduction has partially offset the increase in depreciation on account of capital expenditure incurred on expansion and also on account of new hosting center set up in Bangalore.

     Amortization of intangible assets. Amortization of intangible assets was Rs.28.6 million ($0.6 million) for the six months ended September 30, 2006, compared to Rs.38.8 million for the six months ended September 30, 2005, representing a decrease of Rs.10.2 million, or 26.3%. This decrease is mainly attributable to the decrease in amortization of portal and content rights , decrease in amortization of IP VPN license and decrease in amortization of system software partially offset by increase in amortization of Globe customer contracts.

     Amortization of deferred stock compensation expenses. Amortization of deferred stock compensation expenses was Rs. 41.4 million ($0.9 million) for the six months ended September 30, 2006, compared to Rs.2.0 million for the six months ended September 30, 2005, representing an increase of Rs.39.4 million. The increase is attributable to the charge on account of new stock options granted subsequent to September 2005 and also on account of adoption of SFAS 123-R, Accounting for Stock Based Compensation.

     Foreign exchange gain/loss. Foreign exchange gain for the six months ended September 30, 2006 was Rs.44.3 million , compared to a foreign exchange gain of Rs.2.7 million for the six months ended September 30, 2005, representing a change of Rs.41.6 million. During the six months ended September 30, 2006, the dollar appreciated from Rs.44.48 to Rs.45.95, which impacted the value of our dollar denominated deposits and resulted in a foreign exchange translation gain, whereas during the six months ended September 30, 2005, the Rupee had been fairly stable against the dollar, appreciating marginally from Rs.43.62 as of March 31, 2005 to Rs.43.94 as of September 30, 2005.

     Other income (net) . Other income was Rs.66.0 million ($1.4 million) for the six months ended September 30, 2006, compared to Rs.25.4 million for the six months ended September 30, 2005, representing an increase of Rs40.6 million, or 159.8%. This increase is mainly on account of increase in interest income of Rs.45.8 million and a decrease in interest expense and other financial charges by Rs. 2.4 million which was partially offset by a decrease in miscellaneous income of Rs.7.6 million.

     Equity in profit of affiliates. Equity in the profit of affiliates was Rs.23.9 million ($0.5 million) for the six months ended September 30, 2006, compared to Rs.29.4 million for the six months ended September 30, 2005, representing a decrease of Rs.5.5 million, or 18.7%.

Liquidity and Capital Resources

     The following table summarizes our statements of cash flows for the periods presented:

		Fiscal year ended												For the six months ended
		March 31,												September 30,
		2004				2005				2006				2006				2006
		(in thousands)
Net profit / (loss) from continuing operations		Rs.	(371,284	)		Rs.	(307,576	)		Rs.	(149,245	)		Rs.	130,959			$	2,851
Net decrease/(increase) in working capital			57,288				198,707				(128,119	)			(523,248	)			(11,388	)
Other adjustments for non-cash items			524,922				559,821				500,478				309,265				6,731
Net cash provided by/(used in) operating activities			210,926				450,952				223,114				(83,024	)			(1,806	)
Net cash provided by/(used in) investing activities			74,386				(523,504	)			(429,138	)			(484,480	)			(10,544	)
Net cash provided by/(used in) financing activities			189,958				69,182				1,684,055				49,320				1,073
Effect of exchange rate changes on cash			(47,063	)			1,479				20,558				11,235				245
Net increase/(decrease) in cash and cash equivalents			428,207				(1,891	)			1,498,589				(506,949	)			(11,032	)

     We intend to continue to focus on the reduction of our cash burn and generating cash surplus in fiscal 2007. Based upon our present business and funding plans, we believe that our cash and cash equivalents of Rs.2,315.55 million ($50.4 million) as of September 30, 2006, excluding restricted cash included in non-current assets of Rs.1.0 million ($0.02 million), is sufficient to meet our currently known requirements at least over the next twelve months. In light of the highly dynamic nature of our business, however, we cannot assure you that our capital requirements and sources will not change significantly in the future.

     Cash balances held in foreign currency were Rs.557.7 million, Rs.293.2 million, Rs.1,956.4 million and Rs.351.2 million as of March 31, 2004, 2005, 2006 and September 30, 2006, respectively. Cash balances held in Indian currency were Rs.881.8 million, Rs.1,062.9 million, Rs.867.1 million and Rs.1,965.4 million as of March 31, 2004, 2005, 2006 and September 30, 2006, respectively. These amounts include cash and cash equivalents and restricted cash.

     Cash used by operating activities for the six months ended September 30, 2006 was Rs.83.0 million ($1.8 million), representing cash provided by operations of Rs.440.2 million ($9.6 million) and a decrease in working capital of Rs.523.2 million ($11.4 million) due to increase in accounts receivable by Rs.288.6 million, decrease in trade accounts payable by Rs.173.6 million, decrease in advances received from customers by Rs.3.8 million, increase in other assets by Rs.76.3million, increase in inventories by Rs.0.3 million and investment in leases of Rs.11.7 million, increase in prepaid expenses by Rs.39.6 million, increase in other liabilities by Rs.20.8 million, decrease in dues from employees by Rs.20.4 million and increase in deferred revenues by Rs.29.5 million.

     Cash used by investing activities for the six months ended September 30, 2006 was Rs.484.5 million ($10.5million) and principally consisted of establishment of a new data center and purchase of routers, modems, ports, servers and other capital equipment in connection with the expansion of our network of Rs.385.9 million ($8.4 million), acquisition of Globe Travels of Rs.92.9 million ($2.0 million), expenditure on intangible assets of Rs.7.3 million ($0.15 million), partially offset by proceeds from the sale of property, plant and equipment of Rs.1.6 million ($0.04 million).

     Cash provided by financing activities for the quarter ended September 30, 2006 was Rs.49.3 million ($1.1 million) represented by proceeds from the issuance of common stock of Rs.51.3 million ($1.1 million), partially offset by principal payment under capital lease obligations of Rs.2.0 million ($0.04 million).

     We incurred Rs.533.2 million and Rs.587.5 million for capital expenditure for the fiscal years ended March 31, 2005 and 2006, respectively. Capital expenditure for the six months ended September 30, 2006 were Rs.385.9 million.

     Although we have 183 points of presence in India, a need for expansion into smaller towns could arise as our corporate and data network services and broadband businesses grow. There are a number of ISPs and data/network service providers exiting the business and, depending on pricing and other terms, we may acquire one or more of these third parties. We will need to invest in technologies to increase the speed of the backbone and edge networks. We will also have to invest in wireless and wire line methods of last mile Internet access delivery. We may also add an owned access capability in the United States.

     In the ordinary course of our business, we regularly engage in discussions and negotiations relating to potential investments, strategic partnerships, acquisitions and other strategic transactions. We will continue to be aggressive in our efforts to identify one or more investment or acquisition opportunities.

Income Tax Matters

     For the year ended March 31, 2006, the end of our most recently completed fiscal year, we had a net tax loss carry forward of approximately Rs.4,535.5 million ($98.9 million).

     For fiscal 2006, the basic rate of corporate tax and surcharge were at 30% and 10% respectively, the education cess was 2% on the total tax, resulting in an effective tax rate of 33.66%. For fiscal 2007, the tax rates continue to remain the same.

     Under the Indian Income Tax Act, income tax is payable on the total income as computed under the Income Tax Act in respect of the previous year (fiscal year) relevant to the assessment year. Where the tax payable on the total income is less than 7.5% (excluding surcharges) of the book profit (profit computed as per the provisions of the Indian Companies Act), the book profit after adjusting for accumulated losses or carried forward depreciation (which ever is lower) shall be deemed to be the total income of the assessee, and the tax payable by the assessee on such total income shall be the amount of income tax at the rate of 7.5% (excluding surcharges).

     Under the current Indian Income Tax Act, we will be liable for payment of income tax only after we utilize the unabsorbed business loss of Rs.2,116.3 million ($46.1 million) (lower of carry forward depreciation or business loss). We cannot assure you that the current income tax rate will remain unchanged in the future. We also cannot assure you that the surcharge will be in effect for a limited period of time or that additional surcharges will not be levied by the Government of India.

     The Finance Act, 2005 had introduced income tax on fringe benefits which is in addition to the income tax charged under the Income Tax Act, 1961. Fringe benefits tax (“FBT”) is payable by every employer in respect of fringe benefits provided or deemed to have been provided by the employer to his employees during the year. An employer is required to pay FBT even if no tax is payable on the total income. We have incurred an expenditure of FBT of Rs.4.3 million ($0.1 million) for the quarter ended September 30, 2006 and Rs. 8.7 million($0.2 million) for the six months ended September 30, 2006.

Off Balance Sheet Arrangement

  None.

Commitments

As of September 30, 2006, we had spent approximately Rs.2,809.1 million to develop and deploy our network infrastructure. As of September 30, 2006, our future contractual obligations and commercial commitments were as follows:

Contractual
Obligations		Payments Due by Period												(Rs. Million)
						Less than 1												More than 5
		Total				year				1-3 years				3-5 years				years
Capital Lease Obligations			5.1				2.4				2.7				—				—
Total Contractual Obligations			5.1				2.4				2.7				—				—

		Amount of Commitment Expiration Per Period									(Rs. Million)
Other Commercial		Total Amounts			Less than 1									Over 5
Commitments		Committed			year			1-3 years			4-5 years			years
Standby Letters of Credit			35.9			35.9			—			—			—
Guarantees			184.8			31.6			151.9			1.3			—
Other Commercial Commitments			56.9			56.9			—			—			—
Total Commercial Commitments			277.6			124.4			151.9			1.3			—